<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
<TABLE>
<CAPTION>
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
<S> <C>
/ / Preliminary proxy statement / / Confidential, for use of
/X/ Definitive proxy statement the Commission only
/ / Definitive additional materials (as permitted by Rule
/ / Soliciting material pursuant to Rule 14a-11(c) or 14a-12 14a-6(e)(20) )
</TABLE>
PERFECTDATA CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
PERFECTDATA CORPORATION
--------------------------------------------------------------------------------
(Name of Person (s) Filing Proxy Statement)
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:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to exchange Act Rule 0-11:1
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
<PAGE>
/ / 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 statements
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
PERFECTDATA CORPORATION
110 WEST EASY STREET
SIMI VALLEY, CA 93065
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of
PerfectData Corporation
The Annual Meeting of Shareholders of PerfectData Corporation (the "Company")
will be held at Loews Santa Monica Beach Hotel, located at 1700 Ocean Avenue,
Santa Monica, California 90401 on Thursday, October 19, 2000, at 11:00 a.m.,
Pacific Daylight Time (the "Annual Meeting"), for the following purposes:
1. To elect five directors to serve until the next Annual Meeting of
Shareholders and until their successors are duly elected and
qualify.
2. To ratify the selection of KPMG LLP as independent accountants of
the Company for the fiscal year ending March 31, 2001.
3. To adopt and approve the Stock Option Plan of 2000 of PerfectData
Corporation and to ratify the options heretofore granted
thereunder.
4. To transact such other business as may come before the Annual
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on Monday, August 21, 2000,
are entitled to notice of, and to vote at, the Annual Meeting or any adjournment
thereof.
By Order of the Board of Directors
Irene J. Marino
Secretary
September 11, 2000
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. THE PROXY MAY BE REVOKED
IN WRITING PRIOR TO THE MEETING OR, IF YOU ATTEND THE MEETING, YOU MAY REVOKE
THE PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE>
PERFECTDATA CORPORATION
110 WEST EASY STREET
SIMI VALLEY, CA 93065
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 19, 2000
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of PerfectData Corporation (the
"Company") of proxies to be voted at the Company's Annual Meeting of
Shareholders (the "Meeting") to be held on Thursday, October 19, 2000, or at
any adjournment thereof. The purposes for which the Meeting is to be held are
set forth in the preceding Notice of Annual Meeting. This Proxy Statement and
the enclosed form of proxy are first being mailed on or about Wednesday,
September 13, 2000, to holders of record of the Company's Common Stock, no
par value per share (the "Common Stock"), as of the close of business on
Monday, August 21, 2000 (the "Record Date"), which has been fixed as the
record date for the determination of the shareholders entitled to notice of,
and to vote at, the Meeting.
VOTING SECURITIES
On the Record Date, 6,094,530 shares of the Common Stock, which is
the only class entitled to vote at the Meeting, were issued, outstanding and
entitled to vote. Each shareholder of record is entitled to cast, in person
or by proxy, one vote for each share of the Common Stock held by such
shareholder as of the close business on the Record Date. A plurality of the
votes cast at the Meeting shall be necessary to elect each of the five
directors (I.E., Proposal One). The affirmative vote of the holders of a
majority of the shares present in person or represented by proxy and entitled
to vote at the Meeting shall be necessary (1) to approve the selection of the
independent auditors (I.E., Proposal Two) and (2) to adopt and approve the
Stock Option Plan of 2000 of PerfectData Corporation (the "2000 Option Plan")
relating to 2,000,000 shares of the Common Stock and to ratify options
heretofore granted thereunder to purchase an aggregate of 350,000 shares of
the Common Stock (I.E., Proposal Three).
A majority of the shares entitled to vote, present in person or
represented by proxy, constitutes a quorum at the Meeting. Abstensions and
broker non-votes are treated for the purpose of determining a quorum at the
Meeting and are not treated as a vote for or against a proposal.
Proxies will be voted as indicated in this Proxy Statement and the
enclosed proxy. Shares presented by properly executed proxies, if received in
time, will be voted in accordance with any specifications made therein. A
proxy may be revoked by delivering a written notice of revocation to the
Company (Attention: Irene J. Marino, Secretary) at its principal executive
office or in person at the Meeting, or by a subsequently dated proxy, at any
time prior to the voting thereof. The principal executive office of the
Company is located at the address in the heading to this Proxy Statement.
1
<PAGE>
Rules 451 and 452 of the New York Stock Exchange, Inc. (the "NYSE")
permit a member firm to vote for the directors and/or for the proposal to
ratify the selection of independent auditors if the member firm holds the
shares of the Common Stock for a beneficial owner and receives no
instructions to the contrary by the tenth day before the Meeting. However,
under the Rules the beneficial owner must give specific instructions to the
member firm for it to vote the shareholder's shares on Proposal Three to
adopt and approve the 2000 Option Plan. Rules 576 and 577 of the American
Stock Exchange LLC (the "AMEX") are substantially similar to the foregoing
NYSE Rules so that the beneficial owner's specific instructions are also
required for the AMEX member firms to vote on Proposal Three. Rule 2260
(c)(2) of the National Association of Securities Dealers, Inc. (the "NASD")
permits a NASD member firm to deliver a proxy, with respect to shares of the
Common Stock held by the NASD member firm for a beneficial owner, pursuant to
the rules of any national securities exchange (such as the NYSE and the AMEX)
to which the NASD member firm is also responsible provided that the records
of the member firm clearly indicate which procedure it is following.
The Company, accordingly, urges each beneficial owner to instruct
the member firm which holds of record the shareholder's shares of the Common
Stock to vote in favor of the three proposals submitted to the shareholders
for a vote even though such instruction is only required for Proposal Three.
A shareholder shall have no right to receive payment for his, her or
its shares as a result of shareholders' approval of any proposal in the Notice
of Annual Meeting.
Each of the persons who has served as a director or as an executive
officer of the Company since April 1, 1999 (I.E., the beginning of the last
fiscal year of the Company) and each of the persons nominated by the Board of
Directors of the Company for election as a director at the Meeting, all of
which nominees are currently serving as directors, has no substantial
interest, direct or indirect, by security holdings or otherwise, in any of
the proposals submitted to a vote at the Meeting (as described in the sixth
preceding paragraph), other than, if he or she is a nominee for election as a
director, that he or she has an interest in being elected as a director
(I.E., Proposal One) and, if he or she is still a director or executive
officer of the Company, he or she is, or could be, an optionee under the 2000
Option Plan as discussed under the caption "Proposal Three: Adopt and Approve
2000 Option Plan and Ratify Options Heretofore Granted Thereunder" if the
same is adopted by the shareholders at the Meeting.
PROPOSAL ONE: ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AS DIRECTORS
Five directors will be elected at the Meeting, each to serve for a
one-year term until the next Annual Meeting of Shareholders and until his or
her successor is duly elected and qualifies.
Proxies received in response to this solicitation, unless specified
otherwise, will be voted in favor of the five nominees named below, all of whom
are currently serving as directors of the Company, although as indicated in the
section "Change in Control" under this caption "Proposal One: Election of
Directors," all but one were first elected on March 31, 2000. If a nominee
2
<PAGE>
should not be available for election as contemplated, the management proxy
holders will vote for such lesser number of directors as are available to
serve or will vote for a substitute designated by the current Board of
Directors. In no event will proxies be voted for more than five nominees.
The next following table sets forth certain information, as of the
Record Date, concerning the nominees for election as directors of the
Company. The information as to age has been furnished to the Company by the
individual named. For information as to the shares of the Common Stock
beneficially owned by each nominee, see the table under the caption "Security
Ownership of Certain Beneficial Holders and Management" elsewhere in this
Proxy Statement.
<TABLE>
<CAPTION>
Year First
Elected
Name of Nominee Age Director Position and Offices With the Company
--------------- --- -------- -------------------------------------
<S> <C> <C> <C>
Harris A. Shapiro 65 2000 Director and Chairman of the Board
Bryan Maizlish 38 2000 Director
Timothy D. Morgan 46 2000 Director
Tracie Savage 37 1995 Director
Corey P. Schlossmann 45 2000 Director
</TABLE>
On September 7, 2000, Mr. Shapiro was designated by the Board of
Directors as the Chief Executive Officer of the Company.
CHANGE IN CONTROL
On March 31, 2000 (the "Closing Date"), Millennium Capital Corporation
("Millennium"), JDK & Associates Inc. ("JDK") and other buyers (Millennium, JDK
and these other buyers are collectively referred to herein as the "Buyers")
purchased from the Company, pursuant to a Stock Purchase Agreement dated as of
January 20, 2000 (the "Stock Purchase Agreement") by and among the Company,
Millennium, JDK and persons or entities who or which became Buyers pursuant to
the Stock Purchase Agreement subsequent to its execution, an aggregate of
1,333,333 shares of the Common Stock, at $2.25 per share or an aggregate
purchase price of $2,999,999.25.
On the Closing Date, as a result of the foregoing closing, Millennium
and JDK became financial advisors to the Company to seek acquisitions and
financings on its behalf pursuant to a Consulting Agreement dated as of January
20, 2000 (the "Consulting Agreement") by and among Millennium, JDK and the
Company. For their services, Millennium and JDK are to receive a cash fee equal
to five percent of the Consideration (as defined) received or paid by the
Company with respect to the acquisition or the financing offering.
3
<PAGE>
Recognizing that an added inducement was necessary to solicit
persons or entities to become Buyers, Millennium and JDK negotiated with the
Company, for inclusion in the Consulting Agreement, Common Stock purchase
warrants expiring March 30, 2005 (the "Consulting Warrants") to purchase an
aggregate of 1,800,000 shares of the Common Stock at $2.75 per share. In
order to make the investment more attractive to potential Buyers, the
Consulting Warrants were made immediately exercisable and provision was also
made for "cash-less" exercises. The Company, in consideration thereof,
obtained Millennium's and JDK's consent to the grant of Consulting Warrants
to purchase an aggregate of 30,000 shares of the Common Stock to designated
employees of the Corporation (including its two then executive officers). On
the Closing Date, all holders of the Consulting Warrants (all of whom except
for the employees were Buyers or their assignees) exercised the same,
received an aggregate of 1,515,391 shares of the Common Stock net of an
aggregate of 264,609 shares of the Common Stock surrendered in payment of the
exercise price (such surrendered shares being valued at $18.50 per share,
I.E., the closing market price on the Closing Date). Millennium and JDK had,
on the Closing Date, advised the Company that they were reserving the
aggregate of 20,000 shares of the Common Stock issuable upon the exercise of
Consulting Warrants which were not exercised on the Closing Date for transfer
to future members of the Company's Advisory Board. On May 22, 2000, the two
new members of the Advisory Board were each allocated a Consulting Warrant to
purchase 5,000 shares of the Common Stock at $4.125 per share.
At a directors' meeting on the Closing Date, as contemplated by the
Stock Purchase Agreement, Joseph Mazin, then the Chairman, the President and
the Chief Executive Officer of the Company, and Ronald M. Chodorow resigned
as directors of the Company, the number of directors was increased from three
to five and Brian Maizlish, Timothy D. Morgan, Corey P. Schlossmann and
Harris A. Shapiro were elected as directors to fill the vacancies. Tracie
Savage continued as a director.
The shareholders approved the Stock Purchase Agreement and the
related transactions at a Special Meeting of Shareholders held on March 31,
2000.
As the result of their purchases pursuant to the Stock Purchase
Agreement, their cashless exercises of the Consulting Warrants and the
subsequent purchases at $3.00 per share of 75,000 shares of the Common Stock
from Flamemaster Corporation ("Flamemaster"), then the holder of 10% or more
of the outstanding shares of the Common Stock, the Buyers and their assignees
acquired an aggregate of 2,848,724 shares of the Common Stock, which amount
is 46.7% of the shares outstanding on the Record Date. Of the Buyers, (1)
Harris A. Shapiro, the Chairman of the Board, the Chief Executive Officer
(only since September 7, 2000) and a director of the Company, as the sole
officer, director and shareholder of Millennium, may be deemed the beneficial
owner of 284,500 shares of the Common Stock or 4.7% of the outstanding shares
on the Record Date; (2) Joseph D. Kowal, as the sole officer, director and
shareholder of JDK, may be deemed the beneficial owner of 506,869 shares of
the Common Stock or 8.3% of the outstanding shares on the Record Date; (3)
Corey P. Schlossmann, a director of the Company, is the beneficial owner of
496,259 shares of the Common Stock or 8.1% of the outstanding shares on the
Record Date; (4) Don Haidl is the beneficial owner of 467,003 shares of the
Common Stock or 7.7% of the outstanding shares on the Record Date; and (5)
William B. Wachtel as the Trustee of the Digital Trust may be deemed the
beneficial owner of 427,873 shares of the Common Stock or 7.0% of the
4
<PAGE>
outstanding shares on the Record Date. See "Security Ownership of Certain
Beneficial Owners and Management" elsewhere in the Proxy Statement. Based on
the advice furnished to the Company, each of the Buyers and their assignees
used his, her or its own personal funds to effect the foregoing purchases and
no bank loans were involved. Messrs. Shapiro, Kowal, Schlossmann and Haidl
and the Trustee of the Digital Trust have advised the Company that, to the
extent the Buyers constituted a "group" formed to purchase the shares
pursuant to the Stock Purchase Agreement, such "group" has been dissolved and
each Buyer and the assignees thereof has acted subsequently, and will
continue to act, independently of each other in making his, her or its
decision to sell or buy shares of the Common Stock. Millennium and JDK will,
however, continue to act together as consultants pursuant to the Consulting
Agreement. The agreement with Flamemaster to purchase additional shares of
the Common Stock has been terminated.
FAMILY RELATIONSHIPS OF NOMINEES AND EXECUTIVE OFFICERS
There are no family relationships among the nominees for election as
directors and the executive officers of the Company.
BUSINESS HISTORY OF NOMINEES
Harris A. Shapiro was elected as a director of the Company and Chairman
of the Board on March 31, 2000 (see the section "Change in Control" under this
caption "Proposal One: Election of Directors"). On September 7, 2000, he was
designated Chief Executive Officer of the Company. Mr. Shapiro has been the
President of Millennium Capital Corporation, a consulting firm specializing in
mergers and acquisitions, since 1994. He was Senior Vice President Corporate
Finance of Gilford Securities Incorporated, a registered broker-dealer, from
January 1, 1999 to March 29, 2000. Prior to Gilford Securities, he was a
Managing Director of Whale Securities Co., L.P., a registered broker-dealer,
from June 1993 until December 1998.
Bryan Maizlish was elected as a director of the Company on March 31,
2000 (see the section "Change in Control" under this caption "Proposal One:
Election of Directors"). Since September 1998, he has served as the Executive
Vice President of Strategic Planning and Business Development of Magnet
Interactive Group, Inc. ("Magnet"), a private company furnishing engineering
comprehensive interactive services. Since June 1999, he has also served as
the acting Chief Financial Officer of Magnet. From September 1996 to
September 1998, he was a consultant, serving such clients as Discovery
Communications and the Democratic National Committee. From March 1996 to
September 1996, he was Director of Strategic Planning of Turner Broadcasting.
From September 1994 to March 1996, he was Director of Marketing and
Distribution of Magnet. Prior thereto, he held various managerial positions
with companies in the media communications industry, such as MCA, Inc., Gulf
& Western Corporation and Eugene Roddenbury's Norway Corporation.
Timothy D. Morgan was elected as a director of the Company on March
31, 2000 (see the section "Change in Control" under this caption "Proposal
One: Election of Directors"). He has, since October 1997, been a consultant
on matters of business strategies, taxation, finance and asset protection
techniques. From 1980 through October 1997, he was a partner and principal of
Abacus Tax and Financial Services.
5
<PAGE>
Tracie Savage was elected in July 1995 as a director of the Company.
She joined NBC-TV Los Angeles, a television subsidiary of National
Broadcasting Company, Inc. in March 1994. Ms. Savage is the co-anchor of NBC
4's "Today in LA: Weekend" and also serves as a general assignment reporter
for the "Channel 4 News". From 1991 to 1994, she was a general assignment
reporter for the independent Los Angeles station, KCAL. Ms. Savage has been
in broadcast journalism for more than ten years and has been the recipient of
numerous awards and honors in her field.
Corey P. Schlossmann was elected as a director of the Company on
March 31, 2000 (see the section "Change in Control" under this caption
"Proposal One: Election of Directors"). Mr. Schlossmann has been Chief
Executive Officer since October 1999, and Chief Financial Officer since
January 1999, of Nationwide Auction Systems. Since January 1996, he also
serves as a partner and board member of Gordon, Fishburn & Schlossmann, a
management consulting and accounting firm. Mr. Schlossmann was a partner of
Hankin & Co., a consulting firm, from 1988 until 1995.
DIRECTORSHIPS ON OTHER PUBLIC COMPANIES
Since October 1999, Corey P. Schlossmann has served as a director of
Entrade, Inc., a New York Stock Exchange holding company whose online
subsidiaries (including Nationwide Auction Systems of which he is an executive
officer as indicated in the preceding section "Business History" under this
caption "Proposal One: Election of Directors") provide auction and asset
disposition services to the utility and manufacturing industries, among others.
No other director of the Company currently serves on any board other
than the Company with a class of securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject
to the reporting requirements of Section 15(d) of the Exchange Act or any
company registered as an investment company under the Investment Company Act of
1940, as amended.
COMMITTEES AND BOARD MEETINGS
The Board has two standing committees: Audit and Compensation. Prior to
March 31, 2000, Ronald M. Chodorow and Tracie Savage served as the members of
both Committees. The Company does not have a standing Nominating Committee.
Since March 31, 2000, Timothy D. Morgan, Tracie Savage and Corey P.
Schlossmann have served as members of the Audit Committee, with Mr. Schlossmann
serving as the Chairman. The Audit Committee recommends annually to the
shareholders the independent auditors to be retained by the Company, reviews the
scope and procedures to be followed in the conduct of audits by the independent
auditors and, when employed, the internal auditors of the Company and reviews
various reports and recommendations with respect to internal controls and any
significant changes in accounting.
During the fiscal year ending March 31, 2001 ("fiscal 2001"), the Audit
Committee has initiated reviews of quarterly reports with the independent
auditors and will implement certain
6
<PAGE>
other requirements adopted for audit committees by the Securities and
Exchange Commission (the "Commission") and the NASD on behalf of the
companies whose securities are traded on The Nasdaq Stock Market, Inc.
("Nasdaq") as is the Company's Common Stock, which requirements were not
required to be implemented previously.
The Board of Directors hereby certifies that, on May 22, 2000, the
directors adopted a Charter for the Audit Committee in accordance with the
new Commission/NASD rules. A copy of the Audit Committee Charter is annexed
hereto as Appendix A. All of the current members of the Audit Committee are
"independent" as defined in the Audit Committee Charter and Rule 4200(a)(15)
of the NASD's listing requirements for Nasdaq companies.
Since March 31, 2000, Harris A. Shapiro and Corey P. Schlossmann have
served as members of the Compensation Committee, with Mr. Shapiro serving as the
Chairman. The Compensation Committee approves the remuneration of key officers
of the Company and, if incorporated or acquired, its subsidiaries, reviews and
recommends to the Board of Directors changes in the Company's stock benefit and
executive, managerial or employee compensatory and benefit plans or programs and
administers stock option, restricted stock or similar plans of the Company.
Although the Company has no Nominating Committee, if a shareholder
has a recommendation as to a nominee for election as a director, such
shareholder should make his, her or its recommendation in writing addressed
to Harris A. Shapiro, as the Chairman of the Board of the Company, at the
Company's address shown in the heading to this Proxy Statement, giving the
business history and other relevant biographical information as to the
proposed nominee and the reasons for suggesting such person as a director of
the Company. The Board will then promptly review the recommendation and
advise the shareholder of its conclusion and, if a rejection, the reasons
therefor.
During the fiscal year ended March 31, 2000 ("fiscal 2000"), there
were eight meetings of the Board. Ms. Savage, the sole incumbent director,
participated in all meetings of the Board during such fiscal year. Neither
the Audit Committee nor the Compensation Committee held any meetings during
fiscal 2000. The Audit Committee intends to meet on the date of this Meeting
with representatives of KPMG, the independent auditors for the Company, to
review the auditors' comments derived as a result of their audit of the
Company's financial statements for fiscal 2000.
As previously reported, the Company, with its new directors (see the
section "Change in Control" under this caption "Proposal One: Election of
Directors"), is seeking acquisitions which may or may not be related to its
current business. There can, or course, be no assurance that any such
acquisition will be effected. To facilitate these efforts, the Board
appointed, on March 31, 2000, a Merger and Acquisition Committee consisting
of John C. Reece, a member of the Company's Advisory Board, as Chairman and
two directors, Tracie Savage and Corey P. Schlossmann, as members.
7
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains certain information relating to the
directors and executive officers of the Company as of the Record Date:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harris A. Shapiro 65 Director and Chairman of the Board
(and, since September 7, 2000, Chief
Executive Officer)
Bryan Maizlish 38 Director
Timothy D. Morgan 46 Director
Tracie Savage 37 Director
Corey P. Schlossmann 45 Director
Irene J. Marino 56 Vice President Finance, Chief Financial
Officer and Corporate Secretary
</TABLE>
Each director is elected to serve until the next Annual Meeting of
Shareholders or until his or her successor is elected and shall have qualified.
All of the directors named in the foregoing table are the Board's nominees for
re-election as directors at the Meeting. See the section "Nominees for Election
as Directors" under the caption "Proposal One: Election of Directors." Each
officer of the Company is elected by the Board of Directors to serve at the
discretion of the Board.
BUSINESS HISTORY
For information as to the business histories of Ms. Savage and Messrs.
Shapiro, Maizlish, Morgan and Schlossmann, see the section "Business History of
Nominees" under the caption "Proposal One: Election of Directors."
Joseph Mazin was elected in June 1993 as a director of the Company. Mr.
Mazin was elected as the Chairman, President and Chief Executive Officer of the
Company in October 1993. He resigned as a director on March 31, 2000 (see the
section "Change in Control" under the caption "Proposal One: Election of
Directors") and as the President and Chief Executive Officer effective July 27,
2000. He has agreed to serve the Company as a consultant through March 31, 2001
and to be available to oversee day-to-day operations through September 30, 2000.
Mr. Mazin is the Chairman of the Board, President and Chief Executive Officer of
Flamemaster, a publicly traded specialty chemicals manufacturer. Mr. Mazin has
held this position for more than five years. He previously served as Chairman of
the Board of Altius Corporation, a former manufacturer of industrial steel
products.
8
<PAGE>
Ms. Irene J. Marino originally joined the Company in March 1982 and
rejoined the Company in September 1987 after a leave of approximately four
months. Ms. Marino was promoted to Manager of Finance and Administration in
March 1983 and to Controller and Assistant Secretary in March 1986. Upon
rejoining the Company in September 1987, Ms. Marino assumed the positions of
Controller, Chief Financial Officer and Secretary of the Company. She was
appointed Vice President of Finance in August 1989, and has more than 30 years'
experience in finance, accounting and administration.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 furnished to the Company
under Rule 16a-3(e) promulgated under the Exchange Act, with respect to fiscal
2000, the Company is not aware of any director or executive officer of the
Company who failed to file on a timely basis, as disclosed in such forms,
reports required by Section 16(a) of the Exchange Act during fiscal 1999 except
that because of a change of the Company's counsel as of March 31, 2000 and a
change in the majority of the directors of the Company, one Form 4 for Tracie
Savage, a director of the Company (one transaction), and one Form 4 for Timothy
Morgan, a director of the Company (two transactions), were untimely filed.
As of March 31, 2000, I.E., the end of fiscal 2000, there were no
beneficial owners of 10% or more of the Common Stock known to the Company other
than Joseph Mazin who was, until July 27, 2000, the President and Chief
Executive Officer of the Company and, until March 31, 2000, a director of the
Company. Mr. Mazin has advised the Company that he timely filed all reports
required by Section 16(a) of the Exchange Act during the fiscal 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Proposal One: Election of Directors - Change in Control" for
information with respect to the Consulting Agreement between the Company and
Millennium and JDK. Harris A. Shapiro, the Chairman of the Board and a director
of the Company, is the sole officer, director and shareholder of Millennium.
On September 7, 2000, the Board designated Mr. Shapiro as the Chief
Executive Officer of the Company and authorized that the Corporation enter into
an employment agreement with him providing for (1) a one-year term commencing
September 1, 2000 and (2) a base annual salary of $150,000, from which will be
deducted any fees paid to Millennium pursuant to the Consulting Agreement.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning the
compensation earned for services rendered in all capacities to the Company
during each of the last three fiscal years by the person then serving as the
Company's Chief Executive Officer. No other executive officer of the Company
earned in excess of $100,000:
9
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Securities Underlying
Principal Position Year Salary($) (1) Options
------------------ ---- ------------- -------
<S> <C> <C> <C>
Joseph Mazin 2000 $45,048 2,766 (2)
President and Chief 1999 60,023 -
Executive Officer 1998 61,317 -
-------------------
</TABLE>
1. There are no employment agreements or contracts between the Company and
Joseph Mazin. As indicated under "Management-Business History," he resigned
as the President and Chief Executive Officer of the Company effective July
27, 2000.
2. See the section "Consulting Warrants" under this caption "Executive
Compensation."
APRIL 1999 WARRANTS AND OPTIONS
In April 1999, the Board of Directors of the Company authorized that
100,000 shares of the Common Stock be reserved for the granting of warrants and
options. A warrant or an option has been, or will be, sold to the respective
grantee for a price of five cents per share and has, or will have, an exercise
price of $1.56 per share. The term of the warrants and options is, or will be,
three years from the respective date of issuance. As of March 31, 2000, an
aggregate of 24,000 shares of the Common Stock had been issued upon the
exercises of options and options to purchase a total of 8,000 shares were
outstanding. During fiscal 2000, an option for 1,500 shares was issued to an
executive officer of the Company. No options were exercised or terminated
between March 31, 2000 and the Record Date.
1985 EMPLOYEE STOCK OPTION PLAN
In January 1985, the Board of Directors of the Company adopted the
Company's 1985 Employee Stock Option Plan (the "1985 Plan"). In November 1985,
the shareholders of the Company approved the 1985 Plan. The Board of Directors
voted to extend the term of the 1985 Plan by 12 months, thereby making the new
expiration date December 31, 1996. The 1985 Plan provided for the grant of both
non-qualified stock options and incentive stock options to officers and other
key employees of the Company and for the grant of non-qualified stock options to
non-employee directors of the Company. The 1985 Plan covered an aggregate of
500,000 shares of the Common Stock. At March 31, 2000, options covering a total
of 76,500 shares of the Common Stock were outstanding at an average exercise
price of $ .9922 per share. Options covering a total of 290,250 shares of the
Common Stock have been cancelled through March 31, 2000. An aggregate of 312,750
shares of the Common Stock has been issued through March 31, 2000 upon the
exercise of options granted under the 1985 Plan. Between March 31, 2000 and the
Record Date, no options have been exercised or terminated and, since December
31, 1996, no new options may be granted. The 1985 Plan is administered by the
Board of Directors of the Company. The exercise price of options granted could
not be less than 100% of the fair market price of the Common Stock
10
<PAGE>
on the date of grant. The rate at which options granted under the 1985 Plan
become exercisable was determined by the Board of Directors at the time of the
grant of the option, provided that the option could not become exercisable in
full and faster than annually over a two-year period and no slower than annually
over a five-year period. Options which have been granted under the 1985 Plan are
exercisable annually with respect to 25% of the total number of shares covered
by the option. Options may not be exercised after the expiration of ten years
from the date of grant, are non-transferable, other than by will or inheritance,
and may be exercised only while an optionee is employed by the Company, except
that an option may provide that it will be wholly or partially exercisable (a)
within three months after an optionee's termination of employment for any reason
other than cause, (b) within one year after an optionee's termination of
employment, if such employment is terminated by reason of the optionee's death
or permanent disability or if the optionee dies or becomes permanently disabled
within three months after the termination of the optionee's employment, and (c)
within thirty days after the termination of an optionee's employment for cause.
The termination of a non-employee director's employment is deemed to occur on
the termination of his or her status as a director of the Company.
CONSULTING WARRANTS
See the section "Change in Control" under the caption "Proposal One:
Election of Directors" for information as to the grant and exercise of the
Consulting Warrants. The shares issued pursuant to the exercised Consulting
Warrants included 2,766 shares to Mr. Mazin, 2,766 shares to another executive
officer and an aggregate of 229,861 shares to four directors of the Company.
STOCK OPTION PLAN OF 2000
On May 22, 2000, the Board of Directors of the Company adopted the 2000
Option Plan. A copy of the 2000 Option Plan is annexed as Appendix B to this
Proxy Statement and is incorporated herein by this reference. In addition, for a
description of the terms of the 2000 Option Plan, see "Proposal Three: Adopt and
Approve 2000 Option Plan and Ratify Options Heretofore Granted Thereunder"
elsewhere in this Proxy Statement.
OPTION GRANTS, EXERCISES AND HOLDINGS
No stock options or stock appreciation rights (SARs) were granted
during fiscal 2000 to the Company's then Chief Executive Officer who is the sole
executive officer named in the Summary Compensation Table.
The following table provides certain summary information concerning the
exercise of options during fiscal 2000 and unexercisable options held as of the
end of fiscal 2000 by the then Chief Executive Officer who is the sole executive
officer named in the Summary Compensation Table:
11
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF VALUE OF
ACQUIRED UNEXERCISED UNEXERCISED IN-
ON VALUE OPTIONS HELD AT THE MONEY OPTIONS
EXERCISE REALIZED FISCAL YEAR END AT FY-END (3)
NAME (#) ($) (#)
<S> <C> <C> <C> <C>
Joseph Mazin 27,766 $160,127 (1) 65,000 (2) $1,141,562
--------------
</TABLE>
(1) Such value is based upon the market value of the Common Stock on the
date exercised less the exercise price paid at the time of exercise.
(2) As of March 31, 2000, all 65,000 options were exercisable.
(3) Such value is based upon the market value of the Common Stock as of
March 31, 2000, less the exercise price payable per share under such
options.
OTHER COMPENSATION
The Company currently has no pension plan in effect and has in effect
no restricted stock plan, no stock appreciation rights nor any other long-term
incentive plan under which grants or allocations may be made in the fiscal 2000
or thereafter.
DIRECTOR COMPENSATION
Commencing March 31, 2000, directors will receive cash compensation for
services provided as a director. Each director will be paid $250.00 for
telephonic attendance and $500.00 for attendance in person at a meeting.
Directors may be granted stock options as compensation for their
services. During fiscal 2000, each of the five directors was granted a stock
option under the 2000 Option Plan for 25,000 shares of the Common Stock. See the
section "Outstanding Options" under the caption "Proposal Three: Adopt and
Approve 2000 Option Plan and Ratify Options Heretofore Granted Thereunder" for
information as to these options and options subsequently granted to directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2000, the members of the Compensation Committee were
directors Ronald M. Chodorow and Tracie Savage, each of whom was not, during
such fiscal year, an officer or employee of the Company and each of whom was not
formerly an officer of the Company. In addition, neither had any relationship
with the Company requiring disclosure by the Company pursuant to Items 402(j)
and 404 of Regulation S-K of the Commission.
12
<PAGE>
On March 31, 2000, as a result of the changes in the Board of Directors
(see the section "Change in Control" under the caption "Proposal One: Election
of Directors"), the Compensation Committee was reconstituted to consist of the
following two directors: Harris A. Shapiro (Chairman) and Corey P. Schlossmann.
Neither of the two members had any affiliation or relationship with the Company
prior to March 31, 2000 of the type required to be disclosed pursuant to Items
402(j) and 404 of Regulation S-K of the Commission. See, however,
"Management-Certain Relationships and Related Transactions" and "Proposal One:
Election of Directors-Change in Control" for information as the Consulting
Agreement which first became effective on March 31, 2000 insofar as it relates
to Mr. Shapiro and his authorized employment agreement.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Because of the above-described change in the composition of the
Compensation Committee at the end of the fiscal 2000 and the subsequent
resignation of Joseph Mazin as the Chief Executive Officer of the Company as of
July 27, 2000, the Company does not believe that a discussion of the prior
Compensation Committee's compensation policies applicable to the Company's
executive officers would be informative to the Company's shareholders or any
prospective investor reading this Proxy Statement.
PERFORMANCE GRAPH
Had the Company made the election based on its revenues for fiscal 1999
(which were substantially less than $25,000,000, being only $1,689,000) and its
public float as of March 31, 1999 (which was substantially less than
$25,000,000, being only $5,131,894), the Company could have filed during fiscal
2000 as a small business issuer. On such basis, it would not have been required
to provide the performance graph required by Item 402(l) of Regulation S-K of
the Commission. On such basis and in view of its current losses, the Company
requested in its Annual Report on Form 10-K for fiscal 2000 that it not be
obligated to incur the expenses of having a performance graph prepared and
filed.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the Record Date, certain
information with respect to (1) any person known to the Company who beneficially
owned more than 5% of the Common Stock, (2) each director of the Company, each
of whom is a nominee for election at the Meeting, (3) the former Chief Executive
Officer of the Company (such position was vacant as of the Record Date) and (4)
all directors and executive officers as a group. Each beneficial owner who is a
natural person has advised the Company that he or she has sole voting and
investment power as to the shares of the Common Stock, except that, until a
stock option is exercised, there is no voting right.
13
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF
OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK
------------------- BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
------------------ ---------------------
<S> <C> <C>
Joseph Mazin (2) 829,563 (3) 13.5
110 West Easy Street
Simi Valley, CA 93065
Flamemaster Corporation 538,497 (4) 8.8
11120 Sherman Way
Sun Valley, CA 91252
Don Haidl 467,003 7.7
No.1 Twin Lakes Circle
Corona del Mar, CA 92625
JDK & Associates, Inc. (5) 466,869 7.7
19800 MacArthur Blvd., Suite 880
Irvine, CA 92612
William B. Wachtel, 427,873 7.0
Trustee of Digital Trust (6)
c/o Wachtel & Masyr, LLP
110 East 59th Street
New York, NY 10022
Harris A. Shapiro (7) 284,500 (8) 4.7
110 East 59th Street
New York, NY 10022
Bryan Maizlish (9) 4,256 (10) Nil
9705 Conestoga Way
Potomac, MD 20854
Timothy D. Morgan (9) 5,456 (10) Nil
11734 Gladstone Circle
Fountain Valley, CA 92708
Tracie Savage (9) 14,356 (11) Nil
3000 W. Alameda Avenue
Burbank, CA 91523
Corey P. Schlossmann (9) 496,259 (10) 8.1
19654-A Roscoe Blvd.
Northridge, CA 91324
14
<PAGE>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF
OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK
------------------- BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
------------------ ---------------------
All directors and officers as a group 809,643 (12) 13.3
(6 in number)
</TABLE>
-----------
(1) The percentages computed in the table are based upon 6,094,530 shares
of the Common Stock which were outstanding on the Record Date. Effect
is given, pursuant to Rule 13-d(1)(i) under the Exchange Act to shares
issuable upon the exercise of options currently exercisable or
exercisable within 60 days of the Record Date.
(2) Mr. Mazin resigned as the President and Chief Executive Officer of the
Company effective July 27, 2000. See "Management Business History." He
had resigned as a director (and, as a result, Chairman of the Board) on
March 31, 2000. See "Proposal One: Election of Directors-Change in
Control."
(3) The shares of the Common Stock reported in the table include (a)
538,497 shares owned by Flamemaster for which Mr. Mazin has voting
power as the President, Chairman and Chief Executive Officer of
Flamemaster; (b) 36,000 shares owned by the Flamemaster Employees'
Profit Sharing Plan for which Mr. Mazin is the fiduciary; (c) 30,500
shares owned by Altius Investment Corporation ("Altius") for which Mr.
Mazin has shared voting power as Chairman of the Board of Altius; (d)
9,000 shares owned by dandybiz.com, Inc. for which Mr. Mazin has shared
voting power as its President; and (e) 65,000 shares issuable upon
exercise of an option expiring November 24, 2003.
(4) As indicated in Note (3) to this table, Mr. Mazin is also deemed to be
the beneficial owner of these shares.
(5) Joseph D. Kowal is the sole officer, director and shareholder of JDK
and, accordingly, may be deemed the beneficial owner of the shares
reported in the table.
(6) The following disclosure in this Note 6 is based on information from a
Schedule D: William B. Wachtel as the Trustee of the Digital Trust has,
under the trust agreement, sole voting and investment power with
respect to the shares reported in the table which Digital Trust
acquired as a Buyer pursuant to the Stock Purchase Agreement and upon
the "cashless" exercise of a Consulting Warrant (see "Proposal One:
Election of Directors-Change in Control"). Harris Shapiro, currently
the Chairman of the Board and a director of the Company, was the
settler of the Digital Trust and made an irrevocable grant to it of the
assets which the Digital Trust used to effect the purchase of the
shares. The beneficiaries of the Digital Trust are Mr. Shapiro's
children and grandchildren who survive him, although the Trustee, in
his absolute discretion, may pay or apply yearly income or the
principal of the Trust to any beneficiary. Because he made an
irrevocable grant and has no voting or investment power with respect to
the shares, Mr. Shapiro is not the beneficial owner of the shares
reported in the table as being owned of record by the Digital Trust and
beneficially by the Trustee.
15
<PAGE>
(7) Mr. Shapiro is the Chairman of the Board and a director of the Company
and, since September 7, 2000, the Chief Executive Officer of the
Company.
(8) The shares of the Common Stock reported in the table reflect 284,500
shares owned by Millennium for which Mr. Shapiro has voting power as
its President and sole shareholder and do not reflect (a) 25,000 shares
issuable to him upon the exercise of an option expiring March 30, 2010
or (b) 25,000 shares issuable to him upon the exercise of an option
expiring September 6, 2000, neither of which was exercisable at the
Record Date or within 60 days thereafter. See Note 6 to the table.
(9) A director of the Company.
(10) The shares of the Common Stock reported in the table do not include (a)
25,000 shares issuable upon the exercise of a stock option expiring
March 30, 2010 or (b) 25,000 shares issuable upon the exercise of an
option expiring September 6, 2010, neither of which was exercisable at
the Record Date or within 60 days thereafter.
(11) The shares of the Common Stock reported in the table include 10,000
shares issuable upon the exercise of an option expiring July 20, 2005
and do not include 25,000 shares issuable upon the exercise of a stock
option expiring March 30, 2010 which was not exercisable at the Record
Date or within 60 days thereafter.
(12) The shares of the Common Stock reported in the table include (a) those
shares indicated in the text to Notes 8, 10 and 11 and (b) 1,500 shares
issuable to an executive officer upon the exercise of a stock option
expiring February 3, 2003.
PROPOSAL TWO: APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee has re-appointed KPMG as the Company's independent
public accountants for fiscal 2001. KPMG LLP became the independent auditors for
the Company in connection with the recently completed audit for fiscal 2000. See
the third succeeding paragraph.
The Board is seeking shareholders' approval of the Audit Committee's
selection of KPMG LLP. The California Corporations Code does not require the
approval of the selection of independent auditors by the Company's shareholders;
however, in view of the importance of the financial statements to shareholders,
the Board of Directors deems it desirable that the Company's shareholders pass
upon the selection of auditors. In the event that shareholders disapprove of the
selection, the Audit Committee will consider the selection of other auditors.
A representative of KPMG LLP will be present at the Meeting. The
Company has been informed that the representative does not intend to make any
statement to the shareholders at the Meeting, but will be available to respond
to appropriate questions from shareholders.
Subsequent to March 31, 2000, the Company effected a change in
independent auditors as follows:
16
<PAGE>
1. On June 19, 2000, the Board of Directors of the Company,
which included all members of its Audit Committee voting in the affirmative,
authorized that the firm of KPMG LLP be retained to audit the financial
statements of the Company for fiscal 2000, replacing the firm of Beckman
Kirkland & Whitney; however, the firm of Beckman Kirkland & Whitney was
retained to continue to prepare and file tax returns for the Company as such
firm has been doing. The Board authorized this change because it intends, as
previously reported, to seek acquisitions for the Company and believed that
retention of a national auditing firm would be in the best interests of the
Company.
2. In connection with the audits of the Company for the two
prior fiscal years, there was no adverse opinion or a disclaimer of opinion
nor was the prior auditors' report qualified or modified as to uncertainty,
audit scope, or accounting principles.
3. During such two prior fiscal years and the subsequent
interim period preceding such change, there were no disagreements with the
former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of the former accountant,
would have caused it to make reference to the subject matter of the
disagreement in its report.
4. There were no "reportable events," as defined in paragraph
(a)(1)(v) of Item 304 of Regulation S-K of the Commission, during the two
most recent fiscal years as to which the former auditors performed an audit
or during the subsequent period preceding the change.
5. Prior to the engagement of the firm of KPMG LLP, neither
the Company nor any one acting on its behalf consulted such accounting firm
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 (ii) any
disagreements with the prior accountants, as to which there were none as
indicated above.
6. A copy of the Company's Report on Form 8-K, as proposed to
be filed, describing the accounting firm change was submitted to the newly
engaged accountants before its filing with the Commission and such firm was
provided with the opportunity to furnish the Company with a letter addressed
to the Commission containing any new information, clarification of the
Company's expression of its views or the respects in which it does not agree
with the statements made by the Company above. The firm of KPMG LLP indicated
to the Company that no such letter was necessary.
7. The Company furnished a copy of the Report on Form 8-K to
the former accountants and requested that such firm furnish the Company with
a letter addressed to the Commission stating whether such firm agreed with
the statements made by the Company in the Report on Form 8-K and, if not,
stating the respects in which it did not agree. The response of the firm of
Beckman Kirkland & Whitney, indicating that the firm agreed with the
statements made in the Report on Form 8-K, was filed in an Amendment to the
Company's Report on Form 8-K.
17
<PAGE>
PROPOSAL THREE: ADOPT AND APPROVE 2000 OPTION PLAN AND
RATIFY OPTIONS HERETOFORE GRANTED THEREUNDER
GENERAL
The third item of business set forth in the Notice of Annual Meeting
is to consider and vote upon a proposal to adopt and approve the 2000 Option
Plan, a copy of which is annexed hereto as Appendix B and which is
incorporated herein by this reference, and to ratify the grant of stock
options heretofore granted thereunder to purchase an aggregate of 350,000
shares of the Common Stock. See the section "Outstanding Options" under this
caption "Proposal Three: Adopt and Approve 2000 Option Plan and Ratify
Options Heretofore Granted Thereunder" for information as to the stock
options outstanding as of the Record Date. The 2000 Option Plan provides for
the grant of stock options to employees (including officers), directors and
consultants.
On May 22, 2000, the Board of Directors of the Company adopted the
2000 Option Plan, subject to shareholders' approval, permitting the grant of
stock options to purchase an aggregate of 1,000,000 shares of the Common
Stock. On September 7, 2000, the Board amended the 2000 Option Plan to
authorize an additional 1,000,000 shares for grant, again subject to
shareholders' approval. The 2000 Option Plan provides for the grant of two
types of stock options: (1) stock options which qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and (2) nonstatutory or nonqualified stock options. Employees
may receive incentive stock options or nonqualified stock options, while
non-employee directors, non-employee officers and consultants may only
receive nonqualified stock options.
REASONS FOR PROPOSAL TO SHAREHOLDERS
The California Corporations Code does not require shareholders'
approval of the 2000 Option Plan, but the Code requires such approval for
incentive stock options. In addition, pursuant to the corporate governance
requirements of the NASD applicable to Nasdaq companies, shareholders'
approval is also required.
The 2000 Stock Option Plan is intended to provide a method whereby
employees of the Company who will be largely responsible for the management
of the business and who will be expected to make substantial contributions to
the future of the Company may be offered incentives in addition to those of
current compensation and may be stimulated by personal involvement in the
fortunes of the Company to continue in its service. Such method of
compensation is common practice in industry. The executive and managerial
personnel who will be the recipients of the stock options customarily expect
to receive stock options as part of their compensation package. If a
meaningful option plan were not available, the Board believes that the
Company's cash expenditures for salaries and other employee benefits would be
significantly higher. The Board believes that, in those instances where a
consultant performs services for the Corporation, a stock option has the same
potential benefits of inducement to the consultant and lowering the costs to
the Company. Similarly, the Board believes that stock options are an
appropriate medium to compensate non-employee directors.
18
<PAGE>
As indicated in the section "1985 Employee Stock Option Plan" under
the caption "Executive Compensation," no additional options may be granted
under the 1985 Plan. As indicated in the section "April 1999 Warrants and
Options" under the same caption, only 68,000 shares of the Common Stock may
be sold pursuant to the April 1999 authorization of warrants and options
(assuming the options to purchase a total of 8,000 shares outstanding on the
Record Date are exercised). The directors do not believe that such amount is
sufficient to induce new employees to join the Company or to remain in its
employ and thereby facilitate the future growth of the Company.
Because all directors and executive officers of the Company will be
eligible to receive, and, as indicated in the section "Outstanding Options"
under this caption "Proposal Three: Adopt and Approve 2000 Option Plan and
Ratify Options Heretofore Granted Thereunder," directors have already
received, stock options under the 2000 Option Plan, each of the current
directors and the sole current executive officer has an interest in Proposal
Three being approved.
TERMS OF PLAN
The 2000 Option Plan, consistent with the provisions of the Code,
provides that the exercise price of an incentive stock option shall not be
less than the fair market value of the Common Stock on the date of grant,
except that, if the employee owns stock possessing more than 10% of the total
combined voting power of all classes of stock, the exercise price of the
option must be at least 110% of the fair market value of the Common Stock on
the date of grant and the incentive stock option cannot be exercised after
five years from the date of grant. As of the Record Date, no employee owned
stock possessing more than 10% of the total voting power of all classes of
stock of the Company (the Common Stock being the only class outstanding). No
stock option to be granted under the 2000 Option Plan may have a term in
excess of ten years. The exercise price of a nonstatutory or nonqualified
option may be less than the fair market value on the date of grant.
The number of shares subject to an outstanding stock option and the
exercise price thereof will be subject to adjustment in the event of a stock
dividend, stock split, reorganization, recapitalization, combination of
shares, change in corporate structure or similar events. No fractional shares
will be issued upon exercise of a stock option and the Company will have no
obligation to pay for such fractional share.
Stock options to be granted under the 2000 Option Plan will
generally be non-transferable and not immediately exercisable. It is expected
that no option to be granted will be exercisable during the first year after
the date of grant and that it will thereafter become exercisable in
installments. Some options to be granted to employees may have performance
goals as the condition precedent to becoming exercisable.
If the optionee's employment will terminate for any reason other
than his or her death or disability, he or she may, for a period of up to
three months, exercise the stock option to the extent exercisable upon the
date of termination. If the optionee's employment will terminate because of
his or her total and permanent disability (as defined in the Code), the
optionee will have 12 months to exercise the stock option to the extent
exercisable upon the date of
19
<PAGE>
termination. In the event of other disability causing termination, the
optionee may have six months (three months in the event the optionee wants
continuous treatment of the stock option as an incentive stock option) to
exercise the stock option to the extent exercisable upon the date of
termination. If the optionee dies, his estate may exercise the stock option
to the extent exercisable upon the date of death of the optionee, whether it
occurred during the initial term or during the three, six or 12-month periods
described in the three preceding sentences. In no event may a stock option be
exercised beyond its original expiration date. Similar provisions will be
applicable to optionees who are not employees.
ELIGIBLE OPTIONEES
As of the Record Date, there were four employees and five directors
who were eligible to receive stock options under the 2000 Option Plan and, as
the Company grows, the number of employees will increase.
The Board is currently unable to determine how many shares of the
Common Stock the Compensation Committee may make subject to stock options to
be granted under the 2000 Option Plan to (1) the Chief Executive Officer of
the Company (the position first being filled on September 7, 2000), the
former Chief Executive Officer being the sole executive officer whose
compensation is reported in the Summary Compensation Table under the caption
"Executive Compensation," (2) all current executive officers as a group, (3)
all current directors who are not executive officers as a group, and (4) all
employees (including all current officers who are not executive officers) as
a group.
During fiscal 2000, no options could be granted under the 1985
Option Plan and the only other options granted were those to purchase an
aggregate of 32,000 shares, including an option to purchase 1,500 shares
which was granted to an executive officer, options to purchase an aggregate
of 6,500 shares granted to six employees, and no option was granted to Joseph
Mazin, the former President and Chief Executive Officer, who was the only
officer whose compensation was reported in the Summary Compensation Table
under the caption "Executive Compensation" elsewhere in this Proxy Statement.
As indicated in the section "April 1999 Warrant and Options" under the same
caption, these options are exercisable at $1.56 per share and were purchased
for $.05 per share. Accordingly, the Board does not believe that the grants
in fiscal 2000 are indicative of what might be granted under the 2000 Option
Plan in any given year.
For a consultant to be eligible to receive a grant of a stock option
under the 2000 Option Plan, the optionee must be a natural person and the
services rendered for the Company must be of a BONA FIDE nature and not in
connection with the offer or sale of securities of the Company in a capital
raising transaction and do not directly or indirectly promote or maintain a
market for the Company's securities. The Board cannot currently determine how
many shares of the Common Stock may be made subject to grants of stock
options to consultants. As indicated in the section "Outstanding Options"
under this caption "Proposal Three: Adopt and Approve 2000 Stock Option Plan
and Ratify Options Heretofore Granted Thereunder," a stock option to purchase
25,000 shares of the Common Stock has been granted to each of the three
current members of the Advisory Board and it is expected that a similar stock
option will be granted to any future member.
20
<PAGE>
OUTSTANDING OPTIONS
On March 31, 2000, the Board of Directors granted, subject to
adoption of a stock option plan (which became the 2000 Option Plan), an
option expiring March 30, 2010 to purchase 25,000 shares of the Common Stock
at $18.50 per share to each of the five directors and the Chairman of the
Company's Advisory Board, or an aggregate of 150,000 shares of the Common
Stock. On May 22, 2000, the Board granted an option expiring May 21, 2010
pursuant to the 2000 Option Plan to purchase 25,000 shares at $4.125 per
share to each of two additional members of the Company's Advisory Board, or
an aggregate of 50,000 shares. On September 7, 2000, the Board granted an
option expiring September 6, 2010 pursuant to the 2000 Option Plan to
purchase 25,000 shares at $4.625 per share to each of the five directors and
the Chairman of the Company's Advisory Board, or an aggregate of 150,000
shares. Each of the foregoing options is not exercisable for a year from its
respective date of grant, on which anniversary date the option becomes
exercisable as to 8,333 shares, and then the option becomes exercisable, on a
cumulative basis, as to 8,333 and 8,334 shares on the second and third
anniversary dates, respectively, of the respective date of grant.
In addition to seeking adoption and approval of the 2000 Option
Plan, the Board of Directors is soliciting in Proposal Three ratification of
the foregoing options to purchase an aggregate of 350,000 shares. If Proposal
Three is not adopted, the options will automatically become void.
MARKET PRICE
The closing sales price of the Common Stock on September 7, 2000 as
reported by Nasdaq was $4.625 per share.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS
The discussion of Federal tax consequences which follows is based
upon an analysis by Messrs. Wachtel & Masyr, LLP, counsel to the Company, of
the current provisions of the Code and the regulations promulgated thereunder.
1. Non-incentive or nonqualified stock options
No income will be recognized by an optionee upon the grant
of an option which is not an incentive stock option and which is not
transferable nor exercisable immediately in full by the optionee. As
indicated in the section "Terms of Plan" under this caption "Proposal Three:
Adopt and Approve 2000 Option Plan and Ratify Options Heretofore Granted
Thereunder," the stock options to be granted under the 2000 Option Plan will
generally meet this requirement of the Code.
Upon exercise of such a non-incentive stock option, the
optionee will recognize income equal to the excess of the fair market value
of the shares being acquired at the time the option is exercised over the
exercise price of such option. If the optionee is an employee, this excess
will also constitute wages subject to the withholding of income tax. An
optionee's basis
21
<PAGE>
for the shares acquired upon the exercise of a non-incentive stock option
will be equal to the fair market value of such shares on the date of exercise.
The gain or loss upon the subsequent disposition of the
shares acquired upon the exercise of a non-incentive stock option will be the
difference between the basis for such shares and the amount realized upon the
sale thereof, and will be capital gain or loss. Under the Code, the maximum
capital gains rate is currently 20% for shares held more than 12 months. If
the shares are qualified small business stock as defined in the Code and are
held for more than five years, 50% of the gain realized on the disposition of
such stock may be excluded for income tax purposes; however, in such event,
the gain not excluded is taxed at the rate of 28%.
At the time an optionee exercises a non-incentive stock
option, the Company will be entitled to a deduction in an amount equal to the
amount required to be reported by such optionee as ordinary income.
In the event a non-incentive stock option is exercised by a
director or officer who is subject to the so-called "short swing" profits
provisions of Section 16(b) of the Exchange Act, such shares will be treated
as being subject to a substantial risk of forfeiture and not transferable
within the meaning of Section 83(a) of the Code for the six-month period
during which Section 16(b) applies. Thus, the optionee will include in income
and the Company may deduct at the time the restriction lapses, rather than at
the time the option was exercised, the difference between the fair market
value of the shares at the time of lapse and the exercise price of the
shares, and the optionee's holding period will begin at that time. However,
the optionee may elect, under the provisions of Section 83(b) of the Code,
within 30 days after the transfer of the shares to the optionee, to treat the
shares acquired upon such exercise as not being subject to a substantial risk
of forfeiture, in which event the tax effects are as set forth in the
preceding paragraphs. In addition, because the grant, not the exercise, of a
stock option under the 2000 Option Plan is generally the "purchase" for the
purpose of determining liability under Section 16(b) of the Exchange Act for
"short swing profits" and because the stock options to be granted under the
2000 Option Plan will generally not be exercisable for at least a one-year
period subsequent to the date of grant, a director or officer will generally
not be taking his or her shares upon exercise of a stock option subject to a
substantial risk of forfeiture because of Section 16(b) of the Exchange Act
and, accordingly, the tax consequences described in this paragraph will not
generally be applicable to his or her exercise.
2. Incentive Stock Options
If an optionee exercises an incentive stock option and does
not dispose of the shares until more than one year after the issuance of the
shares to him or her and two years after the grant of such option, then,
(a) no income will be realized by the optionee upon
either the grant of the incentive stock option or upon his or her purchase of
the shares at the time of the exercise of such option;
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(b) the difference between the option price and the
fair market value of the shares at the time of exercise of such option will
be an adjustment for the purpose of computing the alternative minimum tax for
the year in which the option is exercised; and
(c) when the shares are sold by the optionee, any
amount realized in excess of the option price will be treated as capital gain
and any loss will be treated as a capital loss and, if the shares are
qualified small business stock as defined in the Code, 42% of the amount
excluded from income for regular tax purposes will constitute an item of tax
preference for the purpose of computing the alternative minimum tax.
On the other hand, if the shares acquired upon exercise of
an incentive stock option are disposed of within one year of issuance or less
than two years after the grant of such option (a disqualifying disposition),
the lesser of the difference between the option price and the fair market
value of the shares at the time of exercise of such option and the excess (if
any) of the amount realized on such disposition over the adjusted basis of
such shares (generally cost) will be reported by the optionee as ordinary
income in the year of disposition. Any additional gain will be long-term or
short-term capital gain and any loss will be long-term or short-term capital
loss.
To the extent that an optionee exercises an incentive stock
option and does not make a disqualifying disposition, the Company will not be
entitled to a deduction for Federal income tax purposes at any time in
respect of shares so acquired and disposed of. However, if a disqualifying
disposition is made, the Company will be entitled to a deduction equal to the
amount required to be reported by the optionee as ordinary income and the
Company will be required to make whatever arrangements are necessary to
insure that the amount of tax required to be withheld is available for
payment in money.
To the extent that the aggregate fair market value of the
Common Stock with respect to which incentive stock options are exercisable
for the first time by any optionee during any calendar year (under all plans
of the Company) exceeds $100,000, such options shall be treated as options
which are not incentive stock options. Under this provision of the Code, the
options are taken into account in the order in which they were granted and
the fair market value is determined as of the time the option with respect to
such shares was granted.
In the event an officer or director who is subject to the
so-called "short swing" profits provisions of Section 16(b) of the Exchange
Act on the date of exercise makes a disqualifying disposition of shares
acquired pursuant to an incentive stock option, the amount of ordinary income
recognized by such officer or director will be based on the fair market value
of the shares on the date the restrictions lapse (or, if less, on the date of
disposition) and not on the date of exercise (or the date of disposition, as
the case may be). The employee's holding period will be determined by
reference to the date on which the Section 16(b) restrictions lapse. An
optionee may utilize an election, similar to that available with respect to
non-incentive stock options, pursuant to Section 83(b) of the Code to have
the value on the date of exercise apply. In addition, because the grant, not
the exercise, of a stock option under the 2000 Option Plan will generally be
the "purchase" for the purpose of determining liability under Section 16(b)
of the Exchange Act for "short swing profits" and because the stock options
to be granted under the
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<PAGE>
2000 Option Plan will generally not be exercisable for at least a one-year
period subsequent to the date of grant, a director or officer will generally
not be taking his or her shares upon exercise of a stock option subject to a
substantial risk of forfeiture pursuant to Section 16(b) of the Exchange Act,
and accordingly, the tax consequences described in this paragraph will not
generally be applicable to his or her exercise.
RECOMMENDATION
FOR THE REASONS DESCRIBED ABOVE, THE BOARD OF DIRECTORS RECOMMENDS
THAT THE SHAREHOLDERS VOTE FOR PROPOSAL THREE TO ADOPT AND APPROVE THE 2000
OPTION PLAN AND RATIFY OPTIONS HERETOFORE GRANTED THEREUNDER.
FINANCIAL STATEMENTS
The following audited financial statements and management's
discussion and analysis, all of which appear in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2000, a copy of which is
incorporated into the 2000 Annual Report to Shareholders which accompanies
this Proxy Statement, are incorporated herein by this reference.
<TABLE>
<CAPTION>
Page
in the
Form
10-K
ITEM ----
----
<S> <C> <C>
1. Report of KPMG LLP............................................................. F-1
2. Report of Beckman Kirkland & Whitney........................................... F-2
3. Balance Sheets at March 31, 2000 and 1999 (as restated)........................ F-3
4. Statements of Operations for the Years Ended March 31, 2000, 1999
and 1998 (as restated)......................................................... F-4
5. Statements of Shareholders' Equity and Comprehensive Income (Loss)
for the Years Ended March 31, 2000, 1999 and 1998 (as restated)................ F-5
6. Statements of Cash Flows for the Years Ended March 31, 2000, 1999
and 1998 (as restated)......................................................... F-6
7. Notes to Financial Statements.................................................. F-7
8. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 10
</TABLE>
24
<PAGE>
The following unaudited financial statements and management's
discussion and analysis, all of which appears in the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 as filed and in
Appendix C to this Proxy Statement, are incorporated herein by this reference.
<TABLE>
<CAPTION>
Page
in Appendix C
ITEM -------------
----
<S> <C> <C>
1. Balance Sheets at June 30 and March 31, 2000.......................................... C-2
2. Statements of Operations and Comprehensive Income (Loss) for the
three months ended June 30, 2000 and 1999 (as restated)............................... C-3
3. Statements of Shareholders' Equity for the period from March 31, 2000
through June 30, 2000................................................................. C-4
4. Statements of Cash Flows for the three-month periods ended June 30,
2000 and 1999 (as restated)........................................................... C-5
5. Notes to Financial Statements......................................................... C-6
6. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................ C-8
</TABLE>
OTHER MATTERS COMING BEFORE THE MEETING
As of the date of this Proxy Statement, the Board of Directors does
not know of any matters to be presented to the Meeting other than the three
proposals set forth in the attached Notice of Annual Meeting. If any other
matters properly come before the Meeting, it is intended that the holders of
the management proxies will vote thereon in their discretion.
MISCELLANEOUS
The solicitation of proxies on the enclosed form of proxy is made by
and on behalf of the Board of Directors of the Company and the cost of this
solicitation is being paid by the Company. In addition to the use of the
mails, proxies may be solicited personally, or by telephone or telegraph, by
the officers or directors of the Company.
Shareholders' proposals for inclusion in the Company's proxy
statement for the Annual Meeting of Shareholders in 2001 must be received no
later than March 14, 2001. If a shareholder intends to submit a proposal for
consideration at the Annual Meeting in 2001 by means other than the inclusion
of the proposal in the Company's proxy statement for such Meeting, the
shareholder must notify the Company on or before July 3, 2001 of such
intention or risk management exercising discretionary voting authority with
respect to the management proxies to defeat such proposal when and if
presented at the Meeting.
25
<PAGE>
A copy of the Annual Report to Shareholders is being mailed to all
shareholders as of the Record Date with this Proxy Statement. The Annual
Report incorporates the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2000, including financial statements (including the one
schedule). A request for any exhibit to the Form 10-K may be made by written
or oral request to Irene J. Marino, Vice President Finance and Chief
Financial Officer of the Company, at the following address: 110 West Easy
Street, Simi Valley, CA 93065, or telephone number: (805) 581-4000, extension
215. A reasonable fee for duplicating and mailing will be charged if a copy
of any exhibit is requested.
By Order of the Board of Directors
/s/ Irene J. Marino
-------------------
Irene J. Marino
Secretary
September 11, 2000
26
<PAGE>
APPENDIX A
PERFECTDATA CORPORATION
AUDIT COMMITTEE CHARTER
ORGANIZATION
This Charter governs the operations of the Audit Committee (the "Committee") of
PerfectData Corporation (the "Company"). The Committee shall review and reassess
the Charter at least annually and obtain the approval of the Board of Directors
(the "Board"). The Committee shall be appointed by the Board and shall consist
of at least three directors appointed annually and serving at the pleasure of
the Board, each of whom is independent of management and the Company. For
meetings of the Committee two members (a majority if there are more than three
members of the Committee) of the Committee shall constitute a quorum. No action
may be taken except by the affirmative vote of at least two members (a majority
if there are more than three members of the Committee) of the Committee. In the
absence or disqualification of a member of the Committee, the member or members
present at any meeting and not disqualified from voting, whether or not he, she
or they constitute a quorum, may unanimously appoint another member of the Board
to act at the meeting in place of any such absence of disqualified member,
provided that a majority of the persons acting at the meeting are independent of
management and the Company. Members of the Committee shall be considered
"independent" if they have no relationship that may interfere with the exercise
of their independence from management and the Company. So long as the Company's
Common Stock shall be traded on The Nasdaq Stock Market, Inc., or if in the
future the Common Stock be listed on the American Stock Exchange LLC, the Board
shall interpret "independence" as defined in the rules of the National
Association of Securities Dealers, Inc. (the "NASD"). If the Common Stock should
ever be listed on the New York Stock Exchange, Inc., the Board shall interpret
"independence" as defined by such Exchange or, if appropriate, continue to use
the definition in the NASD rules. All Committee members shall be financially
literate, or shall become financially literate within a reasonable period of
time after appointment to the Committee, and at least one member shall have
accounting or related financial management expertise.
STATEMENT OF POLICY
The Committee shall provide assistance to the Board in fulfilling its oversight
responsibility to the shareholders, potential shareholders, the investment
community and others relating to the Company's financial statements and the
financial reporting process, the systems of internal accounting and financial
controls, the internal audit function (when established), the annual independent
audit of the Company's financial statements and the legal compliance and ethics
programs as established by management and the Board. In so doing, it is the
responsibility of the Committee to maintain free and open communication between
the Committee, the independent auditors, the internal auditors (when engaged)
and management of the Company. In discharging its oversight role, the Committee
is empowered to investigate any matter brought to its attention with full access
to all books, records, facilities and personnel of the Company and the power to
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retain outside counsel, including outside counsel to the Company, or other
experts for this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the Committee is to oversee the Company's
financial reporting process on behalf of the Board and report the results of its
activities to the Board. Management is responsible for preparing the Company's
financial statements, and the independent auditors are responsible for auditing
those financial statements. The Committee, in carrying out its responsibilities,
believes its policies and procedures should remain flexible, in order to best
react to changing conditions and circumstances. The Committee should take the
appropriate actions to set the overall corporate "tone" for quality financial
reporting, sound business risk practices and ethical behavior.
The following shall be the principal recurring processes of the Committee in
carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the Committee may supplement them as
appropriate.
- The Committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately
accountable to the Board and the Audit Committee as representatives of the
Company's shareholders. The Committee shall have the ultimate authority and
responsibility to evaluate and, where appropriate, to replace the independent
auditors. The Committee shall discuss with the auditors their independence
from management and the Company and the matters included in the written
disclosures required by the Independence Standards Board. Annually, the
Committee shall review and recommend to the Board the selection of the
Company's independent auditors, subject to shareholders' approval.
- The Committee shall approve the scope of the annual audit by the
independent auditors and authorize any supplementary reviews, investigations
or audits as it shall deem advisable. Also, the Committee shall discuss with
management, the internal auditors (when engaged) and the independent
auditors the adequacy and effectiveness of the accounting and financial
controls, including the Company's system to monitor and manage business
risk, and legal and ethical compliance programs. Further, the Committee
shall meet separately with the internal auditors (when engaged) and the
independent auditors, with and without management present, to discuss the
results of their examinations.
- The Committee shall review the interim financial statements with
management and the independent auditors prior to the filing of the Company's
Quarterly Report on Form 10-Q. Also, the Committee shall discuss the results
of the quarterly review and any other matters required to be communicated to
the Committee by the independent auditors under generally accepted auditing
standards. The Chairperson of the Committee may represent the entire
Committee for the purposes of this review.
- The Committee shall review with management and the independent auditors
the financial statements to be included in the Company's Annual Report on
Form 10-K (or the annual report to shareholders if distributed prior to the
filing of Form 10-K), including its judgment about the
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<PAGE>
quality, not just acceptability, of accounting principles, the reasonableness of
significant judgments and the clarity of the disclosures in the financial
statements. Also, the Committee shall discuss the results of the annual audit
and any other matters required to be communicated to the Committee by the
independent auditors under generally accepted auditing standards.
- The Committee shall review the independent auditors' management letters
with the auditors and with the corporate staff and engage in the appropriate
follow-up of a recommendation in any such management letter.
- The Committee shall determine the appropriate actions that should be taken
regarding all irregularities uncovered.
- The Committee shall report to the Board on the activities and findings of
the Committee and, when appropriate, make recommendations to the Board based on
these findings.
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<PAGE>
APPENDIX B
STOCK OPTION PLAN OF 2000
OF
PERFECTDATA CORPORATION
SECTION 1. PURPOSE OF THE PLAN. The purpose of this Stock Option Plan of 2000
(the "Plan") is to promote the growth and general prosperity of PerfectData
Corporation, a California corporation (the "Company"), by permitting the Company
to grant options to purchase shares of the Company's Common Stock, no par value
(the "Common Stock"), to directors, officers, employees and consultants of the
Company and, when and if incorporated, subsidiaries thereof. The Plan is
designed to help attract and retain superior personnel for positions of
substantial responsibility with the Company and, if incorporated, its
subsidiaries and to provide directors, officers, employees and consultants with
an additional incentive to contribute to the success of the Company and, if
incorporated, its subsidiaries.
SECTION 2. DEFINITIONS. In addition to the definitions used in Section 1 hereof,
as used herein, the following definitions shall apply:
(a) "Administrator" means the Board, its Compensation Committee or
any other Committee appointed to act in lieu of the Compensation Committee
pursuant to Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under applicable United States state
corporate laws, United States federal and applicable state securities laws, the
Code, any Stock Exchange or Nasdaq rules or regulations and the applicable laws
of any other country or jurisdiction where Options are granted under the Plan,
as such laws, rules, regulations and requirements shall be in effect from time
to time.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Compensation Committee appointed by the
Board or any other Committee appointed by the Board to act in lieu of the
Compensation Committee in accordance with Section 4(a) of the Plan.
(f) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Subsidiary to render services in a capacity other
than as an Employee and is compensated for such services and any director or
officer of the Company, whether compensated for such services or not, who is not
an Employee.
(g) "Continuous Status as an Employee or Consultant" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii)
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<PAGE>
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to any Company policy adopted
from time to time; or (iv) transfers between locations of the Company or between
the Company, its Subsidiaries or their respective successors. For purposes of
this Plan, a change in status from an Employee to a Consultant or from a
Consultant to an Employee will not constitute an interruption of Continuous
Status as an Employee or Consultant.
(h) "Employee" means any person, including officers and directors,
employed by the Company or any Subsidiary of the Company, with the status of
employment determined based upon such minimum number of hours or periods worked
as shall be determined by the Administrator in its discretion, subject to any
requirements of the Code. The payment by the Company of a director's fee to a
director shall not be sufficient to constitute "employment" of such director by
the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" means, as of any date, the fair market
value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established
Stock Exchange or traded on the Nasdaq System (whether its National Market
System or its SmallCap Market), its Fair Market Value shall be the closing sales
price for the Common Stock (or the closing bid price, if no sales were reported)
as quoted on such Exchange or the Nasdaq System, or, if traded on more than one
Exchange, the Exchange with the greatest volume of trading in the Common Stock
on the date of determination or, if such date is not a market trading day, on
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is quoted on the NASD's OTC
Bulletin Board or regularly quoted by a recognized securities dealer but selling
prices are not reported, its Fair Market Value shall be the mean between the
high bid and low asked prices for the Common Stock on the date of determination
or, if such date is not a market trading day, on the last market trading day
prior to the time of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(k) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code, or
any successor provision, as designated in the applicable written Option
Agreement.
(l) "Nasdaq" means The Nasdaq Stock Market, Inc.
(m) "NASD" means the National Association of Securities Dealers,
Inc.
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(n) "Nonqualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option as designated in the applicable written
Option Agreement.
(o) "Option" means a stock option granted pursuant to the Plan.
(p) "Option Agreement" means a written agreement between an
Optionee and the Company reflecting the terms of an Option granted under the
Plan and includes any documents attached to such Option Agreement, including,
but not limited to, a notice of stock option grant and a form of exercise
notice.
(q) "Optioned Stock" means the Common Stock subject to an Option.
(r) "Optionee" means an Employee or Consultant who is granted an
Option.
(s) "Reporting Person" means an officer, director, or greater
than 10% shareholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, or any successor provision, who is required to file reports
pursuant to Rule 16a-3 under the Exchange Act.
(t) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time, or any successor provision.
(u) "Securities Act" means the Securities Act of 1933, as amended.
(v) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(w) "Stock Exchange" means any national securities exchange on
which prices for the Common Stock are quoted at any given time.
(x) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
SECTION 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 2,000,000 shares of the Common Stock. The Shares may be
authorized, but unissued, or reacquired shares of the Common Stock. If an Option
should expire or become unexercisable for any reason without having been
exercised in full, the unpurchased Shares that were subject thereto shall,
unless the Plan shall have been terminated, become available for future grant
under the Plan. In addition, any Shares which are retained by the Company upon
exercise of an Option in order to satisfy the exercise price for such Option or
any withholding taxes due with respect to such exercise shall be treated as not
issued and shall continue to be available for future grant under the Plan.
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SECTION 4 ADMINISTRATION OF THE PLAN.
(a) PLAN PROCEDURE
(i) MULTIPLE ADMINISTRATION BODIES. If permitted by Rule
16b-3, grants under the Plan may be made by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS.
With respect to grants of Options to Employees or Consultants who are Reporting
Persons, such grants shall be made by (A) the Board if the Board may make grants
to Reporting Persons under the Plan in compliance with Rule 16b-3, or (B) the
Compensation Committee designated by the Board unless the Board designates
another Committee to make grants to Reporting Persons under the Plan, which
Compensation Committee or other Committee shall be constituted in such a manner
as to permit grants under the Plan to comply with Rule 16b-3. Once appointed,
either such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase the
size of either such Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of either such
Committee and thereafter directly make grants to Reporting Persons under the
Plan, all to the extent permitted by Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO OTHER CONSULTANTS AND
OTHER EMPLOYEES. With respect to grants of Options to Employees or Consultants
who are not Reporting Persons, the Plan shall be administered by (A) the Board
or (B) the Compensation Committee designated by the Board unless the Board
designates another Committee, which Compensation Committee or other Committee
shall be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, either such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of either such Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies, however caused, and remove all members of
either such Committee and thereafter directly administer the Plan, all to the
extent permitted by the Applicable Laws.
(b) POWER OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, Applicable Laws and in, the case of a Committee, the specific duties
delegated by the Board to such Committee, and subject to the approval of any
relevant authorities, including the approval, if required, of any Stock Exchange
or Nasdaq, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock in accordance with Section 2(j) of the Plan;
(ii) to select the Consultants and Employees to whom
Options may from time to time be granted hereunder;
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(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of the Common Stock
to be covered by each such Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder;
(vii) to determine the consideration to be paid upon
exercise of an Option consistent with Section 8(b) hereof;
(viii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(ix) to construe and interpret the terms of the Plan and
Options granted pursuant to the Plan; and
(x) in order to fulfill the purposes of the Plan and
without amending the Plan, to modify grants of Options to participants who are
foreign nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options.
SECTION 5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonqualified Stock Options may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option may,
if he or she is otherwise eligible, be granted additional Options.
(b) TYPE OF OPTION. Each Option shall be designated in the Option
Agreement as either an Incentive Stock Option or a Nonqualified Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Subsidiary)
exceeds $100,000, such Options shall be treated as Nonqualified Stock Options
with respect to the excess Shares. For purposes of this Section 5(b), Incentive
Stock Options shall be taken into account in the order in which they were
granted and the Fair Market Value of the Shares subject to an Incentive Stock
Option shall be determined as of the date of the grant of such Option.
(c) NO EFFECT ON EMPLOYMENT OR CONSULTING RIGHTS. The Plan shall
not confer upon the holder of any Option any right with respect to continuation
of employment or
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consulting relationship with the Company, nor shall it interfere in any way with
such holder's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
(d) CONSULTANT ELIGIBILITY. To be eligible to receive an Option
under the Plan, a Consultant other than a director or officer must be a natural
person and must provide BONA FIDE services to the Company or a Subsidiary which
are not in connection with the offer or sale of securities of the Company in a
capital raising transaction and do not directly or indirectly promote or
maintain a market for the Company's securities.
SECTION 6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 18 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 14 of the Plan.
SECTION 7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the -Option is granted,
owns stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Subsidiary, the term of the Option shall
be five years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
SECTION 8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) PER SHARE EXERCISE PRICE. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator and set forth in the applicable Option
Agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock representing more than 10%
of the total combined voting power of all classes of stock of the Company or any
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonqualified Stock Option, the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant if required by Applicable Laws and, if not so
required, shall be such price as is determined by the Administrator.
(b) CONSIDERATION. The consideration to be paid for the Shares to
be issued upon exercise of an Option, including the method of payment, shall be
determined by the Administrator. The
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<PAGE>
consideration may consist entirely of (i) cash, (ii) check, (iii) promissory
note (subject to the provisions of Applicable Laws), (iv) other Shares that (A),
in the case of Shares acquired upon exercise of an Option, have been owned by
the Optionee for more than six months on the date of surrender or such other
period as may be required to avoid a charge to the Company's earnings, and (B)
have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which such Option shall be exercised, (v)
authorization for the Company to retain from the total number of Shares as to
which the Option is exercised that number of Shares having a Fair Market Value
on the date of exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised, (vi) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price and any applicable income or employment taxes, (vii) delivery of
an irrevocable subscription agreement for the Shares that irrevocably obligates
the Optionee to take and pay for the Shares not more than twelve months after
the date of delivery of the subscription agreement, (viii) any combination of
the foregoing methods of payment, or (ix) such other consideration and method of
payment for the issuance of Shares to the extent permitted under the Applicable
Laws. In making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
SECTION 9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE. Any Option granted hereunder shall be
exercisable at such times and under such conditions as determined by the
Administrator and reflected in the Option Agreement, which may include vesting
requirements and/or performance criteria with respect to the Company and/or the
Optionee.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) FRACTIONAL SHARES. An Option may not be exercised for a
fraction of a Share. Any fraction of a Share shall be lowered to the nearest
whole Share.
(c) RIGHTS AS SHAREHOLDERS. Until the issuance (as evidenced by
the appropriate entry on the books of a duly authorized transfer agent of the
Company) of the stock certificate evidencing the Shares issuable upon exercise
of an Option, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall cause to be issued such stock
certificate promptly upon exercise of the Option. No adjustment will be made for
a dividend or
B-7
<PAGE>
other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
(d) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP.
Subject to Section 9(e) below, in the event of termination of an Optionee's
Continuous Status as an Employee or Consultant with the Company, such
Optionee may, but only within three months (or such other period of time not
less than 30 days as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time
of grant of the Option and not exceeding three months) after the date of such
termination (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), exercise his or her Option
to the extent that the Optionee was entitled to exercise it at the date of
such termination. To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate. No termination shall be deemed to occur
and this Section 9(d) shall not apply if (i) the Optionee is a Consultant who
becomes an Employee, or (ii) the Optionee is an Employee who becomes a
Consultant.
(e) DISABILITY OF OPTIONEE.
(i) Notwithstanding Section 9(d) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant
as a result of his or her total and permanent disability (within the meaning
of Section 22(e)(3) of the Code), such Optionee may, but only within 12
months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise
it at the date of such termination. To the extent that the Optionee was not
entitled to exercise the Option at the date of termination, or if the
Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of a disability
which does not fall within the meaning of total and permanent disability (as
set forth in Section 22(e)(3) of the Code), such Optionee may, but only
within six months from the date of such termination (but in no event later
than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. However, to the extent that such
Optionee fails to exercise an Option which is an Incentive Stock Option
(within the meaning of Section 422 of the Code) within three months of the
date of such termination, the Option will not qualify for Incentive Stock
Option treatment under the Code. To the extent that the Optionee was not
entitled to exercise the Option at the date of termination, or if the
Optionee does not exercise such Option to the extent so entitled within six
months or three months, as the case may be, from the date of termination, the
Option shall terminate.
(f) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within 30 days following termination of the
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within 12 months following the date of
B-8
<PAGE>
death (but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), by such Optionee's estate or by
a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that had accrued
at the date of death or, if earlier, the date of termination of the
Optionee's Continuous Status as an Employee or Consultant. To the extent that
the Optionee was not entitled to exercise the Option at the date of death or
termination, as the case may be, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(g) Anything in subsections (d), (e) and (f) of this Section 9
notwithstanding and always subject to Applicable Laws, particularly the Code
in the case of an Incentive Stock Option, the Administrator may provide in
the Option Agreement for a different date of termination (but in no event
later than the expiration date of the term of the Option) and may provide for
termination in the event of certain events which the Administrator shall
define as Cause or as shall be so defined in any employment or consulting
agreement between the Company and the Optionee.
(h) RULE 16b-3. Options granted to Reporting Persons shall
comply with Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum
exemption for Plan transactions.
SECTION 10. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding
obligations as provided in this Section 10. When an Optionee incurs tax
liability in connection with an Option, which tax liability is subject to tax
withholding under applicable tax laws, and the Optionee is obligated to pay
the Company an amount required to be withheld under applicable tax laws, the
Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash or check payment, (b) out
of the Optionee's current compensation, (c) if permitted by the
Administrator, in its discretion, by surrendering to the Company Shares that
(i), in the case of Shares previously acquired from the Company, have been
owned by the Optionee for more than six months on the date of surrender, and
(ii) have a Fair Market Value on the date of surrender equal to or more than
the Optionee's marginal tax rate times the ordinary income recognized, or (d)
by electing to have the Company withhold from the Shares to be issued upon
exercise of the Option, if any, that number of Shares having a Fair Market
Value equal to the amount required to be withheld. For this purpose, the Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
B-9
<PAGE>
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
SECTION 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN
OTHER TRANSACTIONS.
(a) CHANGE IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option, and the number of shares of Common Stock that
have been authorized for issuance under the Plan but as to which no Options
have yet been granted or that have been returned to the Plan upon
cancellation or expiration of an Option, as well as the exercise price per
share of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination, recapitalization or reclassification of the
Common Stock, or any other increase or decrease in the number of issued
shares of the Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Administrator, whose
determination in that respect shall be final, binding and conclusive. Except
as expressly provided herein, no issuance by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of shares of Common Stock subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least 15 days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale
of all or substantially all of the Company's assets or a merger of the
Company with or into another corporation where the successor corporation
issues its securities to the Company's shareholders, each outstanding Option
shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor
corporation, unless the successor corporation does not agree to assume the
Option or to substitute an equivalent option, in which case such Option shall
terminate upon the consummation of the merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's shareholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without
receipt of consideration by the Company, the Administrator may, in its
discretion, appropriately adjust the price per share of Common Stock covered
by each outstanding Option to reflect the effect of such distribution.
SECTION 12. NON-TRANSFERABILITY OF OPTIONS. Options may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than
by will or by the laws of
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<PAGE>
descent or distribution and may be exercised during the lifetime of the
Optionee only by the Optionee.
SECTION 13. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the
determination granting such Option, or such other date as is determined by
the Administrator; provided, however, that in the case of any Incentive Stock
Option, the grant date shall be the later of the date on which the
Administrator makes the determination granting such Incentive Stock Option or
the date of commencement of the Optionee's employment relationship with the
Company. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
SECTION 14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange or Nasdaq), the Company
shall obtain shareholder approval of any Plan amendment in such a manner and
to such a degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or
termination of the Plan shall adversely affect Options already granted,
unless mutually agreed otherwise between the Optionee and the Board, which
agreement must be in writing and signed by the Optionee and the Company.
SECTION 15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated under the
Securities Act or the Exchange Act, and the requirements of any Stock
Exchange or Nasdaq.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased 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 by law.
SECTION 16. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the
lawful issuance and sale of any Shares hereunder, shall relieve the Company
of any liability in respect of the failure to issue or sell such Shares as to
which such requisite authority shall not have been obtained.
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<PAGE>
SECTION 17. OPTION AGREEMENTS. Options shall be evidenced by written Option
Agreements in such form(s) as the Administrator shall approve from time to
time.
SECTION 18. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within 12 months before or after
the date the Plan is adopted. Such shareholder approval shall be obtained in
the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed or Nasdaq
if the Common Stock is traded therein. All Options issued under the Plan
shall become void in the event such approval is not obtained.
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<PAGE>
APPENDIX C
PERFECTDATA CORPORATION
FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE-MONTH
PERIOD ENDED JUNE 30, 2000
(AS THEY APPEAR IN THE QUARTERLY REPORT ON FORM 10-Q)
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<PAGE>
PERFECTDATA CORPORATION
Balance Sheets
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents, including
short-term certificates of deposit of
$213 at June 30, 2000 and
$222 at March 31, 2000, respectively $ 3,955 $ 4,087
Accounts receivable, less allowance
for doubtful receivables 257 233
Inventories 392 375
Prepaid expenses and other current assets 67 56
Marketable securities, short-term 215 250
------------------ ------------------
Total current assets 4,886 5,001
Property, plant and equipment, at cost, net 56 53
Other assets, net 24 24
------------------ ------------------
$ 4,966 $ 5,078
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 293 $ 222
Accrued salaries, wages and vacation 40 39
Other accrued expenses 105 98
------------------ ------------------
Total current liabilities 438 359
------------------ ------------------
Shareholders' equity:
Preferred Stock. Authorized 2,000,000
shares; none issued - -
Common Stock, no par value. Authorized
10,000,000 shares; issued and
outstanding 6,094,530 shares at
June and at March 11,088 11,088
Accumulated deficit (6,511) (6,345)
Accumulated other comprehensive loss (49) (24)
------------------ ------------------
Net shareholders' equity 4,528 4,719
------------------ ------------------
$ 4,966 $ 5,078
================== ==================
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
PERFECTDATA CORPORATION
Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999
2000 (AS RESTATED)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 500 $ 524
Cost of goods sold 383 330
-------------------------------------
Gross profit 117 194
Selling, general and administrative expenses 340 288
-------------------------------------
Loss from operations (223) (94)
Other income:
Interest income, net 5 5
Other, net 52 39
-------------------------------------
Net loss (166) (50)
Other Comprehensive Income:
Unrealized gain (loss) on marketable securities (25) 300
-------------------------------------
Comprehensive income (loss) $ (191) $ 250
=====================================
Net loss per common share - basic and diluted $ (.03) $ (.02)
=====================================
Weighted average shares outstanding - basic and diluted 6,094 3,175
=====================================
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
PERFECTDATA CORPORATION
Statements of Shareholders' Equity
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Period from March 31, 2000 through June 30, 2000
----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK OTHER NET
-------------------------------------- ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT DEFICIT INCOME (LOSS) EQUITY
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 2000 6,094 $ 11,088 $ (6,345) $ (24) $ 4,719
Net unrealized loss on
marketable securities - - - (25) (25)
Net loss - - (166) - (166)
-------------------------------------------------------------------------------------------------------------------------------
Balance at
June 30, 2000 6,094 $ 11,088 $ (6,511) $ (49) $ 4,528
===============================================================================================================================
</TABLE>
See accompanying notes to financial statements.
C-4
<PAGE>
PERFECTDATA CORPORATION
Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
JUNE 30,
--------------------------------------------
1999
2000 (AS RESTATED)
---- -------------
<S> <C> <C>
Cash Flows from operating activities:
Net loss $ (166) $ (50)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 4 7
Stock Issued for services - 26
(Increase) in accounts receivable (24) (131)
(Increase) decrease in inventories (17) 16
(Increase) decrease in prepaid
expenses and other current assets (11) 16
Increase in accounts payable 71 97
Increase in accrued expenses 8 19
------------- -------------------
Net cash used in operating activities (135) -
------------- -------------------
Cash flows from investing activities:
Purchases of property, plant, and equipment $ (7) -
Decrease in investment securities, net 10 20
------------- -------------------
Net cash provided by investing activities 3 20
------------- -------------------
Increase (decrease) in cash and cash equivalents (132) 20
Cash and cash equivalents at beginning of period 4,087 1,074
------------- -------------------
Cash and cash equivalents at end of period $ 3,955 $ 1,094
============= ===================
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
PERFECTDATA CORPORATION
Notes to Financial Statements
1. In the opinion of the Company, the unaudited financial statements
contained in this Report have been prepared on a basis consistent with the
financial statements contained in the Company's Annual Report on Form 10-K for
the year ended March 31, 2000 ("Annual Report 2000"). As reported in the Annual
Report 2000, when the Company was informed it lost its major customer in June
1997, the Company failed to recognize the event in determining the
recoverability of deferred tax assets and did not record an appropriate
valuation allowance at March 31, 1997. Accordingly, certain accounts were
restated to reflect the correction of this error. All adjustments included in
the financial statements in this Report are of a normal recurring nature and are
necessary to present fairly the Company's financial position as of June 30, 2000
and the results of its operations and cash flows for the three months ended June
30, 2000 and 1999. Results of operations for interim periods are not necessarily
indicative of results of operations for a full year due to external factors that
are beyond the control of the Company.
2. MARKETABLE SECURITIES
Marketable securities classified as current assets at June 30, 2000 and
March 31, 2000, respectively, are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------------- -------------------
Fair Value Cost Fair Value Cost
---------- ---- ---------- ----
<S> <C> <C> <C> <C>
Other Government Obligations $ 24 $ 27 $ 25 $ 27
Marketable equity securities 191 237 225 247
---------- ---------- ---------- ----------
$ 215 $ 264 $ 250 $ 274
========== ========== ========== ==========
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
<S> <C> <C>
Raw materials $ 184 $ 176
Work in process 20 20
Finished products 188 179
----------- -----------
$ 392 $ 375
=========== ===========
</TABLE>
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<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------- --------------
<S> <C> <C>
Machinery and equipment $ 316 $ 316
Furniture and fixtures 81 74
Tooling 3 3
Leasehold improvements 155 155
------------ -----------
555 548
Less accumulated
Depreciation and amortization 499 495
------------ -----------
$ 56 $ 53
============ ===========
</TABLE>
5. INCOME TAXES
At June 30, 2000, the Company had net operating loss (NOL)
carryforwards of approximately $3,857,000 for federal income tax purposes
expiring in varying amounts through 2020. The NOL carryforwards, which are
available to offset future profits of the Company and are subject to limitations
should a "change in ownership" as defined in the Internal Revenue Code occur,
will begin to expire in 2001 if not utilized. Additionally, the Company has
general business tax credit carryforwards of $174,000 which will begin to expire
in 2000.
SFAS 109 requires that the tax benefit of such NOLs and other deferred
tax assets be recorded using current tax rates as an asset to the extent
management assesses the utilization of such NOLs and other assets to be more
likely than not. Management has determined that future taxable income of the
Company will likely not be sufficient to realize the recorded deferred tax asset
of $1,718,000. As such, the Company has recorded a valuation allowance of
$1,718,000.
6. STOCK OPTION PLAN OF 2000
On May 22, 2000, two new Advisory Board Members were each granted a
stock option for 25,000 shares of Common Stock under the Stock Option Plan of
2000. The Plan, as well as the stock option grants, are subject to approval by
the shareholders.
7. LOSS PER COMMON SHARE
Basic net loss per share is based on the weighted average number of
shares outstanding during each of the respective periods. Diluted net loss per
share includes the dilutive effect of all Common Stock equivalents, such as
stock options. During the respective periods, the impact of the Common Stock
equivalents was antidilutive, therefore they have been excluded from the
calculation.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the first fiscal quarter ended June 30, 2000 ("current
quarter") were $500,000 compared to $524,000 in the year-earlier period. The
decrease in sales of $24,000, or 4.6%, was due, in part, to a decline in
business with the Company's European distributor. The Company is seeking new
channels of distribution for its products in Europe.
Cost of goods sold as a percentage of net sales was 76% for the current
quarter compared to 63% in the year-earlier period. The increase primarily
related to an increase in the material cost of the gases used in the Company's
principal selling product line of compressed gas dusters. The Company began
incurring this cost increase during the quarter ended September 30, 1999.
Selling, General and Administrative Expenses ("Expenses") for the
current quarter were $340,000 compared to $288,000 in the year-earlier period.
The increase in Expenses of $52,000, or 18.1%, directly related to costs
associated with opening an acquisition and merger office, legal fees for the
Company's new Corporate Counsel and an increase in accounting fees.
The increased loss from operations in the current quarter was primarily
due to the increase in cost of goods sold and Expenses as described above. As
previously reported in the Annual Report 2000, the shareholders of the Company
approved the Stock Purchase Agreement and related transactions on March 31,
2000, which resulted in a change in control of the Company. The new Board is
currently reviewing what actions would be appropriate to effect a turn around in
the Company's operations. There can be no assurance, however, as to when such
actions will be implemented or as to the success thereof.
Other income for the current quarter was primarily dividend income of
$56,000 net of loss on securities of $2,000, as compared to Other Income in the
year-earlier period of dividend income of $11,000, a gain on securities of
$8,000 and miscellaneous income of $19,000. The increase in dividend income in
the current quarter directly relates to the $3,000,000 which the Company
received from the sale of its Common Stock pursuant to the Stock Purchase
Agreement.
The Company, with its new directors, is seeking acquisitions which may
or may not be related to its current business. There can, of course, be no
assurance that any such acquisitions will be effected.
Joseph Mazin resigned as President and Chief Executive Officer of the
Company effective July 27, 2000. However, Mr. Mazin will continue to serve as a
Consultant to the Company until March 31, 2001. The Board is seeking a
replacement for Mr. Mazin on an interim and ultimately permanent basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $132,000, from $4.087
million at March 31, 2000 to $3.955 million at June 30, 2000. The decrease in
cash during the first quarter of fiscal 2001 resulted primarily from $135,000
used in operating activities. The cash used in operating activities was
primarily the result of the net loss of $166,000, as well as
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<PAGE>
increases in accounts receivables, inventories and prepaid expenses and other
current assets, partially offset by the increase in accounts payable
The Company believes that it has sufficient working capital ($4.448
million at June 30, 2000) to finance the Company's operational requirements for
at least the next twelve months.
At June 30, 2000, the Company had net operating loss and general
business tax credit carry forwards for income tax purposes of approximately
$3,857,000 and $174,000, respectively, available to reduce future potential
Federal income taxes. See note 5 to the financial statements.
YEAR 2000 UPDATE
The Company has completed its Year 2000 ("Y2K") Project ("Project") as
scheduled, including addressing leap year calendar date calculation concerns.
The possibility of significant interruptions of normal operations has been
reduced. As of August 10, 2000, the Company's products, computing, and
communications infrastructure systems have operated without Y2K related problems
and appear to be Y2K ready. The Company is not aware that any of its major
customers or third-party suppliers have experienced significant Y2K related
problems.
Contingency plans are complete and will be implemented if required.
Should a significant problem occur, the Company would revert to standard manual
contingency procedures to continue operation until the problem is corrected.
Readers are cautioned that forward-looking statements contained in the
Year 2000 Update should be read in conjunction with the Company's disclosures
under the caption "Forward-Looking and Cautionary Statements" in this item.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
implementation of SAB 101 would be reported as a change in accounting principle.
In June 2000, the SEC issued SAB 101B which delays the implementation date of
SAB 101 until the fourth fiscal quarter of fiscal years beginning after December
15, 1999.
In March 2000, the FASB issued FASB Interpretation No. 44
("Interpretation No. 44"), and interpretation of APB Opinion No. 25, Accounting
for Certain Transactions involving Stock Compensation. Interpretation No. 44 is
effective after July 1, 2000, but certain conclusions in Interpretation No. 44
cover specific events that occur after either December 15, 1998, or January 12,
2000. To the extent that Interpretation No. 44 covers events occurring during
the period after December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying Interpretation No. 44
are recognized on a prospective basis from July 1, 2000.
While the Company has not fully assessed the impact of the adoption of
these recently issued accounting pronouncements, the Company believes that
adoption of these accounting pronouncements will not have a significant impact
on the Company.
C-9
<PAGE>
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
With the exception of historical information, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations include certain forward-looking statements that involve risks and
uncertainties. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
information that is forward-looking and, accordingly, involves risks and
uncertainties, including, without limitation, statements regarding the Company's
future financial performance, and the results or success of discussions with
other entities on mergers, acquisitions, or alliance possibilities and expansion
of the Company's current product offerings. Other risks are discussed in the
Annual Report 2000. As a result, actual results may differ materially from those
described in the forward-looking statement. The Company cautions that the
foregoing list of important factors is not exclusive. The Company does not
undertake to update any forward-looking statement in this Report.
C-10
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Notice of Annual Meeting of Shareholders ....N/A
Proxy Statement:
Voting Securities..............................1
Proposal One: Election of Directors............2 PERFECTDATA CORPORATION
Management.....................................8
Executive Compensation.........................9
Security Ownership of Certain Beneficial
Holders and Management.....................13
Proposal Two: Appointment of Independent
Auditors...................................16
Proposal Three: Adopt and Approve 2000 NOTICE OF ANNUAL MEETING
Option Plan and Ratify Options Heretofore OF SHAREHOLDERS AND
Granted Thereunder.........................18 PROXY STATEMENT
Financial Statements..........................24
Other Matters Coming Before Meeting...........25
Miscellaneous.................................25
Appendix A - Audit Committee Charter.........A-1
Appendix B - 2000 Stock Option Plan .........B-1
Appendix C - Financial Statements
(Unaudited) for Three-Month
Period Ended June 30, 2000.................C-1
SEPTEMBER 11, 2000
</TABLE>
================================================================================
<PAGE>
PERFECTDATA CORPORATION
110 WEST EASY STREET
SIMI VALLEY, CA 93065
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Harris A. Shapiro and Corey P.
Schlossmann as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all of the
shares of the Common Stock of PerfectData Corporation (the "Company") held of
record by the undersigned on August 21, 2000 at the Annual Meeting of
Shareholders to be held on October 19, 2000 or at any adjournment thereof.
1. Election of Harris A. Shapiro, Bryan Maizlish, Timothy D. Morgan,
Tracie Savage and Corey P. Schlossmann as Directors of the Company.
/ / FOR all nominees listed above.
FOR all nominees listed above EXCEPT: ______________________________
(INSTRUCTION: To withhold authority to vote on any individual nominee(s), write
his/her name(s) in the space above.)
/ / WITHHOLD AUTHORITY to vote for all the nominees listed above.
2. Proposal to Ratify the Appointment of KPMG LLP as Independent Auditors
of the Company.
/ / FOR / / AGAINST / / ABSTAIN
3. Proposal to Adopt and Approve 2000 Option Plan and Ratify Options
Heretofore Granted Thereunder.
/ / FOR / / AGAINST / / ABSTAIN
4. To transact such other business as may come before the Annual Meeting
or any adjournment thereof.
<PAGE>
This proxy, when executed, will be voted in the manner directed by the
undersigned shareholder(s). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1, 2 AND 3
PLEASE MARK, SIGN, DATE, AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED
ENVELOPE
I (we) shall attend the Annual Meeting in person Yes / / No / /
Please sign exactly as your
name appears to the left.
When shares are held by
joint tenants, please both
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 the
President or other
authorized officer. If a
partnership, please sign in
full partnership name by a
duly authorized person.
---------------------------
Signature
---------------------------
Signature, if held jointly
Date: _______________, 2000
