<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[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))
Exchange Applications, Inc.
(Name of Registrant as Specified In Its Charter)
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.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
EXCHANGE APPLICATIONS, INC.
89 SOUTH STREET
BOSTON, MA 02111
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF EXCHANGE APPLICATIONS, INC.:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders of
Exchange Applications, Inc. (the "Company") will be held at the offices of
Bingham Dana LLP, 16(th) Floor, 150 Federal Street, Boston, MA 02110, on
Wednesday, May 26, 1999, at 10:00 a.m., local time, for the following purposes:
1. To elect one director of the Company to hold office for a three-year
term and until his successor has been duly elected and qualified; and
2. To transact such other business as may properly come before the Meeting
or any adjournments or postponements thereof.
The Board of Directors has fixed March 31, 1999 as the record date for the
determination of stockholders entitled to notice of, and to vote at, the 1999
Annual Meeting of Stockholders. Accordingly, only stockholders of record at the
close of business on March 31, 1999 will be entitled to notice of, and to vote
at, such meeting or any adjournments thereof.
By order of the Board of Directors
JOHN G. O'BRIEN
Secretary
April 15, 1999
NOTE: THE BOARD OF DIRECTORS SOLICITS THE EXECUTION AND PROMPT RETURN OF THE
ACCOMPANYING PROXY. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE
MEETING, PLEASE COMPLETE, DATE, SIGN AND MAIL THE ACCOMPANYING PROXY AND
PROMPTLY RETURN IT IN THE PRE-ADDRESSED ENVELOPE PROVIDED FOR THAT
PURPOSE. IF YOU ATTEND THE MEETING, YOU MAY WITHDRAW ANY PROXY GIVEN BY
YOU AND VOTE YOUR SHARES IN PERSON.
<PAGE> 3
EXCHANGE APPLICATIONS, INC.
89 SOUTH STREET
BOSTON, MA 02111
------------------------------
PROXY STATEMENT
------------------------------
GENERAL INFORMATION
PROXY SOLICITATION
This Proxy Statement is furnished to the holders of the common stock, $.001
par value per share ("Common Stock"), of Exchange Applications, Inc. (the
"Company") in connection with the solicitation of proxies on behalf of the Board
of Directors of the Company for use at the Annual Meeting of Stockholders to be
held on May 26, 1999 (the "Meeting"), or at any adjournment or postponement
thereof, pursuant to the accompanying Notice of 1999 Annual Meeting of
Stockholders. The purposes of the Meeting and the matters to be acted upon are
set forth in the accompanying Notice of 1999 Annual Meeting of Stockholders. The
Board of Directors knows of no other business that will come before the Meeting.
This Proxy Statement and proxies for use at the Meeting will be first
mailed to stockholders on or about April 15, 1999, and such proxies will be
solicited chiefly by mail, but additional solicitations may be made by telephone
or telegram by the officers or regular employees of the Company. The Company may
enlist the assistance of brokerage houses in soliciting proxies. All
solicitation expenses, including costs of preparing, assembling and mailing
proxy material, will be borne by the Company. In addition, the Company has
retained Corporate Investor Communications, Inc. to assist in the solicitation
of proxies for the Meeting and expects to pay approximately $1,700 in connection
with such proxy solicitation.
REVOCABILITY AND VOTING OF PROXY
A form of proxy for use at the Meeting and a return envelope for the proxy
are enclosed. Stockholders may revoke the authority granted by their execution
of proxies at any time before their effective exercise by filing with the
Secretary of the Company a written revocation or a duly executed proxy bearing a
later date or by voting in person at the Meeting. Shares represented by executed
and unrevoked proxies will be voted in accordance with the choice or
instructions specified thereon. If no specifications are given, the proxies
intend to vote the shares represented thereby to approve Proposal No. 1 as set
forth in the accompanying Notice of 1999 Annual Meeting of Stockholders and in
accordance with their best judgment on any other matters that may properly come
before the Meeting.
RECORD DATE AND VOTING RIGHTS
Only stockholders of record at the close of business on March 31, 1999, are
entitled to notice of, and to vote at the Meeting, or any adjournment or
postponement thereof. The Company had outstanding on March 31, 1999, 9,800,503
shares of Common Stock, each of which is entitled to one vote upon the matters
to be presented at the Meeting. The presence, in person or by proxy, of a
majority of the issued and outstanding shares of Common Stock will constitute a
quorum for the transaction of business at the Meeting. Votes withheld from any
nominee, abstentions and broker "non-votes" are counted as present or
represented for purposes of determining the presence or absence of a quorum for
the Meeting. A broker "non-vote" occurs when a nominee holding shares for a
beneficial owner does not vote on one or more proposals because the nominee does
not have discretionary voting power and has not received instructions from the
beneficial owner.
<PAGE> 4
Abstentions are included in the number of shares present or represented and
voting on each matter. Broker "non-votes" are not so included.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common stock as of March 31, 1999 of (i) each director or nominee
for director of the Company, (ii) executive officer of the Company named in the
Summary Compensation Table set forth under the caption "Executive Compensation"
below, (iii) all directors and executive officers as a group and (iv) each
person known to the Company to be the beneficial owner of more than 5% of the
issued and outstanding Common Stock. As of March 31, 1999, 9,800,503 shares of
Common Stock were outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENTAGE OF
BENEFICIAL OWNERSHIP OUTSTANDING SHARES OF
NAME AND ADDRESS** OF COMMON STOCK(1) COMMON STOCK OWNED(1)
------------------ -------------------- ---------------------
<S> <C> <C>
Entities affiliated with Insight Venture Associates,
LLC (2)........................................... 3,557,783 36.3%
122 East 42nd Street, Suite 2300
New York, NY 10168
Grant & Partners Limited Partnership (3)............ 575,000 5.9%
150 Federal Street
Boston, MA 02110
Andrew J. Frawley (4)............................... 1,007,337 10.1%
89 South Street
Boston, MA 02111
Ramanan Raghavendran (5)............................ 3,557,783 36.3%
122 East 42nd Street, Suite 2300
New York, NY 10168
Jeffrey Horing (6).................................. 3,557,783 36.3%
122 East 42nd Street, Suite 2300
New York, NY 10168
David G. McFarlane (7).............................. 164,459 1.7%
Stewart I.J. Vassie (8)............................. 28,876 *
Patrick A. McHugh (9)............................... 90,000 *
N. Wayne Townsend (10).............................. 73,625 *
Dean F. Goodermote (11)............................. 6,000 *
All directors and executive officers as a group
(twelve persons).................................. 5,134,355 49.9%
</TABLE>
- ---------------
* Indicates less than 1% of the outstanding shares of Common Stock.
** Addresses are given only for beneficial owners of more than 5% of the
outstanding shares of Common Stock.
(1) Beneficial ownership is calculated in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or become exercisable within 60 days following March
31, 1999 are deemed outstanding. However, such shares are not deemed
outstanding for the purpose of computing the
2
<PAGE> 5
percentage ownership of any other person. Unless otherwise indicated in the
footnotes to this table, the persons and entities named in the table have
sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Includes 1,209,054 shares held by Insight Venture Partners I, L.P., 520,779
shares held by Insight Capital Partners II, L.P. and 61,198 shares held by
Insight Capital Partners (Cayman) II, L.P., each of which is under common
control with Insight Venture Partners I, L.P. Also includes 1,766,752
shares held by Wexford Insight LLC. Pursuant to a consulting agreement
dated as of June 1, 1996, between Insight Venture Management Inc. and
Wexford Insight LLC, Insight Venture Partners I, L.P. may vote all of the
shares held by Wexford Insight LLC for certain matters. As a result,
Insight Venture Associates, LLC and its affiliates may be deemed to be the
beneficial owners of all of the shares held by Wexford Insight LLC. In
addition, Ramanan Raghavendran and Jeffrey Horing are the managing members
of Insight Venture Associates LLC, and as such they may be deemed to be
beneficial owners of all of the shares held by Insight Venture Partners I,
L.P., Insight Capital Partners II, L.P., Insight Capital Partners (Cayman)
II, L.P. and Wexford Insight LLC. The address of Wexford Insight LLC is 411
West Putnam Avenue, Suite 125, Greenwich, Connecticut 06830.
(3) Alan Grant is the President of Grant & Partners, Inc. and the general
partner of Grant & Partners Limited Partnership, and as such he may be
deemed to be a beneficial owner of all of the shares held by Grant &
Partners Limited Partnership.
(4) Includes 177,450 shares of Common Stock subject to options that are
exercisable within 60 days of March 31, 1999.
(5) Includes 1,209,054 shares held by Insight Venture Partners I, L.P., 520,779
shares held by Insight Capital Partners II, L.P., 61,198 shares held by
Insight Capital Partners (Cayman) II, L.P. and 1,766,752 shares held by
Wexford Insight LLC. Mr. Raghavendran is a managing member of Insight
Capital Partners and as such he may be deemed to be a beneficial owner of
all of the shares held by entities affiliated with Insight Capital
Partners. In addition, Insight Venture Partners I, L.P., Insight Capital
Partners II, L.P. and Insight Capital Partners (Cayman) II, L.P. may be
deemed to be beneficial owners of all of the shares held by Wexford Insight
LLC (see Note 2), and as a managing member of Insight Capital Partners, Mr.
Raghavendran may be deemed to be a beneficial owner of all of the shares
held by Wexford Insight LLC.
(6) Includes 1,209,054 shares held by Insight Venture Partners I, L.P., 520,779
shares held by Insight Capital Partners II, L.P., 61,198 shares held by
Insight Capital Partners (Cayman) II, L.P. and 1,766,752 shares held by
Wexford Insight LLC. Mr. Horing is a managing member of Insight Capital
Partners and as such he may be deemed to be a beneficial owner of all of
the shares held by entities affiliated with Insight Capital Partners. In
addition, Insight Venture Partners I, L.P., Insight Capital Partners II,
L.P. and Insight Capital Partners (Cayman) II, L.P. may be deemed to be
beneficial owners of all of the shares held by Wexford Insight LLC (see
Note 2), and as a managing member of Insight Capital Partners, Mr. Horing
may be deemed to be a beneficial owner of all of the shares held by Wexford
Insight LLC.
(7) Includes 132,500 shares of Common Stock subject to options that are
exercisable within 60 days of March 31, 1999.
(8) Includes 16,025 shares of Common Stock subject to options that are
exercisable within 60 days of March 31, 1999.
(9) Includes 22,500 shares of Common Stock subject to options that are
exercisable within 60 days of March 31, 1999.
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<PAGE> 6
(10) Includes 21,375 shares of Common Stock subject to options that are
exercisable within 60 days of March 31, 1999.
(11) Includes 5,000 shares of Common Stock subject to options that are
exercisable within 60 days of March 31, 1999.
PROPOSAL NO. 1
ELECTION OF DIRECTOR
NOMINEE FOR ELECTION AS DIRECTOR
The Board of Directors is divided into three classes, with the members of
the respective classes serving for staggered three-year terms. The first class
is comprised of Jeffrey Horing, the second class is comprised of Dean F.
Goodermote and the third class is comprised of Andrew J. Frawley and Ramanan
Raghavendran. All directors of a class hold their positions until the annual
meeting of stockholders at which their terms of office expire and until their
successors have been duly elected and qualified.
The term of office of Mr. Horing will expire at the Meeting. The Board of
Directors has nominated Mr. Horing (the "Nominee") for re-election as a director
of the Company to hold office until the annual meeting of stockholders to be
held in 2002 and until his successor has been duly elected and qualified. If the
Nominee shall be unable or unwilling to serve as a director, discretionary
authority is reserved to vote for a substitute. The Board of Directors has no
reason to believe that the Nominee will be unable or unwilling to serve.
The affirmative vote of a plurality of the shares of Common Stock present
at the Meeting, in person or by proxy, is required for the election of the
Nominee.
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 1 TO BE IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL THEREOF.
Unless authority to do so is withheld, the persons named in each proxy will vote
the shares represented thereby "FOR" the election of the Nominee.
INFORMATION AS TO DIRECTORS AND NOMINEE FOR DIRECTOR
The names of the directors of the Company (including the Nominee), their
ages, their position(s) with the Company, the year in which each first became a
director, the expiration of the term of office of each, the principal occupation
and employment of each over at least the last five years, and other
directorships, if any, of each are shown below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD DIRECTOR SINCE TERM EXPIRES
---- --- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Andrew J. Frawley..... 36 Chairman of the Board, 1996 2001
President, Chief Executive
Officer and Director
Ramanan
Raghavendran........ 31 Director 1997 2001
Jeffrey Horing........ 35 Director 1997 1999
Dean F. Goodermote.... 45 Director 1998 2000
</TABLE>
Mr. Frawley founded the Company in November 1994 and has served as its
President and Chief Executive Officer since its incorporation in November 1996.
Mr. Frawley was elected Chairman of the Board of Directors of the Company in
January 1998. From July 1993 until founding the Company, Mr. Frawley served as a
principal of Grant & Partners Limited Partnership, a management consulting
company. From
4
<PAGE> 7
May 1989 to July 1993, Mr. Frawley held various positions at MarketPulse, a
subsidiary of Praxis International Inc. and developer and provider of database
marketing products, including serving as Vice President of North American
Operations. Mr. Frawley has more than 10 years of experience in the high
technology industry.
Mr. Raghavendran has served as a Director of the Company since March 1997.
Mr. Raghavendran has served as a member of Insight Venture Associates, LLC and
Insight Venture Associates II, LLC, a private equity investment firm, since
January 1997. From 1992 to 1996, Mr. Raghavendran was employed at General
Atlantic Partners, an investment firm. Mr. Raghavendran also serves on the
boards of directors of several privately held companies.
Mr. Horing has served as a Director of the Company since March 1997. Mr.
Horing has served as a managing member of Insight Venture Associates, LLC and
Insight Venture Associates II, LLC, a private equity investment firm, since
January 1995. From 1990 to 1994, Mr. Horing was employed at E.M. Warburg Pincus,
an investment firm. Mr. Horing also serves on the boards of directors of several
privately held companies.
Mr. Goodermote has been a Director of the Company since January 1998. Mr.
Goodermote has been the President and Chief Executive Officer of Process
Software Corporation, a software development company, since August 1996. From
August 1986 to August 1996, Mr. Goodermote held various positions at Project
Software and Development, Inc., including President and Chief Operating Officer.
He was Chairman of the Board of Directors at Project Software and Development,
Inc. through February 1997. Mr. Goodermote is a director of First International
Bank, N.A., a wholly owned subsidiary of First International Bancorp, Inc., and
is also on the board of directors of several privately held software companies.
Mr. Goodermote has more than 15 years of experience in the high technology
industry.
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors has established an Audit Committee and a
Compensation Committee, but not a nominating committee. The Audit Committee met
one time during the 1998 fiscal year. The functions of the Audit Committee
include reviewing the scope and results of the annual audit of the Company's
consolidated financial statements provided by the Company's independent
accountants, the scope of other services provided by the Company's independent
accountants, proposed changes in the Company's financial and accounting
standards and principles, and the Company's policies and procedures with respect
to its internal accounting, auditing and financial controls, as well as other
matters which may come before the Audit Committee. The members of the Audit
Committee during the 1998 fiscal year were Mr. Raghavendran and Mr. Goodermote.
The Compensation Committee met one time during the 1998 fiscal year. The
Compensation Committee's principal functions are to review and approve salary
plans and bonus awards, as well as other forms of compensation. The members of
the Compensation Committee during the 1998 fiscal year were Mr. Horing and Mr.
Goodermote.
During the 1998 fiscal year, the Board of Directors held four meetings. No
director attended fewer than seventy-five percent (75%) of the Board meetings
and the meetings of Board committees on which he served. The Board of Directors
periodically acted by unanimous written consent in 1998, pursuant to Delaware
law.
COMPENSATION OF DIRECTORS
Mr. Frawley is a director who is a full-time officer of the Company; he
receives no additional compensation for serving on the Board of Directors or its
committees. No other director is a full-time officer of the Company. On January
30, 1998, the Company granted to Mr. Goodermote an option to purchase 20,000
shares of Common Stock at an exercise price of $1.35 per share, vesting over a
four-year period. The
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<PAGE> 8
Directors' Stock Option Plan, approved on July 15, 1998, provides for the grant
of stock options to non-employee directors. Directors who are employees of the
Company are not paid any fees or additional compensation for service as members
of the Board or any committee thereof. The Company may enter from time to time
into customary arrangements with respect to fees and other compensation
(including expense reimbursement) for directors who are not employees of the
Company or any of its subsidiaries.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth certain compensation information for the fiscal
years ended December 31, 1998 and 1997 with respect to the Company's Chief
Executive Officer and its other four most highly compensated executive officers
(the "Named Executive Officers") whose 1998 compensation exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL -------------------------
COMPENSATION(1) RESTRICTED SECURITIES
NAME AND ------------------- STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(2) OPTIONS(#) COMPENSATION
------------------ ---- ------ ----- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Andrew J. Frawley..................... 1998 $200,000 $100,000 $16,661,664 105,000 --
Chairman of the Board, 1997 $200,000 $100,000 $ 2,319,440 151,200 --
President and Chief
Executive Officer
David G. McFarlane.................... 1998 $139,375 $134,723 -- 30,000 --
Chief Operating Officer 1997(3) $ 78,757 $ 47,500 -- 300,000 --
Stewart I.J. Vassie................... 1998 $124,256 $152,633 -- 71,600 --
Vice President, 1997(4) $ 45,224 $ 79,305 -- 20,000 --
European Operations
Patrick A. McHugh..................... 1998 $125,417 $ 89,966 $ 736,088 10,000 --
Vice President, 1997 $110,000 $175,089 $ 81,975 80,000 --
Marketing
N. Wayne Townsend..................... 1998 $134,375 $ 77,762 $ 736,088 11,500 --
Vice President, 1997 $125,000 $ 85,000 $ 81,975 74,000 --
Financial Services Solutions
</TABLE>
- ---------------
(1) Excludes certain perquisites and other benefits the amount of which did not
exceed 10% of the employee's total salary and bonus.
(2) Represents the value of vested restricted stock at December 31, 1997 and
December 31, 1998 using a fair market value for the Common Stock of $3.28
and $19.63 per share, respectively.
(3) Mr. McFarlane joined the Company in June 1997 and his salary and bonus
reflect compensation earned in the latter half of 1997.
(4) Mr. Vassie joined the Company in July 1997 and his salary and bonus reflect
compensation earned in the latter half of 1997.
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<PAGE> 9
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of stock
options to the Named Executive Officers during the fiscal year ended December
31, 1998.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS GRANTED EMPLOYEES IN EXERCISE OR EXPIRATION PRESENT
NAME (SHARES) FISCAL 1998 BASE PRICE DATE VALUE(1)
- ---- --------------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Andrew J. Frawley........ 105,000 8.4% $ 3.85 3/31/03 $249,039
David G. McFarlane....... 30,000 2.4% $ 3.50 3/31/08 $ 64,686
Stewart I.J. Vassie...... 50,000 4.0% $10.00 11/10/08 $306,995
Stewart I.J. Vassie...... 20,000 1.6% $ 1.35 1/30/07 $ 16,634
Stewart I.J. Vassie...... 1,600 0.1% $ 3.50 3/31/08 $ 3,450
Patrick A. McHugh........ 10,000 0.8% $ 3.50 3/31/08 $ 21,562
N. Wayne Townsend........ 11,500 0.9% $ 3.50 3/31/08 $ 24,796
</TABLE>
- ---------------
(1) Based on the Black-Scholes pricing model suggested by the Securities and
Exchange Commission. The estimated values under that model are based on the
following assumptions: (i) expected volatility of 79%; (ii) expected life of
four years; and (iii) risk-free interest rate of 5.4%. No dividends on
common stock were assumed for purposes of this estimate.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the stock
options exercised during the fiscal year ended December 31, 1998, and the
unexercised stock options held at the end of such fiscal year by the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1998(1) DECEMBER 31, 1998(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew J. Frawley..... -- -- 177,450 78,750 $3,273,417 $1,242,675
David G. McFarlane.... 25,000 $246,250 107,500 197,500 $2,018,975 $3,663,050
Stewart I.J. Vassie... -- -- 16,025 75,575 $ 268,796 $ 979,712
Patrick A. McHugh..... 15,000 $147,750 22,500 52,500 $ 419,925 $ 975,075
N. Wayne Townsend..... 9,000 $ 88,650 21,375 55,125 $ 397,504 $1,021,691
</TABLE>
- ---------------
(1) "Exercisable" refers to those options which were both exercisable and
vested, while "Unexercisable" refers to those options which were unvested.
(2) Based on the difference between the aggregate exercise price and the closing
price of the Common Stock of $19.63 per share on the Nasdaq National Market
as of December 31, 1998.
EXECUTIVE EMPLOYMENT AGREEMENTS
Mr. Frawley, the Company's President and Chief Executive Officer, is
employed pursuant to an employment agreement with the Company, dated November
15, 1996 (the "Employment Agreement"). Under the terms of the Employment
Agreement, Mr. Frawley's annual base salary is set at $200,000, and he is
entitled to a performance bonus upon the Company's achievement of certain
profitability performance
7
<PAGE> 10
milestones and Mr. Frawley's corporate citizenship performance, as assessed by
the Board of Directors. Mr. Frawley received a base salary of $200,000 in 1998
and a performance bonus of $100,000. Mr. Frawley's employment with the Company
may be terminated by the Company at any time with or without cause, subject to
the requirements of applicable law. Upon termination of the Employment Agreement
and Mr. Frawley's employment by the Company, Mr. Frawley is not entitled to any
severance benefits other than as may be required by applicable law.
None of the Company's other executive officers has entered into an
employment agreement with the Company, and all serve at the discretion of the
Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Audit Committee or the Compensation Committee is
a past or current officer or employee of the Company.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE OFFICER COMPENSATION
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Company's compensation philosophy is that executive officer
compensation should reflect the value created and protected for stockholders,
while furthering the Company's short- and long-term strategic goals and values
by aligning compensation with business objectives and individual performance.
Short- and long-term compensation should provide an incentive for the
achievement of strategic goals, be tied to the Company's achievement of
quarterly performance targets and attract and retain qualified executive
officers essential to the long-term success of the Company. Accordingly, the
Company's executive officer compensation package consists of three primary
components: base salary, quarterly and annual cash bonuses and grants of stock
options, including stock options whose vesting may be accelerated at the end of
the year based on the achievement of well-defined fiscal and professional
objectives at the beginning of such year.
In evaluating its executive officers' performance, the Company generally
follows the process outlined below:
- Prior to or shortly after the beginning of each fiscal year, the Company
sets goals and objectives that are reviewed with, and ultimately
approved by, the full Board of Directors. The Chief Executive Officer
reports to the Board on the Company's progress toward the achievement of
these goals and objectives throughout the year at Board meetings and at
other times as necessary.
- The Chief Executive Officer submits for the Compensation Committee's
consideration at the end of the fiscal year the amount of proposed
compensation (following fiscal year base salary, current fiscal year
cash bonus and stock option awards) for himself and for the Company's
other executive officers. The executive officers' fiscal year cash bonus
is payable upon the achievement of well-defined objectives established
at the beginning of each year. In addition, some executive officers have
been granted performance-based stock options whose vesting may be
accelerated based on the achievement of fiscal and professional
objectives established at the beginning of each fiscal year. The
following fiscal year base salary, as well as current year stock option
awards, are based on more subjective factors, including the Board of
Directors' evaluation of the Company's success in meeting its strategic
objectives during the most recent fiscal year and the Chief Executive
Officer's subjective evaluation of each executive officer's individual
performance relative to a set of pre-determined individual performance
objectives.
8
<PAGE> 11
- The Compensation Committee acts upon the recommendations made with
respect to the executive officers after weighing the Board of Directors'
evaluation of the Company's overall achievements for the year, the Chief
Executive Officer's discussion of each executive officer's individual
performance for the year and each executive officer's current level of
compensation. The Compensation Committee performs a comprehensive review
of the compensation paid to the Company's executive officers. That
review, combined with the Compensation Committee members' general
industry experience, enables the Compensation Committee to assess
whether proposed compensation levels are in keeping with industry norms.
- The Compensation Committee applies the same criteria in evaluating the
Chief Executive Officer's cash compensation as that applied to the other
executive officers of the Company as previously explained.
COMPENSATION FOR FISCAL 1998
Chief Executive Officer Compensation
In January 1998, the Compensation Committee set Mr. Frawley's 1998 annual
base salary at the same $200,000 level paid in 1997. In addition, the
Compensation Committee recommended, and the Board of Directors approved, a grant
of an option to purchase 105,000 shares of Common Stock. The Compensation
Committee felt that 1998 would be a critical year for the Company, with many
operational milestones targeted for that year. These items included the material
expansion of London-based European operations, the opening of an Australian
office to service the Pacific Rim, the achievement, for the first time in
Company history, of quarterly profitability, and the proposed completion of an
initial public stock offering. It was the Compensation Committee's belief that
Mr. Frawley's 1998 base salary, as well as the 1998 stock option award, was
commensurate for his performance.
In January 1999, the Compensation Committee determined that Mr. Frawley
achieved the major objectives of the previous year and awarded Mr. Frawley a
bonus accordingly. The actual bonus granted to Mr. Frawley for fiscal 1998 was
$100,000, which was paid based on the achievement of quarterly objectives
throughout the year. In addition, the Compensation Committee set Mr. Frawley's
1999 annual base salary at $275,000, representing a level commensurate with
chief executive officers in other public companies who are of similar size and
growth characteristic.
Report on Executive Compensation
In January 1998, Mr. Frawley recommended, and the Compensation Committee
accepted, base salary increases for the executive staff of up to 12%. The
increases were determined after reviewing performance against goals and
objectives set for the year and also against salaries of similar positions in
comparable companies.
The executive officers' stock options awarded during the year to executive
officers who were employed as of January 1, 1998, other than Mr. Frawley,
amounted to 69,500 shares of common stock. In addition, the Compensation
Committee approved the vesting of options to purchase 55,250 shares of Common
Stock for the executive staff, granted as part of performance-based stock
options whose vesting is tied to the achievement of personal and Company
objectives.
Conclusion
The Company does not believe that section 162(m) of the Internal Revenue
Code, which disallows a tax deduction for certain compensation in excess of $1
million, will generally have an effect on the Company.
9
<PAGE> 12
The Compensation Committee believes that the total 1998-related
compensation of the Chief Executive Officer and each of the executive officers,
as described above, is fair and is within the range of compensation for
executive officers in similar positions at comparable companies.
Compensation Committee
Jeffrey Horing and
Dean F. Goodermote
CORPORATE PERFORMANCE GRAPH
The following graph compares the performance of the Company's Common Stock
to the Nasdaq Stock Market Index and to a peer group index since December 8,
1998 (the effective date of the Company's initial public offering of the Common
Stock). The peer group is comprised of Clarify Inc., HNC Software Inc., Siebel
Systems, Inc. and the Vantive Corporation. The comparison assumes $100 was
invested on December 9, 1998 in the Common Stock and in each of the foregoing
indices and assumes reinvestment of dividends. The stock performance on the
graph below is not necessarily indicative of future stock price performance.
<TABLE>
<CAPTION>
EXCHANGE NASDAQ MARKET
APPLICATIONS, INC. INDEX PEER GROUP INDEX
------------------ ------------- ----------------
<S> <C> <C> <C>
12/9/98 100.00 100.00 100.00
12/31/98 129.22 113.16 120.57
</TABLE>
ASSUMES $100 INVESTED ON DEC. 09, 1998
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1998
10
<PAGE> 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As evidenced by a Promissory Note (the "Note"), dated as of December 4,
1997, in the original principal amount of $124,997.73, the Company loaned to Mr.
Frawley the total amount of the purchase price for 38,249 shares of Series B
Convertible Preferred Stock purchased by Mr. Frawley under the Stock Purchase
and Waiver Agreement, dated as of December 4, 1997. The Note bears interest at
8% per annum and is secured by 38,249 shares of Common Stock owned by Mr.
Frawley. The largest aggregate amount of the indebtedness outstanding at any
time during 1998 was $135,747.64. As of April 2, 1999, the outstanding balance
of the indebtedness under the Note was $138,247.60.
The Company adopted a policy in 1998 that all future transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates, will be approved by a majority of the Board,
including a majority of the independent and disinterested outside directors on
the Board, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
From time to time, the Company has retained the services of the law firm of
Bingham Dana LLP. The Company's legal fees to Bingham Dana LLP in 1998 exceeded
$300,000. Neil W. Townsend, a partner at Bingham Dana LLP, is the brother of N.
Wayne Townsend, Vice President, Financial Services Solutions.
As part of the settlement of his January 1998 divorce proceeding, John G.
O'Brien, Vice President, Chief Financial Officer, Treasurer and Secretary of the
Company, voluntarily filed a bankruptcy petition under Chapter 13 of the federal
bankruptcy code. The Company does not believe that the filing of such petition
or the related circumstances reflects on Mr. O'Brien's ability or integrity as
an executive officer of the Company.
For a description of certain transactions and certain employment and other
arrangements between the Company and certain of its directors and executive
officers, see "Compensation of Directors," "Executive Compensation" and
"Executive Employment Agreements."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
Company's directors, its executive (and certain other) officers, and any persons
holding more than 10 percent of the Common Stock are required to report their
ownership of the Common Stock and any changes in that ownership to the
Securities and Exchange Commission (the "SEC"). Specific due dates for these
reports have been established and the Company is required to report in this
proxy statement any failure to file by these dates during 1998. A Form 3 Initial
Statement of Beneficial Ownership of Securities was not filed on a timely basis
with the SEC by the following individuals and entities: David L. Fitzgerald,
Andrew J. Frawley, F. Daniel Haley, David G. McFarlane, David D. McGonagle,
Patrick A. McHugh, John G. O'Brien, N. Wayne Townsend, Stewart I.J. Vassie, Dean
F. Goodermote, Ramanan Raghavendran, Jeffrey Horing, Wexford Insight LLC and the
entities affiliated with Insight Venture Associates.
STOCKHOLDER PROPOSALS
All stockholder proposals that are intended to be presented at the 2000
Annual Meeting of Stockholders of the Company must be received by the Company
not later than November 15, 1999, for inclusion in the Board of Directors' proxy
statement and form of proxy relating to such annual meeting.
11
<PAGE> 14
OTHER BUSINESS
Representatives of Arthur Andersen LLP, the Company's independent public
accountants, are expected to be present at the Meeting and will have the
opportunity to make a statement if they desire to do so and to respond to
appropriate questions.
The Board of Directors knows of no other business to be acted upon at the
Meeting. However, if any other business properly comes before the Meeting, it is
the intention of the persons named in the enclosed proxy to vote on such matters
in accordance with their judgment.
The prompt return of your proxy will be appreciated and helpful in
obtaining the necessary vote. Therefore, whether or not you expect to attend the
Meeting, please sign the proxy and return it in the enclosed envelope.
ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, which includes financial statements, has been filed with the SEC.
Copies of the Annual Report on Form 10-K may be obtained by stockholders of the
Company without charge upon written request to the Secretary of the Company at
the address set forth below.
BY ORDER OF THE BOARD OF DIRECTORS
JOHN G. O'BRIEN
Secretary
Exchange Applications, Inc.
89 South Street
Boston, MA 02111
April 15, 1999
12
<PAGE> 15
PROXY
EXCHANGE APPLICATIONS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
ANNUAL MEETING OF STOCKHOLDERS ON MAY 26, 1999
The undersigned hereby appoints Andrew J. Frawley and John G. O'Brien and
each of them proxies, each with full power of substitution, to vote at the
Annual Meeting of Stockholders of EXCHANGE APPLICATIONS, INC. to be held on May
26, 1999 (including any adjournment or postponements thereof), with all the
powers the undersigned would possess if personally present, as specified on the
ballot on the reverse side on the matters listed on the reverse side and, in
accordance with their discretion, on any other business that may come before the
meeting, and revokes all proxies previously given by the undersigned with
respect to the shares covered hereby.
1: ELECTION OF ONE CLASS I DIRECTOR:
Nominee: Jeffrey Horing
-------
FOR [ ] [ ] WITHHELD
NOMINEE FROM
NOMINEE
This proxy when properly executed will be voted in the manner directed herein by
the stockholder. If no contrary specification is made, this proxy will be voted
FOR the election of the nominee of the Board of Directors and upon such other
business as may properly come before the meeting in the appointed proxies'
discretion.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please date, sign as name appears below, and return this proxy in the enclosed
envelope, whether or not you expect to attend the meeting. You may nevertheless
vote in person if you do attend.
(Executors, administrators, trustees, custodians, etc., should indicate capacity
in which signing. When stock is held in the name of more than one person, each
person should sign the proxy.)
Signature: _____________________________________ Date: _______________________
Signature: _____________________________________ Date: _______________________
