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.
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
________
(2) Aggregate number of securities to which transaction applies: ________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
________________
(4) Proposed maximum aggregate value of transaction: ________
(5) Total fee paid: ________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ________
(2) Form, Schedule or Registration Statement No.: ________
(3) Filing Party: ________
(4) Date Filed: ________
[LOGO] NEON
Systems, Inc.
14100 Southwest Freeway, Suite 500
Sugar Land, Texas 77478
December 20, 2002
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
NEON Systems, Inc., to be held on Tuesday, February 4, 2003 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 February 4, 2003 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 FEBRUARY 4, 2003
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, February 4,
2003 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 four Class III directors to the Board of Directors;
2. To ratify the selection of KPMG LLP as independent auditors for the
fiscal year ending March 31, 2003; and
3. 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 December 11, 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
Brian D. Helman
Chief Financial Officer and Secretary
Sugar Land, Texas
December 20, 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 December 20, 2002.
NEON SYSTEMS, INC.
-----------------
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 December 11, 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, February 4, 2003 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 December
20, 2002.
Q: What may I vote on?
A:. The election of four Class III directors to serve on the Board of
Directors;
. The ratification of KPMG LLP as independent auditors for the fiscal year
ending March 31, 2003; 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; and
. The Board recommends a vote FOR the ratification of the independent
auditors.
Q: Who is entitled to vote?
A: Stockholders of record at the close of business on December 11, 2002 (the
record date) may vote at this meeting.
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.
1
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 Brian D. Helman, Chief Financial Officer and
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 December 11, 2002,
8,739,627 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 power represented at the meeting and entitled to vote is required
on all other matters subject to approval.
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 December
11, 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 Brian D. Helman, Chief Financial Officer and 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.
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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 Brian D. Helman 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 2003 or first calendar quarter of 2004, pursuant to
Rule 14a-8 under the Securities and Exchange Act of 1934 if such proposals are
submitted in writing to Brian D. Helman, Chief Financial Officer and Secretary,
NEON Systems, Inc., 14100 Southwest Freeway, Suite 500, Sugar Land, Texas,
77478 and received before the close of business on June 30, 2003. 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.
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PROPOSAL I
ELECTION OF DIRECTORS
We currently have ten 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 next annual meeting to be held
in the fourth calendar quarter of 2003 or the first calendar quarter of
2004.
. Class II Directors, Richard Holcomb, George H. Ellis and Norris van den
Berg, whose terms will expire at the annual meeting to be held in the
fourth calendar quarter of 2004.
. Class III Directors, John J. Moores, David F. Cary, Loretta Cross, and
Peter Schaeffer, whose terms expire at this annual meeting and if
reelected will expire at the annual meeting to be held in 2005.
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 February 4, 2003, four
directors will be elected as Class III Directors for terms expiring at the
annual meeting to be held in 2005 and until their respective successors are
elected and qualified. Nominees for election this year are John J. Moores,
David F. Cary, Loretta Cross, and Peter Schaeffer. Shares represented by
returned and executed proxies will be voted, unless otherwise specified, in
favor of the four 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
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 Chief Executive Officer. 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.
David F. Cary, age 47, was appointed to the Board of Directors as a Class
III director and as a member of the Audit Committee on December 5, 2002. From
1992 to the present, Mr. Cary has served as Chief Financial Officer of, and in
various other management capacities with, I2 Technologies, Inc., a public
software company. Before joining I2 Technologies, Mr. Cary was an Accounting
System Controller for ComputerLand Texas, a distributor of computer equipment,
from December 1991 to June 1992. Mr. Cary is a Certified Public Accountant and
holds a B.S. in accounting from San Francisco State University and an M.B.A.
from Southern Methodist University.
4
Loretta Cross, age 46, was appointed to the Board of Directors as a Class
III director and as a member of the Audit Committee on December 5, 2002. Ms.
Cross is the Senior Managing Director for FTI Consulting, Inc., a private
financial consulting firm, since its acquisition of the U.S. Business Recovery
Services Division of PricewaterhouseCoopers in September 2002. From 1991 to
August 30, 2002, Ms. Cross served as a Partner with PricewaterhouseCoopers,
LLP. Before joining PricewaterhouseCoopers LLP, Ms. Cross was with Ernst &
Young LLP and Touche Ross & Co. LLP. Since January 1, 2002, Ms. Cross has
served as a director of the Texas Gulf Coast Lupis Foundation, a non-profit
organization. Ms. Cross is a Certified Public Accountant and holds a B.B.A. in
accounting from University of Texas at Austin.
Peter Schaeffer, age 47, is NEON's founder and has been a member of our
Board of Directors 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.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THESE NOMINEES.
DIRECTORS CONTINUING IN OFFICE
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 NEON Enterprise Software,
Inc., 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 54, was elected director on December 21, 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, Chief
Executive Officer 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 Chief Executive Officer
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.
Norris van den Berg, age 64, 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 NEON Enterprise Software, Inc. and
Skunkware, Inc. Mr. van den Berg holds a B.A. in Philosophy and Mathematics
from the University of Maryland.
5
George H. Ellis, age 53, has served as a director since January 2000. Mr.
Ellis has been Chairman and Chief Executive Officer of SoftBrands, Inc., a
global supplier of enterprise-wide software, since December 2001. From October
2001 to confirmation of its plan of reorganization under Chapter 11 of the
Bankruptcy Code in August 2002, Mr. Ellis was Chairman and Chief Executive
Officer of AremisSoft Corporation, a software company and a predecessor to
SoftBrands. Mr. Ellis accepted the position at AremisSoft to assist in the
reorganization. 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. 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 Chief Executive Officer and Chairman from 1995 until 2001. 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
Chief Executive Officer, 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.
James R. (Jim) Woodhill, age 54, was elected director on December 21, 2001.
Mr. Woodhill is a General Partner of JMI-MWSV Fund, Inc. and the founder and
Chairman of Chicago-based Authentify, Inc., a private software company. Mr.
Woodhill was a co-founder with Peter 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 Vice President, 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. Mr. Woodhill holds a B.S. degree in Business from the Illinois
Institute of Technology.
6
STATEMENT OF CORPORATE GOVERNANCE
Our Board of Directors held a total of nine meetings in fiscal 2002. 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. and other related party transactions.
Audit Committee. The Audit Committee selects our independent auditors,
reviews the results and scope of the audit and other accounting related
services and reviews and evaluates our internal control functions. Members of
the Audit Committee in the fiscal year ended March 31, 2002 included 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 2002. The Audit Committee's report is included below in "Audit
Committee Report." On December 5, 2002, the Board accepted the resignations of
Charles E. Noell, III, Richard Holcomb, and Norris van den Berg from the Audit
Committee and appointed David F. Cary and Loretta Cross as independent
directors to serve on the Audit Committee from such date until their successors
are elected or they resign from such position. On December 5, 2002, the Board
also adopted a new Audit Committee Charter which is attached to this Proxy
Statement as Exhibit A.
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, the
2002 Stock Plan and the 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 five times
during fiscal 2002.
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 met twelve times during fiscal 2002. On
December 9, 2002, the Board of Directors voted to increase the size of the
Special Committee by two positions and appointed Loretta Cross and David F.
Cary to fill the two new positions on the Special Committee. See "Certain
Transactions--Scalable Software, Inc. Agreements."
7
AUDIT COMMITTEE REPORT
Composition. The Audit Committee of the Board of Directors in the fiscal
year ended March 31, 2002 was composed of four directors, two of which were
independent directors as defined by Nasdaq rules, and operated 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 in the fiscal year ended March 31, 2002 were George H.
Ellis, Charles E. Noell, III, Richard Holcomb (added June 1, 2001), and Norris
van den Berg. On December 5, 2002, the Audit committee was reconstituted with
the following directors, all of whom qualify as independent directors under
NASDAQ rules: George Ellis, Loretta Cross and David F. Cary.
Responsibilities. The responsibilities of the Audit Committee include
selecting an accounting firm to be engaged as our independent accountants. 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 include the oversight of NEON's financial reporting process,
system of internal controls and corporate compliance process.
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, 2002, 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
8
EXECUTIVE OFFICERS
Our executive officers, their ages as of December 11, 2002, and certain
additional information about them are as follows:
Name Position
---- --------
Louis R. Woodhill Director, President and Chief Executive Officer
Brian D. Helman.. Chief Financial Officer and Secretary
Mark Cresswell... Vice President and General Manager, Shadow Division
Abraham Mahda.... Vice President of Strategy
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 executive officers who are not members of our
Board of Directors.
Brian D. Helman, age 32, joined NEON in May 2002 as its Vice President of
Finance and has served as its Chief Financial Officer and Secretary since July
2002. Prior to joining NEON, Mr. Helman served as Vice President of Finance and
Business Planning for Netspeak Corporation from 1999 until November 2001, prior
to which Mr. Helman had served as NetSpeak's Corporate Controller since 1996.
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.
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.
Abraham Madha, age 46, joined NEON in January 2002 as its Vice President of
Strategy. Prior to joining NEON, Mr. Madha served 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, from July 2001
to November 2002. 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. Madha has a Bachelor of Science degree in Industrial
Technology (Engineering) from the University of Houston.
Brent J. Rhymes, age 35, 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 and Chief Executive Officer 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 Bachelor of Science degree, 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 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
------------------------------- ----------------------- -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Salary Compensation Award(s) Options/SARs Payouts Compensation
Name and Principal Position(a) Year ($) Bonus ($) ($) (#) ($) ($)
------------------------------ ---- ------- ------- ------------ ---------- ------------ ------- ------------
Louis R. Woodhill(2).......... 2002 112,500 135,000 -- -- 400,000 -- --
President & Chief Executive 2001 -- -- -- -- -- -- --
Officer 2000 -- -- -- -- -- -- --
Wayne Webb(3)................. 2002 309,999 32,700 717,705 -- -- -- --
Senior Vice President and 2001 -- -- -- -- -- -- --
General Counsel 2000 -- -- -- -- -- -- --
Don Pate(4)................... 2002 200,000 97,321(5) -- -- -- -- --
Senior Vice President and 2001 141,667 119,602(5) -- -- 30,000 -- --
General Manager, Enterprise 2000 100,000 120,701(5) -- -- -- -- --
Subsystem Management
Division
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 Chief Executive Officer 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 Chief Executive
Officer without compensation from June 2001 to October 15, 2002.
(3) Mr. Webb served as Senior Vice President and General Counsel of NEON from
May 1998 until he resigned effective August 1, 2002 to concentrate on his
role as President and Chief Executive Officer of NEON Enterprise Software,
Inc. (formerly known as Peregrine/Bridge Transfer Corporation). In June
2001, Mr. Webb was appointed interim President of NEON and served in that
capacity, 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 Chief Executive Officer 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 of Mr. Webb in connection with 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.
10
(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.
(5) Mr. Cresswell rejoined NEON in October 2001 at an annual salary of
$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 "Certain Transactions--Lakeview
Advisors Corporation (BVI) Limited." 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. Mr. Cresswell has
indirectly received payments made to Lakeview Advisors Corporation (BVI)
Limited in an amount of $100,000 as of December 11, 2002 and such payments
have been expensed as compensation to Mr. Cresswell.
(6) Mr. Rhymes joined NEON in May 2001. Mr. Rhymes annual salary was set at
$135,000 and he may earn additional compensation based on meeting certain
objectives set by the Chief Executive Officer. On December 5, 2002, the
Board of Directors approved an amendment to Mr. Rhymes compensation plan
which provides that Mr. Rhymes will receive a fee of 4% of the aggregate
consideration received by NEON in any divestiture of NEON's iWave division
if Mr. Rhymes' employment is terminated following such divestiture. See
"Certain Transactions."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended March 31, 2002 to the Named Executive Officers:
Percent of Potential Realizable
Total Value At Assumed
Number of Options Annual Rates of Stock
Securities Granted to Price Appreciation For
Underlying Employees Exercise or Option Term(4)
Options in Fiscal Base Price Expiration ----------------------
Name Granted Year(1) ($/Sh)(2) Date(3) 5% ($) 10% ($)
---- ---------- ---------- ----------- ---------- --------- ---------
Louis R. Woodhill(5) 400,000 25.1% $5.97 1/28/12 1,501,800 3,805,857
Wayne Webb.......... -- 0.0% -- -- -- --
Don Pate(6)......... -- 0.0% -- -- -- --
Mark Cresswell...... 200,000 12.6% $3.56 10/15/11 447,773 1,134,745
Brent Rhymes........ 35,000 2.2% $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 January 28, 2002, 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.
11
AGGREGATED 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
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired Value Fiscal Year-End (#) Fiscal Year-End ($)(1)
On Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Louis R. Woodhill -- -- -- 400,000 -- 812,000
Wayne Webb(2).... -- -- 47,780 -- 296,236 --
Don Pate(3)...... -- -- 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. Webb resigned from the Company effective as of August 1, 2002. The
Compensation Committee has extended the period of time in which Mr. Webb
may exercise his vested options to a termination date of March 31, 2006.
(3) Mr. Pate resigned from the Company on July 15, 2002. The Compensation
Committee has extended the period of time in which Mr. Pate may exercise
his vested options from a termination date of October 13, 2002 to a
termination date of January 1, 2006.
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. In July 2001, we authorized
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, non-employee directors
on the Board of Directors would be granted an option to purchase 7,500 shares
of our common stock in connection with their respective appointments 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.
At the annual meeting commenced on March 26, 2002 and reconvened on April 5,
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 commenced on March 26, 2002 and who served on
the Board of Directors in any of the last three fiscal years ended March 31,
2001, received 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,
12
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. On December 5, 2002, the Board expanded the Board of
Directors from eight members to ten members and appointed David F. Cary and
Loretta Cross as directors. On such date, the Board also authorized the
issuance of an initial "Election" option grant to purchase 12,500 shares of
common stock of NEON to Mr. Cary and Ms. Cross at an exercise price of $2.50
per share.
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 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.
All stock options granted pursuant to the 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. If a non-employee director's status as a
director terminates for any reason (excluding death and disability), then all
options held by him or her under the 2002 Director Option Plan will expire
three 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 twelve months following
the termination. In the event of any proposed dissolution or liquidation of
NEON, any unexercised option would terminate immediately prior to the
consummation of such proposed 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 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 will
become fully vested and exercisable. If the successor corporation does not
agree to assume or substitute for the option, each option will become fully
vested and exercisable for a period of 30 days from the date our Board of
Directors notifies the non-employee director of the option's full
exercisability, after which the option will terminate.
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 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
2002 as they affected our executive officers.
Compensation Philosophy. In the calendar year 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
13
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 our 2002 Stock
Plan 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 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 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 2002 Chief Executive Officer Compensation. In the fiscal year ended
March 31, 2002, 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. On 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, 2002,
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
14
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
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 Chief Executive Officer 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 NEON Enterprise Software, Inc. Mr. Noell and Mr. van
den Berg serve as directors of NEON Enterprise Software, Inc., formerly known
as Peregrine/Bridge Transfer Corporation. Through his interest in Skunkware,
Inc., Mr. Moores beneficially owns approximately 90% of NEON Enterprise
Software, Inc. Through their interests in Skunkware, Inc., each of Messrs.
Noell, van den Berg and Webb beneficially own approximately 1%, and Mr. Pate
beneficially owns less than 1%, of NEON Enterprise Software, Inc. See "Certain
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 NEON
Enterprise Software, Inc. Mr. Moores beneficially owns approximately 90% of
Skunkware, Inc. Each of Messrs. Noell, van den Berg and Webb beneficially own
approximately 1%, and Mr. Pate beneficially owns 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 "Certain Transactions--Scalable Software, Inc."
15
MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The percentage of shares owned provided in the table is based on 8,739,627
shares outstanding as of December 11, 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 December 11, 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 December 11, 2002 by:
. each of our directors;
. Louis R. Woodhill, our President and Chief Executive Officer, and each of
the four other most highly compensated individuals who served as our
executive officers at fiscal year end;
. 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)........................................... 139,999 1.6%
Wayne Webb(3).................................................. 73,060 *
Don Pate(4).................................................... 109,000 1.2%
Mark Cresswell(5).............................................. 112,470 1.3%
Brent Rhymes(6)................................................ 13,125 *
John J. Moores(7).............................................. 3,661,217 41.9%
Charles E. Noell, III(8)....................................... 305,244 3.5%
Norris van den Berg(9)......................................... 113,035 1.3%
Jim Woodhill(10)............................................... 95,385 1.1%
Peter Schaeffer(11)............................................ 370,710 4.2%
Richard Holcomb(12)............................................ 36,620 *
George H. Ellis(13)............................................ 13,750 *
David F. Cary.................................................. 0 *
Loretta Cross.................................................. 0 *
All executive officer and directors as a group (14 Persons)(14) 5,043,615 57.7%
--------
* Less than 1%
(1) The percentage of ownership calculation is based on 8,739,627 shares issued
and outstanding on December 11, 2002.
(2) Includes 15,000 shares of common stock held by the Woodhill Foundation and
124,999 shares of common stock issuable upon exercise of outstanding stock
options that are presently exercisable within 60 days of December 11, 2002.
(3) Includes 47,780 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable within 60 days of
December 11, 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 December 11, 2002.
16
(5) Includes 112,470 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable within 60 days of
December 11, 2002.
(6) Includes 13,125 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable within 60 days of
December 11, 2002.
(7) 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 14,375 shares of common stock issuable upon
exercise of outstanding options that are presently exercisable or will
become exercisable within 60 days of December 11, 2002. Mr. Moores address
is c/o JMI, Inc., 12680 High Bluff Dr., Suite 200, San Diego, CA 92130.
(8) Includes 14,375 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 11, 2002.
(9) Includes 98,660 shares of common stock owned by a family trust. Includes
14,375 shares of common stock issuable upon exercise of outstanding stock
options that are presently exercisable or will become exercisable within 60
days of December 11, 2002.
(10) Includes 15,000 shares of common stock held by the Woodhill Foundation,
11,685 shares held as trustee for a dependent and includes 2500 shares of
common stock issuable upon exercise of outstanding stock options that are
presently exercisable or will become exercisable within 60 days of
December 11, 2002.
(11) Includes 3,125 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 11, 2002.
(12) Includes 28,175 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 11, 2002.
(13) Includes 13,750 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 11, 2002.
(14) 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 December 11, 2002.
EQUITY COMPENSATION PLAN INFORMATION
This table sets forth the aggregate number of shares of common stock
reserved for issuance under all of the compensation plans previously approved
by the stockholders of NEON Systems, Inc. as of the end of March 31, 2002,
including (a) the number of securities to be issued upon exercise of
outstanding options, warrants and rights, (b) the weighted-average exercise
price of outstanding options, warrants and rights and (c) the number of
securities remaining available for future issuance under equity compensation
plans excluding item (a). 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)
Number of Number of securities
securities to be Weighted-average remaining available for
issued upon exercise exercise price of future issuance under equity
of outstanding outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan category and rights and rights reflected in column(a)
------------- -------------------- ----------------- ----------------------------
Equity compensation plans approved by security
holders.......................................... 2,770,344 $8.5348 2,371,823
Equity compensation plans not approved by security
holders.......................................... -0- -0- -0-
Total......................................... 2,770,344 $8.5348 2,371,823
17
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.
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. At the annual
meeting commenced on March 26, 2002 and reconvened on April 5, 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. At
the annual meeting commenced on March 26, 2002 and reconvened on April 5, 2002,
the
18
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 "Election" 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. On December 5, 2002,
the Board authorized the issuance of initial "Election" options to purchase
12,500 shares of NEON common stock to Loretta Cross and David F. Cary upon
their appointment to the Board of Directors on such date.
CERTAIN 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
In January 1996, NEON entered into a distribution agreement with
Peregrine/Bridge Transfer Corporation ("PBTC"), a database software company
whose sole stockholder is an affiliate of John J. Moores, NEON's Chairman of
the Board of Directors. The agreement provided that NEON pay royalties to PBTC
for the license of products and for maintenance and support and upgrade
services equal to 50% of the revenues received by NEON for NEON's distribution
of PBTC's only products, its Enterprise Subsystem Management products. In
December 1998, NEON amended its distribution agreement with Peregrine/Bridge
Transfer Corporation and PBTC granted NEON an exclusive, worldwide license to
market and sublicense PBTC's Enterprise Subsystem Management products in
exchange for NEON's agreement to extend the term of the agreement through March
31, 2004 and 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 advance royalty payment has historically been recorded by
NEON as a prepaid expense and offset by 50% of NEON's sales of PBTC products.
The amended distribution agreement also provided that PBTC would reimburse NEON
for the amount of unearned royalty advances when the agreement terminated in
2004. NEON also had a services agreement with PBTC pursuant to which PBTC
reimbursed 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 NEON's consolidated financial statements. NEON
revised the services agreement with PBTC in October 2001, 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 reduced.
On June 30, 2002, the balance of the unearned advance payments was $3.0
million, an increase of $822,000 from March 31, 2002. Management believed that
while the then-current and reasonably foreseeable business prospects for
revenue received by NEON from licenses and maintenance for PBTC products was
expected to be sufficient to offset the unearned advance payments as of June
30, 2002, these revenues did not appear to be sufficient to meet the aggregate
future minimum royalties required to be paid by NEON to PBTC. As a result, the
balance of unearned advance payments was projected to increase substantially by
the time the distribution agreement was scheduled to terminate on March 31,
2004. On June 30, 2002, PBTC's sole source of income was the royalty payments
made by NEON and PBTC had a substantial negative net worth. As a result, NEON's
Board had concerns regarding PBTC's ability to repay any unearned advances at
the termination of the agreement in 2004.
Therefore, on July 2, 2002, the independent directors of NEON authorized the
officers of NEON to review the distributor relationship with PBTC and to
negotiate a termination of the distribution agreement. On July 24, 2002, the
independent directors of NEON approved a letter of intent with proposed terms
for a termination of the distribution agreement, which letter of intent was
executed by PBTC and NEON on such date.
19
Pursuant to the provisions of the letter of intent and after the review and
approval of the independent directors of NEON and the ratification by the full
Board of Directors on August 12, 2002, NEON and PBTC entered into a Termination
and Customer Support Agreement dated August 14, 2002 pursuant to which the
distribution agreement, the services agreement, and all other agreements
between NEON and PBTC were terminated effective as of August 1, 2002.
Upon the closing of the Termination and Customer Support Agreement on August
14, 2002, PBTC's right to receive from NEON, and NEON's corresponding
obligation to pay to PBTC, the advance royalty payments described in the
distribution agreement terminated. Additionally, NEON's option to purchase PBTC
and right of first refusal under the distribution agreement also terminated.
The Termination and Customer Support Agreement provides that, in consideration
of PBTC's consent to terminate its existing agreements with NEON, NEON paid
PBTC a final cash advance of $2.2 million, which amount will be consolidated
with the $884,028 remaining balance of the outstanding unearned royalty advance
under the distribution agreement and the $500,000 payment with respect to the
transfer of rights described above and represented by the consolidated
promissory note payable to NEON in the aggregate principal amount of
$3,584,028, bearing no interest to its due date of March 31, 2005. This
consolidated promissory note is secured by all of the intellectual property of
PBTC. The Termination and Customer Support Agreement also provided that the
outstanding unearned royalty advance of approximately $3,884,028 as of July 31,
2002 was converted into (i) a $3.0 million dollar convertible promissory note
payable to NEON bearing no interest to its due date of March 31, 2005 which
promissory note is secured by all of the intellectual property of PBTC and (ii)
the remaining balance of $884,000 was consolidated into a second loan as
described above. The $3.0 million convertible note is convertible by NEON, in
its discretion, into equity in PBTC at an agreed pre-cash valuation of $30.0
million dollars. Such conversion right will expire on the due date of the $3.0
million convertible note.
Pursuant to the terms of the Termination and Customer Support Agreement and
in consideration of NEON's assignment to PBTC of license and maintenance
agreements related to the PBTC software products, NEON's grant to PBTC of a
license to use the "NEON" trademark in connection with the marketing of the
PBTC software products, and NEON's agreement to provide PBTC with certain
administrative services, PBTC agreed to pay NEON $500,000, which amount was
consolidated in the promissory note described below.
Pursuant to the Termination and Customer Support Agreement and an assignment
executed in connection with the closing of the Termination and Customer Support
Agreement and effective as of August 1, 2002, PBTC was assigned all of NEON's
rights and obligations under any customer license and maintenance agreements
related to the PBTC software products previously marketed by NEON, including
customer support obligations. In addition, the terms of the Termination and
Customer Support Agreement provide that PBTC offered employment to certain
sales and support personnel of NEON that were assigned to market the PBTC
software products. The Termination and Customer Support Agreement also
contemplated the resignation of Wayne E. Webb Jr. as Senior Vice President and
General Counsel of NEON effective as of August 1, 2002 to focus on his role as
President and CEO of PBTC.
At the closing of the Termination and Customer Support Agreement, Skunkware,
Inc., PBTC's sole stockholder, entered into a Subordination Agreement whereby
all of the promissory notes described above from PBTC to NEON were made senior
in priority to all other indebtedness from PBTC to Skunkware. Pursuant to the
terms of the convertible promissory note and the consolidated promissory note,
PBTC has agreed to preserve and maintain the senior status of its indebtedness
to NEON and pursuant to the Security Agreement agreed to not issue any
additional debt unless such debt does not encumber the PBTC IP.
In further consideration of PBTC entering into the Termination and Customer
Support Agreement, NEON agreed to provide PBTC with administrative, accounting
and legal services pursuant to the terms of a new services agreement. Such
services will be provided by NEON at no cost to PBTC, other than reimbursement
of reasonable business expenses, for the twelve-month period beginning August
1, 2002. After the initial twelve-month period of the services agreement, PBTC
may elect to receive the services, at its option, for up to an
20
additional twelve months for a fee of $10,000 per month. At the end of such
additional term, or in the event PBTC does not elect to continue receiving the
services described above for the additional term, at the end of the initial
term, NEON shall have no further obligations under the services agreement.
Additionally, in connection with the closing of the Termination and Customer
Support Agreement on August 14, 2002, NEON and PBTC entered into a license and
distribution agreement whereby PBTC agreed to market and distribute NEON's 24x7
software product. The NEON 24x7 software product was developed by PBTC as an
OEM software product using the Shadow source and object code under a
remarketing agreement dated January 25, 2000. This remarketing agreement
provided that NEON would distribute the NEON 24x7 software product under the
terms of the distributor agreement.
Finally, in connection with the closing of the Termination and Customer
Support Agreement on August 14, 2002, NEON and PBTC entered into a trademark
license agreement granting PBTC a license to use the "NEON(R)" registered
trademark in its marketing of NEON 24x7 and the PBTC software products. Under
the terms of this agreement, NEON granted PBTC the option to acquire the
"NEON(R)" trademarks in the event that NEON discontinues its use of such marks.
NEON incurred royalty expense of $1.8 million and $283,000 for the six
months ended September 30, 2002 and 2001, respectively, to PBTC. NEON does not
expect to recognize any gain or loss in its consolidated financial statements
for the three months ended September 30, 2002, as a result of this transaction.
Subsequent to the closing of the Termination and Customer Support Agreement,
PBTC changed its company name to NEON Enterprise Software, Inc.
NEON interlocks with NEON Enterprise Software, Inc. John J. Moores, Charles
E. Noell, III and Norris van den Berg, directors of NEON, also serve as
directors of NEON Enterprise Software, Inc., successor to Peregrine/Bridge
Transfer Corporation. Wayne E. Webb, Jr., formerly 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 its 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 on October 15, 2001. As mentioned above, on August 1, 2002 and in
connection with the closing of the Termination and Customer Support Agreement
described above, Mr. Webb resigned from his position as Senior Vice President
and General Counsel of NEON. Through his interest in Skunkware, Inc., John J.
Moores, Chairman of the NEON Board of Directors, beneficially owns
approximately 90% of NEON Enterprise Software, Inc. Through their interests in
Skunkware, Inc., each of Messrs. Noell, van den Berg and Webb beneficially own
approximately 1% of PBTC. Additionally, Messrs. Noell, Moores and van den Berg
serve as directors of Skunkware, Inc.
Scalable Software, Inc.
Scalable Software, Inc., a Houston-based provider of software solutions for
IT portfolio management, is a company founded by Louis R. Woodhill, NEON's
Chief Executive Officer. Several members of NEON's Board of Directors,
including Louis R. Woodhill, John J. Moores and Jim Woodhill, have a financial
interest in Scalable Software. The percentage beneficial ownership of the NEON
directors and executive officers that have a financial interest in Scalable
Software is set forth below:
Ownership
Name 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%
====
21
On July 17, 2001, NEON announced that it had entered into a letter of intent
to acquire Scalable Software, Inc. Louis R. Woodhill, is also a director, and
the President and Chief Executive Officer 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 of 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 independent directors who had 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 its 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.
As of September 30, 2002, there has been no change to the status of the
directors and officers of NEON who are listed as shareholders, directors or
officers of Scalable Software above.
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 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 adjusted
accordingly. 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 stockholders of NEON and the NEON
Board of Directors.
Scalable Software may 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
22
loan. On October 16, 2002, the Board of Directors reviewed the progress of
Scalable Software with respect to the timing of its anticipated break-even
quarter and determined that Scalable Software may require an additional
infusion of approximately $500,000 in additional capital to meet its
projections. In the interest of preserving its investment, the Special
Committee approved an increase in the aggregate borrowing limit under the $5.5
million loan to a aggregate principal amount of $6.0 million, an increase of
$500,000 in Scalable Software's aggregate borrowing limits under its line of
credit with NEON. Such increase will be memorialized in an amendment to the
relevant promissory notes and security agreements and will be subject in all
respect to the current terms and conditions of 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 September
30, 2002, NEON had made total advances of $8.3 million to Scalable Software
(including $4.8 million of unguaranteed advances) and recognized cumulative
losses of $4.3 million. Due to the uncertainties regarding NEON's ultimate
ability to recover any unguaranteed advances to Scalable Software, NEON has
recorded the carrying value of its net advance to Scalable Software at the
guaranteed amount of $3.5 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 by Jim Woodhill. 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. Under the first project description negotiated for such
services agreement, Sheer Genius provided development services to NEON on a
budgeted time and materials basis and delivered 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
extended by the Board for an additional three months with additional maximum
aggregate fees of $300,000. On October 16, 2002, the Board determined that the
Services Agreement with Sheer Genius should be extended on a month-to-month
basis at $75,000 per month. While NEON is currently Sheer Genius' sole source
of income. Sheer Genius is free to solicit other customers. Under the services
agreement, all intellectual property created by Sheer Genius in the course of
performing the services shall be owned by NEON. 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 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.
23
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, with the cumulative total return of a similar investment in companies on
the Nasdaq Stock Market (U.S.) Index and the Nasdaq Computer and Data
Processing Index.
COMPARISON OF 37 MONTH CUMULATIVE TOTAL RETURN*
AMONG NEON SYSTEMS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER AND DATA PROCESSING INDEX
[CHART]
*$100 INVESTED ON 3/5/99 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING MARCH 31.
Cumulative Total Return
--------------------------------
3/5/99 3/99 3/00 3/01 3/02
------ ------ ------ ----- -----
NEON SYSTEMS, INC................ 100.00 366.67 220.00 31.04 53.33
NASDAQ STOCK MARKET (U.S.)....... 100.00 105.31 78.83 78.26 78.83
NASDAQ COMPUTER & DATA PROCESSING 100.00 110.35 68.79 67.54 68.79
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.
24
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, 2003. 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 2002
Audit Fees:
Audit fees billed to the Company by KPMG LLP during the Company's 2002
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 $175,000.
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, 2002.
All Other Fees:
Other fees billed to the Company by KPMG LLP during the Company's 2002
fiscal year related to statutory audits of the Company's subsidiaries and tax
related services totaled $55,800.
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.
25
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
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
Brian D. Helman
Chief Financial Officer and Secretary
Dated: December 20, 2002
26
EXHIBIT A
NEON SYSTEMS, INC.
AUDIT COMMITTEE CHARTER
The Board of Directors of NEON Systems, Inc. (the "Company") has heretofore
constituted and established an Audit Committee (the "Committee") with
authority, responsibility, and specific duties as described in this Audit
Committee Charter.
Composition
The Committee will be appointed annually by the Board of Directors of the
Company (the "Board") and shall serve until the annual meeting of the Board
following the next annual meeting of the stockholders of the Company. The
Chairman of the Board shall appoint the Chairman of the Committee.
The Committee shall be comprised of at least three directors. The members of
the Committee shall meet the independence and experience requirements of the
Marketplace Rules of The Nasdaq Stock Market ("Nasdaq"), Section 10A(m)(3) of
the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations of the Securities and Exchange Commission (the "SEC"). At least one
member of the Committee shall be a financial expert as defined by the SEC. The
Board shall determine annually whether each member of the Committee is
independent in accordance with the requirements described above. No member
shall serve on an audit committee of more than two other public companies.
Notwithstanding the foregoing membership requirements, no action of the
Committee shall be invalid by reason of any such requirement not being met at
the time such action is taken.
Mission Statement and Principal Functions
The Committee's oversight role shall serve to provide reasonable assurance
that the following objectives are achieved:
. Financial Reporting Process--The Company's financial statements are
presented fairly in conformity with generally accepted accounting
principles ("GAAP").
. System of Internal Controls--The Company's system of internal controls
provides reasonable assurance as to the integrity and reliability of
financial statements and the protection of assets from unauthorized
acquisition, use, or disposition.
. Corporate Compliance Process--The Company is in reasonable compliance
with pertinent laws and regulations, is conducting its affairs ethically,
and is maintaining effective controls against employee conflict of
interest and fraud.
The Committee shall have the authority to take all actions it deems
advisable to fulfill its responsibilities and duties. As such, the Committee
will have direct access to financial, legal, and other staff and consultants of
the Company. Such consultants may assist the Committee in defining its role and
responsibilities, consult with Committee members regarding a specific audit or
other issues that may arise in the course of the Committee's duties, and
conduct independent investigations, studies, or tests. The Committee has the
authority to employ such other accountants, attorneys, consultants or other
outside advisors to assist the Committee as it deems advisable, which expenses
the Company shall pay. The Committee may also meet with the Company's
investment bankers or financial analysts who follow the Company. The Committee
may require any officer or employee of the Company or any of its subsidiaries,
the Company's outside legal counsel, and the Company's external auditors to
meet with the Committee or any member of the Committee. The Committee will
report to the Board on a regular basis, and the Board shall provide an annual
performance evaluation of the Committee.
A-1
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Company's financial statements and disclosures are complete
and accurate and are in accordance with GAAP and applicable rules and
regulations. These are the responsibilities of the Company's management and the
Company's independent accountants. The Company's management is responsible for
compliance with laws and regulations and compliance with the Company's policies
and procedures.
The Committee's principal areas of oversight shall include the following:
Financial Reporting Process
The Committee shall:
. Annually select and engage the Company's independent accountants retained
to audit the financial statements of the Company, review the compensation
of the independent accountants and evaluate the performance and on-going
qualifications of the independent accountants. Any independent
accountants selected by the Committee shall be a "registered public
accounting firm" within the definition of Section 2 of the Sarbanes-Oxley
Act of 2002. The Company shall provide for appropriate funding, as
determined by the Committee, for payment of compensation to the
independent accountants.
. Dismiss the independent accountants if it determines, in its sole
discretion, that such action is necessary. The Committee shall also
consider whether or not the firm used as the independent accountants
should be rotated every five years.
. Review the experience and qualifications of the senior members of the
independent accountants' team and the quality control procedures of the
independent accountants.
. Require that the independent accountants rotate the lead audit partner
and the reviewing audit partner engaged on the Company's account every
five years.
. Pre-approve all audit services to be performed for the Company (including
comfort letters) and all permitted non-audit services (including tax
services). The Committee may delegate pre-approval authority for audit or
non-audit services to one or more members, whose decisions shall be
presented to the full Committee at its scheduled meetings.
. Set guidelines for the Company's hiring of employees or former employees
of the independent accountants who were engaged on the Company's account.
. Discuss with the national office of the independent accountants issues on
which it was consulted by the Company's audit team and matters of audit
quality and consistency.
. Confirm and monitor the independence of the independent accountants,
including a review of the nature of all services and related fees
provided by the independent accountants.
. Periodically obtain and review a report from the independent accountants
consistent with Independence Standards Board Standard Number 1 regarding
all relationships between the independent accountants and the Company
that may impact the independent accountants' objectivity and
independence, and discuss such report with the independent accountants.
The Committee shall also recommend any appropriate action to the Board in
response to the written report necessary to satisfy itself of the
independence and objectivity of the independent accountants.
. At least annually, obtain and review a report by the independent
accountants describing such firm's internal quality-control procedures;
any material issues raised by the most recent internal quality-control
review, or peer review, of the firm, or by any inquiry or investigation
by governmental or professional authorities, within the preceding five
years, respecting one or more independent audits carried out by the firm,
and any steps taken to deal with any such issues.
A-2
. Review with the independent accountants, prior to the initiation of the
annual audit, the independent accountants' process for identifying and
responding to key audit and internal control risks, and the scope and
approach of the audit to assure completeness of coverage of key business
controls and risk areas.
. Periodically discuss separately with management, the independent
accountants and the internal auditors the adequacy and integrity of the
Company's accounting policies and procedures and internal accounting
controls, the completeness and accuracy of the Company's financial
disclosure and the extent to which major recommendations made by the
independent accountants or the internal auditors have been implemented or
resolved.
. Approve the formation of all offshore subsidiaries or affiliates of the
Company.
. Serve as a channel of communication between the independent auditor and
the Board and/or management of the Company. The independent auditors are
ultimately accountable to the Committee.
. Instruct the independent accountants to report directly to the Committee
any problems or difficulties incurred in connection with the audit,
including any restrictions on the scope of activities or access to
required information, or any disagreements with management and resolve
any disagreements between management and the independent accountants
regarding financial reporting.
. Review and discuss with management and the independent accountants
disclosures made in management's discussion and analysis of financial
condition and the financial statements and footnotes included in the
annual report to stockholders and Form 10-K filings made with the SEC
prior to the filing of such reports with the SEC. In addition, review
findings of any examinations by regulatory agencies, such as the SEC.
. Review with management and the independent accountants at the completion
of the annual audit:
. The independent accountants' audit of the financial statements and
their report thereon.
. Any significant changes required in the independent accountants' audit
plan.
. The existence of significant estimates and judgments underlying the
financial statements, including the rationale behind those estimates
as well as the details on material accruals and reserves.
. The critical accounting policies used in the financial statements, an
analysis of the effect of alternative methods of applying GAAP on the
Company's financial statements and a description of any transactions
as to which management obtained Statement on Auditing Standards No. 50
letters.
. Insider and affiliated party transactions and potential conflicts of
interest.
. Other matters related to the conduct of the audit, which are to be
communicated to the committee under generally accepted auditing
standards.
. Review significant reports prepared by the Company's finance and
administration department (or an internal or external audit department,
if any) together with management's response and follow up to these
reports.
. Review and approve the appointment, performance and replacement of any
senior executive responsible for the internal audit function of the
Company.
. Direct the scope of the duties and activities of any senior executive
responsible for the internal audit function of the Company, who shall
report directly to the Committee.
. Periodically meet and review with any senior executive responsible for
the internal audit function of the Company the regular internal reports
to management prepared by the Company's finance and administration
department (or its internal or external audit department, if any) and the
progress of activities and any findings of major significance stemming
from internal audits.
A-3
. Discuss with management and any senior executive responsible for the
internal audit function of the Company policies with respect to risk
assessment and risk management.
. Review with management and the independent accountants the effect of
regulatory and accounting initiatives as well as any off-balance sheet
structures contemplated by the Company on the Company's financial
statements.
. Review and discuss with management and the independent accountants the
Company's quarterly financial statements prior to the filing of its Form
10-Q, including disclosures made in management's discussion and analysis
of financial condition and the results of the independent accountants
reviews of the quarterly financial statements.
. Review and discuss with financial management the Company's earnings press
releases, including the use of "pro forma" or "adjusted" non-GAAP
information, as well as financial information and earnings guidance, if
any, provided to analysts or ratings agencies.
. Review with management and the independent accountants any correspondence
with regulators or governmental agencies and any employee complaints or
published reports which raise issues regarding the Company's financial
statements or accounting policies.
. Review with the Company's management and/or legal counsel legal and
regulatory matters that may have a material impact on the financial
statements, the Company's compliance policies and any material reports or
inquiries received from regulators or governmental agencies.
. Discuss with the independent accountants the matters required to be
discussed by Statement of Auditing Standards No. 61 relating to the
conduct of the audit.
System of Internal Controls
. Review and evaluate the effectiveness of the Company's process for
assessing significant risks or exposures and the steps management has
taken to minimize such risks to the Company. Consider and review with
management and the independent accountants the following:
. The effectiveness of or weaknesses in the Company's internal controls
including the status and adequacy of management information systems
and other information and security, the overall control environment
and accounting and financial controls;
. Any disclosures provided by the Chief Executive Officer or the Chief
Financial Officer to the Committee regarding (i) significant
deficiencies in the design or operation of internal controls which
could adversely affect the Company's ability to record, process,
summarize, and report financial data and (ii) any fraud, including
that which involves management or other employees who have a
significant role in the Company's internal controls; and
. Any related significant findings and recommendations of the
independent accountants, together with management's response thereto,
including the timetable for implementation of recommendations to
correct weaknesses in internal controls.
. Assess internal processes for determining and managing key financial
statement risk areas.
. Ascertain whether the company has an effective process for determining
risks and exposures from asserted and unasserted litigation and claims
and from noncompliance with laws and regulations.
. Review with management and the independent accountants any significant
transactions that are not a normal part of the Company's operations and
changes, if any, in the Company's accounting principles or their
application.
A-4
Corporate Compliance Process
. Approve for recommendation to the Board the Company's policies and
procedures regarding compliance with the law and with significant Company
policies, including, but not limited to, codes of conduct expressing
principles of business ethics, legal compliance, the Foreign Corrupt
Practices Act, environmental, health, and safety issues, and other
matters relating to business conduct, and programs of legal compliance
designed to prevent and detect violations of law.
. Establish procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls, auditing
matters and the confidential, anonymous submissions by employees of
concerns regarding accounting and auditing matters. Monitor actions taken
by the Company in response to any letters or reports to management
provided by the internal auditors or independent accountants.
. Monitor compliance with the Company's code of conduct and approve any
waivers under the code of conduct.
. Investigate at its discretion any matter brought to its attention, which
investigation may include reviewing the books, records and facilities of
the Company and interviewing Company officers or employees.
. Review management's monitoring of the Company's compliance programs and
evaluate whether management has the proper review systems in place to
ensure that the Company's financial statements, reports and other
financial information disseminated to governmental organizations and the
public satisfy legal requirements.
. Review with the Company's management and others any legal, tax or
regulatory matters that may have a material impact on Company operations
and the financial statements, related Company compliance policies, and
programs and reports received from regulators.
. Review policies and procedures with respect to officers' expense
accounts, including their use of corporate assets, and consider the
results of any review of these areas by the independent accountants.
Meetings
The Committee will meet at least quarterly, or more frequently as necessary
to carry out its responsibilities. Of these meetings, the Committee should meet
at least annually with management, the independent auditors and the individuals
responsible for the Company's internal audit function in separate executive
sessions to discuss any matters that the Committee or each of these groups
believe should be discussed privately. The Committee will also meet with
management and the independent accountants prior to the release of the
Company's quarterly or annual earnings to discuss the results of the quarterly
review or audit as applicable.
The Chairman of the Committee and/or management of the Company may call
additional meetings as deemed necessary. In addition, the Committee will make
itself available to the independent accountants of the Company as requested by
such independent accountants.
All meetings of the Committee shall be held pursuant to the Bylaws of the
Company with regard to notice and waiver thereof, and written minutes of each
meeting shall be duly filed in the Company records. Reports of meetings of the
Committee, including committee actions and recommendations, shall be made to
the Board at its next regularly scheduled meeting following the Committee
meeting.
Other Committee Responsibilities
The Committee will review and reassess the adequacy of this Charter on an
annual basis, and will submit the charter to the Board for approval. The
Committee Charter will be included in the proxy statement as required under
Securities and Exchange Commission regulations.
A-5
The Committee will prepare a report to shareholders, to be included in the
proxy statement on an annual basis as required by the Securities and Exchange
Commission. This report will specifically address the following activities
carried out by the Committee during the year:
. The Committee's review of the independence of its members.
. Confirmation of the annual review of this Charter.
. The Committee's review of the Company's audited financial statements with
management.
. The Committee's discussion with the independent auditors of the matters
required to be communicated to audit committees.
A-6
[NEON SYSTEMS, INC. LOGO]
14100 Southwest Freeway, Suite 500
Sugar Land, Texas 77478
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 4, 2003
Dear Stockholders:
On Tuesday, February 4, 2003, NEON Systems, Inc. will hold its annual
meeting of stockholders at our offices located at 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 December 11,
2003 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.
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE VOTED "FOR" ALL PROPOSALS.
Please mark [X]
your votes as
indicated in
this example
1. To elect three Class III Directors to the Board of Directors. [ ] FOR [ ] WITHHELD
FOR ALL
01 John J. Moores;
02 David F. Cary;
03 Loretta Cross; and
04 Peter Schaeffer
Withheld for the nominees you list below: (Write that nominee's name in the
space provided below)
------------------------------------------------
II. To ratify the selection of KPMG LLP as independent auditors for the fiscal [ ] FOR [ ] AGAINST [ ] ABSTAIN
year ending March 31, 2003
III. To transact any other business that is properly brought before the meeting
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 for 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
http://www.eproxy.com/nesy
Use the Internet to vote your proxy. Have your proxy card in hand when you
access the web site. You will be prompted to enter your control number, located
in the box below, to create and submit an electronic ballot.
OR
Telephone
1-800-435-6710
Use any touch-tone telephone to vote your proxy. Have your proxy card in hand
when you call. You will be prompted to enter your control number, located in the
box below, and then follow the directions given.
OR
Mail
Mark, sign and date your proxy card and return it in the enclosed postage-paid
envelope.
If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.