UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-25457
NEON Systems, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 76-0345839
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14100 Southwest Freeway, Suite 500, 77478
Sugar Land, Texas (zip code)
(Address of principal executive offices)
(281) 491-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
This Amendment No. 1 on Form 10-K/A amends Part III of the original Annual
Report on Form 10-K (the "Original Form 10-K") filed on June 28, 2002, on behalf
of the Registrant.
Part III of the Original Form 10-K is hereby amended in its entirety to
read as follows:
Page 1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors in fiscal 2002 and as of July 15, 2002 are
as follows:
Name Position
---- --------
John J. Moores Chairman of the Board
Charles E. Noell III Director
George Ellis Director
Norris van den Berg Director
Richard Holcomb Director
Peter Schaefer Director
Jim Woodhill Director
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
Mark Cresswell Vice President and General Manager, Shadow Division
Brent Rhymes Vice President and General Manager, iWave Division
Brian D. Helman Vice President, Chief Financial Officer and Secretary
Abraham Madha Vice President of Strategy
John J. Moores, age 58, has served as Chairman of our Board of Directors
since May 1993. From June 2001 to October 15, 2001, Mr. Moores also served as
NEON's Interim CEO. 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. and Scalable Software, Inc. Mr. Moores has also served as a
director of Peregrine Systems, Inc., an infrastructure management software
company since 1989 and served as its Chairman from March 1990 to July 2000 and
again beginning May 6, 2002. From October 1997 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.
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. Since 1992, Mr. Noell
has served as 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.
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 one privately held technology company 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.
Page 2
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.
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. from 1992 until October
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.
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 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.
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.
James R. (Jim) Woodhill, age 54, 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.
Louis R. Woodhill, age 54, 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 also co-founded in 1998 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 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.
Page 3
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 51, served as NEON's interim President from June
2001 to October 15, 2001, replacing Stephen E. Odom who resigned as President of
NEON in June 2001. Mr. Webb has served as NEON's Senior 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
University of Texas at Austin.
Mark Cresswell, age 37, has served as NEON's Vice President and General
Manager, Shadow Division since October 15, 2001. From 1995 to 2000, Mr.
Cresswell 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. Cresswell served as United Kingdom Managing Director for Framesoft, an
investment banking software company based in Switzerland. Originally a systems
programmer, Mr. Cresswell has held various senior positions with additional high
tech organizations prior to joining NEON in 1995. Mr. Cresswell is qualified in
Pure and Applied Mathematics from Westcliff College in England.
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.
Brian D. Helman, age 32, joined NEON in May 2002 as its Vice President of
Finance. On July 2, 2002, Mr. Helman was promoted to the position of Vice
President, Chief Financial Officer and Secretary, replacing J. Bradford Poynter
who resigned as CFO of NEON on June 30, 2002. Prior to joining NEON, Mr. Helman
served as Vice President of Finance and Business Planning for Netspeak
Corporation from 1999 until November 2001. NetSpeak was acquired by ADIR
Technologies in August 2001. From 1996 to 1999, Mr. Helman served as Netspeak
Corporation's Corporate Controller. Prior to joining Netspeak Mr. Helman worked
for Deloitte & Touche LLP in Audit Services. Mr. Helman is a certified public
accountant and has a Bachelor of Science degree in Finance from the University
of Florida.
Abraham Madha, age 46, joined NEON in January 2002 as its Vice President of
Strategy. Mr. Madha also serves as Vice President of Strategy and Product
Management for Scalable Software, Inc., a Houston-based provider of software
asset lifecycle management tools for Windows networks. Mr. Madha joined Scalable
Software in July 2001. Prior to joining Scalable Software, Mr. Madha was Vice
President of Product Management for Bindview Corporation, a Houston-based
provider of network security management software, from December 2000 to July
2001; Director of E-business and Strategist for BMC Software, a Houston-based
independent systems software vendor, from March 1998 to December 2000; and
Director of Product Management for Harbinger, a Supply Chain Enablement software
vendor. Mr.
Page 4
Madha has a Bachelor of Science degree in Industrial Technology (Engineering)
from the University of Houston.
Page 5
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, 2002, all directors,
officers and ten percent (10%) beneficial owners timely complied with such
filing requirements.
Page 6
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years indicated the compensation
earned by our Chief Executive Officer and each of our four most highly
compensated executive officers who were serving as officers at the end of the
fiscal year ended March 31, 2002 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE (1)
Long-Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
------------------------------- ----------------------------- ------------
Securities
Name and Other Annual Restricted Underlying All Other
Principal Salary Compensation Stock Award(s) Options/SARs LTIP Payouts Compensation
Position Year ($) Bonus($) ($) ($) (#) ($) ($)
----------- ---- ------ ------- ------------ -------------- ------------ ------------ ------------
Louis R. Woodhill (2) 2002 112,500 135,000 -- -- 400,000 -- --
President and CEO 2001 -- -- -- -- -- -- --
2000 -- -- -- -- -- -- --
Wayne Webb (3) 2002 309,999 32,700 717,705 -- -- -- --
Senior Vice President and 2001 -- -- -- -- -- -- --
General Counsel 2000 -- -- -- -- -- -- --
Don Pate (4)
Senior Vice President and 2002 200,000 97,321(5) -- -- -- -- --
General Manager, Enterprise 2001 141,667 119,602(5) -- -- 30,000 -- --
Subsystem Management Division 2000 100,000 120,701(5) -- -- -- -- --
Mark Cresswell (5) 2002 139,201 -- -- -- 200,000 -- --
Vice President and General 2001 -- -- -- -- -- -- --
Manager, Shadow Division 2000 -- -- -- -- -- -- --
Brent Rhymes (6) 2002 117,173 15,980 -- -- 35,000 -- --
Vice President and General 2001 -- -- -- -- -- -- --
Manager, iWave Division 2000 -- -- -- -- -- -- --
----------------------
(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. Woodhill was appointed President and CEO of NEON on October 15, 2001
but served without compensation until January 1, 2002. In January 2002, the
Board paid Mr. Woodhill a bonus of $135,000 for his service in the 3rd
fiscal quarter ended December 31, 2001 and Mr. Woodhill's annual
compensation for calendar year 2002 was set at $450,000. Mr. Woodhill
replaced John J. Moores who served as interim CEO without compensation from
June 2001 to October 15, 2002.
(3) Mr. Webb has served as Senior Vice President and General Counsel of NEON
Systems since May 1998. In June 2001, Mr. Webb was appointed interim
President of NEON Systems, replacing Stephen E. Odom who served as
President, CFO and COO from October 2000 to June 2001, Mr. Webb served as
interim President, in addition to his position as General Counsel until
October 15, 2001. Mr. Webb also served as Senior Vice President and General
Counsel of Peregrine/Bridge Transfer Corporation until February 2002 when
he was made President and CEO of Peregrine/Bridge Transfer Corporation.
Prior to June 2001, Peregrine/Bridge Transfer Corporation paid Mr. Webb's
salary and bonus. In June 2001, Mr. Webb's annual compensation with NEON
was set at $360,000 with an annual bonus of $80,000. In January 2002, Mr.
Webb's annual compensation was set at $400,000 with an annual bonus of
$40,000. In August 2001, Mr. Webb was paid a one-time bonus of $700,000 in
recognition of the efforts Mr. Webb put into the litigation between NEON
and New Era of Networks, for which NEON received a net cash settlement of
$9.96 million in fiscal quarter ended September 30, 2001.
(4) Mr. Pate resigned effective as of July 15, 2002. The entire portion of the
amount listed as bonus is sales commission paid during the applicable year.
Page 7
(5) Mr. Cresswell joined NEON UK Ltd, our UK subsidiary, in October 2001 and
was paid by Neon UK Ltd. until December 31, 2001. On October 15, 2001, Mr.
Cresswell's annual salary was set at $300,000. In addition, pursuant to the
terms of his offer letter with NEON, NEON acquired Mr. Cresswell's interest
in the assets of Lakeview Advisors Corporation (BVI) Limited, a company
formed in the British Virgin Islands, of which Mr. Cresswell is a
principal. See Item 13 Certain Relationships and Related Transactions. In
lieu of a bonus program, Mr. Cresswell will receive an aggregate amount of
$400,000 paid in equal quarterly payments of $25,000 over a four year
period as a result of this transaction. When NEON begins making such
payments to Lakeview Advisors Corporation (BVI) Limited, such payments will
be expensed as compensation to Mr. Cresswell.
(6) Mr. Rhymes joined NEON in May 2001. Mr. Rhymes annual salary was set at
$135,000 and he may earn an annual bonus of $50,000 if he meets certain
objectives set by the CEO.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended March 31, 2002 to the Named Executive Officers:
Potential Realizable Value
At Assumed Annual Rates of
Number of Percent of Total Stock Price Appreciation
Securities Options Granted to Exercise or For Option Term (4)
Underlying Employees in Base Price Expiration ------------------------------
Name Options Grants Fiscal Year (1) ($/Sh) (2) Date (3) 5% ($) 10% ($)
---- -------------- ------------------ ----------- ----------- ------------------------------
Louis R. Woodhill(5) 400,000 20.5% $5.97 1/28/12 1,501,800 3,805,857
Wayne Webb -- 0.0% -- -- -- --
Don Pate (6) -- 0.0% -- -- -- --
Mark Cresswell 200,000 10.2% $3.56 10/15/11 447,773 1,134,745
Brent Rhymes 35,000 1.8% $5.28 5/30/11 116,220 294,524
--------------------
(1) Based on a total of 1,591,980 options granted during the fiscal year ended
March 31, 2002. During the fiscal year ended March 31, 2002, 1,306,637
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 granted have a ten-year term and vest over a four-year period with
one-fourth of the options vesting one year from the date of grant and one
forty-eighth of the options vesting each month thereafter. 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. Woodhill were granted on December 21, 2001, and
vest over a four-year period with one fourth of the options vesting on
October 15, 2002, and one forty-eighth of the options vesting each month
thereafter.
(6) Mr. Pate resigned from the Company on July 15, 2002.
Page 8
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 2002 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, 2002.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at at Fiscal Year-End
Shares Value Fiscal Year-End(#) ($)(1)
Acquired On Realized ---------------------------- ----------------------------
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Louis R. Woodhill -- -- -- 400,000 -- 812,000
Wayne Webb -- -- 47,780 -- 296,236 --
Don Pate(2) -- -- 109,000 33,750 430,434 31,641
Mark Cresswell -- -- -- 200,000 -- 888,000
Brent Rhymes -- -- -- 35,000 -- 95,200
--------------------
(1) Based on the difference between the option exercise price and the closing
sale price of $8.00 of our common stock as reported on the Nasdaq National
Market on March 28, 2002, the last trading day of our 2002 fiscal year,
multiplied by the number of shares underlying the options.
(2) Mr. Pate resigned from the Company on July 15, 2002. All of Mr. Pate's
stock options will terminate on October 13, 2002.
COMPENSATION OF DIRECTORS
During fiscal 2002, each of our non-employee directors was monetarily
compensated for serving as a member of our Board of Directors effective January
1, 2002. From such date each of the non-employee directors received a fee of
$1,000 for each of the board meetings and committee meetings that they attended.
In addition, George Ellis received a fee of $1,000 for each of the seven board
meetings and two Audit Committee meetings he attended prior to January 28, 2002
pursuant to a letter agreement. 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. In July 2001, we authorzied paying each of the members of our
Special Committee a fee of $1,000 per committee meeting attended. The Special
Committee met 12 times in the fiscal year ended March 31, 2002.
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.
On March 26, 2002, the 2002 Director Option Plan was approved by our
stockholders to replace the Stock Option Plan for Non-Employee Directors. Each
current non-employee director who was serving on the Board of Directors
immediately following the Annual Meeting of Stockholders scheduled for March 26,
2002 and who served on the Board of Directors 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
Page 9
subsequently joining the Board of Directors, whether by appointment 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.
All stock options granted pursuant to the Stock Option Plan for Non-Employee
Directors and 2002 Director Option Plan are and will be 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.
Page 10
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Moores, Noell, van den Berg, and Holcomb served on NEON's Compensation
Committee during fiscal 2002 and are continuing to serve on that committee.
These individuals currently do not serve as officers or employees of NEON. Mr.
Moores served as interim CEO from June 2001 to October 15, 2001 during which
time no Compensation Committee meetings were held. Other than Mr. Moores,
none of these directors have served as officers or employees of NEON or any of
its subsidiaries prior to or while serving on NEON's Compensation Committee. 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 has served as Vice President and General Counsel of both NEON Systems, Inc.
and Peregrine/Bridge Transfer Corporation since May 1998, for which Mr. Webb
received an annual salary of $246,667 and a $77,167 bonus in fiscal year ended
March 31, 2001 and an annual salary of $226,667 and a $47,7423 bonus in fiscal
year ended March 31, 2000 from Peregrine/Bridge Transfer Corporation. On June 1,
2001, Mr. Webb was appointed the interim President of NEON Systems, Inc. at an
annual salary of $360,000 and an $80,000 bonus to be received from NEON Systems,
Inc. On October 15, 2001, Mr. Webb resigned his interim position as President of
NEON and returned to his role as Senior Vice President and General Counsel of
NEON Systems, Inc. and Peregrine/Bridge Transfer Corporation. On March 4, 2002,
Mr. Webb was appointed the President and CEO of Peregrine/Bridge Transfer
Corporation. Mr. Webb retains his position as Senior Vice President and General
Counsel of NEON Systems, Inc. and NEON Systems, Inc. continues to pay his salary
and bonus, which was increased to $400,000 annually with a $40,000 bonus on
January 1, 2002. Through his interest in Skunkware, Inc., Mr. Moores
beneficially owns approximately 90% 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
Item 13 "Certain Relationships and Related Transactions - Peregrine/Bridge
Transfer Corporation."
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 90% 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 had been appointed to the Board of Directors of NEON. On June 26,
2002, NEON entered into an Agreement and Plan of Merger which documented the
grant of the two-year option to acquire Scalable Software as outlined therein.
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
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 Item 13 "Certain Relationships and Related Transactions
- Scalable Software, Inc."
Page 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The percentage of shares owned provided in the table is based on 8,689,477
shares outstanding as of July 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 July 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 July 15, 2002 by:
o Louis R. Woodhill, our Chief Executive Officer, and each of the four
other most highly compensated individuals who served as our executive
officers at fiscal year end (the "Named Officers");
o each of our directors;
o 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)
--------------------------------------- ------ ----------
Louis R. Woodhill (2) 15,000 *
Wayne Webb (3) 73,060 *
Don Pate (4) 109,000 1.6%
Mark Cresswell -- *
Brent Rhymes(5) 10,937 *
John J. Moores (6) 3,651,842 42.0%
Charles E. Noell, III (7) 226,969 2.6%
Norris van den Berg (8) 103,660 1.2%
Jim Woodhill (9) 92,885 1.1%
Peter Schaeffer 361,335 4.2%
Richard Holcomb (10) 27,245 *
George H. Ellis (11) 7,500 *
All executive officer and directors as a group
(15 Persons) (12) 4,679,433 53.8%
--------------
* Less than 1%
(1) The percentage of ownership calculation is based on 8,689,477 shares issued
and outstanding on July 15, 2002.
(2) Includes 15,000 shares of common stock held by the Woodhill Foundation.
(3) Includes 47,780 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable within 60 days of
July 15, 2002
(4) Includes 109,000 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of July 15, 2002.
Page 12
(5) Includes 10,937 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable within 60 days of
July 15, 2002.
(6) 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 5,000 shares of common stock issuable upon
exercise of outstanding options that are presently exercisable or will
become exercisable within 60 days of July 15, 2002. Mr. Moores address is
c/o JMI, Inc., 12680 High Bluff Dr., Suite 200, San Diego, CA 92130.
(7) 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 July 15, 2002.
(8) Includes 98,660 shares of common stock owned by a family trust. 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 July 15, 2002.
(9) Includes 15,000 shares of common stock held by the Woodhill Foundation and
11,685 shares held as trustee for a dependent.
(10) Includes 18,800 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of July 15, 2002.
(11) Includes 7,500 shares of common stock issuable upon exercise of outstanding
stock options that are presently exercisable or will become exercisable
within 60 days of July 15, 2002.
(12) 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 July 15, 2002.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of March 31, 2002 about NEON's
common stock that may be issued upon the exercise of options, warrants and
rights under all of its existing equity compensation plans, including the 1993
Stock Plan, the 1999 Long-Term Incentive Plan, the 2002 Stock Plan, the 1999
Stock Option Plan for Non-Employee Directors and the 2002 Director Option Plan.
There are no compensation plans that have not been previously approved by the
stockholders of NEON Systems, Inc.
Equity Compensation Plan Information
---------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
---------------------------- -------------------------- ---------------------------- --------------------------------
Plan category Number of securities to Weighted-average exercise Number of securities remaining
be issued upon exercise price of outstanding available for future issuance
of outstanding options, options, warrants and under equity compensation
warrants and rights rights plans (excluding securities
reflected in column (a)
---------------------------- -------------------------- ---------------------------- --------------------------------
Equity compensation plans(1)
approved by security holders 2,770,344 $8.5348 2,357,421
---------------------------- -------------------------- ---------------------------- --------------------------------
Equity compensation plans
not approved by security -0- -0- -0-
holders
---------------------------- -------------------------- ---------------------------- --------------------------------
Total 2,770,344 $8.5348 2,357,421
---------------------------- -------------------------- ---------------------------- --------------------------------
(1) EMPLOYEE STOCK OPTION PLANS
Under the 1993 Stock Plan (1993 Plan) for the officers and employees of
NEON, the Board of Directors authorized the grant of non-qualified incentive
stock options to purchase up to 2,600,000 shares of NEON's Common Stock. Such
options become exercisable either on the date of grant or in such installments
as the grant may specify up to 10 years from the date of grant.
In January 1999, NEON adopted the 1999 Long-Term Incentive Plan (1999 Plan)
that provides for the grant of 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. NEON reserved 2,000,000
shares of its common stock for issuance under the 1999 Plan. In connection with
NEON's adoption of the 1999 Plan, NEON has not made any new grants under the
1993 Plan and options previously issued under the 1993 Plan are exercisable in
accordance with their terms.
Page 13
On January 28, 2002, the Board of Directors adopted the 2002 Stock Plan, and
reserved 2,000,000 shares of NEON common stock for issuance under the 2002 Stock
Plan plus (a) any shares of NEON common stock that had 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 NEON common stock returned to
the 1999 Long-Term Incentive Plan as a result of termination of options or
repurchase of shares of NEON 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 of NEON
common stock, (ii) 5% of the outstanding shares of NEON common stock on such
date or (iii) a lesser amount determined by our Board of Directors. The 2002
Stock Plan replaces the 1999 Long-Term Incentive Plan. On March 26, 2002, the
stockholders of NEON approved the 2002 Stock Plan at NEON's Annual Meeting of
Stockholders. As of March 31, 2002, no options had been granted pursuant to the
2002 Stock Plan.
In January 1999, NEON adopted the Stock Option Plan for Non-Employee
Directors for compensation of its outside directors and reserved 100,000 shares
of its common stock for issuance thereunder. Outside directors joining the Board
of Directors were to receive 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 (the initial
outside directors will be eligible for such grants upon their re-election to the
Board of Directors). These annual options would vest equally in 33-1/3%
increments over the three-year period from the date of grant. All stock options
granted pursuant to the Stock Option Plan for Non-Employee Directors were to be
nonqualified stock options and remain exercisable for a period of ten years from
the date of grant or, if earlier, 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 shall 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.
On January 28, 2002, the Board of Directors adopted the 2002 Director Option
Plan. The 2002 Director Option Plan is intended to replace the Stock Option Plan
for Non-Employee Directors, which the Board of Directors terminated after
approval of the 2002 Director Option Plan. The Board of Directors has reserved a
maximum of 250,000 shares of NEON common stock for issuance under the 2002
Director Option Plan plus (a) any shares of NEON common stock which had been
reserved but not issued under the Stock Option Plan for Non-Employee Directors
as of the date of stockholder approval of the 2002 Director Option Plan, (b) any
shares of NEON 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 NEON common stock on such date or
(ii) an amount determined by our Board of Directors. On March 26, 2002, the
stockholders of NEON approved the 2002 Director Option Plan at the NEON Annual
Meeting of Stockholders. At the conclusion of the April 5th reconvened Annual
Meeting, options to purchase 187,500 of the available 305,000 share option pool
were issued as initial options to Non-Employee Directors who had served in any
of the previous three fiscal years as previously disclosed in the proxy
statement for the fiscal year ended March 31, 2001.
Page 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Members of NEON's Board of Directors and certain executive officers of NEON are
shareholders and/or directors in other companies, with which NEON has business
relationships. Transactions between NEON and these other companies are described
below.
Peregrine/Bridge Transfer Corporation
Distribution Agreement. NEON entered into a distribution agreement with
Peregrine/Bridge Transfer Corporation ("PBTC"), a database software company, in
January 1996. In December 1998, NEON amended its distribution agreement with
Peregrine/Bridge Transfer Corporation under which PBTC granted NEON an
exclusive, worldwide license to market and sublicense PBTC's only products, its
Enterprise Subsystem Management products. The amended distribution agreement has
an initial term through March 31, 2004. The agreement also provides that NEON
pay royalties for the license of products and for maintenance and support and
upgrade services equal to 50% of the revenues received by NEON. The terms of
this agreement provide that NEON will pay PBTC a minimum advance royalty of
$250,000 per quarter during fiscal year 2000, $500,000 per quarter during fiscal
year 2001, $750,000 per quarter during fiscal year 2002, $1,000,000 per quarter
during fiscal year 2003 and $1,250,000 per quarter during fiscal year 2004, for
an aggregate payment of $15 million. This royalty payment is recorded as a
prepaid expense and offset by 50% of NEON's sales of PBTC products. NEON
incurred royalty expense of $1,454,458 and $1,588,000 for the twelve months
ended March 31, 2002 and 2001, respectively to PBTC.
The amended Distribution Agreement also provides that PBTC will reimburse NEON
for the amount of unearned royalty advances when the Agreement terminates in
2004. The balance of the unearned advance payments was $2.1 million at March 31,
2002, and increased to approximately $3.1 million subsequent to year end.
Management believes that while the current and reasonably foreseeable business
prospects for revenue received by NEON from licenses and maintenance for PBTC
products are expected to be sufficient to offset the unearned advance payments
as of March 31, 2002, these revenues may not be sufficient to meet the aggregate
future minimum royalties to be paid by NEON to PBTC. As a result, the balance of
unearned advance payments may increase substantially by the time the Agreement
terminates. PBTC's sole source of income is the royalty payments made by NEON
and PBTC has a substantial negative net worth. As a result, PBTC may be unable
to repay any unearned advances at the termination of the agreement in 2004.
Services Agreement. NEON also has a services agreement with PBTC pursuant to
which PBTC reimburses NEON for PBTC's share of the general and administrative
expenses supplied to it by NEON. Such amounts are presented as a reduction of
general and administrative expenses in the accompanying consolidated financial
statements. The Company revised the services agreement with PBTC in October
2002, as a result of which PBTC's monthly payment to NEON declined from $30,000
per month to $5,000 per month and NEON's services were substantially reduced.
Due to the timing of cash payments between the two parties related to the
distributor agreement and the services agreement described above, NEON had
accounts receivable (payable)-related party of nil, as of March 31, 2002 and
March 31, 2001.
NEON interlocks with Peregrine/Bridge Transfer Corporation. John J. Moores,
Charles E. Noell, III and Norris van den Berg, directors of NEON, also serve as
directors of PBTC. Wayne E. Webb, Jr., Senior Vice President and General Counsel
of NEON, served as the Vice President and General Counsel of PBTC until February
of 2002, when he was appointed the President and CEO. On June 1, 2001, Mr. Webb
was appointed President and Chief Executive Officer of NEON Systems, Inc., an
office he held until Mr. Louis Woodhill assumed those positions. Through his
interest in Skunkware, Inc., John J. Moores, Chairman of the NEON Board of
Directors, beneficially owns approximately 96% of PBTC. Through their interests
in Skunkware, Inc., each of Messrs. Noell, van den Berg and Webb beneficially
own approximately 1%, and each of Don Pate, Senior Vice President and General
Manager, Enterprise Subsystems Management Division of NEON and Jonathan J. Reed,
Vice President, Business Development and Product Marketing of
Page 15
NEON, beneficially own less than 1%, of PBTC. Additionally, Messrs. Noell,
Moores and van den Berg serve as directors of Skunkware, Inc.
Scalable Software, Inc.
Scalable Software, Inc. is a company founded by Louis R. Woodhill, NEON's
President and Chief Executive Officer. Several members of NEON's Board of
Directors and NEON's Chief Executive Officer have a financial interest in
Scalable Software. The percentage beneficial ownership of the NEON directors and
executive officers who have a financial interest in Scalable Software is set
forth below:
Name Ownership Percentage,
---- ---------------------
Jim Woodhill 24.3%
John J. Moores (and affiliates) 23.8%
Louis R. Woodhill 16.7%
Charles E. Noell (and affiliates) 15.1%
Peter Schaeffer 1.5%
-----
Total 81.4%
=====
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. Louis R. Woodhill, NEON's
President and CEO, is also a shareholder, director, President and CEO of
Scalable Software. In connection with the 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 with a maturity
date of December 31, 2001, 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 an
original maturity date of March 31, 2002, with such increased amount also being
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
proposed 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's management and Board of Directors 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. 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 were both directors and shareholders of Scalable Software and Louis R.
Woodhill was also the President and Chief Executive Officer of Scalable
Software. As of June 2002, their status as shareholders, directors and as
officers of Scalable Software remains unchanged.
NEON has obtained a two-year option to acquire Scalable Software as outlined in
the Agreement and Plan of Merger dated June 26, 2002. In connection with this
Option, NEON 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 J. 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 $5.5 million loan will be secured by all of the
intellectual property rights of Scalable Software. NEON may exercise the Option
to acquire Scalable Software at any time during the two-year term, subject to
provisions that require NEON to
Page 16
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 will 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 will become options and
warrants to purchase common stock of NEON on the same conversion basis. If
Scalable Software incurs more indebtedness for borrowed money or issues more
equity, the exchange ratio will be reduced. Prior to NEON exercising the Option
to acquire Scalable Software, a Special Committee would be appointed to 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 also require approval of the shareholders
of NEON and the NEON Board of Directors.
Management believes that the Scalable Software products are gaining increasing
levels of acceptance in the marketplace and a reputation for ease of
installation and use. Management further believes that the long term prospects
for the products are excellent. However, management also believes that Scalable
Software will exhaust its line of credit from NEON before it is able to generate
cash from operations sufficient to sustain its operations. In that event, and if
Scalable Software is unable to secure additional financing, it could become the
subject of bankruptcy proceedings. If Scalable Software is subject to bankruptcy
proceedings, it is possible that the security interests held by NEON in the
intellectual property of Scalable Software could be set aside, and NEON could be
an unsecured creditor with respect to the $5.5 million loan.
As noted above, certain member's of NEON's board of directors and executive
officers also serve as directors and executive officers of Scalable Software and
claim beneficial ownership of approximately 81% of Scalable's common stock. In
addition, NEON has an option to acquire all of the outstanding shares of
Scalable Software and is currently providing Scalable's primary financing for
its operations. Therefore, NEON recognizes 100% of Scalable Software's losses to
the extent of advances made in excess of the guaranteed amount. At March 31,
2002, NEON had made total advances of $5.8 million to Scalable Software
(including $2.3 million of unguaranteed advances) and recognized an associated
loss of $2.1 million.
Sheer Genius Software, Inc.
On January 3, 2002, NEON entered into a services agreement with Sheer Genius
Software, Inc. of Austin, Texas, a company owned and controlled by Jim Woodhill
and JMI Services, Inc., a private company owned by John J. Moores, NEON's
Chairman. 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 initial project description
was six months and the maximum aggregate fees were $480,000. This agreement was
recently amended to extend the contract period for an additional three months
with additional maximum aggregate fees of $300,000. While NEON is currently
Sheer Genius' sole source of income, it is free to solicit other customers.
Under the services agreement, all intellectual property created by Sheer Genius
in the course of performing the services is owned by NEON. However, 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. 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.
Lakeview Advisors Corporation (BVI) Limited
On March 29, 2002, NEON entered into an Asset Purchase Agreement with
Lakeview Advisors Corporation (BVI) Limited, an entity formed under the laws of
the British Virgin Islands, to acquire all of the assets relating to certain
software formerly owned by Socato Ltd for a purchase price of $600,000 in the
form of the promissory note to be paid over the course of 48 months. No payments
were due under the promissory note in the fiscal year ended March 31, 2002. This
acquisition fulfilled certain requirements required by NEON's offer of
employment to Mark Cresswell, NEON's Vice President and General
Page 17
Manager of the Shadow Division, dated October 11, 2001. Mr. Cresswell is a
Principal in Lakeview Advisors Corporation (BVI) Limited.
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.
Page 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEON SYSTEMS, INC.
By: /s/ LOUIS R. WOODHILL
---------------------------------------
Louis R. Woodhill
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: July 29, 2002
Page 19