================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
EXTENDED SYSTEMS INCORPORATED
- --------------------------------------------------------------------------------
(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 table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
================================================================================
[LOGO]
EXTENDED
SYSTEMS
BEYOND CONNECTED
NOTICE OF THE 2004 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 9, 2004
TO THE STOCKHOLDERS OF EXTENDED SYSTEMS INCORPORATED:
You are cordially invited to attend the 2004 Annual Meeting of Stockholders of
Extended Systems Incorporated, a Delaware corporation, which will be held:
DATE: Thursday, December 9, 2004
TIME: 2:00 p.m. Local Time
PLACE: Extended Systems Executive Offices - Auditorium
5777 North Meeker Avenue
Boise, Idaho 83713
The principal business of the meeting will be:
1. To elect one Class II director to hold office for a two-year term and
until his successor has been duly elected and qualified, or until his
earlier death, resignation or removal;
2. To elect two Class III directors to each hold office for three-year terms
and until their successors have been duly elected and qualified, or until
their earlier death, resignation or removal;
3. To approve an increase by 500,000 in the number of shares reserved for
issuance under our 1998 Stock Plan;
4. To approve an increase by 200,000 in the number of shares reserved for
issuance under our 1998 Director Option Plan;
5. To approve an increase by 25,000 in the number of shares reserved for
issuance under our 2001 Approved Share Option Scheme; and
6. To transact any other business that properly comes before the meeting or
any adjournments or postponements of the meeting.
These items are more fully described in the following pages. Only stockholders
of record at the close of business on October 25, 2004 (the "Record Date"), are
entitled to vote at the meeting, or any adjournment of the meeting.
By Order of the Board of Directors,
Valerie A. Heusinkveld
Vice President of Finance, Chief Financial
Officer and Corporate Secretary
Boise, Idaho
October 28, 2004
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT!
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT
YOU EXPECT TO ATTEND THE MEETING IN PERSON, WE URGE YOU TO COMPLETE, SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE TO ENSURE
YOUR REPRESENTATION AT THE MEETING. VOTING INSTRUCTIONS ARE PRINTED ON YOUR
PROXY CARD AND INCLUDED IN THE ACCOMPANYING PROXY STATEMENT. SENDING IN YOUR
PROXY WILL NOT PREVENT YOU FROM VOTING YOUR SHARES AT THE MEETING IF YOU
DESIRE TO DO SO, AS YOUR PROXY IS REVOCABLE AT YOUR OPTION.
- --------------------------------------------------------------------------------
EXTENDED SYSTEMS INCORPORATED
PROXY STATEMENT
FOR
2004 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 9, 2004
The Board of Directors of Extended Systems Incorporated (the "Board") is
soliciting proxies for our 2004 Annual Meeting of Stockholders to be held
Thursday, December 9, 2004, at 2:00 p.m. local time. The meeting will be held at
the Extended Systems Executive Offices, which are located at 5777 North Meeker
Avenue, Boise, Idaho 83713. Please read this Proxy Statement carefully, as it
contains important information for you to consider when deciding how to vote on
the matters to be brought before the meeting.
Our Board of Directors has set October 25, 2004 as the record date for the
meeting. Stockholders who owned shares of the Company's common stock of record
at the close of business on that date are entitled to vote at and attend the
meeting, with each share entitled to one vote. There were 15,097,542 shares of
our common stock, par value $0.001, outstanding on the record date, which were
held by 309 holders of record.
This Proxy Statement, together with our 2004 Annual Report to Stockholders, is
being mailed on or about November 5, 2004, to all stockholders entitled to vote
at the meeting.
In this Proxy Statement:
o "we", "Company" and "Extended Systems" mean Extended Systems Incorporated,
a Delaware corporation with principal executive offices located at 5777
North Meeker Avenue, Boise, Idaho 83713;
o references to fiscal years are to our fiscal years ended June 30; and
o your shares being held in "street name" means your shares are held in an
account at a brokerage firm, and the stock certificates and record
ownership for your shares are not in your name.
QUESTIONS AND ANSWERS
Q: WHY DID THE COMPANY SEND ME THIS PROXY STATEMENT AND PROXY CARD?
A: We sent to you this Proxy Statement and proxy card because you owned
shares of Extended Systems' common stock on the record date. This Proxy
Statement describes issues on which we would like you, as a stockholder,
to vote. It also gives you information on these issues so that you can
make an informed decision. The proxy card is used for voting.
Q. WHAT IS THE EFFECT OF SIGNING AND RETURNING THE PROXY CARD?
A. When you sign and return the proxy card, you appoint Charles W. Jepson and
Valerie A. Heusinkveld as your representatives at the meeting. Mr. Jepson
and Ms. Heusinkveld, as the proxy holders, will vote your shares as you
have instructed them on the proxy card at the meeting. In this way, your
shares will be voted whether or not you attend the meeting. Even if you
plan to attend the meeting, it is a good idea to complete, sign and return
your proxy card in advance of the meeting in case your plans change. You
can always vote in person at the meeting, even if you have already sent in
your proxy card by following the instructions below. PLEASE NOTE, HOWEVER,
THAT IF YOU HOLD YOUR SHARES IN STREET NAME, YOU MUST REQUEST A LEGAL
PROXY FROM YOUR STOCKBROKER IN ADVANCE OF THE MEETING IN ORDER TO VOTE AT
THE MEETING.
Q. WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: It generally means your shares are registered differently or are in more
than one account. Please provide voting instructions for all proxy cards
you receive.
Q. HOW WILL THE PROXY HOLDERS VOTE ON MATTERS AT THE ANNUAL MEETING THAT ARE
NOT DESCRIBED IN THIS PROXY STATEMENT?
A. It is not expected that any matters other than those described in this
Proxy Statement will be brought before the meeting. However, if any other
matters properly come before the meeting, Mr. Jepson and Ms. Heusinkveld
will be authorized by your proxy to vote on those matters in their
discretion.
1
Q: WHAT AM I VOTING ON?
A: You are being asked to vote on the following:
o the election of one nominee to serve a two-year term as a Class II
director on our Board of Directors;
o the election of two nominees to serve three-year terms as Class III
directors on our Board of Directors;
o the approval of an increase by 500,000 in the number of shares reserved
for issuance under our 1998 Stock Plan;
o the approval of an increase by 200,000 in the number of shares reserved
for issuance under our 1998 Director Option Plan;
o the approval of an increase by 25,000 in the number of shares reserved
for issuance under our 2001 Approved Share Option Scheme; and
o any other matters that properly come before the meeting or any
adjournments or postponements of the meeting.
You will be entitled to one vote for each share of common stock you hold.
You do not have the right to cumulate your votes in the election of
directors. In accordance with Delaware General Corporation Law and our
Restated Certificate of Incorporation and Bylaws, if a quorum is present at
the meeting:
o the nominee for director who receives the highest number of affirmative
votes cast in the election of the Class II director to serve a two-year
term will be elected;
o the two nominees for director who receive the highest number of
affirmative votes cast in the election of Class III directors to serve
three-year terms will be elected;
o the proposal to increase the number of shares reserved for issuance
under our 1998 Stock Plan will be approved if it receives the
affirmative vote of a majority of the votes cast;
o the proposal to increase the number of shares reserved for issuance
under our 1998 Director Option Plan will be approved if it receives the
affirmative vote of a majority of the votes cast; and
o the proposal to increase the number of shares reserved for issuance
under our 2001 Approved Share Option Scheme will be approved if it
receives the affirmative vote of a majority of the votes cast.
Q: HOW DO I VOTE?
A: There are two ways in which you may vote (please see detailed instructions
on your proxy card). First, you may mail in your completed, signed and
dated proxy card. PLEASE NOTE, however, that if you return a signed card
but do not provide voting instructions, your shares will be voted as
follows:
o FOR the named nominee for Class II director;
o FOR the two named nominees for Class III directors;
o FOR approval of the increase in the number of shares reserved for
issuance under our 1998 Stock Plan;
o FOR approval of the increase in the number of shares reserved for
issuance under our 1998 Director Option Plan; and
o FOR approval of the increase in the number of shares reserved for
issuance under our 2001 Approved Share Option Scheme.
Second, you may vote in person by attending the meeting.
We will pass out written ballots to stockholders who desire to vote in
person at the meeting. PLEASE NOTE, HOWEVER, THAT IF YOU HOLD YOUR SHARES
IN STREET NAME, YOU MUST REQUEST A LEGAL PROXY FROM YOUR STOCKBROKER IN
ADVANCE OF THE MEETING IN ORDER TO VOTE AT THE MEETING.
Q: CAN I VOTE ELECTRONICALLY VIA THE INTERNET OR BY TELEPHONE?
A: If your shares are registered in your own name, you may vote either via the
Internet or by telephone. Specific instructions to be followed by any
registered stockholder interested in voting via Internet or by telephone
are set forth on the enclosed proxy card. The Internet and telephone voting
procedures are designed to authenticate your identity and to allow you to
vote your shares and confirm that your voting instructions have been
properly recorded.
If your shares are registered in the name of a bank or brokerage firm and
you have not elected to receive your proxy statement over the Internet, you
may be eligible to vote your shares electronically over the Internet or by
2
telephone. A large number of banks and brokerage firms are participating in
the ADP Investor Communication Services online program. This program
provides eligible stockholders who receive a paper copy of this proxy
statement the opportunity to vote via the Internet or by telephone. If your
bank or brokerage firm is participating in ADP's program, your proxy card
will provide instructions. If your proxy card does not reference Internet
or telephone information, please complete and return the proxy card in the
self-addressed, postage paid envelope provided.
Q: WHAT IF I CHANGE MY MIND AFTER I RETURN MY PROXY CARD?
A: You may revoke your proxy (that is, cancel it) and change your vote at any
time before the voting at the meeting by doing any one of the following:
o delivering written notice of revocation to the Corporate Secretary at
our executive offices listed on the first page of this proxy statement;
o submitting a proxy card with a later date; or
o attending the meeting and voting in person.
Q: WILL MY SHARES BE VOTED IF I DO NOT SIGN AND RETURN MY PROXY CARD?
A: If your shares are held in street name, your brokerage firm may either vote
your shares on "routine" matters (such as election of directors) or leave
your shares unvoted. Your brokerage firm cannot vote on "non-routine
matters" such as the amendment of our option plans or a proposal submitted
by a stockholder. Accordingly, we encourage you to provide instructions to
your brokerage firm by completing the proxy that they send to you. This
ensures that your shares will be voted at the meeting.
Q: HOW ARE ABSTENTIONS COUNTED?
A: Stockholders may abstain from voting for the nominees for director and may
abstain from voting on the other proposals. Any abstentions will be counted
for purposes of determining a quorum and will have the same effect as votes
against the approval of the proposals, other than the election of
directors. With respect to the election of directors, the nominees who
receive the most votes cast are elected as directors. Since abstentions do
not represent votes cast in favor of any nominee, abstentions have no
effect on the election of directors.
Q: WHAT IS A "BROKER NON-VOTE"?
A: In the absence of timely directions from their customers, brokers will
generally not have the discretion to vote shares they hold in street name
for their customers on "non-routine" matters (E.G., the amendment of our
option plans or stockholder proposals). The absence of a vote with respect
to any non-routine matter under these circumstances is referred to as a
"broker non-vote".
Q: HOW ARE BROKER NON-VOTES COUNTED?
A: Pursuant to applicable law, while broker non-votes should be counted for
purposes of determining the presence or absence of a quorum for the
transaction of business, broker non-votes will not be counted for
determining the number of votes cast with respect to the particular
proposal on which a broker has expressly not voted. We intend to treat
broker non-votes in this manner. Accordingly, a broker non-vote will not
affect the outcome on any proposal, since broker non-votes do not
constitute votes actually cast and approval of these matters is based on
the number of votes actually cast.
Q: WHAT IS A "QUORUM?"
A: A "quorum" is the number of shares that must be present, in person or by
proxy, at the meeting for business to be transacted at the meeting. The
required quorum for the meeting is a majority of the shares outstanding as
of the record date. All completed and signed proxy cards, whether
representing a vote for, against, withheld, abstained or a broker non-vote,
will be counted toward the presence of a quorum at the meeting.
Q: IS THERE A LIST OF STOCKHOLDERS AVAILABLE FOR MY REVIEW?
A complete list of stockholders will be available during normal business
hours for ten days before the meeting at our executive offices at 5777
North Meeker Avenue, Boise, Idaho 83713. A stockholder may examine the list
for any legally valid purpose related to the meeting. The list will also be
available during the 2004 Annual Meeting for inspection by any stockholder
present at the meeting.
3
Q: HOW MANY SHARES CAN VOTE AT THE MEETING?
A: As of the record date, 15,097,542 shares of our common stock were
outstanding held by 317 holders of record. In accordance with Delaware
General Corporation Law and our Restated Certificate of Incorporation and
Bylaws, each outstanding share of common stock as of the record date,
October 25, 2004, entitles the holder to one vote on all matters covered in
this Proxy Statement. There are a maximum of 15,097,542 votes that may be
cast at the meeting.
Q: WHO IS THE INSPECTOR OF ELECTION?
In accordance with our Restated Bylaws, our Board of Directors has
appointed Michele Winkle, our Corporate Treasurer and Assistant Corporate
Secretary, to act as Inspector of Election at the meeting. The Inspector of
Election, with the assistance of ADP Investor Communication Services is
responsible for:
o determining the number of shares outstanding and the voting power of
each share;
o determining the number of shares represented at the meeting;
o determining the existence of a quorum;
o determining the authenticity, validity and effect of proxies;
o receiving votes or ballots;
o hearing and determining all challenges and questions in any way arising
in connection with the right to vote;
o counting and tabulating all votes;
o determining the result of the vote; and
o doing any other acts that are proper to conduct the election or vote
with fairness to all stockholders.
Q: WHO IS SOLICITING MY VOTE?
A: This proxy solicitation is being made and paid for by Extended Systems. We
will request banks, brokerage firms, nominees, custodians and fiduciaries
to solicit their customers who have stock of Extended Systems registered in
the names of such persons and we will reimburse them for their reasonable
out-of-pocket expenses. Also, our directors, officers and other employees
may solicit proxies without additional compensation, personally by
telephone, email, telegram, or otherwise. We have hired ADP Investor
Communication Services to manage the tabulation, printing and distribution
of our proxy materials.
4
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
our common stock as of September 30, 2004 by: (i) all those known by us to be
the beneficial owner of more than five percent of our common stock; (ii) each
director and nominee for director; (iii) each executive officer named in the
Summary Compensation Table; and all executive officers and directors as a group.
The address of each of the beneficial owners listed in this table is: c/o
Extended Systems Incorporated, 5777 North Meeker Avenue, Boise, Idaho 83713.
NUMBER
OF SHARES PERCENT OF
BENEFICIALLY TOTAL BENEFICIAL COMMON STOCK
OWNED OPTIONS (1) OWNERSHIP OUTSTANDING
----- ----------- --------- -----------
5% STOCKHOLDERS:
Douglas B. Winterrowd (2).................. 1,071,503 542 1,072,045 7.1
Charles M. Jopson (3)...................... 1,015,252 - 1,015,252 6.72
DIRECTORS AND EXECUTIVE OFFICERS:
Raymond A. Smelek (4)...................... 127,209 61,760 188,969 1.3
Charles W. Jepson ......................... 16,583 128,333 144,916 *
Kerrin Pease (5)........................... 10,342 63,947 74,289 *
Mark A. Willnerd (6)....................... 11,213 40,998 52,211 *
Nigel S. Doust (7)......................... 2,202 34,841 37,043 *
Jody B. Olson (8).......................... 6,128 6,250 12,378 *
Robert Frankenberg (9)..................... 5,052 5,417 10,469 *
James R. Bean (10)......................... 3,440 6,250 9,690 *
Archie Clemins (10)........................ 3,440 5,417 8,857 *
Ralph Godfrey (10)......................... 3,440 5,417 8,857 *
David Willis (11) ......................... 3,601 - 3,061 *
Klaus-Dieter Laidig........................ - - - -
FORMER EXECUTIVE OFFICER:
Steven D. Simpson ......................... 58,247 245,000 303,247 2.0
All executive officers and directors
as a group ( 15 persons) ............. 250,805 621,130 871,935 5.6
- ---------
* Less than 1%.
(1) Beneficial ownership has been determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
beneficial owner exercises voting or investment power. Shares of common
stock subject to options currently exercisable or exercisable within 60
days of September 30, 2004 are deemed outstanding for the purpose of
computing the number of shares beneficially owned and the percentage
ownership of the person holding the options, but are not deemed outstanding
or beneficially owned for the purpose of computing the percentage ownership
of any other person. Except as otherwise indicated, and subject to
community property laws where applicable, we believe, based on information
provided by such persons, that the persons named in the table above have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
(2) Includes 130,000 shares held of record by the Doug Winterrowd and Eileen
Winterrowd Education Trust and 2,000 restricted shares subject to
repurchase by the Company until fully vested.
(3) Includes 6,000 shares held of record by Mr. Jopson's daughter and 4,588
shares held of record by Mr. Jopson's son.
(4) Includes 1,942 shares held of record by Smelek & Associates, a business
owned by Mr. Smelek's spouse, 17,933 shares held of record by Mr. Smelek's
spouse, 15,866 shares held of record by the Smelek Family Foundation, and
7,741 restricted shares subject to repurchase by the Company until fully
vested.
5
(5) Includes 5,425 restricted shares subject to repurchase by the Company until
fully vested.
(6) Includes 4,092 shares held of record by Mr. Willnerd's spouse and 2,620
restricted shares subject to repurchase by the Company until fully vested.
(7) Includes 1,470 restricted shares subject to repurchase by the Company until
fully vested.
(8) Includes 6,128 restricted shares subject to repurchase by the Company until
fully vested.
(9) Includes 5,052 restricted shares subject to repurchase by the Company until
fully vested.
(10) Includes 3,440 restricted shares subject to repurchase by the Company until
fully vested.
(11) Mr. Willis' employment with the Company terminated on September 7, 2004.
6
CORPORATE GOVERNANCE
BOARD MEETINGS
- --------------
During fiscal 2004, the Board of Directors held 28 meetings, including regularly
scheduled and special meetings. All of the incumbent directors attended at least
80% of the total meetings of the Board of Directors and of the committees upon
which they served that were held during their tenure, with the exception of
Klaus-Dieter Laidig, who attended only 1 of 2 board meetings held while he
served due to scheduling conflicts known before his appointment in April 2004.
It is the Company's policy to encourage all directors to attend the Company's
Annual Meetings of Stockholders in person. One director attended our 2003 Annual
Meeting of Stockholders.
BOARD COMMITTEES
- ----------------
Our Board of Directors has established the following standing committees:
AUDIT COMMITTEE. The Audit Committee oversees the integrity of the Company's
financial statements and the Company's accounting and financial reporting
processes including the system of internal controls and disclosure processes.
The Audit Committee also oversees the independence, performance and
qualifications of our independent auditors and assists the Board with legal and
regulatory requirement compliance. In addition, the Committee discharges the
functions of the Audit Committee imposed by all regulatory requirements. The
Audit Committee has a written charter, a copy of which is attached as APPENDIX A
to these proxy materials and can also be viewed on the Company's website at
www.extendedsystems.com.
The Audit Committee consists of Messrs. Olson (Chairman), Bean and Laidig, none
of whom are employees of the Company. Before his resignation from the Board in
January 2004, Mr. Russell was the Chairman of the Audit Committee. Mr. Olson
succeeded Mr. Russell as Chairman and Mr. Laidig joined the Audit Committee upon
his appointment to the Board of Directors in April 2004. Each member of the
Audit Committee is independent as defined in the Nasdaq listing standards and
the Audit Committee has determined that Mr. Olson is the "audit committee
financial expert" as defined in rules promulgated by the Securities and Exchange
Commission (the "SEC"). The Audit Committee met five times during the last
fiscal year.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for preparing,
evaluating and recommending to the Board of Directors all compensation plans,
policies and benefit programs for the Company's Chief Executive Officer and
other executive officers. The Compensation Committee is also responsible for
administering the Company's stock option and other equity-based plans and for
producing an annual report on executive compensation for inclusion in the proxy
statement. The Compensation Committee has a written charter, a copy of which is
attached as APPENDIX B to these proxy materials, and can be viewed on the
Company's website at www.extendedsystems.com.
The Compensation Committee consists of Mr. Frankenberg (Chairman), Admiral
Clemins and Mr. Godfrey. All members of the Committee qualify as independent
directors under the listing standards of Nasdaq. The Compensation Committee met
five times in fiscal 2004.
NOMINATING AND GOVERNANCE COMMITTEE. The Nominating and Governance Committee has
the responsibility of assisting the Board in identifying qualified individuals
for Board membership, recommending the composition of the Board and its
committees, monitoring the process to assess board effectiveness, and developing
and implementing the Company's corporate governance guidelines. The Nominating
and Governance Committee will consider qualified nominees for director whose
names are submitted in accordance with our bylaws. The Nominating and Governance
Committee has a written charter, a copy of which is attached as APPENDIX C to
these proxy materials, and can be viewed on the Company's website at
www.extendedsystems.com.
The Nominating and Governance Committee consists of Messrs. Bean, Clemins,
Frankenberg, Godfrey, Laidig, and Olson. This Committee met three times in
fiscal 2004.
COMMUNICATIONS WITH THE BOARD
- -----------------------------
Any stockholder who desires to communicate with the Company's Board of
Directors, individually or as a group, may do so by writing to the intended
member or members of the Board of Directors, c/o Secretary, Extended Systems
Incorporated, 5777 North Meeker Avenue, Boise, Idaho 83713. All communications
will be compiled by the Secretary and submitted to the director or directors to
whom they are addressed.
7
Communications with the Board of Directors regarding nominations for the
election of directors must be made in accordance with the Director Nomination
Policy described below.
DIRECTOR NOMINATION POLICY
- --------------------------
Shareholders may recommend individuals for consideration by the Nominating
Committee to become nominees for election to the Board of Directors by
submitting a written recommendation to the Nominating Committee, c/o Secretary,
Extended Systems Incorporated, 5777 North Meeker Avenue, Boise, Idaho 83713.
Recommendations received by June 30, 2005 will be considered for nomination at
the 2005 Annual Meeting of Stockholders. Recommendations received after June 30,
2005 will be considered for nomination at the 2006 Annual Meeting of
Stockholders.
Following the identification of director candidates, the Nominating Committee
will meet to discuss and consider each candidate's qualifications. The committee
will then determine by majority vote the candidate(s) whom the Nominating
Committee believes would best serve the Company. In evaluating candidates, the
committee will consider a variety of factors, including the composition of the
Board, the characteristics of each candidate (including independence, diversity,
age, skills and experience), and the performance and continued tenure of
incumbent Board members. The Nominating Committee believes that candidates for
director should have certain qualifications, including sound ethical character,
accomplishments in his or her respective field, the ability to read and
understand financial statements, relevant expertise and experience, and the
ability to exercise sound judgment. Candidates must also be over 21 years of
age. In addition, the committee believes that at least one member of the Board
should meet the criteria for an "audit committee financial expert" as defined by
SEC rules and that a majority of the members of the Board of Directors should
meet the definition of "independent director" under Nasdaq National Market
listing standards.
DIRECTOR COMPENSATION
- ---------------------
Our directors do not receive cash fees as compensation for their services as
directors. Our directors are, however, reimbursed for travel and other expenses
incurred in attending our Board of Directors meetings and meetings of committees
of the Board of Directors. The directors are eligible to participate in our 1998
Director Option Plan (the "Director Plan"). Under the Director Plan, Option
grants and Restricted Stock grants are automatic and non-discretionary and for
which the exercise price of the Option grants is 100% of the fair market value
of our common stock on the grant date. Each option granted from the Director
Plan has a term of 10 years unless the director ceases to be a director. Upon
ceasing to serve as a director, the former director has one year from the date
of termination as a director to exercise a vested option, and only then to the
extent that the director was entitled to exercise the option on the date of
termination.
Under the Director Plan each director receives an initial grant of an option to
purchase 20,000 shares of common stock on the date first becoming a director.
One-third of the shares from this initial grant vest and become exercisable on
the first anniversary of the date of grant and the remaining shares vest and
become exercisable at a rate of 1/36th per month of the total shares. After the
initial grant, each director is automatically granted an option to purchase
10,000 shares of our common stock on the date of our annual meeting of
stockholders each year, if the director has served on our Board of Directors for
at least six months. The shares from the director's annual option vest and
become exercisable in full on the earlier of the first anniversary of the date
of grant of that option or the date of the next annual meeting of stockholders.
Under the Director Plan each director is automatically granted a number of
shares of restricted stock on the date of our annual meeting of stockholders
each year. The number of shares of restricted stock is determined by dividing
$16,000 by the fair market value of a share on the date of our annual meeting of
stockholders. One-third of the shares of this restricted stock grant is released
from our option to repurchase the shares on the anniversary date of grant and
remaining shares are released from our option to repurchase the shares as to
one-third of the shares in each of the following two years. Our option to
repurchase the shares lapses in full on the earlier of the anniversary date of
the grant or the date of the next annual meeting of stockholders if the director
has attended at least 75% of all board meetings held during the last year.
The Chairman of our Board of Directors is automatically granted a number of
shares of restricted stock on the date of our annual meeting of stockholders
each year in addition to the annual grant to all directors set forth above. The
number of shares that the Chairman of our Board of Directors receives is
determined by dividing $20,000 by the fair market value of a share on the date
of our annual meeting of stockholders. The Chairman of our Audit Committee and
the Chairman of our Compensation Committee are also automatically granted a
number of shares of restricted stock on the date of our annual meeting of
stockholders each year. The number of shares that the Chairman of our
8
Audit Committee receives is determined by dividing $12,500 by the fair market
value of a share on the date of our annual meeting of stockholders. The number
of shares that the Chairman of our Compensation Committee receives is determined
by dividing $7,500 by the fair market value of a share on the date of our annual
meeting of stockholders. For each of the grants to the Chairman of our Board of
Directors, the Chairman of our Audit Committee and the Chairman of our
Compensation Committee, our option to repurchase the shares lapses with respect
to one-third of the shares of these grants on the anniversary date of grant and
the remaining option to repurchase the shares lapses as to one-third of the
shares in each of the following two years. Our right to repurchase the shares
lapses in its entirety on the earlier of the anniversary date or the date of the
next annual meeting of stockholders if the director has attended at least 75% of
all board meetings held during the last year in the case of the Chairman of the
Board of Directors, 75% of all Audit Committee meetings in the case of the
Chairman of the Audit Committee or 75% of all Compensation Committee meetings in
the case of the Chairman of the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- -----------------------------------------------------------
During fiscal 2004, the Compensation Committee consisted of Messrs. Clemins,
Frankenberg and Godfrey, none of whom are or have been an officer or employee of
Extended Systems. No interlocking relationship exists between our Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company.
CERTAIN TRANSACTIONS
- --------------------
In August 2003, we entered into a settlement, release and severance agreement
with Steven D. Simpson, our former President and Chief Executive Officer, in
which we agreed to pay Mr. Simpson $375,000 less applicable taxes in lieu of any
other severance payments, and $7,500 in lieu of fringe benefits. We also agreed
to vest in full all then unvested options to acquire our common stock held by
Mr. Simpson and to permit Mr. Simpson to exercise any options held by him for a
period of up to 24 months from the date of his termination. Mr. Simpson agreed
that for a period of 15 months after his termination he would not engage in
specified activities with our customers, including soliciting orders from them,
or accept employment with any such customer. He also agreed not to induce or
attempt to induce any of our employees, consultants or agents to terminate their
employment with us for 15 months from the date of the agreement.
In November 2003, we entered into a settlement, release and severance agreement
with Karla K. Rosa, our former Vice President of Finance, Chief Financial
Officer and Corporate Secretary, in which we agreed to pay Ms. Rosa $89,250 less
applicable taxes in lieu of any other severance payments, and $3,000 in lieu of
fringe benefits. We also agreed to vest in full all then unvested options to
acquire our common stock held by Ms. Rosa that were granted before October 25,
2002 with an exercise price less than $10 per share and to permit Ms. Rosa to
exercise any options held by her until December 31, 2004. Ms. Rosa agreed that
for a period of 6 months after her termination, she would not engage in
specified activities with our customers, including soliciting orders from them,
or accept employment with any such customer. She also agreed not to induce or
attempt to induce any of our employees, consultants or agents to terminate their
employment with us for 6 months from the date of the agreement.
In October 2004, we entered into a settlement, release and severance agreement
with David L. Willis, our former Vice President of North American Sales, in
which we agreed to pay Mr. Willis $60,250, representing three months of base
salary and variable compensation, and $3,000 in lieu of fringe benefits, less
applicable taxes. We also agreed to pay Mr. Willis $8,000 for continuing to
support certain customer negotiations and $21,476 for commissions earned through
September 30, 2004. Mr. Willis agreed to release the Company from any claims he
may have now or in the future against the Company related to his employment or
termination by the Company and agreed that he would not induce or attempt to
induce any of our employees, consultants or agents to terminate their employment
with us for 6 months from the date of the agreement. This agreement with Mr.
Willis will become effective on October 30, 2004 providing it has not been
revoked prior to that date pursuant to the Older Workers Benefit Protection Act
of 1990.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Directors, executive officers and holders of more than 10% of our outstanding
shares of common stock are required to file reports with the Securities and
Exchange Commission indicating the number of shares of our common stock they
beneficially own and any changes in their beneficial ownership. To the best of
our knowledge, based solely on review of the copies of such reports furnished to
us or otherwise in our files and on written representations from our directors
and executive officers, our officers, directors and 10 percent shareholders
complied with all applicable Section 16(a) filing requirements during fiscal
2004 except that Messrs. Laidig, Siegel, and Willnerd each failed to timely file
one Form 4 related to one grant of options to purchase our common stock. Mr.
Olson failed to timely file one Form 4
9
related to one award of restricted stock. Mr. Laidig failed to timely file a
Form 3 related to his appointment as a director, and Mr. Siegel failed to timely
file a Form 3 related to his appointment as an executive officer.
CODE OF ETHICS
- --------------
The Company has adopted a Code of Business Conduct and Ethics for all employees
and directors, which specifically applies to the Company's Chief Executive
Officer, Chief Financial Officer and persons performing similar functions. A
copy of the code of ethics is available on our website at
www.extendedsystems.com under the "Company" link. You can also obtain a copy by
writing to our Corporate Secretary at 5777 North Meeker Avenue, Boise, Idaho
83713.
We intend to post on our website any amendment to, or waiver from, a provision
of our Code of Business Conduct and Ethics within five business days following
the date of an amendment or waiver.
PROPOSAL ONE
ELECTION OF CLASS II DIRECTOR
The number of directors authorized by our Restated Certificate of Incorporation
and Bylaws is currently fixed by our Board of Directors at eight. Our Board of
Directors is divided into three classes: Class I, James Bean and Jody Olson,
whose term will expire at the 2005 Annual Meeting; Class II, Robert Frankenberg
and Ralph Godfrey, whose term will expire at the 2006 Annual Meeting and
Klaus-Dieter Laidig, whose term will expire at the 2006 Annual Meeting if
elected at the 2004 Annual Meeting; and Class III, Archie Clemins and Raymond
Smelek, whose term will expire at the 2004 Annual Meeting. We presently have one
vacancy on our Board of Directors.
One Class II director is to be elected at the 2004 Annual Meeting. The Board of
Directors has recommended the identified below for election as a Class II
director. This nominee is currently a director and was appointed by our
incumbent directors to fill a vacancy on the Board of Directors created by a
resignation. The Class II director elected at the meeting will hold office until
the 2006 Annual Meeting of Stockholders or until his successor has been duly
elected and qualified, except in the event of his earlier death, resignation or
removal.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them for the nominee named below. If the nominee becomes unable or declines to
serve as a director at the time of the meeting the proxy holders will vote the
proxies for any substitute nominee who is designated by the current Board of
Directors to fill the vacancy. We do not expect that the nominee listed below
will be unable or will decline to serve as a director.
NOMINEE FOR ELECTION AS CLASS II DIRECTOR FOR A TERM EXPIRING IN 2006
- ---------------------------------------------------------------------
KLAUS-DIETER LAIDIG; AGE 62. Mr. Laidig has served as a director of the Company
since April 2004. Mr. Laidig has served as a management consultant with Laidig
Business Consulting GmbH since 1998. From 1984 to 1997, Mr. Laidig served as
General Manager of Hewlett Packard GmbH, where he was employed since 1967. Mr.
Laidig currently serves as a director of Agile Software Corporation, Bauerfeind
AG, Heiler Software AG, Mach Hitech AG and several privately held companies.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
NOMINEE FOR CLASS II DIRECTOR NAMED ABOVE.
PROPOSAL TWO
ELECTION OF CLASS III DIRECTORS
Two Class III directors are to be elected at the 2004 Annual Meeting. The Board
of Directors has recommended the two nominees identified below for election as
Class III directors. These nominees are both currently directors of the Company.
The Class III directors elected at the meeting will hold office until the 2007
Annual Meeting of Stockholders or until their successors have been duly elected
and qualified, except in the event of their earlier death, resignation or
removal.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them for the nominees named below. If either of the nominees becomes unable or
declines to serve as a director at the time of the meeting the proxy
10
holders will vote the proxies for any substitute nominee who is designated by
the current Board of Directors to fill the vacancy. We do not expect that either
of the nominees listed below will be unable or will decline to serve as a
director.
NOMINEES FOR ELECTION AS CLASS III DIRECTORS FOR A TERM EXPIRING IN 2007
- ------------------------------------------------------------------------
ARCHIE CLEMINS; AGE 60. Admiral Clemins has served as a director of the Company
since October 2003. Since January 2003 and November 2001, respectively, Admiral
Clemins has served as the owner and president of Caribou Technologies, Inc., and
co-owner of TableRock International LLC, both international consulting firms.
Admiral Clemins retired from active duty in the United States Navy in 1999, and
his final assignment was as the 28th Commander in Chief of the United States
Pacific Fleet. He is currently a member of the Board of Directors of Global
Crossing Limited and several privately held companies.
RAYMOND A. SMELEK; AGE 69. Mr. Smelek has served as chairman of our Board of
Directors since June 1995 and has been a director of the Company since June
1994. Since 1999, Mr. Smelek has served as Chairman of the Board of Directors of
The Network Group, which provides information technology services to
enterprises. He also served as Chief Executive Officer of The Network Group from
1999 to 2003. Since 1998, he has been a Vice President of Smelek & Associates,
which provides management consultant services to enterprises. From June 1994 to
February 1996, he was our President and Chief Executive Officer. Before joining
Extended Systems, Mr. Smelek was employed by Hewlett-Packard and held a number
of positions, the last of which was Vice President and General Manager of the
Mass Storage Group.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
TWO NOMINEES FOR CLASS III DIRECTORS NAMED ABOVE.
DIRECTORS WHOSE TERM EXTENDS BEYOND THE ANNUAL MEETING
- ------------------------------------------------------
JAMES R. BEAN; AGE 54. Mr. Bean has served as a director of the Company since
August 2003. Since May 1997, Mr. Bean has served as President and Chief
Executive Officer of Preco Electronics, Inc., an industry leader in vehicle
warning systems and custom electronic products. Mr. Bean has more than 25 years
of operational experience with Fortune 500 companies, including National
Semiconductor Corporation, Apple Computer, Inc. and Sun Microsystems, Inc. While
at Sun, he was part of the executive team that took the company public and had
responsibility for manufacturing and distribution worldwide.
ROBERT J. FRANKENBERG; AGE 57. Mr. Frankenberg has served as a director of the
Company since October 2003. Since December 1999, Mr. Frankenberg has served as
the Chairman of Kinzan, Inc., a provider of Internet services platforms, and
from May 2001 to December 2003 he was Chairman of PowerQuest, Inc., a supplier
of storage management software. From May 1997 to July 2000, he served as
President and Chief Executive Officer of Encanto Networks, Inc. and from April
1994 to August 1996, he served as the Chairman, President and Chief Executive
Officer of Novell, Inc. Mr. Frankenberg is a member of the Board of Directors of
ElectroGlas, Inc., National Semiconductor Corporation, ScanSoft, Inc. and Secure
Computing Corporation.
RALPH B. GODFREY; AGE 64. Mr. Godfrey has served as our director since October
2003. Since September 2000 Mr. Godfrey has been retired. From July 1990 to
September 2000, Mr. Godfrey served in various business operations and sales
roles at 3Com Corporation, a provider of networking products, services and
solutions for enterprises, the most recent of which was as a Senior Vice
President and a member of the executive committee. He had previously managed
3Com's sales organization for the Americas. Before joining 3Com in July 1990,
Mr. Godfrey served as President of sales and marketing for a division of Unisys
Corporation. He currently serves as a member of the Board of Directors of
Rockford Corporation.
JODY B. OLSON; AGE 57. Mr. Olsen has served as our director since August 2003.
Since July 2000 Mr. Olson has been Of Counsel at Hawley Troxell Ennis & Hawley
LLP, a law firm in Boise, Idaho. Mr. Olson served in many roles over 20 years at
Trus Joist, a building products company, now a Weyerhaeuser Business. He retired
as Vice President of Corporate Development. Mr. Olsen is currently Chairman of
the Board of Public Employer Retirement System of Idaho (PERSI). He is also a
member of the Board of Advisors of Galen Associates, a venture capital fund.
During our fiscal 2004, Hawley Troxell Ennis & Hawley LLP performed legal
services for the Company.
11
PROPOSAL THREE
INCREASE IN THE NUMBER OF SHARES RESERVED FOR ISSUANCE
UNDER OUR 1998 STOCK PLAN
You are being asked to approve an increase by 500,000 in the number of shares
reserved for issuance under our 1998 Stock Plan. Our Board of Directors approved
this increase in August 2004.
PLAN ACTIVITY
- -------------
As of September 30, 2004, options to purchase an aggregate of 770,249 shares of
common stock issued under the 1998 Stock Plan had been exercised, 137,629 shares
of restricted stock had been issued and options to purchase 2,638,495 shares
were outstanding. Without taking into account this proposal, the number of
shares available for future option grants and restricted stock awards was
503,627 at September 30, 2004.
DESCRIPTION OF THE 1998 STOCK PLAN AND OPTION TERMS
- ---------------------------------------------------
The following is a summary of the principal provisions of our 1998 Stock Plan,
but it is not intended to be a complete description of all of the terms and
provisions of the plan. We will furnish a copy of the 1998 Stock Plan to you
upon written request to our Secretary at our principal executive offices listed
on the first page of this proxy statement.
HISTORY. Our Board of Directors adopted the 1998 Stock Plan on December 18,
1997, and our stockholders approved the 1998 Stock Plan on January 22, 1998 with
a total of 1,600,000 shares of our common stock reserved for issuance under the
plan. Our stockholders approved increases in the number of shares reserved for
issuance under the plan of 500,000 on October 25, 2000, 500,000 on October 24,
2001, 725,000 on October 24, 2002, and 725,000 on December 11, 2003.
In August 2004, our Board of Directors approved an amendment to the plan,
whereby upon both a change in control of the Company and an involuntary
termination of an individual's employment other than for cause, any unvested
options vest in the amount of 100% and become immediately exercisable.
PURPOSE. The plan is intended to:
o provide additional compensation and incentives to individuals whose present
and potential contributions are important to our continued success; o to afford
those individuals an opportunity to acquire a proprietary interest in Extended
Systems; and o enable us to continue to attract and retain the best available
talent.
SUMMARY OF THE PLAN AND OPTIONS.
Administration................. Our Compensation Committee currently
administers the plan. Subject to the terms of
the plan, the Compensation Committee, based on
recommendations from management, determines:
o who will receive awards;
o the number of shares subject to each award;
o the terms and conditions of the awards; and
o the grant date.
The Compensation Committee also has the
authority to construe and interpret any of the
provisions of the plan or any options granted
under the plan.
Eligibility.................... Regular employees, directors and consultants
may be granted options under the plan. As of
September 30, 2004, approximately 185 persons
were eligible to receive options under the
1998 Stock Plan.
Exercise Price................. The exercise price of options granted under
the 1998 Stock Plan is determined by the
Compensation Committee, generally the fair
market value on the date of grant.
12
Term........................... The term of options granted under the 1998
Stock Plan is generally 10 years, but can be a
shorter period at the discretion of the
Compensation Committee. Options to holders of
10% or more of our common stock may only have
a term of five years or less.
Vesting........................ The vesting schedule of options granted under
the 1998 Stock Plan is determined by the
Compensation Committee. Options generally vest
over a period of four years, vesting as to 25
percent on the first anniversary and 1/48th
per month thereafter.
Exercise....................... The optionee can choose to pay the exercise
price of the option with cash or with proceeds
from a cashless exercise. In a cashless
exercise, the optionee irrevocably instructs
his or her stockbroker to sell the shares to
be acquired upon exercise of the option and
pay the exercise price to us. With the
administrator's approval, the optionee can
also exercise options by delivering a
promissory note to Extended Systems in the
amount of the exercise price. Promissory notes
are interest bearing, have a term equal to or
less than five years and are collateralized by
a pledge of the shares purchased by the
promissory note. The administrator does not
currently allow the payment of the exercise
price of options with a promissory note. The
administrator can also allow the payment of
the exercise price through the surrender of
shares of our common stock that the option
holder has held for at least six months before
the date of exercise of the options.
Transferability................ During the lifetime of the optionee, an option
is exercisable only by the optionee. An option
may not be transferred or assigned, except by
will or the laws of descent and distribution.
Termination of employment...... An optionee has three months from the date of
termination of employment, except by reason of
death or disability, to exercise the vested
portion of the option. In the event of
termination of employment due to death or
disability, an optionee (or his or her legal
representative) may exercise the vested option
within 12 months after the date of termination
of employment. In the event of an involuntary
termination as a result of a change in
control, an optionee's unvested options will
vest in the amount of 100% and become
immediately exercisable.
Merger or asset sale........... If we merge with or into another corporation
or sell substantially all of our assets, the
successor corporation is required under the
1998 Stock Plan to assume or substitute each
outstanding option under plan. If the
successor corporation refuses to assume or
substitute for options, the outstanding
options under the plan immediately become 100%
vested and the optionee will have the right to
exercise all of his outstanding options.
Term of plan................... The plan will expire on March 3, 2008, unless
our Board of Directors terminates it earlier.
Amendment of plan.............. The Board may at any time amend the 1998 Stock
Plan, but is required to obtain stockholder
approval of any Plan amendment to the extent
necessary and desirable to comply with any
applicable laws and regulations.
PLAN BENEFITS. The number of awards (if any) that may be granted to employees,
directors and consultants under the 1998 Stock Plan is subject to the discretion
of the Compensation Committee. As of the date of this proxy statement, there has
been no determination by the Compensation Committee with respect to future
awards under the 1998 Stock Plan. Accordingly, future awards under the 1998
Stock Plan are not determinable. The following table sets forth information with
respect to the grant of options and awards of restricted stock under the 1998
Stock Plan during fiscal 2004 to (i) each executive officer named in the Summary
Compensation Table (ii) all current executive officers as a group, (iii) all
current directors as a group and (iv) all employees who are not executive
officers or directors as a group:
13
WEIGHTED AVERAGE FAIR MARKET
NUMBER OF SHARES EXERCISE PRICE PER NUMBER OF VALUE ON DATE
SUBJECT TO OPTIONS SHARE RESTRICTED SHARES OF RESTRICTED
GRANTED (#) ($/SH) ISSUED (#) AWARD ($/SH)
----------- ------ ---------- ------------
OFFICERS NAMED IN
SUMMARY COMPENSATION TABLE:
Charles W. Jepson.................................... 253,333 $5.20 --- ---
Kerrin Pease......................................... 34,575 $4.59 5,425 $4.41
Mark A. Willnerd..................................... 37,380 $4.55 2,620 $4.41
Nigel S. Doust....................................... 48,530 $4.57 1,470 $4.41
Steven D. Simpson.................................... --- --- --- ---
David Willis (1)..................................... 90,000 $4.07 --- ---
All current executive officers as a group............ 633,818 $4.82 9,515 $4.41
All current directors as a group..................... --- --- 2,688 $6.15
All employees who are not executive officers
as a group....................................... 458,005 $4.73 125,426 $4.41
(1) Mr. Willis' employment with the Company terminated on September 7, 2004.
U.S. FEDERAL INCOME TAX CONSEQUENCES TO OPTIONEES.
For U.S. federal income tax purposes, under existing tax laws, an optionee
generally does not realize taxable income at the time of the grant of an option
or award of restricted stock. Pursuant to recently adopted legislation, however,
a holder of an option with an exercise price less than fair market value on the
date of grant may be taxed upon vesting of the option.
An optionee has no taxable income upon exercise of an incentive stock option
(except that alternative minimum tax may apply) and generally does not realize
taxable income until the sale of the shares received upon exercise of the
option. If the optionee does not sell the shares for at least two years after
grant and one year after exercise of the option, any gain or loss realized
generally is treated as long-term capital gain or loss. Under these
circumstances, Extended Systems is not entitled to a compensation expense
deduction in connection with the grant or the exercise of the option. If the
optionee sells the shares prior to two years after grant or one year after
exercise, the difference between (i) the lesser of the amount realized upon sale
of the shares or the fair market value on the date of grant and (ii) the option
price generally is taxable as ordinary income to the optionee and generally is
deductible by Extended Systems for U.S. federal income tax purposes.
Upon the exercise of a non-statutory stock option with an exercise price not
less than fair market value on the date of grant, the optionee realizes ordinary
income in the amount of the difference between the option price and the fair
market value of the shares on the date of exercise and Extended Systems is
entitled to a compensation expense deduction. Upon lapse of our repurchase right
on a restricted stock award, the award recipient realizes ordinary income in the
amount of the difference between the par value and the fair market value of the
shares on the date of lapse of the repurchase right and Extended Systems
generally is entitled to a compensation expense deduction in the same amount,
unless the award recipient has made a election to be taxed at the time of the
original transfer of the stock. If the award recipient has made such an
election, the award recipient realizes ordinary income equal to the fair market
value of the shares on the date of transfer and Extended Systems generally is
entitled to a compensation expense deduction in the same amount. Upon the
subsequent sale of previously restricted stock or shares received in the
exercise of non-statutory stock options, the optionee realizes a capital gain or
loss, which will be short or long-term depending on the period for which the
shares are held prior to the sale. The gain or loss is equal to the difference
between the fair market value of the shares on the date of exercise of the
option and the amount realized on the sale, in the case of an option, and the
difference between the fair market value of the shares on the date on which the
right of repurchase lapsed (or the date of original transfer of the shares if
the award recipient elected to be taxed on that date) and the amount realized on
the date of sale, in the case of a restricted stock award.
THE ABOVE IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON THE
OPTIONEE AND EXTENDED SYSTEMS WITH RESPECT TO THE SHARES ACQUIRED UNDER THE 1998
STOCK PLAN. You should reference the applicable provisions of the Internal
Revenue Code. In addition, the summary does not discuss the tax consequences of
an optionee's death or the income tax laws of any state or foreign country in
which the optionee may reside.
14
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
AMENDMENT TO THE 1998 STOCK PLAN.
PROPOSAL FOUR
INCREASE IN THE NUMBER OF SHARES RESERVED FOR ISSUANCE
UNDER OUR 1998 DIRECTOR OPTION PLAN
You are being asked to approve an increase by 200,000 in the number of shares
reserved for issuance under our 1998 Director Option Plan ("Director Plan"). Our
Board of Directors approved this increase in August 2004.
PLAN ACTIVITY
- -------------
As of September 30, 2004, options to purchase an aggregate of 22,917 shares of
common stock under the Director Plan had been exercised, 32,681 shares of
restricted stock had been issued and options to purchase 182,500 shares were
outstanding. Without taking into account this proposal, 136,902 shares remained
available for future option grants or restricted stock awards at September 30,
2004.
DESCRIPTION OF THE 1998 DIRECTOR OPTION PLAN AND OPTION TERMS
- -------------------------------------------------------------
The following is a summary of the principal provisions of our Director Plan, but
it is not intended to be a complete description of all of the terms and
provisions of the plan. We will furnish a copy of the Director Plan to you upon
written request to our Secretary at our principal executive offices listed on
the first page of this proxy statement.
HISTORY. Our Director Plan was adopted by the Board of Directors in December
1997 and approved by the stockholders in January 1998. The plan became effective
on March 4, 1998 in conjunction with the effectiveness of the registration
statement relating to our initial public offering. The Board of Directors
initially reserved a total of 250,000 shares of common stock for issuance under
the Director Plan and our stockholders approved a 125,000-share increase in the
number of shares reserved for issuance under the plan on December 11, 2004.
PURPOSE. The Director Plan is intended to:
o provide compensation and incentives to our Board of Directors whose present
and potential contributions are important to our continued success;
o promote the success of our business; and
o enable us to continue to attract and retain the best available talent.
SUMMARY OF THE DIRECTOR PLAN, OPTIONS AND RESTRICTED STOCK.
Administration................... Our Director Plan is nondiscretionary and
there is no administrator.
Eligibility...................... Directors are granted options and restricted
stock under the plan. All grants are
automatic, non-discretionary grants. See
"CORPORATE GOVERNANCE - Director
Compensation." As of September 30, 2004,
seven persons were eligible to receive
options under the Director Plan.
Exercise Price................... The exercise price of options granted under
the Director Plan is the fair market value
on the date of grant. For restricted stock,
the shares received are outstanding common
stock and the director must pay the Company
par value of $0.001 per share.
Option Term...................... The term of options granted under the
Director Plan is 10 years. Restricted stock
awards do not have a term.
Vesting/Right of Repurchase...... The initial option grant vests over a period
of three years, vesting in the amount of
one-third on the first anniversary of the
grant and 1/36th per month thereafter. The
annual option grant vests on the earlier of
the first anniversary date or the date of
the next annual stockholders meeting. The
repurchase option we have on restricted
stock grants lapses over a period of three
years, with the right lapsing as to
one-third of the shares on each anniversary
of the date of the restricted stock grant.
The repurchase option
15
we have lapses in its entirety on the
earlier of the first anniversary date or the
next annual meeting date if the director
attends 75% of all board meetings, Audit
Committee meetings or Compensation Committee
meetings, as applicable.
Exercise......................... The director pays the exercise price of the
option with cash. Although the Company does
not currently have a cashless exercise
program in place for the Director Plan, the
Company may implement a cashless exercise
program and allow a director to participate.
The director can also pay the exercise price
through the surrender of shares of our
common stock that the outside director has
held for at least six months before the date
of exercise of the options.
Transferability.................. During the term of an option, an option is
exercisable only by the optionee. An option
may not be transferred or assigned, except
by will or the laws of descent and
distribution.
Termination of director status... A director has twelve months from the date
of termination as a director to exercise a
vested stock option.
Merger or asset sale............. If we merge with or into another corporation
or sell substantially all of our assets, the
successor corporation is required under the
Director Plan to assume or substitute each
outstanding option and restricted stock
award under the Director Plan. If the
successor corporation refuses to assume or
substitute for options or restricted stock
awards, the outstanding options under the
Director Plan immediately become 100% vested
and the optionee has the right to exercise
all of their outstanding options or the
right of repurchase we have lapses in its
entirety and the successor corporation will
have no further right to repurchase a
portion of the restricted stock award.
Term of Director Plan............ The Director Plan will expire in March 2008,
unless our Board of Directors terminates it
earlier.
Amendment of Director Plan....... Without the prior approval of our
stockholders, the Board may amend the
Director Plan, except for any amendment that
would modify the terms of the automatic,
nondiscretionary grants to outside directors
or make the terms on which options or
restricted stock may be granted materially
more generous or would increase the maximum
number of shares of the Director Plan.
PLAN BENEFITS. The number of awards (if any) that may be granted to directors
under the Director Plan are automatic and non-discretionary. See "CORPORATE
GOVERNANCE - Director Compensation." The following table sets forth information
with respect to the grant of options under the Director Plan during fiscal 2004:
NUMBER OF SHARES WEIGHTED AVERAGE FAIR MARKET VALUE ON
SUBJECT TO OPTIONS EXERCISE PRICE PER SHARE NUMBER OF RESTRICTED DATE OF RESTRICTED
NAME GRANTED (#) ($/SH) SHARES ISSUED (#) AWARD ($/SH)
- ----- ----------- ------ ----------------- ------------
CURRENT DIRECTORS:
James R. Bean ............... 20,000 $4.91 3,440 $4.65
Archie Clemins .............. 20,000 $4.01 3,440 $4.65
Robert Frankenberg .......... 20,000 $4.01 5,052 $4.65
Ralph Godfrey ............... 20,000 $4.01 3,440 $4.65
Klaus-Dieter Laidig ......... 20,000 $6.04 -- $4.65
Jody B. Olson ............... 20,000 $4.91 6,128 $4.65
Raymond A. Smelek ........... 10,000 $4.65 7,741 $4.65
FORMER DIRECTORS:
John M. Russell (1) ......... 10,000 $4.65 6,128 $4.65
- -------------------
(1) On January 6, 2004, the date Mr. Russell resigned from the Extended Systems
Board of Directors, these options expired unvested and the restricted stock was
repurchased by the Company.
16
U.S. FEDERAL INCOME TAX CONSEQUENCES TO OPTIONEES.
For U.S. federal income tax purposes, under existing tax laws, an optionee
generally does not realize taxable income at the time of the grant of an option
or award of restricted stock. Pursuant to recently adopted legislation, however,
a holder of an option with an exercise price less than fair market value on the
date of grant may be taxed upon vesting of the option. Upon the exercise of a
non-statutory stock option with an exercise price not less than fair market
value on the date of grant, the optionee realizes ordinary income in the amount
of the difference between the option price and the fair market value of the
shares on the date of exercise and Extended Systems is entitled to a
compensation expense deduction. Upon lapse of our repurchase right on a
restricted stock award, the award recipient realizes ordinary income in the
amount of the difference between the par value and the fair market value of the
shares on the date of lapse of the repurchase right and Extended Systems
generally is entitled to a compensation expense deduction in the same amount,
unless the award recipient has made a election to be taxed at the time of the
original transfer of the stock. If the award recipient has made such an
election, the award recipient realizes ordinary income equal to the fair market
value of the shares on the date of transfer and Extended Systems generally is
entitled to a compensation expense deduction in the same amount. Upon the
subsequent sale of previously restricted stock or shares received in the
exercise of non-statutory stock options, the optionee realizes a capital gain or
loss, which will be short or long-term depending on the period for which the
shares are held prior to the sale. The gain or loss is equal to the difference
between the fair market value of the shares on the date of exercise of the
option and the amount realized on the sale, in the case of an option, and the
difference between the fair market value of the shares on the date on which the
right of repurchase lapsed (or the date of original transfer of the shares if
the award recipient elected to be taxed on that date) and the amount realized on
the date of sale, in the case of a restricted stock award.
THE ABOVE IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON THE
OPTIONEE AND EXTENDED SYSTEMS WITH RESPECT TO THE SHARES ACQUIRED UNDER THE
DIRECTOR PLAN. You should reference the applicable provisions of the Internal
Revenue Code. In addition, the summary does not discuss the tax consequences of
an optionee's death or the income tax laws of any state or foreign country in
which the optionee may reside.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
AMENDMENT TO THE DIRECTOR PLAN.
PROPOSAL FIVE
INCREASE IN THE NUMBER OF SHARES RESERVED FOR ISSUANCE
UNDER OUR 2001 APPROVED SHARE OPTION SCHEME
You are being asked to approve an increase by 25,000 in the number of shares
reserved for issuance under our 2001 Approved Share Option Scheme (the
"Scheme"). Our Board of Directors approved this increase in August 2004.
PLAN ACTIVITY
- -------------
As of September 30, 2004, 3,167 options granted under the Scheme had been
exercised, and options to purchase 120,819 shares were outstanding. Without
taking into account this proposal, 26,014 shares remained available for future
grant under the Scheme at September 30, 2004.
DESCRIPTION OF THE SCHEME AND OPTION TERMS
- ------------------------------------------
The following is a summary of the principal provisions of our Scheme, but it is
not intended to be a complete description of all of the terms and provisions of
the plan. We will furnish a copy of the Scheme to you upon written request to
our Secretary at our principal executive offices listed on the first page of
this proxy statement.
HISTORY. Our Board of Directors adopted the Scheme in January 2001, and the
Inland Revenue of the United Kingdom approved the Scheme on February 19, 2001.
The Board of Directors determines the number of shares of common stock to be
reserved for issuance under the Scheme. They approved 100,000 shares of common
stock reserved for issuance under the Scheme in January 2001. Our stockholders
approved increases in the number of shares reserved for issuance under the
Scheme of 25,000 October 24, 2002 and 25,000 on December 11, 2003.
PURPOSE. The Scheme is intended to:
17
o provide additional compensation and incentives to individuals in the United
Kingdom whose present and potential contributions are important to our
continued success;
o promote the success of our business; and
o enable us to continue to attract and retain the best available talent.
SUMMARY OF THE SCHEME AND OPTIONS.
Administration.................... Our Compensation Committee currently
administers the Scheme. Subject to the
terms of the Scheme, the Compensation
Committee, based on recommendations from
management, determines:
o who will receive awards;
o the number of shares subject to each
award;
o the terms and conditions of the awards;
and
o the grant date.
The Compensation Committee also has the
authority to construe and interpret any of
the provisions of the Scheme or any options
granted under the Scheme.
Eligibility....................... Regular employees, directors and
consultants may be granted options under
the Scheme up to, but not in excess of
(pound)30,000 (converted from U.S. dollars
to British pounds on the date of grant). As
of September 30, 2004, approximately 25
persons were eligible to receive options
under the Scheme.
Exercise Price.................... The exercise price of options granted under
the Scheme is determined by the
Compensation Committee, generally the fair
market value on the date of grant.
Term.............................. The term of options granted under the
Scheme is generally 10 years, but can be a
shorter period at the discretion of the
Compensation Committee.
Vesting........................... The vesting schedule of options granted
under the Scheme is determined by the
Compensation Committee. Options generally
vest over a period of four years, vesting
as to 25% of the shares on the first
anniversary of the grant and 1/48th per
month thereafter.
Exercise.......................... The optionee can pay the exercise price of
the option with cash.
Transferability................... During the lifetime of the optionee, an
option is exercisable only by the optionee.
An option may not be transferred or
assigned, except by will or the laws of
descent and distribution.
Termination of employment......... An optionee has three months from the date
of termination of employment, except by
reason of death or disability, to exercise
the vested portion of an option. In the
event of termination of employment due to
death or disability, an optionee (or his
legal representative) may exercise the
vested portion of an option within 12
months after the date of termination of
employment. In the event of termination as
a result of a change of control, members of
the Company's executive management team may
exercise their vested options within 24
months after the date of termination of
employment.
Merger or asset sale.............. If we merge with or into another
corporation or sell substantially all of
our assets, the successor corporation is
required under the Scheme to assume or
substitute each outstanding option under
the Scheme. If the successor corporation
refuses to assume or substitute for
options, the outstanding options under the
plan immediately become 100% vested and the
optionee will have the right to exercise
all of his outstanding options.
Term of Scheme.................... The Scheme will expire in January 2011,
unless our Board of Directors
18
terminates it earlier.
Amendment of Scheme............... The Board may amend the Scheme, except for
any amendment that would make the terms on
which options may be granted materially
more generous or would increase the maximum
number of shares of the Scheme without the
prior approval of our stockholders. No
amendment shall have effect until approval
by Inland Revenue of the United Kingdom.
PLAN BENEFITS. The number of awards (if any) that may be granted to employees,
directors and consultants under the Scheme is subject to the discretion of the
Compensation Committee. As of the date of this proxy statement, there has been
no determination by the Compensation Committee with respect to future awards
under the Scheme. Accordingly, future awards under the Scheme are not
determinable. The following table sets forth information with respect to the
grant of options under the Scheme during the last fiscal year to (i) all current
executive officers as a group, and (ii) all employees who are not executive
officers as a group. No directors received an award from the Scheme in fiscal
2004.
NUMBER OF SHARES WEIGHTED AVERAGE
SUBJECT TO OPTIONS EXERCISE PRICE PER SHARE
NAME AND POSITION GRANTED (#) ($/SH)
----------------- ----------- ------
All employees who are
not executive officers as
a group....................... 50,550 $5.26
UNITED KINGDOM INCOME TAX CONSEQUENCES TO OPTIONEES.
Since the grant of an option made under the Scheme is made under an Inland
Revenue Approved Share Scheme, the optionee can be granted an option covering
shares with a market value of up to (pound)30,000 (converted from U.S. dollars
to British pounds on the date of grant) that is eligible for preferential tax
treatment in THE United Kingdom if the optionee exercises the option within
certain parameters. If the optionee qualifies for preferential tax treatment,
there is no income tax charge incurred at the time of exercise.
To qualify for this tax treatment, the optionee must wait to exercise his or her
options until at least three years after the grant date (or until at least three
years from the date of the exercise of an option that benefited from preferred
tax treatment under this or any other Inland Revenue approved scheme, if later.)
Additionally, the exercise of the option must be made in accordance with the
rules of the Scheme and must be made while the Scheme retains formal Inland
Revenue approval.
If the optionee exercises his or her option under qualifying circumstances, then
the optionee is subject to capital gains tax on the entire gain (i.e., the
difference between the sales price and the exercise price) at the time of sale.
Capital gains are subject to tapering relief (the taper period would run from
the time the shares are purchased, i.e., the date of exercise) and the annual
exemption.
If the optionee chooses to exercise his or her option before the expiration of
the holding period, the optionee would be subject to U.K. income tax on the
difference between the fair market value of the shares at the time of exercise
and the exercise price, which would be due at the end of the tax year in which
the exercise occurs. If the optionee exercises his or her option under
non-qualifying circumstances, then at the time of sale the optionee may be
liable for capital gains tax on the difference between the sale price and the
fair market value of the shares at the time of exercise.
There is no National Insurance Contribution arising on the exercise of the
option even if the exercise does not take place under qualifying circumstances,
unless exceptional circumstances apply such as the option was invalidly or
improperly granted.
THE ABOVE IS ONLY A SUMMARY OF THE EFFECT OF THE UNITED KINGDOM INCOME TAX
CONSEQUENCES AND NATIONAL INSURANCE CONTRIBUTION TREATMENT UPON THE OPTIONEE
WITH RESPECT TO THE SHARES PURCHASED UNDER THE SCHEME. In addition, the summary
does not discuss the tax consequences of an optionee's death or the income tax
laws of any other country or any municipality or state in which the optionee may
reside.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
AMENDMENT TO THE SCHEME.
19
CHANGES IN THE COMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP ("PwC") audited the Company's financial statements
for the fiscal year ended June 30, 2004 that were included in the Company's most
recent Annual Report on Form 10-K and audited the Company's financial statements
for all prior years since the Company's inception in 1984. In June 2004, the
audit committee of the Board of Directors requested proposals for external audit
services for our fiscal year ending June 30, 2005 from three firms, including
PwC, the incumbent independent registered public accounting firm. On July 26,
2004, PwC notified the audit committee the firm would not be submitting a
proposal to provide audit services for our fiscal year ending June 30, 2005 and
that the firm declined to stand for re-election as our independent registered
public accounting firm. The engagement of PwC as our independent registered
public accounting firm ceased on September 29, 2004, the date upon which PwC
completed its audit procedures on our financial statements as of and for the
year ended June 30, 2004. A representative of PwC is not expected to be present
at the 2004 Annual Meeting.
PwC's reports on the Company's financial statements as of and for the years
ended June 30, 2004 and 2003 contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
For the years ended June 30, 2004 and 2003 and through September 29, 2004, there
were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PwC would have caused them
to make reference thereto in their reports on the financial statements for those
years and there were no reportable events as defined in Regulation S-K item
304(a)(1)(v)).
The Company requested that PwC furnish it with a letter addressed to the SEC
stating whether or not it agreed with the above statements concerning PwC. A
copy of this letter, dated October 5, 2004, was filed as Exhibit 16 to the Form
8-K Current Report the Company filed on October 5, 2004.
The audit committee selected Deloitte & Touche LLP ("Deloitte") as our
independent registered public accounting firm for the fiscal year ending June
30, 2005 and Deloitte advised us of its acceptance of this appointment effective
October 1, 2004. However, a formal engagement letter was not executed between
the Company and Deloitte. On October 6, 2004, we advised Deloitte that we had
discovered that one of Deloitte's member firms had completed work in the first
two months of the fiscal year. Deloitte verified it had provided prohibited
bookkeeping services (for total consideration of approximately (euro)1,200) to
an immaterial non-U.S. subsidiary of ours prior to the time it accepted the
appointment as our independent accountants. We immediately destroyed the results
of the prohibited services performed by Deloitte and had the bookkeeping work
performed again by members of our accounting staff. However, on October 28,
2004, Deloitte advised us that as a result of these de minimis services,
Deloitte could not be independent and would not be able to proceed with the
engagement for our fiscal year ending June 30, 2005. Deloitte had not commenced
any review of our financial statements and the withdrawal of Deloitte from the
engagement was not a result of any disagreement between Deloitte and the
Company. We requested that Deloitte furnish us with a letter addressed to the
Securities and Exchange Commission stating whether or not it agreed with the
above statements regarding Deloitte. A copy of such letter, dated October 28,
2004, is filed with our Form 8-K filed on the same date.
We have not yet engaged another independent registered public accounting firm,
although we are actively engaged in discussions with several candidates.
20
INDEPENDENT REGISTERED ACCOUNTING FIRM FEES
The following table sets forth the aggregate fees plus reimbursed expenses
billed to the Company or to be billed for the fiscal years ended June 30, 2004
and 2003 by PwC, our former independent registered public accounting firm:
Fiscal 2004 Fiscal 2003
----------- -----------
Audit Fees (1) $287,448 $173,718
Audit-Related Fees (2) --- 15,000
Tax Fees (3) --- ---
All Other Fees (4) 66,000 2,360
-------- --------
Total $353,448 $191,078
(1) Audit Fees consist of fees billed for professional services rendered for
the audit of our annual consolidated financial statements and review of
interim consolidated financial statements included in our Form 10-Q
quarterly reports and services that are normally provided in connection
with statutory and regulatory filings or engagements.
(2) Audit-Related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of our consolidated financial statements and are not reported
under "Audit Fees." In fiscal 2003 these services consist of services
rendered in connection with the filing of Form S-8 registration
statements.
(3) Tax Fees consist of fees billed for professional services rendered for
tax compliance, tax advice and tax planning.
(4) All Other Fees consist of fees for products and services other than the
services reported above. In fiscal 2004 fees were charged for due
diligence services pertaining to a potential business acquisition and in
fiscal 2003 fees were charged for PwC's accounting research subscription
service.
PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee meets with the Company's independent registered accounting
firm to approve the annual scope of accounting services to be performed,
including all audit, audit-related, and non-audit services, and the related fee
estimates. The Audit Committee also meets with the Company's independent
registered accounting firm, on a quarterly basis, following completion of their
quarterly reviews and annual audit before the Company's earnings announcements,
to review the results of their work. As appropriate, management and the
Company's independent registered accounting firm update the Audit Committee with
material changes to any service engagement and related fee estimates as compared
to amounts previously approved.
Under its charter, the Audit Committee has the authority and responsibility to
review and approve, in advance, any audit and proposed permissible non-audit
services to be provided to the Company by its independent registered public
accounting firm.
21
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
We have included in the following table all compensation earned during the last
three years by our Chief Executive Officer, our former Chief Executive Officer
and our four other most highly compensated executive officers whose total
compensation from Extended Systems during fiscal 2004 exceeded $100,000 (the
"Named Executive Officers"). Mr. Jepson, our current President and Chief
Executive Officer, began serving in that role in August 2003. Mr. Simpson served
as our President and Chief Executive Officer throughout fiscal 2003 and ceased
serving in that role in August 2003. See "Certain Transactions" for a
description of our separation agreement with Mr. Simpson.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------- -----------------------------
RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(1) AWARDS(9) OPTIONS(#) COMPENSATION
- ----------------- ----
Charles W. Jepson.............. 2004 $202,831 $ - - 253,333 $ 20,852(2)
President and Chief 2003 38,829 - - 180,000 -
Executive Officer 2002 - - - - -
Steven D. Simpson.............. 2004 44,409 - - - 764,337(3)
Former President and 2003 254,375 - - 75,000 4,425(4)
Chief Executive Officer 2002 255,000 - - 100,000 6,100(4)
Nigel S. Doust................. 2004 152,631 189,810 6,483 48,530 18,798(5)
Vice President of Europe, 2003 - - - 70,000 -
Middle East and Africa 2002 - - - - -
Kerrin Pease................... 2004 160,348 - 23,924 34,575 -
Vice President of 2003 159,966 - - 75,000 2,633(4)
Research and 2002 153,966 - - 25,000 2,453(4)
Development
David Willis (7)............... 2004 91,382 76,045 - 90,000 35,196(8)
Vice President of North 2003 - - - - -
American Sales 2002 - - - - -
Mark A. Willnerd .............. 2004 118,746 - 11,554 37,380 -
Vice President of 2003 101,148 - - 15,000 1,673(4)
Business Development 2002 96,140 - - 2,000 3,884(6)
- -------------------
(1) Includes quarterly sales commissions.
(2) Consists of reimbursed moving expenses.
(3) Consists of $267,024 of severance and $487,313 of stock option
compensation recognized upon exercise of non-qualified stock options.
(4) Consists of contributions to our defined contribution plans.
(5) Consists of a monthly car allowance.
(6) Includes $2,884 in contributions to our defined contribution plans and
$1,000 for a computer subsidy.
(7) Mr. Willis' employment with the Company terminated on September 7,
2004.
(8) Consists of reimbursed commuting costs and related gross up.
(9) Represents the value of restricted shares granted based on the closing
market price of common stock on the grant date. On October 31, 2003,
restricted stock grants were made to Mr. Doust for 1,470 shares, Mr.
Pease for 5,425 shares and Mr. Willnerd for 2,620 shares. At June 30,
2004 the value of the aggregate 9,515 restricted shares held by these
individuals was $47,575 based on the Company's closing market price of
$5.00 on that date. The restrictions lapse with respect to all of the
shares on the one-year anniversary of the grant date, unless
employment terminates before that date, in which case the restricted
shares are forfeited. These shares are entitled to receive dividends,
if and when declared by the Company.
22
OPTION GRANTS DURING FISCAL 2004
The following table includes information on grants of options to purchase shares
of our common stock that we made to the Named Executive Officers during fiscal
2004. All options set forth in the following table vested over a four-year
period and had 10-year terms except for options granted on December 11, 2003,
which had a five-year vesting schedule and were subject to accelerated vesting
if certain performance measurements would have been met in fiscal 2004. We
calculated the potential realizable value based on the following:
o the term of the option on its grant date;
o the assumption that the stock price on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the
option; and
o the assumption that the option is exercised and sold on the last day of its
term for the appreciated price.
Actual gains, if any, on stock option exercises are dependent on the future
performance of our common stock and overall stock market conditions.
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED
SHARES GRANTED TO EXERCISE ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION PRICE APPRECIATION
NAME OPTIONS GRANTED FISCAL 2003 SHARE DATE FOR OPTION TERM
- ---- --------------- ----------- ----- ---- ---------------
5% 10%
-- ---
Charles W. Jepson.............. 213,333 13.9% $5.00 08/22/13 $ 670,819 $1,699,989
40,000 6.24 04/26/14 156,972 397,799
------- ---------- ----------
253,333 827,791 2,097,788
Nigel S. Doust................. 28,530 4.51 10/21/13 80,920 205,067
20,000 4.65 12/11/13 58,487 148,218
------- ---------- ----------
48,530 2.7 139,407 353,285
Kerrin Pease................... 14,575 4.51 10/21/13 41,339 104,762
20,000 4.65 12/11/13 58,487 148,218
------- ---------- ----------
34,575 1.9 99,826 252,980
David Willis (1)............... 70,000 3.90 10/27/13 171,688 435,092
20,000 4.65 12/11/13 58,487 148,218
------- ---------- ----------
90,000 4.9 230,175 583,310
Mark A. Willnerd............... 27,380 4.51 10/21/13 77,658 196,801
10,000 4.65 12/11/13 29,244 74,109
------- ---------- ----------
37,380 2.1 106,902 270,910
(1) Mr. Willis' employment with the Company terminated on September 7, 2004.
FISCAL 2004 AGGREGATED OPTION EXERCISES
AND OPTION VALUES
The following table includes information regarding the number of shares acquired
through the exercise of stock options during fiscal 2004 by each of the Named
Executive Officers and the value of unexercised options as of June 30, 2004. We
have also included the values of "in-the-money" options that represent the
positive "spread" between the respective exercise prices of outstanding stock
options and the fair market value of our common stock as of June 30, 2004, as
determined by the Board of Directors.
23
We calculated the value of unexercised "in-the-money" options based on a price
of $5.00 per share, which was the closing sales price of our common stock on
June 30, 2004, as reported by the Nasdaq National Market System, minus the
exercise price. Amounts reflected do not necessarily indicate that the optionee
sold the shares of common stock.
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
EXERCISE REALIZED YEAR END AT FISCAL YEAR END
-------- -------- -------- ------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Charles W. Jepson ......... 8,750 $ 6,125 60,000 373,333 $ 206,998 $ 414,002
Steven D. Simpson ......... 175,000 497,313 345,000 -- 25,000 --
Nigel S. Doust ............ -- -- 20,418 98,112 19,193 67,587
Kerrin Pease .............. -- -- 49,896 84,679 93,131 135,661
David Willis (1) .......... -- -- -- 90,000 -- 84,000
Mark A. Willnerd .......... -- -- 30,426 46,463 30,174 29,699
(1) Mr. Willis' employment with the Company terminated on September 7, 2004.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information regarding our equity compensation
plans as of June 30, 2004:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- --------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by
shareholders(1)..................... 3,213,889 $ 8.11 980,980
Equity compensation plans
not approved
by shareholders(2).................. 35,000 $ 7.35 --
Total.................................. 3,248,889 $ 8.10 980,980
- -----------------
(1) INCENTIVE STOCK OPTION PLANS
The aggregate number of shares of common stock for which options may be
granted under the 2001 Approved Share Option Scheme is 150,000. The term of
these non-transferable stock options may not exceed ten years. The exercise
price is generally the fair market value on the date of grant or at a price
determined by our directors. During the years ended June 30, 2004 and 2003,
the Company granted options to purchase 50,550 and 58,466 shares,
respectively. At June 30, 2004, 123,342 options were outstanding under the
2001 Approved Share Option Scheme, of which 45,979 options were exercisable.
The aggregate number of shares of common stock for which options may be
granted under the 1998 Stock Plan is 4,050,000. The term of these
non-transferable stock options may not exceed ten years. The exercise price
is generally the fair market value on the date of grant or at a price
determined by our directors. During the years ended June 30, 2004 and 2003,
the Company granted options to purchase 1,629,445 and 1,195,309 shares,
24
respectively. At June 30, 2004, 2,766,409 options were outstanding under the
1998 Stock Plan, of which 1,329,181 options were exercisable.
The aggregate number of shares of common stock for which options have been
granted under the 1994 Stock Plan is 2,666,667. The term of these
non-transferable stock options may not exceed ten years. The exercise price
is generally the fair market value on the date of grant or at a price
determined by our directors. During the years ended June 30, 2004 and 2003,
there were no options granted under the 1994 Stock Plan. At June 30, 2004,
134,971 options were outstanding and exercisable under the 1994 Stock Plan.
NON-QUALIFIED STOCK PLANS
The aggregate number of shares of common stock for which options have been
granted under the 1987 Restricted Stock Option Plan is 1,668,334. The term
of these non-transferable stock options may not exceed ten years. The terms,
such as exercise price of the options, were determined at the date of grant.
The plan terminated in September 1997. At June 30, 2004, 6,667 options were
outstanding and exercisable under the 1987 Restricted Stock Option Plan.
The aggregate number of shares of common stock for which options may be
granted under the 1998 Director Stock Plan is 375,000. The term of these
non-transferable stock options may not exceed ten years. The exercise price
is generally the fair market value on the date of grant. During the years
ended June 30, 2004 and 2003, the Company granted options to purchase
140,000 and 45,000 shares, respectively. At June 30, 2004, 182,500 options
were outstanding under the 1998 Director Stock Plan, of which 52,500 options
were exercisable.
EMPLOYEE STOCK PURCHASE PLAN
The aggregate number of shares of common stock that are available for
issuance under this plan as of June 30, 2004 is 421,810 shares and is
included in column (c) above. As of June 30, 2004, there have been 1,593,811
shares issued since the plan's inception. The plan provides for annual
increases in the number of shares available for issuance on each anniversary
date of the plan's adoption equal to the lesser of (i) the number of shares
needed to restore the maximum aggregate number of shares available to
700,000, or (ii) an amount determined by the Board of Directors.
(2) WARRANTS
On January 15, 2002, in connection with obtaining our line of credit with
Silicon Valley Bank, the Company issued stock warrants to purchase 35,000
shares of the Company's common stock at an exercise price of $7.35 per
share. The warrants vested immediately upon issuance and expire seven years
from the date of the grant.
25
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
In August 2003, we entered into an agreement with Mr. Smelek, the Chairman of
our Board of Directors, that provides that we will pay Mr. Smelek $7,500 in lieu
of other benefits upon termination of his employment with us. The agreement also
provides that we will extend the period during which he has to exercise any
options to purchase our common stock until the earlier of 12 months after the
termination of his service as a director or employee of our company or the date
of expiration of the stock options set forth in the agreements governing those
options. Mr. Smelek was paid the $7,500 pursuant to this agreement in fiscal
2004.
The Company entered into an employment agreement in August 2003 with Charles W.
Jepson, our President and Chief Executive Officer, in which we agreed to pay Mr.
Jepson an annual base salary of $210,000, as well as a bonus of $24,500 per
quarter and an annual bonus of $42,000 if specified financial goals are met. We
also agreed to give Mr. Jepson 14 days notice in the event we terminate him. On
August 22, 2003, we granted him an option to acquire 213,333 shares of our
common stock with a per share exercise price equal to $5.00 per share, the fair
market value of our common stock on the date of grant. On April 16, 2004 the
Board of Directors approved the grant to Mr. Jepson of an option to purchase
40,000 shares of our common stock at an exercise price equal to $6.24 per share
in recognition of Mr. Jepson's satisfactory resolution of a business issue. Mr.
Jepson's options vest as to 25% of the shares on the first anniversary of grant
date and as to 1/48th of the shares monthly thereafter.
We have entered into employment agreements with our other executive officers and
certain key employees. We agreed that if the individual is terminated without
cause or constructively terminated, as those terms are defined below, he or she
will be entitled to receive six months of his or her then base salary, $3,000 in
lieu of fringe benefits ((pound)6,500 for Mr. Doust), all salary, vacation time
and other benefits earned and accrued before the date of termination, and a pro
rata bonus for the year in which the termination without cause or constructive
termination occurs, assuming that the individual would have received a bonus.
The individual must execute a mutually agreeable release of claims in order to
receive the benefits described in the preceding sentence.
We also have entered into agreements with each of our U.S. executive officers
and certain key employees that provide certain severance and other benefits in
connection with a change in control of the Company as defined below. If
terminated within 13 months of a change in control of our company for other than
cause, death or disability, the individual will be entitled to receive 18 months
of his or her then base salary, an amount equal to 1 1/2 times his or her annual
bonus, reimbursement of up to $10,000 for usual and customary outplacement
benefits, such as legal, accounting, employment placement expense, in lieu of
fringe benefits, all salary, vacation time and other benefits earned and accrued
before the date of termination, and continuing benefit coverage for 18 months.
The individual would also be entitled to vesting in full of all options to
purchase our common stock then held by him or her. In order to receive the
benefits for which the individual would be eligible following termination
without cause or constructive termination after a change in control, the
individual must execute a mutually agreeable release of claims. We also agreed
to gross-up the amount payable to an individual in an amount adequate to pay the
after-tax cost of any excise tax that the covered individual may owe if any of
the benefits he or she is entitled to receive under the individual's employment
agreement, as amended, are characterized as "excess parachute payments" under
Section 280G of the Internal Revenue Code.
For purposes of the individual's employment agreements, as amended, constructive
termination would occur if one or more of the following events occurred without
his or her consent:
o the individual is required to relocate or is required to travel on
Company business to a substantially greater extent than before the
change in control; or
o the individual is assigned duties or responsibilities that are
inconsistent in any respect with his or her position, the individual's
compensation is reduced, or there is any action by the Company that
results in a reduction in the scope or responsibility with respect to
the individual's duties that is inconsistent in any respect with his
or her position, authority, duties or responsibilities before the
change in control.
For purposes of each covered individual's employment agreement, as amended, a
change in control would occur if:
o a person acquires 50% or more of either (A) the outstanding common
stock of the Company or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote in the
election of directors;
26
o we merge with or are consolidated into any other corporation or entity
where our stockholders immediately before the merger or consolidation
do not hold at least 50% of the voting power of the resulting
corporation immediately after the merger or consolidation;
o there is a change in the make-up of the Board of Directors whereby the
current incumbent members cease to constitute a majority of the Board
and the new Board members were not approved by at least a majority
vote of the current incumbent Board members;
o there is a business combination and the board of directors of the
resulting combined corporation is not made up of a majority of the
Company's incumbent members of the Board of Directors before the
business combination; or
o there is a complete liquidation or dissolution of the Company.
27
REPORT OF THE COMPENSATION COMMITTEE1
SUMMARY OF EXECUTIVE COMPENSATION POLICIES
Our executive compensation program is designed to:
o enable us to attract, retain and motivate superior executive personnel;
o align compensation with business objectives and performance; and
o align incentives for executive officers with the interests of stockholders
in maximizing stockholder value.
Our executive compensation program is based on the same principles applicable to
compensation decisions for all of our employees.
We are committed to maintaining a compensation program that attracts and retains
the most qualified executives in the industry. To ensure that our compensation
program is competitive, at least annually, we compare our compensation practices
to competitive compensation data for companies of similar size and business type
and the practices of other leading companies. We set parameters based on this
review.
Employees, including Named Executive Officers, receive options based on the
Compensation Committee's evaluation of Extended Systems' performance and the
executive's individual performance. Our Compensation Committee evaluates our
performance by reviewing the extent to which we meet our strategic and business
plan goals, including such factors as:
o growth;
o profitability;
o performance relative to competitors; and
o timely new product introductions.
We measure overall individual performance against the following factors:
o long-term strategic goals; o short-term business goals;
o growth;
o profitability;
o the development of employees; and
o the fostering of teamwork and other values.
The objective of our compensation practices is to compensate our Named Executive
Officers in a manner that is consistent with their peers at comparable
companies.
NAMED EXECUTIVE OFFICER COMPENSATION PROGRAM
- --------------------------------------------
SALARY. We set a base salary range for each Named Executive Officer by reviewing
the base salary for comparable positions within a broad peer group, including
companies similar in size and businesses who compete with us in the recruitment
and retention of senior personnel. Generally, we set our competitive salary at
the midpoint for an executive officer position above the median level of those
companies that we survey. We then create a salary range based on this midpoint.
The range is designed to place a Named Executive Officer above or below the
midpoint, according to that officer's overall individual performance.
In both setting goals and measuring an executive officer's performance against
those goals, we take into account the performance of our competitors and general
economic and market conditions. None of the factors included in our strategic
and business goals are assigned a specific weight. Instead, we recognize that
these factors may change in order to adapt to specific business challenges and
to changing economic and marketplace conditions.
- ------------
1 This Report of the Compensation Committee, in addition to the section entitled
"Report of the Audit Committee" and the section entitled "Performance Graph,"
are not "soliciting material," are not deemed "filed" with the SEC, and are not
to be incorporated by reference in any filing of the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934, regardless of
date or any general incorporation language in such filing.
28
Over the past fiscal year, as a result of the company's lack of profitability,
each Named Executive Officer, except for those with sales accountability, has
been compensated below the midpoint for his or her position when compared to
competitive compensation surveys. This results from a combination of a permanent
10% salary reduction instituted for all employees in a prior fiscal year, not
authorizing salary increases for Named Executive Officers in fiscal 2004 and
offering newly hired Named Executive Officers without sales accountability a
salary below the midpoint for an executive officer position when compared to
competitive compensation for those companies that we survey.
EQUITY-BASED COMPENSATION. The purpose of our equity-based compensation program
is to provide employees, including Named Executive Officers, additional
incentive to maximize stockholder value. Option grants to Named Executive
Officers under our 1998 Stock Plan and our Scheme are designed to:
o further strengthen the link between executive compensation and stockholder
return;
o provide additional incentives to executive officers that are tied to growth
of our stock price over time; and
o encourage continued employment.
Options generally vest over a period of four years and are granted at a price
that is equal to the fair market value of our common stock on the date of grant.
In December of 2003, Named Executive Officers were granted options that had a
five-year vesting schedule and were subject to accelerated vesting if certain
performance measurements were met in fiscal 2004.
CHIEF EXECUTIVE OFFICER COMPENSATION PROGRAM
- --------------------------------------------
Charles W. Jepson became our President and Chief Executive
Officer in August 2003. The Compensation Committee used the same compensation
policy described above to determine Mr. Jepson's fiscal 2004 compensation. In
setting both the cash and equity-based elements of Mr. Jepson's compensation,
the Compensation Committee made an overall assessment of his leadership in
achieving Extended Systems' objectives with respect to financial results and
business goals while in his previous position of Vice President of Sales.
CASH COMPENSATION. Mr. Jepson's base salary reflects a consideration of both
competitive forces and Extended Systems' performance. We did not assign specific
weights to these categories. In determining the amount of Mr. Jepson's salary
for fiscal 2004, our Compensation Committee considered the following:
o total cash compensation for chief executive officers at all companies
nationally with revenues of less than $100 million as listed in the RADFORD
EXECUTIVE COMPENSATION REPORT published by the Radford Division of Aon
Consulting in July 2002;
o cash compensation at other comparable computer software companies;
o our financial results as compared to other companies within the
high-technology industry; and
o our financial performance for fiscal 2003.
As a result of this review, our Compensation Committee concluded that Mr.
Jepson's base salary was in the low end of the competitive market, and his total
direct compensation (including stock incentives) was competitive for chief
executive officers leading companies comparable in size and complexity to
Extended Systems. In August 2003, the Compensation Committee set Mr. Jepson's
annual salary at $210,000. In addition, Mr. Jepson participated in a bonus
program for fiscal 2004. The bonus amounts to be paid were based on achieving
quarterly and annual revenue and income targets established by the committee for
fiscal 2004. No bonus amounts were earned or paid to Mr. Jepson in fiscal 2004.
EQUITY-BASED COMPENSATION. Our Compensation Committee followed the same policy
described above for other executive officers to determine Mr. Jepson's incentive
awards.
On August 22, 2003, our Compensation Committee approved the grant to Mr. Jepson
of an option to purchase 213,333 shares of common stock. In determining the size
of the option to grant Mr. Jepson, our Compensation Committee reviewed Mr.
Jepson's financial, operational and strategic goals for fiscal 2004 and based
his compensation on an expectation of him achieving those goals. On April 16,
2004 the Compensation Committee approved the grant to Mr. Jepson of an option to
purchase 40,000 shares of common stock in recognition of Mr. Jepson's
satisfactory resolution of a business issue.
QUALIFYING COMPENSATION
- -----------------------
Our Compensation Committee considered the potential impact of Section 162(m) of
the Internal Revenue Code adopted under the Federal Revenue Reconciliation Act
of 1993. Section 162(m) disallows a tax deduction for any publicly held
corporation for certain executive officers' compensation that exceeds $1 million
per person in any taxable
29
year unless it is "performance-based" within the meaning of Section 162(m). Our
policy is, to the extent possible, to qualify our executive officers'
compensation for deductibility under the applicable tax laws.
Respectfully submitted,
Robert Frankenberg, Chairman of the Compensation Committee
Archie Clemins
Ralph Godfrey
30
REPORT OF THE AUDIT COMMITTEE
The following is the report of our Audit Committee with respect to our audited
financial statements for fiscal 2004, included in our 2004 Annual Report on Form
10-K, as well as our unaudited quarterly financial statements for fiscal 2004.
The Audit Committee evaluates audit performance, manages relations with our
independent accountants and evaluates policies and procedures relating to
internal accounting functions and controls. The Board of Directors has adopted a
written charter for the audit committee that details the responsibilities of the
Audit Committee, which is attached as Appendix A to this proxy statement. This
report relates to the activities undertaken by the audit committee in fulfilling
its responsibilities.
The Audit Committee members are not professional accountants or auditors, and
their functions are not intended to duplicate or to certify the activities of
management and the independent accountants. The Audit Committee oversees our
financial reporting process on behalf of the Board of Directors. Our management
has the primary responsibility for the financial statements and reporting
process, including our systems of internal controls. In fulfilling its oversight
responsibilities, the Audit Committee reviewed and discussed with management the
audited financial statements included in the Annual Report on Form 10-K for
fiscal 2004. This review included a discussion of the quality and the
acceptability of our financial reporting and controls, including the clarity of
disclosures in the financial statements. In addition, the Audit Committee
reviewed processes that already are in place as well as those that will be
implemented to comply with the requirements of the Sarbanes-Oxley Act as they
become effective.
The Audit Committee also reviewed and discussed with our independent
accountants, who are responsible for expressing an opinion on the conformity of
our audited financial statements with generally accepted accounting principles,
their judgments as to the quality and the acceptability of our financial
reporting and other matters required to be discussed with the Audit Committee
under generally accepted auditing standards in the United States including
Statement on Auditing Standards No. 61. The Audit Committee has received the
written disclosures and the letter from the independent accountants required by
Independence Standards Board Statement No. 1. The Audit Committee discussed with
our independent accountants their independence from management and our company,
including the matters in their written disclosures required by Independence
Standards Board Statement No. 1.
The Audit Committee further discussed with our independent accountants the
overall scope and plans for their audits. The Audit Committee meets periodically
with the independent accountants, with and without management present, to
discuss the results of the independent accountants' examinations and evaluations
of our internal controls, and the overall quality of our financial reporting.
Based on the review and discussions referred to above in this report, the Audit
Committee recommended to our Board of Directors that the audited financial
statements be included in our Annual Report on Form 10-K for fiscal 2004, for
filing with the SEC.
AUDIT, AUDIT-RELATED AND NON-AUDIT SERVICES AND FEES
- ----------------------------------------------------
During fiscal 2004, PwC provided Extended Systems with various audit,
audit-related and non-audit services. Aggregate fees and reimbursed expenses of
approximately $287,448 were billed or will be billed for professional services
rendered for the annual audit and the quarterly reviews of our consolidated
financial statements for fiscal 2004. Aggregate fees of approximately $66,000
were billed for professional services related to a failed acquisition. The Audit
Committee believes that the provision of non-audit services during fiscal 2004
was compatible with maintaining PwC's independence and determined that those
services did not adversely affect PwC `s independence.
Respectfully submitted,
Jody B. Olson, Chairman of the Audit Committee
James R. Bean
Klaus-Dieter Laidig
31
PERFORMANCE GRAPH
The following graph compares the performance of our common stock with the Nasdaq
Stock Market Index (U.S.), the Nasdaq Computer & Data Processing Index, and the
Russell 2000 Index for the period from June 30, 1999 to June 30, 2004. We have
added the Nasdaq Computer & Data Processing Index so that our stockholders will
be able to make comparisons to companies in our industry. The graph assumes that
on June 30, 1999 $100 was invested in our common stock and in the Nasdaq Stock
Market Index, the Nasdaq Computer & Data Processing Index and the Russell 2000
Index, and that all dividends were reinvested. We have not declared or paid any
dividends on our common stock. Stockholder returns over the indicated period
illustrated below should not be considered indicative of future stockholder
returns.
[ PERFORMANCE GRAPH APPEARS HERE ]
EXTENDED SYSTEMS INC
Cumulative Total Return
-----------------------------------------------------------------
6/99 6/00 6/01 6/02 6/03 6/04
EXTENDED SYSTEMS INCORPORATED 100.00 2075.68 149.62 72.43 84.32 108.11
NASDAQ STOCK MARKET (U.S.) 100.00 192.96 68.78 58.41 56.14 76.85
RUSSELL 2000 100.00 114.32 115.07 105.09 103.37 137.86
NASDAQ COMPUTER & DATA PROCESSING 100.00 146.56 84.94 51.87 52.83 69.63
32
STOCKHOLDER PROPOSALS
STOCKHOLDER PROPOSALS FOR THE 2005 ANNUAL MEETING
- -------------------------------------------------
If you intend to submit a proposal for inclusion in proxy materials for the
Company's 2005 Annual Meeting, your proposal must be received by our Corporate
Secretary no later than June 30, 2005. If you intend to submit a proposal for
consideration at the 2005 Annual Meeting that is not eligible for inclusion in
the proxy statement and form of proxy relating to that meeting, your proposal
must be received by our Corporate Secretary no later than June 30, 2005. .All
proposals should be sent to our Corporate Secretary at 5777 North Meeker Avenue,
Boise, Idaho 83713.
STOCKHOLDER NOMINATIONS FOR DIRECTOR
- ------------------------------------
Stockholders wishing to nominate candidates for election to the Board of
Directors at an annual meeting must do so in accordance with the Company's
bylaws by giving timely notice in writing to the Corporate Secretary as
described above. The notice must set forth, as to each person the stockholder
proposes to nominate for election as a director: (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class and number of shares of the Company
that are beneficially owned by the person, (iv) a description of all
arrangements or understandings among the stockholder, the proposed nominee, and
any other person or persons (naming that person or persons), pursuant to which
the nomination is being made by the stockholder, (v) the person's written
consent to being named in the proxy statement, if any, as a nominee and to
serving as a director if elected, and (vi) any other information relating to the
person that is required to be disclosed in solicitations of proxies for
elections of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The notice must also include, as to the stockholder giving the
notice: (i) the stockholder's name and address as they appear on the Company's
books, (ii) the class and number of shares of the Company that the stockholder
beneficially owns, (iii) any material interest of the stockholder in the
nomination, and (iv) any other information that is required to be provided by
the stockholder pursuant to Regulation 14A under the Exchange Act.
Shareholders wishing to make any director nominations at any special meeting of
stockholders held for the purpose of electing directors must do so by delivering
timely notice to our Corporate Secretary setting forth the information described
above for annual meeting nominations. To be timely, a stockholder's notice
regarding the nomination of a candidate for election at a special meeting must
be delivered to or mailed and received by our Corporate Secretary at the
principal executive offices of the Company not earlier than the 90th day before
the special meeting and not later than the 10th day following the day on which
public announcement is first made of the date of the special meeting.
The chairman of an annual or special meeting may, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by the Company's bylaws, in which case
the defective nomination will be disregarded.
OTHER MATTERS
We are not aware of any business to be presented at the 2004 Annual Meeting
other than the proposals discussed above. If other proposals are properly
brought before the meeting, any proxies returned to us will be voted as the
proxy holders see fit.
You can contact us at:
5777 North Meeker Avenue
Boise, Idaho 83713
Attn: Investor Relations
208-322-7575
xtnd@extendsys.com
It is important that your shares be represented at the 2004 Annual Meeting,
regardless of the number of shares that you hold. Therefore, we urge you to
execute and return, at your earliest convenience, the accompanying proxy card in
the envelope provided.
33
THE BOARD OF DIRECTORS
Dated: October 28, 2004
34
APPENDIX A
CHARTER OF THE AUDIT COMMITTEE OF
THE BOARD OF DIRECTORS OF
EXTENDED SYSTEMS INCORPORATED
I. PURPOSE
The Audit Committee ("Committee") shall:
1. Oversee the integrity of the Company's financial statements including
accounting and financial reporting processes, system of internal controls
and disclosure processes.
2. Oversee the independence, performance and qualifications of the independent
auditor.
3. Assist the Board with compliance with legal and regulatory requirements.
4. Discharge the functions of the Audit committee imposed by all regulatory
requirements.
II. ORGANIZATION
The Committee shall consist of three directors, each of whom shall satisfy the
applicable independence and requirements NASDAQ Stock Market or of any other
pertinent regulatory requirements. The members of the committee shall be
appointed by the independent members of the Board and may be removed by the
Board at its discretion. All members will have sufficient financial experience
and ability to enable them to discharge their responsibilities and at least one
member of the Committee must be a financial expert, as that term is defined by
the Securities and Exchange Commission.
The Board of Directors shall annually elect committee members. Committee members
shall serve until their successors shall be duly elected and qualified. The
Committee's chairman shall be designated by the full Board or, if it does not do
so, the Committee members shall elect a chairman by vote of a majority of the
full Committee. The Committee may form and delegate authority to subcommittees
when appropriate. Such subcommittees shall be composed solely of independent
directors and have a published subcommittee charter.
III. RESPONSIBILITIES
The Committee shall have the power and authority of the Board to perform the
following duties and to fulfill the following responsibilities:
External Financial Reporting
- ----------------------------
1. Discuss with management and the independent auditor the annual audited
financial statements and quarterly financial statements, including matters
required to be reviewed under applicable legal, regulatory, or NASDAQ
requirements, including but not limited to disclosures under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and analysis of significant and/or unusual accounting and reporting
judgments made in connection with the preparation of the company's
financial statements.
2. Discuss with management and the independent auditor, as appropriate,
earnings and press releases, including the use of "pro forma" or "adjusted"
non-GAAP information, as well as financial information and earnings
guidance contained in the press releases and provided to analysts. Such
discussions may be done generally and may include discussions of the types
of information to be disclosed and the types of presentation to be made and
need not take place in advance of each instance in which the Company may
provide earnings guidance.
3. Review and approve major changes in the Company's accounting and reporting
principles and practices as may be recommended by management or the
independent auditor.
4. Review the Company's financial reporting and accounting standards and
principles, significant changes in such standards or principles or in their
application, and the key accounting decisions affecting the financial
statements, including alternatives to, and the rationale for, the decisions
made.
5. Review, with the chief financial officer, the controller, or such others as
the committee deems appropriate, the Company's internal system of financial
and disclosure controls.
6. Prepare and publish an annual Committee report in the Company's proxy
statement.
35
7. Review and discuss with management risk assessment and risk management
policies, including review of the Company's major financial risk exposures
and steps management has taken to monitor and control such exposures.
Independent Auditors
- --------------------
8. Appoint, retain, evaluate and, when appropriate, replace the Company's
independent auditors engaged to prepare and/or issue an audit report or
perform other audit, review or attest services for the Company. Selection
of the independent auditor shall be subject to stockholder ratification.
The committee shall have the sole authority and responsibility to select,
terminate and determine the compensation of the independent auditor. The
committee or an authorized committee member must pre-approve any audit and
permitted non-audit service provided to the Company by the Company's
independent auditor.
9. Review the scope and extent of the independent auditor's annual audit,
including factors identified by the independent auditor in determining the
scope of the annual audit and major risk factors. Meet with the independent
auditor prior to the audit to discuss the planning and staffing of the
audit.
10. Review and discuss with the independent auditor the report the independent
auditor is required to make to the Committee regarding:
o All critical accounting policies and practices,
o All alternative treatments within GAAP for policies and practices
related to material items that have been discussed with management
including the ramifications of the use of alternative disclosures and
treatments and the treatments preferred by the independent auditor,
o Other material written communications between the independent auditor
and management including the management letter and any schedule of
unadjusted audit differences,
o Material weaknesses in the Company's systems of internal controls, and
o All material correcting adjustments identified by the independent
auditor.
11. Review and discuss with management and the independent auditor:
o Major issues regarding accounting principles and financial statement
presentation, including any significant changes in the Company's
selection or application of accounting principles, and major issues
relating to the adequacy of the Company's internal controls and any
special audit steps adopted in light of material control deficiencies,
o Any analysis prepared by management or the independent auditor setting
forth significant financial reporting issues and judgments make in
connection with the preparation of the Company's financial statements,
including the analysis of the effects of alternative GAAP methods on
the Company's financial statements,
o Any accounting adjustments that were noted or proposed by the
independent auditor but were "passed" as immaterial or otherwise, and
o Any communication between the audit team and the independent auditor's
national office with respect to auditing or accounting issues
presented by the engagement.
12. Obtain and review at least annually a written report form the independent
auditor delineating the auditing firm's internal quality-control
procedures, any material issues raised within the preceding five years by
the auditing firm's internal quality-control review, by peer reviews of the
firm, or by any governmental or other inquiry or investigation relating to
any audit conducted by the firm. The committee will also review steps taken
by the auditing firms to address any finding in any of the foregoing
reviews. Also to assess auditor independence and the absence of conflicts
of interest, the committee will review at least annually all relationships
between the independent auditor and the Company.
13. Discuss with management and the independent auditor, as appropriate, any
audit problems or difficulties and management response and the Company's
risk assessment and risk management policies, including the Company's major
financial risk exposure and steps taken by management to monitor and
mitigate such exposure.
14. Review and evaluate the lead partner of the independent auditor, taking
into account opinions of management. Confirm with the independent auditor
that the independent auditor is in compliance with the SEC's requirements
36
concerning the rotation of the lead (or coordinating) audit partner having
primary responsibility for the audit and the audit partner responsible for
reviewing the audit.
15. Set policies for hiring employees or former employees of the Company's
independent auditor.
Compliance Oversight Responsibilities
- -------------------------------------
16. Review and investigate matters pertaining to the integrity of the
management including conflicts of interest or adherence to codes of ethics
as required in the policies of the Company. In connection with these
reviews, the Committee will meet, as deemed appropriate, with outside
counsel and other Company officers and employees.
17. Establish procedures for receipt, retention, investigation and treatment of
complaints received regarding accounting, internal accounting controls or
auditing matters, including procedures for confidential, anonymous
submission by employees of concerns regarding questionable accounting,
auditing or internal control matters. Conduct investigation of such
complaints and concerns submitted to the Committee.
18. Discuss with management and the independent auditor any correspondence from
or with regulators or governmental agencies and any published reports that
raise material issues regarding the Company's financial statements or
accounting policies.
19. Meet periodically with the Company's outside counsel to review regulatory
and legal matters that could have a significant impact on the Company's
financial statements, compliance policies and programs.
20. Review annually a summary of the directors' and officers' expenses and
officers use of corporate assets.
V. COMMITTEE PROCEDURES
1. The Committee shall review and reassess this Charter annually and recommend
any proposed changes to the Board
2. The Committee shall annually review and evaluate the Committee's own
performance;
3. The chairman of the Committee will preside at each meeting of the Committee
and, in consultation with the other members of the Committee, shall set the
length of each meeting and the agenda of items to be addressed at each
meeting. The chairman will ensure that the agenda for each meeting is
circulated in advance of the meeting.
4. The Committee will meet as often as necessary, but not less than quarterly
to carry out its responsibilities. The meetings may be called by the
Committee chair, the Chairman of the Board, or the CEO.
5. The Company's Secretary shall act as secretary of the Committee, and will
take and distribute minutes of the Committee's proceedings. The Committee
shall report Committee activities and minutes to the Board.
6. The Committee is empowered to investigate any matter brought to its
attention with full access to all books, records, facilities and personnel
of the Company, including managers and officers.
7. This standing resolution will remain in effect until it is duly modified or
rescinded. This supersedes all prior board or Committee resolutions with
respect to this subject matter.
VI. COMMITTEE RESOURCES
The Committee shall have unrestricted access to Company personnel, records, and
information needed to execute its responsibilities. The Committee shall have the
authority to obtain advice and seek assistance from external legal counsel,
internal or external accounting and other advisors. The Committee shall have the
sole authority to retain and terminate any third party or consultant used in the
performance of its duties. The Committee shall have the sole authority to:
1. Determine the extent of funding necessary for the payment of compensation
to any consultant retained to advise the Committee and
37
2. Set other consultant retention terms. The Company shall provide all funding
deemed necessary by the Committee for such consultants and resources.
V. LIMITATION OF COMMITTEE'S ROLE
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Company's financial statements and disclosures are complete
and accurate and are in accordance with generally accepted accounting principles
and applicable rules and regulations. These are the responsibilities of
management and the independent auditors.
38
APPENDIX B
CHARTER OF THE COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS OF
EXTENDED SYSTEMS INCORPORATED
I. PURPOSE
The Compensation Committee ("Committee") shall:
1. Discharge the responsibilities delegated to it by the Board related to the
compensation of the Company's Chief Executive Officer and each of the
Company's Executive Officers;
2. Have overall responsibility for preparing, evaluating and recommending to
the Board of Directors all compensation plans, policies, and benefit
programs of the Company as they affect the Chief Executive Officer ("CEO")
and Executive Officers;
3. Make recommendations to the Board of Directors ("Board") for final action
and approval by the Board of all compensation of the Company's CEO and each
of the Company's Executive Officers;
4. Administer the Company's stock option and other equity based plans; and
5. Produce an annual report on executive compensation for inclusion in the
Company's proxy statement.
II. ORGANIZATION
The Committee shall consist of three or more directors, each of whom shall
satisfy the applicable independence requirements of the NASDAQ Stock Market or
of any other pertinent regulatory requirements.
The Board shall annually elect committee members. Committee members shall serve
until their successors shall be duly elected and qualified. The Committee's
chairman shall be designated by the full Board or, if it does not do so, the
Committee members shall elect a chairman by vote of a majority of the full
Committee. The Committee may form and delegate authority to subcommittees when
appropriate. Such subcommittees shall be composed solely of independent
directors and have a published subcommittee charter.
III. RESPONSIBILITIES
The Committee shall make recommendations to the Board after performing the
following duties and responsibilities as a Committee:
1. The Compensation Committee shall, at least annually, review the annual base
salaries and annual incentive opportunities of the CEO and Executive
Officers. In addition, the committee shall at least annually, review the
performance of the CEO of the Company. The committee will establish the
objectives and goals in the CEO's compensations plan, which will be based
on the overall goals and objectives of the company as approved by the
Company's Board of Directors. The Committee will evaluate the CEO's
performance in light of those goals and objectives and recommend to the
Board of Directors the Chief Executive Officer's compensation based on this
evaluation. In determining the incentive components of CEO compensation,
the Committee shall consider the company's performance and relative
shareholder return, the value of similar incentive awards to CEOs at
comparable companies, the awards given to the CEO in past years, and other
factors that the Committee considers relevant.
2. In addition, periodically and as and when appropriate, the Committee shall
review the following as they affect the CEO and Executive Officers: a) all
incentive awards and opportunities including both cash-based and
equity-based awards and opportunities; b) any employment agreements and
severance arrangements; c) any change-in-control agreements and
change-in-control provisions affecting any elements of compensation and
benefits; and d) any special or supplemental compensation and benefits.
3. The Committee shall also:
o receive periodic reports on the Company's compensation programs as
they affect all employees.
o establish criteria for the granting of options to the Company's
officers and other employees, under stock option plans maintained by
the Company, and recommend to the Board the granting of options in
accordance with such criteria;
39
o monitor the dilution impact of the Company's stock option plans, and
establish any necessary guidelines and make appropriate
recommendations to the Board to ensure that the plans are administered
in the best interests of the stockholders, as well as employees;
o review major organizational and staffing matters;
o periodically monitor the adequacy the Company's defined contribution
savings plans;
o perform any other activities consistent with this Charter, the
Company's By-Laws and governing law as the Committee or the Board deem
appropriate.
V. COMMITTEE PROCEDURES
1. The Committee shall review and reassess this Charter annually and recommend
any proposed changes to the Board
2. The Committee shall annually review and evaluate the Committee's own
performance;
3. The chairman of the Committee will preside at each meeting of the Committee
and, in consultation with the other members of the Committee, shall set the
length of each meeting and the agenda of items to be addressed at each
meeting. The chairman will ensure that the agenda for each meeting is
circulated in advance of the meeting.
4. The Committee will meet as often as necessary, but not less than quarterly
to carry out its responsibilities. The meetings may be called by the
Committee chair or the Chairman of the Board.
5. The Company's Secretary shall act as secretary of the Committee, and will
take and distribute minutes of the Committee's proceedings. The committee
shall report Committee activities and minutes to the Board.
6. The Committee is empowered to investigate any matter brought to its
attention with full access to all books, records, facilities and personnel
of the Company.
7. This charter will remain in effect until it is duly modified or rescinded.
This supersedes all prior committee charters with respect to this subject
matter.
V. COMMITTEE RESOURCES
The Committee shall have the authority to obtain advice and seek assistance from
external legal counsel, internal or external accounting and other advisors. The
Committee shall have the sole authority to retain and terminate any consultant
used to assist in the evaluation of the compensation of the CEO and other
officers of the Company. The Committee shall have the sole authority to:
1. Determine the extent of funding necessary for the payment of compensation
to any consultant retained to advise the Committee and
2. Set other consultant retention terms. The Company shall provide all funding
deemed necessary by the Committee for such consultants and resources.
40
APPENDIX C
CHARTER OF THE NOMINATING COMMITTEE OF
THE BOARD OF DIRECTORS OF
EXTENDED SYSTEMS INCORPORATED
PURPOSE. The Board established this Committee to assist the Board in identifying
qualified individuals for Board membership, to recommend the composition of the
Board and its committees, to monitor a process to assess board effectiveness,
and to develop and implement the company's corporate governance guidelines.
COMMITTEE MEMBERSHIP. The Committee shall consist of all independent members of
the Board of Directors. All members of the Committee shall meet the independence
requirements of the Nasdaq Stock Market Exchange.
COMMITTEE AUTHORITY AND RESPONSIBILITIES. The Committee shall:
1. Identify and recommend for election individuals who meet the criteria the
Board has established for board membership. The Committee shall also
recommend nominees to be presented for election at the Corporation's annual
meeting of shareholders;
2. Review director compensation and benefits on an annual basis;
3. Review the Board's committee structure and recommend for Board approval the
composition of each Board committee;
4. Recommend to the Board the response to any shareholder proposal received by
the Corporation;
5. Develop and recommend to the Board for its approval a set of corporate
governance guidelines. The Committee shall review the guidelines on an
annual basis, or more frequently, if appropriate, and recommend changes as
necessary; and
6. Develop and recommend to the Board for its approval an annual
self-evaluation process of the Board and its committees. The Committee
shall oversee the annual self-evaluations and report the findings of such
evaluations to the Committee of Outside Directors.
COMMITTEE PROCEDURE. The Committee shall:
- -------------------
1. Review and reassess this Charter annually and recommend any proposed
changes to the Board.
2. Meet at least twice annually but will meet as often as necessary to carry
out its responsibilities. The meetings may be called by the Committee
chair, the chairman of the Board, or the CEO.
3. Form and delegate authority to subcommittees if so desired.
4. Keep minutes and shall report Committee activities to the Board.
5. Review its own performance annually.
6. Have the authority to retain and terminate any search firm engaged to
assist in identifying director candidates and shall have sole authority to
approve the firm's fees and the other terms and conditions of the firm's
retention.
7. Have the authority to obtain advice and assistance from internal or
external legal, governance, or other advisors as it deems appropriate.
This charter will remain in effect until it is duly modified or rescinded. This
supersedes all prior board or committee resolutions with respect to this subject
matter.
41
PROXY
EXTENDED SYSTEMS INCORPORATED
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 9, 2004
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF EXTENDED SYSTEMS
INCORPORATED
The undersigned hereby appoints Charles W. Jepson and Valerie A. Heusinkveld,
and each of them, proxies and attorneys-in-fact with full power of substitution,
and authorizes them to represent and vote, as indicated on the reverse side, all
shares of Extended Systems Incorporated stock that the undersigned will be
entitled to vote, and, in their discretion, to vote upon such other business as
may properly come before the Annual Meeting of Stockholders of Extended Systems
Incorporated to be held on December 9, 2004, and any adjourned or postponed
sessions thereof, with all powers the undersigned would possess if personally
present.
Attendance of the undersigned at the meeting or at any adjourned or postponed
sessions thereof will not be deemed to revoke this proxy unless the undersigned
affirmatively indicates at the meeting the intention to vote the shares
represented by this proxy in person. If the undersigned is not the registered
direct holder of the shares, the undersigned must obtain appropriate
documentation from the registered holder in order to be able to vote the shares
in person. If the undersigned holds any of the shares in fiduciary, custodial or
joint capacity or capacities, this proxy is signed by the undersigned in every
such capacity as well as individually.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED. IF NO DIRECTION IS GIVEN, THE SHARES WILL BE VOTED "FOR" PROPOSALS
1, 2, 3, 4 AND 5. THE PROXIES MAY VOTE IN THEIR DISCRETION AS TO OTHER MATTERS
THAT MAY COME BEFORE THE MEETING.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SEE REVERSE
SIDE SIDE
DETACH HERE
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
A VOTE FOR PROPOSALS 1, 2, 3, 4, and 5 ARE RECOMMENDED BY THE BOARD OF
DIRECTORS.
VOTE ON DIRECTORS
1. Proposal to elect the following Class II Director to serve for a two-year
term expiring in 2006: NOMINEE: Klaus-Dieter Laidig
FOR AGAINST ABSTAIN
/ / / / / /
2. Proposal to elect the following Class III Directors to serve for a three-year
term expiring in 2007: NOMINEES:
(2a) Archie Clemins FOR AGAINST ABSTAIN
/ / / / / /
(2b) Raymond A. Smelek FOR AGAINST ABSTAIN
/ / / / / /
VOTE ON PROPOSALS
3. Proposal to approve an amendment to the Extended FOR AGAINST ABSTAIN
Systems Incorporated 1998 Stock Plan to increase / / / / / /
the number of shares of common stock reserved for
issuance thereunder by 500,000.
4. Proposal to approve an amendment to the Extended FOR AGAINST ABSTAIN
Systems 1998 Director Option Plan to increase the / / / / / /
number of shares of common stock reserved for
issuance thereunder by 200,000.
5. Proposal to approve an amendment to the Extended FOR AGAINST ABSTAIN
Systems Incorporated 2001 Approved Share Option / / / / / /
Scheme to increase the number of shares of common
stock reserved for issuance thereunder by 25,000.
Please sign this proxy exactly as your name appears on Extended Systems' books.
Joint owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and, where more than one name appears,
a majority must sign. A corporation's proxy should be signed by an authorized
officer, who should state his or her title.
Signature: Date: Signature: Date:
------------------ ----- ------------------ -----