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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
[_]
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 (S) 240.14a-11(c) or (S) 240.14a-12
EVOLVING SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
[X]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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.
6. Amount Previously Paid:
- -------------------------------------------------------------------------------
7. Form, Schedule or Registration Statement No.:
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8. Filing Party:
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9. Date Filed:
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EVOLVING SYSTEMS, INC.
9777 Mt. Pyramid Court
Englewood, Colorado 80112
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 30, 1999
To the Stockholders of Evolving Systems, Inc.:
Notice Is Hereby Given that the Annual Meeting of Stockholders of Evolving
Systems, Inc., a Delaware corporation (the "Company"), will be held on Friday,
April 30, 1999, at 8:30 a.m. local time at the Company's offices located at
9777 Mt. Pyramid Court, Englewood, Colorado for the following purposes:
1. To elect two directors to hold office until the 2002 Annual Meeting of
Stockholders.
2. To approve the Company's Amended and Restated Stock Option Plan, as
amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 1,200,000 shares.
3. To approve the Company's Employee Stock Purchase Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 100,000 shares.
4. To ratify the selection of PricewaterhouseCoopers LLP as independent
auditors of the Company for its fiscal year ending December 31, 1999.
5. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 18, 1999 as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors,
Anita T. Moseley
Secretary
Englewood, Colorado
March 31, 1999
All stockholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, please complete, date, sign
and return the enclosed proxy as promptly as possible in order to ensure your
representation at the meeting. A return envelope (which is postage prepaid if
mailed in the United States) is enclosed for that purpose. Even if you have
given your proxy, you may still vote in person if you attend the meeting.
Please note, however, that if your shares are held of record by a broker, bank
or other nominee and you wish to vote at the meeting, you must obtain from the
record holder a proxy issued in your name.
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EVOLVING SYSTEMS, INC.
9777 Mt. Pyramid Court
Englewood, Colorado 80112
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
April 30, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the Board of Directors of
Evolving Systems, Inc., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held on April 30, 1999, at 8:30 a.m.
local time (the "Annual Meeting"), or at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting. The Annual Meeting will be held at the Company's offices
located at 9777 Mt. Pyramid Court, Englewood, Colorado. The Company intends to
mail this proxy statement and accompanying proxy card on or about March 31,
1999, to all stockholders entitled to vote at the Annual Meeting.
Solicitation
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of Common Stock
beneficially owned by others to forward to such beneficial owners. The Company
may reimburse persons representing beneficial owners of Common Stock for their
costs of forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or
other regular employees for such services.
Voting Rights and Outstanding Shares
Only holders of record of Common Stock at the close of business on March 18,
1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on March 18, 1999, the Company had outstanding and entitled
to vote 12,081,792 shares of Common Stock.
Each holder of record of Common Stock on March 18, 1999 will be entitled to
one vote for each share held on all matters to be voted upon at the Annual
Meeting. All votes will be tabulated by the inspector of election appointed
for the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum, but are not counted for any purpose in determining whether a
matter has been approved.
Revocability of Proxies
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 9777 Mt.
Pyramid Court, Englewood, Colorado 80112, a written notice of revocation or a
duly executed proxy bearing a later date. A proxy also may be revoked by
attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
Stockholder Proposals
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2000 annual
meeting of stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is January 3, 2000. A stockholder proposal or nomination for
director that is not to be included in such proxy statement and proxy must be
received by the Secretary of the Company no earlier than January 30, 2000 and
no later than March 1, 2000.
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PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Board of Directors shall be divided into three classes, each class
consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board
may be filled only by persons elected by a majority of the remaining
directors. A director elected by the Board to fill a vacancy (including a
vacancy created by an increase in the Board of Directors) shall serve for the
remainder of the full term of the class of directors in which the vacancy
occurred and until such director's successor is elected and qualified.
The Board of Directors is presently composed of five members and there are
two vacancies. There are two Class I Directors, whose terms of office expire
in 1999. Each of the nominees for election to this class is currently a
director of the Company who was previously elected by the stockholders. If
elected at the Annual Meeting, each of the nominees would serve until the 2002
annual meeting and until his successor is elected and has qualified, or until
such director's earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented
by executed proxies will be voted, if authority to do so is not withheld, for
the election of the two nominees named below. In the event that any nominee
should be unavailable for election as a result of an unexpected occurrence,
such shares will be voted for the election of such substitute nominee as
management may propose. Each person nominated for election has agreed to serve
if elected, and management has no reason to believe that any nominee will be
unable to serve.
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the Annual
Meeting.
Nominees for Election for a Three-year Term Expiring at the 2002 Annual
Meeting
Robert J. Loarie
Robert J. Loarie has served as a member of the Company's Board of Directors
since May 1996. Since August 1992, Mr. Loarie has been a Principal of, and
since December 1997, a Managing Director of, Morgan Stanley Dean Witter & Co.
Incorporated, a diversified investment firm, and a general partner of Morgan
Stanley Venture Partners, L.P. and Morgan Stanley Venture Partners II, L.P.,
venture capital investment partnerships. Since November 1996, Mr. Loarie has
also served as a managing member of Morgan Stanley Venture Partners III,
L.L.C., a venture capital investment company. Mr. Loarie also serves as a
director of Adaptec, Inc. and several privately-held companies. Mr. Loarie
holds a B.S. from the Illinois Institute of Technology and an M.B.A. from the
Harvard University Graduate School of Business.
David J. Molny
David J. Molny joined the Company in February 1987, serving as a system
architect and group manager on numerous development projects, until September
1997 when he assumed the positions of Vice President and Chief Technical
Officer of the Company. Mr. Molny has served as a member of the Company's
Board of Directors since November 1996. Previously, Mr. Molny held various
positions at AT&T Bell Laboratories and AT&T Network Systems, both
telecommunications companies. Mr. Molny holds a B.S. from the State University
of New York at Potsdam and an M.S. from the University of Southern California.
The Board Of Directors Recommends a Vote in Favor of Each Named Nominee.
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Directors Continuing in Office Until the 2000 Annual Meeting
Donald R. Dixon
Donald R. Dixon has served as a member of the Company's Board of Directors
since December 1997 and previously served as a member of the Company's Board
of Directors from May 1996 to November 1996. Since 1993, Mr. Dixon has been
associated with Trident Capital, L.P., a venture capital firm ("Trident"),
which he helped found. From 1988 to 1993, Mr. Dixon served as Co-President of
Partech International, a private equity fund manager associated with Banque
Paribas. Mr. Dixon serves as a director of Bank America Merchant Services,
Inc. and Platinum Software Corporation, as well as several privately-held
companies. Trident manages Information Associates L.P. and Information
Associates, C.V, both of which are stockholders of the Company. Mr. Dixon
holds a B.S. from Princeton University and an M.B.A. from Stanford University.
George A. Hallenbeck
George A. Hallenbeck currently serves as the Company's Chief Executive
Officer. Mr. Hallenbeck was a founder of the Company in June 1985 and has
served as Chairman and a member of the Board of Directors since that time. Mr.
Hallenbeck served as the Company's Chief Executive Officer from June 1985
until December 1996 and as its President from June 1985 until December 1988.
Mr. Hallenbeck received a B.A. from the University of Colorado.
Director Continuing in Office Until the 2001 Annual Meeting
Harry B. Fair
Mr. Fair is one of the founders of the Company and has served on the
Company's Board of Directors since 1986. Mr. Fair served as President of the
Company between December 1988 and April 1996. Mr. Fair currently is the
general manager of several privately-held companies that provide
infrastructure commercial data and voice communications, Internet solutions
and technical solutions for credit unions. Mr. Fair holds a B.A. from the
University of Denver. Mr. Fair is currently providing consulting services to
the Company through The Brogden Group, L.L.C.
Board Committees and Meetings
During the fiscal year ended December 31, 1998, the Board of Directors held
twenty-one meetings. The Board has an Audit Committee and a Compensation
Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained;
and receives and considers the accountants' comments as to controls, adequacy
of staff and management performance and procedures in connection with audit
and financial controls. The Audit Committee consists of Messrs. Dixon and
Loarie. It met one time during such fiscal year.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants
under the Company's stock option plan and otherwise determines compensation
levels and performs such other functions regarding compensation as the Board
may delegate. The Compensation Committee consists of Messrs. Dixon and Loarie.
It met one time during such fiscal year.
During the fiscal year ended December 31, 1998, each Board member attended
75% or more of the aggregate of the meetings of the Board and of the
committees on which he served, held during the period for which he was a
director or committee member, respectively.
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PROPOSAL 2
APPROVAL OF AMENDED AND RESTATED STOCK OPTION PLAN, AS AMENDED
The Company's Amended and Restated Stock Option Plan (the "Stock Option
Plan") was adopted by the Board of Directors on January 19, 1996 and was most
recently amended on December 16, 1997. There are currently 3,150,000 shares of
Common Stock authorized for issuance under the Stock Option Plan. As of March
8, 1999 options (net of canceled or expired options) covering an aggregate of
2,665,534 shares of Common Stock had been granted under the Stock Option Plan.
Only 484,466 shares of Common Stock (plus any shares that might in the future
be returned to the Option Plan as a result of cancellations or expiration of
options) remained available for future grant under the Stock Option Plan.
On February 23, 1999, the Board of Directors amended the Stock Option Plan,
subject to stockholder approval, to increase the number of shares of Common
Stock authorized for issuance thereunder from a total of 3,150,000 shares to a
total of 4,350,000 shares. The Board adopted this amendment in order to ensure
that the Company can continue to grant stock options at levels determined
appropriate by the Board.
Stockholders are requested in this Proposal 2 to approve the Stock Option
Plan, as amended. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and voting at the meeting
will be required to approve the amended Stock Option Plan.
The Board of Directors Recommends a Vote in Favor of Proposal 2.
Description of Stock Option Plan
The Stock Option Plan provides for the grant of incentive stock options
under the Internal Revenue Code of 1986, as amended (the "Code"), to employees
and nonstatutory stock options, stock appreciation rights, restricted stock
purchase awards and stock bonuses to employees, directors and consultants. The
Board of Directors or a committee appointed by the Board of Directors
administers the Stock Option Plan and determines recipients and types of
awards to be granted, including the exercise price, number of shares subject
to the award and the exercisability thereof.
The terms of stock options granted under the Stock Option Plan generally may
not exceed 10 years. The Board of Directors determines the exercise price of
options granted under the Stock Option Plan. However, the exercise price of an
incentive stock option cannot be less than 100% of the fair market value of
the Common Stock on the date of the option grant, and the exercise price of a
nonstatutory stock option cannot be less than 50% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Stock Option Plan vest at the rate specified in the option agreement. The
optionee may not transfer a stock option other than by will or the laws of
descent or distribution or, in certain limited instances, pursuant to a
domestic relations order. An optionee whose service to the Company or its
affiliates ceases for any reason (other than by death or disability) generally
may exercise an option for three months thereafter (unless the option
terminates or expires sooner by its terms). An optionee generally may exercise
an option for up to 12 months and 18 months after the optionee's service to
the Company and its affiliates ceases due to disability or death,
respectively.
The Board of Directors may not grant an incentive stock option to any person
who, at the time of the grant, owns (or is deemed to own) stock possessing
more than 10% of the total combined voting power of the Company or any
affiliate of the Company, unless the option exercise price is at least 110% of
the fair market value of the Common Stock on the date of grant, and the option
term is five years or less. The aggregate fair market value, determined at the
time of grant, of the shares of Common Stock with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year (under all such plans of the Company and its affiliates) may not
exceed $100,000. However, no person may be granted options under the Stock
Option Plan exercisable for more than 1,260,000 shares of Common Stock during
any calendar year ("Section 162(m) Limitation"). Options may be immediately
exercisable, at the discretion of the Company, whether vested or not, subject
to repurchase by the Company of any unvested shares.
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Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full become available again for the grant of
awards under the Stock Option Plan. Shares with respect to which stock
appreciation rights have been exercised are not available for the grant of new
awards or stock options.
The Board of Directors has the specific authority to reprice outstanding
options and the general authority to reprice stock appreciation rights and to
offer optionees and holders of stock appreciation rights the opportunity to
replace outstanding options and stock appreciation rights with new options or
stock appreciation rights for the same or a different number of shares.
The Board of Directors may grant restricted stock purchase awards under the
Stock Option Plan pursuant to a repurchase option in favor of the Company in
accordance with a vesting schedule and at a price determined by the Board of
Directors. Restricted stock purchases must be at a price equal to at least 85%
of the stock's fair market value on the award date, but stock bonuses may be
awarded in consideration of past services without a purchase payment.
The holder of a restricted stock award must pay the purchase price of the
stock either in cash or, at the discretion of the Board, by delivery of other
Common Stock of the Company, pursuant to a deferred payment arrangement or in
any other form of legal consideration acceptable to the Board.
A participant may not transfer his or her rights under a stock bonus or
restricted stock purchase agreement other than by will, the laws of descent
and distribution or a domestic relations order while the stock awarded
pursuant to such an agreement remains subject to the agreement. Stock
appreciation rights granted under the Stock Option Plan may be tandem rights,
concurrent rights or independent rights.
Transactions not involving receipt of consideration by the Company, such as
a merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares of Common Stock subject to the Stock
Option Plan and outstanding awards. In that event, the Stock Option Plan will
be appropriately adjusted as to the class and the maximum number of shares of
Common Stock subject to the Stock Option Plan and the Section 162(m)
Limitation. Outstanding awards also will be adjusted as to the class, number
of shares and price per share of Common Stock subject to such awards.
Upon certain changes in control of the Company, the successor corporation
may assume outstanding stock awards or substitute equivalent stock awards. If
the successor corporation refuses to do so, such stock awards will become
fully vested and exercisable for a period of 15 days after notice from the
Company but the option will terminate if not exercised during that period. In
addition, restricted shares acquired upon exercise of options will be released
from the Company's repurchase option.
The Board of Directors may amend the Stock Option Plan at any time or from
time to time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by
the Board of Directors if such modification requires stockholder approval in
order to comply with Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or to satisfy the requirements of Section 422 of
the Code or any securities exchange listing requirements. The Board may submit
any other amendment to the Stock Option Plan for stockholder approval,
including, but not limited to, amendments intended to satisfy the requirements
of Section 162(m) of the Code regarding the exclusion of performance-based
compensation from the limitation on the deductibility of compensation paid to
certain employees.
The Board of Directors may suspend or terminate the Stock Option Plan
without stockholder approval or ratification at any time or from time to time.
Unless sooner terminated, the Stock Option Plan will terminate on December 15,
2007.
Federal Income Tax Information
Long-term capital gains currently are generally subject to lower tax rates
than ordinary income or short-term capital gains. The maximum long-term
capital gains rate for federal income tax purposes is currently 20% while
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the maximum ordinary income rate and short-term capital gains rate is
effectively 39.6%. Slightly different rules may apply to participants who
acquire stock subject to certain repurchase options or who are subject to
Section 16(b) of the Exchange Act.
Incentive Stock Options. Incentive stock options under the Stock Option Plan
are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the participant or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the
participant's alternative minimum tax liability, if any.
If a participant holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
participant upon exercise of the option, any gain or loss on a disposition of
such stock will be a long-term capital gain or loss.
Generally, if the participant disposes of the stock before the expiration of
either of these holding periods (a "disqualifying disposition"), then at the
time of disposition the participant will realize taxable ordinary income equal
to the lesser of (i) the excess of the stock's fair market value on the date
of exercise over the exercise price, or (ii) the participant's actual gain, if
any, on the purchase and sale. The participant's additional gain or any loss
upon the disqualifying disposition will be a capital gain or loss, which will
be long-term or short-term depending on whether the stock was held for more
than one year.
To the extent the participant recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the
Code and the satisfaction of a tax reporting obligation) to a corresponding
business expense deduction in the tax year in which the disqualifying
disposition occurs.
Nonstatutory Stock Options, Restricted Stock Purchase Awards and Stock
Bonuses. Nonstatutory stock options, restricted stock purchase awards and
stock bonuses granted under the Stock Option Plan generally have the following
federal income tax consequences:
There are no tax consequences to the participant or the Company by reason of
the grant. Upon acquisition of the stock, the participant normally will
recognize taxable ordinary income equal to the excess, if any, of the stock's
fair market value on the acquisition date over the purchase price. However, to
the extent the stock is subject to certain types of vesting restrictions, the
taxable event will be delayed until the vesting restrictions lapse unless the
participant elects to be taxed on receipt of the stock. With respect to
employees, the Company is generally required to withhold from regular wages or
supplemental wage payments an amount based on the ordinary income recognized.
Subject to the requirement of reasonableness, the provisions of Section 162(m)
of the Code and the satisfaction of a tax reporting obligation, the Company
will generally be entitled to a business expense deduction equal to the
taxable ordinary income realized by the participant.
Upon disposition of the stock, the participant will recognize a capital gain
or loss equal to the difference between the selling price and the sum of the
amount paid for such stock plus any amount recognized as ordinary income upon
acquisition (or vesting) of the stock. Such gain or loss will be long-term or
short-term depending on whether the stock was held for more than one year.
Slightly different rules may apply to participants who acquire stock subject
to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
Stock Appreciation Rights. No taxable income is realized upon the receipt of
a stock appreciation right, but upon exercise of the stock appreciation right
the fair market value of the shares (or cash in lieu of shares) received must
be treated as compensation taxable as ordinary income to the participant in
the year of such exercise. Generally, with respect to employees, the Company
is required to withhold from the payment made on exercise of the stock
appreciation right or from regular wages or supplemental wage payments an
amount based
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on the ordinary income recognized. Subject to the requirement of
reasonableness, Section 162(m) of the Code and the satisfaction of a reporting
obligation, the Company will be entitled to a business expense deduction equal
to the taxable ordinary income recognized by the participant.
Potential Limitation on Company Deductions. Section 162(m) of the Code
denies a deduction to any publicly-held corporation for compensation paid to
certain "covered employees" in a taxable year to the extent that compensation
to such covered employee exceeds $1 million. It is possible that compensation
attributable to awards, when combined with all other types of compensation
received by a covered employee from the Company, may cause this limitation to
be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options and stock appreciation rights will qualify as
performance-based compensation if the award is granted by a compensation
committee comprised solely of "outside directors" and either (i) the plan
contains a per-employee limitation on the number of shares for which such
awards may be granted during a specified period, the per-employee limitation
is approved by the stockholders, and the exercise price of the award is no
less than the fair market value of the stock on the date of grant, or (ii) the
award is granted (or exercisable) only upon the achievement (as certified in
writing by the compensation committee) of an objective performance goal
established in writing by the compensation committee while the outcome is
substantially uncertain, and the award is approved by stockholders.
Compensation attributable to restricted stock and stock bonuses will qualify
as performance-based compensation, provided that: (i) the award is granted by
a compensation committee comprised solely of "outside directors" and (ii) the
purchase price of the award is no less than the fair market value of the stock
on the date of grant. Stock bonuses qualify as performance-based compensation
under the Treasury regulations only if (i) the award is granted by a
compensation committee comprised solely of "outside directors," (ii) the award
is granted (or exercisable) only upon the achievement of an objective
performance goal established in writing by the compensation committee while
the outcome is substantially uncertain, (iii) the compensation committee
certifies in writing prior to the granting (or exercisability) of the award
that the performance goal has been satisfied and (iv) prior to the granting
(or exercisability) of the award, stockholders have approved the material
terms of the award (including the class of employees eligible for such award,
the business criteria on which the performance goal is based, and the maximum
amount--or formula used to calculate the amount--payable upon attainment of
the performance goal).
PROPOSAL 3
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors on December 16, 1997. There are currently 250,000
shares of Common Stock authorized for issuance under the Purchase Plan. During
the fiscal year ended December 31, 1998, shares of Common Stock were purchased
in the amounts and at the weighted average prices per share under the Purchase
Plan as follows: all employees (excluding executive officers) as a group
66,143 shares ($4.1225 per share). No shares were purchased by any current
executive officer during the fiscal year ended December 31, 1998. As of March
8, 1999 purchase rights (net of canceled or expired purchase rights) covering
an aggregate of 66,143 shares of Common Stock had been granted under the
Purchase Plan. Only 183,857 shares of Common Stock (plus any shares that might
in the future be returned to the Purchase Plan as a result of cancellations or
expiration of purchase rights) remained available for future grant under the
Purchase Plan.
On February 23, 1999, the Board of Directors amended the Purchase Plan,
subject to stockholder approval, to increase the number of shares of Common
Stock authorized for issuance thereunder from a total of 250,000 shares to a
total of 350,000 shares. The Board adopted this amendment in order to ensure
that the Company can continue to grant purchase rights at levels determined
appropriate by the Board.
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Stockholders are requested in this Proposal 3 to approve the Purchase Plan,
as amended. The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy and voting at the meeting will be
required to approve the amended Purchase Plan.
The Board of Directors Recommends a Vote in Favor of Proposal 3.
Description of Purchase Plan
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption of the
Purchase Plan. The Board of Directors currently plans that the offering period
for any offering will be six months.
The Board of Directors, through its Compensation Committee, administers the
Purchase Plan and has the final power to construe and interpret both the
Purchase Plan and the rights granted under it. The Board of Directors has the
power, subject to the provisions of the Purchase Plan, to determine when and
how rights to purchase Common Stock of the Company will be granted, the
provisions of each offering of such rights (which need not be identical), and
whether employees of any parent or subsidiary of the Company will be eligible
to participate in the Purchase Plan.
Generally, any person who is customarily employed at least 20 hours per week
and five months per calendar year by the Company (or by any parent or
subsidiary of the Company designated by the Board) on the first day of an
offering is eligible to participate in that offering. However, no employee is
eligible to participate in the Purchase Plan if, immediately after the grant
of purchase rights, the employee would own, directly or indirectly, stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or of any parent or subsidiary of the Company
(including any stock which such employee may purchase under all outstanding
rights and options). In addition, no employee may accrue the right to purchase
more than $25,000 worth of Common Stock (determined at the fair market value
of the shares at the time such rights are granted) under all employee stock
purchase plans of the Company and its affiliates in any calendar year. Rights
granted under the Purchase Plan are not transferable and may be exercised only
by the person to whom such rights are granted.
Employees are eligible to participate in the first offering commencing
following the date they are employed by the Company or an affiliate of the
Company. Employees who participate in an offering may have up to 15% of their
earnings withheld pursuant to the Purchase Plan and applied at the end of each
offering period to the purchase of shares of Common Stock. The price of Common
Stock purchased under the Purchase Plan will be equal to 85% of the lower of
the fair market value of the Common Stock on the commencement date of each
offering period or the purchase date. Employees may end their participation in
the offering at any time prior to the end of the offering period (except as
otherwise provided by the Board of Directors for that offering), and
participation ends automatically upon termination of employment with the
Company.
If the aggregate number of shares to be purchased upon exercise of rights
granted in the offering would exceed the maximum aggregate number of shares of
Common Stock available, the Board would make a pro rata allocation of
available shares in a uniform and equitable manner. Unless the employee's
participation is discontinued, his or her right to purchase shares is
exercised automatically at the end of the offering at the applicable price.
In the event of a change of control in the Company, the Company and the
Board of Directors have discretion to provide that each right to purchase
Common Stock will be assumed or an equivalent right substituted by the
successor corporation. Alternatively, the Board of Directors may shorten the
offering period and provide for all sums collected by payroll deductions to be
applied to purchase stock immediately prior to the change in control. The
Purchase Plan will terminate at the direction of the Board of Directors.
The Board may amend the Purchase Plan at any time. Any amendment of the
Purchase Plan must be approved by the stockholders within 12 months of its
adoption by the Board if the amendment would (i) increase
8
<PAGE>
the number of shares of Common Stock reserved for issuance under the Purchase
Plan, (ii) modify the requirements relating to eligibility for participation
in the Purchase Plan, or (iii) modify any other provision of the Purchase Plan
in a manner that would materially increase the benefits accruing to
participants under the Purchase Plan if such approval is required in order to
comply with the requirements of Rule 16b-3 under the Exchange Act or any other
applicable rule or regulation. Rights granted before amendment or termination
of the Purchase Plan will not be altered or impaired by any amendment or
termination of the Purchase Plan without consent of the employee to whom such
rights were granted.
Federal Income Tax Information
Rights granted under the Purchase Plan are intended to qualify for favorable
federal income tax treatment associated with rights granted under an employee
stock purchase plan which qualifies under provisions of Section 423 of the
Code.
A participant will be taxed on amounts withheld for the purchase of shares
of Common Stock as if such amounts were actually received. Other than this, no
income will be taxable to a participant until disposition of the acquired
shares, and the method of taxation will depend upon the holding period of the
acquired shares.
If the stock is disposed of at least two years after the beginning of the
offering period and at least one year after the stock is transferred to the
participant, then the lesser of (i) the excess of the fair market value of the
stock at the time of such disposition over the exercise price or (ii) the
excess of the fair market value of the stock as of the beginning of the
offering period over the exercise price (determined as of the beginning of the
offering period) will be treated as ordinary income. Any further gain or any
loss will be taxed as a long-term capital gain or loss. Such capital gains
currently are generally subject to lower tax rates than ordinary income.
If the stock is sold or disposed of before the expiration of either of the
holding periods described above, then the excess of the fair market value of
the stock on the exercise date over the exercise price will be treated as
ordinary income at the time of such disposition. The balance of any gain will
be treated as capital gain. Even if the stock is later disposed of for less
than its fair market value on the exercise date, the same amount of ordinary
income is attributed to the participant. A capital loss is recognized equal to
the difference between the sales price and the fair market value of the stock
on such exercise date. Any capital gain or loss will be short-term or long-
term, depending on how long the stock has been held.
There are no federal income tax consequences to the Company by reason of the
grant or exercise of rights under the Purchase Plan. The Company is entitled
to a deduction to the extent amounts are taxed as ordinary income to a
participant (subject to the requirement of reasonableness and the satisfaction
of tax reporting obligations).
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending December 31, 1999,
and has further directed that management submit the selection of independent
auditors for ratification by the stockholders at the Annual Meeting.
PricewaterhouseCoopers LLP has audited the Company's financial statements
since 1997. Representatives of PricewaterhouseCoopers LLP are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
Stockholder ratification of the selection of PricewaterhouseCoopers LLP as
the Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of
PricewaterhouseCoopers 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 Audit Committee and the Board in
their discretion may direct
9
<PAGE>
the appointment of different independent auditors at any time during the year
if they determine that such a change would be in the best interests of the
Company and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of PricewaterhouseCoopers LLP. Abstentions
and broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether this matter has been approved.
The Board of Directors Recommends a Vote in Favor of Proposal 4.
MANAGEMENT
As of March 8, 1999, the executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
George A. Hallenbeck.. 57 President and Chief Executive Officer
David R. Johnson...... 49 Senior Vice President of Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
James M. Ross......... 57 Senior Vice President and General Manager of
Services
Robert M. Gahan....... 47 Vice President of Business Management
David J. Molny........ 40 Vice President and Chief Technical Officer
Anita T. Moseley...... 47 Vice President of Legal Services, General Counsel
and Secretary
Terry C. Porter....... 47 Vice President of Emerging Products and Services
</TABLE>
See "Proposal 1--Election of Directors" for the biographies of Messrs.
Hallenbeck and Molny.
David R. Johnson joined the Company in November 1998 as Senior Vice
President of Finance, Chief Financial Officer, Treasurer and Assistant
Secretary. From February 1996 until July 1998, Mr. Johnson served as the Chief
Financial Officer of Sodak Gaming, Inc., an international gaming operator,
hardware, software and telecommunications supplier. In 1992, Mr. Johnson
founded the consulting firm Technology Business Affiliates in San Jose,
California, where he still serves as a principal. The firm provides initial
public offering, re-engineering and strategic planning expertise to computer,
medical device and software manufacturers. From 1990 through 1992, Mr. Johnson
served as President, Chief Executive Officer and Chief Financial Officer of
Zentec Corporation, a manufacturer of workstations, terminals and
communications software. Mr. Johnson began his career with KPMG Peat Marwick
LLP and was a member of the founding group at Sprint. He holds a B.S. in
Accounting from the University of Washington, an MBA in finance from the
University of California-Berkeley and multiple graduate degrees from the
University of Southern California. Mr. Johnson is a Certified Public
Accountant.
James M. Ross joined the Company in June 1997 as Vice President of
Integration Services and held that position until September 1997 when he
assumed the position of Senior Vice President and General Manager of Services.
Mr. Ross served as Senior Vice President of APAC Teleservices Inc., a customer
care outsourcing company, from June 1996 until May 1997, and as Senior Vice
President and General Manager of Cap Gemini Sogeti, an international
information technology and systems integration company, from December 1994
until May 1996. From August 1991 to June 1994, Mr. Ross served as Executive
Vice President--Managing Director, Worldwide Telecommunications of SHL
Systemhouse Inc., an international information technology and systems
integration company. Mr. Ross holds a B.A. from Rutgers University.
Robert M. Gahan joined the Company in May 1997 as Director of Business
Development and held that position until August 1997 when he assumed the
position of Vice President of Corporate Development. In January 1999, Mr.
Gahan assumed the position of Vice President of Business Management. From
January 1993 until December 1996, Mr. Gahan served as National Sales Director
at Qwest Communications, a Denver-based telecommunications company.
Previously, Mr. Gahan held the positions of General Manager at Bakersfield
10
<PAGE>
Cellular Telephone Company, a business unit of BellSouth Cellular Corporation,
a telecommunications company, and Senior Sales Manager for U.S. West Cellular.
Mr. Gahan holds a B.A. from the University of Iowa.
Anita T. Moseley joined the Company in May 1994 as corporate counsel of the
Company and held that position until June 1997 when she assumed the positions
of Vice President of Legal Services, General Counsel and Secretary of the
Company. Between September 1991 and May 1994, she held an in-house corporate
counsel position with the Federal Deposit Insurance Corporation/Resolution
Trust Corporation. Ms. Moseley holds a B.A. from Syracuse University and a
J.D. from the University of Utah.
Terry C. Porter joined the Company in May 1997 as Director of Sales and
Sales Support and held that position until September 1997 when he assumed the
position of Vice President of Sales and Sales Support. From July 1998 to
December 1998, Mr. Porter served as Vice President of Product Development and
Integration Services, at which time he became Vice President of Emerging
Products and Services. From March 1996 until May 1997, Mr. Porter was the
Managing Director of U.S. Operations, responsible for middleware sales and
support, at Siemens Nixdorf Information Systems. Prior to 1996, Mr. Porter
served in various executive management positions at Covia Technologies, a
company providing interoperable message-based product groups. Mr. Porter holds
a B.S. from Purdue University.
11
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 8, 1999 by: (i) each director and
nominee for director; (ii) each executive officer named in the Summary
Compensation Table and currently serving as an executive officer of the
Company; (iii) all executive officers and directors of the Company as a group;
and (iv) all those known by the Company to be beneficial owners of more than
five percent of its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
---------------------------------
Beneficial Owner Number of Shares Percent of Total
- ---------------- ---------------- ----------------
<S> <C> <C>
George A. Hallenbeck(2)...................... 2,079,375 17.1%
c/o Evolving Systems, Inc.
9777 Mt. Pyramid Court
Englewood, CO 80112
Harry B. Fair(3)............................. 1,654,375 13.6
c/o Evolving Systems, Inc.
9777 Mt. Pyramid Court
Englewood, CO 80112
Marsh & McLennan Companies, Inc.(4).......... 1,372,000 11.4
1166 Avenue of the Americas
New York, NY 10036
Jacquie Hallenbeck........................... 1,062,500 8.8
344 Race Street
Denver, CO 80206
Morgan Stanley Venture Partners(5)........... 1,090,210 8.7
3000 Sand Hill Road, Building 4, Suite 250
Menlo Park, CA 94025
Trident Capital(6)........................... 977,673 7.8
2480 Sand Hill Road
Menlo Park, CA 94025
Management Insights, Inc./................... 784,000 6.5
Robert Coates/Suzanne Coates(7)
5501 LBJ Freeway
Dallas, TX 75240
U.S. Bancorp................................. 648,500 5.4
601 2nd Avenue South
Minneapolis, MN 55402-4302
Donald R. Dixon(8)........................... 1,017,273 8.1
Robert J. Loarie(9).......................... 1,090,210 8.7
James M. Ross(10)............................ 67,811 *
David J. Molny(11)........................... 85,934 *
Anita T. Moseley(12)......................... 21,988 *
Terry C. Porter(13).......................... 10,077 *
All current executive officers and directors
as a group
(10 persons)(14)............................ 6,053,916 45.8
</TABLE>
- --------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "SEC"). Unless
12
<PAGE>
otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, the Company believes that each
of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned.
Applicable percentages are based on 12,078,848 shares outstanding on March
8, 1999, adjusted as required by rules promulgated by the SEC.
(2) Includes 1,062,500 shares held by Mr. Hallenbeck's former spouse as to
which Mr. Hallenbeck retains voting power. Also includes 54,375 shares
subject to stock options exercisable within 60 days of March 8, 1999.
(3) Includes 250,000 shares held by a trust for which Mr. Fair's spouse
serves as trustee. Also includes 54,375 shares subject to stock options
exercisable within 60 days of March 8, 1999 held by The Brogden Group,
LLC, of which Mr. Fair is a Senior Manager.
(4) Held by mutual funds and institutional clients for whom Putnam Investment
Management, Inc. and The Putnam Advisory Company, Inc., wholly-owned
subsidiaries of Putnam Investments, Inc., a wholly-owned subsidiary of
Marsh & McLennan Companies, Inc., act as investment advisers. Such
investment advisers share voting and investment power with respect to
such shares. Marsh & McLennan Companies, Inc. and Putnam Investments,
Inc. disclaim beneficial ownership of such shares.
(5) Includes 100,135 shares owned by Morgan Stanley Venture Capital Fund II,
C.V., 402,213 shares owned by Morgan Stanley Venture Capital Fund II,
L.P. and 104,402 shares owned by Morgan Stanley Venture Investors, L.P.
Also includes warrants to purchase an aggregate of 483,460 shares of
Common Stock, 79,838 of which are owned by Morgan Stanley Venture Capital
Fund II, C.V., 320,453 of which are owned by Morgan Stanley Venture
Capital Fund II, L.P. and 83,169 of which are owned by Morgan Stanley
Venture Investors, L.P.
(6) Includes 14,908 shares owned by Information Associates, C.V. and 535,592
shares owned by Information Associates, L.P. Also includes warrants to
purchase an aggregate of 427,173 shares of Common Stock, 11,597 of which
are owned by Information Associates, C.V. and 415,576 of which are owned
by Information Associates, L.P.
(7) Held by Management Insights, Inc. Robert Coates and Suzanne Coates are
the sole shareholders, and also serve as officers, of such corporation.
(8) Includes shares owned by investment funds managed by Trident Capital (see
Note 6 above). Mr. Dixon is President of Trident Capital Management,
L.L.C., the Investment General Partner of Information Associates, C.V.
and the General Partner of Information Associates, L.P. Also includes
39,600 shares held by the Dixon Family Trust; Mr. Dixon disclaims
beneficial ownership of such shares.
(9) Consists solely of shares owned by investment funds managed by Morgan
Stanley Venture Partners (see Note 5 above). Mr. Loarie is a General
Partner of Morgan Stanley Venture Partners II, L.P., the General Partner
of each of the funds. He is also a Vice President of Morgan Stanley
Venture Capital II, Inc., the Managing General Partner of Morgan Stanley
Venture Partners II, L.P. Mr. Loarie disclaims beneficial ownership of
such shares.
(10) Includes 66,311 shares subject to stock options exercisable within 60
days of March 8, 1999.
(11) Includes 11,936 shares subject to stock options exercisable within 60
days of March 8, 1999.
(12) Includes 19,980 shares subject to stock options exercisable within 60
days of March 8, 1999.
(13) Includes 7,735 shares subject to stock options exercisable within 60 days
of March 8, 1999.
(14) Includes 241,585 shares subject to stock options exercisable within 60
days of March 8, 1999. Also see Notes 2, 3, 8 and 9 above.
13
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with; except that an
initial report of ownership was filed late by Mr. Johnson.
14
<PAGE>
EXECUTIVE COMPENSATION
Compensation of Directors
The Company's directors do not receive any compensation for serving on the
Board of Directors; however, directors are reimbursed for reasonable out-of-
pocket expenses incurred in connection with attending Board of Directors or
committee meetings.
Compensation of Executive Officers
Summary of Compensation
The following table shows for the fiscal years ended December 31, 1997 and
1998, compensation awarded or paid to, or earned by, each person who served as
Chief Executive Officer of the Company during fiscal year 1998, each of the
other four most highly compensated executive officers of the Company at
December 31, 1998 and two former executive officers who departed from the
Company during fiscal year 1998 (the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- ------------
Securities
Name and Principal Underlying All Other
Position Year* Salary ($) Bonus ($) Options (#) Compensation(1)
------------------ ----- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
George A. Hallenbeck.... 1997 -- -- -- --
President and Chief 1998 $ 50,000 -- 217,500 $ 3,000
Executive Officer
J. Richard Abramson..... 1997 $ 306,000 $112,094 427,500 $23,142(1)(2)
Former Chief Executive 1998 342,366 94,531 15,000 16,739
Officer
James M. Ross........... 1997 $ 94,738 $ 25,000 100,000 $ 2,625
Senior Vice President 1998 185,000 31,260 245,000(3) 13,505
and General Manager of
Services
David J. Molny.......... 1997 $ 160,500 $ 4,136 59,500 $ 9,450
Vice President and 1998 163,000 15,296 94,000(4) 11,026
Chief Technical Officer
Anita T. Moseley........ 1997 $ 112,882 $ 11,610 59,929 $ 6,656
Vice President of Legal 1998 144,165 25,503 78,000(5) 10,947
Services, General
Counsel and Secretary
Terry C. Porter......... 1997 $ 114,437(6) -- 45,000 $ 5,547
Vice President of 1998 169,213(7) $ 25,657 58,750(8) 11,083
Emerging Products and
Services
Roger A. Barnes......... 1997 $ 22,326 -- 112,500 --
Former Senior Vice 1998 160,857 $ 34,469 25,000 $10,394
President of Finance,
Chief Financial
Officer, Treasurer and
Assistant Secretary
Jeffrey J. Finn......... 1997 $ 235,026(9) $ 54,927 240,750 $ 9,600
Former Senior Vice 1998 247,803(10) 37,100 15,000 $29,026(11)
President and General
Manager of Product
Development and
Distribution
</TABLE>
- -------
* As permitted by the rules promulgated by the SEC, no amounts are shown
for 1996.
(1) Includes value of Company provided insurance premiums paid by the Company
and contributions made by the Company on behalf of the individuals which
are currently managed under the Company's 401(k) Plan.
(2) Includes severance payments in the amount of $13,542.
(3) Includes 15,000 replacement options granted in connection with
cancellation of options granted in fiscal year 1997.
(4) Includes 59,500 replacement options granted in connection with
cancellation of options granted in fiscal year 1997.
(5) Includes 37,500 replacement options granted in connection with
cancellation of options granted in fiscal year 1997.
(6) Includes commissions in the amount of $39,193 earned in 1997.
(7) Includes commissions in the amount of $35,030 earned in 1998.
(8) Includes 38,750 replacement options granted in connection with
cancellation of options granted in fiscal year 1997.
(9) Includes commissions in the amount of $47,768 earned in 1997.
(10) Includes commissions in the amount of $55,187 earned in 1998.
(11) Includes severance payments in the amount of $18,288.
15
<PAGE>
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its Amended and
Restated Stock Option Plan (the "Stock Option Plan"). As of March 8, 1999,
options to purchase a total of 2,665,534 shares were outstanding under the
Stock Option Plan, and options to purchase 484,466 shares remained available
for grant thereunder.
The following tables show for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at
year-end by, the Named Executive Officers:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual
Rates of Stock Price
Percent of Total Appreciation for
Number of Options Granted Exercise Option Term(4)
Options to Employees in Price Expiration ---------------------------
Name Granted(1) Fiscal Year(2) ($/Share)(3) Date 5% 10%
---- ---------- ---------------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
George A. Hallenbeck.... 217,500(5) 9.26% $2.75 12/1/08 $ 376,158 $ 953,257
J. Richard Abramson..... 15,000 0.64% 10.00 4/7/08 94,334 239,061
James M. Ross........... 52,500(6) 2.23% 2.75 11/4/08 90,797 230,097
192,500 8.19% 2.75 11/5/08 332,921 843,687
David J. Molny.......... 69,500(7) 2.96% 2.75 11/4/08 120,197 304,604
24,500 1.04% 2.75 11/5/08 42,372 107,378
Anita T. Moseley........ 52,500(8) 2.23% 2.75 11/4/08 90,797 230,097
25,500 1.09% 2.75 11/5/08 44,101 111,761
Terry C. Porter......... 38,750(9) 1.65% 2.75 11/4/08 67,017 169,833
20,000 0.85% 2.75 11/5/08 34,589 87,656
Roger A. Barnes......... 25,000 1.06% 10.00 4/7/08 157,224 398,436
Jeffrey J. Finn......... 15,000 0.64% 10.00 4/7/08 94,334 239,061
</TABLE>
- --------
(1) Unless otherwise noted, each option vests in 16 quarterly installments
beginning February 5, 1999.
(2) Based on 2,349,723 total options granted in 1998.
(3) The Board of Directors of the Company may reprice options under the terms
of the Stock Option Plan.
(4) The potential realizable value is calculated assuming that the fair market
value of the Common Stock on the date of the grant as determined by the
Board of Directors appreciates at the indicated annual rate compounded
annually for the entire term of the option, and that the option is
exercised and the Common Stock received therefor is sold on the last day
of the term of the option for the appreciated price. The 5% and 10% rates
of appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future increases in the price of the Common Stock.
(5) Vests in eight quarterly installments beginning January 1, 1999.
(6) Includes 15,000 replacement options granted in connection with
cancellation of options granted fiscal year 1997.
(7) Includes 59,500 replacement options granted in connection with
cancellation of options granted in fiscal year 1997.
(8) Includes 37,500 replacement options granted in connection with
cancellation of options granted in fiscal year 1997.
(9) Consists of replacement options granted in connection with cancellation of
options granted in fiscal year 1997.
16
<PAGE>
OPTION EXERCISES IN LAST FISCAL YEAR ANDFISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of In-the-Money
Unexercised Options at Options at
Shares December 31, 1998 (#) December 31, 1998 ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable(1) Unexercisable(2)
---- ------------ ------------ ---------------------- ---------------------
<S> <C> <C> <C> <C>
George A. Hallenbeck.... -- -- 0/217,500 $ 0/$176,828
J. Richard Abramson..... 90,000 $221,503 143,738/306,262 $397,148/$183,082
James M. Ross........... 1,500 $ 13,800 32,180/296,320 $ 88,913/$340,982
David J. Molny.......... 1,311 $ 10,840 1/95,688 $ 3/$81,086
Anita T. Moseley........ 1,008 $ 9,274 9,739/92,253 $ 26,909/$102,795
Terry C. Porter......... 1,952 $ 4,417 391/62,657 $ 1,080/$58,559
Roger A. Barnes......... -- -- 0/137,500 $ 0/$0
Jeffrey J. Finn......... 100,000 $220,000 -- --
</TABLE>
- --------
(1) Includes both "in-the-money" and "out-of the-money" options. "In-the-
money" options are options with exercise prices below the market price of
the Company's Common Stock at December 31, 1998.
(2) Based on the fair market value of the Common Stock as of December 31, 1998
($3.563), minus the per share exercise price of "in-the-money" unexercised
options, multiplied by the number of shares represented by such options.
Management Change in Control Agreements
Each of the Company's Named Executive Officers, except George A. Hallenbeck
(the "Executives"), have entered into a Management Change in Control Agreement
with the Company. Each agreement generally provides that upon a Qualified
Termination (as defined below), the Company shall pay to the Executive all
amounts earned or accrued through the applicable termination date, including,
without limitation, the Executive's base salary, a prorated portion of any
earned incentive compensation, compensation for unused paid time off,
reimbursement for reasonable and necessary expenses incurred by the Executive
on behalf of the Company during the period ending on the applicable
termination date. The Company also is obligated to provide certain insurance
benefits during the Executive's applicable severance period. Moreover, the
Company has agreed to pay the Executive an amount equal to 100% of his or her
annual base salary, plus 100% of the Executive's annual incentive target. In
addition, immediately upon the occurrence of a Change of Control (as defined
below) or a Qualified Termination, 50% or 100%, respectively, of the
Executive's unvested stock options shall vest. The Company also has agreed to
reimburse the Executive for any excise taxes payable as a result of
Executive's receipt of these payments. A Qualified Termination will occur upon
any of the following: (i) termination of the Executive's employment by the
Company, without cause, as a result of the influence of a person or entity
seeking to cause a Change in Control; (ii) termination of the Executive's
employment by the Company for any reason, other than for cause, disability or
death, within 18 months following a Change in Control; (iii) resignation by
the Executive following a change in a material condition of the Executive's
employment in anticipation of a Change in Control or within 18 months
following a Change in Control. A Change in Control will occur upon (i) the
sale, transfer or other disposition of all or substantially all of the
Company's assets; (ii) a merger or consolidation in which the Company is not
the surviving corporation; (iii) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's Common Stock are
converted into other property; or (iv) the acquisition by any person, entity
or group within the meaning of Securities Exchange Act of 1934 of the
beneficial ownership of securities of the Company representing at least 50% of
the combined voting power entitled to vote in the election of directors.
17
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE/1/
The Compensation Committee
The Compensation Committee of the Board of Directors (the "Compensation
Committee") is composed of at least two directors appointed by the Board of
Directors. The Compensation Committee is responsible for providing guidance
and periodic monitoring for all corporate compensation, benefit, perquisite,
and employee equity programs. The Compensation Committee has full power and
authority to carry out the following responsibilities: (i) recommends to the
Board the compensation levels for officers and employees of the Company, (ii)
recommends to the Board the type of compensation to be paid to the officers
and employees of the Company, (iii) reviews the performance of the Chief
Executive Officer of the Company, and (iv) performs such other functions and
has such other powers as may be necessary or convenient in the efficient
discharge of its responsibilities.
Base Salary
The Committee annually reviews each officer's base salary and the base
salary of employees by category. When reviewing base salaries, the Committee
considers individual and corporate performance, levels of responsibility,
prior experience, breadth of knowledge and competitive pay practices. The
Committee also considers its operating, strategic, and financial goals that
are considered to be critical to the Company's fundamental long-term goal of
building stockholder value. For fiscal 1998, these goals were: continued
marketing and development of the Company's LNP products and recruitment and
retention of key technical staff. At the same time as the Committee considers
the base salary of its employees for the upcoming fiscal year, it also sets
forth the performance goals to be met in setting the amount of bonuses to be
paid to its employees in the upcoming fiscal year. The amount of each
employee's bonus is determined by comparing the degree to which the Company
has met its goals for the fiscal year as set forth above and evaluating each
participant's performance against the enumerated objectives and allocating a
portion or all of such participant's bonus pool to him or her based on his or
her contributions during the year. Base salaries for executive officers were
increased by 1% to 12% for fiscal 1998 compared to fiscal 1997. The increases
were due to fiscal 1997 financial performance, increased responsibilities
associated with a public company, and the need to remain within the range of
competitive salaries for comparable companies.
Bonuses
The Company paid bonuses to its former Chief Executive Officer and six other
executive officers in 1998, in amounts ranging from $15,296 to $94,531. Such
bonuses were based on the extent to which the corporate goals described above
were achieved, and represented from approximately 9.4% to 27.6% of such
officer's base salary.
Stock-Based Incentive Compensation
The Company adopted the Amended and Restated Stock Option Plan (the "Plan")
in order to provide equity based performance incentives to its employees. The
Plan authorizes the Company to award incentive stock options and nonqualified
stock options to purchase Common Stock to officers and other employees of the
Company. The purpose of the Plan is to attract, retain and motivate officers
and employees. Stock options may be exercised at a purchase price as
determined by the Board of Directors, provided that the exercise price per
share under the Plan is not less than 100% of the fair market value on the
date of grant for incentive stock options and not less than 85% of the fair
market value on the date of grant for nonqualified stock options. Options to
beneficial owners of 10% or more of the Company's outstanding shares may be
granted at an exercise price per share of not less than 110% of fair market
value. The grants are designed to align the interests of the optionees
- --------
/1/Notwithstanding anything to the contrary set forth in any of the Company's
filings under the Securities Act of 1933, as amended (the "Securities Act")
or the Exchange Act that might incorporate future filings by reference,
including this Proxy Statement, in whole or in part, the following Report of
the Compensation Committee and the Performance Measurement Comparison shall
not be incorporated by reference into any such filings, and shall not be
deemed soliciting material under the Securities Act or the Exchange Act.
18
<PAGE>
with those of the stockholders and provide each individual with a significant
incentive to manage the Company from the perspective of an owner with an
equity stake in the business, even though certain executive officers are
already significant stockholders of the Company (see "Security Ownership of
Certain Beneficial Owners and Management"). Moreover, the long-term vesting
schedule encourages a long-term commitment to the Company by its executive
officers and other optionees. The size of the option grant to each optionee is
set at a level that the Compensation Committee deems appropriate in order to
create a meaningful opportunity for stock ownership based upon the
individual's current position with the Company, but also takes into account
the individual's potential for future responsibility and promotion over the
option vesting period, and the individual's performance in recent periods. The
Compensation Committee periodically reviews the number of shares owned by, or
subject to options held by, each executive officer, and additional awards are
considered based upon past performance of the executive officer.
Corporate Performance and Chief Executive Officer Compensation
For the fiscal year ended December 31, 1998, George A. Hallenbeck, President
and Chief Executive Officer of the Company received total cash payments of
$50,000 in salary. The base salary of Mr. Hallenbeck was set at an annual rate
of $200,000 commencing October 1, 1998. Mr. Hallenbeck's base salary was based
largely on competitive salaries, which the Compensation Committee believes are
in excess of Mr. Hallenbeck's salary. In fiscal 1998, Mr. Hallenbeck received
a stock option grant for 217,500 shares of the Company's Common Stock.
For the fiscal year ended December 31, 1998, J. Richard Abramson, the former
President and Chief Executive Officer of the Company received total cash
payments of $342,366 in salary. His bonus was $94,531. The base salary of Mr.
Abramson was set at an annual rate of $325,000 commencing January 1, 1998. Mr.
Abramson's fiscal 1998 base salary was based largely on competitive salaries
of CEOs of public technology companies. In fiscal 1998, the Company achieved
several key objectives. These achievements included becoming a public company.
Accordingly, Mr. Abramson received an increase in base salary of $19,000. In
fiscal 1998, Mr. Abramson received an additional stock option grant for 15,000
shares of the Company's Common Stock.
Limitation on Deduction of Compensation Paid to Certain Executive Officers
Section 162(m) of the Internal Revenue Code (the "Code") limits the Company
to a deduction for federal income tax purposes of no more than $1 million of
compensation paid to certain Named Executive Officers in a taxable year.
Compensation above $1 million may be deducted if it is "performance-based
compensation" within the meaning of the Code. The statute containing this law
and the applicable proposed Treasury regulations offer a number of
transitional exceptions to this deduction limit for pre-existing compensation
plans, arrangements and binding contracts. As a result, the Compensation
Committee believes that at the present time it is quite unlikely that the
compensation paid to any Named Executive Officer in a taxable year which is
subject to the deduction limit will exceed $1 million. Therefore, the
Compensation Committee has not yet established a policy for determining which
forms of incentive compensation awarded to its Named Executive Officers shall
be designed to qualify as "performance-based compensation." The Compensation
Committee intends to continue to evaluate the effects of the statute and any
final Treasury regulations and to comply with Section 162(m) of the Code in
the future to the extent consistent with the best interest of the Company.
Conclusion
The Compensation Committee believes that the compensation programs of the
Company and the administration of those programs well serve the interest of
the Company's stockholders. These programs allow the Company to attract,
retain and motivate exceptional management talent and to compensate executives
in a manner that reflects their contributions to both the short and long-term
performance of the Company. The Company intends to continue to emphasize
programs that it believes will positively affect stockholder value.
COMPENSATION COMMITTEE MEMBERS
Donald R. Dixon and Robert J. Loarie
19
<PAGE>
OPTION REPRICING INFORMATION
The following table shows certain information concerning the repricing of
options received by the Named Executive Officers since the Company's initial
public offering.
Option Repricings
<TABLE>
<CAPTION>
Length of
Number of Original
Securities Market Price Option Term
Underlying of Stock Exercise Price Remaining
Options/SARs at Time of at Time of at Date of
Repriced or Repricing or Repricing or New Exercise Repricing or
Name Date Amended (#) Amendment ($) Amendment ($) Price ($) Amendment
---- ------- ------------ ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
George A. Hallenbeck.... -- -- -- -- -- --
J. Richard Abramson..... -- -- -- -- -- --
James M. Ross........... 11/5/98 15,000 $2.50 $ 9.50 $2.75 9 yrs./2 mos.
11/5/98 12,500 $2.50 $10.00 $2.75 9 yrs./3 mos.
11/5/98 25,000 $2.50 $10.00 $2.75 9 yrs./5 mos.
David J. Molny.......... 11/5/98 59,500 $2.50 $ 9.50 $2.75 9 yrs./2 mos.
11/5/98 10,000 $2.50 $10.00 $2.75 9 yrs./6 mos.
Anita T. Moseley........ 11/5/98 37,500 $2.50 $ 9.50 $2.75 9 yrs./2 mos.
11/5/98 15,000 $2.50 $10.00 $2.75 9 yrs./5 mos.
Terry C. Porter......... 11/5/98 38,750 $2.50 $ 9.50 $2.75 9 yrs./2 mos.
Roger A. Barnes......... -- -- -- -- -- --
Jeffrey J. Finn......... -- -- -- -- -- --
</TABLE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors currently consists of
Messrs. Dixon and Loarie. Mr. Dixon has served on the Compensation Committee
since December 1997. Mr. Loarie became a member of the Compensation Committee
in October 1998 and Mr. Hallenbeck previously served on the committee from May
1996 until October 1998. Mr. Fair previously served as the Company's President
and currently serves as a member of the Board of Directors of the Company. Mr.
Hallenbeck currently serves as the Company's Chairman of the Board of
Directors, President and Chief Executive Officer. Mr. Dixon was not at any
time during fiscal 1998, nor at any other time, an officer or employee of the
Company. No member of the Compensation Committee or executive officer of the
Company has a relationship that would constitute an interlocking relationship
with executive officers or directors of another entity.
On October 1, 1998, the Company entered into a consulting services agreement
with The Brogden Group, LLC ("Brogden"), pursuant to which the Company is
obligated to pay Brogden $220,963 per year. In addition, Brogden will be
entitled to receive a bonus of $160,000 for 1999 upon the achievement of
certain revenue and operating income targets. Unless the agreement is earlier
terminated in accordance with the terms contained therein, the agreement will
terminate on December 31, 2000. Harry B. Fair is a Senior Manager of Brogden.
Pursuant to the agreement, the Company paid Brogden a total of $40,180 during
1998.
20
<PAGE>
Performance Measurement Comparison
Cumulative Total Return
--------------------------------
5/12/98 6/98 9/98 12/98
LIVING SYSTEMS, INC. 100 79 20 25
GROUP 100 97 57 60
DAQ STOCK MARKET (U.S.) 100 102 93 120
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 1, 1998, the Company entered into a consulting services agreement
with Brogden, pursuant to which the Company is obligated to pay Brogden
$220,963 per year. In addition, Brogden will be entitled to receive a bonus of
$160,000 for 1999 upon the achievement of certain revenue and operating income
targets. Unless the agreement is earlier terminated in accordance with the
terms contained therein, the agreement will terminate on December 31, 2000.
Harry B. Fair is a Senior Manager of Brogden. Pursuant to the agreement, the
Company paid Brogden a total of $40,180 during 1998.
Each of the Executives, have entered into a Management Change in Control
Agreement with the Company. Each agreement generally provides that upon a
Qualified Termination (as defined below), the Company shall pay to the
Executive all amounts earned or accrued through the applicable termination
date, including, without limitation, the Executive's base salary, a prorated
portion of any earned incentive compensation, compensation for unused paid
time off, reimbursement for reasonable and necessary expenses incurred by the
Executive on behalf of the Company during the period ending on the applicable
termination date. The Company also is obligated to provide certain insurance
benefits during the Executive's applicable severance period. Moreover, the
Company has agreed to pay the Executive an amount equal to 100% of his or her
annual base salary, plus 100% of the Executive's annual incentive target. In
addition, immediately upon the occurrence of a Change of Control (as defined
below) or a Qualified Termination, 50% or 100%, respectively, of the
Executive's unvested stock options shall vest. The Company also has agreed to
reimburse the Executive for any excise taxes payable as a result of
Executive's receipt of these payments. A Qualified Termination will occur upon
any of the following: (i) termination of the Executive's employment by the
Company, without cause, as a result of the influence of a person or entity
seeking to cause a Change in Control; (ii) termination of the Executive's
employment by the Company for any reason, other than for cause, disability or
death, within 18 months following a Change in Control; (iii) resignation by
the Executive following a change in a material condition of the Executive's
employment in anticipation of a Change in Control or within 18 months
following a Change in Control. A Change in Control will occur upon (i) the
sale, transfer or other disposition of all or substantially all of the
Company's assets; (ii) a merger or consolidation in which the Company is not
the surviving corporation; (iii) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's Common Stock are
converted into other property; or (iv) the acquisition by any person, entity
or group within the meaning of Securities Exchange Act of 1934 of the
beneficial ownership of securities of the Company representing at least 50% of
the combined voting power entitled to vote in the election of directors.
21
<PAGE>
The Company has entered into indemnification agreements (the
"Indemnification Agreements") with each of its directors and executive
officers. Subject to the provisions of the Indemnification Agreements, the
Company shall indemnify and advance expenses to such directors and executive
officers in connection with their involvement in any event or occurrence which
arises in their capacity as, or as a result of, their position with the
Company.
The Company believes that the terms of the transactions described above were
no less favorable to the Company than would have been obtained from
unaffiliated third parties. Any future transactions between the Company and
any of its officers, directors or principal stockholders will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the independent and
disinterested members of the Board of Directors.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors,
Anita T. Moseley
Secretary
March 31, 1999
22
<PAGE>
PROXY PROXY
EVOLVING SYSTEMS, INC.
9777 MT. PYRAMID COURT
ENGLEWOOD, COLORADO 80112
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE ANNUAL MEETING OF STOCKHOLDERS--APRIL 30, 1999
The undersigned hereby constitutes and appoints David R. Johnson and Anita
T. Moseley, and each of them, his true and lawful agents and proxies with
full power of substitution in each, to represent the undersigned at the
Annual Meeting of Stockholders of Evolving Systems, Inc. to be held at 9777
Mt. Pyramid Court, Englewood, Colorado, on Friday, April 30, 1999, at 8:30
a.m. local time and at any postponements, continuations or adjournments
thereof, on all matters coming before said meeting.
<PAGE>
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
WITHHOLD
1. Election of FOR AUTHORITY Nominees: Robert J. Loarie,
Class I [ ] [ ] David J. Molny
Directors
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------------------------------
2. Approval of Amended and Restated Stock Option Plan, as Amended
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Approval of Employee Stock Purchase Plan, as Amended
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Ratification of Selection of Independent Accountants
FOR [ ] AGAINST [ ] ABSTAIN [ ]
You are encouraged to specify your choices by marking the appropriate boxes,
but you need not mark any boxes if you wish to vote in accordance with the
Board of Directors' recommendations. The persons named herein as agents and
proxies cannot vote your shares unless you sign and return this card.
In their discretion, the proxies are entitled to vote upon such other matters
as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1 THROUGH 4.
_________________________________________ DATED _____________________, 1999
(SIGNATURE)
_________________________________________ DATED _____________________, 1999
(SIGNATURE IF HELD JOINTLY)
NOTE: PLEASE MARK, SIGN AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE.
EXECUTORS, AD-MINISTRATORS, TRUSTEES, ETC. SHOULD GIVE A TITLE AS SUCH. IF THE
SIGNER IS A CORPORA-TION, PLEASE SIGN FULL CORPORATE NAME BY DULY AUTHORIZED
OFFICER.
