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SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the registrant [X]
Filed by a party other than the registrant [_]
Check the appropriate box:
[_] Preliminary proxy statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
NEON SYSTEMS, INC.
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(Name of Registrant as Specified in Its Charter)
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(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):
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(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: ____________________________________________________________
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[Neon Systems, Inc. logo]
14100 Southwest Freeway, Suite 500
Sugar Land, Texas 77478
February 27, 2002
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
NEON Systems, Inc., to be held on Tuesday, March 26, 2002 at 10:00 a.m., Sugar
Land, Texas time, at our offices located at 14100 Southwest Freeway, Suite
500, Sugar Land, Texas 77478. Details regarding the meeting and the business
to be conducted are more fully described in the accompanying Notice of Annual
Meeting and Proxy Statement. We hope you will be able to attend the annual
meeting on March 26, 2002 to listen to information regarding actions to be
taken, and to ask any questions you may have.
Your vote is very important. Whether or not you plan to attend the annual
meeting, please vote as soon as possible. In order to facilitate your voting,
you may vote in person at the meeting, by sending in your written proxy, by
telephone, or by using the Internet. Your vote by telephone, over the Internet
or by written proxy will ensure your representation at the annual meeting if
you cannot attend in person. Please review the instructions on the proxy card
regarding each of these voting options.
Thank you for your on-going support and continued interest in NEON Systems,
Inc.
Very truly yours,
Louis R. Woodhill
President and Chief Executive
Officer
NEON SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 26, 2002
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the annual meeting of the stockholders of NEON
Systems, Inc., a Delaware corporation, will be held on Tuesday, March 26, 2002
at 10:00 a.m., Sugar Land, Texas time, at our offices located at 14100
Southwest Freeway, Suite 500, Sugar Land, Texas 77478, for the following
purposes:
1. To elect three Class II directors to the Board of Directors;
2. To ratify the selection of KPMG LLP as independent auditors for the
fiscal year ending March 31, 2002;
3. To vote on our proposal to amend our Amended and Restated Certificate
of Incorporation to eliminate the supermajority voting requirement
applicable to mergers and similar transactions;
4. To adopt NEON's 2002 Stock Plan;
5. To adopt NEON's 2002 Director Option Plan; and
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the proxy
statement accompanying this notice. Only stockholders of record at the close
of business on February 26, 2002 are entitled to receive notice of, to attend
and to vote at the meeting and any adjournment of the meeting. All
stockholders are cordially invited to attend the meeting in person. Any
stockholder attending the meeting and entitled to vote may vote in person even
if such stockholder returned a proxy.
FOR THE BOARD OF DIRECTORS
James Bradford Poynter
Secretary
Sugar Land, Texas
February 27, 2002
IMPORTANT: WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE OR YOU MAY VOTE BY TELEPHONE OR OVER THE INTERNET FOLLOWING THE
DIRECTIONS ON THE PROXY CARD; EITHER METHOD WILL ENSURE REPRESENTATION OF
YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
This proxy statement and proxy card are being distributed to the stockholders
on or about March 5, 2002.
NEON SYSTEMS, INC.
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Q: Why am I receiving this proxy statement?
A: The Board of Directors of NEON Systems, Inc., a Delaware corporation, is
furnishing this proxy statement to stockholders of NEON as of February 26,
2002 in connection with the solicitation of proxies to be voted at NEON's
annual meeting of stockholders, or at any adjournment of the meeting, for the
purposes set forth in the accompanying Notice of Annual Meeting of
Stockholders. The meeting will be held at NEON's principal executive offices
at 14100 Southwest Freeway, Suite 500, Sugar Land, Texas 77478, on Tuesday,
March 26, 2002 at 10:00 a.m., Sugar Land, Texas time.
Q: Who is soliciting my vote?
A: This proxy statement is furnished in connection with the solicitation of
your vote by the Board of Directors of NEON. NEON will bear the cost of
solicitation of proxies. In addition to the use of the mails, proxies may also
be solicited by personal interview, facsimile transmission and telephone by
directors, officers, employees and agents of NEON, none of whom will receive
additional compensation. NEON will also supply brokers, nominees or other
custodians with the number of proxy forms, proxy statements and annual reports
they may require for forwarding to beneficial owners and NEON will reimburse
these persons for their expenses.
Q: When was this proxy statement mailed to stockholders?
A: This proxy statement was first mailed to stockholders on or about March 5,
2002.
Q: What may I vote on?
A:. The election of three Class II directors to serve on the Board of
Directors;
. The ratification of KPMG LLP as independent auditors for the fiscal year
ending March 31, 2002;
. The amendment of our Amended and Restated Certificate of Incorporation to
eliminate the supermajority voting requirement applicable to mergers and
similar transactions;
. The adoption of NEON's 2002 Stock Plan;
. The adoption of NEON's 2002 Director Option Plan; and
. At the discretion of the persons named in the enclosed form of proxy, on
any other matter that may properly come before the meeting or any
adjournment thereof.
Q: How does the Board recommend I vote on the proposals?
A:. The Board recommends a vote FOR each of the nominees to serve on the
Board of Directors;
. The Board recommends a vote FOR the ratification of the independent
auditors;
. The Board recommends a vote FOR the amendment of our Amended and Restated
Certificate of Incorporation;
. The Board recommends a vote FOR the adoption of NEON's 2002 Stock Plan;
and
. The Board recommends a vote FOR the adoption of NEON's 2002 Director
Option Plan.
Q: Who is entitled to vote?
A: Stockholders of record at the close of business on February 26, 2002 (the
record date) may vote at this meeting.
1
Q: How do I vote?
A: Stockholders entitled to vote may vote by any one of the following methods:
. By mail by signing, dating and completing the enclosed proxy card and
returning it in the enclosed postage-prepaid envelope;
. By telephone by calling the toll-free telephone number and following the
instructions for voting by telephone set forth on your proxy card;
. By the Internet by following the instructions for Internet voting set
forth on your proxy card; or
. In person, at the meeting.
If you hold your shares through a bank, broker or other nominee, they will
give you separate instructions for voting your shares.
Q: How can I revoke or change my vote?
A: If you have already voted and wish to change or revoke your proxy, you may
do so at any time prior to the meeting by any one of the following methods:
. Notifying in writing James Bradford Poynter, Secretary, NEON Systems,
Inc., 14100 Southwest Freeway, Suite 500, Sugar Land, Texas, 77478;
. Voting in person at the meeting;
. Returning a later-dated proxy card that is received prior to the meeting;
or
. Subsequently voting by telephone or by following the Internet
instructions found on your proxy card.
Q: Who will count the votes?
A: A representative of our transfer agent, ChaseMellon Shareholder Services,
will count the votes and act as inspector of the election.
Q: Is my vote confidential?
A: Proxy cards, ballots and voting tabulations of Internet and telephone votes
that identify individual stockholders are mailed or returned directly to
ChaseMellon and handled in a manner that protects your voting privacy. Your
vote will not be disclosed except:
. as needed to permit ChaseMellon to tabulate and certify the vote; or
. as required by law.
Your identity will be kept confidential unless you ask that your name be
disclosed.
Q: How many votes do I have?
A: As of the close of business on the record date of February 26, 2002,
8,672,103 shares of common stock were issued and outstanding. Every
stockholder is entitled to one (1) vote for each share of common stock held.
Q: What is a "Quorum" and what vote is required to pass proposals?
A: A "quorum" is a majority of the outstanding shares. The person with the
right to vote the shares may be present at the meeting or represented by
proxy. There must be a quorum for the meeting to be held. Abstentions and
broker non-votes are each included in the determination of the number of
shares present at the meeting for purposes of determining a quorum. A
plurality of the votes cast at the meeting is required to elect directors.
Cumulative voting is not permitted in the election of directors. The
affirmative vote of a majority of the voting
2
power represented at the meeting and entitled to vote is required on all other
matters subject to approval; except for the amendment to our Amended and
Restated Certificate of Incorporation, which requires the affirmative vote of
two-thirds of our outstanding shares of common stock.
Q: Who can attend the annual meeting and how do I get on the guest list?
A: All stockholders as of the close of business on the record date of February
26, 2002 can attend. To be included on the guest list, you may check the box
on your proxy card. If your shares are held by a broker and you would like to
attend, please write to James Bradford Poynter, Secretary, NEON Systems, Inc.,
14100 Southwest Freeway, Suite 500, Sugar Land, Texas, 77478. Include a copy
of your brokerage account statement or omnibus proxy (which you can get from
your broker), and we will place your name on the guest list.
Q: How will voting on any other business be conducted?
A: We do not know of any business to be considered at this annual meeting
other than the proposals described in this proxy statement. If any other
business is presented at the annual meeting, your signed proxy card gives
discretionary authority to Louis R. Woodhill or James Bradford Poynter to vote
on such matters.
Q: When are the stockholder proposals for the next annual meeting due?
A: Stockholder proposals will be eligible for consideration for inclusion in
the proxy statement for the next annual meeting, which will be held in the
fourth calendar quarter of 2002, pursuant to Rule 14a-8 under the Securities
and Exchange Act of 1934 if such proposals are submitted in writing to James
Bradford Poynter, Secretary, NEON Systems, Inc., 14100 Southwest Freeway,
Suite 500, Sugar Land, Texas, 77478 and received before the close of business
on July 31, 2002. Notices of stockholder proposals submitted outside the
processes of Rule 14a-8 will be considered timely, pursuant to the advance
notice requirement set forth in NEON's bylaws, if such notices are received by
the secretary of NEON not less than 60 nor more than 90 days prior to the
scheduled date of the annual meeting in the manner provided in the bylaws or,
if less than 70 days' notice or prior public disclosure of the date of the
annual meeting is given or made to stockholders, stockholders may give timely
notice of a proposal no later than 10 days after the day such notice or public
disclosure was made, whichever was earlier.
Q: Where are your principal executive offices?
A: Our principal executive offices are located at 14100 Southwest Freeway,
Suite 500, Sugar Land, Texas 77478, telephone number (281) 491-4200.
3
PROPOSAL I
ELECTION OF DIRECTORS
We currently have eight directors holding office. The directors are divided
into three classes with staggered terms as follows:
. Class I Directors, Louis R. Woodhill, James R. Woodhill and Charles E.
Noell, III, whose terms will expire at the annual meeting to be held in
2003.
. Class II Directors, Richard Holcomb, George H. Ellis and Norris van den
Berg, whose terms expire at this Annual Meeting and if re-elected will
expire at the annual meeting to be held in 2004.
. Class III Directors, John J. Moores and Peter Schaeffer, whose terms will
expire at the next annual meeting to be held in the fourth calendar
quarter of 2002.
Vacancies on the Board of Directors or newly created directorships will be
filled by a vote of the majority of the directors then in office and any
director so chosen will hold office until the next election of the class for
which that director was chosen.
At the annual meeting of stockholders to be held on March 26, 2002, three
directors will be elected as Class II Directors for terms expiring at the
annual meeting to be held in 2004 and until their respective successors are
elected and qualified. Nominees for election this year are: Richard Holcomb,
George H. Ellis and Norris van den Berg. Shares represented by returned and
executed proxies will be voted, unless otherwise specified, in favor of the
three nominees for the Board of Directors named below. If any director is
unable to stand for reelection, the Board may reduce the Board's size or
designate a substitute. If a substitute is designated, proxies voting on the
original Director candidate will be cast for the substituted candidate. You
may withhold authority to vote for any nominee by marking the proxy as
indicated for that purpose on the proxy card.
NOMINEES FOR DIRECTOR
Norris van den Berg, age 63, has served as a director since May 1993. Mr.
van den Berg has served as a General Partner of JMI Partners, L.P., which is
the General Partner of JMI Equity Fund, L.P., since July 1991. Prior to
joining JMI, Mr. van den Berg served in various management positions at IBM.
Mr. van den Berg also served as a director of Peregrine Systems, Inc. until
the end of 2000, and is currently a director of Peregrine/Bridge Transfer
Corporation and Skunkware, Inc. Mr. van den Berg holds a B.A. in Philosophy
and Mathematics from the University of Maryland.
George H. Ellis, age 53, has served as a director since January 2000. Since
October 2001, Mr. Ellis has been the Chief Executive Officer, Chairman and a
member of the Board of Directors of AremisSoft Corporation, a global supplier
of enterprise-wide applications software. Mr. Ellis also served as executive
vice president and chief operating officer of the Communities Foundation of
Texas from February 2000 until October 2001. Mr. Ellis served as Chief
Financial Officer of Sterling Software, Inc. from 1985 through June 1996, and
held a similar position with Sterling Commerce, Inc. from February 1996
through June 1996. From 1996 through 1999, Mr. Ellis was a full time law
student and a business consultant providing consulting services to various
technology-related companies. During this time he was also a Founder and
Managing Director of Chaparral Ventures, Ltd., a Dallas-based venture capital
firm focused on electronic commerce investment. Mr. Ellis also currently
serves on the Board of Directors of three privately held technology companies
and is a member of the Board of Advisors to the law school at Southern
Methodist University and the Advisory Board of the Entrepreneurs Foundation of
North Texas. Mr. Ellis is a Certified Public Accountant and an attorney in the
State of Texas. Mr. Ellis holds a B.S. in Accounting from Texas Tech
University and a J.D. from Southern Methodist University.
Richard Holcomb, age 40, has served as a director since May 1993. In 1995
Mr. Holcomb co-founded HAHT Commerce, an e-commerce application provider, and
served as its CEO and Chairman from 1995 until
4
2001. Prior to 1995, Mr. Holcomb co-founded Q+E Software, a privately held
supplier of client/server database access technology, in 1986 and from 1986
through 1994 served as its CEO, President and Chairman. Q+E Software was
acquired by Intersolv in 1994. Mr. Holcomb serves on several public advisory
boards, including the North Carolina State University Graduate School Board of
Advisors, the North Carolina Electronics and Information Technology
Association (NCEITA), the Council for Entrepreneurial Development (CED) and is
a former appointed member of the North Carolina Information Resources
Management Commission. Mr. Holcomb holds a B.S. degree in Computer Science
from the University of South Carolina and an M.S. in Computer Science from
North Carolina State University.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THESE NOMINEES.
DIRECTORS CONTINUING IN OFFICE
John J. Moores, age 57, has served as Chairman of our Board of Directors
since May 1993. Since December 1994, Mr. Moores has served as owner and
Chairman of the Board of the San Diego Padres Baseball Club, L.P. and since
September 1991 as Chairman of the Board of JMI Services, Inc., a private
investment company. In 1980, Mr. Moores founded BMC Software, Inc., a vendor
of system software utilities, and served as its President and Chief Executive
Officer until 1986 and as its Chairman of the Board until 1992. Mr. Moores
also serves as Chairman of the Board of numerous privately held companies,
including Skunkware, Inc., Scalable Software, Inc., and until July 2000,
Peregrine Systems, Inc., an infrastructure management software company. Until
August 2000, Mr. Moores also served as a director of BindView Development
Corporation, a systems management software company. Mr. Moores holds a B.S. in
Economics and a J.D. from the University of Houston.
Peter Schaeffer, age 46, is NEON's founder and has been a member of our
Board of Directors and of our predecessor-in-interest, NEON Systems, Inc., an
Illinois corporation, since July 1991. From November 1995 to February 2001,
Mr. Schaeffer served as our Chief Technology Officer. From July 1991 to
October 1995, Mr. Schaeffer served as our President and Chief Executive
Officer. From June 1990 to June 1991, Mr. Schaeffer was employed with Goal
Systems International, Inc., a privately held software development company. In
1986, Mr. Schaeffer co-founded MVS Software, a privately held software
development company, and was Vice President-Technology of MVS Software until
April 1990. Mr. Schaeffer holds a B.S. in Organic Chemistry from the
University of Chicago.
Charles E. Noell, III, age 50, has served as a director since May 1993.
Since January 1992, Mr. Noell has served as President and Chief Executive
Officer of JMI Services, Inc., and as a General Partner of JMI Partners, L.P.,
which is the General Partner of JMI Equity Fund, L.P. Mr. Noell is a director
of Peregrine Systems, Inc. Mr. Noell also serves on the board of numerous
privately held companies, including Peregrine/Bridge Transfer Corporation,
Scalable Software, Inc. and Skunkware, Inc. Mr. Noell holds a B.A. in History
from the University of North Carolina at Chapel Hill and an M.B.A. from
Harvard University.
Louis R. Woodhill, age 53, was elected director on December 21, 2001 to
fill a vacancy created by the resignation of Stephen E. Odom in July of 2001.
Since October 15, 2001, Mr. Woodhill has served as the President and Chief
Executive Officer of NEON Systems, Inc. Mr. Woodhill is also the founder,
Chairman, CEO and President of Scalable Software, Inc., a Houston-based
provider of software asset lifecycle management tools for Windows networks.
Scalable Software was founded in January of 1999 and is headquartered in
Houston, Texas. Mr. Woodhill is also a co-founder of and is the Chairman of
the Board of Configuresoft, Inc., a Colorado-based software company that
provides configuration management solutions for Windows NT networks. Mr.
Woodhill is also involved in a number of start-up software companies as an
investor. Prior to forming Scalable Software, Mr. Woodhill was one of the
founders of Mission Critical Software, Inc., a leading provider of e-business
infrastructure management software, headquartered in Houston, Texas. Mission
Critical went public in August of 1999 and was subsequently acquired by NetIQ
Corporation in March of 2000. Mr. Woodhill served as
5
the President and CEO of Mission Critical from August of 1995 until May of
1998. Louis Woodhill holds a Bachelor of Science degree in Mechanical
Engineering from the Illinois Institute of Technology. Louis Woodhill and Jim
Woodhill are identical twins.
James R. (Jim) Woodhill, age 53, was elected director on December 21, 2001
to fill a vacancy created by the resignation of Michael Bennett in July of
2001. Mr. Woodhill was a co-founder with Mr. Schaeffer of MVS Software, Inc.,
a mainframe software company that ultimately became part of Computer
Associates. Mr. Woodhill was a seed-round investor in Houston-based Mission
Critical Software, Inc. and was its VP, Marketing from 1996 to 1998. Mission
Critical went public in August of 1999 and was subsequently acquired by NetIQ
Corporation in May of 2000. Mr. Woodhill has also been involved as an investor
through his wholly-owned company, Mission Critical Software I, Inc. and is a
director of the following companies: Scalable Software, Inc., ConfigureSoft,
Inc., and Sheer Genius Software, Inc. Jim Woodhill and Louis R. Woodhill are
identical twins.
STATEMENT OF CORPORATE GOVERNANCE
Our Board of Directors held a total of seven meetings in fiscal 2001. All
directors attended at least seventy-five percent (75%) of all of the meetings
held by the Board of Directors and meetings held by committees of the Board of
Directors on which that director served.
Our Board of Directors considers all major decisions. The Board has
established two standing committees, an Audit Committee and a Compensation
Committee, so that certain areas can be addressed in more depth than may be
possible at a full Board of Directors meeting. The Board does not have a
nominating committee. On July 17, 2001, the Board established a Special
Committee to review the terms of our proposed acquisition of Scalable
Software, Inc.
Audit Committee. The Audit Committee makes recommendations to our Board of
Directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other accounting related services and reviews and
evaluates our internal control functions. On June 12, 2000, the Board of
Directors adopted an audit committee charter and is in compliance with the new
Nasdaq audit committee structure and membership requirements. Current members
of the Audit Committee include George H. Ellis, Charles E. Noell, III, Richard
Holcomb (added on June 1, 2001), and Norris van den Berg. The Audit Committee
met and/or took action four times during fiscal 2001. The Audit Committee's
report is included below in "Audit Committee Report."
Compensation Committee. The Compensation Committee makes recommendations to
our Board of Directors concerning salaries and incentive compensation for our
officers and employees and administers our 1993 Stock Option Plan, the Stock
Option Plan for Non-Employee Directors, the 1999 Long-Term Incentive Plan and,
if approved by our stockholders, our 2002 Stock Plan and 2002 Director Stock
Option Plan. Members of the Compensation Committee include John J. Moores,
Charles E. Noell, III, Norris van den Berg and Richard Holcomb. The
Compensation Committee met three times during fiscal 2001.
Special Committee. On July 17, 2001, NEON entered into a letter of intent
to acquire Scalable Software, Inc. Several members of NEON's Board of
Directors have a financial interest in Scalable Software. Therefore, on July
17, 2001, the Board of Directors formed a special committee composed solely of
directors who have no interest in Scalable Software to review the terms of the
acquisition. The members of the Special Committee are George Ellis and Richard
Holcomb. The Special Committee was formed after March 31, 2001 and therefore
did not meet in fiscal year ended March 31, 2001. See "Certain Transactions--
Scalable Software, Inc. Agreements."
6
AUDIT COMMITTEE REPORT
Composition. The Audit Committee of the Board of Directors is composed of
four directors, two of which are independent directors as defined by Nasdaq
rules, and operates under a written charter adopted by the Board of Directors,
a copy of which was attached as Exhibit A to the proxy statement for our 2000
annual meeting. The members of the Audit Committee are George H. Ellis,
Charles E. Noell, III, Richard Holcomb (added June 1, 2001), and Norris van
den Berg.
Responsibilities. The responsibilities of the Audit Committee include
recommending to the Board of Directors an accounting firm to be engaged as our
independent accountants. Management is responsible for NEON's internal
controls and financial reporting process. The independent accountants are
responsible for performing an independent audit of NEON's consolidated
financial statements in accordance with generally accepted auditing standards
and for issuing a report thereon. The Audit Committee's responsibilities are
to oversee these processes and the activities of NEON's internal audit
department.
Review with Management and Independent Accountants. In this context, the
Audit Committee has met and held discussions with management and the
independent accountants, including discussions regarding the audited
consolidated financial statements. Management represented to the Audit
Committee that NEON's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee has reviewed and discussed the consolidated financial statements
with management and the independent accountants. The Audit Committee discussed
with the independent accountants matters required to be discussed by Statement
on Auditing Standards No. 61, "Communication with Audit Committees."
NEON's independent accountants also provided to the Audit Committee the
written disclosures and the letter required by Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees," and the
Audit Committee discussed with the independent accountants, KPMG LLP, the
firm's independence.
Summary. Based upon the Audit Committee's discussions with management and
the independent accountants and the Audit Committee's review of the
representations of management, and the report of the independent accountants
to the Audit Committee, the Audit Committee recommended that the Board of
Directors include the audited consolidated financial statements in NEON's
Annual Report on Form 10-K for the year ended March 31, 2001, as filed with
the Securities and Exchange Commission.
Submitted by the Audit Committee
George H. Ellis
Charles E. Noell, III
Norris van den Berg
Richard Holcomb
7
EXECUTIVE OFFICERS
Our executive officers are as follows:
Name Position
---- --------
Louis R. Woodhill................... Director, President and Chief Executive
Officer
Don Pate............................ Senior Vice President and General
Manager, Enterprise Subsystems
Management Division
Wayne E. Webb, Jr. ................. Senior Vice President and General Counsel
James Bradford Poynter.............. Chief Financial Officer and Secretary
Mark Creswell....................... Vice President and General Manager,
Shadow Division
Jonathan J. Reed.................... Vice President, Business Development and
Product Marketing
Kevin O'Brien....................... Vice President, Technical Operations
Brent Rhymes........................ Vice President and General Manager, iWave
Division
Information concerning the business experience of members of our Board of
Directors is provided under the caption "Nominees for Directors" and
"Directors Continuing in Office" above. Set forth below is information
concerning the age and business experience of our other executive officers.
Don Pate, age 47, has served as NEON's Senior Vice President and General
Manager, Enterprise Subsystems Management Division since July 2001. Mr. Pate
served as Vice President-Worldwide Sales from January 1998 to June 2001 and as
NEON's Vice President of International Sales and VP of Worldwide Marketing
from November 1996 to January 1998. From October 1989 to November 1996, Mr.
Pate served in several sales and sales management positions with BMC Software,
Inc., including Manager of International Sales, Sales Operations Manager and
Regional Manager. Prior to that, Mr. Pate was a salesman for IBM Corporation.
Mr. Pate holds a B.S. in Economics and Psychology from Houston Baptist
University.
Wayne E. Webb, Jr., age 50, served as NEON's interim President from June
2001 to October 15, 2001 and has served as NEON's Vice President and General
Counsel since June 1998. Mr. Webb is also Vice President and General Counsel
of Peregrine/Bridge Transfer Corporation. From August 1989 through May 1998,
Mr. Webb was a partner in the law firm of Fulbright & Jaworski LLP. Mr. Webb
holds a B.S. in Electrical Engineering from Rice University and a J.D. from
the University of Texas at Austin.
James Bradford Poynter, age 51, has served as NEON's Chief Financial
Officer and Secretary since July 2001. Prior to joining NEON, Mr. Poynter
served as Chief Financial Officer for Scalable Software, Inc., a Houston-based
software company. From 1993 until joining Scalable, Mr. Poynter was a
principal in Dunlukin Enterprises, a private investment and financial
consulting firm. Prior to that, Mr. Poynter served as executive vice president
and chief financial officer of U.S. Intec, Inc., an American Stock Exchange
listed manufacturing concern. Mr. Poynter received an A.B. in Classics from
Dartmouth College and an M.B.A. from Harvard Business School.
Mark Creswell, age 37, has served as NEON's Vice President and General
Manager, Shadow Division since October 15, 2001. From 1995 to 2000, Mr.
Creswell served as NEON's managing director of its UK subsidiary, NEON Systems
(UK) Ltd., in London, England. Before returning to NEON in his current
position, Mr. Creswell served as United Kingdom Managing Director for
Framesoft, an investment banking software company based in Switzerland.
Originally a systems programmer, Mr. Creswell has held various senior
positions with additional high tech organizations prior to joining NEON in
1995. Mr. Creswell is qualified in Pure and Applied Mathematics from Westcliff
College in England.
Jonathan J. Reed, age 46, has served as NEON's Vice President of Business
Development since September 2000 and in January 2002 assumed the additional
responsibility of Product Marketing. From January 1998 to December 1998, Mr.
Reed served as NEON's Director of Marketing and subsequently served as Vice
President of Marketing from January 1999 to June 2000. From July 1996 to
December 1997, Mr. Reed served as NEON's
8
Principal Consultant and Technical Marketing Manager. From April 1995 until
July 1996, Mr. Reed served as Alliance Manager for Sybase, Inc. From March
1991 to April 1995, Mr. Reed was employed by BMC Software where he served as a
Commercial Analyst. Mr. Reed holds a B.S. in Biology from the University of
Houston and an M.S. in Management and Computer Science from Houston Baptist
University.
Kevin O'Brien, age 44, has served as NEON's Vice President of Technical
Operations since April 2000. From March 1996 to April 2000, Mr. O'Brien served
as NEON's Manager of Customer Support. In August 1995, Mr. O'Brien began his
employment with NEON as a Customer Support Representative. From April 1994
until August 1995, Mr. O'Brien served as Customer Support Leader for Mission
Critical Software. Prior to that, Mr. O'Brien was employed by BMC Software
where he served as a Product Author. Mr. O'Brien holds a B.E. in Electrical
Engineering from Cork University in Ireland.
Brent Rhymes, age 34, has served as NEON's Vice President and General
Manager, iWave Division since June of 2001. Prior to joining NEON, Mr. Rhymes
served as Vice President of Enablement Services at NetIQ Corporation from July
2000 to May 2001 and as President/CEO of Software Realization, Inc. from March
of 1997 to July of 2000. Mr. Rhymes has held numerous managerial and technical
positions at leading companies including IBM (from 1994 to 1997), Microsoft,
and Exxon. Mr. Rhymes holds an MBA from the University of St. Thomas and a
B.S., with honors, in Computer Science from the University of Tennessee.
9
EXECUTIVE COMPENSATION AND OTHER MATTERS
Executive Compensation
The following table sets forth for the fiscal years indicated the
compensation earned by our former Chief Executive Officer, our former Chief
Financial Officer, our former President and Chief Operating Officer, and each
of our four other most highly compensated executive officers who were serving
as officers at the end of the fiscal year ended March 31, 2001 (collectively,
the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE (1)
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
------------------------------- ------------------------- -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Position(a) Year ($) ($) ($) ($) (#) ($) ($)
------------------ ---- ------- ------- ------------ ---------- ------------ ------- ------------
Joe Backer(2)........... 2001 192,811 159,695(3) -- -- 100,000 -- --
Former Chief Executive 2000 130,000 165,971(3) -- -- 300,000 -- --
Officer 1999 130,000 144,087(3) -- -- 0 -- --
John Reiland(4)......... 2001 158,752 51,279 -- -- 0 -- --
Former Chief Financial 2000 110,000 35,309 -- -- 0 -- --
Officer 1999 110,000 27,878 -- -- 30,000 -- --
Jonathan Reed........... 2001 110,208 69,943 -- -- 20,000 -- --
Vice President of 2000 115,000 34,206 -- -- 0 -- --
Business 1999 115,000 14,454 -- -- 58,450 -- --
Development
Don Pate................ 2001 141,667 119,602(3) -- -- 30,000 -- --
Senior Vice President 2000 100,000 120,701(3) -- -- 0 -- --
and General 1999 100,000 160,686(3) -- -- 60,000 -- --
Manager, Enterprise
Subsystem
Management Division
Peter Schaeffer......... 2001 100,000 72,709 -- -- 75,000 -- --
Former Chief Technology 2000 100,000 47,078 -- -- 25,000 -- --
Officer 1999 100,000 35,256 -- -- 0 -- --
Steven Smith............ 2001 137,083 115,215(5) -- -- 35,000 -- --
Former Senior Vice 2000 100,000 53,493(6) -- -- 0 -- --
President of 1999 100,000 17,977 -- -- 0 -- --
Research and
Development
Steven Odom(7).......... 2001 137,500 41,875(8) -- 509,380(9) 200,000 -- --
Former President and 2000 -- -- -- -- 0 -- --
Chief 1999 -- -- -- -- 0 -- --
Operating Officer
-------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Executive Officers
that are available generally to all of our salaried employees, and may not
include certain perquisites and other personal benefits received by the
Named Executive Officers that do not exceed the lesser of $50,000 or ten
percent (10%) of any such officer's salary and bonus disclosed in the
table.
(2) Mr. Backer resigned as Chief Executive Officer and left the employ of the
Company on December 31, 2000.
(3) The entire portion of the amount listed as bonus is a sales commission
paid during the applicable fiscal year.
(4) Mr. Reiland resigned as Chief Financial Officer and left the employ of the
Company on October 10, 2000.
(5) Includes $71,516 of sales commissions paid during fiscal 2001.
(6) Includes $17,500 of sales commissions paid during fiscal 2000.
(7) Mr. Odom was named President, Chief Operating Officer and Chief Financial
Officer of the Company on October 15, 2000. The numbers on the chart
reflect his salary from his start date through March 31, 2001. Had he been
employed for the entire year, his salary would have been $275,000 and his
other annual compensation would have been $175,000. Mr. Odom resigned as
President, Chief Operating Officer and Chief Financial Officer and left
the employ of the Company on June 7, 2001.
(8) Includes $7,500 of automobile allowance paid during fiscal 2001.
10
(9) Mr. Odom received a restricted stock grant of 100,000 shares of NEON's
common stock on December 21, 2000. As of March 31, 2001, 100,000 shares of
restricted common stock had a fair market value of $466,000. As of June 7,
2001, the date of Mr. Odom's resignation, all rights to the restricted
common stock were cancelled pursuant to a Separation Agreement.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended March 31, 2001 to the Named Executive Officers:
Percent Of
Total Potential Realizable Value
Number Of Options At Assumed Annual Rates Of
Securities Granted To Stock Price Appreciation
Underlying Employees Exercise Or For Option Term(4)
Options In Fiscal Base Price Expiration ---------------------------
Name Granted Year(1) ($/Sh)(2) Date(3) 5% ($) 10% ($)
---- ---------- ---------- ----------- ---------- ------------ --------------
Joe Backer.............. 100,000(5) 8.19 15.06 06/22/10 947,304 2,400,654
John Reiland............ -- -- -- -- -- --
Jonathan Reed........... 20,000(6) 1.64 6.31 10/24/10 79,398 201,210
Don Pate................ 30,000(6) 2.46 6.31 10/24/10 119,097 301,815
Peter Schaeffer......... -- -- -- -- -- --
Steven Smith............ 20,000(6) 1.64 6.31 10/24/10 79,398 201,210
15,000(7) 1.23 10.25 07/28/10 96,693 245,038
Steve Odom.............. 200,000(8) 16.37 5.09 12/21/10 640,686 1,623,625
--------
(1) Based on a total of 1,221,415 options granted during the fiscal year ended
March 31, 2001. During the fiscal year ended March 31, 2001, 364,499
outstanding options were forfeited.
(2) The option exercise price for the common stock is based on the fair market
value on the date of grant as determined pursuant to the terms of the 1999
Long-Term Incentive Plan.
(3) Options may terminate before their expiration date upon death, disability
or termination of employment of the optionee.
(4) In accordance with the rules of the Commission, shown are the gains or
"option spreads" that would exist for the respective options granted.
These gains are based on the assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the
full option term. These assumed compound rates of stock price appreciation
are mandated by the rules of the Commission and do not represent our
estimate or projection of future prices of our common stock.
(5) The options granted to Mr. Backer were fully vested as of the date of
grant.
(6) The options vest over a four-year period with twenty-five percent (25%)
vesting on October 21, 2001, and the remainder vesting quarterly for the
following twelve quarters.
(7) The options vest over a four-year period with twenty-five percent (25%)
vesting on the first, second, third and fourth anniversaries of the award
date, which was July 28, 2000.
(8) The options granted to Mr. Odom were granted on December 21, 2000, and
vest over a four-year period with one thirty-sixth of the options vesting
each month through December 21, 2001, and one fifty-fourth of the options
vesting each month thereafter. As of June 7, 2001, the date of Mr. Odom's
resignation, all rights to the options granted were cancelled pursuant to
a Separation Agreement.
11
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth, for each of the Named Executive Officers,
information concerning the number of shares received during fiscal 2001 upon
exercise of options and the aggregate dollar amount received from such
exercise, as well as the number and value of securities underlying unexercised
options held on March 31, 2001.
Number of Securities Value Of In-The-Money
Shares Underlying Options At Options At Year-End
Acquired Value Year End (#) ($)(2)
On Exercise Realized ------------------------- -------------------------
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- --------- ----------- ------------- ----------- -------------
Joe Backer.............. -- -- 453,000 -- 1,128,380 --
John Reiland............ 26,374 187,598 15,000 -- -- --
Jonathan Reed........... -- -- 38,130 49,225 48,812 10,431
Don Pate................ -- -- 82,750 60,000 235,265 --
Peter Schaeffer......... 395,835 6,669,820 6,250 -- -- --
Steven Smith............ 11,400 312,793 11,400 46,400 41,724 41,724
Steve Odom (3).......... -- -- 33,333 166,667 77,667 388,333
--------
(1) Based on the difference between the option exercise price and the fair
market value of NEON's common stock on the exercise date as determined
pursuant to the terms of the 1993 Stock Option Plan and 1999 Long-Term
Incentive Plan.
(2) Based on the difference between the option exercise price and the closing
sale price of $4.66 of our common stock as reported on the Nasdaq National
Market on March 31, 2001, the last trading day of our 2001 fiscal year,
multiplied by the number of shares underlying the options.
(3) Does not include the 100,000 shares of restricted stock granted to Mr.
Odom, as disclosed above. As of June 7, 2001, the date of Mr. Odom's
resignation, all rights to the restricted common stock and the options
granted were cancelled pursuant to a Separation Agreement.
COMPENSATION OF DIRECTORS
During fiscal 2001, only one of our non-employee directors was monetarily
compensated for serving as a member of our Board of Directors. George Ellis
received a fee of $1,000 for each of the seven board meetings and four Audit
Committee meetings he attended in fiscal year 2001. In July 2001, we
authorized paying each of the members of the Special Committee (See STATEMENT
OF CORPORATE GOVERNANCE--Special Committee) a fee of $1,000 per committee
meeting attended. Additionally, effective January 1, 2002, we authorized
paying each non-employee director a fee of $1000 per board meeting attended.
In 1999 we adopted the Stock Option Plan for Non-Employee Directors for
compensation of our non-employee directors and reserved 100,000 shares of our
common stock for issuance thereunder. Under such plan, all current non-
employee directors on the Board of Directors (other than Peter Schaeffer) have
each been granted an option to purchase 7,500 shares of our common stock in
connection with his appointment to our Board. The options granted under the
Stock Option Plan for Non-Employee Directors vest equally in 33 1/3%
increments on the date of each successive annual meeting during the three-year
period following the date of grant. Other non-employee directors who join our
Board of Directors would receive identical options to purchase 7,500 shares of
NEON common stock exercisable at the fair market value of the common stock at
the close of business on the date immediately preceding the date of grant if
the 2002 Director Option Plan is not approved by the stockholders. If the 2002
Director Option Plan is approved by our stockholders (see Proposal V and the
description of the plan therein), it will replace the Stock Option Plan for
Non-Employee Directors. In such event, each current non-employee director who
is serving on the Board of Directors immediately following the Annual Meeting
of Stockholders scheduled for March 26, 2002 and who served as a non-employee
director in any of the last three fiscal years ended March 31, 2001, will
receive a one-time initial "Election" option grant to purchase 12,500 shares
of common stock for each of such three previous fiscal years, up to a maximum
grant of 37,500 shares of common stock of NEON. Non-employee directors
subsequently joining the Board of Directors, whether by appointment
12
or election, will also receive a one-time initial "Election" option grant to
purchase 12,500 shares of common stock under the 2002 Director Option Plan.
Additionally, all non-employee directors serving on the Board of Directors of
NEON immediately following any subsequent annual meeting of stockholders after
the adoption of the 2002 Director Option Plan who have served as a director of
NEON for at least the preceding six months will receive an "Annual" grant of
an option to purchase 12,500 shares of common stock under the 2002 Director
Option Plan. The Election options granted under the 2002 Director Option Plan
vest equally in quarterly increments during the three-year period following
the date of grant. The Annual options granted will vest equally in quarterly
increments during a two-year period following the date of grant. See Proposal
V for a more complete description of the 2002 Director Option Plan.
All stock options granted pursuant to the Stock Option Plan for Non-
Employee Directors are nonqualified stock options and will remain exercisable
for a period of ten years from the date of grant or, if sooner, six months
after the option holder ceases to be a director of NEON. In the event of a
change in control of NEON or certain other significant events, all options
outstanding under the Stock Option Plan for Non-Employee Directors would
terminate, provided that immediately before the effective date of such
transaction each holder of an outstanding option under the Stock Option Plan
for Non-Employee Directors would be entitled to purchase the total number of
shares of common stock that such option holder would have been entitled to
purchase during the entire remaining term of the option.
COMPENSATION COMMITTEE REPORT
Decisions on compensation of our executive officers generally are made by
the four-member Compensation Committee of our Board of Directors. Each member
of the current Compensation Committee is a non-employee director. All
decisions by the Compensation Committee relating to compensation of our
executive officers are reviewed by the Board of Directors. Decisions with
respect to awards under certain of NEON's employee benefit plans are made
solely by the Compensation Committee in order for such awards to satisfy
applicable legal and regulatory considerations. Set forth below is a report
prepared by Messrs. Moores, Noell, van den Berg and Holcomb in their capacity
as all of the members of the Compensation Committee addressing our
compensation policies for fiscal 2001 as they affected our executive officers.
Compensation Philosophy. In the fiscal year ended March 31, 2001, the
Compensation Committee's executive compensation policies were designed to
provide a conservative base salary complemented with a bonus system to reward
those executives with competitive levels of compensation when compared with
similar positions at companies similarly situated, thus integrating pay with
the Company's annual and long-term performance goals, rewarding above average
corporate performance, recognizing individual initiative and achievements, and
assisting NEON in attracting and retaining qualified executives. Targeted
levels of total executive compensation were generally set at levels that the
Compensation Committee believed to be consistent with others in NEON's
industry, although actual compensation levels in any particular year may be
above or below those of NEON's competitors, depending upon NEON's performance.
Effective January 1, 2002, the Compensation Committee and the full Board of
Directors approved an executive compensation plan that eliminates performance
based cash compensation bonuses in favor of fixed annual salaries.
Grant of Stock Awards. The Compensation Committee endorses the position
that stock ownership by management and performance-based compensation
arrangements are beneficial in aligning management's and stockholders'
interests in the enhancement of stockholder value and helps to attract and
retain these persons, and takes this factor into account in designing the
compensation packages of the Company's executive officers. Under NEON's 1999
Long-Term Incentive Plan, which has previously been approved by our
stockholders, the Company may grant incentive stock options and non-qualified
stock options to purchase NEON common stock, stock appreciation rights,
restricted stock and performance units to key employees of NEON. Under our
2002 Stock Plan, if approved by our stockholders, NEON may grant non-qualified
stock options, stock purchase rights and incentive stock options to employees
of NEON and its subsidiaries. Options are exercisable over a period of
13
time in accordance with the terms of option agreements entered into at the
time of the grant. Stock options provide value to the recipients only if and
when the market price of NEON's common stock increases above the option grant
price. Stock acquired pursuant to a stock purchase right provides value to the
recipient if, at the time of its vesting, the market price of NEON's common
stock exceeds the recipient's purchase price for the stock.
Base Salary and Incentive Bonus Compensation. In addition to stock-based
awards in the form of option grants, in fiscal and calendar year 2001, there
were two components of NEON's non-stock-based compensation program. First,
executive officers received an annual base salary, which was believed to be
consistent with similar positions at similar companies in the industry.
Second, executive officers were eligible to receive an annual bonus comprised
of (i) an amount, up to a maximum established amount per year, awarded based
upon the executive's meeting and exceeding established performance and other
corporate goals set by the Compensation Committee, and/or (ii) an amount equal
to a percentage of sales based upon NEON's sales performance. The Compensation
Committee believes these principal components of NEON's compensation plan were
commensurate with others in the industry. However, effective January 1, 2002,
the Compensation Committee and the full Board of Directors approved an
executive compensation plan that eliminates performance based cash
compensation bonuses in favor of fixed annual salaries.
Fiscal 2001 Chief Executive Officer Compensation. In the fiscal year ended
March 31, 2001, the Compensation Committee considered several factors in
establishing our Chief Executive Officer's compensation package, including
compensation practices in the industry, performance level, contributions
toward achievement of strategic goals and NEON's overall financial and
operating success. Mr. Backer's compensation for fiscal 2001 as President and
Chief Executive Officer principally consisted of a base salary and bonus. Mr.
Backer's base salary for fiscal 2001 was established by the Compensation
Committee based upon factors described above relating to executive officers in
general. The bonus paid to Mr. Backer in fiscal 2001 was determined as a
percentage of sales based upon the sales performance of the Company. Mr.
Backer did not participate in the Compensation Committee's decision regarding
his compensation. Mr. Backer resigned as NEON's Chief Executive Officer on
December 31, 2000. Mr. Moores acted as interim Chief Executive Officer from
June 2001 to October 2001. October 15, 2001, the Board of Directors appointed
Louis R. Woodhill as the President and Chief Executive Officer of NEON. Mr.
Woodhill served as President and Chief Executive Officer from October 15, 2001
to December 31, 2001 without a compensation package. The Compensation
Committee authorized a bonus of $135,000 based on Mr. Woodhill's achievement
of a number of operational improvements resulting in a refocusing of NEON's
strategic direction in the quarter ended December 31, 2001. Effective January
1, 2001, the Compensation Committee and the full Board of Directors approved
an executive compensation plan setting Mr. Woodhill's annual compensation at a
base salary of $450,000 and authorizing the grant of an option to purchase
400,000 shares under the 1999 Long-Term Incentive Plan. The Compensation
Committee has determined that such compensation package is commensurate with
the policies set forth above for setting the compensation of our Chief
Executive Officer and is believed by the Compensation Committee to be
consistent with similar positions at similar companies in the industry.
Limit on the Deductibility of Executive Compensation. In 1993, Congress
amended the Internal Revenue Code to add Section 162(m). Section 162(m) of the
Internal Revenue Code limits the deductibility of compensation paid to
specified executive officers to $1,000,000 per officer in any one year.
Compensation which qualifies as performance based compensation does not have
to be taken into account for the purposes of this limitation. The Compensation
Committee intends to recommend action in connection with NEON's benefit plans
and salary and bonus policies to address this issue if and when circumstances
require.
Submitted by the Compensation
Committee,
John J. Moores
Charles E. Noell, III
Norris van den Berg
Richard Holcomb
14
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Moores, Noell, van den Berg, and Holcomb served on NEON's
Compensation Committee during fiscal 2001 and are continuing to serve on that
committee. These individuals do not serve as officers or employees of NEON.
The following sets forth interlocks involving the executive officers and
directors of NEON.
NEON interlocks with Peregrine/Bridge Transfer Corporation. Mr. Noell and
Mr. van den Berg serve as directors of Peregrine/Bridge Transfer Corporation.
Mr. Webb serves as the Vice President and General Counsel of Peregrine/Bridge
Transfer Corporation, for which Mr. Webb received an annual salary of $280,000
and an $80,000 bonus from Peregrine/Bridge Transfer Corporation. On June 1,
2001, Mr. Webb became an employee of NEON Systems, Inc. at an annual salary of
$360,000 and an $80,000 bonus. Through his interest in Skunkware, Inc., Mr.
Moores beneficially owns approximately 96% of Peregrine/Bridge Transfer
Corporation. Through their interests in Skunkware, Inc., each of Messrs.
Noell, van den Berg and Webb beneficially own approximately 1%, and each of
Messrs. Pate and Reed beneficially own less than 1%, of Peregrine/Bridge
Transfer Corporation. See "Certain Transactions--Peregrine/Bridge Transfer
Corporation Agreements."
NEON interlocks with Skunkware, Inc. Messrs. Noell, Moores and van den Berg
serve as the directors of Skunkware, Inc., the sole stockholder of
Peregrine/Bridge Transfer Corporation. Mr. Moores beneficially owns
approximately 96% of Skunkware, Inc. Each of Messrs. Noell, van den Berg and
Webb beneficially own approximately 1%, and each of Messrs. Pate and Reed
beneficially own less than 1%, of Skunkware, Inc.
NEON interlocks with Scalable Software, Inc. On December 21, 2001, NEON
announced that it had entered into a non-binding term sheet to be granted a
two-year option to acquire Scalable Software, Inc., a privately held Houston-
based provider of software asset lifecycle management tools for Windows
networks. This term sheet reflected a revision by NEON and Scalable Software
of NEON's previously announced plan to acquire Scalable Software. In addition,
NEON also announced that Louis R. Woodhill, its Chief Executive Officer, and
Jim Woodhill have been appointed to the Board of Directors of NEON. Louis
Woodhill is a founder of Scalable Software, Inc. and both Louis and Jim
Woodhill serve on Scalable Software's Board of Directors, together with John
J. Moores, Peter Schaeffer and Charles E. Noell, III. Louis Woodhill is also a
founder and chairman of the board of Configuresoft, Inc., a Colorado-based
software company that provides configuration management solutions for Windows
NT networks and he currently continues to serve as the Chief Executive Officer
of Scalable Software. See "Certain Transactions--Scalable Software, Inc.
Agreements."
15
MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The percentage of shares owned provided in the table is based on 8,672,103
shares outstanding as of February 15, 2002. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Except as indicated by footnote, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown
as beneficially owned by them. The determination of whether these persons have
sole voting and investment power is based on information provided by them. In
computing an individual's beneficial ownership, the number of shares of common
stock subject to options held by that individual that are exercisable within
60 days of February 15, 2002 are also deemed outstanding. These shares,
however, are not deemed outstanding for the purpose of computing the
beneficial ownership of any other person.
The following table sets forth certain information regarding beneficial
ownership of our common stock as of February 15, 2002 by:
. each of our directors;
. Joe Backer, our former Chief Executive Officer, John Reiland, our former
Chief Financial Officer, Steve Odom, our former President and Chief
Operating Officer, and each of the four other most highly compensated
individuals who served as our executive officers at fiscal year end (the
"Named Officers");
. all individuals who serve as directors or executive officers as a group;
and
. each person who is known by us to own beneficially more than 5% of our
common stock.
Shares Beneficially Owned
------------------------------
Directors, Officers and 5% Stockholders Number Percent(1)
--------------------------------------- --------------- --------------
John J. Moores(2).............................. 3,649,342 42.0%
Charles E. Noell, III(3)....................... 224,469 2.6%
Norris van den Berg(4)......................... 104,160 1.2%
Richard Holcomb(5)............................. 19,300 *
Joe Backer(6).................................. 578,300 6.6%
Peter Schaeffer................................ 369,335 5.1%
Don Pate(7).................................... 107,125 1.2%
Jonathan J. Reed(8)............................ 64,338 *
George H. Ellis(9)............................. 5,000 *
Steve Odom..................................... -0- *
John Reiland(10)............................... 15,000 *
Louis R. Woodhill(11).......................... 15,000 *
Jim Woodhill(12)............................... 92,885 1.1%
All executive officers and directors as a group
(13 persons) (13)............................. 5,244,254 60.4%
--------
* Less than 1%
(1) The percentage of ownership calculation is based on 8,672,103 shares
issued and outstanding.
(2) Includes 744,265 shares of common stock owned by various family trusts for
which Mr. Moores serves as trustee, as to which Mr. Moores disclaims
beneficial ownership. Includes 10,000 shares of common stock owned by JMI
Services, Inc. Also includes 2,500 shares of common stock issuable upon
exercise of outstanding options that are presently exercisable or will
become exercisable within 60 days of February 15, 2002.
(3) Includes 2,500 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
16
(4) Includes 98,660 shares of common stock owned by a family trust. Includes
2,500 shares of common stock issuable upon exercise of outstanding stock
options that are presently exercisable or will become exercisable within
60 days of February 15, 2002.
(5) Includes 16,300 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
(6) Includes 20,000 shares held by John Backer and Kristin Backer, the
children of Mr. Backer, as to which Mr. Backer disclaims beneficial
ownership. Includes 543,000 shares of common stock issuable upon exercise
of outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
(7) Includes 107,125 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
(8) Includes 58,993 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
(9) Includes 5,000 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
(10) Includes 15,000 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
(11) Includes 15,000 shares of common stock held by the Woodhill Foundation.
(12) Includes 15,000 shares of common stock held by the Woodhill Foundation
and 11,685 shares held as trustee for a dependent.
(13) Includes 752,918 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of February 15, 2002.
17
CERTAIN TRANSACTIONS
Peregrine/Bridge Transfer Corporation Agreements
NEON entered into a distributor agreement with Peregrine/Bridge Transfer
Corporation, a database software company, in January 1996. Previously under
the distributor agreement, NEON marketed and sublicensed certain Enterprise
Subsystem Management products under a non-exclusive worldwide license from
Peregrine/Bridge Transfer Corporation. The distributor agreement provided that
NEON pay license fees for licensed products and for maintenance and support
and upgrade services equal to 50% of the revenues received by NEON. NEON
incurred license fees of $703,337, $979,246 and $1,588,000 to Peregrine/Bridge
Transfer Corporation in fiscal 1999, 2000 and 2001, respectively.
In December 1998, NEON and Peregrine/Bridge Transfer Corporation amended
the distributor agreement. The amended agreement grants us an exclusive,
worldwide license to market and sublicense Enterprise Subsystem Management
products, with the exception of limited co-marketing rights held by IBM
relating to one of the Peregrine/Bridge Transfer Corporation Enterprise
Subsystem Management products. The amended distributor agreement has an
initial term through March 31, 2004. The amended agreement grants us first
refusal rights to acquire Peregrine/Bridge Transfer Corporation by matching
any third-party offer that Peregrine/Bridge Transfer Corporation or its
stockholder chooses to accept, and an option to acquire Peregrine/Bridge
Transfer Corporation that is exercisable on or after January 1, 2002 or such
earlier date that we have paid Peregrine/Bridge Transfer Corporation license
fees totaling $10.0 million or more in any single fiscal year. Beginning April
1, 1999, the amended agreement provides for us to make quarterly advances in
respect of anticipated license fees, with the advances to be in equal
quarterly payments based on annualized license fee amounts of $1.0 million,
$2.0 million, $3.0 million, $4.0 million and $5.0 million for fiscal 2000,
2001, 2002, 2003 and 2004, respectively. Following the date, if any, in each
quarter when the license fees earned equal the aggregate amount of quarterly
advances outstanding on the first day of such quarter, the license fee that we
pay under the agreement decreases from 50% to 40% of the revenues received by
us, with the decrease continuing in effect until the start of the next
quarter. Upon any termination or expiration of the distributor agreement, any
advances then outstanding are to be refunded to us by Peregrine/Bridge
Transfer Corporation.
When entered into, a services agreement between NEON and Peregrine/Bridge
Transfer Corporation provided that Peregrine/Bridge Transfer Corporation would
pay NEON for general and administrative services supplied to it by NEON for
the time spent by our management developing and implementing Peregrine/Bridge
Transfer Corporation's product development and marketing strategy and for the
use of available space in NEON's offices from time to time. The services
agreement was terminable on 30 days' notice by either party. Peregrine/ Bridge
Transfer Corporation paid NEON $33,995 per month under the services agreement.
For fiscal 1999, 2000 and 2001, $287,076, $287,940 and $398,000, respectively,
were paid by Peregrine/Bridge Transfer Corporation to NEON under this
arrangement. The scope of and charge for such services were determined
pursuant to negotiations between NEON's officers and the non-employee
directors of Peregrine/Bridge Transfer Corporation. We believe that the fees
for the services provided by NEON to Peregrine/Bridge Transfer Corporation
were no less favorable than those that would have been obtained from an
unaffiliated entity in an arm's-length negotiation. By agreement, and pursuant
to written notice provided by PBTC to NEON, this Services Agreement was
terminated effective September 30, 2001. From that date NEON ceased providing
management services to PBTC, and instead provides only record keeping services
for which PBTC pays NEON $5,000 per month. Such agreement is terminable at the
will of either party.
Due to the timing of cash payments between the two parties related to the
distributor agreement and the services agreement described in the preceding
two paragraphs, NEON had accounts receivable (payable)-related party balances
of $278,817, ($6,942) and $0 as of March 31, 1999, 2000 and 2001,
respectively.
See "Compensation Committee Interlocks and Insider Participation--NEON
interlocks with Peregrine/ Bridge Transfer Corporation."
Scalable Software, Inc. Agreements
On July 17, 2001, NEON announced that it had entered into a letter of
intent to acquire Scalable Software, Inc., a Houston-based provider of client
effectiveness management tools for Windows networks. Several members of NEON's
Board of Directors have a financial interest in Scalable Software. In
connection with the
18
Letter of Intent, NEON and Scalable Software entered into a Promissory Note
dated July 17, 2001, which provided bridge financing to Scalable in a maximum
amount of $3.0 million and is secured by the personal guarantees of John J.
Moores, Louis R. Woodhill and Jim Woodhill. On November 13, 2001, the
promissory note was amended to increase the maximum lending limit to $3.5
million, with such increased amount remaining personally guaranteed by Messrs.
Moores, Woodhill and Woodhill.
Due to the interests in Scalable Software by several members of NEON's
Board of Directors, the Board of Directors concluded that it would be
appropriate to create a Special Committee comprised solely of directors who
have no interest in Scalable Software to review the terms of the proposed
acquisition. After thorough consideration and discussion by the Special
Committee and its advisors, the Special Committee proposed that the payment of
the consideration for the acquisition be structured as an earn out, in which
the NEON stock to be used as consideration would be placed in escrow subject
to release to the Scalable Software shareholders upon Scalable Software's
attainment of specified revenue and profitability goals. This proposal was
unacceptable to Scalable Software and was rejected. The status of the proposed
acquisition was then discussed at a special meeting of NEON's Board of
Directors in December 2001. After thorough consideration and discussion and
upon endorsement by the Special Committee, NEON's Board of Directors approved
modifications to the proposed terms and conditions for the acquisition such
that the transaction would be structured as an option to acquire Scalable
Software as discussed below.
On December 21, 2001, NEON announced that it had entered into a non-binding
term sheet to be granted a two-year option to acquire Scalable Software. This
term sheet reflects a revision by NEON and Scalable Software of NEON's
previously announced letter of intent to acquire Scalable Software. In
connection with the Option to acquire Scalable Software, NEON has agreed to
provide bridge financing of up to $5.5 million, in addition to the $3.5
million previously loaned to Scalable Software that is secured by personal
guarantees from John Moores, Louis R. Woodhill and Jim Woodhill. The aggregate
financing has a 36-month term and will not bear interest during the term of
the two-year option to acquire Scalable Software. After the expiration of the
option, the loan will bear interest at the prime rate plus two percentage
points. In addition to the personal guarantees of John J. Moores, Louis R.
Woodhill and Jim Woodhill for the initial $3.5 million loaned to Scalable
Software, the aggregate loan amount will be secured by all of the intellectual
property rights of Scalable Software. The term sheet provides that NEON may
exercise the option to acquire Scalable Software at any time during the two-
year term, subject to provisions that would require NEON to exercise its
option within a 30-day window under certain circumstances or forfeit the
option. If NEON exercises the option and acquires Scalable Software, each of
the approximately 19,400,000 outstanding shares of common stock of Scalable
Software would be converted into approximately 0.135 of a share of NEON common
stock and outstanding options and warrants to purchase approximately 3,000,000
shares of common stock of Scalable Software would become options and warrants
to purchase common stock of NEON on the same conversion basis. The transaction
is subject to the negotiation and execution of definitive documentation. As
previously disclosed, several members of NEON's Board of Directors have a
financial interest in Scalable Software. Prior to NEON exercising the option
to acquire Scalable Software, the Special Committee would review the
negotiated terms of the proposed acquisition and NEON would seek to obtain a
fairness opinion regarding the transaction from a financial advisory firm. The
acquisition of Scalable Software will require approval of the stockholders of
NEON and the NEON Board of Directors.
In addition, NEON also announced on December 21, 2001, that Louis R.
Woodhill, its President and Chief Executive Officer, and Jim Woodhill had been
appointed to the Board of Directors of NEON. Louis R. Woodhill and Jim
Woodhill are both directors and stockholders of Scalable Software. Louis R.
Woodhill is also the President and Chief Executive Officer of Scalable
Software.
Sheer Genius Software, Inc. Agreements
On January 3, 2002, NEON entered into a Services Agreement with Sheer
Genius Software, Inc. of Austin, Texas, a company owned by or affiliated with
Jim Woodhill. Under the first Project Description negotiated for such Services
Agreement, Sheer Genius will provide development services to NEON on a
budgeted time and materials basis and will deliver fixed deliverables,
consisting primarily of developed source code. The term of the Project
Description is six months and the maximum aggregate fees will be $480,000.
Under the Services Agreement, all intellectual property created by Sheer
Genius in the course of performing the Services shall be owned by NEON.
Additionally, Sheer Genius will receive a license back of such intellectual
property for limited use in the development by Sheer Genius of software that
does not compete with software distributed by NEON.
19
Also, JMI Services, Inc., a private company owned by John J. Moores, Neon's
Chairman, is a creditor of Sheer Genius, holding a promissory note dated
August 31, 2001 in the amount of $200,000. The Board of Directors reviewed the
terms of the Services Agreement and Project Description and approved such
agreements following disclosure of the interest of its officers and directors
associated with Sheer Genius.
Other Directorships
Members of our Board of Directors also serve as officers or directors of
other software or computing companies. NEON and such companies, despite each
being software companies, are not sufficiently similar in their operations to
be competitors. We do not believe that the concurrent service of our directors
as officers and/or directors of the entities listed in their biographical
descriptions poses potential conflicts of interest.
PERFORMANCE GRAPH
The following graph compares the annual cumulative total stockholder return
on an investment of $100 on March 5, 1999 (the date of the Company's initial
public offering) in our common stock, based on the market price of the common
stock at the end of our fiscal years ended March 31, 1999, 2000 and 2001, with
the cumulative total return of a similar investment in companies on the Nasdaq
Stock Market (U.S.) Index and the Chase H & Q Computer Software Index.
[Performance Graph]
Cumulative Total Return
-----------------------
3/99 3/00 3/01
------- ------- -------
NEON SYSTEMS, INC................................ 100.00 366.67 220.00 31.04
NASDAQ STOCK MARKET (U.S.)....................... 100.00 105.31 195.74 78.42
CHASE H & Q COMPUTER SOFTWARE.................... 100.00 97.82 234.85 106.87
20
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that our executive officers and directors, and beneficial owners of more than
ten percent (10%) of any class of equity security registered pursuant to the
Securities Act of 1933, as amended, make certain filings with the SEC and the
Company. We believe, based on information provided to us by the reporting
persons, that during the fiscal year ended March 31, 2001, all directors,
officers and ten percent (10%) beneficial owners timely complied with such
filing requirements except as follows: Stephen E. Odom failed to timely file
his initial Form 3.
PROPOSAL II
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has selected KPMG LLP as the Company's independent
public accountants for the fiscal year ending March 31, 2002. This selection
was based upon the recommendation of our audit committee. KPMG LLP has audited
the Company's financial statements since its initial public offering in fiscal
1999. A representative of KPMG LLP is expected to be present at the Annual
Meeting, will have an opportunity to make a statement if he or she so desires,
and will be available to respond to appropriate questions.
Fees billed to the Company by KPMG LLP during Fiscal 2001
Audit Fees:
Audit fees billed to the Company by KPMG LLP during the Company's 2001
fiscal year for review of the Company's annual financial statements and those
financial statements included in the Company's quarterly reports on Form 10-Q
totaled $141,000.
Financial Information Systems Design and Implementation Fees:
The Company did not engage KPMG LLP to provide advice to the Company
regarding financial information systems design and implementation during the
fiscal year ended March 31, 2001.
All Other Fees:
Fees billed to the Company by KPMG LLP during the Company's 2001 fiscal
year for all other non-audit services rendered to the Company, including tax
related services totaled $54,115.
The audit committee believes that the provision of the services described
under "Financial Information Systems Design and Implementation Fees" and "All
Other Fees" was compatible with maintaining KPMG LLP's independence from the
Company.
Stockholder Ratification and Board Recommendation
Stockholder ratification of the selection of KPMG LLP as the Company's
independent public accountants is not required by the Company's By-Laws or
other applicable legal requirement. However, the Board is submitting the
selection of KPMG LLP to the stockholders for ratification as a matter of good
corporate practice. If the stockholders fail to ratify the selection, the
audit committee and the Board will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Board at its discretion may
direct the appointment of a different independent accounting firm at any time
during the year if it determines that such a change would be in the best
interests of the Company and its stockholders.
Adoption of Proposal Two requires approval by the holders of a majority of
shares of common stock present in person or represented by proxy, and entitled
to vote at the annual meeting. Abstentions may be specified on this proposal
to ratify the selection of the independent auditors. Abstentions will be
considered present and entitled to vote at the annual meeting. Abstentions
will have the effect of a vote against this proposal to ratify the selection
of the independent auditors.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
21
PROPOSAL III
AMENDMENT AND RESTATEMENT OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Approval by Our Board of Directors
On January 28, 2002, our Board of Directors unanimously adopted resolutions
proposing, declaring advisable and recommending that our stockholders
authorize the amendment and restatement of our Amended and Restated
Certificate of Incorporation to remove Article 11 of our Certificate of
Incorporation. Article 11 of our Certificate of Incorporation provides that
there must be an affirmative vote of the holders of at least two-thirds of our
shares to adopt an agreement of merger or to approve the sale, lease or
exchange of all or substantially all of our property and assets. This
supermajority voting requirement exceeds the vote that would otherwise be
required for mergers and similar transactions as described below. In addition,
the language as drafted in Article 11 may require stockholder approval for
certain transactions that would not otherwise require stockholder approval.
Purpose of the Amendment
The purpose of the amendment is to provide us with greater flexibility to
enter into corporate transactions and to do so without incurring the expense
and delay of receiving stockholder approval, if stockholder approval is not
otherwise required. NEON will continue to be subject to the requirements of
Delaware law and the rules of the Nasdaq Stock Market, upon which our common
stock is listed for trading. Under Delaware law and the Nasdaq rules, the
approval of the holders of a majority of the shares outstanding is required to
approve the merger of NEON with another company, the sale, lease or exchange
of all or substantially all of our property and assets, or any acquisition
transaction in which common stock (or securities convertible into common
stock) will be issued that has 20% or more of the total voting power
outstanding before the issuance of such securities.
NEON's management routinely evaluates merger or acquisition opportunities.
The affect of this proposal would be to facilitate such a transaction,
including the proposed acquisition of Scalable Software if NEON chooses to
exercise its option to acquire Scalable Software. See "Certain Transactions--
Scalable Software, Inc. Agreements."
Reservation of Rights
Even if you approve the amendment to our Amended and Restated Certificate
of Incorporation, our Board of Directors reserves the right not to proceed,
if, at any time prior to filing the amendment with the Secretary of State of
the State of Delaware, our Board of Directors determines that the amendment is
no longer in our and our stockholders' best interests.
Vote Required
Under our Amended and Restated Certificate of Incorporation and Delaware
law, approval of the proposed amendment to our Amended and Restated
Certificate of Incorporation requires the affirmative vote of at least two-
thirds of the outstanding shares of common stock. Abstentions may be specified
on this proposal. Abstentions and broker non-votes will have the effect of a
vote against this proposal to amend our Amended and Restated Certificate of
Incorporation.
Recommendation of Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION.
22
PROPOSAL IV
APPROVAL OF THE 2002 STOCK PLAN
Approval by Our Board of Directors
Our Board of Directors determined that it is in our best interests and the
best interests of our stockholders to adopt the 2002 Stock Plan (described
below). On January 28, 2002, our Board of Directors adopted the 2002 Stock
Plan, subject to the approval of stockholders, and reserved 2,000,000 shares
of our common stock for issuance thereunder, plus (a) any shares of our common
stock which have been reserved but not issued under our 1999 Long-Term
Incentive Plan as of the date of stockholder approval of the 2002 Stock Plan,
(b) any shares of our common stock returned to the 1999 Long-Term Incentive
Plan as a result of termination of options or repurchase of shares of our
common stock issued under the 1999 Long-Term Incentive Plan and (c) annual
increases on the first day of each fiscal year, beginning April 1, 2003, equal
to the lesser of (i) 750,000 shares, (ii) 5% of the outstanding shares on such
date or (iii) a lesser amount determined by our Board of Directors. The 2002
Stock Plan is intended to replace the 1999 Long-Term Incentive Plan. As of the
date of this proxy, no options had been granted pursuant to the 2002 Stock
Plan.
Description of the NEON Systems, Inc. 2002 Stock Plan
General. The purpose of the 2002 Stock Plan is to help us attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to our employees and the
employees of our parent and subsidiary companies and to promote the success of
our business. Options granted under the 2002 Stock Plan may be either
"incentive stock options" or nonstatutory stock options. Stock purchase rights
may also be granted under the 2002 Stock Plan.
Administration. The 2002 Stock Plan may generally be administered by our
Board of Directors or a committee appointed by the board, referred to as the
administrator. The administrator may make any determinations deemed necessary
or advisable for the 2002 Stock Plan.
Eligibility. Nonstatutory stock options, incentive stock options and stock
purchase rights may be granted to our employees and to employees of any of our
parent or subsidiary companies. The administrator, in its discretion, selects
which of our employees to whom options and stock purchase rights may be
granted, the time or times at which such options and stock purchase rights
shall be granted, and the exercise price and number of shares subject to each
such grant. As of January 31, 2002, approximately 100 persons were eligible to
receive options and/or stock purchase rights under the 2002 Stock Plan.
Limitations. Section 162(m) of the Internal Revenue Code of 1986, as
amended (the Code), places limits on the deductibility for federal income tax
purposes of compensation paid to certain of our executive officers. In order
to preserve our ability to deduct the compensation income associated with
options granted to such persons, the 2002 Stock Plan provides that no employee
may be granted, in any fiscal year, options and stock purchase rights to
purchase more than 500,000 shares of our common stock.
Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between us and the optionee and is subject to the following terms
and conditions:
(a) Exercise Price. The administrator determines the exercise price of
options at the time the options are granted. The exercise price of an
incentive stock option and a nonstatutory stock option intended to qualify
as "performance based compensation" under Section 162(m) of the Code may
not be less than 100% of the fair market value of our common stock on the
date such option is granted; provided, however, that the exercise price of
an incentive stock option granted to a 10% stockholder may not be less than
110% of the fair market value on the date such option is granted. The fair
market value of our common stock is generally determined with reference to
the closing sale price for our common stock (or the closing bid if no sales
were reported) on the date the option is granted. The closing sale price of
the Company's common stock on the Nasdaq National Market on February 15,
2002 was $6.01 per share.
23
(b) Exercise of Option; Form of Consideration. The administrator
determines when options become exercisable, and may in its discretion
accelerate the vesting of any outstanding option. The means of payment for
shares issued upon exercise of an option is specified in each option
agreement. The 2002 Stock Plan permits payment to be made by cash,
promissory note, other shares of our common stock (with some restrictions),
cashless exercises, any other form consideration permitted by applicable
law, or any combination thereof.
(c) Term of Option. The term of an incentive stock option may be no more
than ten (10) years from the date of grant; provided, however, that in the
case of an incentive stock option granted to a 10% stockholder, the term of
the option may be no more than five (5) years from the date of grant. No
option may be exercised after the expiration of its term.
(d) Termination of Employment. If an optionee's employment with us
terminates for any reason (excluding death or disability), then the
optionee generally may exercise the option within three (3) months of such
termination to the extent that the option is vested on the date of
termination (but in no event later than the expiration of the term of such
option as set forth in the option agreement). If an optionee's employment
with us terminates due to the optionee's death or disability, the optionee
or the optionee's personal representative, estate, or the person who
acquires the right to exercise the option by bequest or inheritance, as the
case may be, generally may exercise the option, to the extent the option
was vested on the date of termination, within twelve (12) months from the
date of such termination.
(e) Nontransferability of Options. Unless otherwise determined by the
administrator with respect to nonstatutory stock options, options granted
under the 2002 Stock Plan are not transferable other than by will or the
laws of descent and distribution, and may be exercised during the
optionee's lifetime only by the optionee.
Other Provisions. The stock option agreement may contain other terms,
provisions and conditions not inconsistent with the 2002 Stock Plan as may be
determined by the administrator.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with us for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option shall lapse at a
rate determined by the administrator.
Adjustments Upon Changes in Capitalization. In the event that our common
stock changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration, appropriate
adjustments shall be made in the number and class of shares of stock subject
to the 2002 Stock Plan, the number of shares that may be added to the 2002
Stock Plan on an annual basis, the number of shares that may be granted to an
optionee in any year and in connection with an optionee's initial employment
with us, the number and class of shares of stock subject to any option or
stock purchase right outstanding under the 2002 Stock Plan, and the exercise
price of any such outstanding option or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The administrator may, in its sole
discretion, provide that each optionee shall have the right to exercise all or
any part of the option or stock purchase right, including shares as to which
the option or stock purchase right would not otherwise be exercisable.
In connection with our merger with or into another corporation or our
"change of control," as defined in the 2002 Stock Plan, each outstanding
option and stock purchase right shall be assumed or an equivalent option or
right substituted by the successor corporation. If the successor corporation
refuses to assume the options and stock purchase rights or to substitute
substantially equivalent options or rights, the optionee shall have the right
24
to exercise the option or stock purchase right as to all the optioned stock,
including shares not otherwise vested or exercisable. In such event, the
administrator shall notify the optionee that the option or stock purchase
right is fully exercisable for fifteen (15) days from the date of such notice
and that the option or stock purchase right terminates upon expiration of such
period.
Amendment and Termination of the Plan. Our Board of Directors may amend,
alter, suspend or terminate the 2002 Stock Plan, or any part thereof, at any
time and for any reason. However, we will obtain stockholder approval for any
amendment to the 2002 Stock Plan to the extent necessary and desirable to
comply with applicable law. No such action by the Board of Directors or
stockholders may alter or impair any option or stock purchase right previously
granted under the 2002 Stock Plan without the written consent of the optionee.
Unless terminated earlier, the 2002 Stock Plan shall terminate ten (10) years
from the date the 2002 Stock Plan was adopted by our Board of Directors.
The foregoing is only a summary of the 2002 Stock Plan. It does not purport
to be complete. A complete copy of the 2002 Stock Plan is attached as Appendix
A. Stockholders are encouraged to review the 2002 Stock Plan in its entirety.
New Plan Benefits
In January of 2002, the Board of Directors approved a new compensation plan
submitted by the management of NEON. Under such plan, all officers and
employees of NEON would receive some level of option grant under the 2002
Stock Plan if it is approved by the stockholders if and as needed to raise
such officer or employee to a commensurate level of option grants with
similarly situated peers in the industry as determined by the Company. No
options under the 2002 Stock Plan will be granted until we receive stockholder
approval of the plan. We do not anticipate that any one person will receive 5%
or more of the shares reserved for issuance under the 2002 Stock Plan. The
dollar value of options to be granted under the 2002 Stock Plan is not
determinable. The dollar value of options granted under the 2002 Stock Plan
depends on the Exercise Price, as defined in the plan. The Exercise Price is
based on the Fair Market Value of the Common Stock on the date of the grant,
as defined in the plan. Until the options are granted, the Fair Market Value
is not determinable. The following table sets forth the current anticipated
New Plan Benefits as of February 15, 2002 that may be granted under the 2002
Stock Plan if it is approved by the stockholders for the following:
. The current Chief Executive Officer and each of the four other most
highly compensated individuals who currently serve as our executive
officers as of February 15, 2002;
. All current executive officers as a group;
. All current directors who are not executive officers as a group; and
. All employees, including all current officers who are not executive
officers, as a group;
25
NEW PLAN BENEFITS
2002 Stock Plan
Dollar (2) Number of
Name and Position(1) Value ($) Units
-------------------- ---------- ---------
Louis R. Woodhill, President and Chief Executive
Officer................................................. -0-
Wayne Webb, Jr., Senior Vice President and General
Counsel................................................. 71,980
Mark Creswell, Vice President and General Manager, Shadow
Division................................................ -0-
Don Pate, Senior Vice President and General Manager,
Enterprise Subsystems Management Division............... 63,000
Jonathan Reed, Vice President Business Development and
Product Marketing....................................... 19,500
Executive Group.......................................... 323,500
Non-Executive Director Group............................. -0-
Non-Executive Officer Employee Group..................... 1,510,619
--------
(1) Disclosure of the options granted to the Named Executive Officers is
limited to the current Chief Executive Officer and the four most highly
compensated executive officers that are currently employed by NEON Systems
as of February 15, 2002. NEON does not anticipate that any options will be
granted to any Named Executive Officers except as disclosed in the table
above.
(2) The dollar value of options to be granted under the 2002 Stock Plan is not
currently determinable. The dollar value of options granted under the 2002
Stock Plan depends on the Exercise Price, as defined in the plan. The
Exercise Price is based on the Fair Market Value of the Common Stock on
the date of the grant, as defined in the plan. Until the options are
granted, the Fair Market Value is not determinable.
Federal Income Tax Consequences
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise is an adjustment item for alternative
minimum tax purposes and may subject the optionee to the alternative minimum
tax. Under proposed regulations, for an incentive stock option exercised on
and after January 1, 2003, the excess of the then fair market value of the
shares over the exercise price will constitute "wages" for FICA and FUTA tax
purposes at the time of exercise, but not for income tax purposes. Upon a
disposition of the shares more than two (2) years after grant of the option
and one (1) year after exercise of the option, any gain or loss is treated as
long-term capital gain or loss. Net capital gains on shares held more than
twelve (12) months may be taxed at a maximum federal rate of 20%. Capital
losses are allowed in full against capital gains and up to $3,000 against
other income. If these holding periods are not satisfied, the optionee
recognizes ordinary income at the time of disposition equal to the difference
between the exercise price and the lower of (i) the fair market value of the
shares at the date of the option exercise or (ii) the sale price of the
shares. Any gain or loss recognized on such a premature disposition of the
shares in excess of the amount treated as ordinary income is treated as long-
term or short-term capital gain or loss, depending on the holding period. A
different rule for measuring ordinary income upon such a premature disposition
may apply if the optionee is also an officer, director, or 10% stockholder of
ours. Unless limited by Section 162(m) of the Code, we are entitled to a
deduction in the same amount as the ordinary income recognized by the
optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price.
Any taxable income recognized in connection with an option exercise by our
employee is subject to tax withholding by us. Unless limited by Section 162(m)
of the Code, we are entitled to a deduction in the same amount as the ordinary
income recognized by the optionee. Upon a disposition of such shares by the
optionee, any difference between the sale price and the optionee's exercise
price, to the extent not recognized as taxable income as provided above, is
treated as long-term or short-term capital gain or loss, depending on the
holding period. Net capital gains on shares held more than 12 months may be
taxed at a maximum federal rate of 20%. Capital losses are allowed in full
against capital gains and up to $3,000 against other income.
26
Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is
subject to a "substantial risk of forfeiture" within the meaning of Section 83
of the Code, because we may repurchase the stock when the purchaser ceases to
provide services to us. As a result of this substantial risk of forfeiture,
the purchaser will not recognize ordinary income at the time of purchase.
Instead, the purchaser will recognize ordinary income on the dates when the
stock is no longer subject to a substantial risk of forfeiture (i.e., when our
right of repurchase lapses). The purchaser's ordinary income is measured as
the difference between the purchase price and the fair market value of the
stock on the date the stock is no longer subject to a right of repurchase.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and begin his or her capital gains holding period
by timely filing (i.e., within thirty (30) days of purchase) an election
pursuant to Section 83(b) of the Code. In such event, the ordinary income
recognized, if any, is measured as the difference between the purchase price
and the fair market value of the stock on the date of purchase, and the
capital gain holding period commences on such date. The ordinary income
recognized by a purchaser who is our employee will be subject to tax
withholding by us. Different rules may apply if the purchaser is also an
officer, director, or 10% stockholder of ours.
The foregoing is only a summary of the effect of federal income taxation
upon us and our optionees with respect to the grant and exercise of options
under the 2002 Stock Plan. It does not purport to be complete and does not
discuss the tax consequences of the employee's death or the provisions of the
income tax laws of any municipality, state or foreign country in which the
employee may reside.
Vote Required
The approval of the NEON Systems, Inc. 2002 Stock Plan requires the
affirmative vote of a majority of the voting power represented at the Annual
Meeting and entitled to vote on the subject matter. Abstentions may be
specified on this proposal. Abstentions will have the effect of a vote against
this proposal to approve the NEON Systems, Inc. 2002 Stock Plan. Broker non-
votes will have no effect on the outcome of the vote on this proposal.
Recommendation of Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
ADOPTION OF THE 2002 STOCK PLAN.
27
PROPOSAL V
APPROVAL OF THE 2002 DIRECTOR OPTION PLAN
In January 2002 our Board of Directors adopted the 2002 Director Option
Plan, subject to the approval of our stockholders. The 2002 Director Option
Plan is intended to replace our Stock Option Plan for Non-Employee Directors,
which the Board of Directors plans to terminate after approval of the 2002
Director Option Plan. Our Board of Directors has reserved a maximum of 250,000
shares of our common stock for issuance under the 2002 Director Option Plan
plus (a) any shares of our common stock which have been reserved but not
issued under our Stock Option Plan for Non-Employee Directors as of the date
of stockholder approval of this 2002 Director Option Plan, (b) any shares of
our common stock returned to the Stock Option Plan for Non-Employee Directors
as a result of termination of options or repurchase of shares issued under the
Stock Option Plan for Non-Employee Directors, and (c) annual increases on the
first day of each fiscal year, beginning on April 1, 2003, equal to the lesser
of (i) 2% of the outstanding shares of our common stock on such date or (ii)
an amount determined by our Board of Directors.
Description of the NEON Systems, Inc. 2002 Director Option Plan
Purpose. The purpose of the 2002 Director Option Plan is to attract and
retain highly qualified directors who are not our employees.
Administration. The 2002 Director Option Plan provides for grants of
options to be made in two ways:
(a) Each non-employee director is automatically granted a one-time
option to purchase up to 37,500 shares, referred to as the "Election
Option," on: (i) the date on which the 2002 Director Option Plan is
approved at a meeting by stockholders provided that he or she is a non-
employee director immediately following such meeting and has served as a
non-employee director during any fiscal year prior to and including the
fiscal year ended March 31, 2001 or (ii) the date on which such person
first becomes a non-employee director, if such date is subsequent to (i),
whether through election by our stockholders or appointment by our Board of
Directors to fill a vacancy; provided, however, that an employee director
who ceases to be an employee director on a date subsequent to (i) but who
remains a director will not receive an Election Option upon such event. In
the case of (i), the number of shares subject to an Election Option will be
12,500 for each full or partial fiscal year in which the non-employee
director served as a non-employee director of NEON as of March 31, 2001, up
to a maximum of three years of service. For example, the awards for
directors who served one year, two years, and three years would be 12,500,
25,000 or 37,500, respectively. In the case of (ii), the number of shares
subject to an Election Option will be 12,500; and
(b) Each non-employee director is automatically granted an option to
purchase 12,500 shares, referred to as the "Annual Option," on the date of
each of our subsequent annual stockholders meeting following the Annual
Meeting of Stockholders scheduled for March 26, 2002, if he or she is a
non-employee director immediately following such meeting and on such dates
he or she shall have served on our Board of Directors for at least the
preceding six (6) months.
Eligibility. Only non-employee directors are eligible to receive
nonstatutory stock options under the 2002 Director Option Plan. Currently, our
Board of Directors consists of eight directors of whom seven are non-employee
directors.
Terms and Conditions of Options. Each option is evidenced by a director
option agreement between us and the relevant non-employee director, and is
subject to the following additional terms and conditions:
Exercise Price. The exercise price of options granted under the 2002
Director Option Plan is 100% of the fair market value per share of our common
stock on the date of grant. The fair market value of our common stock is
generally determined with reference to the closing sale price for our common
stock (or the closing bid if no sales were reported) on the date the option is
granted. The closing sale price of the Company's common stock on the Nasdaq
National Market on February 15, 2002 was $6.01 per share.
28
Exercise of Option. An Election Option will vest quarterly over 3 years
from the date of grant. An Annual Option will vest quarterly over 2 years from
the date of grant. An option will be exercisable in whole or in part by giving
us written notice, stating the number of shares with respect to which the
option is being exercised, accompanied by payment in full for such shares.
Forms of Consideration. We receive no consideration for granting options
under the 2002 Director Option Plan. The means of payment for shares issued
upon exercise of an option is specified in each option agreement. The 2002
Director Option Plan permits payment to be made by cash, check, other shares
of common stock of the Company (with some restrictions), cashless exercises or
any combination of these alternatives.
Term of Option. The term of any option shall be ten (10) years from the
date of grant. No option may be exercised after the expiration of its term.
Termination of Directorship. If a non-employee director's status as a
director terminates for any reason (excluding death or disability), then all
options held by him or her under the 2002 Director Option Plan expire 3 months
following the termination. If the non-employee director's status as a director
terminates due to death or disability, then all options held by him or her
under the 2002 Director Option Plan expire 12 months following the
termination. In no case may an option be exercised after its 10-year term.
Nontransferability of Options. Unless otherwise determined by the Board,
options granted under the 2002 Director Option Plan are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the non-employee director's lifetime only by the non-employee director.
Other Provisions. The director option agreement may contain other terms,
provisions and conditions consistent with the 2002 Director Option Plan as may
be determined by the Board.
Adjustments Upon Changes in Capitalization. In the event that our stock
changes by reason of any stock split, reverse stock split, stock dividend,
combination, reclassification or other similar change in our capital structure
effected without the receipt of consideration, appropriate adjustments will be
made in the number and class of shares of stock subject to the 2002 Director
Option Plan, the number and class of shares of stock subject to any
outstanding option, the exercise price of any such outstanding option and the
number of shares that may be subsequently issued pursuant to Election and
Annual Options.
In the event of our proposed liquidation or dissolution, any unexercised
options will terminate prior to such action.
In the event of our merger or the sale of substantially all of our assets,
each option may be assumed or an equivalent option substituted for by the
successor corporation. If an option is assumed or substituted for by the
successor corporation, it shall continue to vest as provided in the 2002
Director Option Plan. If following such assumption or substitution a non-
employee director's status as a director terminates other than by his or her
voluntary resignation, the option shall become fully vested and exercisable
and shall remain exercisable in accordance with the provisions of the 2002
Director Option Plan and the applicable option agreement. If the successor
corporation does not agree to assume or substitute for the option, each option
shall become fully vested and exercisable for a period of thirty (30) days
from the date our Board of Directors notifies the non-employee director of the
option's full exercisability, after which period the option will terminate.
Amendment and Termination of the 2002 Director Option Plan. Our Board of
Directors may amend, alter, suspend or terminate the 2002 Director Option
Plan, or any part thereof, at any time and for any reason. However, we will
obtain stockholder approval for any amendment to the 2002 Director Option Plan
to the extent necessary to comply with applicable laws or regulations. No such
action by our Board of Directors or stockholders may alter or impair any
option previously granted under the 2002 Director Option Plan without the
consent of the non-employee director. Unless terminated earlier, the 2002
Director Option Plan will terminate ten (10) years from the date of its
approval by our stockholders.
29
The foregoing is only a summary of the 2002 Director Option Plan. It does
not purport to be complete. A complete copy of the 2002 Director Option Plan
is attached as Exhibit B. Stockholders are encouraged to review the 2002
Director Option Plan in its entirety.
New Plan Benefits
The following table shows in the aggregate the amount of options to
purchase shares of our common stock that will be granted to non-employee
directors under the 2002 Director Option Plan in fiscal 2002, if the 2002
Director Option Plan is approved by the stockholders. If re-elected to the
Board by the stockholders, Messrs. van den Berg, Ellis and Holcomb and all
other current non-employee directors shall each receive an Election Option to
purchase up to 37,500 shares which vests over a three-year period. No Annual
Options will be granted until the next scheduled annual stockholders meeting.
2002 Director Option Plan
Number of
Name and Position Dollar Value ($) Shares (2)
----------------- ---------------- ---------
Non-Executive Directors as a Group (seven
persons)......................................... (1) 187,500
Norris van den Berg............................... 37,500
George H. Ellis................................... 25,000
Richard Holcomb................................... 37,500
John J. Moores.................................... 37,500
Charles E. Noell, III............................. 37,500
Peter Schaeffer................................... 12,500
Jim Woodhill...................................... 0
--------
(1) The Company cannot determine the dollar value of benefits to be awarded
under the 2002 Director Option Plan. All option grants pursuant to the
2002 Director Option Plan shall have an exercise price per share equal to
the fair market value of our common stock on the date of the grant.
(2) In the event that the 2002 Director Option Plan is approved by the
stockholders of NEON, the aggregate number of shares available for grant
under the 2002 Director Option Plan will be 250,000 new shares, plus
55,000 shares reserved for issuance under the Stock Option Plan for Non-
Employee Directors that are not currently subject to previously granted
options.
Federal Income Tax Consequences
The following discussion summarizes certain U.S. federal income tax
considerations for non-employee directors receiving options under the 2002
Director Option Plan and certain tax effects for us, based upon the provisions
of the Internal Revenue Code of 1986, as amended, as in effect on the date of
this Proxy Statement, current regulations and existing administrative rulings
of the Internal Revenue Service. However, the summary is not intended to be a
complete discussion of all the federal income tax consequences of this plan:
Nonstatutory Stock Options. Options granted under the 2002 Director Option
Plan do not qualify as incentive stock options under Section 422 of the Code.
A non-employee director does not recognize any taxable income at the time he
or she is granted a nonstatutory stock option. Upon exercise, the non-employee
director recognizes taxable income generally measured by the excess of the
fair market value on the date of exercise for the shares exercised over the
exercise price. We are entitled to a deduction in the same amount as the
ordinary income recognized by the non-employee director. Upon a disposition of
such shares by the non-employee director, any difference between the sale
price and the relevant option's exercise price, to the extent not recognized
as taxable income as provided above, is treated as long-term or short-term
capital gain or loss, depending on how long after exercise the shares are
sold. Net capital gains on shares held more than 12 months may be taxed at a
maximum federal rate of 20%. Capital losses are allowed in full against
capital gains and up to $3,000 against other income.
30
The foregoing is only a summary of the effect of federal income taxation
upon us and optionees with respect to the grant and exercise of options under
the 2002 Director Option Plan. It does not purport to be complete and does not
discuss the tax consequences of the director's death or the provisions of the
income tax laws of any municipality, state or foreign country in which the
director may reside.
Vote Required
The approval of the NEON Systems, Inc. 2002 Director Option Plan requires
the affirmative vote of a majority of the voting power represented at the
Annual Meeting and entitled to vote on the subject matter. Abstentions may be
specified on this proposal. Abstentions will have the effect of a vote against
this proposal to approve the NEON Systems, Inc. 2002 Director Option Plan.
Broker non-votes will have no effect on the outcome of the vote on this
proposal.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
ADOPTION OF THE 2002 DIRECTOR OPTION PLAN.
NO INCORPORATION BY REFERENCE; NO SOLICITATION
In NEON's filings with the SEC, information is sometimes "incorporated by
reference." This means that we are referring you to information that has
previously been filed with the SEC, so the information should be considered as
part of the filing that you are reading. Based on SEC regulations, the
performance graph of this proxy statement, the "Audit Committee Report" and
the "Compensation Committee Report" specifically are not incorporated by
reference into any other filings with the SEC or deemed filed with the SEC
under the Securities Act of 1933, as amended, or under the Securities Exchange
Act of 1934, as amended.
This proxy statement is sent to you as part of the proxy materials for the
2002 Annual Meeting of Stockholders. You may not consider this proxy statement
as material for soliciting the purchase or sale of NEON's common stock.
OTHER MATTERS
We know of no other matters to be submitted to the meeting. If any other
matters properly come before the meeting, it is the intention of the persons
named in the enclosed proxy to vote the shares they represent as the Board of
Directors may recommend.
It is important that your stock be represented at the meeting, regardless
of the number of shares that you hold. You are, therefore, urged to execute
and return the accompanying proxy in the envelope, which has been enclosed, at
your earliest convenience.
FOR THE BOARD OF DIRECTORS
James Bradford Poynter
Secretary
Dated: February 27, 2002
31
Exhibit A
NEON SYSTEMS, INC.
2002 STOCK PLAN
1. Purposes of the Plan. The purposes of this 2002 Stock Plan are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options or
Stock Purchase Rights are, or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" means the occurrence of any of the following
events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) becomes the "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly, of securities of
the Company representing fifty percent (50%) or more of the total
voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" will mean
directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but will not
include an individual whose election or nomination is in connection
with an actual or threatened proxy contest relating to the election of
directors to the Company); or
(iii) The consummation of the sale or disposition by the Company of
all or substantially all of the Company's assets; or
(iv) The consummation of a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity or its parent) at least fifty percent (50%) of the
total voting power represented by the voting securities of the Company
or such surviving entity or its parent outstanding immediately after
such merger or consolidation.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means a committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
(g) "Common Stock" means the common stock of the Company.
(h) "Company" means NEON Systems, Inc., a Delaware corporation.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. An
Employee shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or any Parent or Subsidiary, as applicable
or (ii) transfers between locations of the Company or between the Company,
its Parent, any Subsidiary, or any successor. For purposes of Incentive
Stock Options, no such leave may exceed ninety days, unless reemployment
upon expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the Company
is not so guaranteed, then three (3) months following the 90th day of such
leave, any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes
as a Nonstatutory Stock Option. Neither service as a Director nor payment
of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company. If an Employee's employer ceases to be a
Subsidiary of the Company, such Employee's employment shall be deemed
terminated on such date unless the Administrator provides otherwise.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system on the day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the day of determination,
as reported in The Wall Street Journal or such other source as the
Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase
Right grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise
price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
2
(v) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 2002 Stock Plan, as it may be amended and/or
restated from time to time.
(y) "Restricted Stock" means shares of Common Stock acquired pursuant to
a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted
Stock Purchase Agreement is subject to the terms and conditions of the Plan
and the Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect
to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
(cc) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(dd) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ee) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares that may be sold under the
Plan is 2,000,000 Shares plus (a) any Shares which have been reserved but not
issued under the Company's 1999 Long-Term Incentive Plan (the "1999 Plan") as
of the date of stockholder approval of this Plan, (b) any Shares returned to
the 1999 Plan as a result of termination of options or repurchase of Shares
issued under the 1999 Plan and (c) an annual increase to be added on the first
day of the Company's fiscal year beginning April 1, 2003, equal to the lesser
of (i) 750,000 Shares, (ii) 5% of the outstanding Shares on such date or (iii)
an amount determined by the Board. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued
under the Plan, whether upon exercise of an Option or Stock Purchase Right,
shall not be returned to the Plan and shall not become available for future
distribution under the Plan, except that if Shares of Restricted Stock are
repurchased by the Company at their original purchase price, such Shares shall
become available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different Committees with
respect to different groups of Employees may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m)
of the Code, the Plan shall be administered by a Committee of two or
more "outside directors" within the meaning of Section 162(m) of the
Code.
3
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption
under Rule 16b-3, including having the Plan administered by a Committee
comprised solely of "Non-Employee Directors" within the meaning of Rule
16b-3(b)(3).
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties delegated by
the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Employees to whom Options and Stock Purchase
Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be covered
by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options or Stock Purchase
Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right
or the shares of Common Stock relating thereto, based in each case on
such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall
have declined since the date the Option or Stock Purchase Right was
granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to establish, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans
established for the purpose of satisfying applicable foreign laws;
(x) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than
is otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the minimum amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by an Optionee to have Shares withheld for
this purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option or Stock Purchase
Right previously granted by the Administrator;
(xiii) to correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, or in any Option Agreement, in a manner and
to the extent it shall deem necessary, all of which determinations and
interpretations made by the Administrator shall be conclusive and
binding on all Optionees, any other holders of Options and on their
legal representatives and beneficiaries;
4
(xiv) except to the extent prohibited by, or impermissible in order
to obtain treatment desired by the Administrator under, applicable law
or rule, to allocate or delegate all or any portion of its powers and
responsibilities to any one or more of its members or to any person(s)
selected by it, subject to revocation or modification by the
Administrator of such allocation or delegation; and
(xv) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Incentive Stock Options, Nonstatutory Stock Options and
Stock Purchase Rights may only be granted to Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of
the Shares shall be determined as of the time the Option with respect to
such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as an Employee with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Employee shall be granted, in any fiscal year of the Company,
Options to purchase more than 500,000 Shares.
(ii) The foregoing limitation shall be adjusted proportionately in
connection with any change in the Company's capitalization as described
in Section 13.
(iii) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a
transaction described in Section 13), the cancelled Option will be
counted against the limit set forth in subsection (i) above. For this
purpose, if the exercise price of an Option is reduced, the transaction
will be treated as a cancellation of the Option and the grant of a new
Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten
(10) years from the date of grant or such shorter term as may be provided in
the Option Agreement. Moreover, in the case of an Incentive Stock Option
granted to an Optionee who, at the time the Incentive Stock Option is granted,
owns stock representing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant or such shorter term as may be provided in the Option
Agreement.
5
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of
grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of
a Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per
Share exercise price shall be no less than 100% of the Fair Market
Value per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before
the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the
time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares, provided such Shares (A) if acquired directly or
indirectly from the Company, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (B) have a Fair
Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which said Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined
6
by the Administrator and set forth in the Option Agreement. Unless the
Administrator provides otherwise, vesting of Options granted hereunder
shall be suspended during any unpaid leave of absence. An Option may not be
exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised and
any withholding taxes the Company is required to withhold or arrangements
for the payment of such taxes, satisfactory to the Company, have been made.
Full payment may consist of any consideration and method of payment
authorized by the Administrator and permitted by the Option Agreement and
the Plan. Shares issued upon exercise of an Option shall be issued in the
name of the Optionee or, if requested by the Optionee, in the name of the
Optionee and his or her spouse or in the name of a family trust of which
the Optionee is a trustee. Until the Shares are issued (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Company shall issue
(or cause to be issued) such Shares promptly after the Option is exercised;
provided that if the Company shall be advised by counsel that certain
requirements under the Federal, state or foreign securities laws must be
met before Shares may be issued under this Plan, the Company shall notify
all persons who have been issued Options, and the Company shall have no
liability for failure to issue Shares under any exercise of Options because
of delay while such requirements are being met or the inability of the
Company to comply with such requirements. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as an Employee. If an Optionee ceases
to be an Employee, other than upon the Optionee's death or Disability, the
Optionee may exercise his or her Option within such period of time as is
specified in the Option Agreement to the extent that the Option is vested
on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the
absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be an Employee as a
result of the Optionee's Disability, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no
event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination (but in no event later than the
expiration of the term of such Option as set forth in the Option
Agreement). If, on the date of termination, the Optionee is not vested as
to his or her entire Option, the Shares covered by the unvested portion of
the Option shall revert to the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. If an Optionee dies, the Option may be exercised
following the Optionee's death within such period of time as is specified
in the Option Agreement to the extent that the Option is vested on the date
of death (but in no event may the Option be exercised later than the
expiration of the term of such Option as set forth in the Option
Agreement), by the Optionee's designated beneficiary, provided such
7
beneficiary has been designated prior to the Optionee's death in a form
acceptable to the Administrator. If no such beneficiary has been designated
by the Optionee, then such Option may be exercised by the personal
representative of the Optionee's estate or by the person(s) to whom the
Option is transferred pursuant to the Optionee's will or in accordance with
the laws of descent and distribution. In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Optionee's death (but in no event later than the
expiration of the term of such Option as set forth in the Option
Agreement). If, at the time of death, the Optionee is not vested as to his
or her entire Option, the Shares covered by the unvested portion of the
Option shall immediately revert to the Plan. If the Option is not so
exercised within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it
shall advise the offeree in writing or electronically, by means of a Notice
of Grant, of the terms, conditions and restrictions related to the offer,
including the number of Shares that the offeree shall be entitled to
purchase, the price to be paid, and the time within which the offeree must
accept such offer. The offer shall be accepted by execution of a Restricted
Stock Purchase Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's employment with the Company, its Parent and Subsidiaries
for any reason (including death or Disability). The purchase price for
Shares repurchased pursuant to the Restricted Stock Purchase Agreement
shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion,
including tax withholding rights and obligations.
(d) Rights as a Stockholder. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a stockholder,
and shall be a stockholder when his or her purchase is entered upon the
records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is
prior to the date the Stock Purchase Right is exercised, except as provided
in Section 13 of the Plan.
12. Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator with respect to Nonstatutory Stock
Options, an Option or Stock Purchase Right may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or
by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. If the Administrator makes an
Option or Stock Purchase Right transferable, such Option or Stock Purchase
Right shall contain such additional terms and conditions as the Administrator
deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Change in Control.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock that have
been authorized for issuance under the Plan but as to which no Options or
Stock Purchase Rights have yet been granted or which have been returned to
the Plan upon cancellation or expiration of an Option or Stock Purchase
Right, the number of Shares that may be added annually to the Shares
reserved under the Plan (pursuant to Section 3(c)(i)) and the number of
Shares as well as the price per share of Common Stock covered by each such
outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of
8
Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each Optionee
as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until ten (10)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company
repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock Purchase Right shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Change in Control. In the event of a merger of the Company
with or into another corporation, or a Change in Control, each outstanding
Option and Stock Purchase Right shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation
refuses to assume or substitute for the Option or Stock Purchase Right, the
Optionee shall fully vest in and have the right to exercise the Option or
Stock Purchase Right as to all of the Optioned Stock, including Shares as
to which it would not otherwise be vested or exercisable. If an Option or
Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or Change in Control,
the Administrator shall notify the Optionee in writing or electronically
that the Option or Stock Purchase Right shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice,
and the Option or Stock Purchase Right shall terminate upon the expiration
of such period.
For the purposes of this subsection (c), the Option or Stock Purchase
Right shall be considered assumed if, following the merger or Change in
Control, the option or right confers the right to purchase or receive, for
each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the merger or Change in Control, the consideration
(whether stock, cash, or other securities or property) received in the
merger or Change in Control by holders of Common Stock for each Share held
on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of
a majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or Change in Control is not solely
common stock of the successor corporation or its Parent, the Administrator
may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or Change
in Control.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the determination
shall be provided to each Optionee within a reasonable time after the date of
such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
9
(b) Stockholder Approval. The Company shall obtain stockholder approval
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the
Optionee and the Company. Termination of the Plan shall not affect the
Administrator's or the Company's ability to exercise the powers granted to
it hereunder with respect to Options and Stock Purchase Rights granted
under the Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and warrant at
the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan
is adopted. Such stockholder approval shall be obtained in the manner and to
the degree required under Applicable Laws. No Option shall become exercisable
or Stock Purchase Right vested prior to such stockholder approval and in the
event such stockholder approval is not obtained, all awards granted under the
Plan shall be automatically cancelled.
10
Exhibit B
NEON SYSTEMS, INC.
2002 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 2002 Director Option Plan are
to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive
to the Outside Directors of the Company to serve as Directors, and to
encourage their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the common stock of the Company.
(d) "Company" means NEON Systems, Inc., a Delaware corporation.
(e) "Director" means a member of the Board.
(f) "Disability" means total and permanent disability as defined in
section 22(e)(3) of the Code.
(g) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a Director's fee by the Company shall not be sufficient in and
of itself to constitute "employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system on the day of determination, as reported in The Wall
Street Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the day of determination,
as reported in The Wall Street Journal or such other source as the Board
deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "Inside Director" means a Director who is an Employee.
(k) "Option" means a stock option granted pursuant to the Plan.
(l) "Optioned Stock" means the Common Stock subject to an Option.
(m) "Optionee" means a Director who holds an Option.
(n) "Outside Director" means a Director who is not an Employee.
(o) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(p) "Plan" means this 2002 Director Option Plan, as it may be amended
and/or restated from time to time.
(q) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 10 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue
Code of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be sold under the
Plan is 250,000 Shares plus (a) any Shares which have been reserved but not
issued under the Company's Stock Option Plan for Non-Employee Directors (the
"Non-Employee Director Plan") as of the date of stockholder approval of this
Plan, (b) any Shares returned to the Non-Employee Director Plan as a result of
termination of options or repurchase of Shares issued under the Non-Employee
Director Plan and (c) an annual increase to be added on the first day of the
Company's fiscal year beginning on April 1, 2003, equal to the lesser of (i)
2% of the outstanding Shares on such date or (ii) an amount determined by the
Board. The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
(a) Procedure for Grants. All grants of Options to Outside Directors
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares
to be covered by Options.
(ii) Each Outside Director shall be automatically granted a one-time
Option to purchase up to 37,500 Shares (the "Election Option") on: (A)
the date on which this Plan is approved at a meeting by the
stockholders of the Company, provided he or she is an Outside Director
immediately following such meeting and has served as an Outside
Director since at least March 31, 2001 or (B) the date on which such
person first becomes an Outside Director, if such date is subsequent to
(A), whether through election by the stockholders of the Company or
appointment by the Board to fill a vacancy; provided, however, that an
Inside Director who ceases to be an Inside Director on a date
subsequent to (A) but who remains a Director shall not receive an
Election Option upon such event. In the case of (A), the number of
Shares subject to an Election Option shall be equal to the product of
(x) 12,500 and (y) the number of full or partial fiscal years that such
grantee has served as an Outside Director as of March 31, 2001;
provided that the number of Shares subject to an Election Option shall
not exceed 37,500. In the case of (B), the number of Shares subject to
an Election Option shall be 12,500.
(iii) Each Outside Director shall be automatically granted an Option
to purchase 12,500 Shares (an "Annual Option") on the date of the
Company's annual stockholder meeting of each year provided (A) he or
she is an Outside Director immediately following such meeting, (B) as
of such date, he or she shall have served as a Director for at least
the preceding six (6) months and (C) no Annual Options shall be granted
on the date of the Company's annual stockholder meeting at which this
Plan is approved by the stockholders of the Company.
(iv) The terms of an Election Option granted hereunder shall be as
follows:
(A) the term of the Election Option shall be ten (10) years.
(B) the Election Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set
forth in Sections 8 and 10 hereof.
2
(C) the exercise price per Share shall be 100% of the Fair Market
Value per Share on the date of grant of the Election Option.
(D) subject to Section 10 hereof, the Election Option shall
become exercisable as to one-twelfth (1/12th) of the Shares subject
to the Election Option every three (3) months following its date of
grant, provided that the Optionee continues to serve as a Director
on such dates.
(v) The terms of an Annual Option granted hereunder shall be as
follows:
(A) the term of the Annual Option shall be ten (10) years.
(B) the Annual Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair Market
Value per Share on the date of grant of the Annual Option.
(D) subject to Section 10 hereof, the Annual Option shall become
exercisable as to one-eighth (1/8th) of the Shares subject to the
Annual Option every three (3) months following its date of grant,
provided that the Optionee continues to serve as a Director on such
dates.
(vi) In the event that any Option granted under the Plan would cause
the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the total number of
Shares reserved for issuance under the Plan, then the remaining Shares
available for Option grant shall be granted under Options to the
Outside Directors on a pro rata basis. No further grants shall be made
until such time, if any, as additional Shares become available for
grant under the Plan through the provisions of the Plan, by action of
the Board, by the stockholders approving an increase in the number of
Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth
in Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director,
nor shall it interfere in any way with any rights which the Director or the
Company may have to terminate the Director's relationship with the Company at
any time.
6. Term of Plan. The Plan shall become effective upon its approval by the
stockholders of the Company. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other Shares, which, in the case of
Shares acquired from the Company, (x) have been owned by the Optionee for more
than six (6) months on the date of surrender, and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares
as to which said Option shall be exercised, (iv) consideration received by the
Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (v) any combination of the foregoing methods of
payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times as are set forth in Section 4
hereof and may not be exercised for a fraction of a Share. An Option shall
be deemed to be exercised when written notice of such exercise has been
given to the Company in accordance with the terms of the Option by the
person entitled to exercise the Option and full payment for the Shares with
respect to which the Option is exercised has been received by the Company.
Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly
3
authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. A share certificate for the
number of Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. No adjustment shall be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to Section
10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or Disability), the Optionee may
exercise his or her Option, but only within three (3) months following the
date of such termination, and only to the extent that the Optionee was
entitled to exercise it on the date of such termination (but in no event
later than the expiration of its ten (10) year term). To the extent that
the Optionee was not vested as to his or her entire Option on the date of
such termination, the Shares covered by the unvested portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option
shall terminate, and the Shares covered by such Option shall revert to the
Plan.
(c) Disability of Optionee. In the event an Optionee's status as a
Director terminates as a result of Disability, the Optionee may exercise
his or her Option, but only within twelve (12) months following the date of
such termination, and only to the extent that the Optionee was entitled to
exercise it on the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was
not vested as to his or her entire Option on the date of termination, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option, but only within twelve
(12) months following the date of death, and only to the extent that the
Optionee was entitled to exercise it on the date of death (but in no event
later than the expiration of its ten (10) year term). To the extent that
the Optionee was not vested as to his or her entire Option on the date of
death, the Shares covered by the unvested portion of the Option shall
revert to the Plan. To the extent that the Optionee's estate or a person
who acquired the right to exercise such Option does not exercise such
Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
9. Transferability of Options. Unless determined otherwise by the Board, an
Option may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised, during the lifetime of the Optionee, only
by the Optionee. If the Board makes an Option transferable, such Option shall
contain such additional terms and conditions as the Board deems appropriate.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of Shares which have been
authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, the number of Shares as well as the price per
Share covered by each such outstanding Option, and the number of Shares
issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other
4
increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company; provided, however, that conversion
of any convertible securities of the Company shall not be deemed to have
been "effected without receipt of consideration." Except as expressly
provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, to the extent that an Option has not been
previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options
may be substituted by the successor corporation or a Parent or Subsidiary
thereof (the "Successor Corporation"). If an Option is assumed or
substituted for, the Option or equivalent option shall continue to be
exercisable as provided in Section 4 hereof for so long as the Optionee
serves as a Director or a director of the Successor Corporation. Following
such assumption or substitution, if the Optionee's status as a Director or
director of the Successor Corporation, as applicable, is terminated other
than upon a voluntary resignation by the Optionee, the Option or option
shall become fully exercisable, including as to Shares for which it would
not otherwise be exercisable. Thereafter, the Option or option shall remain
exercisable in accordance with Sections 8(b) through (d) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully
vested and exercisable, including as to Shares for which it would not
otherwise be exercisable. In such event the Board shall notify the Optionee
that the Option shall be fully exercisable for a period of thirty (30) days
from the date of such notice, and upon the expiration of such period the
Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the
right to purchase or receive, for each Share of Optioned Stock subject to
the Option immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for
each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by
the holders of a majority of the outstanding Shares). If such consideration
received in the merger or sale of assets is not solely common stock of the
successor corporation or its Parent, the Board may, with the consent of the
successor corporation, provide for the consideration to be received upon
the exercise of the Option, for each Share of Optioned Stock subject to the
Option, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received
by holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend, or discontinue the Plan, but no amendment, alteration, suspension,
or discontinuation shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any
applicable law, regulation, stock exchange rule or quotation system rule,
the Company shall obtain shareholder approval of any Plan amendment in such
a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof.
5
13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
or quotation system upon which the Shares may then be listed or quoted, and
shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without
any present intention to sell or distribute such Shares, if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
14. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
6
[NEON LOGO APPEARS HERE]
14100 Southwest Freeway, Suite 500
Sugar Land, Texas 77478
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 26, 2002
Dear Stockholders:
On Tuesday, March 26, 2002, NEON Systems, Inc. will hold its annual
meeting of stockholders at our offices located 14100 Southwest Freeway, Suite
500, Sugar Land, Texas. The meeting will begin at 10:00 a.m., Sugar Land, Texas
time.
Only stockholders that own stock at the close of business on February
26, 2002 can vote at the meeting.
See Reverse Side
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
IMPORTANT NOTICE:
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
OR VOTE VIA THE INTERNET OR TELEPHONE FOLLOWING THE INSTRUCTIONS ON THE PROXY
CARD.
Please mark [X]
your votes as
indicated in
this example
FOR WITHHELD
FOR ALL FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. To elect three [ ] [ ] II. To ratify the [ ] [ ] [ ] IV. To adopt NEON's [ ] [ ] [ ]
Class II Directors selection of 2002 Stock Plan
to the Board of KPMG LLP as FOR AGAINST ABSTAIN
Directors independent V. To adopt NEON's [ ] [ ] [ ]
Class II Directors auditors for the 2002 Director Option
01 Norris van den Berg; fiscal year ending Plan
02 George H. Ellis; and March 31, 2002
03 Richard Holcomb FOR AGAINST ABSTAIN IV. To transact any other business that is
III. To approve the [ ] [ ] [ ] properly brought before the meeting
Withheld for the nominees you list proposal to
below: (Write that nominee's name in amend the Amended
the space provided below) and Restated
Certificate of
_____________________________________ Incorporation of
NEON Systems, Inc.
By checking the box to the right, I consent to future [ ]
delivery of annual reports, proxy statements, prospectuses
and other materials and shareholder communications
electronically via the Internet at a webpage which will be
disclosed to me. I understand that the Company may no longer
distribute printed materials to me from any future
shareholder meeting until such consent is revoked. I
---------| understand that I may revoke my consent at any time by
| contacting the Company's transfer agent, Mellon Investor
| Services LLC, Ridgefield Park, NJ and that costs normally
| associated with electronic delivery, such as usage and
telephone charges as well as any costs I may incur in
printing documents, will be my responsibility.
Signature_______________________________________ Signature_______________________________________ Date____________________________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such.
.....................................................................................................................................
FOLD AND DETACH HERE
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Internet and telephone voting is available through 4PM Eastern Time
the business day prior to annual meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
Internet Telephone Mail
http://www.eproxy.com/nesy 1-800-435-6710
Use the Internet to vote your Use any touch-tone telephone to Mark, sign and date
proxy. Have your proxy card in vote your proxy. Have your proxy your proxy card
hand when you access the web OR card in hand when you call. You will OR and
site. You will be prompted to enter be prompted to enter your control return it in the
your control number, located in number, located in the box below, enclosed postage-paid
the box below, to create and sub- and then follow the directions given. envelope.
mit an electronic ballot.
If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.