SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, For Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[_] Definitive Additional Materials by Rule 14a-6(e)(2))
[_] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
NETWORK EQUIPMENT TECHNOLOGIES, 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):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
- --------------------------------------------------------------------------------
1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
[_] Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
[LOGO]NET
6500 Paseo Padre Parkway
Fremont, California 94555
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
August 10, 1999
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Network
Equipment Technologies, Inc. ("N.E.T." or the "Company"), a Delaware
corporation, will be held on Tuesday, August 10, 1999, at 10:00 a.m., local
time, at the principal offices of the Company, 6500 Paseo Padre Parkway,
Fremont, California, for the following purposes:
1. To elect James K. Dutton and George M. Scalise as Class III Directors
to serve for the term specified in the accompanying Proxy Statement
and until their successors are elected and qualified.
2. To approve amendments to the Company's 1998 Employee Stock Purchase
Plan to increase the number of shares available for issuance
thereunder by 1,000,000.
3. To approve an amendment to the Company's 1993 Stock Option Plan to
increase the number of shares available for issuance to any one
Officer employee in any one calendar year.
4. To approve an amendment to the Automatic Option Grant Program in the
Company's 1993 Stock Option Plan whereby option grants to non-employee
Directors will vest immediately upon the option grant date and will
then be exercisable ratably over the three year period following the
option grant date.
5. To ratify the appointment of Deloitte & Touche LLP as independent
public accountants of the Company for the fiscal year ending March 31,
2000.
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on June 11, 1999 are
entitled to notice of and to vote at the Meeting and at any continuation or
adjournment of the Meeting.
By order of the Board of Directors,
HUBERT A. J. WHYTE
President and Chief Executive Officer
Fremont, California
July 12, 1999
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO VOTE,
SIGN, AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE
POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE.
<PAGE>
[LOGO]NET
6500 Paseo Padre Parkway
Fremont, California 94555
PROXY STATEMENT
For the Annual Meeting of Stockholders
To Be Held
August 10, 1999
The enclosed Proxy is solicited by the Board of Directors of Network
Equipment Technologies, Inc. ("N.E.T." or the "Company"), a Delaware
corporation, for use at the Annual Meeting of Stockholders to be held at 10:00
a.m. on August 10, 1999 (the "Annual Meeting" or "Meeting"), and at any
postponement or adjournment of this Meeting at the principal offices of the
Company located at 6500 Paseo Padre Parkway, Fremont, California 94555.
Stockholders of record on June 11, 1999 will be entitled to notice of and to
vote at the Annual Meeting.
The Company intends to mail this Proxy Statement and accompanying Proxy
Card (the "Proxy"), together with the Annual Report to stockholders, on
approximately July 15, 1999. On June 11, 1999, there were outstanding and
entitled to vote 21,293,818 shares of Common Stock of the Company ("Common
Stock").
Voting
By properly marking, dating, signing and returning the enclosed Proxy Card,
the shares represented on the card will be voted at the Annual Meeting in
accordance with the instructions of the stockholder. Each stockholder is
entitled to one (1) vote for each share of Common Stock held by such
stockholder. All votes will be tabulated by the inspector of election appointed
for the Annual Meeting, who will separately tabulate affirmative and negative
votes, abstentions and broker non-votes. Abstentions and broker non-votes will
be counted in determining whether a quorum is present at the Annual Meeting. In
addition, for purposes of determining whether a proposal has been approved or
not, abstentions will be counted toward the tabulation of votes cast on
proposals presented to the stockholders and will have the same effect as
negative votes, whereas broker non-votes will not be counted toward the
tabulation of votes.
Any person giving a Proxy has the power to revoke it at any time before its
exercise at the Annual Meeting by delivering to the Secretary of the Company at
6500 Paseo Padre Parkway, Fremont, California 94555, a written revocation or a
duly executed Proxy bearing a later date, or by attending the Annual Meeting and
voting in person.
Solicitation
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy and any additional
soliciting materials furnished to stockholders. The Company does not presently
intend to solicit Proxies other than by mail. The Company reserves the right to
have an outside solicitor conduct the solicitation of Proxies and to pay such
solicitor for its services.
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
- --------------------------------------------------------------------------------
Election of Directors
The Certificate of Incorporation of the Company provides for a classified
Board of Directors. The Board is divided into three classes, designated as Class
I, Class II and Class III, whose respective current terms expire at the 2000,
2001 and 1999 Annual Meetings of Stockholders. The terms of Messrs. Gill and
Whyte as Class I Directors, and Messrs. Doll and Wolf as Class II Directors,
continue beyond this Annual Meeting. The Bylaws of the Company authorize the
Board to consist of between five and eight Directors, and authorize the Board to
determine the exact number of Directors within the specified limits. The number
of Directors is currently set at six.
The nominees for Class III Directors are Messrs. Dutton and Scalise. They
have agreed to serve if elected, and management has no reason to believe that
Messrs. Dutton and Scalise will be unable to serve. Unless otherwise instructed,
the Proxy holders will vote the Proxies received by them for Messrs. Dutton and
Scalise. The candidates receiving the highest number of affirmative votes of the
shares entitled to vote at the Annual Meeting will be elected Class III
Directors of the Company. The recipients of the highest number of votes will
hold office until the Annual Meeting of Stockholders in the year 2002 and until
a successor, if any, is elected or appointed, or until death, resignation or
removal.
Directors
Set forth below is information regarding the Directors of the Company,
including nominees for Director, Messrs. Dutton and Scalise.
<TABLE>
<CAPTION>
Class and
Director Year Current
Name of Nominee Age Since Term Expires
--------------- --- ----- ------------
<S> <C> <C> <C>
James K. Dutton ....................... 66 1995 Class III-1999*
George M. Scalise ..................... 65 1997 Class III-1999*
Name of Incumbent
-----------------
Dixon R. Doll ......................... 56 1984 Class II-2001
Walter J. Gill ........................ 64 1991 Class I-2000
Hubert A.J. Whyte ..................... 48 1999 Class I-2000
Hans A. Wolf .......................... 70 1992 Class II-2001
</TABLE>
- ------------
* Upon re-election, their terms will expire in 2002.
Dixon R. Doll has been a Director of the Company since April 1984. In
December 1996, he founded Doll Capital Management, a private venture capital
firm that invests in entrepreneurial companies in the information technology and
communications markets, where he serves as Managing General Partner. From
September 1994 to December 1996, Dr. Doll was actively engaged in venture
capital activities as a private investor. From September 1985 to September 1994,
Dr. Doll was a partner of Accel Partners, a private venture capital firm. Dr.
Doll holds a Bachelor of Science degree in electrical engineering from Kansas
State University and Master of Science and Ph.D. degrees in electrical
engineering from the University of Michigan. Dr. Doll is also a Director of
About.com and Zamba, Inc., both of which are public companies, and several
private companies.
2
<PAGE>
James K. Dutton has been a Director of the Company since October 1995. He
is a retired business executive. He is currently a Director of Caere Corporation
and ECCS, Inc., each a public company.
Walter J. Gill, a founder of the Company, has served as a Director since
January 1991. From 1983 until October 1994 when he retired from his full-time
management position, he served as Vice President and Chief Technology Officer.
He has also held several senior management positions within the Company,
including Vice President and General Manager, Private Network Division, Chief
Technical Officer from April 1987 to February 1988, and Vice President,
Engineering from July 1983 until April 1987.
George M. Scalise has served as a Director of the Company since October
1997. In June 1997, he became President of the Semiconductor Industry
Association after having served as Executive Vice President at Apple Computer.
From 1991 to 1996, Mr. Scalise was at National Semiconductor Corporation where
he served as Executive Vice President and Chief Administrative Officer. Prior to
that, he was President and Chief Executive Officer of Maxtor Corporation, and
served in senior executive capacities at Advanced Micro Devices, Fairchild
Semiconductor and Motorola Semiconductor. Mr. Scalise is also a Director of
Cadence Design Systems, Inc. He has served on several other corporate,
association and community boards.
Hubert A.J. Whyte has served as a Director of the Company since June 1,
1999. From 1994 until he joined the Company, Mr. Whyte served as President and
CEO of Advanced Computer Communications (ACC), where he created a new vision and
strategy for the company, successfully restructured the organization and almost
doubled annual revenues before initiating the acquisition of ACC by Ericsson for
approximately $290 million. Prior to joining ACC, Mr. Whyte served as Vice
President and General Manager of the Access Products unit of Newbridge Networks
Corporation. Earlier in his career, Mr. Whyte gained industry experience with
British Telecom, Ericsson, Shell Oil, Business Intelligence Services, Mitel and
Siemens.
Hans A. Wolf has served as a Director of the Company since August 1992. Mr.
Wolf retired on December 31, 1992 as Vice Chairman of the Board of Syntex
Corporation, a worldwide pharmaceutical company, and he retired from the Syntex
Board of Directors in December 1993. He headed several of Syntex's business
units and served as Chief Administrative Officer from 1975 until his retirement.
Previously, Mr. Wolf spent 20 years at Texas Instruments where he held a number
of positions, including Vice President and Treasurer. Mr. Wolf is also a
Director of Hyal Pharmaceutical Corporation and Hyal Pharmaceutical Australia
Ltd., and is Chairman of the Board of Tab Products Co., Inc., all of which are
public companies.
3
<PAGE>
Stock Ownership of Five Percent Stockholders, Directors, and Corporate Officers
The following table sets forth certain information as of June 1, 1999
(except as otherwise noted), regarding ownership of the Company's Common Stock
by (i) each person known by the Company to be the beneficial owner of five
percent (5%) or more of the Company's Common Stock, (ii) each Director and
nominee, (iii) each Executive Officer ("Corporate Officer") named in the Summary
Compensation Table, and (iv) all Corporate Officers and Directors as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
Five Percent (5%) Stockholders, Approximate
Directors, Named Corporate Percentage of
Officers, and all Directors Number of Outstanding
and Corporate Officers as a Group Shares Shares
--------------------------------- --------- -------------
<S> <C> <C>
State of Wisconsin Investment Board (1)............................ 2,479,400 11.5%
121 East Wilson Street
Madison, WI 53707
Joseph L. Harrosh (1).............................................. 1,480,600 6.8%
40900 Grimmer Boulevard
Fremont, CA 94538
R. Eliot King & Associates (1)..................................... 1,222,200 5.6%
3000 Sand Hill Road, Building 2, Suite 245
Menlo Park, CA 94025-7195
Kopp Investment Advisors, Inc. (1)................................. 1,166,725 5.4%
7701 France Avenue South, Suite 500
Edina, MN 55435
Dimensional Fund Advisors, Inc. (1)................................ 1,089,550 5.0%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Roger A. Barney (2)................................................ 61,872 *
Dixon R. Doll (3).................................................. 185,791 *
James K. Dutton (4)................................................ 35,663 *
Samuel H. Ezekiel (5).............................................. 46,770 *
Joseph J. Francesconi (6).......................................... 369,062 *
Walter J. Gill (7)................................................. 85,000 *
Raymond E. Peverell (8)............................................ 88,186 *
George M. Scalise (9).............................................. 6,055 *
G. Michael Schumacher (10)......................................... 73,364 *
Robert T. Warstler (11 )........................................... 1,234 *
Hubert A.J. Whyte (12)............................................. 0 *
Hans A. Wolf (13).................................................. 66,494 *
All Corporate Officers and Directors as a group
(seventeen persons) (14) ....................................... 1,200,530 5.5%
</TABLE>
- ------------
* Represents less than 2% of the outstanding shares.
(1) This information is acquired from publicly available information filed with
the Securities and Exchange Commission ("SEC") as of May 12, 1999. The
Company has been advised that the State of Wisconsin Investment Board has
sole voting and dispositive power with respect to all of the shares shown
opposite its name; Joseph L. Harrosh has sole voting and dispositive power
with respect to all of the shares shown opposite his name; R. Eliot King &
Associates, Inc. has shared voting and dispositive power with respect to
all of the shares shown opposite its name; Kopp Investment Advisors, Inc.
has sole voting power with respect to 121,500 of the shares, sole
dispositive power with respect to 110,000 of the shares, shared dispositive
power with respect to
4
<PAGE>
888,725 of the shares, and LeRoy C. Kopp has sole voting and dispositive
power with respect to 168,000 shares shown opposite his name; and
Dimensional Fund Advisors, Inc. has sole voting and dispositive power with
respect to all of the shares shown opposite its name. The Company has not
independently verified the accuracy of this information.
(2) Includes 56,694 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(3) Includes the following shares as to which Dr. Doll disclaims beneficial
ownership: 200 shares owned by a son and 4,800 shares owned by
International Synergies, Ltd., a corporation in which Dr. Doll has a
beneficial interest. Includes 98,994 shares issuable within 60 days of June
1, 1999, upon exercise of outstanding options.
(4) Includes 31,663 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(5) Includes 43,020 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options, and 2,500 shares purchased under the 1988
Restricted Stock Award Plan that are unvested as of June 1, 1999.
(6) Includes 349,062 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(7) Includes 10,000 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(8) Includes 82,186 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(9) Includes 5,055 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(10) Includes 72,238 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(11) Includes zero shares issuable within 60 days of June 1, 1999, upon exercise
of outstanding options.
(12) Mr. Whyte joined the Company as a Director, President and Chief Executive
Officer on June 1, 1999.
(13) Includes 65,994 shares issuable within 60 days of June 1, 1999, upon
exercise of outstanding options.
(14) See notes (2) through (13) above. Includes 957,477 shares issuable within
60 days of June 1, 1999, upon exercise of outstanding options, and 2,500
shares purchased under the 1988 Restricted Stock Award Plan that are
unvested as of June 1, 1999.
Board Committees, Meetings, and Remuneration
There are currently four committees of the Board: Audit, Compensation,
Finance and Nominating Committees ("Committees" or "Committee"). Compensation is
paid and stock options are granted to members of the Audit and Compensation
Committees, all of whom are non-employee Directors. For the Finance and
Nominating Committees, no compensation is paid and no stock options are granted
to members. Audit Committee members are Messrs. Doll, Dutton and Wolf.
Compensation Committee members are Messrs. Doll, Dutton and Scalise. Finance
Committee members are Messrs. Dutton and Wolf, and Nominating Committee members
are Messrs. Dutton, Gill and Scalise.
The functions of the Audit Committee include reviewing the audit plan and
results of each audit with the independent accountants, and reviewing with
management the scope and quality of internal accounting and financial reporting
controls in effect. The functions of the Compensation Committee include
determining remuneration for Corporate Officers and Directors, and administering
the Company's stock plans and variable compensation programs. The functions of
the Finance Committee include reviewing the Company's cash management and
investment strategies. The functions of the Nominating Committee include
establishing criteria and procedures for the selection of new Directors. No
nominations were received from, and no procedures have been established for the
consideration of nominees recommended by, stockholders.
During the fiscal year ended March 31, 1999, the Board of Directors held
seven meetings, the Audit Committee held four meetings, the Compensation
Committee held four meetings, the Finance Committee held no meetings, and the
Nominating Committee held one meeting. Each Director attended 75% or more of the
aggregated total number of meetings of the Board of Directors and aggregated
total number of meetings of Committees on which he served during the fiscal
year. There are no family relationships among Corporate Officers or Directors of
the Company.
Each non-employee Board member receives $18,000 per year. In addition, each
non-employee Board member receives $1,000 for attendance at each meeting of the
Board and $1,000 for attendance at a meeting of any standing Committee of the
Board for which compensation is paid and on which the Director serves; Committee
chairmen receive $2,000 for attending a meeting of such Committee. The Chairman
of the Board receives $1,000 per
5
<PAGE>
Board meeting attended and $3,000 per month for services rendered. Non-employee
Directors are eligible for reimbursement of expenses for attending Board of
Directors meetings or for attending any Committee meetings. The Company entered
into an Employment Agreement with Walter J. Gill in October 1994. Until October
1999, Mr. Gill will provide services to the Company for up to an average of 20
hours per month, for which he will be compensated $3,500 per month. Mr. Gill
will continue to receive employee medical, dental, group life and disability
insurance coverages and his employee stock options will continue to vest. He
will not accrue vacation, holiday, or sick leave. Mr. Gill will not receive
either non-employee Board member compensation or stock options under the
Automatic Option Grant Program of the Company's 1993 Stock Option Plan during
the term of the Employment Agreement.
Non-employee Directors are eligible to participate in the Automatic Option
Grant Program ("Automatic Grant Program" or "Program") of the 1993 Stock Option
Plan. This Program authorizes the granting of options to non-employee members of
the Board. At each Annual Meeting, each non-employee Board member who is first
elected or re-elected at that Meeting is automatically granted an option to
purchase 12,000 shares of Common Stock. Each non-employee Board member who is
first elected or appointed other than on the date of an Annual Meeting is
granted an option to purchase shares of Common Stock ("share options") in an
amount prorated based on months of service. The Chairman of the Board receives
an annual grant of an additional 4,000 share options. Each non-employee Board
member who serves on the Audit or Compensation Committee is automatically
granted 4,000 share options annually for each Committee on which he serves. An
additional annual grant of 4,000 share options is made to the Chairmen of the
Audit and Compensation Committees. A prorated number of shares is awarded to
each non-employee Board member who is first appointed to either the Audit or
Compensation Committee or to the chairmanship of either of these Committees
other than on the date of an Annual Meeting. The option price per share for each
automatic grant will be the fair market value per share of Common Stock on the
date of grant, and will be payable in cash or shares of Common Stock or through
a cashless exercise procedure.
Automatic option grants become exercisable as follows: one-third of the
share options are exercisable beginning one year after the grant date and the
remainder of the share options are exercisable in monthly installments over 24
months following the grant date, provided the optionee remains a member of the
Board. Share options granted to Directors who have served for at least three
years as non-employee Board members and who are at least age 65 at the time of
retirement from the Board become fully exercisable on the date Board service
ends and remain exercisable until the expiration or sooner termination of the
applicable option agreement.
Share options become exercisable immediately upon the occurrence of a
Corporate Transaction and Change in Control (as such terms are defined in the
1993 Stock Option Plan). Also, each share option will be automatically cancelled
upon the occurrence of a Hostile Take-Over (as defined in the 1993 Stock Option
Plan), whether or not the option is then exercisable; in return, the optionee
will be entitled to a cash distribution as provided in the 1993 Stock Option
Plan.
If a non-employee Board member or retired Board member dies, options
exercisable at the time of death may subsequently be exercised by the personal
representative of the optionee's estate or by the person(s) to whom such options
are transferred by either the optionee's will or the laws of inheritance,
provided that any exercise must be within 12 months of the optionee's death.
Pursuant to a policy adopted by the Board in 1992, non-employee Directors
first elected to the Board after the 1992 Annual Meeting must retire at age 72.
All other non-employee Directors must retire at age 75.
6
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL NO. 2 -- AMENDMENT TO THE 1998 EMPLOYEE
STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
The Board of Directors believes that an employee stock purchase plan is
crucial to the Company's ability to retain and recruit highly qualified
employees. An employee stock purchase plan provides a significant incentive to
all employees participating in the plan to perform their responsibilities in
ways that increase return on equity to the Company's stockholders. Stock
purchase plans also foster positive relations between the Company and its
employees by assisting employees in acquiring Company Common Stock and helping
provide for their future financial security. The Board of Directors is
recommending for approval an Amendment to the 1998 Employee Stock Purchase Plan
("1998 Plan" or "Plan") to increase the number of shares available for issuance
to employees under this Plan by 1,000,000 shares. The Amendment to the 1998 Plan
was adopted by the Board of Directors on June 1, 1999 subject to stockholder
approval at the Annual Meeting. As discussed in more detail below, the Board of
Directors believes that the recruitment and retention of employees necessary for
the Company's success will be undermined if employees were not able to
participate in an employee stock purchase plan.
Approval of the 1998 Plan Amendment
In 1998, the stockholders approved the 1998 Plan as the successor to the
Company's 1990 Employee Stock Purchase Plan (the "1990 Plan"). The 1998 Plan
provides that a total of 600,000 shares may be issued to employees who purchase
the Company's Common Stock under the Plan. A total of 368,098 shares have been
issued to date under the 1998 Plan. Due to the current low share price of the
Company's Common Stock, employees have been purchasing, but not selling, shares
under the 1998 Plan.
At the current rate of purchases, the 1998 Plan will have issued all of its
available shares by December 31, 1999. At that time, no more shares will be
available for issuance to employees. All employee purchases of shares under the
1998 Plan will have to cease unless and until stockholder approval is obtained
for the issuance of additional shares.
Since employee stock purchase plans traditionally have a strong
motivational impact upon employee participants, the Board of Directors feels
actions regarding the 1998 Plan described in this Proposal will provide a
significant incentive for employees to remain with the Company.
Description of the 1998 Plan
The current terms and provisions of the 1998 Plan are summarized below.
This summary does not purport to be a complete description of the 1998 Plan.
Copies of the actual 1998 Plan document and proposed amendments may be obtained
by any stockholder upon written request to the Secretary of the Company at the
Corporate office in Fremont, California.
All employees, including Officers and Directors who are employees,
regularly employed by the Company or its designated subsidiaries 20 or more
hours per week and five or more months each year, are eligible to participate in
the 1998 Plan. Participation begins as of the first enrollment date following
employment. Notwithstanding employment, any person who holds 5% or more of the
Common Stock of the Company or any of its subsidiaries is prohibited from
participating in the 1998 Plan. Employees who participated in the 1990 Plan are
eligible to participate in the 1998 Plan. Any eligible employee may enroll in
the 1998 Plan on the enrollment dates established by the Plan administrator.
Currently, the enrollment date for existing employees is the first trading day
of May each year. For new employees, the enrollment dates are scheduled to be
the first trading day of May, September or January each year, depending upon
their hire date. As of May 31, 1999, approximately 1,075 employees of the
Company were eligible to participate in the 1998 Plan, 483 of whom were
participating.
The 1998 Plan is administered by the Compensation Committee of the Board of
Directors (the "Plan Committee"). The Plan Committee may amend or terminate the
1998 Plan at any time; however, stockholder approval is required for amendments
which would increase the number of shares subject to the 1998 Plan. The Company
must also solicit stockholder approval to the extent required by Section 423 of
the Internal Revenue Code of 1986, as amended, or other applicable laws, rules
or regulations, or if the Board determines stockholder approval is advisable.
7
<PAGE>
Common Stock that may be purchased under the 1998 Plan may be shares that
the Company has either newly issued or reacquired. The 1998 Plan was originally
allocated 600,000 shares for purchase by 1998 Plan participants. After adoption
of this Proposal No. 2, 1,600,000 shares will be allocated for purchase. No
employee is permitted under the 1998 Plan to purchase Common Stock at a rate
which exceeds the lesser of: (i) the rate set by the Plan Committee, or (ii)
$25,000 of fair market value of Common Stock, determined as of the enrollment
date. In the event that the Company's outstanding Common Stock is affected by
reason of any stock dividend, stock split, combination of shares,
recapitalization or other charge affecting the outstanding Common Stock as a
class without receipt of consideration, to prevent dilution or enlargement of
the rights of participants under the 1998 Plan, appropriate adjustments will be
made to any or all of the following: the maximum number of shares issuable over
the term of the Plan; the maximum number of shares which may be purchased by any
one participant during a single purchase period or over the term of the Plan;
the number of shares that may be purchased; and the price per share payable
under all outstanding purchase rights.
Participating employees may elect to make contributions to the 1998 Plan at
a rate equal to any whole percentage, up to a maximum of 15% of the employee's
gross pay per pay period. Gross pay includes an employee's regular base earnings
but does not include: (i) overtime payments, bonuses, commissions,
profit-sharing distributions or other incentive-type payments, and (ii) any
contributions by the Company or its corporate affiliates for the employee's
benefit under a health or welfare plan. The length of each offering period is
established from time to time by the Plan Committee, but may not exceed 24
months. Each offering period will have three purchase periods of four months
each. Current offerings are from May 1-April 30, with purchase periods April 30,
August 31 and December 31. On the last trading day of each purchase period (or
other purchase dates established by the Plan Committee pursuant to the 1998
Plan), the Company will apply the funds then in the employee's account to the
purchase of shares. The cost for each share purchased is 85% of the lower of the
closing price of the Common Stock on the purchase date or the first trading day
in the enrollment period in which the purchase is made.
A participant may elect to terminate contributions to the 1998 Plan at any
time by giving written notice to the Company. Any such election will take effect
on the soonest practicable payroll date following receipt of such notice by the
Company, and the participant will be deemed to have withdrawn from the 1998 Plan
immediately.
Certain Federal Income Tax Consequences
THE FOLLOWING SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IS
BASED UPON EXISTING STATUTES, REGULATIONS AND THEIR INTERPRETATIONS. THE
APPLICABLE RULES ARE COMPLEX, AND INCOME TAX CONSEQUENCES MAY VARY DEPENDING
UPON THE PARTICULAR CIRCUMSTANCES OF EACH 1998 PLAN PARTICIPANT. THIS PROXY
STATEMENT DESCRIBES UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF GENERAL
APPLICABILITY, BUT DOES NOT PURPORT TO DESCRIBE EITHER PARTICULAR CONSEQUENCES
TO EACH INDIVIDUAL 1998 PLAN PARTICIPANT OR FOREIGN, STATE OR LOCAL INCOME TAX
CONSEQUENCES, WHICH MAY DIFFER FROM THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES.
In general, participants will not have taxable income or loss under the
1998 Plan until they sell or otherwise dispose of shares acquired under the Plan
(or die holding such shares). If the shares are held, as of the date of sale or
disposition, for longer than both: (i) two years after the beginning of the
enrollment period during which the shares were purchased, and (ii) one year
following purchase, a participant will have taxable ordinary income equal to 15%
of the fair market value of the shares on the first day of the enrollment period
(but not in excess of the gain on the sale). Any additional gain from the sale
will be long-term capital gain. The Company is not entitled to an income tax
deduction if the holding periods are satisfied.
If the shares are disposed of before the expiration of both of the holding
periods (a "disqualifying disposition"), a participant will have taxable
ordinary income equal to the excess of the fair market value of the shares on
the purchase date over the purchase price. In addition, the participant will
have taxable capital gain (or loss) measured by the difference between the sale
price and the participant's purchase price plus the amount of ordinary income
recognized, which gain (or loss) will be long-term if the shares have been held
as of the date of sale for more than one year. The Company is entitled to an
income tax deduction equal to the amount of ordinary income recognized by a
participant in a disqualifying disposition.
8
<PAGE>
The tax consequences to non-U.S. employees are governed by foreign law,
which typically does not offer the same tax advantages as United States law.
1998 Plan Benefits
As of May 31, 1999, 368,098 shares have been issued under the 1998 Plan.
The following table shows the number of shares issued under the 1998 Plan to the
persons and the groups named below in the fiscal year ended March 31, 1999 and
the "Dollar Value" of those shares. The "Dollar Value" is the difference between
the fair market value of the Common Stock on the dates of purchase and the
participant's purchase price.
PLAN BENEFITS
1998 Plan
<TABLE>
<CAPTION>
Number of
Shares Dollar
Name and Position Issued Value
----------------- ------- --------
<S> <C> <C>
Joseph J. Francesconi, President and Chief Executive Officer............... 0 $ 0
G. Michael Schumacher, Senior Vice President, Product Operations........... 1,126 3,207
Raymond E. Peverell, Senior Vice President, International.................. 0 0
Robert T. Warstler, Senior Vice President, North America................... 1,234 1,877
Roger A. Barney, Senior Vice President, Corporate Services and
Assistant Corporate Secretary .......................................... 0 0
Samuel H. Ezekiel, Senior Vice President, Marketing........................ 0 0
Corporate Officers as a Group ............................................. 3,656 8,529
Non-Officer Employee Group ................................................ 281,522 782,208
</TABLE>
Stockholder Vote
The affirmative vote of a majority of the votes that could be cast by
stockholders who are present or represented at the Annual Meeting is required to
adopt the Amendment to the 1998 Plan increasing the number of shares available
for issuance under the Plan by 1,000,000 shares for a total of 1,600,000 shares.
The Board of Directors recommends a vote FOR adoption of the proposed
Amendment to the 1998 Plan.
- --------------------------------------------------------------------------------
PROPOSAL NO. 3 -- 1993 STOCK OPTION PLAN AMENDMENT
- --------------------------------------------------------------------------------
The Board of Directors believes that a competitive employee stock option
plan is critical if the Company is to recruit and retain high quality Officers
and Directors. Traditionally, stock option plans provide a significant incentive
to Officers and other key personnel to perform their responsibilities in ways
that increase return on equity to stockholders. The Board of Directors is
recommending approval of an Amendment to the Company's 1993 Stock Option Plan
("1993 Option Plan") to increase the number of share options which may be
granted to any one Officer employee in any one year period from the current
350,000 share options to 600,000 share options. The Amendment to the 1993 Option
Plan was adopted by the Board of Directors on June 1, 1999 subject to
stockholder approval at the Annual Meeting. Since this change in the number of
share options which may be granted would mean that more than one percent (1%) of
the outstanding shares could be granted to a given individual within a one year
time period, New York Stock Exchange rules require stockholder approval of the
proposed Amendment. As discussed in more detail below, failure to approve this
Proposal No. 3 will result in curtailment of the Company's ability to offer
competitive stock option plan grants to prospective Officers the Company wishes
to bring on board and to current Officers that the Company wishes to remain on
board.
9
<PAGE>
Approval of 1993 Option Plan Amendment
Option grants are a critical component of the Company's employee
compensation structure. In the past 12 months, the Company has had several
members of executive management resign including the President and Chief
Executive Officer, the Chief Financial Officer, and the Senior Vice President of
Marketing. In order to recruit and retain well-qualified individuals for these
positions and others, the Company must be in a position to offer competitive
compensation packages that tie management performance to an increase in the
return on equity to stockholders. A compensation consultant retained by the
Company has advised that the current limit in the 1993 Option Plan of 350,000
share options to any individual employee in any one year period may not be
competitive when seeking to fill certain executive level management positions.
This Amendment is designed to provide the Company flexibility to make
competitive offers in order to fill executive level positions. Without approval
of this Amendment to the 1993 Option Plan to increase the share options which
may be awarded to any one individual in any one year period from 350,000 to
600,000, the Company may be unable to make future competitive option grants from
the 1993 Option Plan to Officer employees and other new hires placing the
Company at a significant disadvantage in its recruitment and retention of
employees.
Description of the 1993 Option Plan
The current terms and provisions of the 1993 Option Plan are summarized
below. This summary does not purport to be a complete description of the 1993
Option Plan. Copies of the actual 1993 Option Plan document and proposed
amendments may be obtained by any stockholder upon written request to the
Secretary of the Company at the Corporate office in Fremont, California.
The 1993 Option Plan is comprised of two parts: a discretionary option
grant program applicable to employees, including Officers, and an Automatic
Grant Program applicable to non-employee Directors. In 1997, the Company
instituted the 1997 Stock Option Program ("1997 Option Program") that grants
options to all non-Officer/Director employees under similar terms and conditions
as those contained in the 1993 Option Plan. Officers and Directors continue to
be granted share options under the 1993 Option Plan. Under either the 1993
Option Plan or the 1997 Option Program, share options are granted to employees,
including Officers, who contribute to the management, growth and financial
success of the Company and its subsidiaries.
As of May 31, 1999, over 1,200 employees were eligible for share option
grants under the 1997 Option Program; eight Corporate Officers were eligible to
participate in the 1993 Option Plan; and four non-employee Board members were
eligible for share option grants under the Automatic Grant Program section of
the 1993 Option Plan. Under the 1993 Option Plan, for any Officer of the
Company, the number of share options that may be granted in any one year period
to that employee is limited to 350,000. Under the 1997 Option Program, the
number of share options that may be granted to a non-Officer/Director employee
in any one year period is limited to 100,000. The proposed Amendment to the 1993
Option Plan would change the number of shares which could be granted to any one
Officer in any one year, but would not change the number of options that can be
granted to any one non-Officer employee in any one year under the 1997 Option
Program: that number would remain at 100,000.
The 1993 Option Plan is administered by the Compensation Committee (the
"Committee") comprised of at least two members of the Board of Directors,
neither of whom is an employee of the Company. The Committee has sole and
exclusive authority, subject to the provisions of the 1993 Option Plan, to
determine the eligible individuals who are to receive discretionary options
under the Plan, the number of shares to be covered by each granted option, the
date or dates on which the option is to become exercisable and the maximum term
for which the option is to remain outstanding. The Committee also has the
authority to determine whether the granted option is to be an incentive stock
option under the federal tax laws and to establish rules and regulations for
proper plan administration. The Automatic Grant Program is self-administering.
All shares issued under the 1993 Option Plan, whether or not the shares are
subsequently repurchased by the Company pursuant to its repurchase rights under
the 1993 Option Plan, will reduce on a share-for-share basis the number of
shares available for subsequent option grants. Should any stock option granted
under the 1993 Option Plan expire or terminate prior to exercise, the shares
subject to option are available for regranting. For share options repurchased or
surrendered in full in accordance with the provisions of the 1993 Option Plan,
the shares subject to the portion of the option exercised or surrendered are not
available for subsequent option grants.
10
<PAGE>
The Automatic Grant Program under the 1993 Option Plan authorizes the grant
of options to non-employee members of the Board of Directors and is described in
Proposal No. 4 on pages 13 to 15 below. Options granted to non-employee members
of the Board of Directors of the Company are issued from the same pool of shares
as are employee options, and are subject to the same restrictions on number of
share awards issued.
The exercise price of options issued under the 1993 Option Plan may not be
less than the fair market value of the Common Stock on the grant date and the
maximum period during which any option may remain outstanding may not exceed ten
years. Options issued under the 1993 Option Plan may become exercisable in
cumulative increments over a period of months or years as determined by the
Committee. Options are not assignable or transferable other than by will or by
the laws of inheritance and, during the optionee's lifetime, the option may be
exercised only by the optionee. Outstanding options under the 1993 Option Plan
will terminate within a specified period (generally not in excess of 12 months)
following cessation of service, unless the Committee determines that the
exercise period should be further extended.
As of May 31, 1999, approximately 5,257,042 shares of Commons Stock were
subject to outstanding options under the 1993 Option Plan and the 1997 Option
Program, and 2,548,482 shares were available for future option grants and
awards. The 1993 Option Plan provides that options may be granted to purchase
shares of Common Stock in excess of the number of shares then available for
issuance under the Plan, provided that such options are not to become
exercisable at any time before stockholder approval of sufficient shares
issuable under the 1993 Option Plan to cover the excess grant. By the terms of
the vesting schedule in option agreements signed by 1993 Option Plan
participants, share options begin vesting one year after the grant date of the
Company.
Under the 1993 Option Plan, the option exercise price may be paid to the
Company in cash or in shares of Common Stock valued at fair market value on the
exercise date. The Committee may assist any optionee (including a Corporate
Officer) in the exercise of outstanding share options by authorizing a loan from
the Company or permitting the optionee to pay the option price in installments
over a period of years.
The 1993 Option Plan includes a stock appreciation rights feature whereby
the Committee has the authority to accept the surrender of one or more
outstanding options under the 1993 Option Plan and authorize, in exchange, the
payment by the Company of an appreciation distribution equal to the excess of:
(i) the fair market value (on the date of surrender) of the vested shares of
Common Stock surrendered over (ii) the option price payable for such vested
shares. This payment may be made, at the discretion of the Committee, in shares
of Common Stock valued at fair market value on the date of surrender, or in
cash.
Corporate Officers of the Company subject to the short-swing profit
restrictions of the federal securities laws are granted limited stock
appreciation rights as part of any stock option grant made to them under the
1993 Option Plan. Upon the occurrence of a Hostile Take-Over (as defined in the
1993 Option Plan), any option with a limited stock appreciation right in effect
for at least six months will automatically be cancelled in exchange for a cash
distribution from the Company. In addition, outstanding stock appreciation
rights granted before May 1993 to employees, Corporate Officers and certain
Directors of the Company under the 1983 Option Plan and incorporated into the
1993 Option Plan, allow such persons to surrender the underlying options to the
Company for a cash distribution in the event of certain changes in control of
the Company.
In the event of a "Change in Control" of the Company or certain "Corporate
Transactions" (each as defined in the 1993 Option Plan), the Committee may, in
certain circumstances and subject to limitations set forth in the 1993 Option
Plan, accelerate the vesting of outstanding share options.
The Committee has authority to cancel outstanding share options granted
under the 1993 Option Plan (except for options granted to non-employee Directors
under the Automatic Grant Program) and to grant replacement options covering the
same or different numbers of shares of Common Stock. The option price per share
of the replacement share options cannot be less than the fair market value of
the Common Stock on the new grant date. It is anticipated that the option price
in effect under the replacement grant will in all instances be less than the
option price in effect under the cancelled option.
The Board of Directors may terminate the 1993 Option Plan at any time. The
1993 Option Plan is scheduled to terminate on August 10, 2003. Any options
outstanding at the time of the 1993 Option Plan termination will continue to
remain outstanding and exercisable in accordance with the terms and provisions
of the instruments evidencing those grants.
11
<PAGE>
Federal Income Tax Consequences
THE FOLLOWING SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IS
BASED UPON EXISTING STATUTES, REGULATIONS AND THEIR INTERPRETATIONS. THE
APPLICABLE RULES ARE COMPLEX, AND INCOME TAX CONSEQUENCES MAY VARY DEPENDING
UPON THE PARTICULAR CIRCUMSTANCES OF EACH 1993 OPTION PLAN PARTICIPANT. THIS
PROXY STATEMENT DESCRIBES UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
GENERAL APPLICABILITY, BUT DOES NOT PURPORT TO DESCRIBE EITHER PARTICULAR
CONSEQUENCES TO EACH INDIVIDUAL 1993 OPTION PLAN PARTICIPANT OR FOREIGN, STATE
OR LOCAL INCOME TAX CONSEQUENCES, WHICH MAY DIFFER FROM THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES.
An option granted to an employee who is a citizen or resident of the United
States ("U.S. employee") will be either an incentive stock option ("ISO") or a
non-qualified option ("NQO"). In general, an employee who is a U.S. employee
will not have taxable income (and the Company will receive no deduction) upon
the grant or exercise of an ISO. However, exercise of an ISO by a U.S. employee
may subject a U.S. employee to the federal alternative minimum tax.
A U.S. employee generally will be entitled to long-term capital gain
treatment upon the sale of shares ("Option Shares") acquired upon the exercise
of an ISO if the shares have been held for more than two years after the grant
date and for more than one year after the exercise date. If the Option Shares
are disposed of before both of these holding periods have expired, the U.S.
employee will have taxable ordinary income and/or capital gain (or loss) in the
year of sale determined as if the option had been an NQO (see below), except
that the amount of ordinary income will not exceed the actual gain on the sale,
and the Company will be entitled to a corresponding deduction.
In general, a U.S. employee will not have taxable income upon the grant of
an NQO. Upon exercise of an NQO, the U.S. employee will generally have ordinary
income subject to income and employment tax withholding (and the Company will be
entitled to a corresponding deduction) in the amount by which the fair market
value of the stock at that time exceeds the purchase price. In general, unless
he or she makes the election described below, a U.S. employee will not have
taxable income upon the grant of restricted (vesting) stock, but will have
taxable income upon the lapse of any vesting restrictions. A U.S. employee
receiving restricted stock, however, may make an election to be taxable at the
time of the grant on any excess of fair market value over the amount paid, in
which case the lapse of vesting restrictions will not be a taxable event. If
shares are held at least one year after the date the U.S. employee has taxable
income from acquiring them, then upon sale of the shares, the U.S. employee will
have long-term capital gain or loss equal to the difference between the sale
price and the fair market value of the shares on the date taxable income is
recognized. Under current federal income tax law, long-term capital gain is
taxable at a minimum stated rate of 28%, while ordinary income is taxable at a
maximum stated rate of 39.6% (disallowances of deductions at certain income
levels may result in a higher implicit rate).
The tax consequences to non-U.S. employees are governed by foreign law,
which typically does not offer the same tax advantages as United States law.
Special rules apply to participants who are Corporate Directors or Corporate
Officers.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will have taxable ordinary income subject to income and employment tax
withholding, if an optionee is a U.S. employee in the year of exercise, equal to
the amount of the appreciation distribution. The Company will be entitled to a
business expense deduction equal to the appreciation distribution for the
taxable year of the Company in which the ordinary income is recognized by the
optionee.
Parachute Payments. If the exercisability of an option or stock
appreciation right is accelerated as a result of a Change in Control, all or a
portion of the value of the option or stock appreciation right at that time may
be a "parachute payment" for purposes of the "excess parachute payment"
provisions of the Internal Revenue Code. Those provisions generally provide that
if parachute payments to Corporate Officers, highly compensated employees, or
employee stockholders exceed three times such an employee's average compensation
for the five tax years preceding the Change in Control, the employer corporation
may not deduct, and the recipient is subject to a 20% excise tax for the amount
of the parachute payments in excess of one times such average compensation.
12
<PAGE>
Note Forgiveness. If any promissory note delivered in payment of shares
acquired under the 1993 Option Plan is forgiven in whole or in part, the amount
of such forgiveness will be taxable to the participant as ordinary compensation
income subject to income and employment tax withholding if the participant is a
U.S. employee. The Company will be entitled to a business expense deduction
equal to the amount of ordinary income taxable to the participant in connection
with the acquisition of the shares and any note forgiveness. The deduction will
be allowed for the taxable year of the Company in which the ordinary income is
taxable to the participant.
1993 Option Plan Benefits
The following table shows the number of options granted under the 1993
Option Plan to the persons and the groups named below during the fiscal year
ended March 31, 1999, excluding options that were granted and subsequently
cancelled during the fiscal year.
PLAN BENEFITS
1993 Option Plan
<TABLE>
<CAPTION>
Number of Exercise
Named Corporate Officers and Groups Options Granted Price
----------------------------------- --------------- -----
<S> <C> <C>
Joseph J. Francesconi, President and Chief Executive Officer.............. 100,000 $10.2500
G. Michael Schumacher, Senior Vice President, Product Operations.......... 25,000 $10.2500
Raymond E. Peverell, Senior Vice President, International................. 20,000 $10.2500
Robert T. Warstler, Senior Vice President, North America.................. 30,000 $11.5000
Roger A. Barney, Senior Vice President, Corporate Services and 15,000 $10.2500
Assistant Corporate Secretary .......................................... 10,000 $11.5000
Samuel H. Ezekiel, Senior Vice President, Marketing....................... 20,000 $10.2500
Corporate Officers as a Group ............................................ 293,500 $11.0510*
Non-Employee Director Group .............................................. 56,000 $13.5625
Non-Officer Employee Group ............................................... 1,712,300 $10.1959*
</TABLE>
- ------------
* Average exercise price per share.
The closing price of the Common Stock on the New York Stock Exchange on May 28,
1999 was $10.375 per share.
Stockholder Approval
The affirmative vote of a majority of the outstanding shares of the
Company's voting Common Stock represented and voted at the Annual Meeting is
required for approval of the above described Amendment to the 1993 Option Plan.
The Board of Directors recommends a vote FOR Proposal No. 3.
- --------------------------------------------------------------------------------
PROPOSAL NO. 4 -- AMENDMENT TO THE 1993 OPTION PLAN
AUTOMATIC GRANT PROGRAM VESTING PERIOD
- --------------------------------------------------------------------------------
The 1993 Option Plan contains an Automatic Grant Program which authorizes
the Company to grant stock options to non-employee members of the Board of
Directors. The Financial Accounting Standards Board ("FASB") has issued a
proposed Interpretation of Accounting Principles Bulletin 25 ("APB 25")
governing the accounting for stock options granted by companies in compensatory
transactions. Under this Interpretation, stock options granted to non-employee
Directors would no longer be given the accounting treatment available to
employee stock options. Consequently, the Company could incur increased
compensation expense due to the requirement that unvested share options granted
to non-employees must be revalued quarterly. For the Company to reduce the
amount of additional compensation expense that may be incurred, the vesting
period for previous and subsequent grants of stock options provided in the
Automatic Grant Program should be changed from the current vesting of one-third
of the share options vesting after one year and the remainder vesting in monthly
installments over the following 24 months, to all share
13
<PAGE>
options vesting immediately upon the grant date with exercise allowable in equal
monthly installments over the three year period following the grant date. The
Amendment to the 1993 Option Plan was approved by the Board on June 1, 1999
subject to approval by the stockholders at the Annual Meeting.
Description of the Proposal
The Automatic Grant Program in the 1993 Option Plan provides that on the
date a Director is first elected or appointed to the Board of Directors, and on
the date of the Annual Meeting where a Director is re-elected to the Board, the
elected or appointed non-employee Director is automatically granted an option to
purchase 12,000 shares of Common Stock. Non-employee Directors who are either
first elected or appointed as Directors sometime other than at the Annual
Meeting are granted a pro-rata number of stock options based upon the date first
elected or appointed. In addition to the baseline 12,000 shares, the following
additional share options are granted under the Automatic Grant Program: (i)
options to purchase 4,000 shares are granted annually to the Chairman of the
Board of Directors; (ii) options to purchase 4,000 shares are granted annually
for each non-employee Board member who serves on the Audit Committee or the
Compensation Committee; and (iii) 4,000 share options are granted annually to
the Chairman of the Audit Committee and the Chairman of the Compensation
Committee, in addition to the shares awarded for membership on the Committee.
Non-employee Directors first appointed to either the Audit or Compensation
Committee sometime other than at the Annual Meeting are granted a pro-rata
number of stock options based upon the date first appointed.
Under the current terms of the Automatic Grant Program before adoption of
the proposed Amendment, automatic option grants vest over the course of three
years with one-third of the options vesting at the end of the first year and the
remainder of the shares vesting in monthly installments over the following 24
months, provided the optionee remains a member of the Board. Automatic option
grants to Directors who have served for at least three years as non-employee
Board members and who are at least age 65 at the time of retirement from the
Board continue to vest and remain exercisable until the expiration or sooner
termination of the applicable option agreement. Regardless of vesting status,
full and immediate vesting of all share options granted will occur upon a
Corporate Transaction and Change in Control, as these terms are defined in the
1993 Option Plan. Also, each automatic option grant is automatically cancelled
upon the occurrence of a Hostile Take-Over, as defined in the 1993 Option Plan,
whether or not the option is then exercisable; in return, the optionee is
entitled to a cash distribution as provided in the 1993 Option Plan.
If a non-employee Board member or retiree dies, options vested at the time
of death may subsequently be exercised within 12 months of the optionee's death
by the personal representative of the optionee's estate, or by the person to
whom the options are transferred by the optionee's will or by the laws of
inheritance.
Under the FASB Interpretation, non-employee Director stock options will no
longer be given the accounting treatment available to employee stock options
under APB 25. Consequently, for non-employee share options which are not vested
as of the effective date of the Interpretation, the Company will be required to
value all unvested non-employee Director share options using a specific formula,
the Black-Scholes Valuation Model (the "Valuation Model"). Each quarter, the
Valuation Model will be used to value the unvested share options based upon the
then fair market value of the underlying stock. The quarterly revaluation of
unvested share options would result in the Company being required to recognize
additional compensation expense. If the proposed Amendment to the Automatic
Grant Program is adopted, the share options will vest at the time of granting
and will not be revalued each quarter. Adoption of the proposed Amendment
mandating immediate vesting of non-employee Director stock options upon granting
will eliminate the Company's exposure to additional compensation expense as a
result of increases in the market value of the Company's stock. The FASB
Interpretation is scheduled to take effect September 30, 1999. Shares vested
prior to September 30, 1999 will continue to be treated as "employee" share
options and will not be subject to the valuation and expense rules described
above.
Description of the Automatic Grant Program in the 1993 Option Plan
The current terms and provisions of the Automatic Grant Program in the 1993
Option Plan are summarized on pages 13 to 15 of this Proxy Statement. This
summary does not purport to be a complete description of the 1993 Option Plan.
Copies of the actual Automatic Grant Program and 1993 Option Plan document and
proposed amendments may be obtained by any stockholder upon written request to
the Secretary of the Company at the Corporate office in Fremont, California.
14
<PAGE>
Automatic Grant Program Benefits
The following table shows the number of share options issued since fiscal
year 1997 under the Automatic Grant Program to the non-employee Directors named
below, the grant price of those share options, and the number of shares which
will not yet be vested as of September 30, 1999. Under the terms of the
Automatic Grant Program, share options granted during fiscal year 1996 or
earlier would be vested by September 30, 1999, the effective date of the FASB
proposed Interpretation.
PLAN BENEFITS
Director Automatic Option Plan
Grant Shares Grant Unvested as of
Named Directors Date Granted Price September 30, 1999
- --------------- -------- ------- -------- ------------------
Dixon R. Doll 08-12-97 12,000 $21.7500 3,669
08-11-98 24,000 $13.5625 15,332
James K. Dutton 08-12-97 4,000 $21.7500 1,223
08-11-98 4,000 $13.5625 2,555
Walter J. Gill zero
George M. Scalise 10-23-97 7,333 $17.2500 2,648
01-13-98 2,666 $13.8750 1,185
08-11-98 4,000 $13.5625 2,555
Hans A. Wolf 08-12-97 12,000 $21.7500 3,669
08-11-98 24,000 $13.5625 15,332
The closing price of the Common Stock on the New York Stock Exchange on May 28,
1999 was $10.375 per share.
Stockholder Vote
The affirmative vote of the majority of the outstanding shares of the
Company's voting Common Stock represented and voted at the 1999 Annual Meeting
is required for approval of the above described Amendment to the 1993 Option
Plan Automatic Grant Program.
The Board of Directors recommends a vote FOR Proposal No. 4.
- --------------------------------------------------------------------------------
PROPOSAL NO. 5 -- RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
The Company is asking the stockholders to ratify the selection of Deloitte
& Touche LLP as the Company's independent public accountants for the fiscal year
ending March 31, 2000. The affirmative vote of the holders of a majority of the
shares represented and voting at the Annual Meeting will be required to ratify
the selection of Deloitte & Touche LLP.
In the event the stockholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the selection is ratified, the
Board in its discretion may direct the appointment of a different independent
accounting firm at any time during the year if the Board determines that such a
change would be in the best interest of the Company and its stockholders.
Deloitte & Touche LLP has audited the Company's financial statements since
inception. Its representatives are expected to be present at the Annual Meeting,
will have the opportunity to make a statement if they desire to do so, and will
be available to respond to appropriate questions.
The Board of Directors recommends that the stockholders vote FOR the
ratification of the appointment of Deloitte & Touche LLP to serve as the
Company's independent accounting firm for the fiscal year ending March 31, 2000.
15
<PAGE>
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION AND RELATED INFORMATION
- --------------------------------------------------------------------------------
Summary of Cash and Certain Other Compensation
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the Company's four (4) other most highly
compensated Corporate Officers during fiscal 1999 (the "Named Corporate
Officers") for services rendered in all capacities to the Company for each of
the last three (3) fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
--------------------------------------- ------------------------------------
Bonus Restricted Securities
Name and Fiscal Salary (Variable Other Variable Stock Underlying
Principal Position Year ($)(1) Comp.) ($) Comp. ($) Comp.($) Awards ($)(2) Options (#)
------------------ ---- ------ ---------- --------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph J. Francesconi, 1999 $400,202(4) $ 0 $ 40,000(5) $251,250 0 100,000(6)
President and Chief 1998 401,999 220,000 0 63,750 0 75,000
Executive Officer (3) 1997 401,547 110,000 0 50,000 0 60,000(7)
G. Michael Schumacher, 1999 $225,000 $ 0 $ 0 $ 44,375 0 25,000(6)
Senior Vice President, 1998 225,865 135,000 0 27,500 0 35,000
Product Operations 1997 215,827 50,000 0 21,250 0 50,000(8)
Raymond E. Peverell, 1999 $225,000 $ 0 $ 0 $ 36,875 0 20,000(6)
Senior Vice President, 1998 225,865 65,000 0 28,750 0 35,000
International 1997 225,865 50,000 0 22,500 0 35,000(8)
Robert T. Warstler, 1999 $194,522(9) $ 0 $ 90,655(10) $ 0 0 30,000(6)
Senior Vice President, 1998 84,087(11) 0 85,000(12) 0 0 60,000(6)
North America (3) 1997 0 0 0 0 0 0
Roger A. Barney, 1999 $180,212(13) $ 0 $ 0 $ 30,250 0 25,000(14)
Senior Vice President, 1998 171,123(15) 90,000 0 19,000 0 20,000
Corporate Services and 1997 160,800(16) 32,000 0 15,000 0 35,000(8)
Assistant Corp. Secretary
Samuel H. Ezekiel, 1999 $210,000 $ 30,000 $ 0 $ 63,750 0 20,000(6)
Senior Vice President, 1998 210,808 60,000 0 11,250 0 35,000
Marketing (3) 1997 149,538 90,000(17) 20,000(18) 0 139,950 35,000(8)
</TABLE>
- ------------
(1) Salary includes amounts deferred pursuant to the Company's 401(k) Plan.
(2) Shares awarded to and purchased by individuals under the 1988 Restricted
Stock Award Plan may not be sold until they vest. All of the shares of
restricted stock held as of March 31, 1999 were awarded in fiscal year 1996
(other than for an award of 5,000 shares in fiscal year 1995 to Mr.
Schumacher, which are 100% vested, and an award of 5,000 shares in fiscal
year 1997 to Mr. Ezekiel) and vest 25% on each anniversary of the award
date over four years. The amounts listed for Mr. Ezekiel in the table are
calculated based on the closing price of the Company's Common Stock on the
date of the grant. As of March 31, 1999, the number of shares and value of
restricted stock held, including unvested shares, is as follows: Mr.
Francesconi held 20,000 shares valued at $465,000; Mr. Schumacher held zero
shares; Mr. Peverell held 6,000 shares valued at $139,500; Mr. Warstler
held zero shares; Mr. Barney held 5,000 shares valued at $116,250; and Mr.
Ezekiel held 3,750 shares valued at $105,000.
(3) These individuals are no longer employed by the Company.
(4) Salary includes $201.47 of extra CHOICES dollars.
(5) This amount was included as part of Mr. Francesconi's severance.
(6) These options were cancelled and a new option for an equal number of shares
was issued on October 16, 1998, with a new four-year vesting schedule.
Option cancellation and issuance of replacement options was offered to all
option holders, except non-employee Directors, subject to the vesting
period starting anew.
(7) An option for 80,000 shares was cancelled and a new option for 60,000
shares was issued on July 24, 1996, with a new four-year vesting schedule.
16
<PAGE>
(8) These options were cancelled and a new option for an equal number of shares
was issued on July 24, 1996, with a new four-year vesting schedule. Option
cancellation and issuance of replacement options was offered to all option
holders, except non-employee Directors, subject to the vesting period
starting anew.
(9) Salary includes $2,925.85 of extra CHOICES dollars.
(10) Other compensation consists of commissions earned in calendar year 1998 as
well as a $60,000 non-recoverable draw.
(11) Salary includes $1,009.76 of extra CHOICES dollars.
(12) Other compensation consists of a $25,000 sign-on bonus as well as a $60,000
non-recoverable draw.
(13) Salary includes $674.08 of extra CHOICES dollars.
(14) An option for 15,000 shares was cancelled and a new option for an equal
number of shares was issued on October 16, 1998, with a new four-year
vesting schedule. An additional option for 10,000 shares was issued on
December 22, 1998.
(15) Salary includes $469.56 of extra CHOICES dollars.
(16) Salary includes $184.98 of extra CHOICES dollars.
(17) Mr. Ezekiel's 1997 bonus was guaranteed in his offer of employment.
(18) Sign-on bonus.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options to the Named Corporate
Officers in fiscal year 1999 under the 1993 Option Plan. Pursuant to SEC rules,
the table also shows the value of options granted at the end of the option terms
(ten years) if the stock price were to appreciate annually by 5% and 10%,
respectively. There is no assurance that the stock price will appreciate at the
rates shown in the table. The table also indicates that if the stock price does
not appreciate, there will be no increase in the potential realizable value of
the options granted.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------------------ Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Exercise or Option Term ($)
Options Employees in Base Price Expiration ----------------------------------
Name Granted (#) Fiscal Year ($/Share) Date 0% 5% 10%
---- ---------- ------------ ----------- ---------- --- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Francesconi 100,000(1) 3.4317% $ 10.25 10-16-08 0 $ 644,616 $1,633,586
Schumacher 25,000(1) 0.8579 10.25 10-16-08 0 161,154 408,396
Peverell 20,000(1) 0.6863 10.25 10-16-08 0 128,923 326,717
Warstler 60,000(2) 2.0590 10.25 10-25-08 0 386,770 980,151
30,000(1) 1.0295 11.50 12-22-08 0 216,968 549,841
Barney 15,000(1) 0.5148 10.25 10-16-08 0 96,692 245,037
10,000 0.3432 11.50 12-22-08 0 72,322 183,280
Ezekiel 20,000(1) 0.6863 10.25 10-16-08 0 128,923 326,717
</TABLE>
- ----------
(1) These options were cancelled and a new option for an equal number of shares
was issued on October 16, 1998, with a new four-year vesting schedule.
Option cancellation and issuance of replacement options was offered to all
option holders, except non-employee Directors, subject to the vesting
period starting anew.
(2) These options were granted October 20, 1997 and subsequently cancelled. A
new option for an equal number of shares was issued on October 16, 1998,
with a new four-year vesting schedule. Option cancellation and issuance of
replacement options was offered to all option holders, except non-employee
Directors, subject to the vesting period starting anew.
17
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of
options during fiscal year 1999 and unexercised options held as of the end of
such year by the Named Corporate Officers.
<TABLE>
<CAPTION>
Aggregate
Shares Value Realized Number of Securities Value of Unexercised
Acquired (Sale price at Underlying Unexercised In-the-Money
On exercise less Options at FY-End (#) Options at FY-End ($)
Exercise exercise price) ---------------------------- ----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Francesconi 0 $ 0 340,937 179,063 $267,187 $0
Schumacher 0 0 67,602 68,648 0 0
Peverell 10,000 110,937 78,436 56,564 562 0
Warstler 0 0 0 90,000 0 0
Barney 0 0 54,402 47,085 12,568 0
Ezekiel 0 0 40,103 49,897 0 0
</TABLE>
10-YEAR OPTION REPLACEMENT TABLE
The following table summarizes stock options granted to the Officers of the
Company that have had options cancelled and new options issued during the past
ten fiscal years with new vesting schedules and exercise prices.
<TABLE>
<CAPTION>
Number of
Securities Exercise Length of
Underlying Market Price of Price Original Option
Options Stock at Time at Time of New Term Remaining
Repriced or of Repricing Repricing or Exercise at Date of
Amended or Amendment Amendment Price Repricing or
Name Date (#) ($) ($) ($) Amendment
---- -------- -------- ---------- --------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
NAMED OFFICERS
Joseph J. Francesconi 07-24-96 60,000 12.375 23.2500 12.375 8 Years 268 Days
07-24-96 60,000 12.375 30.0000 12.375 9 Years 265 Days
10-16-98 100,000 10.250 19.0625 10.250 9 Years 180 Days
Raymond E. Peverell 07-24-96 20,000 12.375 23.2500 12.375 8 Years 268 Days
07-24-96 35,000 12.375 30.0000 12.375 9 Years 265 Days
10-16-98 20,000 10.250 19.0625 10.250 9 Years 180 Days
G. Michael Schumacher 07-24-96 26,250 12.375 23.8750 12.375 8 Years 183 Days
07-24-96 50,000 12.375 30.0000 12.375 9 Years 265 Days
10-16-98 25,000 10.250 19.0625 10.250 9 Years 180 Days
Roger A. Barney 08-14-90 8,750 6.625 13.2500 6.625 7 Years 73 Days
08-14-90 8,165 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 15,000 6.625 25.0000 6.625 8 Years 275 Days
07-24-96 10,000 12.375 23.2500 12.375 8 Years 268 Days
07-24-96 25,000 12.375 30.0000 12.375 9 Years 265 Days
10-16-98 15,000 10.250 19.0625 10.025 9 Years 180 Days
Robert T. Warstler 10-16-98 60,000 10.250 18.6250 10.250 9 Years 4 Days
Samuel H. Ezekiel 07-24-96 35,000 12.375 28.0000 12.375 9 Years 314 Days
10-16-98 20,000 10.250 19.0625 10.250 9 Years 180 Days
OTHER CURRENT OFFICERS
Robert P. Bowe 7-24-96 1,500 12.375 23.2500 12.375 8 Years 268 Days
7-24-96 3,900 12.375 30.0000 12.375 9 Years 265 Days
10-16-98 3,500 10.250 19.0625 10.250 9 Years 180 Days
David P. Owen 08-14-90 10,000 6.625 10.1250 6.625 9 Years 264 Days
07-24-96 10,000 12.375 23.2500 12.375 8 Years 268 Days
07-24-96 25,000 12.375 30.0000 12.375 9 Years 265 Days
10-16-98 20,000 10.250 19.0625 10.250 9 Years 180 Days
Charles S. Shiverick 07-24-96 25,000 12.375 23.250 12.375 8 Years 268 Days
07-24-96 25,000 12.375 30.000 12.375 9 Years 265 Days
10-16-98 15,000 10.250 19.0625 10.250 9 Years 180 Days
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Number of
Securities Exercise Length of
Underlying Market Price of Price Original Option
Options Stock at Time at Time of New Term Remaining
Repriced or of Repricing Repricing or Exercise at Date of
Amended or Amendment Amendment Price Repricing or
Name Date (#) ($) ($) ($) Amendment
---- -------- -------- ---------- --------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
FORMER OFFICERS
Robert D. Bressler 08-14-90 25,000 6.625 33.8750 6.625 9 Years 218 Days
John K. Clary 08-14-90 9,850 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 10,000 6.625 25.0000 6.625 8 Years 275 Days
Jerry L. Davis 08-14-90 9,844 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 7,500 6.625 14.5000 6.625 8 Years 93 Days
08-14-90 15,000 6.625 25.0000 6.625 8 Years 275 Days
07-24-96 10,000 12.375 23.2500 12.375 8 Years 268 Days
07-24-96 25,000 12.375 30.0000 12.375 9 Years 265 Days
James B. De Golia 08-14-90 4,100 6.625 15.5000 6.625 8 Years 120 Days
08-14-90 10,000 6.625 25.0000 6.625 8 Years 275 Days
07-24-96 4,000 12.375 23.2500 12.375 8 Years 268 Days
07-24-96 5,000 12.375 30.0000 12.375 9 Years 265 Days
10-16-98 15,000 10.250 19.0625 10.250 9 Years 180 Days
J. Robert Forkish 08-14-90 26,000 6.625 13.2500 6.625 7 Years 73 Days
08-14-90 15,000 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 15,000 6.625 25.0000 6.625 8 Years 275 Days
07-24-96 10,000 12.375 23.2500 12.375 8 Years 268 Days
07-24-96 10,000 12.375 30.0000 12.375 9 Years 265 Days
Craig M. Gentner 08-14-90 20,000 6.625 23.750 6.625 9 Years 1 Day
07-24-96 15,000 12.375 23.250 12.375 8 Years 268 Days
07-24-96 35,000 12.375 30.000 12.375 9 Years 265 Days
Walter J. Gill 08-14-90 50,000 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 25,000 6.625 25.0000 6.625 8 Years 275 Days
Charles N. Keating, Jr. 10-26-87 30,188 13.250 20.5000 13.250 4 Years 208 Days
10-26-87 19,812 13.250 20.5000 13.250 4 Years 208 Days
08-14-90 30,188 6.625 13.2500 6.625 7 Years 73 Days
08-14-90 19,812 6.625 13.2500 6.625 7 Years 73 Days
08-14-90 32,500 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 25,000 6.625 25.0000 6.625 8 Years 275 Days
Laurence M. Markowitz 08-14-90 42,500 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 20,000 6.625 25.0000 6.625 8 Years 275 Days
Barrett B. Roach 08-14-90 43,500 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 25,000 6.625 25.0000 6.625 8 Years 275 Days
Anthony P. Russo 08-14-90 47,500 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 30,000 6.625 25.0000 6.625 8 Years 275 Days
Steve Schlumberger 08-14-90 39,500 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 25,000 6.625 25.0000 6.625 8 Years 275 Days
Bruce D. Smith 08-14-90 100,000 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 100,000 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 100,000 6.625 16.0000 6.625 8 Years 52 Days
Craig S. Tysdal 08-14-90 18,750 6.625 16.0000 6.625 8 Years 52 Days
08-14-90 35,000 6.625 14.5000 6.625 8 Years 93 Days
08-14-90 30,000 6.625 25.0000 6.625 8 years 275 Days
Daniel J. Warmenhoven 08-14-90 100,000 6.625 26.1250 6.625 9 Years 94 Days
</TABLE>
19
<PAGE>
COMPENSATION COMMITTEE REPORT
Introduction
The Company's compensation programs are administered by the Compensation
Committee of the Board of Directors (the "Committee"). These programs have been
designed to ensure that the compensation paid to the Corporate Officers is
linked to both Company and individual performance. Accordingly, a substantial
portion of the compensation potentially payable to each Corporate Officer is
intended to be performance-based because it is comprised of components based
upon individual achievement and Company performance such as operating profit,
attainment of predetermined goals, the improvement in the market price of the
Company's stock, etc. As such, it is the Committee's responsibility, working
with the CEO, the Company's human resources staff and independent consultants to
set the base salaries and to approve the individual variable compensation and
incentive awards to the CEO and other Corporate Officers. In addition, the
Committee administers the 1993 Option Plan and 1997 Option Program.
Compensation Philosophy and Principles
Under the supervision of the Committee, the Company implements a
compensation philosophy which is designed to attract and retain qualified
Corporate Officers and other employees critical to the Company's success and to
provide them with performance-based incentives tied to the profitability of the
Company and stockholder value. Over time, base salary is intended to become
proportionately less significant and a greater portion of the Corporate
Officer's compensation is intended to be dependent upon the Company's
performance and the individual's contribution to the success of the Company.
The Company's executive compensation programs are based on the following
series of guiding principles:
o Attract and retain key executives essential to the long-term success
of the Company;
o Reward executives for long-term Corporate success by facilitating
their ability to acquire an ownership interest in the Company;
o "Provide direct linkage between the compensation payable to executives
and the attainment by the executives of the Company's objectives and
goals; and
o Emphasize reward for performance at the individual, team and Corporate
levels.
Compensation Factors
Factors which were considered in establishing the components of each
Corporate Officer's compensation for fiscal year 1999 are summarized below.
Additional factors may also be taken into account and the Committee may, in its
discretion, apply entirely different factors, particularly different measures of
individual and Company performance.
An integral part of the data and analysis the CEO and the Committee use in
determining how to implement the overall compensation philosophy is provided by
independent compensation surveys and consultants. These sources focus primarily
on Silicon Valley companies that are either similar to the Company in size and
business complexity, or that compete with the Company in the recruitment and
retention of senior personnel.
Base Salary. Base compensation is established primarily based on
competitive market rates through comparisons with companies of similar size and
complexity. The base salary level for Corporate Officers is generally at the
fiftieth (50th) percentile level determined for such individuals on the basis of
the external salary data provided to the Committee by the independent
compensation surveys. The Committee believes that the Company's most direct
competitors for executive talent are not necessarily the companies that the
Company would use in a comparison for stockholder returns. Therefore, the
compensation comparison group is not the same as the industry group index in the
Stock Performance Graph on page 23.
Variable Compensation. The Company's Corporate Officers and all employees
are eligible to participate in the Company's annual Variable Compensation
Program ("VCP"). Corporate Officers also participate in a Long-Term Variable
Compensation ("LTVC") Plan described below. Awards to Corporate Officers under
these programs are based primarily on achievement of financial and individual
performance objectives which support the Company's
20
<PAGE>
goals. Individual objectives typically include elements of leadership, financial
and personnel management, innovation and planning. Each Corporate Officer's
individual performance is measured against objectives established early in the
fiscal year. These objectives are reviewed periodically during the year and are
modified or new objectives are established if it is determined by the CEO or the
Committee that to do so is in the Company's interest. The weight assigned to
each objective and performance related to that objective varies from individual
to individual. Actual awards are subject to decrease or increase on the basis of
the Company's core business performance and the individual's performance and at
the discretion of the Committee. In fiscal year 1999, Corporate Officers were
eligible for receipt of variable compensation payouts early in fiscal year 1999
of between 0% and 80% to 110% of base salary (depending on the Corporate
Officer's level). Variable compensation payouts with respect to fiscal year 1999
were based on Company performance as well as individual performance against
their objectives. The Company's performance for fiscal year 1999 was measured on
the basis of operating income goals. These goals were not met due to a shortfall
in planned revenue and continued investment in long-term development and
infrastructure improvements. The Company's performance was factored into
variable compensation payouts and LTVC awards to individual Corporate Officers.
Long-Term Incentives and Compensation
Long-term incentives are provided to eligible employees and Corporate
Officers primarily through annual stock option grants, as well as by
supplemental option grants, compensation and restricted stock awards. These
incentives are intended to motivate the Corporate Officer to improve long-term
Company performance. All options currently outstanding were granted with an
exercise price equal to the market price on the grant date and will be of no
value unless the market price of the Company's Common Stock has appreciated
since the grant date, thereby aligning that portion of the option holder's
compensation with the return realized by stockholders. Approximately 95% of the
professional level technical and management employees of the Company hold stock
options.
Stock Options. The Company's broad-based 1993 Option Plan and 1997 Option
Program provide Corporate Officers and other key employees with incentives to
maximize long-term stockholder values. Awards under these Plans can take the
form of stock options, restricted stock and stock appreciation rights, all of
which are designed to give the recipient a significant equity stake in the
Company and thereby closely align their interests with those of the Company's
stockholders.
In addition to linking compensation directly to stockholder value, the
Committee believes that stock options and restricted stock awards, through
staged vesting provisions, perform an important role in attracting, motivating
and retaining key technical and management personnel. The Committee has
established general guidelines for making option grants to Corporate Officers
and other employees based upon the individual's position with the Company and
their existing holdings of vested and unvested options. However, the Committee
does not adhere strictly to these guidelines and will occasionally vary the size
of the option grant made to each Corporate Officer or employee as circumstances
warrant.
Long-Term Variable Compensation. The Company's LTVC Plan is intended to
promote retention and focus on objectives that span more than one fiscal year.
Under the LTVC Plan, Corporate Officers are eligible for annual awards of up to
one-half of the amount provided under the previously described VCP, or an amount
determined at the discretion of the Committee. Provided the Corporate Officer
remains an employee of the Company or one of its subsidiaries, LTVC will be paid
to the Corporate Officer in four equal annual installments commencing the year
after its award. The third payout under the LTVC Plan occurred early in fiscal
1999, when Corporate Officers received one-fourth of the amount of their fiscal
1996, fiscal 1997, and fiscal 1998 LTVC awards.
Restricted Stock. Awards of restricted stock are not made by reference to
formulas or guidelines. They are provided to promote long-term stockholder value
and retention of key executives, solely at the Committee's discretion.
Restricted stock is therefore awarded only under limited circumstances, such as
to recognize a significant contribution to the Company's long-term performance,
to provide an incentive to achieve performance objectives, or in connection with
a significant promotion. The vesting schedules for restricted stock awards are
tailored to meet the particular purposes of the awards, and therefore may be
different from the more uniform vesting schedules utilized for stock option
grants. No restricted stock awards were made in fiscal 1999.
21
<PAGE>
CEO Compensation
Joseph J. Francesconi was President, Chief Executive Officer and a Director
of the Company from March 1994 through May 1999. As noted on page 16, Mr.
Francesconi's salary in fiscal year 1999 was $400,202.08 (which includes $201.47
of extra CHOICES money). The Committee used independent compensation advice in
determining how to structure Mr. Francesconi's compensation. On January 26,
1999, Mr. Francesconi entered into an agreement with the Company to terminate
his employment effective March 31, 1999, or the date a successor to his position
is named, which was to be no later than May 31, 1999. Mr. Francesconi will
continue to receive his salary at the gross rate of $400,000.00 per annum, for a
period of up to three years from his termination date; payment of deferred LTVC
from fiscal years 1996, 1997, 1998 and 1999 for a gross total of $251,250.00;
immediate payment on the date of termination of $40,000.00 as part of the
agreement; continuation of medical, dental, life and disability insurance during
the period of salary continuation; and immediate vesting on the termination date
of all shares of non-qualified stock options and all shares of restricted stock.
Hubert A.J. Whyte became President, Chief Executive Officer and a Director
of the Company on June 1, 1999. His compensation is structured as follows: Mr.
Whyte's annual base salary will be $400,000.00. For fiscal year 2000, this base
salary will be prorated over the ten months served as President and Chief
Executive Officer for a salary of approximately $333,333.33. Mr. Whyte has been
guaranteed variable compensation for fiscal year 2000 of $167,000.00. Any
additional variable compensation payment will be based upon performance and
could range up to 110% of his base salary. Participation in LTVC will begin in
fiscal year 2001. Mr. Whyte was given the standard executive compensation
package which includes participation in the Company's CHOICES comprehensive
benefits program, a car allowance and a financial planning allowance. For his
relocation to the Bay Area, Mr. Whyte was given the following assistance: (i) a
one time payment of $33,333.00 to be used for miscellaneous relocation expenses;
(ii) reimbursement on the sale of his current residence for (1) the difference
between the selling price and the average of two appraisals obtained by N.E.T.,
and (2) real estate commissions and closing costs to a maximum of 8% of the
selling price; and (iii) reimbursement for closing costs and real estate
commissions up to a maximum of 3% of the purchase price for purchase of a new
residence in the Bay Area. Mr. Whyte was granted 600,000 share options of N.E.T.
Common Stock under the terms of the 1993 Stock Option Plan, 250,000 of which are
subject to stockholder approval. The exercise price will be the fair market
value of the stock on the grant date of June 1, 1999. The options will vest over
four years with 25% of the options granted vesting at the end of the first year
from the grant date, and the remaining 75% vesting at the monthly rate of 1/36th
of the options granted at the end of each full month, with vesting beginning the
13th month after the grant date and ending the 48th month.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code (the "Code") limits the Company
to a deduction for federal income tax purposes of no more than $1 million of
compensation paid to Corporate Officers named in the Summary Compensation Table
in a taxable year. Compensation above $1 million may be deducted if it is
"performance based" within the meaning of the Code.
The Committee believes that stock options granted to the Company's
Corporate Officers with an exercise price equal to or greater than the fair
market value of the Company's Common Stock on the date of grant will qualify for
the performance-based compensation to the deduction limit. The Committee does
not expect that cash compensation to any Named Corporate Officer, together with
other compensation paid to such Corporate Officer in the 1999 fiscal year that
is not exempt from the limitations of Section 162(m), will exceed $1 million.
We conclude our report with the acknowledgment that no member of the
Committee is a former or current Corporate Officer or employee of the Company or
any of its subsidiaries.
Compensation Committee Members
Dixon R. Doll, Chairman
James K. Dutton
George M. Scalise
22
<PAGE>
Stock Performance Graph
The graph depicted below shows the Company's stock price as an index
assuming $100 invested over the five year period beginning on March 31, 1994,
along with the composite prices of companies listed in the S&P 500 Index and H&Q
Technology Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
N.E.T., S&P 500 INDEX &
H&Q TECHNOLOGY INDEX
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Mar 94 Mar 95 Mar 96 Mar 97 Mar 98 Mar 99
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
N.E.T. $100 $303 $363 $161 $194 $107
S&P 500 $100 $112 $145 $177 $247 $289
H&Q TECHNOLOGY INDEX $100 $130 $177 $205 $306 $428
</TABLE>
Assumes $100 invested on 3/31/94 in N.E.T. stock, the S&P 500 Index, and the H&Q
Technology Industry Index. Assumes reinvestment of all dividends. Stockholder
returns over the indicated period should not be considered indicative of future
stockholder returns.
Employment Contracts
Each of the Company's Named Corporate Officers has an agreement with the
Company that provides that in the event of his termination resulting from a
Corporate Transaction, Change in Control or Hostile Take-Over (as those terms
are defined in the 1993 Option Plan, collectively referred to in this agreement
as "Change in Control") or from involuntary termination for reasons other than
cause, for limited time periods, the Company will provide severance benefits as
follows: base salary continuance; variable compensation at the mid-point of the
range; medical, dental, life and disability insurance; and continued vesting of
stock options and restricted stock during salary continuance (vesting of options
and restricted stock shall accelerate if termination is in conjunction with a
Change in Control). In order to receive the foregoing severance benefits, each
of the Named Corporate Officers has agreed to execute the Company's release and
non-competition agreement at the time of any such termination. The applicable
limited time periods under
23
<PAGE>
each of these agreements is as follows: two years for Mr. Whyte and 12 months
for Messrs. Schumacher, Peverell and Barney. Messrs. Francesconi, Warstler and
Ezekiel did not leave the Company as a result of a Change in Control.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Company's Directors,
Corporate Officers and any persons holding more than 10% of the Company's Common
Stock are required to report initial ownership of the Common Stock and any
subsequent changes in ownership to the SEC. Specific due dates have been
established by the SEC and the Company is required to disclose in this Proxy
Statement any failure to file by these dates. Based upon (i) the copies of
Section 16(a) reports which the Company received from such persons for their
fiscal year 1999 transactions, and (ii) the written representations received
from one or more of such persons, the Company has concluded that none of the
Company's Directors or Corporate Officers failed to file timely Forms 4 or Forms
5 regarding changes in ownership.
- --------------------------------------------------------------------------------
OTHER BUSINESS
- --------------------------------------------------------------------------------
The Board of Directors knows of no other business that will be presented
for consideration at the Annual Meeting. If other matters are properly brought
before the Annual Meeting, however, it is the intention of the persons named in
the accompanying Proxy Card to vote the shares represented thereby on such
matters in accordance with their best judgment.
- --------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS
- --------------------------------------------------------------------------------
Proposals of stockholders that are intended to be presented at the
Company's Annual Meeting of Stockholders to be held in 2000 must be received by
the Company no later than April 10, 2000 in order to be included, if
appropriate, in the Proxy Statement and Proxy relating to that Meeting.
In addition, pursuant to the Company's Bylaws, in order for any stockholder
to propose any business (including nominations for Director) at an Annual
Meeting, such stockholder is required to provide the Company with advance
written notice at least 60 days prior to such meeting (no later than June 9,
2000 with respect to the Annual Meeting to be held August 8, 2000). The notice
must contain certain information regarding such stockholder (and any nominee for
Director), any arrangements between the stockholder and the nominee, and any
other information regarding such nominee or each matter of business proposed by
the stockholder that would be required to be disclosed in a Proxy Statement
filed with the SEC for solicitations of Proxies to approve such proposed
business.
Any such proposals or notices should be directed to the attention of the
Secretary, N.E.T., 6500 Paseo Padre Parkway in Fremont, California 94555.
By order of the Board of Directors,
HUBERT A.J. WHYTE
President and Chief Executive Officer
July 12, 1999
<PAGE>
N.E.T. [LOGO] NET
6500 PASEO PADRE PARKWAY
FREMONT, CA 94555
TEL: 510.713.7300
FAX: 510.574.4000
July 15, 1999
Dear Stockholder:
In 1989, the Board of Directors of N.E.T. adopted a Stockholder Rights Plan (the
"Rights Plan" or the "Plan"). The purpose of the Rights Plan was, and continues
to be, to enhance the Board's ability to protect your interests as a stockholder
of the Company against coercive takeover tactics that may deprive stockholders
of the full potential value of their shares. The Rights Plan will expire on
August 24, 1999. After careful deliberation, the Board of Directors voted at a
July 12, 1999 meeting to amend and extend the Rights Plan for an additional 10
years subject to finalizing the following amendments in the Rights Agreement
between N.E.T. and BankBoston, who acts as the Rights Agent.
The amendments deal with two issues: 1) the exercise price of the Rights; and 2)
review of the Rights Plan during its 10 year term. As to the exercise price,
after consulting with investment bankers retained to advise the Board on this
matter, it was determined that the exercise price of the Rights should be
adjusted to $80.00 per one one-hundredth of a share of Series A Preferred Stock.
As to review of the Rights Plan during its term, after consulting with its
investment bankers and outside counsel, the Board deemed it advisable to adopt a
Three Year Independent Director Evaluation Provision ("TIDE provision"), whereby
a committee of independent Directors ("Independent Directors Committee" or
"Committee") of N.E.T. will review and evaluate the Rights Plan at least once
every three years to determine whether it continues to be in the best interests
of N.E.T. and its stockholders to maintain the Rights Plan in effect. Upon
completion of its review, the Committee will report its conclusion to the full
Board of Directors. The Independent Directors Committee will be comprised of
N.E.T. Directors who have been determined to be independent by the Audit
Committee of the Board of Directors. The Committee will have the ability to
retain its choice of legal counsel, investment bankers and other advisors, all
at N.E.T.'s expense. The Board also reviewed with outside counsel judicial
decisions concerning the enforceability of rights plans in Delaware, N.E.T.'s
state of incorporation.
The Stockholder Rights Plan was not extended in response to any specific effort
to acquire control of N.E.T., and we are not aware of any such effort. The
Rights Plan will not prevent a takeover on terms that the Board of Directors
considers fair and in the best interests of all stockholders. Instead, the Plan
should encourage any person seeking to acquire N.E.T. to negotiate with the
Board of Directors prior to attempting a takeover.
The Rights will not be exercisable and no certificates for the Rights will be
sent to stockholders until after the occurrence of specified events. All Rights
will expire on August 24, 2009 and are subject to redemption by the Company at
$.01 per Right in certain circumstances.
Please be aware that this letter does not purport to be a complete description
of the Rights Plan or amendments to the Rights Plan. Changes in addition to
those mentioned in this letter may be necessary in order to implement the
approved amendments. The description and terms of the Rights Plan are contained
in the Rights Agreement mentioned above. Upon finalizing the amendments to the
Rights Agreement, all stockholders will be sent a Rights Plan summary informing
them of the Plan provisions and all changes.
Be assured that, along with renewal of the Rights Plan, we will continue to work
toward enhancing the value of N.E.T.'s stock and to protect your interests as a
stockholder.
On behalf of the Board of Directors,
HUBERT A.J. WHYTE
President and Chief Executive Officer
<PAGE>
Exhibit to Proposal No. 4
Amending Automatic Option Grant Program in
the Company's 1993 Stock Option Plan
- --------------------------------------------------------------------------------
NETWORK EQUIPMENT TECHNOLOGIES, INC.
1993 STOCK OPTION PLAN
ARTICLE ONE
...
ARTICLE TWO
...
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
...
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
...
E. Exercisability.
1. Each option granted under this Article Three will vest fully on the
automatic grant date. After vesting, each option granted will become exercisable
in a series of 36 equal monthly installments beginning one month after the
automatic grant date, provided the optionee remains a Director through each such
date.
2. Each option granted under this Article Three shall also become fully
exercisable upon the date of the optionee's cessation of Board service by reason
of death or retirement, provided the optionee has served on the Board for at
least three (3) years at the time of cessation of Board service. A Director
shall be deemed to have ceased Board service by reason of retirement if he or
she has attained the age of 65 at the time of the cessation.
...
N.E.T. PRIVILEGED AND CONFIDENTIAL June 1, 1999
<PAGE>
PROXY NETWORK EQUIPMENT TECHNOLOGIES, INC. PROXY
6500 Paseo Padre Parkway, Fremont, CA 94555
This Proxy is Solicited on Behalf of the Board of Directors of
Network Equipment Technologies, Inc.
The undersigned revokes all previous proxies, acknowledges receipt of the Notice
of Annual Meeting of Stockholders and the Proxy Statement and appoints Hubert
A.J. Whyte and Robert P. Bowe and each of them, the Proxy of the undersigned,
with full power of substitution, to vote all shares of Common Stock of Network
Equipment Technologies, Inc. (the "Company") held of record by the undersigned
on June 11, 1999, either on his or her own behalf or on behalf of any entity or
entities, at the Annual Meeting of Stockholders of the Company to be held August
10, 1999, and at any adjournment or postponement thereof, with the same force
and effect as the undersigned might or could do if personally present. The
shares represented by this Proxy shall be voted in the manner set forth below.
1. To elect James K. Dutton and George M. Scalise as Class III Directors to
serve for the term specified in the accompanying Proxy Statement and until their
successors are elected and qualified.
FOR WITHHELD
James K. Dutton _____________ ________________
George M. Scalise _____________ ________________
2. To approve an amendment to the Company's 1998 Employee Stock Purchase Plan to
increase the number of shares available for issuance thereunder by 1,000,000.
___ FOR ___ AGAINST ___ ABSTAIN
3. To approve an amendment to the Company's 1993 Stock Option Plan to increase
the number of share options available for issuance to any one Officer employee
in any one calendar year from 350,000 to 600,000.
___ FOR ___ AGAINST ___ ABSTAIN
4. To approve an amendment to the Automatic Option Grant Program in the
Company's 1993 Stock Option Plan whereby share options granted to non-employee
Directors will vest immediately upon the grant date and will then be exercisable
ratably over the three year period following the grant date.
___ FOR ___ AGAINST ___ ABSTAIN
5. To ratify the appointment of Deloitte & Touche LLP to serve as the Company's
independent accountants for the fiscal year ending March 31, 2000.
___ FOR ___ AGAINST ___ ABSTAIN
6. To transact such other business as may properly come before the meeting or
any adjournment thereof.
(PLEASE DATE AND SIGN ON REVERSE SIDE)
This Proxy, when properly executed, will be voted in the manner directed herein.
This Proxy will be voted FOR the proposals if no specification is made.
<PAGE>
Please sign exactly as your name(s) is (are) shown on the share certificate to
which the Proxy applies. When shares are held by joint tenants, both should
sign. When signing as an 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 the partnership name by an authorized person.
Dated: _________________________, 1999
_________________________ Please mark, sign, date and
Signature return the proxy card promptly
using the enclosed envelope
_________________________
Signature if held jointly
