SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
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CHECK THE APPROPRIATE BOX:
[ ] PRELIMINARY PROXY STATEMENT
[X] DEFINITIVE PROXY STATEMENT
[ ] DEFINITIVE ADDITIONAL MATERIALS
[ ] SOLICITING MATERIAL PURSUANT TO SEC.240.14a-11(c) OR SEC.240.14a-12
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
NETEGRITY, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NETEGRITY, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] NO FEE REQUIRED.
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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
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STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING.
(1) AMOUNT PREVIOUSLY PAID:
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NETEGRITY, INC.
201 Jones Road
Waltham, MA 02451
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held on
May 16, 2003
To Our Stockholders:
The Annual Meeting of Stockholders of Netegrity, Inc., a Delaware
corporation (the "Company" or "Netegrity"), will be held on Friday, May 16, 2003
at 9:00 a.m. local time at 201 Jones Road, Waltham, Massachusetts 02451 (the
"Meeting") for the following purposes:
1. To elect a Board of Directors; and
2. To consider and act upon any other business which may properly come
before the Meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on March 17,
2003 as the record date for the Meeting. All stockholders of record at the close
of business on March 17, 2003 are entitled to notice of, and to vote at, the
Meeting.
All stockholders are cordially invited to attend the Meeting.
By Order of the Board of Directors,
Barry N. Bycoff,
Chairman, President and Chief Executive Officer
April 4, 2003
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 IN ORDER TO
ASSURE REPRESENTATION OF YOUR SHARES. THE PROXY MAY BE REVOKED BY THE PERSON
EXECUTING THE PROXY BY FILING WITH THE SECRETARY OF THE COMPANY AN INSTRUMENT OF
REVOCATION OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY ELECTING TO VOTE
IN PERSON AT THE MEETING. NO POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED IN
THE UNITED STATES.
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NETEGRITY, INC.
PROXY STATEMENT
2003 ANNUAL MEETING OF STOCKHOLDERS
MAY 16, 2003
Proxies in the form enclosed with this proxy statement are solicited by
the Board of Directors of Netegrity, Inc., a Delaware corporation (the
"Company"), for use at the 2003 Annual Meeting of Stockholders to be held on
Friday, May 16, 2003, at 9:00 a.m., local time, at the Company's principal
executive offices located at 201 Jones Road, Waltham, Massachusetts 02451, and
any adjournments thereof (the "Meeting").
If the enclosed proxy is properly executed and returned, it will be
voted in the manner directed by the stockholder. If no specification is made
with respect to a particular matter, the shares will be voted "For" approval of
the matter. With respect to the election of directors, any stockholder
submitting a proxy has the right to withhold authority to vote for any
individual nominee or group of nominees to the Board of Directors by writing the
name of such individual or group in the space provided on the proxy. Any person
giving the enclosed form of proxy has the power to revoke it by executing a
proxy bearing a later date and delivering it to the Secretary of the Company at
any time before the proxy is exercised, by voting in person at the meeting, or
by giving written notice of revocation to the Secretary of the Company at any
time before the proxy is exercised.
The representation in person or by proxy of at least a majority of the
outstanding shares of Common Stock is necessary to establish a quorum for the
transaction of business. The election of the nominees for director will be
decided by a plurality vote. Both abstentions and broker "non-votes" will be
counted as present for the purposes of determining the existence of a quorum for
the transaction of business. However, for purposes of determining the number of
shares voting on a particular proposal, abstentions and broker "non-votes" will
not be counted as votes cast or shares voting.
The Annual Report to Stockholders, containing financial statements for
the fiscal year ended December 31, 2002, is being mailed with the proxy
materials to all stockholders entitled to vote, on or about April 4, 2003.
The Company's principal executive offices are located at 201 Jones
Road, Waltham, Massachusetts 02451, and its telephone number is (781) 890-1700.
RECORD DATE AND VOTING SECURITIES
Only stockholders of record at the close of business on March 17, 2003
are entitled to notice of, and to vote at, the Meeting. On March 17, 2003, the
Company had outstanding 34,324,210 shares of Common Stock, par value $.01 per
share. Each outstanding share of Common Stock entitles the record holder to one
vote.
MANAGEMENT AND PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth the beneficial ownership of the
Company's Common Stock, as of February 28, 2003, by (i) each person known by the
Company to beneficially own more than 5% of the issued and outstanding shares of
Common Stock, (ii) each director, (iii) each "named executive officer"
identified in the Summary Compensation Table below, and (iv) the current
directors and executive officers as a group. The address of each of our
directors and named executive officers is c/o Netegrity, Inc., 201 Jones Road,
Waltham, MA 02451.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC"), and generally includes voting power
and/or investment power with respect to securities. Shares of Common Stock
subject to options or warrants exercisable within 60 days of February 28, 2003
are deemed outstanding for purposes of computing the percentage beneficially
owned by the person holding the options or warrants, but are not deemed
outstanding for purposes of computing the percentage beneficially owned by any
other person. Except as indicated by footnote, we believe that the persons named
in this table, based on information provided by them, have sole voting and
investment power with respect to the shares of Common Stock indicated.
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On August 23, 2002, the Company filed a tender offer statement with the
SEC in connection with its offer to exchange certain employee options to
purchase shares of the Company's Common Stock for new options to purchase shares
of its Common Stock (the "Offer to Exchange"). The Offer to Exchange provided
for the grant of new options on two different dates. The number of shares to be
granted to each optionee will equal the number of shares tendered by each
optionee, except that options with an exercise price of $36.09 tendered by Barry
Bycoff and Deepak Taneja will be exchanged at a rate of one share underlying a
new option for each two shares underlying such tendered options. The Company
granted 50% of the new options on March 25, 2003 and expects to grant the
remaining 50% on or about April 25, 2003, subject to the terms and conditions of
the Offer to Exchange. Each new option will be exercisable in accordance with a
schedule tied to the duration of an individual's employment with the Company.
Solely for the purposes of the following table, the options that are currently
expected to be exercisable under the Offer to Exchange when they are granted are
deemed outstanding for purposes of computing the percentage beneficially owned
by the person who will hold the option, but are not deemed outstanding for
purposes of computing the percentage beneficially owned by any other person.
Name and Address of Shares Beneficially
Beneficial Owner Owned Percent of Class
---------------- ----- ----------------
T. Rowe Price Associates, Inc. (1) 3,951,260 11.52%
100 East Pratt Street
Baltimore, MD 21202
Lawrence D. Lenihan, Jr. (2) 2,706,805 7.89%
Pequot Capital Management, Inc. (3) 2,651,180 7.73%
500 Nyala Farm Road
Westport, CT 06880
Barry N. Bycoff (4) 1,170,250 3.36%
Regina O. Sommer (5) 75,000 *
Deepak Taneja (6) 247,344 *
James E. Rosen (7) 222,571 *
Michael L. Mark (8) 176,829 *
Thomas M. Palka (9) 157,465 *
Ralph B. Wagner (10) 85,600 *
William C. Bartow (11) 120,000 *
Paul F. Deninger (11) 58,719 *
Eric R. Giler (11) 33,063 *
All current executive officers and directors as a group 4,896,181 13.99%
(10 persons) (12)
----------------
* less than 1%
(1) Consists of securities owned by various individual and institutional
investors for which T. Rowe Price Associates, Inc. serves as investment
advisor with power to direct investment and/or vote the securities. T.
Rowe Price has sole dispositive power for 3,951,260 shares and sole
voting power for 1,073,060 shares. T. Rowe Price expressly disclaims
beneficial ownership of these shares.
(2) Includes 15,000 shares held by Mr. Lenihan's minor children. Mr.
Lenihan is a Managing General Partner of Pequot Capital Management,
Inc. and may be deemed to beneficially own the 2,651,180 shares held by
Pequot Equity and Pequot Offshore. Mr. Lenihan disclaims beneficial
ownership of these shares, except to the extent of his pecuniary
interest therein. Mr. Lenihan is also a Trustee of the Lenihan Family
Foundation (the "Foundation") and may be deemed to beneficially own the
1,000 shares held by the Foundation. Mr. Lenihan disclaims beneficial
ownership of these shares.
(3) Consists of 2,353,235 shares held of record by Pequot Private Equity
Fund, L.P. ("Pequot Equity"), and 297,945 shares held of record by
Pequot Offshore Private Equity Fund, Inc. ("Pequot Offshore"). Both
funds are managed
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by Pequot Capital Management, Inc., which has voting and dispositive
power of the shares of Common Stock held by Pequot Equity and Pequot
Offshore.
(4) Includes 15,000 shares held in trust for the benefit of Mr. Bycoff's
children and 785,000 shares issuable upon exercise of options
exercisable within 60 days of February 28, 2003.
(5) Includes 40,000 shares issuable upon exercise of options exercisable
within 60 days of February 28, 2003.
(6) Includes 135,800 shares issuable upon exercise of options exercisable
within 60 days of February 28, 2003.
(7) Includes 137,001 shares issuable upon exercise of options exercisable
within 60 days of February 28, 2003.
(8) Includes 24,063 shares issuable upon exercise of options exercisable
within 60 days of February 28, 2003.
(9) Includes 100,000 shares issuable upon exercise of options exercisable
within 60 days of February 28, 2003. Mr. Palka resigned as an executive
officer of the Company on October 1, 2002 and terminated his employment
with the Company on December 31, 2002. Mr. Palka currently serves as a
consultant to the Company.
(10) Includes 22,188 shares issuable upon exercise of options exercisable
within 60 days of February 28, 2003.
(11) Consists of options issuable upon exercise of options exercisable
within 60 days of February 28, 2003.
(12) Includes 1,355,834 shares issuable upon exercise of options exercisable
within 60 days of February 28, 2003.
ELECTION OF DIRECTORS
At the Meeting, six directors are to be elected, constituting the
entire Board of Directors (the "Board"). The directors of the Company shall hold
office until the next annual meeting of stockholders and until their successors
have been elected and qualified.
No proxy may be voted for more people than the number of nominees
listed below. Shares represented by all proxies received by the Board and not so
marked as to withhold authority to vote for any individual director (by writing
that individual director's name where indicated on the proxy) or for all
directors will be voted FOR the election of all the nominees named below. If one
or more nominees are unable or unwilling to serve the persons named in the
accompanying proxy will vote for substitutes designated by the Board. Should the
Board not recommend a substitute for any nominee, the proxy will be voted for
the election of the remaining nominees.
THE FOLLOWING PARAGRAPHS PROVIDE INFORMATION AS OF THE DATE OF THIS
PROXY STATEMENT ABOUT EACH MEMBER OF THE COMPANY'S BOARD OF DIRECTORS,
EACH OF WHOM IS A NOMINEE FOR ELECTION.
BARRY N. BYCOFF, 54 years old, was appointed President and Chief
Executive Officer and director of the Company in April 1993. In November 1999,
Mr. Bycoff was also appointed Chairman of the Board.
PAUL F. DENINGER, 44 years old, became a director of the Company in
February 2000. Mr. Deninger is Chairman and CEO of Broadview Holdings LLP, a
merger and acquisition advisor and private equity-investing firm, which he
joined in 1987. Mr. Deninger was elected Managing Director of Broadview in 1991,
CEO in 1996 and Chairman in 1997. Mr. Deninger serves on the Board of Directors
of the Boston Globe Newspaper; TechNet Mass, a bipartisan political organization
serving the interests of the technology industry; and the Advisory Board of the
Media and Technology Charter High School in Boston.
ERIC R. GILER, 47 years old, became a director of the Company in
December of 1996. Mr. Giler is a director and President of Brooktrout, Inc., a
supplier of hardware and software platforms used in the development of
applications, services and systems for The New Network, which was founded in
1984. Mr. Giler serves on the Executive Committee of
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the American Electronics Association (AeA) New England Council. In addition, Mr.
Giler has served on the board of the Massachusetts Telecommunications Council
since it's founding, most recently as Chairman.
LAWRENCE D. LENIHAN, JR., 38 years old, became a director of the
Company in November 2000. Mr. Lenihan is a Managing General Partner and co-head
of the Pequot venture funds and the Pequot private equity funds. Prior to
joining Pequot in 1996, he was a principal of Broadview Associates L.L.C., a
technology oriented investment-banking firm. Prior to joining Broadview, he held
several positions at IBM, including the leader of the interactive multimedia
software product business. Mr. Lenihan also serves on the Board of Directors of
Digital Generation Systems, Inc., a provider of digital distribution services to
the broadcast advertising industry; and US Search.com, Inc., an online provider
of information and risk management services providing public record information
about individuals and companies; and several other private companies.
MICHAEL L. MARK, 57 years old, became a director of the Company in
October 1994. Since 1990, Mr. Mark has been a private investor and principal of
Walnut Venture Associates, an early stage technology funding partnership.
Previously, he served as Vice President, System Integrations at Interleaf, Inc.,
an electronic publishing software developer, Vice President and co-founder of
Cadmus Computer Corporation, a workstation manufacturer, and founder and
President of American Energy Services, Inc. Mr. Mark also serves as a director
of Progress Software Corporation, a manufacturer of software development tools.
RALPH B. WAGNER, 69 years old, became a director of the Company in
September 1992. Since 1997, Mr. Wagner has been a principal of Walnut Venture
Associates, an early stage technology funding partnership. Mr. Wagner is a
co-founder of icomXpress, Inc., a company producing workflow software for
electronic commerce applications. Mr. Wagner serves as a director of several
private companies including DYS Analytics, a developer, manufacturer and
marketer of software programs; and Softrax, a software developer specializing in
software for the software industry.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION
OF EACH OF THE ABOVE NOMINEES.
CORPORATE GOVERNANCE PHILOSOPHY
GENERAL
We believe that good corporate governance is important to ensure that the
Company is managed for the long-term benefit of its stockholders. During the
past year, we have been reviewing our corporate governance policies and
practices and comparing them to those suggested by various authorities in
corporate governance and the practices of other public companies. We have also
been reviewing the provisions of the Sarbanes-Oxley Act of 2002, the new and
proposed rules of the Securities and Exchange Commission (the "SEC") and the
proposed new listing standards of NASDAQ to ensure compliance.
Based on our review, we have taken steps to voluntarily implement many of
the proposed new rules and listing standards. In particular, we have:
- Adopted corporate governance guidelines
- Reconstituted our Nominating Committee as the Nomination and
Governance Committee and adopted a new charter for this Committee
- Adopted new charters for our Audit Committee and Compensation
Committee
- Amended our Code of Business Conduct and Ethics, which applies to all
officers and employees
- Established a Disclosure Committee, which is made up of members of the
finance, legal, marketing and investor relations departments and
includes the Chief Financial Officer
- Established the position of Lead Director on the Board
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If you are interested in receiving a copy of our current Committee charters,
Corporate Governance Guidelines and Code of Business Conduct and Ethics, please
write to: Secretary of the Company, Netegrity, Inc., 201 Jones Road, Waltham,
Massachusetts 02451.
BOARD OF DIRECTORS
The business affairs of the Company are conducted under the direction of
the Board in accordance with Delaware law, as implemented by the Company's
Certificate of Incorporation and By-laws. In satisfying its responsibilities,
the Board is authorized to retain its own advisors to assist and advise the
Board and its Committees.
The role of the Board is to effectively govern the affairs of the Company
for the benefit of its stockholders. The Board strives to ensure the success and
continuity of the Company's business through the appointment of qualified
management. The Board also seeks to ensure that the Company's activities are
conducted in a responsible and ethical manner. The Board has established a
policy that Board members must limit the number of other public company boards
on which they serve so that they are able to devote adequate time to their
duties to the Company.
The Board held eight meetings during the year ended December 31, 2002. Each
director attended at least 75% of all meetings held by the Board and all
Committees of the Board (as defined below) on which he served during the year
ended December 31, 2002 and his respective tenure as director and member of such
Committee.
NON-EMPLOYEE DIRECTORS AND LEAD DIRECTOR
Mr. Bycoff is the only director who is also an employee of the Company.
Non-employee directors do not receive consulting, legal or other fees from the
Company other than compensation for services as a member of the Board or
Committees of the Board. Mr. Bycoff does not participate in any action of the
Board relating to his executive compensation plans.
The Board has established the position of Lead Director, which is currently
held by Mr. Deninger. Non-employee directors meet on a regular basis apart from
Mr. Bycoff and management representatives, and the Lead Director is responsible
for setting the agenda and running the meetings.
BOARD EVALUATION AND SUCCESSION PLANNING
The Board and its members engage in periodic self-evaluation and
self-assessment. The Chief Executive Officer periodically reports to the Board
on succession planning and management development. At least annually, the Board
evaluates the performance of the Chief Executive Officer and other senior
management personnel.
BOARD COMMITTEES AND MEETINGS
The Board currently has standing Nomination and Governance, Compensation
and Audit Committees (the "Committees"). Each of these Committees has a written
charter approved by the Board. The Committees evaluate their performance on an
annual basis and review their respective Committee charters to ensure that they
are following the best practices in corporate governance. Each of the Committees
is authorized to retain independent consultants in order to advise and assist
them in their duties. The members of the Committees are identified below.
Nomination and Governance Committee
The Nomination and Governance Committee is currently composed of Messrs.
Deninger, Chairman, Lenihan and Wagner. The Nomination and Governance Committee
held one meeting during the year ended December 31, 2002.
The Nomination and Governance Committee has developed a set of Corporate
Governance Guidelines (the "Guidelines") applicable to the Company. The
Nomination and Governance Committee is responsible for overseeing the
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Guidelines and reporting and making recommendations to the Board concerning
corporate governance matters. Among other matters, the Guidelines established
the following governing principles:
- A majority of the members of the Board are to be independent
directors. Independent directors do not receive consulting, legal or
other fees from the Company other than Board compensation;
- Directors shall stand for re-election every year;
- Directors shall not stand for re-election after age 75;
- The Board shall appoint members to Committees of the Board and
establish criteria for selection of new Board members;
- The Board and Committees of the Board shall have access to management
and independent advisors;
- The Board and its members shall be subject to periodic self-evaluation
and self-assessment;
- At least annually the Board shall review the Company's strategic
long-range plan, business unit initiatives, capital projects and
budget matters;
- The Board shall provide for the designation of a Lead Director;
- Independent directors shall meet on a regular basis apart from other
Board members and management representatives, and the Lead Director
shall be responsible for setting the agenda and running the meetings;
- The Chief Executive Officer shall report periodically to the Board on
succession planning and management development;
- The Board and Compensation Committee shall evaluate the performance of
the Chief Executive Officer and other senior management personnel
annually; and
- Incentive compensation plans shall link pay directly and objectively
to measured financial goals set in advance by the Compensation
Committee.
The duties and responsibilities of the Nomination and Governance Committee
include the following:
- Identify individuals qualified to become Board members;
- Recommend to the Board the persons to be nominated by the Board for
election as directors at the annual meeting of stockholders;
- Consider suggestions from stockholders and other sources regarding
possible candidates for directors;
- Review the Company's Corporate Governance Guidelines annually; and
- Oversee the evaluation of the Board and management.
The Nomination and Governance Committee will consider for nomination to the
Board candidates suggested by stockholders, provided such recommendations are
delivered to the Company not later than the deadline for submission of
stockholder proposals (see "Stockholder Proposals" below). Stockholders who wish
to suggest qualified candidates for consideration as directors of the Company by
the Nomination and Corporate Governance Committee should write to Secretary of
the Company, Netegrity, Inc., 201 Jones Road, Waltham, Massachusetts 02451,
stating in detail the qualifications of such persons.
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Compensation Committee
The Compensation Committee is currently composed of Mr. Mark, Chairman, and
Mr. Wagner. The Compensation Committee held five meetings during the year ended
December 31, 2002.
The duties and responsibilities of the Compensation Committee include the
following:
- Establish overall strategy with respect to compensation for officers
and management;
- Determine who should receive stock options under the Company's various
stock plans;
- Provide oversight of the Company's qualified employee benefit plans;
- Perform annual appraisal of the Chief Executive Officer and report
results to the Board;
- Oversee strategic human resource issues of the Company; and
- Develop incentive compensation plans, which link pay directly and
objectively to measured financial goals.
Audit Committee
The Audit Committee is currently composed of Mr. Lenihan, Chairman, and
Messrs. Mark and Giler, each of whom is an independent director under the
current rules of the NASDAQ Stock Market governing the qualifications of the
members of the Audit Committee. The Audit Committee held seven meetings during
the year ended December 31, 2002.
The duties and responsibilities of the Audit Committee include the
following:
- Provide oversight of the financial reporting process and management's
responsibility for the integrity, accuracy and objectivity of
financial reports, and accounting and financial reporting practices;
- Appoint the Company's independent public accountants;
- Pre-approve all fees to the Company's independent auditors;
- Oversee the performance and reviews the scope of the audit function of
the Company's independent auditors;
- Provide oversight of the adequacy of the Company's systems of internal
controls; and
- Provide oversight of management's practices relating to ethical
considerations and business conduct, including compliance with laws
and regulations.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee has reviewed and discussed the Company's audited
financial statements with management. The Audit Committee has discussed with
KPMG LLP, ("KPMG") the Company's independent accountants, the matters required
to be discussed by Statement of Auditing Standards No. 61, Communication with
Audit Committees which provides that certain matters related to the conduct of
the audit of the Company's financial statements are to be communicated to the
Audit Committee. The Audit Committee has also received the written disclosures
and the letter from KPMG required by Independence Standards Board Standard No. 1
relating to the accountant's independence from the Company, has discussed with
KPMG their independence from the Company, and has considered the compatibility
of non-audit services with the accountant's independence. Based on the review
and discussions referred to above, the Audit Committee recommended to the
Company's Board (and the Board has approved) that the Company's audited
financial statements be included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as amended.
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The Audit Committee acts pursuant to a written Audit Committee charter,
which is attached to this proxy statement as Appendix A. Each member of the
Audit Committee qualifies as an "independent" director under the current listing
standards of the NASDAQ Stock Market.
Management is responsible for the Company's financial reporting process
including its system of internal control, and for the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. The Company's independent auditors are responsible for
auditing those financial statements. The Audit Committee's responsibility is to
monitor and review these processes. This oversight does not provide the Audit
Committee with an independent basis to determine that management has maintained
appropriate accounting and financial reporting principles or policies, or
appropriate internal controls and procedures designed to assure compliance with
accounting standards and applicable laws and regulations. Therefore, the
Committee members have relied, without independent verification, on management's
representation that the financial statements have been prepared with integrity
and objectivity and in conformity with accounting principles generally accepted
in the United States of America and on the representations of the independent
auditors included in their report on the Company's financial statements.
AUDIT COMMITTEE
Lawrence D. Lenihan, Jr., Chairman
Michael L. Mark
Eric R. Giler
INDEPENDENT AUDITOR FEES AND OTHER MATTERS
Audit Fees
KPMG billed us an aggregate of $177,500 in fees for professional services
rendered in connection with the audit of our financial statements for the most
recent fiscal year and the reviews of the financial statements included in each
of our quarterly reports on Form 10-Q during the fiscal year ended December 31,
2002. During 2002, fees paid by the Company to KPMG for non-audit services did
not exceed the fees paid to KPMG for audit services.
Financial Information Systems Design and Implementation Fees
KPMG did not bill us for any professional services rendered to us for the
fiscal year ended December 31, 2002 in connection with the design and
implementation of financial information systems, the operation of information
systems or the management of local area networks.
All Other Fees
KPMG billed us an aggregate of $68,000 in fees for other services rendered
to the Company for the fiscal year ended December 31, 2002, primarily for
services rendered in connection with corporate income tax planning and tax
compliance matters as well as for services rendered in connection with the Offer
to Exchange filed by the Company in August 2002.
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COMPENSATION OF DIRECTORS
As compensation for serving on the Board, each non-employee director is
paid his expenses by the Company for each quarter during which he attends
meetings. The Company compensated each non-employee director at a rate of $6,000
per year during 2002. Effective January 1, 2003, each non-employee director will
be compensated at a rate of $15,000 per year. Each non-employee director is also
reimbursed by the Company for his expenses associated with meeting attendance
each calendar quarter. The Chairman of the Audit Committee will receive an
additional $15,000 per year and the other members of the Audit Committee will
receive an additional $5,000 per year.
During the year ended December 31, 2002, each non-employee director of the
Company (with the exception of Mr. Lenihan) participated in the 2000 Incentive
Stock Plan (the "Director Plan"). The Director Plan authorized grants of stock
options to members of the Company's Board of Directors who are neither an
employee nor an officer of the Company. During the year ended December 31, 2002,
Mr. Deninger was granted an option to purchase 35,688 shares pursuant to the
Director Plan at an exercise price of $15.37, and Messrs. Giler, Mark and Wagner
were each granted an option to purchase 17,500 shares pursuant to the Director
Plan at an exercise price of $15.37. Additionally, during the year ended
December 31, 2002, Mr. Deninger was granted an additional option to purchase
30,000 shares pursuant to the 1997 Non-Employee Director Plan and 20,000 shares
pursuant to the 2000 Stock Incentive Plan, in each case, at an exercise price of
$2.99 per share.
Compensation Committee Interlocks and Insider Participation
The current members of our Compensation Committee are Messrs. Mark,
Chairman and Wagner. No executive officer of the Company has served as a
director or member of the Compensation Committee or any other entity where
executive officers served as a member of the Company's Board or Compensation
Committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1996, Mr. Bycoff exercised an option to purchase 300,000 shares of
the Company's Common Stock for an aggregate price of $200,000. The Company's
Board of Directors approved a loan of $200,000 to Mr. Bycoff for payment of the
exercise price, which was evidenced by a full recourse note, the repayment of
which was secured by the 300,000 shares of Common Stock until May 2002, when the
security obligation was removed. This note bears interest at a rate of 7% per
annum and is due and payable on demand by the Company at the discretion of the
Board. Mr. Bycoff has paid approximately $94,000 in principal and interest on
the loan as of February 28, 2003. Also, during 2002, Mr. Bycoff repaid an
advance made during 2002 of approximately $17,000. The largest aggregate amount
of indebtedness of Mr. Bycoff to the Company during 2002 was approximately
$155,000.
During 2002, the Company paid approximately $125,000 to a company for
marketing services. The principal stockholder of such company is the son-in-law
of Mr. Mark, a member of the Company's Board. The Company has similar
arrangements with other marketing services firms and believes the arrangement
was entered into on substantially the same terms and conditions as its
arrangements with such other firms.
SUMMARY COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for the most recent three years ended
December 31, 2002, of those persons who (i) served as the Chief Executive
Officer of the Company during any part of the year ended December 31, 2002, (ii)
the four most highly compensated executive officers of the Company at December
31, 2002 whose annual compensation and bonus exceeded $100,000, and (iii)
another individual who would have been included under item (ii) above but for
the fact that the individual was not serving as an executive officer of the
Company as of December 31, 2002 (the "Named Executive Officers"):
- 11 -
LONG-TERM COMPENSATION
AWARDS (2)
CALENDAR ANNUAL COMPENSATION (1) OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (#) (3)
--------------------------- ---- --------------------- -------
Barry N. Bycoff 2002 $375,000 $ 25,000 425,000
Chairman of the Board, Chief 2001 375,000 20,000 100,000
Executive Officer & President 2000 250,000 250,000 0
William C. Bartow 2002 $170,000 $0 70,000
Vice President of Engineering 2001 170,000 15,000 50,000
2000 150,000 18,129 0
James E. Rosen 2002 $175,000 $0 75,000
Vice President of Corporate and 2001 175,000 15,000 50,000
Business Development 2000 150,000 58,763 0
Regina O. Sommer 2002 $200,000 $0 0
Chief Financial Officer and Treasurer 2001 2,081 0 200,000
Deepak Taneja 2002 $210,000 $0 145,000
Chief Technology Officer 2001 202,000 15,000 50,000
2000 170,000 97,150 0
Thomas M. Palka (resigned as an 2002 $200,000 $572,017 175,000
executive officer as of October 1, 2002) 2001 200,000 189,016 60,000
Former Vice President of Sales and Service 2000 150,000 802,848 0
---------------
(1) Salary and bonus amounts include amounts earned in 2002. In the case of
Mr. Palka, bonus amounts include sales commissions, payment of which in
some cases had been deferred. Excludes perquisites and other personal
benefits, the aggregate annual amount of which for each officer is less
than the lesser of $50,000 or 10% of the total salary and bonus
reported.
(2) The Company did not grant any restricted stock awards or stock
appreciation rights ("SARs") or make any long-term incentive plan
payouts to the named executive officers during the three years ended
December 31, 2002.
(3) All of the options granted during 2002 to the named executive officers,
other than to Mr. Palka, were tendered in connection with the Offer to
Exchange in August 2002. In exchange for these options, as well as
other options tendered, it is expected that new options will be granted
to the named executive officers on two different dates. The Company
granted 50% of the new options on March 25, 2003 and expects to grant
the remaining 50% on or about April 25, 2003. The number of shares to
be granted to each optionee will equal the number of shares tendered by
each optionee, except that options with an exercise price of $36.09
tendered by Barry Bycoff and Deepak Taneja will be exchanged at a rate
of one share underlying a new option for each two shares underlying
such tendered options. Each new option will be granted at fair market
value on the date of the grant and will be exercisable in accordance
with a schedule based on the duration of each individual's employment
with the Company.
- 12 -
OPTION GRANTS IN THE FISCAL YEAR
The following table sets forth grants of stock options to the Named
Executive Officers during the fiscal year ended December 31, 2002.
PERCENT OF TOTAL EXERCISE OR POTENTIAL REALIZABLE VALUE AT
OPTIONS OPTIONS GRANTED TO BASE PRICE EXPIRATION ASSUMED ANNUAL RATES OF STOCK PRICE
NAME GRANTED (#)(1) EMPLOYEES IN FISCAL YEAR ($/SHARE) DATE APPRECIATION FOR OPTION TERM (2)
---- -------------- ------------------------ --------- ---- --------------------------------
5%($) 10%($)
--------------- -------------
Barry N. Bycoff 425,000 8.7% $15.37 3/15/09 $ 2,659,282 $ 6,197,257
William C. Bartow 70,000 1.4% $15.37 3/15/09 $ 437,999 $ 1,020,725
James E. Rosen 75,000 1.5% $15.37 3/15/09 $ 469,285 $ 1,093,634
Regina O. Sommer - 0.0% - -
Deepak Taneja 145,000 3.0% $15.37 3/15/09 $ 907,284 $ 2,114,358
Thomas M. Palka 75,000 1.5% $15.37 3/15/09 $ 469,285 $ 1,093,634
Thomas M. Palka 100,000 2.0% $ 2.20 7/08/09 $ 89,562 $ 208,718
-----------
(1) All of the options granted during 2002 to the named executive officers,
with the exception of Mr. Palka, were tendered in connection with the Offer
to Exchange in August 2002. In exchange for these options, as well as other
options tendered, it is expected that new options will be granted to the
named executive officers on two different dates. The Company granted 50% of
the new options on March 25, 2003 and expects to grant the remaining 50% on
or about April 25, 2003. The number of shares to be granted to each
optionee will equal the number of shares tendered by each optionee, except
that options with an exercise price of $36.09 tendered by Barry Bycoff and
Deepak Taneja will be exchanged at a rate of one share underlying a new
option for each two shares underlying such tendered options. Each new
option will be granted at fair market value on the date of the grant and
will be exercisable in accordance with a schedule based on the duration of
each individual's employment with the Company.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the Company's Common Stock over the term of the
options. These numbers are calculated based on rules promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth. Actual gains, if any, on stock
option exercises and Common Stock holdings are dependent on the timing of
such exercise and the future performance of the Company's Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected would be received by
the individuals.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to options to
purchase the Company's Common Stock granted to the named executive officers,
including (i) the number of shares purchased upon exercise of options in the
most recent fiscal year, (ii) the net value realized upon such exercise, (iii)
the number of unexercised options outstanding at December 31, 2002, and (iv) the
value of such unexercised options at December 31, 2002:
- 13 -
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 2002 OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2002 DECEMBER 31, 2002($)(3)
ACQUIRED VALUE -------------------------------- ---------------------------
NAME ON EXERCISE REALIZED($)(1) EXERCISABLE(2) UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
---- ----------- -------------- -------------- ---------------- ----------- -------------
Barry N. Bycoff......... 73,950 $127,194 485,000 - $972,155 -
William C. Bartow....... - - - - - -
James E. Rosen.......... 15,300 $147,339 27,000 - $ 37,983 -
Regina O. Sommer ....... - - - - - -
Deepak Taneja........... 35,700 $ 31,284 27,800 - $ 30,288 -
Thomas M. Palka......... 56,500 $ 62,150 215,000 - $ 7,696 -
------------------------
(1) Based on the closing price of a share of Common Stock of the Company as
reported on the NASDAQ Stock Market on the date of exercise less the
aggregate exercise price.
(2) The number of unexercised options at December 31, 2002 does not reflect
the options tendered in the Offer to Exchange since they were not
outstanding at December 31, 2002.
(3) Based on the closing price of a share of Common Stock of the Company,
as reported on the NASDAQ Stock Market on December 31, 2002 ($3.25),
less the exercise price.
The following table provides information about the securities authorized
for issuance under the Company's equity compensation plans as of December 31,
2002.
EQUITY COMPENSATION PLAN INFORMATION
(c)
NUMBER OF SHARES REMAINING
(a) AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SHARES TO BE ISSUED (b) UNDER EQUITY COMPENSATIONS
UPON EXERCISE OF OUTSTANDING WEIGHTED AVERAGE EXERCISE PRICE OF PLANS (EXCLUDING SHARES
PLAN CATEGORY OPTIONS AND WARRANTS (1) OUTSTANDING OPTIONS AND WARRANTS REFLECTED IN COLUMN a)(1)
------------- ------------------------ -------------------------------- -------------------------
Equity compensations plans
approved by stockholders (2) 1,850,423 $ 8.29 6,873,446(3)
Equity compensations plans not
approved by stockholders (4) (5) 328,732 $ 7.31 669,887
--------- ---------
Total 2,179,155 $ 7.98 7,543,333
========= =========
(1) On August 23, 2002, the Company filed a tender offer statement with the
SEC in connection with its offer to exchange certain employee options
to purchase shares of the Company's Common Stock for new options to
purchase shares of its Common Stock (the "Offer to Exchange"). The
Offer to Exchange provided for the grant of new options on two
different dates. The Company granted 50% of the new options on March
25, 2003 and expects to grant the remaining 50% on or about April 25,
2003, subject to the terms and conditions of the Offer to Exchange. The
number of shares to be granted to each optionee will equal the number
of shares tendered by each optionee, except that options with an
exercise price of $36.09 tendered by Barry Bycoff and Deepak Taneja
will be exchanged at a rate of one share underlying a new option for
each two shares underlying such tendered options. The options expected
to be granted in the Offer to Exchange are not included in column (a).
(2) Consists of the following equity compensation plans: the 1991 Director
Stock Plan, the 1994 Stock Plan, the 1997 Stock Option Plan, as
amended, the 1997 Non-Employee Director Stock Option Plan, the 2000
Stock Incentive Plan and the 2002 Employee Stock Purchase Plan (the
"2002 ESPP"). Shares of Common Stock are available for issuance under
each of these plans.
- 14 -
(3) Includes an aggregate of 588,000 shares remaining to be issued under
the 2002 ESPP, of which up to 112,000 shares are issuable in connection
with the current offering period, which ends May 15, 2003.
(4) Consist of the following equity compensation plans, the 2001 Interim
General Stock Incentive Plan, the 2002 Employee Retention General
Incentive Plan and the 2002 General Stock Incentive Plan. Shares of
Common Stock are available for issuance under all of these plans except
the 2001 Interim General Incentive Plan.
(5) Includes warrants issued to a customer for the right to purchase 48,469
shares of Common Stock at exercise prices ranging from $14.00 to $62.50
per share, and expiration dates through December 15, 2004.
2001 INTERIM GENERAL STOCK INCENTIVE PLAN, 2002 EMPLOYEE RETENTION
GENERAL INCENTIVE PLAN AND 2002 GENERAL STOCK INCENTIVE PLAN.
On December 12, 2001, the Board adopted the 2001 Interim General Stock
Incentive Plan ("2001 Interim Plan") pursuant to which non-qualified stock
options for up to 600,000 shares of Common Stock may be granted to employees. On
March 15, 2002, the Board adopted the 2002 Employee Retention General Incentive
Plan ("2002 Retention Plan") pursuant to which non-qualified stock options for
up to 263,000 shares of Common Stock may be granted to employees. On July 8,
2002, the Board adopted the 2002 General Stock Incentive Plan ("2002 Stock
Plan") pursuant to which non-qualified stock options or stock awards for up to
350,000 shares of Common Stock may be granted to employees. Options may be
granted under the 2001 Interim Plan, 2002 Retention Plan and 2002 Stock Plan
(collectively, the "Plans") to any employee of the Company or any of its
subsidiaries other than an employee who is either (i) an executive officer of
the Company for purposes of Section 16 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), (ii) determined by the Company as likely to be
subject to the tax deduction limitations of Section 162(m) of the Internal
Revenue Code of 1986, as amended, or (iii) determined by the Company to
constitute an "officer" or a "director" for purposes of Rule 4350(i)(1)(A) of
the rules of the National Association of Securities Dealers, Inc.
The Board is authorized to adopt, amend and repeal the administrative rules
relating to the Plans and to interpret the provisions of the Plans. The grant of
stock options under these Plans shall be on such terms and conditions as deemed
appropriate by the Board, provided that the terms and conditions of the options
otherwise comply with all provisions of the Plans.
The Board has the authority to select the recipients of options under the
Plans and determine (i) the employees eligible for options under the Plans, (ii)
the dates upon which such options become exercisable, (iii) the exercise price
of options (which may not be less than the fair market value of the Common Stock
on the date of grant), and (iv) the duration of the options (which may not
exceed 7 years).
If any option granted under the Plans expires or is terminated,
surrendered, canceled or forfeited, the unused shares of Common Stock covered by
such option will again be available for grant under the Plans.
The terms of the Plans are substantially similar except that no option may
be granted under the 2002 Retention Plan after March 15, 2004, no options may be
granted under the 2002 Stock Plan after July 8, 2012, and no option may be
granted under the 2001 Interim Plan after December 12, 2003.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board, currently consisting of Mr. Mark, Chairman,
and Mr. Wagner (the "Compensation Committee"). All members of the Compensation
Committee are non-employee directors. From January 1, 2002 until May 14, 2002,
the Compensation Committee of the Board of Directors consisted of Mr. Deninger,
Chairman, Mr. Giler and Mr. Mark, from May 15, 2002 until December 18, 2002, the
Compensation Committee of the Board of Directors consisted of Mr. Deninger,
Chairman, Mr. Wagner and Mr. Mark, and from December 18, 2002 through December
31, 2002, the Compensation Committee of the Board consisted of Mr. Mark,
Chairman, and Mr. Wagner. Mr. Deninger abstained from voting on matters
regarding executive compensation during 2002. In August 2001, Broadview
International LLC was engaged by the Company to
- 15 -
assist with the acquisition of identified companies with portal service
products. The Company paid a fee of $750,000 to Broadview International LLC in
connection with an acquisition. Mr. Deninger is the Chairman and CEO of
Broadview.
Pursuant to the authority delegated to it by the Board, the Compensation
Committee is responsible for the review and approval of company bonus plans and
the granting of stock options to employees and consultants. The Compensation
Committee recommends the compensation of executive management to the Board who
has authority to approve the annual salaries, bonuses and stock option grants.
One of the Company's primary business objectives is to maximize long-term
stockholder returns. To achieve this objective, the Company believes it is
necessary to attract, to retain and to motivate qualified executives. The
Compensation Committee and the Board therefore apply the philosophy that
compensation of executive officers, specifically including that of the Chief
Executive Officer should be linked to the Company's performance.
Establishing compensation programs generally and determining the
compensation of individual executive officers are complex matters involving
numerous issues and a variety of data, including a competitive analysis prepared
by an independent third party executive compensation advisory firm. The approach
of the Compensation Committee is primarily subjective in nature. The
Compensation Committee identifies relevant factors to be considered, such as the
need to be competitive in the market for executive talent, retain and motivate
existing officers with competitive salary and option programs and to provide
incentives and rewards for individual and corporate performance. However, the
Compensation Committee maintains a flexible approach that is based on the
exercise of judgment and discretion and reflects the Company's entrepreneurial
operating environment and long-term performance orientation. Although targets
and goals are set, precise formulas are not utilized and specific weights are
not assigned to the various factors.
The Compensation Committee focuses on the Company's goal of long-term
enhancement of stockholder value by stressing long-term goals and by using
stock-based incentive programs with extended vesting schedules. The Compensation
Committee believes that the use of such incentives to retain and motivate
individuals who have developed the skills and expertise required to lead the
Company is key to the Company's success.
Under the supervision of the Compensation Committee, the Company has
developed and implemented certain compensation policies. The Compensation
Committee's executive compensation policies are designed to (i) enhance
profitability of the Company and stockholder value, (ii) integrate compensation
with the Company's annual and long-term performance goals, (iii) reward
corporate performance, (iv) recognize individual initiative, achievement and
hard work, (v) assist the Company in attracting and retaining qualified
executive officers and (vi) retain and motivate existing officers to perform.
Compensation is comprised of cash compensation in the form of annual base
salary and performance-based bonuses and long-term incentive compensation in the
form of stock options.
In setting cash compensation levels for executive officers, the
Compensation Committee prepares a salary review annually. The Compensation
Committee endeavors to set base salaries at levels comparable to the amounts
paid to senior executives with comparable qualifications, experience and
responsibilities at other technology companies with which the Company competes
for talent.
The Compensation Committee relies on incentive compensation in the form of
performance-based bonuses and stock options to retain and motivate executive
officers. Incentive compensation in the form of performance-based bonuses for
the Chief Executive Officer and the Company's other executive officers are based
upon management's success in meeting the Company's financial and operational
goals. Milestones are established for revenue growth, operating income and
earnings per share. With the exception of Mr. Thimot, Vice President of
Worldwide Sales and Services, the milestones established by the Compensation
Committee for 2002 were not achieved and no performance-based bonuses were paid
to the executive officers. Mr. Thimot was paid $49,575 during February 2003, as
incentive compensation for achieving his performance milestones in the fourth
quarter of 2002.
In establishing the compensation for 2002 of Barry N. Bycoff, the Chief
Executive Officer and President of the Company, the Compensation Committee
considered the factors detailed above. The Compensation Committee also
established objective financial measures against which Mr. Bycoff's performance
is measured, including achievement of certain revenue goals and other
operational goals. Mr. Bycoff's incentive compensation is tied to the
achievement of these goals.
- 16 -
Mr. Bycoff's base salary was $375,000 and Mr. Bycoff was granted a $25,000
retention bonus in 2002, in accordance with the terms of his Executive
Employment Agreement. The Compensation Committee, as an incentive to build
stockholder value and improve corporate performance over the long term, granted
Mr. Bycoff options to purchase 425,000 shares of the Company's Common Stock at
an exercise price of $15.37 per share.
Incentive compensation in the form of stock options is designed to provide
long-term incentives to executive officers and other employees, to encourage the
executive officers and other employees to remain with the Company and to enable
optionees to develop and maintain a significant, long-term stock ownership
position in the Company's Common Stock, which in turn motivates the recipient to
focus on long-term enhancement in stockholder value. The Company's 1994 Stock
Option Plan, 1997 Stock Option Plan, 2000 Stock Incentive Plan, 2001 Interim
General Stock Incentive Plan, 2002 General Stock Incentive Plan and 2002
Employee Retention General Incentive Plan, each administered by the Compensation
Committee, are the vehicles for the granting of stock options.
Factors reviewed by the Compensation Committee in determining whether to
grant options are similar to those considered in determining salaries and
bonuses described above. Several other factors, however, such as an employee's
individual initiative, achievement and performance are also considered by the
Compensation Committee. In making recommendations for specific grants to
executives, the Compensation Committee evaluates each officer's total equity
compensation package in relation to competitive data provided by the independent
third party executive compensation advisory firm. The Compensation Committee
generally reviews the option holdings of each of the executive officers
including vesting and exercise price and the then current value of such unvested
options. The Compensation Committee considers equity compensation to be an
integral part of a competitive executive compensation package, a way to
reinforce the individual's commitment to the Company and an important mechanism
to align the interests of management with those of the Company's stockholders.
In August 2002, the Company offered to employees the opportunity to
exchange certain outstanding options to purchase shares of Common Stock for new
options to be issued in March 2003 and April 2003. Because the market value of
the Company's Common Stock had fallen substantially below the exercise price of
most outstanding options, the value of such stock options as a means of
motivating and retaining employees had been significantly diminished. The
Compensation Committee concluded that the Company needed to restore the value of
the existing stock options as a means of motivating and retaining employees in
order to promote the successful implementation of the Company's strategies.
The Internal Revenue Code limits the deduction a public company is
permitted for compensation paid to the chief executive officer and to the four
most highly compensated executive officers, other than the chief executive
officer. Generally, amounts paid in excess of $1 million to a covered executive,
other than performance-based compensation, cannot be deducted. In order to
qualify as performance-based compensation under the tax law, certain
requirements must be met including approval of the performance measures by the
stockholders. In its deliberations, the Compensation Committee considers ways to
maximize deductibility of executive compensation, while retaining the discretion
the Compensation Committee considers appropriate to compensate executive
officers at levels commensurate with their responsibilities and achievements.
The Company has not adopted a policy that all executive compensation be fully
deductible.
COMPENSATION COMMITTEE
Michael L. Mark, Chairman
Ralph B. Wagner
- 17 -
EMPLOYMENT AND RETENTION AGREEMENTS
The Company has entered into an Executive Employment Agreement with Mr.
Bycoff. The agreement is for an initial three-year term ending in May 2005, and
renews automatically for additional one-year periods unless terminated. The
agreement establishes a base salary of $375,000, a retention bonus of $25,000
and incentive bonus compensation of up to 75% of his base salary, payable upon
the attainment of performance milestones mutually agreed to by Mr. Bycoff and
the Compensation Committee prior to each fiscal year. The agreement also
provides for life and disability insurance coverage. The agreement provides that
in the event of a change of control of the Company (as defined in the
agreement), if Mr. Bycoff's employment is terminated by the Company without
cause (as defined in the agreement), Mr. Bycoff will be entitled to either 36
months or 24 months base salary and bonus, depending on the particular
circumstances of the termination, and 24 months continuation of life and
disability insurance benefits. In the event of termination in connection with a
change in control, 50% of Mr. Bycoff's unvested stock options will automatically
vest. In the event the Company does not renew the agreement with Mr. Bycoff
after its initial three-year term, Mr. Bycoff will be entitled to 12 months base
salary and bonus.
The Company has entered into Executive Retention Agreements with the each
of the executive officers. These agreements provide that in the event of a
change of control of the Company (as defined in the agreements), if the
executive officer's employment is terminated by the Company or by the executive
officer for good reason (as defined in the agreements), the executive officer
will be entitled to six months base salary and bonus, 12 months continuation of
benefits and the acceleration of outstanding stock options so that the number of
shares that would otherwise have become vested during the two-year period
following the date of termination will immediately become exercisable.
The Company has entered into Transition and Consulting Agreements with
Thomas Palka, former Vice President of Sales and Services. Pursuant to these
agreements, Mr. Palka resigned as an executive officer of the Company on October
1, 2002 and as an employee of the Company on December 31, 2002. Effective
January 1, 2003, Mr. Palka was retained as a consultant to the Company for a
period of one year. Mr. Palka will be paid $220,000 during the consultancy
period. Mr. Palka will not accrue or be paid any other compensation or benefits
during the consultancy period.
- 18 -
PERFORMANCE GRAPH
The following graph illustrates a five-year comparison of cumulative total
stockholder return among the Company, the University of Chicago's Center for
Research in Security Prices ("CRSP") Index for the NASDAQ Stock Market and the
CRSP Index for the Nasdaq Computer Software Industry. The comparison assumes
$100 was invested on December 31, 1997 in the Company's Common Stock and in each
of the foregoing indices and assumes reinvestment of dividends, if any.
[LINE GRAPH]
------------------------------------------------------------------------------------------------------------------
Company/Index Name Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02
-------------------------------------------------------------------------------------------------------------------
NETEGRITY, INC. $ 100.0 $ 328.6 $ 4,338.1 $ 6,214.0 $ 2,212.5 $ 371.8
------------------------------------------------------------------------------------------------------------------
NASDAQ STOCK MARKET (U.S. Companies) 100.0 141.0 261.5 157.4 124.9 86.3
------------------------------------------------------------------------------------------------------------------
NASDAQ STOCKS
(SIC 7300-7399 US Companies)
Business Services 100.0 186.8 384.6 204.3 159.4 110.0
------------------------------------------------------------------------------------------------------------------
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On March 13, 2001, the Company terminated the engagement of
PricewaterhouseCoopers LLP ("PwC") as the Company's independent public
accountants. This decision was approved by the Audit Committee and by the Board.
PwC's report on the Company's financial statements for the fiscal year ended
December 31, 2000 did not contain an adverse opinion, a disclaimer of opinion or
any qualifications or modifications related to uncertainty, limitation of audit
scope or application of accounting principles. During the fiscal year ended
December 31, 2000 and through March 13, 2001, the date of termination of the
engagement, there were no disagreements with PwC on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to the Company's financial statements that, if not
resolved to PwC's satisfaction, would have caused PwC to make reference to the
subject matter of the disagreement in connection with PwC's reports.
During the fiscal year ended December 31, 2000 and through the date of
termination of PwC's engagement, there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K promulgated by the SEC.
- 19 -
On June 20, 2002, the Company terminated the engagement of Arthur Andersen
LLP ("AA") as the Company's independent public accountants. This decision was
approved by the Audit Committee and by the Board of Directors. AA's report on
the Company's financial statements for the fiscal year ended December 31, 2001
did not contain an adverse opinion, a disclaimer of opinion or any
qualifications or modifications related to uncertainty, limitation of audit
scope or application of accounting principles. During the fiscal year ended
December 31, 2001 and through June 20, 2002, the date of termination of the
engagement, there were no disagreements with AA on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to the Company's financial statements that, if not
resolved to AA's satisfaction, would have caused AA to make reference to the
subject matter of the disagreement in connection with AA's reports.
During the fiscal year ended December 31, 2001 and through the date of
termination of AA's engagement, there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K promulgated by the SEC.
On June 26, 2002, the Company engaged KPMG as its independent public
accountants for the fiscal year ending December 31, 2002. The engagement was
approved by the Audit Committee and by the Board. The Company did not consult
with KPMG during the fiscal year ended December 31, 2001 nor during the
subsequent period to the date of such engagement regarding either (i) the
application of accounting principles to a specified transaction or transactions,
either completed or proposed, or (ii) the type of audit opinion KPMG might
render on the Company's financial statements.
The Company has selected KPMG as its independent public accountants for the
fiscal year ending December 31, 2003.
Representatives of KPMG are expected to be present at the annual meeting,
will have the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions. Representatives of
AA will not be present at this meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities (collectively, "Reporting Persons") to file
initial reports of ownership and reports of changes in ownership of common stock
of the Company with the SEC. Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of reports filed by reporting
persons pursuant to Section 16(a) of the Exchange Act or written representations
from reporting persons that no Form 5 filing was required for such persons, the
Company believes that, during the year ended December 31, 2002, all filing
required to be made by its reporting persons were timely made in accordance with
the requirements of the Exchange Act, except as follows: (i) Mr. Taneja was not
timely in filing one report relating to two transactions and one report
reflecting two option grants; (ii) Mr. Bycoff was not timely in filing one
report reflecting two option grants; (iii) Mr. Deninger was not timely in filing
one report reflecting two option grants; (iv) Mr. Giler was not timely in filing
one report reflecting two option grants; (v) Mr. Mark was not timely in filing
one report reflecting two option grants; (vi) Mr. Palka was not timely in filing
one report reflecting two option grants; (vii) Mr. Wagner was not timely in
filing one report reflecting two option grants and one report relating to one
transaction; (viii) Mr. Rosen was not timely in filing one report reflecting one
option grant; and (ix) Mr. Bartow was not timely in filing one report reflecting
one option grant.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next annual meeting of
the Company must be received at the Company's principal executive offices not
later than December 5, 2003.
In accordance with the provisions of Rule 14a-4(c) promulgated under the
Exchange Act, if the Company does not receive notice of a stockholder proposal
to be raised at its 2004 Annual Meeting on or before February 18, 2004, proxies
designated by the Board of Directors shall be allowed to use their discretionary
voting authority when the proposal is raised at the 2004 Annual Meeting.
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OTHER BUSINESS
The Board knows of no business that will be presented for consideration at
the Meeting other than those items stated above. If any other business should
come before the Meeting, votes may be cast pursuant to proxies in respect to any
such business in the best judgment of the person or persons acting under the
proxies.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by the Company, and in
addition to soliciting stockholders by mail, the Company may request banks,
brokers and other custodians, nominees and fiduciaries to solicit their
customers who have stock of the Company registered in the names of a nominee
and, if so, will reimburse such banks, brokers and other custodians, nominees
and fiduciaries for their reasonable out-of-pocket costs. Solicitation by
officers and employees of the Company may also be made of some stockholders in
person or by mail, telephone or telegraph following the original solicitation.
HOUSEHOLDING OF PROXY STATEMENT
Some banks, brokers and other nominee record holders may be participating
in the practice of "householding" proxy statements and annual reports. This
means that only one copy of the Company's proxy statement or annual report may
have been sent to multiple stockholders in your household. The Company will
promptly deliver a copy of either document to you if you call or write the
Company at the following address or phone number: Netegrity, Inc., 201 Jones
Road, Waltham, Massachusetts 02451, Attention: Secretary of the Company, (781)
890-1700. If you would like to receive separate copies of the annual report and
proxy statement in the future, or if you have received multiple copies and in
the future would like to receive only one copy for your household, you should
contact your bank, broker, or other nominee record holder, or you may contact
the Company at the above address and phone number.
By Order of the Board of Directors,
Barry N. Bycoff
President And Chief Executive Officer
- 21 -
Appendix A
NETEGRITY, INC.
AUDIT COMMITTEE CHARTER
(AS AMENDED OCTOBER 22, 2002)
I. PURPOSE
The Audit Committee (the "Committee") has been appointed by the Board
of Directors (the "Board") to assist the Board by providing general oversight of
the Company's financial accounting and reporting process, system of internal
controls, audit process and the process for monitoring compliance with the
Company's standards of business conduct established by the Board. In so doing,
it is the responsibility of this audit committee to maintain free and open
communication among the independent accountants, the internal auditors and the
Company's management.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors, as
determined by the Board, each of whom shall meet the independence and experience
requirements of applicable statutes and regulations including the requirements
of NASDAQ.
III. MEETINGS
Members of the Committee may participate in meetings of the Committee
by conference telephone and participation by such means shall constitute
presence in person at a meeting. A majority of the Committee members shall be
present to constitute a quorum for the transaction of the Committee's business.
Unless a chairman of the Committee is appointed by the Board, the members of the
Committee may designate a chair by majority vote of the full Committee
membership.
IV. RESPONSIBILITIES
The Committee shall:
1. Review this Charter at least annually.
2. Have the sole authority to appoint or replace the independent
accountants, to determine all compensation to be paid to the
independent accountants and to oversee the work of the
independent accountants (including resolution of disagreements
between the management and the independent accountants
regarding financial reporting). The independent accountants
shall report directly to the Committee.
3. Annually review and approve the scope of the independent audit
for the current fiscal year.
4. In consultation with the independent accountants, review the
integrity of the Company's financial reporting processes, both
internal and external.
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5. Take appropriate action to oversee the independence of the
independent accountants.
6. Review and discuss with the independent accountants their
annual written statement delineating all relationships between
the independent accountants and the Company, consistent with
Independence Standards Board Standard 1, and actively engage
in a dialogue with the independent accountants with respect to
any disclosed relationships or services that may impact the
objectivity and the independence of the independent
accountants, including in particular any services other than
those relating to the annual audit of the Company's financial
statements and reviews of the Company's quarterly financial
statements.
7. Review the Company's audited annual financial statements and
the independent accountants' opinion thereon. In reviewing the
Company's audited annual financial statements, confer with the
Company's independent accountants and management and consider
the following:
- Changes in accounting principles or the application
thereof; significant judgment areas; significant risks
and exposures and the steps management has taken to
minimize such risks to the Company; and significant and
complex transactions.
- The results of the independent accountants' audit for the
year, including the independent accountants' judgments on
the quality, appropriateness and consistent application
of the Company's accounting principles, disclosures and
underlying estimates in the financial statements.
- The effectiveness and adequacy of the Company's internal
accounting procedures and the effectiveness and adequacy
of internal financial controls. Particular emphasis
should be given to the adequacy of internal controls to
expose any payments, transactions, or procedures that
might be deemed illegal or otherwise improper.
- The effectiveness and adequacy of the Company's
disclosure controls and procedures to ensure that
information required to be disclosed by the Company is
recorded, processes, summarized and reported within the
time periods specified in the Securities and Exchange
Commission.
- Any comments and recommendations of the independent
accountants, including any serious difficulties or
disputes with management encountered during the course of
the audit.
8. Review with management and the independent accountants the
interim financial statements and the results of the
independent accountants' review, including the independent
accountants' judgments on the quality and consistent
application of the Company's accounting principles,
disclosures and underlying estimates in the interim financial
statements.
9. Discuss with the independent accountants any audit findings
pursuant to Section 10A of the Private Litigation Reform Act
of 1995. (Among other things, this section requires each audit
to include procedures regarding detection of illegal acts,
identification of related party transactions and evaluation of
the issuer's ability to continue as a going concern.)
10. Discuss with the independent accountants the matters required
to be discussed by Statement on Auditing Standards No. 61
relating to the conduct of the audit including internal
control matters, fraud, the auditor's responsibility under
generally accepted auditing standards, significant audit
adjustments and other such items.
11. Provide any recommendation, certifications and reports that
may be required by NASDAQ or the Securities and Exchange
Commission. The report required by the Securities and Exchange
Commission to be included in the Company's annual proxy
statement shall affirm that the Committee is governed by a
charter and has (i) reviewed and discussed the audited
financial statements with management, (ii) discussed with the
independent accountants the matters required to be discussed
by SAS 61, (iii) received the written disclosures and the
letter from the independent accountants required by
Independence Standards Board Standard No.1 and has discussed
with the independent accountants the
- 23 -
independent accountants' independence and (iv) recommended to
the Board that the audited financial statements be included in
the Company's Annual Report on Form 10-K.
12. Conduct or authorize investigations into any matters within
the Committee's scope of responsibilities. The Committee shall
be empowered to retain and determine fees for independent
counsel, accountants and others to assist it in the conduct of
any investigation.
13. Review and approve in advance all related party transactions
on an ongoing. The term related party transaction shall have
the meaning ascribed to it for the purposes of Rule 4350(h) of
NASD.
14. Provide sufficient opportunity for each of the chief financial
officer, and the independent accountants to meet separately
with members of the Audit Committee without other members of
management present. Among the matters to be discussed in these
meetings are the independent accountants' evaluation of the
Company's financial accounting personnel and the cooperation
that the independent accountants received during the course of
the audit.
15. Pre-approve all audit and non-audit services provided to the
Company by independent accountant. The Committee may delegate
to one or more of its members the authority to grant such
pre-approvals. Pre-approvals granted by any such delegate
shall be presented to the full Committee at its next scheduled
meeting.
16. Establish a procedure for:
- the receipt, retention, and treatment of complaints
received by the Company regarding accounting, internal
accounting controls or auditing matters; and
- the confidential, anonymous submission by employees of
the Company of concerns regarding questionable accounting
or auditing matters.
17. The Committee shall discuss with management and the
independent accountants:
- the accounting policies of the Company which may be
viewed as critical; the nature and extent of any
significant changes in accounting principles or the
application thereof; significant judgment areas;
significant risks and exposures and the steps management
has taken to minimize such risks to the Company; and the
quality and adequacy of the Company's internal controls,
accounting policies and estimates.
- the terms and effects of any transactions with parties
related to the Company which are significant in size or
which involve terms or other aspects which differ from
those which would likely be negotiated with an
unaffiliated third party and which are material to an
understanding of the Company's financial statements.
- the nature of any off-balance sheet structures, including
financing arrangements, and their potential impact on the
Company and its financial statements.
- 24 -
DETACH HERE 2NTEC2
PROXY
NETEGRITY, INC.
ANNUAL MEETING OF STOCKHOLDERS
May 16, 2003
The undersigned hereby appoints Ralph B. Wagner and Barry N. Bycoff, and
each of them, as proxies, with full power of substitution, to vote all shares of
capital stock of Netegrity, Inc. (the "Company") which the undersigned is
entitled to vote at the Annual Meeting of Stockholders of the Company to be held
on Friday, May 16, 2003, at 9:00 a.m., local time, at the Company, 201 Jones
Road, Waltham, MA 02451 and at any adjournments thereof, upon such business as
may properly come before the meeting, including the following set forth on this
proxy.
________________________________________________________________________________
Please sign exactly as your name(s) appear(s) on this Proxy. When shares are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
PLEASE ACT PROMPTLY
DATE AND SIGN THIS PROXY IN THE SPACE PROVIDED AND RETURN IT IN THE
ENCLOSED ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON.
________________________________________________________________________________
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE
ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN
THIS PORTION IN THE ENVELOPE PROVIDED. DO YOU HAVE ANY COMMENTS?
___________________________________________ _____________________________
___________________________________________ _____________________________
___________________________________________ _____________________________
NETEGRITY, INC.
C/O EQUISERVE TRUST COMPANY, N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL 2NTEC1
Please mark
/X/ votes as in
this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES IN
PROPOSAL 1.
Election of Directors.
Nominees: Barry N. Bycoff, Ralph B. Wagner, Michael L. Mark,
Eric R. Giler, Lawrence D. Lenihan, Jr. and
Paul F. Deninger
FOR WITHHOLD
ALL / / / / FROM ALL
NOMINEES NOMINEES
/ / ________________________________________
For all nominee(s) except as written above
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THE BOARD
RECOMMENDS AN AFFIRMATIVE VOTE ON ALL PROPOSALS SPECIFIED. SHARES WILL BE
VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED
WILL BE VOTED FOR THE ELECTION OF DIRECTORS AS SET FORTH IN THE PROXY
STATEMENT.
Mark box at right if you plan to attend the Annual Meeting. / /
Mark box at right if an address change or comment has been
noted on the reverse side of this card. / /
Please sign this proxy exactly as name appears hereon. When
shares are held by joint tenants, both should sign. When
signing as attorney, administrator, trustee or guardian,
please give full title as such. / /
Signature: ____________________________ Date: _________________________
Signature: ____________________________ Date: _________________________