<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
The Coast Distribution System, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] Fee not required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
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<PAGE> 2
THE COAST DISTRIBUTION SYSTEM, INC.
350 WOODVIEW AVENUE
MORGAN HILL, CALIFORNIA 95037
(408) 782-6686
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 27, 1999
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders of The
Coast Distribution System, Inc., a Delaware corporation (the "Company"), will be
held at the Executive Offices of the Company, 350 Woodview Avenue, Morgan Hill,
California, on Tuesday, July 27, 1999, at 10:00 A.M., Pacific Time, for the
following purposes, as more fully described in the accompanying Proxy Statement:
(1) To elect the following Class II nominee to serve as a director of the
Company for a term of three years or until his successor is elected and
has qualified:
John W. Casey
(2) To approve the Company's 1999 Stock Incentive Plan (the "1999 Plan")
which authorizes the grant, to officers, other key employees and
directors, of options and rights to purchase up to an aggregate of
300,000 shares of common stock of the Company; and
(3) To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
Only stockholders of record at the close of business on June 18, 1999 will
be entitled to vote at the meeting or any adjournment or postponement thereof.
By Order of the Board of Directors
Sandra A. Knell
Secretary
June 29, 1999
YOUR VOTE IS IMPORTANT. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING YOU SHOULD COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY. ANY
STOCKHOLDER PRESENT AT THE MEETING MAY WITHDRAW HIS OR HER PROXY AND VOTE
PERSONALLY ON EACH MATTER BROUGHT BEFORE THE MEETING. STOCKHOLDERS ATTENDING THE
MEETING WHOSE SHARES ARE HELD IN THE NAME OF A BROKER OR OTHER NOMINEE WHO
DESIRE TO VOTE THEIR SHARES AT THE MEETING SHOULD BRING WITH THEM A PROXY OR
LETTER FROM THAT FIRM CONFIRMING THEIR OWNERSHIP OF SHARES.
<PAGE> 3
THE COAST DISTRIBUTION SYSTEM, INC.
350 WOODVIEW AVENUE
MORGAN HILL, CALIFORNIA 95037
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 27, 1999
------------------------
INTRODUCTION
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors of The Coast Distribution System, Inc., a
Delaware corporation (the "Company"), for use at its 1999 Annual Meeting of
Stockholders to be held on Tuesday, July 27, 1999, at 10:00 A.M., at the
executive offices of the Company, 350 Woodview Avenue, Morgan Hill, California
95037. It is contemplated that this solicitation of proxies will be made
exclusively by mail; however, if it should appear desirable to do so in order to
ensure adequate representation at the meeting, directors, officers and employees
of the Company may communicate with stockholders, brokerage houses and others by
telephone, telegraph or in person to request that proxies be furnished and may
reimburse banks, brokerage houses, custodians, nominees and fiduciaries for
their reasonable expenses in forwarding proxy materials to the beneficial owners
of the shares held by them. All expenses incurred in connection with this
solicitation shall be borne by the Company.
Holders of shares of common stock of the Company ("stockholders") who
execute proxies retain the right to revoke them at any time before they are
voted. Any proxy given by a stockholder may be revoked or superseded by
executing a later dated proxy, by giving notice of revocation to the Secretary
of the Company, 350 Woodview Avenue, Morgan Hill, California 95037, in writing
prior to or at the meeting or by attending the meeting and voting in person. A
proxy, when executed and not so revoked, will be voted in accordance with the
instructions given in the proxy. If a choice is not specified in the proxy, the
proxy will be voted "FOR" the election, as a director, of the nominee named in
this Proxy Statement and "FOR" approval of the 1999 Stock Incentive Plan. This
Proxy Statement is first being mailed to stockholders on or about June 29, 1999.
VOTING SECURITIES
The shares of common stock constitute the only outstanding class of voting
securities of the Company. Only the stockholders of the Company of record as of
the close of business on June 18, 1999 (the "Record Date"), will be entitled to
vote at the meeting or any adjournment or postponement thereof. As of the Record
Date, there were 4,458,141 shares of common stock outstanding and entitled to
vote. Each stockholder is entitled to one vote for each share of Common Stock
held as of the Record Date. Abstentions and broker non-votes are each included
in the determination of the number of shares present and voting for the purpose
of determining whether a quorum is present. For any matter, other than the
election of directors, that requires the affirmative vote of a majority of the
shares present and voting at the annual meeting, an abstention will have the
same effect as a vote against a proposal and a broker non-vote will not be
counted as having been voted on such matter and, therefore, will have no effect
on the outcome of a proposal.
All stockholders entitled to vote at the Annual Meeting of Stockholders may
cumulate the votes in the election of directors. With cumulative voting, each
stockholder is entitled to a number of votes equal to the number of directors to
be elected multiplied by the number of shares of common stock held by such
stockholder, and those votes may be cast for a single candidate for director or
distributed among as many candidates as such stockholder desires. However, in
accordance with the applicable provisions of the Company's Certificate of
Incorporation, no stockholder may cumulate votes for any candidate for director
unless the name of such candidate is placed in nomination before the voting and
any stockholder, before the voting, gives oral or written notice to the
Secretary of the Company at the Annual Meeting of such
<PAGE> 4
stockholder's intention to cumulate his or her votes. If such notice is given by
any stockholder entitled to vote at the Annual Meeting, then every stockholder
entitled to vote at the Annual Meeting will be entitled to cumulate his or her
votes in the election of directors. The proxies solicited by the Board of
Directors confer discretionary authority in the proxy holders to cumulate votes
and to allocate such votes among the nominees of the Board of Directors as such
proxy holders deem appropriate so that, if shares are voted cumulatively in the
election of directors, the maximum number of such nominees will be elected. Such
proxy holders do not intend to cumulate votes at the Annual Meeting, but they
reserve the right to do so if cumulative voting is properly elected by a
stockholder of the Company that is not one of such proxy holders.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 18, 1999, information regarding
the ownership of the Company's outstanding common stock by each person known to
management to own, beneficially or of record, more than five percent (5%) of the
common stock and by each director and executive officer of the Company and all
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
------------------------------------ ----------------------- --------
<S> <C> <C>
Thomas R. McGuire.................................... 678,829(2) 15.2%
350 Woodview Avenue
Morgan Hill, CA 95037
Dimensional Fund Advisors Inc. ...................... 404,600(3) 9.1%
1299 Ocean Avenue
Santa Monica, CA 90401
John E. Turco........................................ 222,192(4) 4.9%
Louis B. Sullivan.................................... 118,570(4) 2.6%
John W. Casey........................................ 9,000(4) *
Ben A. Frydman....................................... 13,000(4) *
Robert S. Throop..................................... 15,000(4) *
Sandra A. Knell...................................... 92,465(5) 2.0%
Jeffrey R. Wannamaker................................ 72,490(5) 1.6%
David A. Berger...................................... 60,831(5) 1.3%
Dennis A. Castagnola................................. 21,246(5) *
All directors and officers as a group (10 persons)... 1,303,623(6) 27.8%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted below, the persons named in the table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them, subject to community property laws where applicable.
(2) Does not include an aggregate of 50,016 shares held in trust for the benefit
of Mr. McGuire's adult children, as to which Mr. McGuire disclaims
beneficial ownership. Includes 34,750 shares subject to outstanding stock
options exercisable during the 60-day period ending August 17, 1999.
(3) In a report filed with the Securities and Exchange Commission, Dimensional
Fund Advisors, Inc., a registered investment advisor ("DFA"), has reported
that all 404,600 shares are held in portfolios of DFA Investment Dimensions
Group, Inc., a registered open ended investment company or in series of the
DFA Investment Trust Company, a Delaware business trust, or the DFA Group
Trust and DFA Participation Group Trust, investment vehicles for qualified
employee benefit plans for which DFA serves as investment manager. DFA
disclaims beneficial ownership of all such shares.
(4) Includes shares subject to outstanding stock options, as follows: Mr.
Sullivan -- 12,000 shares; Mr. Turco -- 12,000 shares; Mr. Frydman -- 12,000
shares; Mr. Throop -- 10,000 shares, and Mr. Casey -- 2,000 shares.
2
<PAGE> 5
(5) Includes shares subject to outstanding stock options exercisable during the
60-day period ending August 17, 1999, as follows: Mrs. Knell -- 54,500
shares; Mr. Wannamaker -- 54,500 shares; Mr. Berger -- 42,500 shares; and
Mr. Castagnola -- 16,750 shares.
(6) Includes 251,000 shares subject to outstanding stock options exercisable
during the 60-day period ending August 17, 1999.
PROPOSAL ONE
ELECTION OF DIRECTORS
As of the date of the Annual Meeting, the authorized number of directors
will be four (4), as a result of decisions by Messrs. Sullivan and Turco to
retire and not stand for reelection to the Board. The Company's Bylaws provide
for a classified Board of Directors with one class of directors elected each
year for a term of three years. The Director in Class II, John W. Casey, holds
office until the 1999 Annual Stockholders Meeting; the Directors in Class III,
Thomas R. McGuire and Ben A. Frydman, hold office until the 2000 Annual
Stockholders Meeting; and the Director in Class I, Robert S. Throop, holds
office until the 2001 Annual Stockholders Meeting.
Unless authority to vote for the Class II Nominee has been withheld in the
proxy, the persons named in the enclosed proxy intend to vote at the Annual
Meeting for the election of John W. Casey, who is an incumbent director, as the
Class II Director of the Company to serve for a term of three years or until his
successor is elected and qualified. Under Delaware law, the nominee receiving
the highest number of votes will be elected as the Class II Director at the
Annual Meeting. As a result, proxies voted to "Withhold Authority," which will
be counted, and broker non-votes, which will not be counted, will have no
practical effect.
Mr. Casey has consented to serve as a Director if he is elected at the
Annual Meeting. If any nominee becomes unavailable for any reason before the
election, then the enclosed proxy will be voted for the election of such
substitute nominees, if any, as shall be designated by the Board of Directors.
The Board of Directors has no reason to believe that the nominee will become
unavailable to serve.
The names and certain information, as of June 18, 1999, concerning, John W.
Casey, the nominee for election as a Class II Director, and the continuing
Directors, are set forth below. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
"FOR" THE ELECTION OF THE NOMINEE NAMED BELOW.
NOMINEE AND DIRECTORS
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH THE COMPANY
------------ -------------------------
<S> <C>
CLASS II NOMINEE
John W. Casey, 55................... Director
CLASS III DIRECTORS
Thomas R. McGuire, 55............... Chairman and Chief Executive Officer and Director
Ben A. Frydman, 52.................. Director and Assistant Secretary
CLASS I DIRECTOR
Robert S. Throop, 61................ Director
</TABLE>
John W. Casey has served as a director since August 1998. From 1980 and
until his retirement in 1994, Mr. Casey was President and Chief Executive
Officer of Shurflo Pump Manufacturing Company ("Shurflo"), which was engaged in
the manufacture and sale of pumps used in pumping and circulating water or other
liquids in a variety of products and equipment, including recreational vehicles
and soft drink dispensing machines. Mr. Casey also serves as a director of
Shurflo Pump Manufacturing Company, A WICOR Company; the Deschutes Basin Land
Trust and RV/MHI Heritage Foundation, Inc.
3
<PAGE> 6
Thomas R. McGuire is a founder of the Company and has been a director since
1977. For more than the past five years he has been Chairman of the Board and
Chief Executive Officer of the Company. From 1981 until August 1985 he also
served as the Company's Chief Financial Officer and Secretary.
Ben A. Frydman has served as a director since 1988. Mr. Frydman is, and for
more than the past five years has been, engaged in the private practice of law,
as a member and shareholder of Stradling Yocca Carlson & Rauth, a Professional
corporation, which provided legal services to the Company in 1998.
Robert S. Throop has served as a director since 1995. Until his retirement
in late 1996, and for more than five years prior thereto, Mr. Throop was the
Chairman and Chief Executive Officer of Anthem Electronics, Inc. ("Anthem"),
which is a national distributor of semiconductor and computer products. Mr.
Throop is also a director of Arrow Electronics, Inc., the corporate parent of
Anthem, and the Manitowoc Company, both of which are public companies.
There are no family relationships among any of the Company's officers or
directors.
BOARD MEETINGS
The Board of Directors of the Company held five meetings during the fiscal
year ended December 31, 1998. In 1998, each of the Directors attended at least
75% of the number of meetings of the Board and of the number of meeting of the
Committees on which he served.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established standing Audit and Compensation
Committees.
The Audit Committee was established to meet with the independent public
accountants to review planned audit procedures and to review with the
independent public accountants and management the results of audits, including
any recommendations of the independent public accountants for improvements in
accounting procedures and internal controls. John Turco and Robert S. Throop
were the members of the Audit Committee in the fiscal year ended December
31,1998, during which the Committee held one meeting. Following the Annual
Meeting, it is expected that Messrs. Throop and Casey will be the members of the
Audit Committee.
The Compensation Committee reviews programs in the areas of employee and
incentive compensation plans, administers the Company's Stock Purchase Plans,
and reviews and makes recommendations to the Board of Directors with respect to
base salary adjustments and bonuses for all officers and other key personnel of
the Company. Louis B. Sullivan, Robert S. Throop and John Turco served as the
members of the Compensation Committee in the fiscal year ended December 31,1998,
during which the Committee held two meetings. Following the Annual Meeting, it
is expected that Messrs. Throop and Casey will be the members of the
Compensation Committee.
The Board of Directors does not have a Nominating Committee. Instead, the
Board of Directors, as a whole, identifies and screens candidates for membership
on the Company's Board of Directors.
DIRECTOR'S COMPENSATION
Directors who also are Company employees receive no compensation for
serving as directors. Non-employee directors are paid a retainer of $6,000 per
year and receive $1,500 for each Board of Directors' meeting attended and are
reimbursed for the out-of-pocket expenses incurred in attending those meetings.
No compensation is paid for attending meetings of Committees of the Board of
Directors on which directors serve. Each non-employee director is automatically
granted, on the date of each annual stockholders' meeting, an option to purchase
2,000 shares of the Company's Common Stock at an exercise price that is equal to
the fair market value of the shares on the date of grant. These options become
fully exercisable six months after the date of grant. Upon joining the Board,
each new non-employee director receives an option to purchase 2,000 shares,
which becomes exercisable in full one year after the date of grant.
4
<PAGE> 7
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based on its review of copies of reporting forms and certifications of the
Company's directors and executive officers, the Company believes that all filing
requirements under Section 16(a) of the Securities Exchange Act of 1934
applicable to its directors and executive officers in the year ended December
31, 1998 were satisfied.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth compensation received for the fiscal year
ended December 31, 1998, by the Company's Chief Executive Officer, and the other
executive officers whose aggregate cash compensation for services rendered to
the Company in all capacities exceeded $100,000 for fiscal year 1998
(collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
----------------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS(1) OPTIONS(#)
--------------------------- ---- --------- -------- ---------------------
<S> <C> <C> <C> <C>
Thomas R. McGuire........................... 1998 $248,276 $20,000 -0-
Chairman of the Board and 1997 248,303 -0- 47,500
Chief Executive Officer 1996 263,532 59,250 -0-
Sandra A. Knell............................. 1998 143,366 13,500 50,000
Chief Financial Officer and 1997 134,039 -0- 20,000
Executive Vice President 1996 121,192 30,500 -0-
Jeffrey R. Wannamaker....................... 1998 160,193 16,500 50,000
Executive Vice President and 1997 134,039 -0- 20,000
President of Distribution Division 1996 121,192 30,500 -0-
David A. Berger............................. 1998 112,116 10,000 20,000
Executive Vice President 1997 106,542 -0- 20,000
1996 102,248 30,500 -0-
Dennis A. Castagnola........................ 1998 112,116 10,000 20,000
Executive Vice President and 1997 108,437 -0- 12,500
President of the DTS Division 1996 94,313 22,100 -0-
</TABLE>
- ---------------
(1) Bonuses were awarded under annual incentive compensation plans.
OPTION GRANTS
Set forth below is certain information regarding options to purchase Common
Stock of the Company that were granted to the Named Officers by the Company in
the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF OPTIONS AT
ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS ALL EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(1) IN FISCAL YEAR(2) ($/SHARE)(3) DATE 5% 10%
---- ------------ ----------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. McGuire.............. -0- 0.0% N/A N/A $ -0- $ -0-
Sandra A. Knell................ 50,000 28.9 3.1875 1/07/08 100,000 254,000
Jeffrey R. Wannamaker.......... 50,000 28.9 3.1875 1/07/08 100,000 254,000
David A. Berger................ 20,000 11.6 3.1875 1/07/08 40,000 101,600
Dennis A. Castagnola........... 20,000 11.6 3.1875 1/07/08 40,000 101,600
</TABLE>
- ---------------
(1) These options vest in five equal annual installments of 20% of the shares
covered by such options. Each option is subject to termination in the event
of the optionee's cessation of employment with the Company.
5
<PAGE> 8
(2) Options to purchase an aggregate of 173,000 shares were granted to all
employees in fiscal 1998, including the Named Officers. Each non-employee
director received options to purchase 2,000 shares in 1998.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the date of exercise, or through a
cashless exercise procedure.
(4) There is no assurance that the values that may be realized on exercise of
such options will be at or near the values estimated in the table, which
utilizes arbitrary compounded rates of growth of the price of the Company's
stock of 5% and 10% per year.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no option exercises by any of the Named Officers in 1998. In
addition, none of the Named Officers held any "in-the-money" options as of
December 31, 1998.
COMPENSATION COMMITTEE INTERLOCKS
In fiscal year 1998 the members of the Committee were Louis B. Sullivan,
John E. Turco and Robert S. Throop, who are non-employee directors of the
Company.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is a standing committee of the Board of
Directors of the Company. The Compensation Committee is responsible for adopting
and evaluating the effectiveness of compensation policies and programs for the
Company and for making determinations regarding the compensation of the
Company's executive officers, subject to review by the full Board of Directors.
The following report is submitted by the members of the Compensation
Committee with respect to the executive compensation policies established by the
Compensation Committee and compensation paid or awarded to executive officers
for fiscal year 1998.
Compensation Policies and Objectives
In adopting compensation programs for executive officers, as well as other
employees of the Company, the Compensation Committee is guided by three basic
principles:
- The Company must offer competitive salaries to be able to attract and
retain highly-qualified and experienced executives and other management
personnel.
- Annual executive compensation in excess of base salaries should be tied
primarily to the Company's performance.
- The financial interests of the Company's senior executives should be
aligned with the financial interests of the stockholders, primarily
through stock option grants and other equity-based compensation programs
which reward executives for improvements in the market performance of the
Company's common stock.
Salaries and Employee Benefits Programs
In order to retain executives and other key employees, and to be able to
attract additional well-qualified executives when the need arises, the Company
strives to offer salaries and health care and other employee benefit programs to
its executives and other key employees which are comparable to those offered by
competing businesses.
In establishing salaries for executive officers, the Compensation Committee
reviews (i) the historical performance of the executives; and (ii) available
information regarding prevailing salaries and compensation programs offered by
competing businesses. Another factor which is considered in establishing
salaries of
6
<PAGE> 9
executive officers is the cost of living in Northern California where the
Company is headquartered, as such cost generally is higher than in other parts
of the country.
In 1998, the Compensation Committee approved 19% increases in the annual
salaries of Mrs. Knell and Mr. Wannamaker and increases of 5% in the respective
annual salaries of Messrs. Berger and Castagnola, in order to make their
salaries more competitive with salaries being paid to individuals holding
similar positions with other corporations based in the San Jose/San Francisco
area where the Company is headquartered. Mr. McGuire's salary was not increased.
However, in 1997, Mr. McGuire took a voluntary pay reduction in his annual
salary to $248,000 from $263,000. Effective in January 1999, the Compensation
Committee approved an increase in his annual salary to bring it back to $263,000
per year.
In order to retain qualified management personnel, the Company also has
followed the practice of seeking to promote executives from within the Company
whenever that is practicable. The Board of Directors believes that this policy
enhances employee morale and provides continuity of management. Typically,
modest salary increases are made in conjunction with such promotions.
Performance-Based Compensation
The Compensation Committee believes that, as a general rule, annual
compensation in excess of base salaries should be made dependent primarily on
the Company's performance. Accordingly, at the beginning of each fiscal year,
the Compensation Committee establishes an incentive compensation program for
executive officers and other key management personnel under which executive
officers and other key management personnel may earn bonuses, in amounts ranging
from 5% to 100% of their annual salaries, provided the Company achieves or
exceeds the earnings goal established for the year.
The earnings goal is established on the basis of the annual operating plan
that is initially developed by management, submitted to the Board of Directors
for its review, possible modification and approval. The annual operating plan,
which is designed to maximize profitability within the constraints of prevailing
economic and competitive conditions, some of which are outside the control of
the Company, is developed on the basis of (i) the Company's performance in the
prior year; (ii) estimates of sales revenue for the plan year based upon recent
market conditions and trends and other factors which, based on historical
experience, are expected to affect the level of sales that can be achieved;
(iii) historical operating costs and cost savings that management believes can
be realized; and (iv) competitive conditions faced by the Company. By taking all
of these factors into account, the earnings goal in the annual operating plan,
which is also the basis on which bonus awards are determined under the incentive
plan, is fixed at what is believed to be a realistic level so as to make the
incentives meaningful to executives and to avoid penalizing executives and other
key management personnel for conditions outside of their control.
In certain instances, bonuses under the incentive plan are awarded not only
on the basis of the Company's overall profitability, but also on the achievement
by an executive of specific objectives within his or her area of responsibility.
For example, a bonus may be awarded for an executive's efforts in achieving
greater than anticipated cost savings, or establishing new or expanding existing
markets for the Company's products. Typically, the maximum bonus that may be
awarded for achievement of specific objectives is determined at the beginning of
the year to provide the requisite incentive for such performance.
As a result of this performance-based bonus program, executive compensation
generally increases in those years in which the Company's profitability
increases. On the other hand, in years in which the Company experiences less
than anticipated profit growth, bonuses, and therefore also total executive
compensation, tend to be lower. The Company did achieve the earnings goal that
had been established for 1998, and, accordingly, bonuses were awarded to
executive officers under the incentive compensation program described above.
Stock Options and Equity-Based Programs
In order to align the financial interests of senior executives and other
key employees with those of the stockholders, the Company grants stock options
to its senior executives and other key employees on a periodic basis and makes
contributions to an employee stock purchase plan under which officers and
employees may
7
<PAGE> 10
elect to have a portion of their salaries withheld and used, together with the
Company's contributions, to purchase common stock of the Company. Stock option
grants, in particular, reward senior executives and other key employees for
performance that results in increases in the market price of the Company's
common stock, which directly benefits all stockholders. Moreover, generally
options are granted on terms which provide that the options become exercisable
in cumulative annual installments, generally over a three-to-five-year period.
The Compensation Committee believes that these features of the option grants not
only provide an incentive for senior executives to remain in the employ of the
Company, but also makes the Company's earnings performance and longer term
growth in share prices important for the executives who receive stock options.
During 1998, the Company granted options to purchase an aggregate of
140,000 shares of its common stock to the Named Officers of the Company. The
Company also made contributions to the Company's Employee Stock Purchase Plan,
which were designed to increase management ownership of the Company's Common
Stock and provide management with a continuing interest in the Company's share
performance.
Louis B. Sullivan
John E. Turco
Robert S. Throop
Notwithstanding anything to the contrary set forth in the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the foregoing Report, and
the performance graph below, shall not be incorporated by reference into any
such filings.
8
<PAGE> 11
COMPANY PERFORMANCE
The following graph shows a five-year comparison of cumulative total
returns for the Company, the American Stock Exchange composite index (the "AMEX
Composite"), and an index of peer group companies (the "Peer Group") selected by
the Company as described below.
COMPARISON OF CUMULATIVE TOTAL RETURN
(COMPANY, AMEX COMPOSITE, PEER GROUP)
<TABLE>
<CAPTION>
COAST DISTRIBUTION SYSTEM, CUSTOMER SELECTED STOCK
INC. LIST AMEX MARKET INDEX
-------------------------- ----------------------- -----------------
<S> <C> <C> <C>
'1993' 100.00 100.00 100.00
'1994' 124.49 98.16 88.33
'1995' 97.96 128.74 113.86
'1996' 59.18 146.99 120.15
'1997' 51.02 188.58 144.57
'1998' 44.90 164.86 142.61
</TABLE>
The graph above compares the performance of the Company with that of (i)
the AMEX Composite index and (ii) a Peer Group consisting of Brunswick
Corporation, Coachmen Industries, Inc., Fleetwood Enterprises, Inc., and
Winnebago Industries, Inc., all of which are manufacturers of recreational
vehicles, and West Marine, Inc., which is a vertically integrated retailer of
boating products and accessories. The Company is the only publicly-traded
company whose primary activity is the wholesale distribution of recreational
vehicle and boating parts and accessories.
The total cumulative return on investment (change in the period-end stock
price plus reinvested dividends) for each of the periods for the Company, the
AMEX Composite and the Peer Group is based on the stock price or index at the
end of fiscal 1993.
9
<PAGE> 12
PROPOSAL TWO
APPROVAL OF 1999 STOCK INCENTIVE PLAN
INTRODUCTION
On April 20, 1999, the Board of Directors adopted The Coast Distribution
System, Inc. 1999 Stock Incentive Plan (the "1999 Plan"), which provides for the
grant, to officers, other key employees and directors of the Company and its
subsidiaries, of options to purchase, and restricted rights to purchase, up to
an aggregate of 300,000 shares of Common Stock of the Company.
Approval of the 1999 Plan requires the favorable vote of the holders of a
majority of the outstanding shares of Common Stock present or represented, and
entitled to vote, at the Annual Meeting. Proxies solicited by management for
which no specific direction is included will be voted FOR approval of the 1999
Plan.
As of June 18, 1999, options for the purchase of an aggregate of 539,500
shares had been issued and were outstanding, and another 20,500 shares were
available for the grant of future options, under the Company's 1993 Option Plan.
However, of the number of options outstanding under the 1993 Option Plan, only
60,000 had in-the-money exercise prices (that is exercise prices above the
prevailing market prices of the Company's outstanding shares). As a result, the
Board concluded that it was advisable for the Company to adopt a new stock
option and stock incentive plan, that would enable the Company to issue options
or stock purchase rights that would provide meaningful incentives needed to
attract new and retain existing officers, key employees and directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 1999 PLAN.
The essential features of the 1999 Plan are summarized below. The summary
does not purport to be a complete description of the 1999 Plan. Copies of the
1999 Plan can be obtained by writing the Secretary, The Coast Distribution
System, Inc., 350 Woodview Avenue, Morgan Hill, California 95037.
DESCRIPTION OF THE 1999 PLAN
The 1999 Plan provides for the grant by the Company of options to purchase
Common Stock, and also provides for sales of shares of restricted Common Stock,
to officers and other key employees and to directors of the Company and its
subsidiaries. If the 1999 Plan is approved by vote of the Stockholders at the
Annual Meeting, the number of shares available for issuance under the 1999 Plan
will be 300,000. The aggregate number and kind of shares covered by the 1999
Plan, and the number and kind of shares and the exercise price per share covered
by outstanding stock options, will be subject to adjustment in the event of any
changes in the character or number of outstanding shares of Common Stock by
reason of stock splits, reverse stock splits, stock dividends, reclassification
or similar changes in the capital structure of the Company.
At June 18, 1999, no options had been granted under the 1999 Plan. As of
that same date, there were five executive officers, five non-employee directors
and approximately 30 other employees of the Company and its subsidiaries that
were eligible to participate in the 1999 Plan.
The 1999 Plan provides that it is to be administered by the Board of
Directors or a committee of at least two directors appointed by the Board (the
"Committee"). The 1999 Plan is administered by the Company's Compensation
Committee, the current members of which are Louis B. Sullivan, John E. Turco,
and Robert S. Throop, all of whom are non-employee directors of the Company.
Following the date of the Annual Meeting, it is expected that the members of the
Committee will be Robert S. Throop and John W. Casey. The Committee has broad
discretion, subject to the terms of the 1999 Plan, to determine the persons
entitled to receive options and/or restricted stock, and the terms and
conditions on which options and/or restricted stock are granted and to interpret
and prescribe rules and regulations relating to the 1999 Plan.
10
<PAGE> 13
STOCK OPTIONS
Options granted under the 1999 Plan may be either "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or "nonqualified stock options," as determined by
the Board of Directors or the Committee at the time of grant. The exercise price
of options must be at least equal to the fair market value of the Common Stock
as of the date of grant; provided, however, that in the case of an incentive
stock option granted to any person who owns, at the time of the grant, stock
possessing more than 10% of the combined voting power of all classes of the
Company's stock or of any parent or subsidiary corporation (a 10% stockholder),
the exercise price must be at least 110% of the fair market value as of the date
of grant. In addition, nonqualified options may be granted on terms which will
permit the optionee to forego other compensation that would be payable to him or
her by the Company, or any parent or subsidiary, in exchange for a reduction in
the aggregate exercise price of such options equal to the amount of other
compensation which such optionee agrees to forego.
Incentive stock options may be granted under the 1999 Plan to officers and
other key employees of the Company or of any parent or subsidiary corporation of
the Company, including directors if they are also employees. Nonqualified stock
options may be granted to officers, key employees and directors (whether or not
employed by the Company). Options may be exercised at such times and be subject
to such restrictions and conditions as the Board or Committee approves, which
need not be the same for all optionees. The Board or Committee has full
discretion to determine the terms of vesting of options, whether by the tenure
of employment or affiliation with the Company, by performance goals or by other
events, which may include a change of control of the Company (provided that the
aggregate fair market value of shares subject to incentive stock options that
become exercisable for the first time in any calendar year cannot exceed
$100,000).
Options granted under the 1999 Plan are not transferable except by will or
the laws of descent and distribution, provided that nonqualified stock options
may be transferred pursuant to a qualified domestic relations order, as defined
in the Code. Options may have a term not exceeding ten years from the date of
grant, and not more than five years from the date of grant in the case of an
incentive stock option granted to a 10% stockholder.
The exercise price of stock options may be paid in cash; by delivery of
other shares of Common Stock owned by the optionee or by cancellation of
indebtedness of the Company to the optionee (in either case with the consent of
the Board of Directors); provided that a public market for the Common Stock
exists, by a "same day sale" commitment from the optionee and a broker to
deliver proceeds of the sale of Common Stock acquired on exercise or through a
"margin" commitment from the optionee and a broker to use the stock acquired on
exercise as security for a loan from the broker to pay the exercise price; or
such other form of consideration as the Board or Committee in its discretion may
determine.
AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS
Under the 1999 Plan, each director of the Company who is not an employee of
the Company, and was not previously an officer or employee of the Company or
subsidiary that was eligible to receive options under any employee stock option
plan of the Company, will automatically be granted nonqualified options to
purchase 2,000 shares of Common Stock upon commencement of service as a
director, and incumbent directors who are not employees of the Company or any
subsidiary will automatically be granted options to purchase 2,000 shares of
Common Stock on the date of each annual meeting of stockholders of the Company.
The options granted on commencement of service will vest on the first
anniversary of the date of grant. The options granted to incumbent directors on
the date of each annual meeting of stockholders will vest in full six months
after grant. In each case, the options will have an exercise price equal to the
fair market value on the date of grant and will have a ten-year term. The
amount, price and timing of grants and the vesting of options to be granted to
non-employee directors pursuant to the automatic grant provisions of the 1999
Plan may be modified by action of the Board of Directors, but not more often
than once every six months.
11
<PAGE> 14
RESTRICTED STOCK
The Committee may grant rights to purchase Common Stock on restricted terms
to officers, key employees and directors (whether or not employed by the
Company). Such rights would entitle the recipient to purchase a specified number
of shares of Common Stock from the Company under the 1999 Plan on terms which
would, for a specified period of time, restrict the transferability of the
shares or require the recipient to resell the shares to the Company, at cost, on
the occurrence of such conditions or events as the Committee may determine. The
restrictions on transfer and any resale obligation would lapse on such schedule
or on other conditions as the Committee may determine, which may include
continued employment, achievement of financial goals, or upon the death,
disability or retirement of the participant.
AMENDMENT AND TERMINATION OF THE 1999 PLAN
The Board of Directors may amend or terminate the 1999 Plan at any time
without stockholder approval; provided, however, that stockholder approval will
be obtained for any amendment to the 1999 Plan to the extent that stockholder
approval is necessary and desirable to comply with either Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or with Section 422 of the Code (or
any other applicable law or regulation), and provided further, that the amount,
price or timing of automatic option grants to non-employee directors may not be
amended more often than once every six months except to comport with changes in
Rule 16b-3 or the Code. Unless it is terminated sooner by the Board of
Directors, the 1999 Plan will terminate on March 31, 2009.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of
participation in the 1999 Plan (the Plan). The summary should not be relied upon
as being a complete statement. Federal tax laws are complex and subject to
change. Moreover, participation in the Plan may also have consequences under
state and local tax laws which may vary from the federal tax consequences
described below.
Incentive Options. No taxable income will be recognized by an optionee
under the 1999 Plan upon either the grant or the exercise of an incentive
option. Instead, a taxable event will occur upon the sale or other disposition
of the shares acquired upon exercise of an incentive option, and the tax
treatment of the gain or loss realized will depend upon how long the shares were
held before their sale or disposition. As is discussed below, the exercise of an
incentive option also may result in items of "tax preference" for purposes of
the "alternative minimum tax."
If a sale or other disposition of the shares received upon the exercise of
an incentive option occurs more than (i) one year after the date of exercise of
the option and (ii) two years after the date of grant of the option, the holder
will recognize long-term capital gain or loss at the time of sale equal to the
full amount of the difference between the proceeds realized and the exercise
price paid. However, a sale, exchange, gift or other transfer of legal title of
such stock before the expiration of either the one-year or two-year period
described above will constitute a "disqualifying disposition." A disqualifying
disposition involving a sale or exchange will result in ordinary income to the
optionee in an amount equal to the lesser of (i) the fair market value of the
stock on the date of exercise minus the exercise price, or (ii) the amount
realized on disposition minus the exercise price. If the amount realized in a
disqualifying disposition exceeds the fair market value of the stock on the date
of exercise, the gain realized, in excess of the amount taxed as ordinary income
as indicated above, will be taxed as capital gain. A disqualifying disposition
as a result of a gift will result in ordinary income to the optionee in an
amount equal to the difference between the exercise price and the fair market
value of the stock on the date of exercise. Any loss realized upon a
disqualifying disposition will be treated as a capital loss. Capital gains and
losses resulting from disqualifying dispositions will be treated as long-term or
short-term depending upon whether the shares were held for more or less than the
applicable statutory holding period (which is currently more than 12 months for
long-term capital gains). The Company will be entitled to a tax deduction in an
amount equal to the ordinary income recognized by the optionee as a result of
the disqualifying disposition.
12
<PAGE> 15
If legal title to any shares acquired upon exercise of an incentive option
is transferred by sale, gift or exchange, such transfer will be treated as a
disposition for purposes of determining whether a "disqualifying disposition"
has occurred. However, certain transfers will not be treated as dispositions for
such purposes, such as transfers to an estate or by inheritance upon an
optionee's death, a mere pledge or hypothecation, or a transfer into the name of
the optionee and another person as joint tenants.
Section 55 of the Code imposes an "alternative minimum tax" on an
individual's income to the extent the amount of the alternative minimum tax
exceeds the individual's regular tax for the year. For purposes of computing the
alternative minimum tax, the excess of the fair market value (on the date of
exercise) of the shares received upon the exercise of an incentive option over
the exercise price paid is included in alternative minimum taxable income in the
year the option is exercised. If the shares are sold in the same year that the
option is exercised, the regular tax treatment and the alternative tax treatment
will be the same. If the shares are sold during a year subsequent to that in
which the option was exercised, the basis of the stock acquired will equal its
fair market value on the date of exercise for purposes of computing alternative
minimum taxable income in the year of sale. For example, assume that an
individual pays an exercise price of $10 to purchase stock having a fair market
value of $15 on the date of exercise. The amount included in alternative minimum
taxable income is $5, and the stock has a basis of $10 for regular tax purposes
and $15 for alternative minimum tax purposes. If the individual sells the stock
in a subsequent year for $20, the gain recognized is $10 for regular tax
purposes and $5 for alternative minimum tax purposes.
An optionee who is subject to the alternative minimum tax in the year of
exercise of an incentive option may claim as a credit against the optionee's
regular tax liability in future years, the amount of alternative minimum tax
paid that is attributable to the exercise of the incentive option. This credit
is available in the first year following the year of exercise in which the
optionee has a regular tax liability.
Under the 1999 Plan, the Committee may permit an optionee to pay the
exercise price of an incentive option by delivering shares of Common Stock of
the Company already owned by the optionee, valued at their fair market value on
the date of exercise. Generally, if the exercise price of an incentive option is
paid with already-owned shares or by a combination of cash and already-owned
shares, there will be no current taxable gain or loss recognized by the optionee
on the already-owned shares exchanged. A special rule applies, however, if the
shares exchanged were previously acquired through the exercise of an incentive
option and the applicable holding period requirements for favorable tax
treatment of such shares have not been met at the time of the exchange. In such
event, the exchange will be treated as a disqualifying disposition of such
shares and will result in the recognition of income to the optionee, in
accordance with the rules described above for disqualifying dispositions. If
this special rule does not apply, then the new shares received by the optionee
upon the exercise of the option equal in number to the old shares exchanged will
have the same tax basis and holding period for capital gain purposes as the
optionee's basis and holding period in the old shares. The balance of the shares
received by the optionee upon exercise of the option will have a tax basis equal
to any cash paid by the optionee, and if no cash was paid, the tax basis of such
shares will be zero. The holding period of the additional shares for capital
gain purposes will commence on the date of exercise. The holding period for
purposes of the one-year and two-year periods described above will commence on
the date of exercise as to all of the shares received upon the exercise of an
incentive option. If any of the shares subject to the basis allocation rules
described above are subsequently transferred in a disqualifying disposition, the
shares with the lowest tax basis will be treated as being transferred first.
Nonqualified Options. No taxable income is recognized by an optionee upon
the grant of a nonqualified option. Upon exercise, however, the optionee will
recognize ordinary income in the amount by which the fair market value of the
shares purchased exceeds, on the date of exercise, the exercise price paid for
such shares. The income recognized by an optionee who is an employee will be
subject to income tax withholding by the Company out of the optionee's current
compensation. If such compensation is insufficient to pay the taxes due, the
optionee will be required to make a direct payment to the Company for the
balance of the tax withholding obligation. The Company will be entitled to a tax
deduction equal to the amount of ordinary income recognized by the optionee,
provided certain reporting requirements are satisfied.
13
<PAGE> 16
If the exercise price of a nonqualified option is paid by the optionee in
cash, the tax basis of the shares acquired will be equal to the cash paid plus
the amount of income recognized by the optionee as a result of such exercise. If
the exercise price is paid by delivering shares of Common Stock of the Company
already owned by the optionee or by a combination of cash and already-owned
shares, there will be no current taxable gain or loss recognized by the optionee
on the already-owned shares exchanged (however, the optionee will nevertheless
recognize ordinary income to the extent that the fair market value of the shares
purchased on the date of exercise exceeds the price paid, as described above).
The new shares received by the optionee equal in number to the old shares
exchanged will have the same tax basis and holding period as the optionee's
basis and holding period in the old shares. The balance of the shares received
will have a tax basis equal to any cash paid by the optionee plus the amount of
income recognized by the optionee as a result of such exercise, and will have a
holding period commencing with the date of exercise.
Upon the sale or disposition of shares acquired pursuant to the exercise of
a nonqualified option, the difference between the proceeds realized and the
optionee's basis in the shares will be a capital gain or loss and will be
treated as long-term or short-term capital gain or loss if the shares have been
held for more than the applicable statutory holding period (which is currently
more than 12 months for long-term capital gains).
Restricted Stock. The receipt of restricted stock will not result in a
taxable event to the participant until the expiration of any repurchase rights
retained by the Company with respect to such stock, unless the participant makes
an election under Section 83(b) of the Code to be taxed as of the date of
purchase. If no repurchase rights are retained, or if a Section 83(b) election
is made, the participant will recognize ordinary income in an amount equal to
the excess of the fair market value of such shares on the date of purchase over
the purchase price paid for such shares. Even if the purchase price and the fair
market value of the shares are the same (in which case there would be no
ordinary income), a Section 83(b) election must be made to avoid deferral of the
date ordinary income is recognized. The election must be filed with the Internal
Revenue Service not later than 30 days after the date of transfer.
If no Section 83(b) election is made and repurchase rights are retained by
the Company, a taxable event will occur on each date the participant's ownership
rights vest (e.g., when the Company's repurchase rights expire) as to the number
of shares that vest on that date, and the holding period for capital gain
purposes will not commence until the date the shares vest. The participant will
recognize ordinary income on each date shares vest in an amount equal to the
excess of the fair market value of such shares on that date over the amount paid
for such shares. Any income recognized by a participant who is an employee will
be subject to income tax withholding by the Company out of the optionee's
current compensation. If such compensation is insufficient to cover the amount
to be withheld, the participant will be required to make a direct payment to the
Company for the balance of the tax withholding obligation. The Company is
entitled to a tax deduction in an amount equal to the ordinary income recognized
by the participant. The participant's basis in the shares will be equal to the
purchase price, if any, increased by the amount of ordinary income recognized.
Tax Withholding. Under the 1999 Plan, the Company has the power to
withhold, or require a participant to remit to the Company, an amount sufficient
to satisfy Federal, state and local withholding tax requirements with respect to
any options exercised or restricted stock granted under the 1999 Plan. To the
extent permissible under applicable tax, securities, and other laws, the
Committee may, in its sole discretion, permit a participant to satisfy an
obligation to pay any tax to any governmental entity in respect of any option or
restricted stock up to an amount determined on the basis of the highest marginal
tax rate applicable to such participant, in whole or in part, by (i) directing
the Company to apply shares of Common Stock to which the participant is entitled
as a result of the exercise of an option or as a result of the lapse of
restrictions on restricted stock, or (ii) delivering to the Company shares of
Common Stock owned by the participant.
14
<PAGE> 17
INDEPENDENT ACCOUNTANTS
During 1998 Grant Thornton provided audit services to the Company, which
included the examination of the Company's financial statements for the year
ended December 31, 1998. The Company has not yet selected auditors for fiscal
year 1999. A representative of Grant Thornton is expected to be present at the
Annual Meeting to respond to appropriate questions from stockholders, and will
have an opportunity to make a statement if he so desires.
ANNUAL REPORT
The 1998 Annual Report to Stockholders of the Company is being sent with
this Proxy Statement to each stockholder of record as of June 18, 1999. The
Annual Report is not to be regarded as proxy solicitation material.
STOCKHOLDER PROPOSALS
Any stockholder desiring to submit a proposal for action at the 2000 Annual
Meeting of Stockholders and presentation in the Company's Proxy Statement with
respect to such Meeting should arrange for such proposal to be delivered to the
Company at its principal place of business no later than February 29, 2000 in
order to be considered for inclusion in the Company's proxy statement relating
to that meeting. Matters pertaining to such proposals, including the number and
length thereof, eligibility of persons entitled to have such proposals included
and other aspects are regulated by the Securities Exchange Act of 1934, Rules
and Regulations of the Securities and Exchange Commission and other laws and
regulations to which interested persons should refer.
OTHER MATTERS
Management is not aware of any other matters to come before the Annual
Meeting. If any other matter not mentioned in this Proxy Statement is brought
before the Annual Meeting, the proxy holders named in the enclosed Proxy will
have discretionary authority to vote all proxies with respect thereto in
accordance with their judgment.
By Order of the Board of Directors
Sandra A. Knell
Secretary
June 29, 1999
COPIES OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K, AS AMENDED, FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998, WILL BE PROVIDED TO STOCKHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO
THE SECRETARY, THE COAST DISTRIBUTION SYSTEM, INC., 350 WOODVIEW AVENUE, MORGAN
HILL, CALIFORNIA 95037.
15
<PAGE> 18
PROXY
THE COAST DISTRIBUTION SYSTEM, INC.
1999 ANNUAL MEETING OF STOCKHOLDERS -- JULY 27, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas R. McGuire, Ben A. Frydman, Robert S.
Throop, and each of them, individually, as attorneys and Proxies, with full
power of substitution, to represent the undersigned and to vote, as designated
below, all the shares of Common Stock of The Coast Distribution System, Inc.
(the "Company") which the undersigned is entitled to vote at the Annual Meeting
of Stockholders of the Company to be held at the Company's Executive Offices,
350 Woodview Avenue, Morgan Hill, California, at 10:00 A.M. on Tuesday, July 27,
1999.
1. ELECTION OF DIRECTOR:
[ ] FOR THE NOMINEE LISTED BELOW [ ] WITHHOLD AUTHORITY
(to vote for the nominee listed below)
John W. Casey
2. APPROVAL OF THE COMPANY'S 1999 STOCK INCENTIVE PLAN:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. IN THEIR DISCRETION, UPON OTHER BUSINESS WHICH PROPERLY COMES BEFORE THE
MEETING OR ANY ADJOURNMENT THEREOF.
IMPORTANT -- PLEASE SIGN AND DATE ON OTHER SIDE AND RETURN PROMPTLY.
<PAGE> 19
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER ON THE REVERSE SIDE OF THIS PROXY. WHERE NO DIRECTION IS GIVEN, SUCH
SHARES WILL BE VOTED "FOR" THE ELECTION, AS A DIRECTOR, OF THE NOMINEE NAMED ON
THE REVERSE SIDE OF THIS PROXY AND "FOR" APPROVAL OF THE 1999 STOCK INCENTIVE
PLAN. THIS PROXY CONFERS DISCRETIONARY AUTHORITY TO CUMULATE VOTES FOR ANY OR
ALL OF THE NOMINEES FOR ELECTION OF DIRECTORS FOR WHICH AUTHORITY TO VOTE HAS
NOT BEEN WITHHELD.
Date ___________________, 1999
______________________________
(Signature of Stockholder)
______________________________
Please sign your name exactly
as it appears hereon.
Executors, administrators,
guardians, officers of
corporations, and others
signing in fiduciary capacity
should state their full titles
as such.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN AND
RETURN THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
