SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Security Exchange Act of 1934
(Amendment No. __)
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(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
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[ ] Soliciting Material Pursuant to ss.240.14a-12
AEHR TEST SYSTEMS
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[LOGO]AEHR TEST SYSTEMS
AEHR TEST SYSTEMS
400 Kato Terrace
Fremont, California 94539
-----------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 15, 2003
-----------------------------
TO THE SHAREHOLDERS OF
AEHR TEST SYSTEMS:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of Aehr Test Systems, a California corporation (the
"Company") to be held on October 15, 2003, at 4:00 p.m., at the Company's
corporate headquarters located at 400 Kato Terrace, Fremont, California 94539,
for the following purposes:
1. To elect five directors.
2. To approve an amendment of the Company's 1996 Stock Option Plan to
increase the number of shares reserved for issuance thereunder by
400,000 shares, to a new total of 1,950,000 shares.
3. To approve an amendment of the Company's 1997 Employment Stock
Purchase Plan to increase the number of shares reserved for issuance
thereunder by 100,000 shares, to a new total of 400,000 shares.
4. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent auditors of the Company for the fiscal year ending May 31,
2004.
5. To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
Only holders of record of the Common Stock at the close of business on
September 4, 2003 will be entitled to notice of and to vote at the Annual
Meeting. Please sign, date and mail the enclosed proxy so that your shares may
be represented at the Annual Meeting if you are unable to attend and vote in
person. If you attend the Annual Meeting, you may vote in person even if you
return a proxy.
By Order of the Board of Directors,
/s/ Rhea J. Posedel
RHEA J. POSEDEL
Chief Executive Officer and
Chairman of the Board of Directors
AEHR TEST SYSTEMS
400 Kato Terrace
Fremont, California 94539
---------------
PROXY STATEMENT
---------------
2003 ANNUAL MEETING OF SHAREHOLDERS
This Proxy Statement is being furnished to the Shareholders (the
"Shareholders") of Aehr Test Systems, a California corporation (the "Company"),
in connection with the solicitation of proxies by the Board of Directors for use
at the Annual Meeting of Shareholders (the "Annual Meeting") of the Company to
be held on October 15, 2003 and at any adjournments thereof.
At the Annual Meeting, the Shareholders will be asked:
1. To elect five directors.
2. To approve an amendment of the Company's 1996 Stock Option Plan to
increase the number of shares reserved for issuance thereunder by
400,000 shares, to a new total of 1,950,000 shares.
3. To approve an amendment of the Company's 1997 Employment Stock
Purchase Plan to increase the number of shares reserved for issuance
thereunder by 100,000 shares, to a new total of 400,000 shares.
4. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent auditors of the Company for the fiscal year ended May 31,
2004.
5. To transact such other business as may properly come before the Annual
Meeting or any adjournments of the Annual Meeting.
The Board of Directors has fixed the close of business on September 4,
2003 as the record date for the determination of the holders of Common Stock
entitled to notice of and to vote at the Annual Meeting. Each such Shareholder
will be entitled to one vote for each share of Common Stock ("Common Share")
held on all matters to come before the Annual Meeting and may vote in person or
by proxy authorized in writing.
This Proxy Statement and the accompanying form of proxy are first being
sent to holders of the Common Shares on or about September 26, 2003.
THE ANNUAL MEETING
Date, Time and Place
The Annual Meeting will be held on October 15, 2003 at 4:00 p.m., local
time, at 400 Kato Terrace, Fremont, California 94539.
General
The Company's principal office is located at 400 Kato Terrace, Fremont,
California 94539 and its telephone number is (510) 623-9400.
Record Date and Shares Entitled to Vote
Shareholders of record at the close of business on September 4, 2003 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. As
of the Record Date, there were 7,157,386 Common Shares outstanding and entitled
to vote.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a
later date or by attending the meeting and voting in person.
1
Voting and Proxy Solicitation
Each shareholder voting for the election of directors may cumulate his or
her votes, giving one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of shares that the shareholder
is entitled to vote, or distributing the shareholder's votes on the same
principle among as many candidates as the shareholder chooses. No shareholder
shall be entitled to cumulate votes for any candidate unless the candidate's
name has been properly placed in nomination prior to the voting and the
shareholder, or any other shareholder, has given notice at the meeting prior to
the voting of the intention to cumulate votes. On all other matters, each share
has one vote.
Proxies are being solicited by the Company. The cost of this solicitation
will be borne by the Company. The Company may reimburse brokerage firms and
other persons representing beneficial owners of shares for their expenses in
forwarding solicitation material to such beneficial owners. Proxies may also be
solicited by certain of the Company's directors, officers, and regular
employees, without additional compensation, personally or by telephone, telegram
or facsimile.
Quorum; Abstentions; Broker Non-Votes
The required quorum for the transaction of business at the Annual Meeting
is a majority of the shares of Common Stock issued and outstanding on the Record
Date. Votes cast by proxy or in person at the Annual Meeting will be tabulated
by the Inspector of Elections, appointed for the meeting, who will determine
whether or not a quorum is present. If the shares present, in person and by
proxy, do not constitute the required quorum the meeting may by adjourned to a
subsequent date for the purposes of obtaining a quorum. Shares that are voted
"FOR," "AGAINST" or "WITHHELD FROM" a matter are treated as being present at
the meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote (the "Votes Cast") at the Annual Meeting with respect to such
matter.
While there is no definitive statutory or case law authority in California
as to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
Broker non-votes (i.e. votes from shares of record by brokers as to which
the beneficial owners have no voting instructions) will be counted for purposes
of determining the presence or absence of a quorum for the transaction of
business, but will not be counted for purposes of determining the number of
Votes Cast with respect to the proposal on which the broker has expressly not
voted. Thus, a broker non-vote will make a quorum more readily but will not
otherwise affect the outcome of the voting on a proposal. With respect to a
proposal that requires a majority of the outstanding shares (such as an
amendment to the articles of incorporation), however, a broker non-vote has the
same affect as a vote against the proposal.
Deadline for Receipt of Shareholder Proposals for 2004 Annual Meeting
Shareholders are entitled to present proposals for action at a forthcoming
meeting if they comply with the requirements of the proxy rules promulgated by
the Securities and Exchange Commission ("SEC"). Proposals of shareholders of the
Company intended to be presented for consideration at the Company's 2004 Annual
Meeting of Shareholders must be received by the Company no later than May 22,
2004, in order that they may be included in the proxy statement and form of
proxy related to that meeting.
Shareholder Information
IN COMPLIANCE WITH RULE 14A-3 PROMULGATED UNDER THE SECURITIES EXCHANGE
ACT OF 1934, THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH
PERSON UPON WRITTEN REQUEST, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K,
INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES THERETO. REQUESTS FOR
SUCH COPIES SHOULD BE DIRECTED TO AEHR TEST SYSTEMS, 400 KATO TERRACE, FREMONT,
CA 94539, ATTENTION: INVESTOR RELATIONS.
2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS
AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of August 31, 2003, or
some other practical date in cases of the principal shareholders, by: (i) each
person (or group of affiliated persons) known to the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, (ii) each
director of the Company, (iii) each of the Company's executive officers named in
the Summary Compensation Table appearing herein, and (iv) all directors and
executive officers of the Company as a group:
Shares Beneficially
Owned(1)
-------------------------
Beneficial Owner Number Percent(2)
---------------- -------- ----------
Named Executive Officers and Directors:
Rhea J. Posedel (3) ................................................. 1,060,897 14.6%
Robert R. Anderson (4) .............................................. 97,500 1.4%
William W. R. Elder (5) ............................................. 62,083 *
Mukesh Patel (6) .................................................... 40,000 *
Mario M. Rosati (7) ................................................. 216,300 3.0%
Carl J. Meurell (8) ................................................. 197,230 2.7%
Gary L. Larson (9) .................................................. 104,517 1.4%
Carl N. Buck (10) ................................................... 84,430 1.2%
David S. Hendrickson (11) ........................................... 63,644 *
All Directors and Executive Officers as a group (10 persons) (12) ... 1,950,079 25.1%
Principal Shareholders:
Private Capital Management, Inc. (13) ............................... 1,473,368 20.6%
8889 Pelican Bay Blvd., Naples, FL 34108
State of Wisconsin Investment Board (14) ............................ 1,184,400 16.5%
121 East Wilson Street, Madison, WI 53707
Wellington Management Company, LLP (15) ............................. 745,100 10.4%
75 State Street, 19th Floor, Boston, MA 02109
Dimensional Fund Advisors Inc. (16) ................................. 369,300 5.2%
1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401
--------------------------------
* Represents less than 1% of the Common Shares
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. Unless otherwise indicated in the footnotes to this table, the
persons and entities named in the table have represented to the Company
that they have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Unless otherwise indicated, the address of each of the
individuals listed in the table is c/o Aehr Test Systems, 400 Kato
Terrace, Fremont, California 94539.
(2) Shares of Common Stock subject to options that are currently exercisable
or exercisable within 60 days of August 31, 2003 are deemed to be
outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
(3) Includes 20,000 shares held by Vivian Owen, Mr. Posedel's wife, 9,950
shares held by Rhea J. Posedel, trustee for Natalie Diane Posedel, Mr.
Posedel's daughter, and 94,166 shares issuable upon the exercise of stock
options exercisable within 60 days of August 31, 2003.
(4) Includes 25,000 shares issuable upon the exercise of stock options within
60 days of August 31, 2003.
3
(5) Includes 37,083 shares issuable upon the exercise of stock options
exercisable within 60 days of August 31, 2003.
(6) Includes 35,000 shares issuable upon the exercise of stock options within
60 days of August 31, 2003.
(7) Includes 3,040 shares held of record by WS Investment Company 87A. Mr.
Rosati is a general partner of WS Investment Company 87A and disclaims
beneficial ownership of the shares held by WS Investment Company 87A
except to the extent of his proportionate partnership interest therein.
Also includes 27,000 shares held by Mario M. Rosati and Douglas Laurice,
trustees for the benefit of Mario M. Rosati, 149,177 shares held by Mario
M. Rosati, Trustee of the Mario M. Rosati Trust, U/D/T dated 1/9/90
and 37,083 shares issuable upon the exercise of stock options exercisable
within 60 days of August 31, 2003.
(8) Includes 196,041 shares issuable upon the exercise of stock options
within 60 days of August 31, 2003.
(9) Includes 61,394 shares issuable upon the exercise of stock options within
60 days of August 31, 2003.
(10) Includes 40,124 shares issuable upon the exercise of stock options within
60 days of August 31, 2003.
(11) Includes 63,644 shares issuable upon the exercise of stock options within
60 days of August 31, 2003.
(12) Includes 613,013 shares issuable upon the exercise of stock options
within 60 days of August 31, 2003.
(13) Based solely on Form 13F Holdings Report filed with the SEC by Private
Capital Management ("PCM") for the period ended June 30, 2003. PCM has
shared investment power and shared voting power with respect to the
shares.
(14) Based solely on Form 13F Holdings Report filed with the SEC by the State
of Wisconsin Investment Board ("SWIB") for the period ended June 30,
2003. SWIB has sole investment and sole voting power with respect to the
shares.
(15) Based solely on Form 13F Holdings Report filed with the SEC by Wellington
Management Company, LLP ("WMC") for the period ended June 30, 2003. WMC,
in its capacity as investment advisor, may be deemed to have beneficial
ownership of the 745,100 shares which are held of record by investment
advisory clients of WMC. WMC has sole investment power and no voting
power with respect to 140,000 shares and shared investment and shared
voting power with respect to the remaining shares.
(16) Based solely on Form 13F Holdings Report filed with the SEC by
Dimensional Fund Advisors Inc. ("DFA") for the period ended June 30,
2003. DFA has sole investment and sole voting power with respect to the
shares.
Equity Compensation Plan Information
The following table gives information about the Company's common stock
that may be issued upon the exercise of options, warrants and rights under all
of the Company's existing equity compensation plans as of May 31, 2003.
(a) (b) (c)
Number of securities
remaining available for future
Number of securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities reflected
Plan Category warrants and rights warrants and rights in column (a))
------------- ------------------- ------------------- --------------
Equity compensation
plans approved by 1,224,500 (1) $5.02 346,646
security holders
Equity compensation
plans not approved by -- -- --
security holders
Total 1,224,500 $5.02 346,646
---------------------
4
(1) Issued pursuant to the Company's 1996 Stock Option Plan and the 1997
Employee Stock Purchase Plan ("Stock Option Plans"), which require the approval
of and have been approved by the Company's shareholders. See description of the
Stock Option Plans below.
Stock Option Plans
On October 23, 1996, the Board of Directors approved the 1996 Stock Option
Plan (the "Stock Plan"). The Stock Plan provides for the granting of non-
qualified stock options or incentive stock options to employees and consultants
at the fair market value of the Company's common stock as of the date of grant.
Options granted under the Stock Plan generally vest at a rate of 1/48th per
month, however, the vesting schedule can change on a grant-by-grant basis. The
Stock Plan provides that vested options may be exercised for 3 months after
termination of employment and for 12 months after termination of employment as a
result of death or disability. The Company may select alternative periods of
time for exercise upon termination of service. The Stock Plan permits options
to be exercised with cash, check, certain other shares of the Company's common
stock or consideration received by the Company under a "cashless exercise"
program. In the event that the Company merges with or into another corporation,
or sell substantially all of the Company's assets, the Stock Plan provides that
each outstanding option will be assumed or substituted for by the successor
corporation. If such substitution or assumption does not occur, each option will
fully vest and become exercisable. As of May 31, 2003, there are 1,502,167
shares of Common Stock reserved under the Stock Plan and 288,388 shares
remaining for future issuance.
On June 9, 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "ESPP"). The ESPP has consecutive, overlapping, twenty-four
month offering periods. Each twenty-four month offering period includes four
six month purchase periods. The offering periods generally begin on the first
trading day on or after April 1 and October 1 each year, except that the first
such offering period commenced with the effectiveness of the Company's initial
public offering and ended on the last trading day on or before March 31, 1999.
Shares are purchased through employee payroll deductions at exercise prices
equal to 85% of the lesser of the fair market value of the Company's Common
Stock at either the first day of an offering period or the last day of the
purchase period. If a participant's rights to purchase stock under all employee
stock purchase plans of the Company accrue at a rate which exceeds $25,000 worth
of stock for a calendar year, such participant may not be granted an option to
purchase stock under the ESPP. The maximum number of shares a participant may
purchase during a single purchase period is determined by dividing $12,500 by
the fair market value of a share of the Company's Common Stock on the first day
of the then current offering period. As of May 31, 2003, there are 300,000
shares of Common Stock reserved under the ESPP and 58,258 shares remaining for
future issuance.
PROPOSAL 1
ELECTION OF DIRECTORS
At the Annual Meeting, five directors are to be elected to serve until
the next Annual Meeting or until their successors are elected and qualified.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them for the election of the five nominees named below, all of whom are
presently directors of the Company. Each nominee has consented to be named a
nominee in this Proxy Statement and to continue to serve as a director if
elected. Should any nominee become unable or decline to serve as a director or
should additional persons be nominated at the meeting, the proxy holders intend
to vote all proxies received by them in such a manner as will assure the
election of as many nominees listed below as possible (or, if new nominees have
been designated by the Board of Directors, in such a manner as to elect such
nominees) and the specific nominees to be voted for will be determined by the
proxy holders. The Company is not aware of any reason that any nominee will be
unable or will decline to serve as a director. There are no arrangements or
understandings between any director or executive officer and any other person
pursuant to which he is or was to be selected as a director or officer of the
Company.
The names of the nominees and certain information about them are set
forth below:
5
Director
Name of Nominee Age Position Since
---------------------------- --- ------------------------------------------------- --------
Rhea J. Posedel 61 Chairman of the Board and Chief Executive Officer 1977
Robert R. Anderson (1) 65 Director 2000
William W.R. Elder (1)(2) 64 Director 1989
Mukesh Patel (1) 45 Director 1999
Mario M. Rosati (2) 57 Director and Secretary 1977
----------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The principal occupation of each of the Board members during the past
five years is set forth below. There is no family relationship between any
director or executive officer of the Company.
RHEA J. POSEDEL is a founder of the Company and has served as Chief
Executive Officer and Chairman of the Board of Directors since its inception in
1977. From the Company's inception through May 2000, Mr. Posedel also served as
President. Prior to founding the company, Mr. Posedel held various project
engineering and engineering managerial positions at Lockheed Martin Corporation
(formerly "Lockheed Missile & Space Corporation"), Ampex Corporation, and Cohu,
Inc. He received a B.S. in Electrical Engineering from the University of
California, Berkeley, an M.S. in Electrical Engineering from San Jose State
University and an M.B.A. from Golden Gate University.
ROBERT R. ANDERSON was appointed to the Company's Board of Directors in
October 2000. Mr. Anderson is a private investor. From January 1994 to January
2001, he was Chairman of Silicon Valley Research, Inc., a semiconductor design
automation software company, and its Chief Executive Officer from December 1996
to August 1998, and from April 1994 to July 1995. He also served as Chairman of
Yield Dynamics, Inc., a private semiconductor process control software company,
from October 1998 to October 2000, and as Chief Executive Officer from October
1998 to April 2001. Mr. Anderson co-founded KLA Instruments Corporation, now
KLA-Tencor Corporation, a supplier of semiconductor process control systems, in
1975 and served in various capacities including Chief Operating Officer, Chief
Financial Officer, Vice Chairman and Chairman before he retired from that
company in 1994. Mr. Anderson is a director of MKS Instruments, Inc., Metron
Technology N.V. and Trikon Technologies, Inc. He also serves as a director for
two private development stage companies, and as a trustee of Bentley College.
WILLIAM W. R. ELDER has been a director of the Company since 1989. Dr.
Elder was the Chief Executive Officer of Genus, Inc. ("Genus"), a semiconductor
company, from his founding of Genus in 1981 to September 1996, and has been
serving in that same position again since April 1998. Dr. Elder has been a
director of Genus since its inception. Dr. Elder holds a B.S.I.E. and an
honorary Doctorate Degree from the University of Paisley in Scotland.
MUKESH PATEL was appointed to the Company's Board of Directors in June
1999. Mr. Patel is a leading entrepreneur in the Silicon Valley who founded
Sparkolor Corporation, acquired by Intel Corporation in late 2002, and co-
founded SMART Modular Technologies, Inc., a billion dollar company, acquired by
Solectron Corporation in late 1999. Mr. Patel holds a B.S. degree in Engineering
with an emphasis in digital electronics from Bombay University, India. Mr. Patel
also serves as a Board member for Nazomi Communications Inc. and Parama
Networks.
MARIO M. ROSATI has been a director of the Company since 1977. He has
been with the law firm Wilson Sonsini Goodrich & Rosati, Professional
Corporation since 1971. Mr. Rosati is a director of Genus, Inc., a semiconductor
company, Sanmina-SCI Corporation, an electronics contract manufacturer, Symyx
Technologies, Inc., a combinatorial materials science company and Vivus, Inc.,
a specialty pharmaceutical company, all publicly-held companies. He is also a
director of several privately-held companies.
6
Board Meetings and Committees
The Board of Directors held a total of four (4) meetings and acted two
(2) times by unanimous written consent during the fiscal year ended May 31,
2003. No incumbent director during his period of service in such fiscal year
attended fewer than 75% of the aggregate of all meetings of the Board of
Directors and the committees of the Board upon which such director served. The
Board of Directors has two committees, the Audit Committee and the Compensation
Committee.
The Compensation Committee of the Board of Directors currently consists
of Messrs. Elder and Rosati. The Compensation Committee held one (1) meeting
during fiscal year 2003. The Compensation Committee reviews and advises the
Board of Directors regarding all forms of compensation to be provided to the
officers, employees, directors and consultants of the Company.
The Board of Directors has no nominating committee or any committee
performing such function.
REPORT OF THE AUDIT COMMITTEE(1)
The Audit Committee of the Board of Directors of the Company serves as
the representative of the Board for general oversight of the Company's financial
accounting and reporting system of internal control, audit process and process
for monitoring compliance with laws and regulations. The Audit Committee,
consisting of Messrs. Patel, Anderson and Elder, held four (4) meetings in
fiscal year 2003. Each member is an independent director in accordance with the
Nasdaq National Market Audit Committee requirements. The Audit Committee
evaluates the scope of the annual audit, reviews audit results, consults with
management and the Company's independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of the Company's financial affairs.
The Company's management has primary responsibility for preparing the
Company's financial statements and for the Company's financial reporting
process. The Company's independent auditors, PricewaterhouseCoopers LLP ("PwC"),
are responsible for expressing an opinion on the conformity of the Company's
audited financial statements to generally accepted accounting principles. The
Audit Committee has reviewed and discussed with management the audited financial
statements for the year ended May 31, 2003. PwC, the Company's independent
auditors for fiscal year 2003, issued their unqualified report dated July 1,
2003 on the Company's consolidated financial statements.
The Audit Committee has also discussed with PwC the matters required to
be discussed by AICPA Statement on Auditing Standards No. 61, "Communication
with Audit Committees." The Audit Committee has also received the written
disclosures and the letter from PwC required by Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees," and has
conducted a discussion with PwC relative to its independence. The Audit
Committee has considered whether PwC's provision of non-audit services is
compatible with its independence. The Audit Committee has an Audit Committee
Charter.
Based on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors of Aehr Test Systems that the
Company's audited financial statements for the fiscal year ended May 31, 2003 be
included in the Annual Report on Form 10-K.
AUDIT COMMITTEE
Mukesh Patel
Robert R. Anderson
William W.R. Elder
7
(1) The information regarding the Audit Committee is not "soliciting" material
and is not deemed "filed" with the SEC, and is not incorporated by reference
into any filings of the Company under the Securities Act or the Exchange Act,
whether made before or after the date hereof and irrespective of any general
incorporation language contained in such filing.
Director Compensation
Rhea J. Posedel, the only inside director of the Company, does not
receive any cash compensation for his services as a member of the Board of
Directors. Each outside director receives (1) an annual retainer of $10,000, (2)
$1,250 for each regular board meeting he attends, and (3) $750 for each
committee meeting he attends if not held in conjunction with a regular board
meeting, in addition to being reimbursed for certain expenses incurred in
attending Board and committee meetings. Prior to each annual meeting of
shareholders, each outside director may elect to receive an additional stock
option grant in lieu of any cash payments throughout the year. An inside
director is a director who is a regular employee of the Company, whereas an
outside director is not an employee of the Company. Directors are eligible to
participate in the Company's stock option plans. In fiscal 2001, outside
directors William Elder, Mario Rosati and Mukesh Patel were each granted options
to purchase 5,000 shares at $6.25 per share, additional options to purchase
20,000 shares at $4.00 per share were each granted to William Elder and Mario
Rosati, and an option to purchase 15,000 shares at $6.00 was granted to outside
director Robert Anderson. In fiscal 2002, outside directors William Elder, Mario
Rosati, Mukesh Patel and Robert Anderson were each granted options to purchase
5,000 shares at $3.85 per share. In fiscal 2003, outside directors William
Elder, Mario Rosati, Mukesh Patel and Robert Anderson were each granted options
to purchase 5,000 shares at $2.70 per share
Vote Required
The five nominees receiving the highest number of affirmative votes of
the shares present or represented and entitled to be voted for them shall be
elected as directors. Votes withheld from any director are counted for purposes
of determining the presence or absence of a quorum for the transaction of
business, but have no other legal effect in the election of directors under
California law. See "Quorum; Abstentions; Broker Non-Votes."
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE NOMINEES
LISTED ABOVE
8
PROPOSAL 2
AMENDMENT TO THE 1996 STOCK OPTION PLAN
Proposal
The Board of Directors is proposing that the 1996 Stock Option Plan
(the "Stock Plan") be amended to increase the number of shares authorized
thereunder to provide for the issuance of up to an aggregate of 1,950,000 shares
of Common Stock of the Company to employees, directors and consultants of the
Company. This would require the reservation of an additional 400,000 shares
of Common Stock for issuance upon exercise of the options granted pursuant to
the Stock Plan, in addition to the 1,550,000 shares previously reserved under
the Stock Plan.
The Board of Directors is proposing this amendment in order to allow for
sufficient stock options to cover the Company's needs for at least the next
fiscal year.
Participation in the 1996 Stock Option Plan
The grant of options, stock purchase rights, stock bonus awards and
long-term performance awards under the Stock Plan to employees, including the
executive officers named in the Summary Compensation Table herein, is subject to
the discretion of the plan administrator. As of the date of this proxy
statement, there has been no determination by the plan administrator with
respect to future awards under the Stock Plan. Accordingly, future awards are
not determinable. No stock bonus awards or long-term performance awards were
granted during the last fiscal year. The following table sets forth information
with respect to the grant of options to the executive officers named in the
Summary Compensation Table, to all current executive officers as a group, to all
outside directors as a group and to all other employees as a group during the
last fiscal year:
Amended Plan Benefits
1996 Stock Option Plan
Weighted
Securities Average
Name of Individual Underlying Exercise Price
Or Options Per Share
Identity of Group and Position Granted(#) ($/share)
------------------------------------------- ------------ ----------------
Rhea J. Posedel 40,000 $4.47
Carl J. Meurell 10,000 $4.06
Gary L. Larson 25,000 $4.06
Carl N. Buck 10,000 $4.06
David S. Hendrickson 5,000 $4.06
All current executive officers as a group 100,000 $4.22
All Outside Directors as a group 20,000 $2.70
All other employees (including all current
officers who are not executive officers)
as a group 77,850 $3.68
Summary of Stock Plan
Purpose. The purposes of the Stock Plan are to attract and retain the
best available personnel, to provide additional incentive to employees,
directors and consultants of the Company and to promote the success of the
Company's business.
Status of Shares. As of September 1, 2003, options to purchase a total
of 1,311,184 (net of cancelled or expired options) shares were outstanding under
the Stock Plan. In addition, options to purchase 190,983
9
(plus any shares that might in the future be returned to the plan as a result
of cancellations or expiration of options) shares remained available for future
grant thereunder.
Eligibility; Administration. Under the Stock Plan, employees may be
granted "incentive stock options" intended to qualify within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
employees, directors and consultants may be granted "non-statutory stock
options" not intended to qualify under such statute. The Stock Plan is
administered by the Board of Directors of the Company, or by a committee
appointed by the Board of Directors and consisting of at least two members of
the Board, which determine the terms of options granted, including the exercise
price, the number of shares subject of the option and the options'
exercisability. The Board or its committee has sole discretion to interpret any
provision of the Stock Plan.
Exercise Price. The exercise price of options granted under the Stock
Plan is determined by the Board of Directors or its committee. The exercise
price of incentive stock options may not be less than 100% of the fair market
value of the Common Stock on the date the option is granted. However, the
exercise price of options granted to an optionee who owns more than 10% of the
voting power or value of all classes of stock of the Company must not be less
than 110% of the fair market value on the date of grant. The Common Stock is
currently traded on The Nasdaq Stock Market. While the Company's stock is traded
on The Nasdaq Stock Market, the fair market value is the reported closing price
on the date of grant.
Exercisability. Options granted to new optionees under the Stock Plan
generally become exercisable starting one month after the date of grant with
1/48th of the shares covered thereby becoming exercisable at that time and with
an additional 1/48th of the total number of option shares becoming exercisable
each month thereafter, with full vesting occurring on the fourth anniversary of
the date of grant. The term of an option may not exceed ten years. No option may
be transferred by the optionee other than by will or the laws of descent or
distribution. Each option may be exercised, during the lifetime of the optionee,
only by such optionee.
Stock Purchase Rights. The Stock Plan permits the Company to grant
rights to purchase Common Stock. After the Board or Committee determines that it
will offer stock purchase rights under the Stock Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of shares that the offeree shall be
entitled to purchase, and the time within which the offeree must accept such
offer. The offer shall be accepted by execution of a stock purchase agreement or
a stock bonus agreement in the form determined by the Board or Committee.
Unless the Board or Committee determines otherwise, the stock purchase
agreement or a stock bonus agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason. The purchase price for shares
repurchased pursuant to the stock purchase agreement or a stock bonus agreement
shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at such rate as the Board or Committee may determine.
Amendment and Termination. The Board may at any time amend or terminate
the Stock Plan without approval of the shareholders; provided, however, that the
Company will obtain shareholder approval of any amendment to the Stock Plan to
the extent necessary to comply with Rule 16b-3 under the Securities Exchange Act
of 1934 (the "Exchange Act"), with Section 422 of the Code, or with any other
applicable law or regulation, including requirements of the NASD or any
established stock exchange. Any amendment or termination of the Stock Plan is
subject to the rights of optionees under agreements entered into prior to such
amendment or termination.
Certain Federal Tax Information
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or at the time it is
exercised, although exercise of the option may subject the optionee to the
alternative minimum tax. The Company will not be allowed a deduction for federal
income tax purposes as a result of the exercise of an incentive stock option
regardless of the applicability of the alternative minimum tax. Upon the sale or
exchange of the shares at least two years after grant of the option and one year
after exercise of the option, any gain will be treated as long-term capital
gain. If these holding periods are not satisfied at the time of sale, the
optionee will recognize ordinary income equal to the difference between the
exercise price and the lower of (i) the fair market value of the stock at the
date of the option exercise or (ii) the sale price of the stock, and the Company
will be entitled to a deduction in the same
10
amount. (Different rules may apply upon a premature disposition by an optionee
who is an officer, director or 10% shareholder of the Company.) Any additional
gain or loss recognized on such a premature disposition of the shares will be
characterized as capital gain or loss. If the Company grants an incentive stock
option and as a result of the grant the optionee has the right in any calendar
year to exercise for the first time one or more incentive stock options for
shares having an aggregate fair market value (under all plans of the Company and
determined for each share as of the date the option to purchase the share was
granted) in excess of $100,000, then the excess shares must be treated as non-
statutory options.
An optionee who is granted a non-statutory stock option will also not
recognize any taxable income upon the grant of the option. However, upon
exercise of a non-statutory stock option, the optionee will recognize ordinary
income for tax purposes measured by the excess of the then fair market value of
the shares over the exercise price. Any taxable income recognized by an optionee
who is an employee of the Company will be subject to tax withholding by the
Company. Upon resale of the shares by the optionee, any difference between the
sales price and the fair market value at the time of exercise, to the extent not
recognized as ordinary income as described above, will be treated as capital
gain or loss. The Company will be allowed a deduction for federal income tax
purposes equal to the amount of ordinary income recognized by the optionee.
Vote Required
Approval of the amendment to the Stock Plan requires the affirmative
vote of the Votes Cast (which affirmative vote must constitute at least a
majority of the required quorum). The effect of an abstention is the same as
that of a vote against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENT
TO THE 1996 STOCK OPTION PLAN
11
PROPOSAL 3
AMENDMENT TO THE 1997 EMPLOYEE STOCK PURCHASE PLAN
Proposal
The Board of Directors is proposing that the 1997 Employee Stock
Purchase Plan (the "ESPP") be amended to increase the number of shares
authorized thereunder to provide for the issuance of up to an aggregate of
400,000 shares of Common Stock of the Company to employees of the Company. This
would require the reservation of an additional 100,000 shares of Common Stock
for issuance upon the ESPP, in addition to the 300,000 shares previously
reserved under the ESPP.
The Board of Directors is proposing this amendment in order to enable
the Company to continue its policy of encouraging employee equity participation
in the Company by enabling employees to purchase the Company's common stock at a
discount from the market price through voluntary payroll deductions. The
Management also believes the continued opportunity for employees equity
participation will promote the attraction, retention and motivation of
employees.
Participation in the 1997 Employee Stock Purchase Plan
Participation in the ESPP is voluntary and is dependent on each eligible
employee's election to participate and his or her determination as to the level
of payroll deductions. Accordingly, future purchases under the ESPP are not
determinable. Outside directors are not eligible to participate in the ESPP. No
purchases have been made under the ESPP since its amendment by the Board.
However, purchases were made under the ESPP prior to such amendment. The
following table sets forth certain information regarding shares purchased under
the ESPP during the last fiscal year and the payroll deductions accumulated at
the end of the last fiscal year in accounts under the ESPP for each of the
executive officers named in the Summary Compensation Table, for all current
executive officers as a group and for all other employees who participated in
the ESPP as a group:
Amended Plan Benefits
1997 Employee Stock Purchase Plan
Payroll
Number of Deductions
Name of Individual Shares Dollar as of
Or Purchased Value Fiscal
Identity of Group and Position (#) ($)(1) Year End
------------------------------------------- ------------ --------- ------------
Rhea J. Posedel -- -- --
Carl J. Meurell -- -- --
Gary L. Larson 6,826 $ 2,969 $ 3,270
Carl N. Buck 5,441 $ 2,301 $ 2,837
David S. Hendrickson -- -- --
All current executive officers as a group 12,267 $ 5,270 $ 6,107
All other employees (including all current
officers who are not executive officers)
as a group 29,348 $12,910 $14,263
-------------------
(1) Market value of shares on date of purchase, minus the purchase price under
the ESPP.
12
Summary of Stock Plan
Purpose. The purpose of the ESPP is to provide employees of the Company
who participate in the ESPP with an opportunity to purchase common stock of the
Company through payroll deductions.
Administration. The ESPP may be administered by the Board of Directors
or a committee appointed by the Board. All questions of interpretation or
application of the ESPP are determined at the sole discretion of the Board of
Directors or its committee. The ESPP is currently being administered by the
Board of Directors. Members of the Board of Directors who are eligible employees
are permitted to participate in the ESPP but may not vote on any matter
affecting the administration of the ESPP or the grant of any option pursuant to
the ESPP, or be a member of any committee appointed to administer the ESPP. No
charges for administrative or other costs may be made against the payroll
deductions of a participant in the ESPP. Members of the Board of Directors
receive no additional compensation for their services in connection with the
administration of the ESPP.
Eligibility. Any person who is employed by the Company for at least 20
hours per week and more than five months in a calendar year on the date his or
her participation in the ESPP is effective is eligible to participate in the
ESPP. As of May 31, 2003, approximately 73 employees were eligible to
participate in the ESPP.
Offer Date. The ESPP has consecutive, overlapping, twenty-four month
offering periods. Each twenty-four month offering period includes four six month
purchase periods. The offering periods generally begin on the first trading day
on or after April 1 and October 1 each year, except that the first such offering
period commenced with the effectiveness of the Company's initial public offering
and ended on the last trading day on or before March 31, 1999.
Purchase Price. Shares are purchased through employee payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of the Company's Common Stock at either the first day of an offering
period or the last day of the purchase period. If a participant's rights to
purchase stock under all employee stock purchase plans of the Company accrue at
a rate which exceeds $25,000 worth of stock for a calendar year, such
participant may not be granted an option to purchase stock under the ESPP. The
maximum number of shares a participant may purchase during a single purchase
period is determined by dividing $12,500 by the fair market value of a share of
the Company's Common Stock on the first day of the then current offering period.
Payment of Purchase Price; Payroll Deductions. The purchase price of the
shares is accumulated by payroll deductions during the offering period. The
deductions may not exceed 10% of a participant's eligible compensation. A
participant may discontinue his or her participation in the ESPP or may
decrease, but not increase, the rate of payroll deductions at any time during
the offering period. All payroll deductions are credited to the participant's
account under the ESPP and are deposited with the general funds of the Company.
All payroll deductions received or held by the Company may be used by the
Company for any corporate purpose.
Purchase of Stock; Exercise of Option. At the beginning of each
offering period, by executing a subscription agreement to participate in the
ESPP, each employee is in effect granted an option to purchase shares of common
stock. The maximum number of shares placed under option to a participant in an
offering is determined by dividing the compensation which such participant has
elected to have withheld during the offering period by 85% of the fair market
value of the common stock at the beginning of the offering period or ending of a
purchase period, whichever is lower.
Withdrawal. While each participant in the ESPP is required to sign a
subscription agreement authorizing payroll deductions, the participant's
interest in a given offering may be terminated in whole, but not in part, by
signing and delivering to the Company a notice of withdrawal from the ESPP. Such
withdrawal may be elected at any time prior to the end of the applicable six-
month offering period. A participant's withdrawal from an offering does not have
any effect upon such participant's eligibility to participate in subsequent
offerings under the ESPP.
Termination of Employment. Termination of a participant's employment
for any reason, including retirement or death, cancels his or her participation
in the ESPP immediately. In such event, the payroll deductions credited to the
participant's account will be returned to such participant or, in the case of
death, to the person or persons entitled thereto as specified by the employee in
the subscription agreement.
13
Changes. In the event of any change, such as stock splits or stock
dividends, made in the capitalization of the Company that results in an increase
or decrease in the number of shares of common stock outstanding without receipt
of consideration by the Company, appropriate adjustments will be made by the
Company in the number of shares subject to purchase and in the purchase price
per share, subject to any required action by the shareholders of the Company.
Amendment and Termination of the ESPP. The Board of Directors may at
any time amend or terminate the ESPP, except that such termination shall not
affect options previously granted nor may any amendment make any change in an
option granted prior thereto which adversely affects the rights of any
participant. No amendment may be made to the ESPP without approval of the
shareholders of the Company if such amendment would increase the number of
shares reserved under the ESPP. The ESPP will by its terms terminate in 2007.
Tax Information. The ESPP, and the right of participants to make
purchases thereunder, is intended to qualify under the provisions of Sections
421 and 423 of the Code. Under these provisions, no income will be taxable to a
participant until the shares purchased under the ESPP are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax and the amount of the tax will depend upon the
holding period. If the shares are sold or otherwise disposed of more than two
years from the first day of the offering period and one year from the date the
shares are purchased, the participant will recognize ordinary income measured as
the lesser of (a) the excess of the fair market value of the shares at the time
of such sale or disposition over the purchase price, or (b) an amount equal to
15% of the fair market value of the shares as of the first day of the offering
period. Any additional gain will be treated as long-term capital gain. If the
shares are sold or otherwise disposed of before the expiration of these holding
periods, the participant will recognize ordinary income generally measured as
the excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
the holding period. The Company is not entitled to a deduction for amounts taxed
as ordinary income or capital gain to a participant except to the extend of
ordinary income recognized by participants upon a sale or disposition of shares
prior to the expiration of the holding period(s) described above.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and the Company with respect to the shares purchased under
the ESPP. Reference should be made to the applicable provisions of the Code. In
addition, the summary does not discuss the tax consequences of a participant's
death or the income tax laws of any state or foreign country in which the
participant may reside.
Vote Required
Approval of the amendment to the ESPP requires the affirmative vote of
the Votes Cast (which affirmative vote must constitute at least a majority of
the required quorum). The effect of an abstention is the same as that of a
vote against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENT
TO THE 1997 EMPLOYEE STOCK PURCHASE PLAN
14
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected PricewaterhouseCoopers
LLP, as the Company's independent auditors, to audit the financial statements of
the Company for the current fiscal year ending May 31, 2004, and recommends that
Shareholders vote for ratification of such appointment. In the event of a
negative vote on such ratification, the Audit Committee and the Board of
Directors will reconsider their selection. Even if the selection is ratified,
the Audit Committee and the Board of Directors in their discretion may direct
the appointment of different independent auditors at any time during the year.
Representatives of PricewaterhouseCoopers LLP are expected to be present at the
meeting with the opportunity to make a statement if they desire to do so, and
are expected to be available to respond to appropriate questions.
Audit Fees
The following table sets forth the aggregate fees billed or to be billed
by PricewaterhouseCoopers LLP for the following services during fiscal 2003:
DESCRIPTION OF SERVICES
-----------------------
Audit fees(1) $ 92,375
Financial information system design
and implementation fees(2) --
All other fees(3) 68,175
--------
TOTAL $160,550
========
(1) Represents the aggregate fees billed or to be billed for professional
services rendered for the audit of the Company's fiscal 2003 annual
financial statements and for the review of the financial statements
included in the Company's quarterly reports during such period.
(2) Represents the aggregate fees billed for operating or supervising the
operation of the Company's information system or managing the Company's
local area network and/or designing or implementing a hardware or
software system that aggregates data or generates information that is
significant to the generation of the Company's financial statements.
(3) Represents the aggregate fees billed or to be billed for tax services
rendered in fiscal 2003. The Audit Committee considered and determined
that the auditor's provision of non-audit services is compatible with the
auditor's independence.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP
15
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows information concerning compensation awarded
to, earned by or paid for services to the Company in all capacities during the
fiscal years ended May 31, 2003, 2002 and 2001 by the Chief Executive Officer
and each of the four other most highly compensated executive officers with
annual compensation in excess of $100,000 for the fiscal year ended May 31,
2003.
Summary Compensation Table
Long-term
Compensation
------------
Annual Compensation Securities
Fiscal ----------------------- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options ($) Compensation ($)
--------------------------- ---- ---------- --------- ------------ ----------------
Rhea J. Posedel ..................... 2003 $213,252 -- $2,252 $17,505(1)
Chief Executive Officer and 2002 $200,199 -- $1,935 $ 5,795(2)
Chairman of the Board of 2001 $220,613 $ 55,755 $7,183 $ 3,341(3)
Directors
Carl J. Meurell ..................... 2003 $195,850 $ 52,965 $2,294 $17,254(1)
President and Chief Operating 2002 $197,397 $ 10,000 $1,935 $13,968(2)
Officer 2001 $197,067 $ 58,488 $7,183 $ 2,755(3)
Gary L. Larson ...................... 2003 $169,855 -- $1,944 $ 4,061(1)
Vice President of Finance and 2002 $166,503 -- $1,935 $ 7,341(2)
Chief Financial Officer 2001 $166,176 $ 33,709 $6,576 $ 3,380(3)
Carl N. Buck ...........................2003 $151,205 $ 14,749 $1,580 $ 6,187(1)
Vice President of Contactor 2002 $139,289 -- $1,746 $ 3,717(2)
Business Group 2001 $164,520 $ 31,395 $6,753 $ 2,189(3)
David S. Hendrickson................. 2003 $174,214 $ 26,906 $2,015 $13,013(1)
Vice President of Engineering 2002 $175,792 $ 14,280 $1,935 $ 5,491(2)
2001 $128,455 $ 28,735 $5,195 $ 2,278(3)
---------------------
(1) Consists of health and life insurance premiums and medical costs paid by
the Company during the year ended May 31, 2003.
(2) Consists of health and life insurance premiums and medical costs paid by
the Company during the year ended May 31, 2002.
(3) Consists of health and life insurance premiums and medical costs paid by
the Company during the year ended May 31, 2001.
16
Stock Option Grants and Exercises
The following table sets forth the number and terms of options granted to
the persons named in the Summary Compensation Table during the fiscal year ended
May 31, 2003.
Option Grants in Last Fiscal Year
Potential Realizable
Individual Grants Value at Assumed
---------------------------------------------------- Annual Rates of
Number of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(4)
Options Employees in Price Expiration -------------------
Name Granted(1) Fiscal Year(2) ($/Share)(3) Date 5% ($) 10% ($)
---- ---------- -------------- ------------ ---------- -------- --------
Rhea J. Posedel 40,000 22.5% $4.47 7/22/2009 $49,873 $137,831
Carl J. Meurell 10,000 5.6% $4.06 7/22/2009 $16,528 $ 38,518
Gary L. Larson 25,000 14.1% $4.06 7/22/2009 $41,321 $ 96,295
Carl N. Buck 10,000 5.6% $4.06 7/22/2009 $16,528 $ 38,518
David S. Hendrickson 5,000 2.8% $4.06 7/22/2009 $ 8,264 $ 19,259
-----------------
(1) The options were granted under the 1996 Stock Option Plan and vested over
four years.
(2) Based on an aggregate of 177,850 options granted by the Company in the
year ended May 31, 2003 to employees and consultants to the Company,
including the named executive officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors, except the exercise price of the options granted to Mr.
Posedel was equal to 110% of the fair market value of the Common Stock on
the date of the grant.
(4) This column sets forth hypothetical gains or "option spreads" for the
options at the end of their respective seven-year terms, as calculated in
accordance with the rules of the SEC. Each gain is based on an arbitrarily
assumed annualized rate of compound appreciation of the market price at
the date of grant of 5% and 10% annually from the date the option was
granted to the end of the option term. The 5% and 10% rates of
appreciation are specified by the rules of the SEC and do not represent
the Company's estimate or projection of future Common Stock prices. The
Company does not necessarily agree that this method properly values an
option. Actual gains, if any, on option exercises are dependent on the
future performance of the Company's Common Stock and overall market
conditions and the timing of option exercises, if any.
The following table provides information concerning option exercises by
the persons named in the Summary Compensation Table during the fiscal year ended
May 31, 2003 and the value of unexercised options at such date.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares Fiscal Year-End(#)(1) Fiscal Year-End($)(2)
Acquired on Value --------------------------- --------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Rhea J. Posedel ............ -- -- 99,062 65,938 -- --
Carl J. Meurell ............ -- -- 182,186 42,814 -- --
Gary L. Larson ............. -- -- 63,061 34,939 -- --
Carl N. Buck ............... -- -- 41,998 19,502 -- --
David S. Hendrickson ....... -- -- 54,373 40,627 -- --
----------------------------
(1) The Company has not granted any stock appreciation rights and its stock
plans do not provide for the granting of such rights.
17
(2) Calculated by determining the difference between the fair market value of
the securities underlying the options at year end ($2.87 per share as of
May 31, 2003) and the exercise price of the options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
In its ordinary course of business, the Company enters into transactions
with certain of its directors and officers. The Company believes that each such
transaction has been on terms no less favorable for the Company than could have
been obtained in a transaction with an independent third party.
Legal Counsel
During fiscal 2003, Mario M. Rosati, a member of the Board of Directors of
the Company, was also a member of the law firm of Wilson Sonsini Goodrich &
Rosati ("WSGR"). The Company retained WSGR as its legal counsel during the
fiscal year. The Company plans to retain WSGR as its legal counsel again during
fiscal 2004.
Change of Control Severance Agreement
On January 24, 2001, the Company entered into Change of Control Severance
Agreements with Mr. Carl N. Buck, Mr. David S. Hendrickson, Mr. Gary L. Larson,
Mr. Carl J. Meurell and Mr. Rhea J. Posedel pursuant to which those executives
would be entitled to a payment in the event of a termination of employment for
specified reasons following a change of control of the Company. For this
purpose, a change of control of the Company means a merger or consolidation of
the Company, a sale by the Company of all or substantially all of its assets,
the acquisition of beneficial ownership of a majority of the outstanding voting
securities of the Company by any person or a change in the composition of the
Board as a result of which fewer than a majority of the directors are incumbent
directors. Termination of employment for purposes of these agreements means a
discharge of the executive by the Company, other than for specified causes
including dishonesty, conviction of a felony, misconduct or wrongful acts.
Termination also includes resignation following the occurrence of an adverse
change in the executive's position, duties, compensation or work conditions. The
amounts payable under the agreements will change from year to year based on the
executive's compensation. In the event of a termination in fiscal 2004 following
a change of control, the amounts payable to Messrs. Buck, Hendrickson, Larson,
Meurell and Posedel would be approximately $78,000, $98,000, $134,000, $170,000
and $233,000, respectively.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Elder and Rosati. No
interlocking relationship exists between the Company's Board of Directors and
Compensation Committee and the board of directors or compensation committee of
any other company.
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Exchange Act of 1933, as amended, or the
Securities Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following report and
the Performance Graph shall not be incorporated by reference into any such
filings and such information shall be entitled to the benefits provided in Item
306(c) and (d) of Regulation S-K and Item 7(d)(3)(v) of Schedule 14A.
General
The objectives of the overall executive compensation program are to
attract, retain, motivate and reward Company executives while aligning their
compensation with the achievements of key business objectives, maximization of
shareholder value and optimal satisfaction of customers.
18
The Compensation Committee is responsible for:
1. Determining the specific executive compensation methods to be used by
the Company and the participants in each of those specific programs;
2. Determining the evaluation criteria and timeliness to be used in those
programs;
3. Determining the processes that will be followed in the ongoing
administration of the programs; and
4. Determining their role in the administration of the programs.
All of the actions take the form of recommendations to the full Board of
Directors where final approval, rejection or redirection will occur. The
Compensation Committee is responsible for administering the compensation
programs for all Company officers. The Compensation Committee has delegated the
responsibility of administering the compensation programs for all other Company
employees to the Company's officers.
Compensation Vehicles
Currently, the Company uses the following executive compensation vehicles:
o Cash-based programs: Base salary, Annual Incentive Bonus Plan, Annual
Profit Sharing Plan, and a Sales Incentive Commission Plan; and
o Equity-based programs: 1996 Incentive Stock Option Plan, the 1997
Employee Stock Purchase Plan and the Employee Stock Bonus Plan.
These programs apply to all executive level positions, except for the
Sales Incentive Commission Plan, which only includes executives directly
responsible for sales activities. Periodically, but at least once near the
close of each fiscal year, the Compensation Committee reviews the existing plans
and recommends those that should be used for the subsequent year.
The criteria for determining the appropriate salary level, bonus and stock
option grants for each of the executive officers include (a) Company performance
as a whole, (b) business unit performance (where appropriate) and (c) individual
performance objectives. Company performance and business unit performance are
measured against both strategic and financial goals. Examples of these goals are
to obtain: operating profit, revenue growth, timely new product introduction,
and shareholder value (usually measured by the Company stock price). Individual
performance is measured to specific objectives relevant to the individual's
position and a specific time frame.
These criteria are usually related to a fiscal year time period, but may,
in some cases, be measured over a shorter or longer time frame.
The processes used by the Compensation Committee include the following
steps:
1. The Compensation Committee periodically receives information comparing
the Company's pay levels to other companies in similar industries,
other leading companies (regardless of industry) and competitors.
Primarily national and regional compensation surveys are used.
2. At or near the start of each evaluation cycle, the Compensation
Committee meets with the Chief Executive Officer to review, revise as
needed, and agree on the performance objectives set for the other
executives. The Chief Executive Officer and Compensation Committee
jointly set the Company objectives to be used. The business unit and
individual objectives are formulated jointly by the Chief Executive
Officer and the specific individual. The Compensation Committee also,
with the Chief Executive Officer, jointly establishes and agrees on
their respective performance objectives.
3. Throughout the performance cycle review, feedback is provided by the
Chief Executive Officer, the Compensation Committee and full Board, as
appropriate.
4. At the end of the performance cycle, the Chief Executive Officer
evaluates each other executive's relative success in meeting the
performance goals. The Chief Executive Officer makes recommendations on
salary, bonus and stock options, utilizing the comparative results as a
factor. Also included in the decision criteria are subjective factors
such as teamwork, leadership contributions and ongoing changes in the
business climate. The Chief Executive Officer reviews the
recommendations and obtains Compensation Committee approval.
19
5. The final evaluations and compensation decisions are discussed with
each executive by the Chief Executive Officer or Compensation
Committee, as appropriate.
Compensation of the Chief Executive Officer
The Compensation Committee used the same compensation policy described
above for all executive officers to determine the compensation for Rhea J.
Posedel, the Company's Chief Executive Officer, in fiscal year 2003. In setting
both the cash-based and the equity-based elements of Mr. Posedel's compensation,
the Compensation Committee considered the company's performance, competitive
forces taking into account Mr. Posedel's experience and knowledge, and Mr.
Posedel's leadership in achieving our long-term goals. During fiscal year 2003,
he received a stock option grant under our 1996 Stock Option Plan for 40,000
shares. These options vest over four years. The Compensation Committee believes
Mr. Posedel's fiscal year 2003 compensation was fair, relative to the Company's
performance and Mr. Posedel's individual performance and leadership, and it
rewards him for this performance and will serve to retain him as a key employee.
Policy on Deductibility of Compensation
We are required to disclose our policy regarding qualifying executive
compensation for deductibility under Section 162(m) of the Internal Revenue Code
of 1986, as amended, which provides that, for purposes of the regular income
tax, the otherwise allowable deduction for compensation paid or accrued with
respect to the executive officers of a publicly-held company, which is not
performance-based compensation is limited to no more than $1 million per year.
It is not expected that the compensation to be paid to our executive officers
for fiscal 2003 will exceed the $1 million limit per officer; however, to the
extent such compensation to be paid to such executive officers exceeds the $1
million limit per officer, such excess will be treated as performance-based
compensation.
The Compensation Committee feels that the compensation vehicles used by
the company, generally administered through the process as outlined above,
provide a fair and balanced executive compensation program related to the proper
business issues. In addition, it should be noted that compensation vehicles will
be reviewed and, as appropriate, revised in order to attract and retain new
executives in addition to rewarding performance on the job.
COMPENSATION COMMITTEE
William W. R. Elder
Mario M. Rosati
20
Company Performance
The following graph shows a comparison of total shareholder return for
holders of the Company's Common Stock for the last five fiscal years and ending
May 31, 2003, compared with The Nasdaq Stock Market (U.S.) Index and the
Philadelphia Semiconductor Index. The graph assumes that $100 was invested in
the Company's Common Stock, in the Nasdaq Stock Market (U.S.) Index and the
Philadelphia Semiconductor Index on May 31, 1998, and that all dividends were
reinvested. The Company believes that while total shareholder return can be an
important indicator of corporate performance, the stock prices of semiconductor
equipment companies like Aehr Test Systems are subject to a number of market-
related factors other than company performance, such as competitive
announcements, mergers and acquisitions in the industry, the general state of
the economy, and the performance of other semiconductor equipment company
stocks.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
Cumulative Total Return
--------------------------------------------------------------
5/31/98 5/31/99 5/31/00 5/31/01 5/31/02 5/31/03
AEHR TEST SYSTEMS 100.00 65.98 95.10 65.98 98.13 47.34
NASDAQ STOCK MARKET (U.S.) 100.00 141.04 193.32 120.24 92.53 91.95
PHILADELPHIA SEMICONDUCTOR 100.00 160.48 373.77 182.43 167.96 123.57
21
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires that directors, certain
officers of the Company and ten percent Shareholders file reports of ownership
and changes in ownership with the SEC as to the Company's securities
beneficially owned by them. Such persons are also required by SEC rules to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of copies of such forms received by the
Company, or on written representations from certain reporting persons, the
Company believes that, (i) during the period from June 1, 2002 to May 31, 2003,
its executive officers, directors and ten percent stockholders filed all
required Section 16(a) reports on a timely basis, and (ii) during the period
from June 1, 2000 to May 31, 2001, its executive officers, directors and ten
percent stockholders filed all required Section 16(a) reports on a timely basis,
with the exceptions of Carl J. Meurell, Gary L. Larson and Carl N. Buck, each of
whom failed to timely file a Form 4.
FINANCIAL STATEMENTS
The Company's Annual Report to Shareholders for the last fiscal year is
being mailed with this proxy statement to Shareholders entitled to notice of the
meeting. The Annual Report includes the consolidated financial statements,
unaudited selected consolidated financial data and management's discussion and
analysis of financial condition and results of operations.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed Proxy to vote the shares they represent as the
Board of Directors may recommend.
By Order of the Board of Directors,
/s/ Rhea J. Posedel
RHEA J. POSEDEL
Chief Executive Officer and
Chairman of the Board of Directors
Dated: September 26, 2003
22
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
AEHR TEST SYSTEMS
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 15, 2003
The undersigned Shareholder of Aehr Test Systems, a California corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders and
Proxy Statement and hereby appoints Rhea J. Posedel and Gary L. Larson, or
either of them, proxies and attorneys-in-fact, with full power to each of
substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the Annual Meeting of Shareholders of Aehr Test Systems to be
held on October 15, 2003, at 4:00 p.m., local time, at 400 Kato Terrace,
Fremont, California 94539, and at any adjournments thereof and to vote all
shares of Common Stock which the undersigned would be entitled to vote if then
and there personally present, on the matters set forth on the reverse side of
this card.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR (1) THE ELECTION OF DIRECTORS, (2) FOR THE AMENDMENT TO THE
1996 STOCK OPTION PLAN, (3) FOR THE AMENDMENT TO THE 1997 EMPLOYEE STOCK
PURCHASE PLAN, AND (4) FOR RATIFICATION OF THE APPOINTMENT OF THE COMPANY'S
INDEPENDENT AUDITORS, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS
AS MAY COME BEFORE THE MEETING AND ANY ADJOURNMENT(S) THEREOF.
PLEASE SIGN AND DATE ON REVERSE SIDE
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DETACH PROXY CARD HERE
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1. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to [ ] EXCEPTION
below (except as vote for all nominees
indicated). listed below
IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S), STRIKE
A LINE THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW:
Rhea J. Posedel Robert R. Anderson William W. R. Elder
Mukesh Patel Mario M. Rosati
2. PROPOSAL TO AMEND THE COMPANY'S 1996 STOCK OPTION PLAN TO INCREASE BY
400,000 SHARES THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER TO
PROVIDE FOR THE ISSUANCE OF UP TO AN AGGREGATE OF 1,950,000 SHARES OF
COMMON STOCK OF THE COMPANY TO EMPLOYEES, DIRECTORS AND CONSULTANTS OF THE
COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO AMEND THE COMPANY'S 1997 EMPLOYEE STOCK PURCHASE PLAN TO
INCREASE BY 100,000 SHARES THE NUMBER OF SHARES RESERVED FOR ISSUANCE
THEREUNDER TO PROVIDE FOR THE ISSUANCE OF UP TO AN AGGREGATE OF 400,000
SHARES OF COMMON STOCK OF THE COMPANY TO EMPLOYEES OF THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS
INDEPENDENT AUDITORS:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. IN THEIR DISCRETION, UPON SUCH OTHER MATTER OR MATTERS WHICH MAY PROPERLY
COME BEFORE THE MEETING AND ANY ADJOURNMENT(S) THEREOF.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby ratifies and
confirms all that the attorneys and
proxies, or any of them, or their
substitutes, shall lawfully do or
cause to be done by virtue hereof,
and hereby revokes any and all
proxies heretofore given by the
undersigned to vote at the meeting.
The undersigned acknowledges receipt
of the Notice of Annual Meeting and
the Proxy Statement accompanying
such notice.
Dated: _______________________, 2003
____________________________________
Signature
____________________________________
Signature
Please date this proxy card and sign
above exactly as your name appears
on this card. Joint owners should
each sign personally. Corporate
proxies should be signed by an
authorized officer, executors,
administrators, trustee, etc.,
should give their full titles.
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