SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
SONOMAWEST HOLDINGS, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on the table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(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): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid: N/A
[ ] 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: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
SONOMAWEST
HOLDINGS INC
2064 HIGHWAY 116 NORTH o SEBASTOPOL, CA 95472
PH: (707) 824-2001 o FAX: (707) 829-4630
--------------------------
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS AND PROXY STATEMENT
October 30, 2002
---------------------------
To the Shareholders of SonomaWest Holdings, Inc.:
Notice is hereby given that the Annual Meeting of the Shareholders of
SonomaWest Holdings, Inc. (the "Company") will be held on Wednesday, October 30,
2002 at 10:00 a.m., local time, at 333 Bush Street, 17th Floor, San Francisco,
California 94104 for the following purposes:
1. To elect four directors to serve until the 2003 Annual Meeting of
Shareholders or until their respective successors are elected and
qualified.
2. To approve the SonomaWest Holdings, Inc. 2002 Stock Incentive
Plan.
3. To approve the appointment of Grant Thornton LLP as independent
auditors for the fiscal year ending June 30, 2003.
4. 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 shareholders of record at the close of business on September 13,
2002 are entitled to notice of and to vote at the meeting and at any
continuation or adjournment thereof.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, we urge you to mark,
sign, date and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if such shareholder has returned a proxy.
By Order of the Board of Directors,
Matthew J. Ertman
SECRETARY
Sebastopol, California
October 1, 2002
SONOMAWEST
HOLDINGS INC
2064 HIGHWAY 116 NORTH o SEBASTOPOL, CA 95472
PH: (707) 824-2001 o FAX: (707) 829-4630
--------------------------
PROXY STATEMENT
For Annual Meeting of Shareholders
October 30, 2002, at 10:00 a.m.
INFORMATION CONCERNING VOTING AND SOLICITATION
GENERAL
This Proxy Statement is furnished by the Board of Directors of
SonomaWest Holdings, Inc. (the "Company") to solicit Shareholder proxies to be
voted at the Annual Meeting of Shareholders to be held on Wednesday, October 30,
2002, at 10:00 a.m., local time, or at any adjournment or postponement thereof,
for the purposes set forth herein and in the accompanying Notice of Annual
Meeting of Shareholders. The Annual Meeting will be held at 333 Bush Street,
17th Floor, San Francisco, California.
The mailing of these proxy solicitation materials and the Company's
Annual Report to Shareholders for the year ended June 30, 2002 commenced on or
about October 1, 2002.
VOTING
The Board of Directors has fixed the close of business on September 13,
2002 as the Record Date for the determination of Shareholders entitled to
receive notice of, and to vote at, the Annual Meeting or any adjournment
thereof. At the Record Date 1,104,783 shares of the Company's common stock were
issued and outstanding, and no shares of any other class of stock were
outstanding.
Each Shareholder on the Record Date will be entitled to one vote for
each share held on all matters to be voted upon at the Annual Meeting, except
for the election of Directors. In the election of Directors, Shareholders have
cumulative voting rights, which means that each Shareholder is entitled to a
number of votes equal to the number of his or her shares multiplied by the
number of Directors to be elected (four). A Shareholder may cast all of his or
her votes for a single candidate, or may distribute votes among as many
candidates as he or she may see fit. No Shareholder may cumulate votes for a
candidate, however, unless the name(s) of the candidate(s) have been placed in
nomination prior to the voting and the Shareholder has given notice at the
Meeting, prior to the voting, of the intention to cumulate votes. If one
Shareholder has already given such a notice, all Shareholders may cumulate their
votes for candidates in nomination without further notice.
The inspector of election appointed for the meeting will tabulate all
votes and will separately tabulate affirmative and negative votes, abstentions
and broker non-votes. Each proxy received without specific directions indicated
thereon will be voted FOR the election of the nominees named in this proxy
statement, or as many of such nominees as may be elected as directors of the
Company, FOR approval of the SonomaWest Holdings, Inc. 2002 Stock Incentive
Plan, and FOR approval of the appointment of Grant Thornton LLP as the Company's
independent auditors for the fiscal year ended June 30, 2003. Abstentions
-1-
will have the same effect as negative votes. Broker non-votes are counted
towards a quorum, but are not counted for any purpose in determining whether a
matter has been approved. "Broker non-votes" are shares held by brokers or
nominees which are present in person or represented by proxy, but which are not
voted on a particular matter because instructions have not been received from
the beneficial owner. All properly executed proxies that are not revoked will be
voted at the meeting in accordance with the instructions contained therein.
REVOCABILITY OF PROXIES
Any person giving a proxy in the form accompanying this statement has
the power to revoke such proxy at any time before it is voted. The proxy may be
revoked by filing with the Secretary of the Company at the Company's principal
executive office a written notice of revocation or a duly executed proxy bearing
a later date, or by filing written notice of revocation with the secretary of
the meeting prior to the voting of the proxy, or by attending the meeting and
voting in person.
SOLICITATION
The Company will bear the entire cost of solicitation, including
preparation, assembly, printing, and mailing of this Proxy Statement, the Proxy
card, and any additional material furnished to Shareholders. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names which are beneficially owned by others
to forward to such beneficial owners. In addition, the Company may reimburse
such persons for their costs of forwarding the solicitation material to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram, or personal solicitation by directors, officers, or
employees of the Company. No additional compensation will be paid for any such
services. Except as described above, the Company does not intend to solicit
proxies other than by mail.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Proposals of Shareholders that are intended to be presented at the
Company's 2003 Annual Meeting of Shareholders must be received by the Company no
later than June 7, 2003 in order to be included in the proxy statement and proxy
relating to that meeting. Shareholders wishing to present a proposal in person
must give the Company written notice of their proposal no later than August 21,
2003.
PROPOSAL 1
ELECTION OF DIRECTORS
At the Annual Meeting, four Directors are to be elected by the
Shareholders to serve until the next Annual Meeting or until the election and
qualification of their successors. The Board's proxy holders (named on the
enclosed Proxy card) intend to vote all shares for which proxies are granted to
elect the four nominees selected by the Company's Board of Directors and intend
to vote such shares cumulatively if necessary to elect some or all of such
nominees.
If any of the Board's nominees refuses or is unable to serve as a
Director (which is not now anticipated), the Board's proxy holders intend to
nominate and vote for such other person(s) as they believe will best serve the
interests of the Company. Any Shareholder may nominate a candidate for Director
from the floor at the Meeting. Such nominee must consent to serve, if elected,
prior to voting on his or her name. The Board of Directors has no reason to
believe that any substitute nominee or nominees will be required.
-2-
The four nominees for Director who receive the most affirmative votes
will be elected Directors. Votes withheld shall have no effect on the election
result, though applicable securities laws and regulations may require that the
number of such votes subsequently be disclosed to the Company's Shareholders
under certain circumstances.
MANAGEMENT RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES
FOR DIRECTOR NAMED BELOW
NOMINEES
The table below indicates the respective nominee's position with the
Company, age, and year in which he first became a Director.
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
- ---- --- ------------------------- --------------
David J. Bugatto 38 Director 2001
Gary L. Hess 50 Director 1996
Roger S. Mertz 58 Chairman of the Board 1993
Fredric Selinger 63 Director 1999
Each of the nominees, directors and named current executive officers of
the Company has been engaged in the principal occupations set forth below during
the past five (5) years.
DAVID J. BUGATTO, Director. Mr. Bugatto is President and Chief
Executive Officer of Alleghany Properties, Inc. ("API") and Sacramento
Properties Holdings Inc. ("SPHI") (real estate investments) which are
subsidiaries of Alleghany Corporation, a publicly traded corporation on the
NYSE. Mr. Bugatto is also a Director of both API and SPHI.
GARY L. HESS, Director. Mr. Hess served as President and Chief
Executive Officer of the Company from May 1, 1996 until October 31, 2001, and
Chief Financial Officer from June 14, 1999 until October 31, 2001. Prior thereto
he was a Senior Vice President of Dole Food Company, Inc. (fresh and processed
fruit) (1993-1996); President of Cadace Enterprises, Inc. (water conservation
products) and The Marketing Partnership 1992-1993; and Director of Marketing, E.
& J. Gallo Winery (wine and distilled spirits) (1987-1992).
ROGER S. MERTZ, Chairman of the Board. Mr. Mertz was appointed Chairman
of the Board on October 31, 2001. In accordance with Section 312 of the
California General Corporation Law, since the Company has no individual serving
as President, Mr. Mertz is deemed the Company's Chief Executive Officer and
serves in that capacity. Mr. Mertz is an attorney-at-law. He is a partner of the
California law firm of Allen Matkins Leck Gamble & Mallory LLP. Prior to October
1999, Mr. Mertz was a partner of the San Francisco, California law firm of
Severson & Werson.
FREDRIC SELINGER, Director. Mr. Selinger is Senior Managing Director of
Corporate Finance of Sutter Securities, Incorporated (private investment banking
and consulting). Prior to March 1995, Mr. Selinger was Managing Director of
Jackson Square Capital Corp. (private investment banking and consulting).
THOMAS R. EAKIN, Chief Financial Officer. Mr. Eakin, age 48, has served
as the Company's Chief Financial Officer since October 31, 2001 and also served
in such capacity from March 1987 to April 1999. Mr. Eakin served as the
Company's Controller from December 1983 to February 1987. Since July 2000,
-3-
Mr. Eakin has also owned, managed and served as a consultant for Eakin
Consulting. From April 1999 to June 2000, Mr. Eakin served as Chief Financial
Officer for Associated Vintage Group, a custom wine producer in Graton,
California.
BOARD COMMITTEES AND MEETINGS
The Board of Directors met 9 times during the fiscal year ending June
30, 2002 and no director attended fewer than 75% of the meetings of the Board of
Directors or its committees upon which such Director served. The Company's Board
of Directors has authorized two standing committees.
COMPENSATION COMMITTEE. The functions of the Compensation Committee are
to develop and recommend to the full Board compensation arrangements, including
bonuses, and stock options for executive officers and other key employees, and
fee arrangements for outsourced management; to advise the chief executive
officer on policy matters concerning officers' compensation; and to administer
the 2002 Stock Incentive Plan and the 1996 Stock Option Plan, as amended. The
members of the committee are Messrs. Bugatto, Hess (Chairman) and Selinger. The
Compensation Committee held one meeting during the fiscal year.
AUDIT COMMITTEE. The function of the Audit Committee is to recommend to
the full Board the accounting firm to be retained as the Company's independent
auditors and the price to be paid to the firm, and to consult with the auditors
regarding the plan of audit, the results of the audit and the audit report, and
the adequacy of internal accounting controls. The members of the committee
currently are Messrs. Hess (from October 31, 2001), Selinger (Chairman) and
Bugatto. The Audit Committee held two meetings during the fiscal year.
The full Board acts as the nominating committee for the Directors of
the Company.
COMPENSATION OF DIRECTORS
DIRECTOR COMPENSATION. Directors receive $900 per quarter for serving
as Directors, $600 for each Board or committee meeting attended, and $400 for
each telephonic Board meeting. Directors' fees paid by the Company during fiscal
year 2002 totaled $27,000. In connection with their services to the Company, on
July 17, 2001, Messrs. Mertz and Selinger received a fully vested, non-qualified
stock option grant to purchase 5,000 shares of the Company's Common Stock at $
7.48 per share and Mr. Bugatto received a fully vested, non-qualified stock
option grant to purchase 10,000 shares of the Company's Common Stock at $7.48
per share.
-4-
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following tables, based in part upon information supplied by
officers, directors and principal Shareholders, set forth certain information
known to the Company with respect to beneficial ownership of the Company's
Common Stock as of September 13, 2002, by (i) each beneficial owner of more than
5% of the Company's Common Stock, (ii) the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers whose
aggregate compensation exceeded $100,000 for the fiscal year ended June 30, 2002
(collectively, the "Named Executive Officers"), (iii) each director of the
Company, and (iv) all directors and executive officers of the Company as a
group. Except as otherwise indicated, each person has sole voting and investment
power with respect to all shares shown as beneficially owned, subject to
community property laws where applicable. Voting power is the power to vote or
direct the voting of securities, and investment power is the power to dispose of
or direct the disposition of securities.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
SHARES OF COMMON STOCK BENEFICIALLY OWNED(a)
--------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------ ---------- -------
Craig R. Stapleton 317,852(b) 28.51%
135 E. Putnam Avenue
Greenwich, CT 06830
Gary L. Hess 125,893(c) 11.25%
2064 Highway 116, North
Sebastopol, CA 95472
Wendy W. Stapleton 71,165(d) 6.44%
135 E. Putnam Avenue
Greenwich, CT 06830
(a) Security ownership information for beneficial owners is taken from
statements filed with the Securities and Exchange Commission pursuant to
Sections 13(d), 13(g) and 16(a) and information made known to the Company.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options that are currently exercisable or exercisable within 60 days of
September 13, 2002 are deemed to be outstanding for the purpose of
computing the percentage ownership of the person holding those options, but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. The percentage of beneficial ownership is
based on 1,104,783 shares of common stock outstanding as of September 13,
2002.
(b) Includes 291,159 shares owned directly by Mr. Stapleton or trusts for the
benefit of Mr. Stapleton, 10,000 shares issuable upon the exercise of stock
options and 26,693 shares owned by Mr. Stapleton's wife to which Mr.
Stapleton disclaims any beneficial interest.
(c) Includes 111,419 shares owned directly and 14,474 shares issuable upon the
exercise of stock options.
(d) Wendy W. Stapleton is the daughter of Craig R. Stapleton.
-5-
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The table below presents the security ownership of the Company's
Directors, Named Executive Officers, and all directors and executive officers as
a group as of September 13, 2002.
SHARES BENEFICIALLY OWNED(a)
----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ ------ -------
Gary L. Hess 125,893(b) 11.25%
Roger S. Mertz 49,610(c) 4.42%
Fredric Selinger 17,000(d) 1.52%
David J. Bugatto 15,000(e) 1.34%
- -------------------------------------------
All directors and executive officers as a
group 208,003 17.83%
- -------------------------------------------
* Does not exceed 1% of the referenced class of securities.
(a) Shares listed in this column include all shares held by the named
individuals and all directors and executive officers as a group in their
own names and in street name. Security ownership information for beneficial
owners is taken from statements filed with the Securities and Exchange
Commission pursuant to Sections 13(d), 13(g) and 16(a) and information made
known to the Company. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of Common
Stock subject to options that are currently exercisable or exercisable
within 60 days of September 13, 2002 are deemed to be outstanding for the
purpose of computing the percentage ownership of the person holding those
options, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. The percentage of beneficial
ownership is based on 1,104,783 shares of common stock outstanding as of
September 13, 2002.
(b) Includes 111,419 shares owned directly and 14,474 shares issuable upon the
exercise of stock options.
(c) Includes 29,955 shares owned directly, 17,500 shares issuable upon the
exercise of stock options, and 2,155 shares held by Mr. Mertz as trustee
and to which Mr. Mertz disclaims any beneficial interest.
(d) Includes 2,000 shares owned directly and 15,000 shares issuable upon the
exercise of stock options.
(e) Includes 15,000 shares issuable upon the exercise of stock options.
-6-
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION OF NAMED EXECUTIVES
The Summary Compensation Table shows certain compensation information
for the Chief Executive Officer and each of the four other most highly
compensated executive officers whose aggregate compensation exceeded $100,000
for the fiscal year ended June 30, 2002 (collectively, the "Named Executive
Officers"). Compensation data is shown for the fiscal years ended June 30, 2002,
2001, and 2000. This information includes the dollar value of base salaries,
bonus awards, the number of SARs granted, and certain other compensation, if
any, whether paid or deferred.
SUMMARY COMPENSATION TABLE(a)
Long Term
Compensation
Annual Compensation Awards
---------------------- ------ All Other
Name Year Salary($) Bonus($) Options/SARs(#) Compensation($)
- ---- ---- --------- -------- --------------- ---------------
Roger S. Mertz(b) 2002 -- -- 5,000 --
Chief Executive Officer 2001 -- -- -- --
2000 -- -- -- --
Gary L. Hess(c) 2002 $ 31,814 -- -- $ 185,642(d)
President and Chief Executive 2001 $176,004 -- -- $ 15,455(e)
Officer 2000 $176,016 $17,600 -- $ 21,724(f)
(a) Amounts shown include cash and non-cash compensation earned with respect to
the year shown above.
(b) In accordance with Section 312 of the California General Corporation Law,
since the Company has no individual serving as President, Mr. Mertz is
deemed the Company's Chief Executive Officer and serves in that capacity.
Mr. Mertz is not compensated for services as an officer. Mr. Mertz receives
only the quarterly and per meeting director fees and option grants that are
granted to Mr. Mertz in connection with his services as Chairman of the
Board. During fiscal year 2002, Mr. Mertz received a total of $7,500 in
director fees and a fully vested non-qualified stock option grant to
purchase 5,000 shares of the Company's Common Stock at $7.48 per share.
(c) Effective October 31, 2001, Mr. Hess resigned as President, Chief Executive
Officer and Chief Financial Officer of the Company.
(d) In accordance with a Separation Agreement dated July 17, 2001, Mr. Hess was
paid $3,053 per month for his services as part-time President and Chief
Financial Officer from September 1, 2001 until October 31, 2001, and
effective September 1, 2001 through January 2004, Mr. Hess receives $12,500
per month as a severance fee. Under the Separation Agreement, Mr. Hess also
receives commissions on sales of Perma-Pak finished goods inventory,
production equipment and intellectual property. During fiscal 2002, Mr.
Hess received a total of $137,500 in severance fees, $8,844 in commissions,
$30,906 for accrued vacation, $1,440 in car allowance payments, $3,052 in
401(k) plan contributions and $3,900 in director fees.
(e) The Company contributed $8,255 with respect to the 401(k) plan and a $7,200
car allowance.
(f) The Company contributed $14,084 with respect to the 401(k) plan, $428 for a
life insurance benefit, $12 for a group term life insurance payment, and a
$7,200 car allowance.
-7-
INCENTIVE AND REMUNERATION PLANS
STOCK OPTION PLANS
1996 STOCK OPTION PLAN, AS AMENDED
The Company's 1996 Stock Option Plan, (the "1996 Plan") which was
approved by the Shareholders at the 1996 Annual Meeting, is intended to advance
the interests of the Company by inducing persons of outstanding ability and
potential to join and remain with the Company by enabling them to acquire
proprietary interest in the Company. The 1996 Plan was adopted for the principal
purpose of assisting the Company in recruiting a new President and Chief
Executive Officer of the Company. An amendment to the 1996 Plan increasing the
number of shares available for issuance under the 1996 Plan to 275,000 was
approved by the shareholders at the 1999 Annual Meeting. A total 25,000 options
were granted under the 1996 Plan in fiscal year 2002. As of September 13, 2002,
options to purchase 268,574 shares have been issued under the 1996 Plan. As of
September 13, 2002, 142,026 shares remain available under the 1996 Plan for
future issuance, while options to purchase a total of 52,274 shares remain
outstanding.
If Proposal 2 is approved at the Annual Meeting, no further options
will be granted under the 1996 Plan and all future option grants will be made
under the new 2002 Stock Incentive Plan. Please see Proposal 2 for a full
description of the 2002 Stock Incentive Plan.
GENERAL. The 1996 Plan provides for the granting of two types of
options: "incentive stock options" and "non-qualified stock options." The
incentive stock options only are intended to qualify as "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended. The 1996 Plan is not qualified under Section 401(a) of the Internal
Revenue Code nor is it subject to the provisions of ERISA. Options may be
granted under the 1996 Plan to all key employees and to non-employee consultants
of the Company; provided, however, that incentive stock options may only be
granted to employees and not to any non-employee consultants.
ADMINISTRATION. The Company's Compensation Committee administers the
1996 Plan. Subject to the terms of the 1996 Plan, the Compensation Committee has
the power to grant options, determine the option price and term of each option,
and the persons to whom and the time or times at which options shall be granted.
OPTION TERMS. The maximum term of each option is ten years. Options
granted under the 1996 Plan generally terminate three months after the optionee
ceases to be employed by the Company, a parent or subsidiary, except if
termination is due to the employee's permanent and total disability, in which
event the option may be exercised within a year of termination. In the event of
the employee's death, the employee's estate has 12 months to exercise the
option.
CHANGES IN STOCK AND EFFECT OF CERTAIN CORPORATE EVENTS. If there is
any change in the Common Stock subject to the 1996 Plan or subject to any option
granted under the 1996 Plan, whether through merger, consolidation,
reorganization, recapitalization, dividend or otherwise, the 1996 Plan provides
that an appropriate adjustment be made by the Committee to the aggregate number
of shares subject to the 1996 Plan and the number of shares and the price per
share of stock subject to the outstanding options. In the event of dissolution,
liquidation or specified types of merger of the Company, the options granted
under the 1996 Plan terminate unless the surviving entity assumes the
outstanding options or substitutes similar options.
-8-
AMENDMENT AND TERMINATION. The Board of Directors may amend or
terminate the 1996 Plan at any time, except that any amendment which would (i)
materially increase the benefits accruing to participants, or (ii) materially
modify the eligibility requirements will only be effective if approved by the
Company's Shareholders within 12 months before or after adoption. Unless
terminated earlier, the Option Plan will terminate on March 15, 2006.
FEDERAL INCOME TAX CONSEQUENCES. Incentive stock options granted under
the 1996 Plan are intended to be eligible for the favorable income tax treatment
accorded incentive stock options under Section 422 of the Internal Revenue Code.
Non-qualified stock options granted under the 1996 Plan are subject to federal
income tax treatment pursuant to rules governing options that are not incentive
stock options.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock
options granted from July 1, 2001 to June 30, 2002 to the Named Executive
Officers under the 1996 Plan.
Number of Percent of
Securities Total Options
Underlying Granted to Grant Date
Options Employees in Per Share Expiration Present Dollar
Name Granted Fiscal Year Exercise Price Date Value (a)
- ---- ---------- -------------- -------------- ---------- --------------
Roger S. Mertz 5,000 20% $7.48 07/16/11 $37,400
Chief Executive
Officer(b)
Gary L. Hess -- -- -- -- --
President and Chief
Executive Officer(c)
- ----------
(a) Dollar value does not represent potential realizable value to the optionee,
but was computed by multiplying the number of shares by the price of the
last reported sale of the Company's Common Stock on the Nasdaq SmallCap
Market on the date grants were approved by the Board of Directors.
(b) On July 17, 2001, Mr. Mertz received a fully vested, non-qualified stock
option grant to purchase 5,000 shares of the Company's Common Stock at an
exercise price of $7.48 per share, for services rendered as a director of
the Company.
(c) Effective October 31, 2001, Mr. Hess resigned as President, Chief Executive
Officer and Chief Financial Officer of the Company.
-9-
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to option
exercises from July 1, 2001 to June 30, 2002, by the Named Executive Officers
and the value of such officers' unexercised options at June 30, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Shares
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Fiscal Year-End (#) Fiscal Year-End ($)(a)
--------------------------- ---------------------------
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
Roger S. Mertz -- -- 10,000 -- $17,600 --
Chief Executive
Officer
Gary L. Hess 80,000 $192,000(c) 9,474 -- $28,422 --
President and
Chief Executive
Officer(b)
- ----------
(a) Market value of unexercised options was determined by multiplying the
number of unexercised options by the difference between the price of the
last reported sale of the Company's Common Stock on the NASDAQ SmallCap
Market of $8.00 per share on June 28, 2002 (the last trading day for fiscal
2002), and the exercise price of such unexercised options.
(b) Effective October 31, 2001, Mr. Hess resigned as President, Chief Executive
Officer and Chief Financial Officer of the Company.
(c) Value was determined by multiplying the 80,000 shares acquired on exercise
by the difference between the price of the last reported sale of the
Company's Common Stock on the NASDAQ SmallCap Market of $7.40 per share on
the date of exercise and the exercise price of $5.00 per share.
-10-
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share and exercise information about our
equity compensation plans as of September 13, 2002.
Number of Securities
Number of Securities Remaining Available for
to be Issued Upon Weighted-Average Future Issuance Under
Exercise of Exercise Price of Equity Compensation Plans
Outstanding Options, Outstanding Options, (excluding securities
Plan Category Warrants and Rights Warrants and Rights included in 1st column)
- ------------- -------------------- -------------------- -------------------------
Equity Compensation Plans Approved by
Security Holders
1996 STOCK OPTION PLAN: 52,274 $6.31 142,026
Equity Compensation Plans Not Approved by
Security Holders
2002 STOCK INCENTIVE PLAN: 24,200 $7.20 50,800
---------------- --------------- -----------
Total 76,474 $6.59 192,826
Please see the discussion set forth below under Proposal 2 for a
description of the material terms of the 2002 Stock Incentive Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SEPARATION AGREEMENT BETWEEN THE COMPANY AND GARY L. HESS
On July 17, 2001 the Company entered into a separation agreement in
principle, which was thereafter executed, with its former President and Chief
Executive Officer, Gary L. Hess, replacing Mr. Hess' then existing employment
agreement. Pursuant to the separation agreement, Mr. Hess continued as President
and Chief Executive Officer, first on a full-time basis and then on a part-time
basis, through October 31, 2001. Effective September 2001, the Company began
paying separation payments to Mr. Hess in the amount of $12,500 monthly for 29
months, replacing all payment obligations under his prior employment agreement.
As part of the separation agreement, Mr. Hess was given until January 29, 2002
to decide whether to extend the period within which he was eligible to exercise
the stock options previously granted to him. On January 28, 2002, Mr. Hess
elected to exercise his option to purchase 80,000 shares of his total
outstanding options of 89,474 shares and to extend the termination date on his
option to purchase the remaining 9,474 shares, through the last date of the
severance period (January 31, 2004). As part of the separation agreement, the
Company agreed to loan Mr. Hess up to $447,370 to allow Mr. Hess to exercise the
aforementioned options. Mr. Hess elected to borrow the money to purchase the
80,000 shares from the Company. The note dated January 28, 2002 in the amount of
$400,000, bears interest at the Applicable Federal Rate (AFR) for loans of three
years or less on the date of the note (the AFR at January 28, 2002 was 2.73%),
payable quarterly. The note is payable on August 1, 2004. The note is full
recourse, secured by the stock certificates and evidenced in the form of a loan
and security agreement. The largest aggregate amount of principal and interest
owing under the note since issuance was $403,650 on July 31, 2002. The aggregate
principal and interest owing under the note as of September 13, 2002 was
$402,244.
-11-
The Company also granted to Mr. Hess the following two alternative
options regarding the business property and operations of Perma-Pak: (1) from
July 17, 2001 through December 31, 2002, the Company will designate Mr. Hess the
exclusive representative to sell any of the remaining Perma-Pak finished goods
inventory, production equipment and intellectual property; or (2) from July 17,
2001 through December 31, 2002, Mr. Hess may purchase the Perma-Pak business,
including all then existing Perma-Pak finished goods inventory, production
equipment and intellectual property for a purchase price of $250,000. If Mr.
Hess chooses the first option, Mr. Hess would receive a commission of 7% of the
net purchase price for the first $250,000 received by the Company from sales and
50% commission of the net purchase price received by the Company from sales
above the initial $250,000. Mr. Hess remains a member of the Company's Board of
Directors.
CONSULTING AGREEMENT BETWEEN GARY L. HESS AND TREE TOP, INC.
As part of the Company's asset sale of its apple product lines to Tree
Top, Inc., Gary L. Hess entered into a three-year consulting and non-competition
agreement with Tree Top as of June 17, 1999. The consulting agreement provided
for payments to Mr. Hess in the amount of $833 per month in return for
consulting and advisory services concerning the product lines sold to Tree Top.
During the term of the agreement, Mr. Hess agreed not to directly or indirectly
own, manage, control, participate in, perform services for or otherwise carry on
a business competitive with the apple product lines anywhere in the world. The
consulting and non-competition agreement expired on June 16, 2002.
RELATIONSHIP BETWEEN THE COMPANY, ALLEN MATKINS AND ROGER S. MERTZ
During fiscal year 2002 the Company engaged Allen Matkins Leck Gamble &
Mallory LLP ("Allen Matkins") as its legal counsel. Roger S. Mertz, Chairman of
the Board, is a partner at Allen Matkins. During 2002, 2001 and 2000, the
Company incurred $186,000, $214,000 and $271,000 respectively, for legal
services from this firm and from another firm of which Mr. Mertz was a partner
prior to October 16, 1999.
CONSULTING AGREEMENT BETWEEN THE COMPANY AND THOMAS R. EAKIN
On July 1, 2002, the Company entered into a Consulting Agreement with
Thomas R. Eakin, Chief Financial Officer. The agreement replaced the former
consulting agreement between Mr. Eakin and the Company which terminated by its
terms on June 30, 2002. Under the new agreement, Mr. Eakin will provide
financial management and accounting services to the Company for which he is
compensated at an hourly billing rate of $110 per hour, plus expenses.
CONSULTING AGREEMENT BETWEEN THE COMPANY AND DAVID J. BUGATTO
On July 17, 2001, the Company entered into a Consulting Agreement with
David J. Bugatto, a Director. Pursuant to the agreement Mr. Bugatto will provide
consulting services to the Company in connection with its real estate business
for a monthly fee of $2,500. The agreement is retroactive to April 1, 2001. In
addition, in the event that either of the Company's Sonoma County properties are
sold during the term of the agreement, Mr. Bugatto would be paid a fee of 2-1/2%
of the sales price if no broker commission is involved and 1-1/4% of the sales
price if a broker is involved in the sale. In the event that either property is
refinanced during the term of the agreement, Mr. Bugatto will be paid a fee
equal to 1% of the amount of the proceeds by the Company in excess of its
current debt. The agreement is effective until the earlier of its termination by
either party or December 31, 2003.
-12-
COMPENSATION COMMITTEE REPORT
This report is provided by the Compensation Committee of the Board of
Directors (the "Committee") to assist Shareholders in understanding the
Committee's objectives and procedures in establishing the compensation of the
Company's Chief Executive Officer and other executive officers. The Committee,
made up of non-employee Directors, is responsible for establishing and
administering the Company's executive compensation program.
In accordance with the Company's strategy of reducing operating
expenses, particularly expenses related to being a public reporting company, the
Company has outsourced virtually all of its management functions. As a result,
the Company's current compensation strategy is to make sure that the fees it
pays for outsourced services are fair and reasonable.
The executive compensation policy set forth below was used in
determining the compensation to be paid to the Company's executive officers, who
served in such capacity during fiscal 2001. Because of the outsourcing of the
Company's management, the policy is no longer relevant for determining the
compensation of current management.
FORMER EXECUTIVE COMPENSATION POLICY
During fiscal 2001, the Company's executive compensation program was
designed to motivate, reward, and retain the management talent needed to achieve
its business objectives and maintain its competitiveness during the Company's
strategic reorientation to a real estate investment and management business. It
did this by utilizing competitive base salaries that rewarded exceptional
performance and accomplishments that contributed to the Company's success.
FORMER COMPENSATION PHILOSOPHY AND OBJECTIVE
The philosophical basis of the compensation program was to pay for
performance and the level of responsibility of an individual's position.
Compensation decisions for all executives, including the Named Executive
Officers, was based on the same criteria. These included quantitative factors
that reflected improvements in the Company's short and long-term financial
performance, such as stock price, earnings and revenues, as well as qualitative
factors which reflected the strength of the Company over the long term, such as
initiative, business judgment, technical expertise, and management skills.
CURRENT KEY ELEMENTS OF EXECUTIVE COMPENSATION
Currently, the outsourced management of the Company is compensated
through consulting fees and long term incentives.
CONSULTING FEES. Consulting fees paid to outsourced management are
reviewed annually by the Compensation Committee to determine whether they are
fair and reasonable on the basis of the services provided and whether the fees
charged for such services are consistent with those charged by competitors.
LONG-TERM INCENTIVES. Long-term incentive awards provided by
shareholder approved compensation programs are designed to develop and maintain
strong management through share appreciation awards and to tie compensation to
the success of the Company as reflected in its stock price. The 1996 Stock
Option Plan, as amended, provides for the granting to key employees and
non-employee consultants of incentive stock options, which promotes the
long-term interests of the Company's
-13-
shareholders. Following shareholder approval of the new 2002 Stock Incentive
Plan, no further options will be granted under the 1996 Stock Option Plan. The
new 2002 Stock Incentive Plan, as amended, will replace the 1996 Stock Option
Plan, and provide for the granting to officers, employees, Board members and
consultants of incentive stock options, which will promote the long-term
interests of the Company's shareholders.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In accordance with Section 312 of the California General Corporation
Law, since the Company has no individual serving as President, Mr. Mertz is
deemed the Company's Chief Executive Officer and serves in that capacity. Mr.
Mertz is not compensated for services as Chief Executive Officer. Mr. Mertz
receives only the quarterly and per meeting director fees and option grants that
are granted to Mr. Mertz in connection with his services as Chairman of the
Board.
COMPENSATION OF THE FORMER CHIEF EXECUTIVE OFFICER
Gary L. Hess served as Chief Executive Officer from May 1, 1996 until
October 31, 2001. During the period beginning July 1, 2001 through October 31,
2001, Mr. Hess' base salary was $14,667 per month. Effective September 2001, the
Company began paying separation payments to Mr. Hess in the amount of $12,500
monthly for 29 months, replacing all payment obligations under his prior
employment agreement. During fiscal year 2002, Mr. Hess received a total of
$3,052 as a contribution to the Company's 401(k) plan and Profit Sharing Plan
(terminated effective December 31, 2001). Mr. Hess' compensation was determined
in a manner described above. The Committee believes Mr. Hess' total compensation
package was appropriate for Mr. Hess' level of responsibility and was well
within competitive practice. The Committee also believes the compensation was
appropriate to the Company's financial performance during the year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the fiscal year ended June 30, 2002, the Compensation Committee
consisted of Messrs. Bugatto, Mertz (resigned October 31, 2001), Hess (appointed
October 31, 2001) and Selinger. With the exception of Mr. Hess and Mr. Mertz, no
members of the Compensation Committee were employees of the Company during the
fiscal year ended June 30, 2002. Mr. Hess served as President and Chief
Executive Officer of the Company from May 1, 1996 until October 31, 2001, and
Chief Financial Officer from June 14, 1999 until October 31, 2001. Upon Mr.
Hess' resignation as President, Chief Executive Officer and Chief Financial
Officer, he was appointed to the Compensation Committee to fill the vacancy
created by Mr. Mertz who resigned from the committee on October 31, 2001, in
connection with Mr. Mertz' appointment as Chairman of the Board and Chief
Executive Officer of the Company. At no time did Mr. Hess or Mr. Mertz serve on
the Compensation Committee while they were employed as an officer of the
Company. In accordance with Section 312 of the California General Corporation
Law, since the Company has no individual serving as President, Mr. Mertz is
deemed the Company's Chief Executive Officer and serves in that capacity. Mr.
Mertz is not compensated for services as Chief Executive Officer. As noted in
the Section above entitled "Certain Relationships and Related Transactions," Mr.
Hess receives separation payments from the Company pursuant to a separation
agreement and was issued a promissory note by the Company in connection with the
exercise of stock options.
Compensation Committee:
David J. Bugatto
Gary L. Hess
Fredric Selinger
-14-
SHARE INVESTMENT PERFORMANCE
The following graph compares the total return performance of the
Company for the periods indicated with the performance of the Russell 2000 Index
and the performance of a Peer Index comprised of the publicly traded stocks of
Crescent Operating Inc., Focal Corp., Monmouth Capital Corp., National
Properties Corp., Regency Equities Corp., Tower Properties Co., and SonomaWest
Holdings, Inc. The Company's shares are traded over-the-counter on the NASDAQ
SmallCap Market under the symbol "SWHI". Two of the companies in the Peer Group
have market capitalizations greater than the Company and four have market
capitalizations less than the Company. The Russell 2000 Index is comprised of
the publicly traded stocks of the 2,000 smallest companies included in the
Russell 3,000 Index, which includes the publicly traded stocks of the 3,000
largest companies. The total return indices reflect reinvested dividends and are
weighted on a market capitalization basis at the time of each reported data
point.
PERFORMANCE GRAPH
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG SONOMA WEST HOLDINGS, INC., THE RUSSELL 2000 INDEX
AND A PEER GROUP
[DATA BELOW ARE REPRESENTED IN A CHART IN THE ORIGINAL DOCUMENT]
* $100 invested on 6/30/97 in stock or index--including reinvestment of
dividends. Fiscal year ending June 30.
Year (June 30) 1997 1998 1999 2000 2001 2002
- -------------- ---- ---- ---- ---- ---- ----
SonomaWest Holdings, Inc. 100 164.10 200.00 125.64 144.00 164.10
Russell 2000 100 116.51 118.26 135.19 136.08 124.28
Peer Group 100 138.20 76.87 41.18 42.26 31.56
-15-
PROPOSAL 2
APPROVAL OF SONOMAWEST HOLDINGS, INC.
2002 STOCK INCENTIVE PLAN
INTRODUCTION
On July 31, 2002, the Board of Directors approved the SonomaWest
Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"), a copy of which is
attached as Appendix A. The 2002 Plan will serve as the successor program to the
1996 Plan. Adoption of the 2002 Plan is intended to reduce the number of shares
reserved for stock option grants to a number which better matches the current
capitalization of the Company. As of September 13, 2002, 142,026 shares of
Common Stock were available for issuance under the 1996 Plan and options to
purchase 52,274 shares were outstanding. Since the inception of the 1996 Plan,
80,700 shares of Common Stock have been issued upon the exercise of options
granted under the 1996 Plan at an average exercise price per share of $5.03. The
adoption of the 2002 Plan will reduce the total shares available for future
stock option grants to 75,000 shares.
The Board of Directors believes that the 2002 Plan will benefit the
Company and its shareholders by providing incentive based compensation and will
encourage officers, directors, consultants and other key employees of the
Company and its affiliates to attain high performance and encourage stock
ownership in the Company. Currently, the Company has one stock-based incentive
program, the 1996 Plan, by which the Board may grant incentive and nonqualified
stock options to key employees and non-employee consultants.
VOTE REQUIRED
Shareholders are requested to approve the 2002 Plan. A majority of the
votes cast on this proposal will be required to approve the 2002 Plan. For
purposes of this vote, abstentions and broker non-votes will not be counted for
any purpose in determining whether this matter has been approved. The Board of
Directors recommends a vote "FOR" approval of the 2002 Plan.
DESCRIPTION OF THE 2002 PLAN
INTRODUCTION
The 2002 Plan was adopted by the Board of Directors on July 31, 2002
and, subject to Shareholder approval, will become effective on the date of
adoption by the Board. At that time, all outstanding options under the 1996 Plan
will continue to be governed by the terms of the 1996 Plan and the applicable
grant notice and stock option agreement, and no further option grants will be
made under the 1996 Plan.
SHARE RESERVE
The Board has authorized up to 75,000 shares of the Common Stock for
issuance under the 2002 Plan. No participant in the 2002 Plan may be granted
stock options, direct stock issuances and share right awards for more than
15,000 shares of common stock in total in any calendar year.
-16-
PROGRAMS
The 2002 Plan has two separate programs:
- the discretionary option grant program, under which the plan
administrator (currently the Board of Directors) may grant (i)
non-statutory options to purchase shares of Common Stock to
eligible individuals in the employ or service of the Company
(including employees, officers, Board members and consultants) at
an exercise price not less than 85% of the fair market value of
those shares on the grant date and (ii) incentive stock options to
purchase shares of Common Stock to eligible employees at an
exercise price not less than 100% of the fair market value of
those shares on the grant date; and
- the stock issuance program, under which eligible individuals may
be issued shares of Common Stock directly, upon the attainment of
performance milestones or the completion of a specified period of
service or as a bonus for past services.
ELIGIBILITY
The individuals eligible to participate in the 2002 Plan include
officers and other employees, directors and consultants. The Company currently
employs six employees and there are four directors and two officers that would
be eligible to participate in the 2002 Plan.
ADMINISTRATION
The Board of Directors will administer the discretionary option grant
and stock issuance programs. The Board of Directors will determine which
eligible individuals are to receive option grants, stock issuances or share
right awards under those programs, the time or times when the grants or
issuances are to be made, the number of shares subject to each grant or
issuance, the status of any granted option as either an incentive stock option
or a non-statutory stock option under the federal tax laws, the vesting schedule
to be in effect for the option grant, stock issuance or share right awards and
the maximum term for which any granted option is to remain outstanding.
PLAN FEATURES
The 2002 Plan will include the following features:
- The exercise price for any options granted under the 2002 Plan may
be paid in cash or in shares of Company Common Stock valued at
fair market value on the exercise date. Options may also be
exercised through a same-day sale program without any cash outlay
by the optionee.
- The Board will have the authority to cancel outstanding options
under the discretionary option grant program, in return for the
grant of new options for the same or different number of option
shares with an exercise price per share based upon the fair market
value of the Common Stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary
option grant program. These rights will provide the holders with
the election to surrender their outstanding options for a payment
equal to the fair market value of the shares subject to the
surrendered options less the exercise price payable for those
shares. Payment may be made in cash or in shares of Common Stock.
-17-
CHANGE IN CONTROL
The 2002 Plan will include the following change in control provisions
that may result in the accelerated vesting of outstanding option grants and
stock issuances:
- In the event that we are acquired by merger or asset sale or a
successful tender offer for more than fifty percent of our
outstanding voting stock which the Board of Directors recommends
that the Shareholders accept, each outstanding option under the
discretionary option grant program which is not to be assumed by
the successor corporation or otherwise continued in full force and
effect will immediately become exercisable for all the option
shares, and all outstanding unvested shares will immediately vest,
except to the extent our repurchase rights with respect to those
shares are to be assigned to the successor corporation.
- The Board of Directors will have complete discretion to grant one
or more options which will become exercisable for all the option
shares in the event those options are assumed in the acquisition
but the optionee's service with us or the acquiring entity is
subsequently terminated. The vesting of any outstanding shares
under the stock issuance program may be accelerated upon similar
terms and conditions.
- The Board of Directors may grant options and structure repurchase
rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a successful
tender offer for more than twenty-five percent of our outstanding
voting stock which the Board of Directors does not recommend that
the Shareholders accept or a change in the majority of the Board
through one or more contested elections. This accelerated vesting
may occur either at the time of the transaction or upon the
subsequent termination of the individual's service.
- The Board of Directors will have complete discretion to determine
that any one or more transactions do not constitute a change in
control requiring accelerated vesting or other similar treatment
of options or capital stock.
ADDITIONAL PROGRAM FEATURES
The 2002 Plan will also have the following features:
- Limited stock appreciation rights may be granted to one or more
officers or directors as part of their option grants under the
discretionary option grant program. Options with this feature may
be surrendered to us upon the successful completion of a hostile
tender offer for more than 25% of our outstanding voting stock or
a change in the majority of the Board through one or more
contested elections. In return for the surrendered option, the
optionee will be entitled to a cash payment from us in an amount
per surrendered option share based upon the highest price per
share of our common stock paid in the tender offer, or the fair
market value per share of our common stock on the effective date
of a change in the majority of the Board.
- The Board may amend or modify the 2002 Plan at any time, subject
to any required Shareholder approval. The 2002 Plan will terminate
no later than the tenth anniversary of the adoption of the plan by
the Board of Directors.
-18-
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended to be only a general description
of the tax consequences of the 2002 Plan under the provisions of U.S. federal
income tax law currently in effect and does not address any estate, gift, state,
local or non-U.S. tax laws. U.S. federal income tax law is subject to change at
any time, possibly with retroactive effect. Accordingly, each grantee should
consult a tax advisor regarding his or her specific tax situation.
INCENTIVE STOCK OPTIONS
The grant of an incentive stock option does not give rise to federal
income tax to the grantee. Similarly, the exercise of an incentive stock option
generally does not give rise to federal income tax to the grantee, as long as
the grantee is continuously employed by the Company from the date the option is
granted until the date the option is exercised. This employment requirement is
subject to certain exceptions. However, the exercise of an incentive stock
option may increase the grantee's alternative minimum tax liability, if any.
If the grantee holds the option shares for more than two years from the
date the option is granted and more than one year from the date of exercise, any
gain or loss recognized on the sale or other disposition of the option shares
will be capital gain or loss, measured by the difference between the sales price
and the amount paid for the shares by the grantee. The capital gain or loss will
be long-term or short-term, depending on the grantee's holding period for the
shares. If the grantee disposes of the option shares before the end of the
required holding period, the grantee will recognize ordinary income at the time
of the disposition equal to the excess, if any, of (i) the fair market value of
the option shares at the time of exercise (or, under certain circumstances, the
selling price, if lower) over (ii) the option exercise price paid by the
grantee. Any additional amount received by the grantee would be treated as
capital gain. Under current law, there is a maximum tax rate of 20% for
long-term capital gains. The deductibility of capital losses is subject to
certain limitations.
The Company generally is not entitled to a tax deduction at any time
with respect to an incentive stock option. If, however, the grantee does not
satisfy the employment or holding period requirements described above, the
Company will be allowed a deduction in an amount equal to the ordinary income
recognized by the grantee, subject to certain limitations and W-2 reporting
requirements. The Internal Revenue Service ("IRS") has indicated that it may
require income and employment tax withholding with respect to such ordinary
income and employment tax withholding with respect to the exercise of incentive
stock options. The IRS intends to issue administrative guidance to clarify this
issue. If withholding is required, the obligation will be satisfied by
withholding from the grantee's wages or through payment by the grantee to the
Company.
NON-STATUTORY STOCK OPTIONS
The grant of a non-statutory stock option generally does not result in
federal income tax to the grantee. However, the grantee will recognize taxable
ordinary income upon the exercise of a non-statutory option equal to the excess
of the fair market value of the option shares on the exercise date over the
option exercise price paid. Slightly different rules may apply to grantees who
acquire stock under options subject to certain vesting requirements or who are
subject to Section 16(b) of the Securities Exchange Act of 1934. With respect to
employees, the Company is required to withhold income and employment taxes based
on the amount of ordinary income recognized by the grantee.
-19-
On the sale of the option shares, the grantee will recognize capital
gain or loss in an amount equal to the difference between the sales price and
the sum of the exercise price paid by the grantee for the shares plus any amount
recognized as ordinary income upon the exercise of the option. The capital gain
or loss will be long-term or short-term depending on the grantee's holding
period for the shares.
The Company will be allowed a tax deduction on the exercise of the
option by the grantee, equal to the amount of ordinary income recognized by the
grantee, subject to certain limitations and W-2 or 1099 reporting requirements.
STOCK GRANTS
The grantee will generally recognize taxable ordinary income on the
receipt of a direct grant of stock from the Company. Slightly different rules
may apply to grantees who are granted stock or share right awards which are
subject to certain vesting requirements or who are subject to Section 16(b) of
the Securities Exchange Act of 1934. The rules regarding the Company's
entitlement to a tax deduction for the income recognized by the grantee and the
Company's tax withholding obligations are similar to those discussed above for
non-statutory stock options.
CHANGE IN CONTROL
In general, if the total payments to an individual that are contingent
upon a "change in control" of the Company (as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code")), including payments
under the 2002 Plan that vest upon a "change in control," equal or exceed three
times the individual's "base amount" (generally, such individual's average
annual compensation for the five calendar years preceding the change in
control), then, subject to certain exceptions, the payments may be treated as
"parachute payments" under the Code, in which case a portion of such payments
would be non-deductible to the Company and the individual would be subject to a
20% excise tax on such portion of the payments.
CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Code generally denies a deduction to publicly
held corporations for compensation paid to certain executive officers in excess
of $1 million per executive per taxable year (including any deduction
attributable to stock options or stock grants). Certain kinds of compensation,
including qualified "performance-based compensation," are disregarded for
purposes of the deduction limitation. Compensation attributable to stock options
will qualify as performance-based compensation if the exercise price of the
options is no less than the fair market value of stock on the date of grant, the
options are granted by a compensation committee comprised solely of "outside
directors" (as defined in the Treasury Regulations issued under Section 162(m))
and certain other requirements are met. Compensation attributable to stock
grants or share right awards may also qualify as performance-based compensation
if the stock's grant or vesting is based on the attainment of a performance goal
and otherwise satisfies the standards for performance-based compensation.
The 2002 Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") and is not qualified under
Section 401(a) of the Code.
PLAN BENEFITS
The grant of awards under the 2002 Plan to employees, officers, board
members and consultants including the Named Executive Officers, is subject to
the discretion of the Board. As of the date of this
-20-
proxy statement, there has been no determination made by the Board with respect
to future discretionary awards to the Named Executive Officers, other officers,
directors, employees or consultants under the 2002 Plan. Accordingly, future
awards to such persons are not determinable.
The following table sets forth the options to be received under the new
2002 Plan if it is approved by the Company shareholders by (a) the Named
Executive Officers, (b) all current executive officers as a group (2 persons),
(c) all directors who are not executive officers as a group (3 persons), and (d)
all employees, including all officers who are not executive officers, as a group
(7 persons):
Number of
Name and Position Dollar Value(a)($) Units
- ----------------- ------------------ ---------
Roger S. Mertz $ 54,000 7,500
Chief Executive Officer
All current executive officers as a group $ 57,600 8,000
2 persons)
All Directors, who are not currently executive $108,000 15,000
officers, as a group (3 persons)
All employees including all officers who are $ 8,640 1,200
not executive officers (7 persons)
- ----------
(a) Dollar value does not represent potential realizable value to the optionee,
but was computed by multiplying the number of shares by the price of the
last reported sale of the Company's Common Stock on the Nasdaq SmallCap
Market on the date grants were approved by the Board of Directors.
MANAGEMENT RECOMMENDS A VOTE
"FOR" APPROVAL OF THE 2002 STOCK INCENTIVE PLAN
PROPOSAL 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board has selected Grant Thornton LLP, independent auditors, to
audit the financial statements of the Company for the fiscal year ending June
30, 2003. Representatives of Grant Thornton LLP are expected to be present at
the Annual Meeting and will have the opportunity to make a statement if they so
desire. The representatives also are expected to be available to respond to
appropriate questions from shareholders.
The affirmative vote of the holders of a majority of the shares of
common stock voting in person or by proxy on this proposal is required to ratify
the appointment of the independent auditors.
MANAGEMENT RECOMMENDS A VOTE
FOR RATIFICATION OF THE APPOINTMENT OF GRANT THORNTON LLP.
Arthur Andersen LLP served as our independent auditor for the fiscal
year ended June 30, 2002. On July 10, 2002, upon the recommendation of the Audit
Committee, the Board of Directors formally dismissed Arthur Andersen as our
independent auditor for the fiscal year ended June 30, 2002, and retained Grant
Thornton LLP. On July 10, 2002, we filed a Form 8-K reporting Arthur Andersen's
dismissal and the engagement of Grant Thornton.
-21-
Arthur Andersen's reports on our consolidated financial statements for
each of the fiscal years ended June 30, 2001 and 2000 did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During the fiscal years ended June 30, 2001 and 2000 and through July
10, 2002, there were no disagreements between the Company and Arthur Andersen on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to Arthur Andersen's satisfaction, would have caused Arthur Andersen to make
reference to the subject matter in connection with its reports on our
consolidated financial statements for such years; and there were no reportable
events as defined in Item 304(a)(1)(v) of Regulation S-K.
We provided Arthur Andersen with a copy of the foregoing disclosures.
In accordance with Item 304T of Regulation S-K, no letter from Arthur Andersen
acknowledging agreement with the foregoing disclosures was filed with the
Securities and Exchange Commission.
During the fiscal years ended June 30, 2001 and 2000 and through the
date hereof, we did not consult with Grant Thornton with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements, or any other matters or reportable events
as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
AUDIT COMMITTEE REPORT
THE FOLLOWING REPORT OF THE AUDIT COMMITTEE DOES NOT CONSTITUTE
MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE INTO ANY
OTHER COMPANY FILING UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934, EXCEPT AS TO INFORMATION CONCERNING THE AUDITORS' ALLOCATION OF
TIME AND FEES AND CONSIDERATION OF THEIR IMPACT (IF ANY) ON INDEPENDENCE AND TO
THE EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES THIS REPORT BY REFERENCE
THEREIN.
To the Board of Directors of SonomaWest Holdings, Inc.:
Our Committee has reviewed and discussed with management of the Company
and Grant Thornton LLP, the independent auditing firm of the Company, the
audited financial statements of the Company as of June 30, 2002 (the "Audited
Financial Statements"). In addition, we have discussed with Grant Thornton LLP
the matters required by Codification of Statements on Auditing Standards No. 61.
The Committee also has received and reviewed the written disclosures
and the letter from Grant Thornton LLP required by Independence Standards Board
Standard No. 1, and we have discussed with that firm its independence from the
Company. We also have discussed with management of the Company and the auditing
firm such other matters and received such assurances from them as we deemed
appropriate.
Management is responsible for the Company's internal controls and the
financial reporting process. Grant Thornton LLP is responsible for performing an
independent audit of the Company's financial statements in accordance with
auditing standards generally accepted in the United States of America and
issuing a report thereon. The Committee's responsibility is to monitor and
oversee these processes.
The Audit Committee has adopted a charter. Our securities are quoted on
the Nasdaq SmallCap Market and are governed by its listing standards. All
members of the Audit Commitment, with the
-22-
exception of Mr. Hess, meet the independence standards under Rule 4200(a)(15) of
the Marketplace Rules contained in the National Association of Securities
Dealers Manual. Because Mr. Hess served as the Company's President, Chief
Executive Officer and Chief Financial Officer until October 31, 2001 and because
he receives separation payments in the amount of $12,500 per month from the
Company pursuant to a separation agreement, Mr. Hess is not considered
independent under Rule 4200(a)(15). However, in accordance with Rule 4350, the
Board of Directors determined that the appointment of Mr. Hess to the Audit
Committee was in the best interests of the Company and the shareholders based on
his background and financial expertise.
FISCAL 2002 AUDIT FEE SUMMARY
In 2001, the Company appointed Arthur Andersen LLP as its independent
auditor for the fiscal year ended June 30, 2002. In conjunction with that
appointment, Arthur Andersen LLP performed certain reviews and other services
during the first three fiscal quarters ended March 31, 2002. On July 10, 2002,
prior to commencement of the fiscal 2002 audit, the Company elected to dismiss
Arthur Andersen LLP and retained Grant Thornton LLP to perform the fiscal 2002
audit. Accordingly, the Company incurred fees for reviews of its quarterly
financial statements and other fees in connection with work performed by Arthur
Andersen LLP through and including fiscal 2002 to July 10, 2002, and incurred
fees in connection with the fiscal 2002 audit prepared by Grant Thornton LLP.
The following is a description of those fees:
Audit and Quarterly Financial Statement Review Fees (Arthur Andersen LLP) $84,000
Audit and Quarterly Financial Statement Review Fees (Grant Thornton LLP) $40,000
Financial Information Systems Design and Implementation Fees $ -0-
All Other Fees (Grant Thornton LLP) $ 6,006
The Audit Committee of the Board of Directors has considered the effect
that provision of the services described under "All Other Fees" may have on the
independence of Grant Thornton LLP. These fees related primarily to privacy
attestation and tax compliance. The Audit Committee has determined that
provision of those services is compatible with maintaining the independence of
Grant Thornton LLP as the Company's principal auditors.
Based on the foregoing review and discussions and a review of the
report of Grant Thornton LLP with respect to the Audited Financial Statements,
and relying thereon, we have recommended to the Company's Board of Directors the
inclusion of the Audited Financial Statements in the Company's Annual Report on
Form 10-K for the year ended June 30, 2002.
Members of the Audit Committee:
Gary L. Hess
Fredric Selinger
David J. Bugatto
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors, and persons who own more than ten
percent of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Executive officers, directors and greater than ten-percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
-23-
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during fiscal year ended
June 30, 2002 all filing requirements applicable to its executive officers,
directors, and greater than ten-percent beneficial owners were complied with
except that Mr. Stapleton filed late one Form 5.
AVAILABILITY OF 10-K REPORT
THE COMPANY WILL FILE ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30,
2002 WITH THE SECURITIES EXCHANGE COMMISSION ON OR BEFORE SEPTEMBER 30, 2002. A
COPY OF THE REPORT, INCLUDING ANY FINANCIAL STATEMENTS AND SCHEDULES, AND A LIST
DESCRIBING ANY EXHIBITS NOT CONTAINED THEREIN, MAY BE OBTAINED WITHOUT CHARGE BY
ANY SHAREHOLDER. THE EXHIBITS ARE AVAILABLE UPON PAYMENT OF CHARGES WHICH
APPROXIMATE THE COMPANY'S COST OF REPRODUCTION OF THE EXHIBITS. REQUESTS FOR
COPIES OF THE REPORT SHOULD BE SENT TO THE OFFICE OF THE CORPORATE SECRETARY AT
THE MAILING ADDRESS OF THE COMPANY LISTED ON PAGE ONE OF THIS PROXY STATEMENT.
OTHER MATTERS
The Board of Directors presently knows of no other matter that may come
before the Annual Meeting. If any other matters should properly come before the
Meeting, however, the Board's proxy holders intend to vote on such matters in
accordance with their best judgment.
By Order of the Board of Directors
Matthew J. Ertman
SECRETARY
Dated: October 1, 2002
-24-
APPENDIX A
SONOMAWEST
HOLDINGS INC
2002 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 2002 Stock Incentive Plan is intended to promote the interests of
SonomaWest Holdings, Inc. (the "Corporation") by providing eligible persons with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the Service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
-- the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan
Administrator, be granted options to purchase shares
of Common Stock and stock appreciation rights; and
-- the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan
Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of
such shares or as a bonus for services rendered the
Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board or an Option Committee
appointed by the Board. Should administration of the Plan be vested in an Option
Committee, any discretionary option grants or stock issuances to members of the
Option Committee must be authorized and approved by a disinterested majority of
the Board.
B. Members of the Option Committee shall serve for such period of time
as the Board may determine and may be removed by the Board at any time.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. Service on the Option Committee shall constitute service as a Board
member, and members of such committee shall accordingly be entitled to full
indemnification and reimbursement as Board members for their service on such
committee. No member of the Option Committee shall be liable for any act or
omission made in good faith with respect to the Plan or any option grants or
stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) Officers, members of the Board or the board of directors
of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine:
(i) with respect to the option grants or stock appreciation rights under the
Discretionary Option Grant Program, which eligible persons are to receive
grants, the time or times when such grants are to be made, the number of shares
to be covered by each such grant, the status of a granted option as either an
Incentive Option or a Non-Statutory Option, the time or times when each option
is to become exercisable, the vesting schedule (if any) applicable to the option
shares and the maximum term for which the option is to remain outstanding; and
(ii) with respect to stock issuances under the Stock Issuance Program, which
eligible persons are to receive stock issuances, the time or times when such
issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration for such shares.
C. The Plan Administrator shall have the absolute discretion either to
grant options or stock appreciation rights in accordance with the Discretionary
Option Grant Program or to effect stock issuances or grant share right awards in
accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
seventy-five thousand (75,000) shares. No one person participating in the Plan
may receive stock options, direct stock issuances and share right awards for
more than fifteen thousand (15,000) shares of Common Stock in the aggregate per
calendar year.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise
-2-
in full or (ii) the options are canceled in accordance with the
cancellation-regrant provisions of Article Two. Unvested shares issued under the
Plan and subsequently canceled or repurchased by the Corporation at the original
exercise or issue price paid per share, pursuant to the Corporation's repurchase
rights under the Plan, shall be added back to the number of shares of Common
Stock reserved for issuance under the Plan and shall accordingly be available
for reissuance through one or more subsequent option grants or direct stock
issuances under the Plan. In addition, should the exercise price of an option
under the Plan be paid with shares of Common Stock or should shares of Common
Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
only by the net number of shares of Common Stock issued to the holder of such
option or stock issuance, and not by the gross number of shares for which the
option is exercised or which vest under the stock issuance. However, shares of
Common Stock underlying one or more stock appreciation rights exercised under
Section V of Article Two of the Plan shall not be available for subsequent
issuance under the Plan.
C. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to: (i) the maximum number and/or class of securities issuable under the
Plan; (ii) the number and/or class of securities for which any one person may be
granted stock options, direct stock issuances and share right awards under this
Plan per calendar year; and (iii) the number and/or class of securities and the
exercise price per share in effect under each outstanding option under the Plan.
Such adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to Incentive Options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of
the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall become immediately due upon
exercise of the option and may, subject to the provisions of Section I
of Article Four and the documents evidencing the option, be payable in
one or more of the forms specified below:
(i) cash or check made payable to the Corporation, or
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise
Date, or
-3-
(iii) to the extent the sale complies with all applicable laws
relating to the regulation and sale of securities, through a special
sale and remittance procedure pursuant to which the Optionee shall
concurrently provide irrevocable written instructions to: (a) a
Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise;
and (b) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or
death:
(i) Subject to subparagraph (iv) below, any option outstanding
at the time of the Optionee's cessation of Service for any reason shall
remain exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the documents
evidencing the option.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently
exercised by the personal representative of the Optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution or by the Optionee's designated beneficiary or
beneficiaries of that option.
(iii) Except as otherwise determined in the discretion of the
Plan Administrator either at the time the option is granted or at any
time the option remains outstanding, should the Optionee's Service be
terminated for Misconduct or should the Optionee otherwise engage in
Misconduct while one or more options granted to the Optionee under this
Article Two are outstanding, then all those options shall terminate
immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate
and cease to be outstanding to the extent the option is not otherwise
at that time exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
either at the time an option is granted or at any time while the option
remains outstanding, to:
-4-
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from
the limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of
vested shares of Common Stock for which such option is exercisable at
the time of the Optionee's cessation of Service but also with respect
to one or more additional installments in which the Optionee would have
vested had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the purchase price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same limitation, except that a Non-Statutory Option may be
assigned in whole or in part during Optionee's lifetime to one or more members
of the Optionee's Immediate Family or to a trust established for the exclusive
benefit of Optionee or one or more members of the Optionee's Immediate Family or
to the Optionee's former spouse, to the extent such assignment is in connection
with Optionee's estate plan or pursuant to a domestic relations order. The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment. The terms
applicable to the assigned portion shall be the same as those in effect for this
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.
Notwithstanding the foregoing, the Optionee may also designate one or more
persons as the beneficiary or beneficiaries of his or her outstanding options
under this Article Two, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred option subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Four shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall NOT be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-5-
B. EXERCISE PRICE. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. FAILURE TO QUALIFY AS INCENTIVE OPTION. To the extent that any
option governed by this Plan does not qualify as an Incentive Option by reason
of the dollar limitation described in Section II.C of Article Two or for any
other reason, such option shall be exercisable as a Non-Statutory Option under
the Federal tax laws.
E. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new grant date.
IV. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. No option outstanding at the time of a Change in Control shall
become exercisable on an accelerated basis if and to the extent: (i) that option
is, in connection with the Change in Control, assumed by the successor
corporation (or parent thereof) or otherwise continued in full force and effect
pursuant to the terms of the Change in Control transaction, (ii) such option is
replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Change in Control on the shares
of Common Stock for which the option is not otherwise at that time exercisable
and provides for subsequent payout in accordance with the same exercise/vesting
schedule applicable to those option shares or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan Administrator at the
time of the option grant. However, if none of the foregoing conditions are
satisfied, then each option outstanding at the time of the Change in Control but
not otherwise exercisable for all the shares of Common Stock at that time
subject to such option shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock.
B. All of the Corporation's outstanding repurchase rights under the
Discretionary Option Grant Program shall also terminate automatically, and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, in the event of any Change in Control, except to the extent: (i) those
repurchase rights are assigned to the successor corporation (or parent thereof)
or otherwise continued in full force and effect pursuant to the terms of the
Change in Control transaction or
-6-
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Change in Control, all
outstanding options shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control transaction.
D. Each option which is assumed in connection with a Change in Control
or otherwise continued in effect shall be appropriately adjusted, immediately
after such Change in Control, to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such Change in
Control had the option been exercised immediately prior to such Change in
Control. Appropriate adjustments to reflect such Change in Control shall also be
made to: (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same; (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan; and (iii) the maximum number
and/or class of securities for which any one person may be granted options,
direct stock issuances and share right awards under the Plan per calendar year.
To the extent the actual holders of the Corporation's outstanding Common Stock
receive cash consideration for their Common Stock in consummation of the Change
in Control transaction, the successor corporation may, in connection with the
assumption of the outstanding options under the Discretionary Option Grant
Program, substitute one or more shares of its own common stock with a fair
market value equivalent to the cash consideration paid per share of Common Stock
in such Change in Control transaction.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
that time subject to such options on an accelerated basis and may be exercised
for any or all of such shares as fully vested shares of Common Stock, whether or
not those options are to be assumed or otherwise continued in full force and
effect or replaced with a cash incentive program pursuant to the express terms
of the Change in Control transaction. In addition, the Plan Administrator shall
have the discretionary authority to structure one or more of the Corporation's
repurchase rights under the Discretionary Option Grant Program so that those
rights shall immediately terminate at the time of such Change in Control and
shall not be assignable to the successor corporation (or parent thereof), and
the shares subject to those terminated rights shall accordingly vest in full at
the time of such Change in Control.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall vest and become exercisable for all the
shares of Common Stock at that time subject to such options on an accelerated
basis in the event the Optionee's Service is subsequently terminated by reason
of an Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Change in Control in which
those options do not otherwise accelerate. Any options so accelerated shall
remain exercisable for fully vested shares of Common Stock until the expiration
or sooner termination of the option term. In addition, the Plan Administrator
may structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall immediately
terminate with respect to any shares of Common Stock held by the Optionee at the
time of his or her Involuntary Termination, and the shares subject to those
terminated repurchase rights shall accordingly vest in full at that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall,
-7-
immediately prior to the effective date of a Hostile Take-Over, vest and become
exercisable for all the shares of Common Stock at that time subject to such
options on an accelerated basis and may be exercised for any or all of such
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Hostile Take-Over, and the shares subject to those terminated rights shall
thereupon immediately vest in full. Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
Involuntary Termination of the Optionee's Service within a designated period
(not to exceed eighteen (18) months) following the effective date of such
Hostile Take-Over. Each option so accelerated shall remain exercisable for fully
vested shares of Common Stock until the expiration or sooner termination of the
option term.
H. The portion of any Incentive Option accelerated in connection with a
Change in Control or Hostile Take-Over shall remain exercisable as an Incentive
Option only to the extent the applicable One Hundred Thousand Dollar ($100,000)
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
I. The grant of options under the Discretionary Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
V. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of: (A) the Option Surrender Value of the number of shares for which the
option is surrendered; over (B) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
-8-
II. STOCK ISSUANCE TERMS
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than eighty-five percent (85%) of
the Fair Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program
for any of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more
installments over the Participant's period of Service or upon
attainment of specified performance objectives. The elements of the
vesting schedule applicable to any unvested shares of Common Stock
issued under the Stock Issuance Program shall be determined by the Plan
Administrator and incorporated into the Stock Issuance Agreement.
Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to
receive those shares upon the attainment of designated performance
goals. Upon the attainment of such performance goals, fully vested
shares of Common Stock shall be issued upon satisfaction of those share
right awards.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock
dividend, stock split, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration
shall be issued subject to: (i) the same vesting requirements
applicable to the Participant's unvested shares of Common Stock; and
(ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under
the Stock Issuance Program, whether or not the Participant's interest
in those shares is vested. Accordingly, the Participant shall have the
right to vote such shares and to receive any regular cash dividends
paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the
Stock Issuance Program or should the performance objectives not be
attained with respect to one or more such unvested shares of Common
Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness but not including services
rendered by the Participant), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and
shall cancel the
-9-
unpaid principal balance of any outstanding purchase-money note of the
Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common
Stock which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares as to
which the waiver applies. Such waiver may be effected at any time,
whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock
shall actually be issued in satisfaction of those awards, if the
performance goals or Service requirements established for such awards
are not attained. The Plan Administrator, however, shall have the
discretionary authority to issue shares of Common Stock under one or
more outstanding share right awards as to which the designated
performance goals or Service requirements have not been attained.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Change in Control, except to the extent (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the express terms of
the Change in Control transaction or (ii) such accelerated vesting is precluded
by other limitations imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part upon the occurrence of a Change in Control and shall not be assignable
to the successor corporation (or parent thereof), and the shares of Common Stock
subject to those terminated rights shall immediately vest in full at the time of
such Change in Control.
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, upon the Involuntary Termination of the Participant's
Service within a designated period (not to exceed eighteen (18) months)
following the effective date of any Change in Control in which those repurchase
rights do not otherwise terminate.
D. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part upon the occurrence of a Hostile Take-Over, and the shares of Common
Stock subject to those terminated rights shall immediately vest in full at the
time of such Hostile Take-Over.
-10-
ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. SHARE ESCROW/LEGENDS
Unvested shares issued under the Plan may, in the Plan Administrator's
discretion, be held in escrow by the Corporation until the Participant's
interest in such shares vests or may be issued directly to the Participant with
restrictive legends on the certificates evidencing those unvested shares.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Taxes incurred by such holders in connection with the exercise of their
options or the vesting of their shares. Such right may be provided to any such
holder in either or both of the following formats:
1. Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the amount of the Taxes (not
to exceed one hundred percent (100%) of such Taxes) to be satisfied in such
manner as designated by the holder in writing; or
2. Stock Delivery: The election to deliver to the Corporation,
at the time the Non-Statutory Option is exercised or the shares vest, one or
more shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the amount of the Taxes (not to exceed
one hundred percent (100%) of such Taxes) to be satisfied in such manner as
designated by the holder in writing.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan Effective
Date. Options may be granted under the Discretionary Option Grant at any time on
or after the Plan Effective Date. However, no options granted under the Plan may
be exercised, and no shares shall be issued under the Plan, until the Plan is
approved by the Corporation's stockholders. If such stockholder approval is not
-11-
obtained within twelve (12) months after the Plan Effective Date, then all
options previously granted under this Plan shall terminate and cease to be
outstanding, and no further options shall be granted and no shares shall be
issued under the Plan.
B. The Plan shall terminate upon the EARLIEST of (i) the tenth
anniversary of the Plan Effective Date, (ii) the date on which all shares
available for issuance under the Plan shall have been issued as fully-vested
shares or (iii) the termination of all outstanding options in connection with a
Change in Control. Upon such plan termination, all outstanding option grants and
unvested stock issuances shall thereafter continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained any required approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
approval is not obtained within twelve (12) months after the date the first such
excess issuances are made, then (i) any unexercised options granted on the basis
of such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically canceled and cease to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of the Nasdaq SmallCap Market (or any stock exchange, if applicable) on which
Common Stock is then quoted for trading.
-12-
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
IX. SECTION 162(M)
It is the intent of the Corporation that any options granted under the
Plan to a "covered employee" (as that term is defined in Section 162(m) of the
Code) with an exercise price of not less than the Fair Market Value per share of
Common Stock on the date of grant shall qualify as "qualified performance-based
compensation" (within the meaning of Treas. Reg. ss. 1.162-27(e)) and the Plan
shall be interpreted consistently with such intent. In furtherance of the
foregoing, if and to the extent that the Corporation intends that an option
granted under the Plan to any covered employee shall qualify as qualified
performance-based compensation, all decisions regarding the grant of such option
shall be made only by members of the Committee who qualify as "outside
directors" within the meaning of Treas. Reg. ss. 1.162-27(e)(3).
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-13-
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:
(i) a stockholder-approved merger or consolidation in which
securities possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately prior to
such transaction; or
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets; or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's stockholders which
the Board recommends such stockholders accept;
PROVIDED, however, the Plan Administrator shall have the
discretionary authority to determine that a transaction or series of
transactions does not constitute a Change in Control. Such determination by the
Plan Administrator shall govern notwithstanding the fact that the determination
is contrary to paragraphs (i) through (iii) set forth above.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATION shall mean SonomaWest Holdings, Inc., a California
corporation, and its successors.
F. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
G. EMPLOYEE shall mean an "employee" of the Corporation (or any Parent
or Subsidiary), within the meaning of Section 3401(c) of the Code and the
regulations thereunder.
H. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
I. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
SmallCap Market, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question, as such price
is reported on the Nasdaq SmallCap Market or any successor system.
APPENDIX
-1-
If there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
J. HOSTILE TAKE-OVER shall mean:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept; or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either: (a) have been Board
members continuously since the beginning of such period; or (b) have been
elected or nominated for election as Board members during such period by at
least a majority of the Board members described in clause (a) who were still in
office at the time the Board approved such election or nomination.
K. IMMEDIATE FAMILY shall mean any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include
adoptive relationships.
L. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
M. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces his
or her level of responsibility or the level of management to which Optionee
reports, (B) a reduction in his or her level of compensation (including base
salary, fringe benefits and participation in any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is effected by
the Corporation without the individual's consent.
N. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or
APPENDIX
-2-
any Parent or Subsidiary) in a material manner. The foregoing definition shall
not be deemed to be inclusive of all the acts or omissions which the Corporation
(or any Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of any Optionee, Participant or other person in the Service of the
Corporation (or any Parent or Subsidiary).
O. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
P. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
Q. OFFICER shall mean any person serving as the president, chief
executive officer, chief financial officer, chief operating officer, treasurer,
secretary or in any other managerial or administrative capacity for the
Corporation or a Parent or Subsidiary of the Corporation, as determined in the
Administrator's discretion.
R. OPTION COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs.
S. OPTIONEE shall mean any person to whom an option is granted under
the Discretionary Option Grant Program.
T. OPTION SURRENDER VALUE shall mean the Fair Market Value per share of
Common Stock on the date the option is surrendered to the Corporation or, in the
event of a Hostile Take-Over, effected through a tender offer, the highest
reported price per share of Common Stock paid by the tender offer or in
effecting such Hostile Take-Over, if greater. However, if the surrendered option
is an Incentive Option, the Option Surrender Value shall not exceed the Fair
Market Value per share.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
W. PLAN shall mean the Corporation's 2002 Stock Incentive Plan, as set
forth in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Option Committee or the Board, which is authorized to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to one or
more classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.
Y. PLAN EFFECTIVE DATE shall mean the date on which the Plan was
adopted by the Board.
Z. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
APPENDIX
-3-
AA. SERVICE shall mean the performance of services for the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee,
Officer, member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
BB. SHORT TERM FEDERAL RATE shall mean the federal short-term rate in
effect under Section 1274(d) of the Code for the period the shares were held in
escrow.
CC. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
DD. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
EE. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
FF. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
GG. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of options or unvested shares of Common
Stock in connection with the exercise of those options or the vesting of those
shares.
HH. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
APPENDIX
-4-
SONOMAWEST HOLDINGS, INC.
2064 Highway 116 North
Sebastopol, California 95472
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
hereby appoints Roger S. Mertz and David J. Bugatto, or either of them, with
full power of substitution, as Proxies of the undersigned to attend the Annual
Meeting of Shareholders of SonomaWest Holdings, Inc. to be held on Wednesday,
October 30, 2002 at 10:00 a.m., local time, at 333 Bush Street, 17th Floor, San
Francisco, California 94104, and any adjournment thereof, and to vote the number
of shares the undersigned would be entitled to vote if personally present as
indicated below.
1. Election of four directors to serve until the 2003 Annual Meeting of
Shareholders or until their respective successors are elected and qualified.
|_| FOR all nominees listed below |_| WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees
listed below
(Instructions: To withhold authority to vote for any individual nominee
strike a line through the nominee's name in the list below.)
Roger S. Mertz; Gary L. Hess; Fredric Selinger; David J. Bugatto
2. Approval of the SonomaWest Holdings, Inc. 2002 Stock Incentive Plan
|_| FOR APPROVAL |_| AGAINST APPROVAL |_| ABSTAIN
3. Approval of appointment of Grant Thornton LLP as independent auditors for
the fiscal year ending June 30, 2003.
|_| FOR the appointment |_| AGAINST the appointment |_| ABSTAIN
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
The undersigned hereby acknowledge receipt of (a) the Notice of Annual Meeting
of Shareholders to be held October 30, 2002, (b) the accompanying Proxy
Statement, and (c) the Annual Report of the Company for the fiscal year ended
June 30, 2002.
This Proxy, when properly executed, will be voted
in the manner directed herein by the undersigned
shareholder. If no direction is made, the Proxy
will be voted FOR proposals one, two, three and
four.
Please sign exactly as signature appears on this
proxy card. Executors, administrators, traders,
guardians, attorneys-in-fact, etc. should give
their full titles. If signer is a corporation,
please give full corporate name and have a duly
authorized officer sign, stating title. If a
partnership, please sign in partnership name by
authorized person. If stock is registered in two
names, both should sign.
Dated: , 2002
---------------
--------------------------------------------------
Signature
--------------------------------------------------
Signature