<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
</TABLE>
NEON SYSTEMS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Not Applicable
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] 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:
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<PAGE> 2
[NEON LOGO]
14100 SOUTHWEST FREEWAY, SUITE 500
SUGAR LAND, TEXAS 77478
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 22, 2000
---------------------
Dear Stockholders:
On Tuesday, August 22, 2000, NEON Systems, Inc. will hold its annual
meeting of stockholders at Sugar Creek Country Club, 420 Sugar Creek Boulevard,
Sugar Land, Texas, 77478. The meeting will begin at 9:00 a.m., Sugar Land, Texas
time.
Only stockholders who own stock at the close of business on July 14, 2000
can vote at this meeting. At the meeting we will:
1. Elect two Class I Directors to the Board of Directors;
2. Ratify the selection of KPMG LLP as independent auditors for the
fiscal year ending March 31, 2001; and
3. Transact any other business that is properly brought before the
meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSALS
OUTLINED IN THIS PROXY STATEMENT.
IMPORTANT NOTICE:
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD OR VOTE VIA THE INTERNET OR TELEPHONE FOLLOWING THE INSTRUCTIONS ON THE
PROXY CARD, OR YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE ANNUAL
MEETING. ANY STOCKHOLDER ATTENDING THE ANNUAL MEETING MAY VOTE IN PERSON EVEN IF
HE OR SHE HAS RETURNED A PROXY. TO ASSURE YOUR REPRESENTATION AT THE MEETING,
HOWEVER, YOU ARE URGED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE
OR UTILIZE THE CONVENIENT OPTION OF VOTING BY TELEPHONE OR VIA THE INTERNET.
By Order of the Board of Directors
/s/ JOHN S. REILAND
JOHN S. REILAND,
Secretary
July 21, 2000
<PAGE> 3
NEON SYSTEMS, INC.
---------------------
PROXY STATEMENT
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers....................................... 1
Proposal One -- Election of Directors....................... 3
Nominees for Director....................................... 3
Directors Continuing in Office.............................. 4
Statement of Corporate Governance........................... 5
Directors' Compensation..................................... 5
Executive Officers.......................................... 6
Executive Compensation and Other Matters.................... 7
Executive Compensation.................................... 7
Summary Compensation Table................................ 7
Option Grants in Last Fiscal Year......................... 7
Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................. 8
Compensation Committee Report............................... 9
Compensation Committee Interlocks and Insider
Participation............................................. 10
Security Ownership of Principal Stockholders, Directors and
Executive Officers........................................ 10
Certain Transactions........................................ 12
Performance Graph........................................... 13
Section 16(a) Beneficial Ownership Reporting Compliance..... 14
Proposal Two -- Ratification of Independent Auditors........ 14
Other Matters............................................... 14
Annual Report on Form 10-K.................................. 14
</TABLE>
i
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QUESTIONS AND ANSWERS
<TABLE>
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1. Q: WHY AM I RECEIVING THIS PROXY STATEMENT?
A: The Board of Directors of NEON Systems, Inc., a Delaware
corporation, is furnishing this proxy statement to
stockholders of NEON as of July 14, 2000 in connection with
the solicitation of proxies to be voted at NEON's annual
meeting of stockholders, or at any adjournment of the
meeting, for the purposes set forth in the accompanying
Notice of Annual Meeting of Stockholders. The meeting will
be held at the Sugar Creek Country Club, 420 Sugar Creek
Boulevard, Sugar Land, Texas, 77478, on Tuesday, August 22,
2000 at 9:00 a.m., Sugar Land, Texas time.
2. Q: WHO IS SOLICITING MY VOTE?
A: This proxy statement is furnished in connection with the
solicitation of your vote by the Board of Directors of NEON.
NEON will bear the cost of solicitation of proxies. In
addition to the use of the mails, proxies may also be
solicited by personal interview, facsimile transmission and
telephone by directors, officers, employees and agents of
NEON, none of whom will receive additional compensation.
NEON will also supply brokers, nominees or other custodians
with the number of proxy forms, proxy statements and annual
reports they may require for forwarding to beneficial owners
and NEON will reimburse these persons for their expenses.
3. Q: WHEN WAS THIS PROXY STATEMENT MAILED TO STOCKHOLDERS?
A: This proxy statement was first mailed to stockholders on or
about July 21, 2000.
4. Q: WHAT MAY I VOTE ON?
A: (1) The election of two Class I directors to serve on the
Board of Directors;
(2) The ratification of KPMG LLP as independent auditors for
the fiscal year ending March 31, 2001; and
(3) At the discretion of the persons named in the enclosed
form of proxy, on any other matter that may properly come
before the meeting or any adjournment thereof.
5. Q: HOW DOES THE BOARD RECOMMEND I VOTE ON THE PROPOSALS?
A: (1) The Board recommends a vote FOR each of the nominees to
serve on the Board of Directors.
(2) The Board recommends a vote FOR the ratification of the
independent auditors.
6. Q: WHO IS ENTITLED TO VOTE?
A: Stockholders of record at the close of business on July 14,
2000 (the record date) may vote at this meeting.
7. Q: HOW DO I VOTE?
A: Stockholders entitled to vote may vote by any one of the
following methods:
- By signing, dating and completing the enclosed proxy card
and returning it in the enclosed postage-prepaid envelope by
mail;
- By telephone using the toll-free telephone number and
following the instructions for voting by telephone set forth
on your proxy card;
- Via the Internet following the instructions for Internet
voting set forth on your proxy card; or
- In person, at the meeting.
If you hold your shares through a bank, broker or other
nominee, they will give you separate instructions for voting
your shares.
</TABLE>
1
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<TABLE>
<C> <C> <S>
8. Q: HOW CAN I REVOKE OR CHANGE MY VOTE?
A: If you have already voted and wish to change or revoke your
proxy, you may do so at any time prior to the meeting by any
one of the following methods:
(1) Notifying in writing John Reiland, Secretary, NEON
Systems, Inc., 14100 Southwest Freeway, Suite 500, Sugar
Land, Texas, 77478;
(2) Voting in person at the meeting;
(3) Returning a later-dated proxy card that is received
prior to the meeting; or
(4) Subsequently voting by telephone or via the Internet
following the instructions found on your proxy card.
9. Q: WHO WILL COUNT THE VOTES?
A: A representative of our transfer agent, ChaseMellon
Shareholder Services, will count the votes and act as
inspector of the election.
10. Q: IS MY VOTE CONFIDENTIAL?
A: Proxy cards, ballots and voting tabulations of Internet and
telephone votes that identify individual stockholders are
mailed or returned directly to ChaseMellon and handled in a
manner that protects your voting privacy. Your vote will not
be disclosed except: (1) as needed to permit ChaseMellon to
tabulate and certify the vote or (2) as required by law.
Your identity will be kept confidential unless you ask that
your name be disclosed.
11. Q: HOW MANY VOTES DO I HAVE?
A: As of the close of business on the record date of July 14,
2000, 9,434,969 shares of common stock were issued and
outstanding. Every stockholder is entitled to one (1) vote
for each share of common stock held.
12. Q: WHAT IS A "QUORUM" AND WHAT VOTE IS REQUIRED TO PASS
PROPOSALS?
A: A "quorum" is a majority of the outstanding shares. The
person with the right to vote the shares may be present at
the meeting or represented by proxy. There must be a quorum
for the meeting to be held. Abstentions and broker non-votes
are each included in the determination of the number of
shares present at the meeting for purposes of determining a
quorum. Abstentions and broker non-votes have no effect on
determinations of plurality, except to the extent that they
affect the total votes received by any particular candidate.
The affirmative vote of a plurality of the shares of
outstanding NEON common stock represented at the meeting and
entitled to vote is required for the election of directors.
The affirmative vote of a majority of the voting power
represented at the meeting and entitled to vote is required
on all other matters. Cumulative voting is not permitted in
the election of directors.
13. Q: WHO CAN ATTEND THE ANNUAL MEETING AND HOW DO I GET ON THE
GUEST LIST?
A: All stockholders as of the close of business on the record
date of July 14, 2000 can attend. To be included on the
guest list, you may check the box on your proxy card. If
your shares are held by a broker and you would like to
attend, please write to John Reiland, Secretary, NEON
Systems, Inc., 14100 Southwest Freeway, Suite 500, Sugar
Land, Texas, 77478. Include a copy of your brokerage account
statement or omnibus proxy (which you can get from your
broker), and we will place your name on the guest list.
14. Q: HOW WILL VOTING ON ANY OTHER BUSINESS BE CONDUCTED?
A: We do not know of any business to be considered at NEON's
2000 annual meeting other than the proposals described in
this proxy statement. If any other business is presented at
the annual meeting, your signed proxy card gives
discretionary authority to Joe Backer or John Reiland to
vote on such matters.
</TABLE>
2
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<TABLE>
<C> <C> <S>
15. Q: WHEN ARE THE STOCKHOLDER PROPOSALS FOR THE 2001 ANNUAL
MEETING DUE?
A: All stockholder proposals to be considered for inclusion in
next year's proxy statement must be submitted in writing
prior to March 23, 2001 to John Reiland, Secretary, NEON
Systems, Inc., 14100 Southwest Freeway, Suite 500, Sugar
Land, Texas, 77478. Additionally, the proxy for the annual
meeting may confer discretionary authority to NEON to vote
on any matter at its 2001 annual meeting of stockholders if
NEON does not have notice of the matter prior to June 6,
2001.
</TABLE>
PROPOSAL ONE
ELECTION OF DIRECTORS
We currently have eight directors holding office. In January 2000, our
Board of Directors created a new directorship and named George H. Ellis as a
Class II Director. The directors are divided into three classes with staggered
terms as follows:
- Class I Directors, Joe Backer and Charles E. Noell III, whose terms will
expire at the annual meeting to be held on August 22, 2000.
- Class II Directors, Richard Holcomb, George H. Ellis and Norris van den
Berg, whose terms will expire at the annual meeting to be held in 2001.
- Class III Directors, John J. Moores, John S. Reiland and Peter Schaeffer,
whose terms will expire at the annual meeting to be held in 2002.
Vacancies on the Board of Directors or newly created directorships will be
filled by a vote of the majority of the directors then in office and any
director so chosen will hold office until the next election of the class for
which that director was chosen.
At the annual meeting of stockholders to be held on August 22, 2000, two
directors will be elected as Class I Directors for terms expiring at the annual
meeting to be held in 2003 and until their respective successors are elected and
qualified. Nominees for election this year are: Joe Backer and Charles E. Noell
III. Shares represented by returned and executed proxies will be voted, unless
otherwise specified, in favor of the two nominees for the Board of Directors
named below. If any director is unable to stand for reelection, the Board may
reduce the Board's size or designate a substitute. If a substitute is
designated, proxies voting on the original Director candidate will be cast for
the substituted candidate. You may withhold authority to vote for any nominee by
marking the proxy as indicated for that purpose on the proxy card.
NOMINEES FOR DIRECTOR
Joe Backer, age 62, has served as our President and Chief Executive Officer
and as a member of NEON's Board of Directors since November 1995. From December
1993 to October 1995, Mr. Backer was a private investor. Mr. Backer held the
position of Senior Vice President of BMC Software, Inc. from November 1989 to
November 1993. Mr. Backer also serves as President, Chief Executive Officer and
a member of the Board of Directors of Peregrine/Bridge Transfer Corporation and
Skunkware, Inc. Mr. Backer holds a B.S. in Electrical Engineering from Purdue
University.
Charles E. Noell III, age 48, has served as a director since May 1993.
Since January 1992, Mr. Noell has served as President and Chief Executive
Officer of JMI Services, Inc., and as a General Partner of JMI Partners, L.P.,
which is the General Partner of JMI Equity Fund, L.P. Mr. Noell is a director of
Peregrine Systems, Inc. and also serves as a director of Transaction Systems
Architects, Inc., an electronic funds transfer company. Mr. Noell also serves on
the board of numerous privately held companies, including Peregrine/Bridge
Transfer Corporation and Skunkware, Inc. Mr. Noell holds a B.A. in History from
the University of North Carolina at Chapel Hill and an M.B.A. from Harvard
University.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THESE NOMINEES.
3
<PAGE> 7
DIRECTORS CONTINUING IN OFFICE
John J. Moores, age 56, has served as Chairman of our Board of Directors
since May 1993. Since December 1994, Mr. Moores has served as owner and Chairman
of the Board of the San Diego Padres Baseball Club, L.P. and since September
1991 as Chairman of the Board of JMI Services, Inc., a private investment
company. In 1980, Mr. Moores founded BMC Software, Inc., a vendor of system
software utilities, and served as its President and Chief Executive Officer
until 1986 and as its Chairman of the Board until 1992. Mr. Moores also serves
as Chairman of the Board of Peregrine Systems, Inc., an infrastructure
management software company, and numerous privately held companies, including
Skunkware, Inc. Mr. Moores serves as a director of BindView Development
Corporation, a systems management software company. Mr. Moores holds a B.S. in
Economics and a J.D. from the University of Houston.
Peter Schaeffer, age 44, is NEON's founder and has been a member of our
Board of Directors and of our predecessor-in-interest, NEON Systems, Inc., an
Illinois corporation, since July 1991. Since November 1995, Mr. Schaeffer has
served as our Chief Technology Officer. From July 1991 to October 1995, Mr.
Schaeffer served as our President and Chief Executive Officer. From June 1990 to
June 1991, Mr. Schaeffer was employed with Goal Systems International, Inc., a
privately held software development company. In 1986, Mr. Schaeffer co-founded
MVS Software, a privately held software development company, and was Vice
President-Technology of MVS Software until April 1990. Mr. Schaeffer holds a
B.S. in Organic Chemistry from the University of Chicago.
John S. Reiland, age 50, has served as our Chief Financial Officer since
July 1996, as our Secretary since July 14, 2000 and as a member of our Board of
Directors since November 1998. Mr. Reiland also serves as Chief Financial
Officer of Peregrine/Bridge Transfer Corporation. From June 1994 to April 1996,
Mr. Reiland served as Senior Vice President, Chief Financial Officer and a
director of Pointe Communications Corporation, an international
telecommunication and Internet service provider. From May 1991 to May 1994, Mr.
Reiland served as Vice President of Motor Columbus AG, an international
long-distance telephone service reseller, and also served as Chief Executive
Officer of its subsidiary, WorldCom International, Inc. Mr. Reiland is a
Certified Public Accountant and holds a B.B.A. in Accounting from the University
of Houston.
Norris van den Berg, age 61, has served as a director since May 1993. Mr.
van den Berg has served as a General Partner of JMI Partners, L.P., which is the
General Partner of JMI Equity Fund, L.P., since July 1991. Mr. van den Berg is
also a director of Peregrine Systems, Inc., Peregrine/Bridge Transfer
Corporation and Skunkware, Inc. Mr. van den Berg holds a B.A. in Philosophy and
Mathematics from the University of Maryland.
George H. Ellis, age 51, has served as a director since January 2000. Mr.
Ellis is currently a Managing Director of Chaparral Ventures. Mr. Ellis was a
founder of Sterling Commerce and served as its Executive Vice President and
Chief Executive Officer from November 1995 through June 1996. Mr. Ellis served
as Chief Financial Officer of Sterling Software, Inc. from 1985 through June
1996. Mr. Ellis also has held financial and operations management roles at Texas
Instruments, Inmos Corporation and other technology-related companies. Mr. Ellis
is an officer of The Communities Foundation of Texas and a member of the Board
of Advisors to the law school at Southern Methodist University. Mr. Ellis
currently serves on the Board of Directors of AremisSoft and Future Three. Mr.
Ellis is a Certified Public Accountant and an attorney in the State of Texas.
Mr. Ellis holds a B.S. in Accounting from Texas Tech University and a J.D. from
Southern Methodist University.
Richard Holcomb, age 38, has served as a director since May 1993. Mr. Holcomb is
a co-founder of haht Software, a privately held software company, and has served
as its Chairman of the Board since 1995. Mr. Holcomb co-founded Q+E Software, a
privately held supplier of client/server database access technology, and from
1986 through 1994 served as its President. Mr. Holcomb serves as an appointed
member of the North Carolina Information Resources Management Commission and on
the board of the North Carolina Electronics and Technologies Association. Mr.
Holcomb holds a B.A. in Computer Science from the University of South Carolina
and an M.S. in Computer Science from North Carolina State University.
4
<PAGE> 8
STATEMENT OF CORPORATE GOVERNANCE
Our Board of Directors held a total of six meetings in fiscal 2000. All
directors attended at least seventy-five percent (75%) of all of the meetings
held by the Board of Directors and meetings held by committees of the Board of
Directors on which that director served.
Our Board of Directors considers all major decisions. The Board has
established two standing committees, an Audit Committee and a Compensation
Committee, so that certain areas can be addressed in more depth than may be
possible at a full Board of Directors meeting. The Board does not have a
nominating committee.
Audit Committee. The Audit Committee makes recommendations to our Board of
Directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other accounting related services and reviews and
evaluates our internal control functions. On June 12, 2000, the Board of
Directors adopted an audit committee charter and is in compliance with the new
Nasdaq audit committee structure and membership requirements. The audit
committee charter is included with this proxy statement as Exhibit A. Members of
the Audit Committee include George H. Ellis, Charles E. Noell III and Norris van
den Berg. The Audit Committee met and/or took action one time during fiscal
2000.
Compensation Committee. The Compensation Committee makes recommendations to
our Board of Directors concerning salaries and incentive compensation for our
officers and employees and administers our 1993 Stock Option Plan, the Stock
Option Plan for Non-Employee Directors and the 1999 Long-Term Incentive Plan.
Members of the Compensation Committee include John J. Moores, Charles E. Noell
III, Norris van den Berg and Richard Holcomb. The Compensation Committee met one
time during fiscal 2000.
DIRECTORS' COMPENSATION
During fiscal 2000, our outside directors were not compensated for serving
as members of our Board of Directors and we expect that this policy will not
change in fiscal 2001, except that George H. Ellis received an option for 7,500
shares of our common stock and outside directors subsequently joining the Board
of Directors will receive option grants under the Stock Option Plan for
Non-Employee Directors as described below.
We have adopted the Stock Option Plan for Non-Employee Directors for
compensation of our outside directors and have reserved 100,000 shares of our
common stock for issuance thereunder. George H. Ellis received an option for
7,500 shares of our common stock in connection with his appointment to our Board
in January 2000, and other outside directors who join our Board of Directors
will receive options to purchase 7,500 shares of NEON common stock exercisable
at the fair market value of the common stock at the close of business on the
date immediately preceding the date of grant (outside directors serving
currently on our Board of Directors will be eligible for such grants upon their
re-election to the Board of Directors). These options will vest equally in
33 1/3% increments on the date of each annual meeting during the three-year
period following the date of grant. All stock options granted pursuant to the
Stock Option Plan for Non-Employee Directors will be nonqualified stock options
and will remain exercisable for a period of ten years from the date of grant or,
if sooner, six months after the option holder ceases to be a director of NEON.
In the event of a change in control of NEON or certain other significant events,
all options outstanding under the Stock Option Plan for Non-Employee Directors
shall terminate, provided that immediately before the effective date of such
transaction each holder of an outstanding option under the Stock Option Plan for
Non-Employee Directors shall be entitled to purchase the total number of shares
of common stock that such option holder would have been entitled to purchase
during the entire remaining term of the option.
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EXECUTIVE OFFICERS
Our executive officers are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
John J. Moores................................... Chairman of the Board of Directors
Joe Backer....................................... President, Chief Executive Officer and Director
Peter Schaeffer.................................. Chief Technology Officer and Director
John S. Reiland.................................. Chief Financial Officer, Secretary and Director
Don Pate......................................... Vice President-Worldwide Sales
Jonathan J. Reed................................. Vice President of Marketing
Wayne E. Webb, Jr. .............................. Vice President and General Counsel
</TABLE>
Information concerning the business experience of members of our Board of
Directors is provided under the caption "Nominees for Directors" and "Directors
Continuing in Office" above. Set forth below is information concerning the age
and business experience of our other executive officers.
Don Pate, age 45, has served as our Vice President-Worldwide Sales since
March 1998 and served as our Vice President of Sales from November 1996 to March
1998. From October 1989 to November 1996, Mr. Pate served in several sales and
sales management positions with BMC Software, Inc., including Manager of
International Sales, Sales Operations Manager and Regional Manager. Prior to
that, Mr. Pate was a salesman for the IBM Corporation. Mr. Pate holds a B.S. in
Economics and Psychology from Houston Baptist University.
Jonathan J. Reed, age 44, has served as our Vice President of Marketing
since January 1999. From January 1998 through December 1998, Mr. Reed served as
our Director of Marketing. From July 1996 to December 1997, Mr. Reed served as
our Principal Consultant and Technical Marketing Manager. From April 1995 until
July 1996, Mr. Reed served as Alliance Manager for Sybase, Inc., a distributed
computing company. From March 1991 to April 1995, Mr. Reed was employed by BMC
Software, Inc. where he served as a Commercial Analyst. Mr. Reed holds a B.S. in
Biology from the University of Houston and an M.S. in Management and Computer
Science from Houston Baptist University.
Wayne E. Webb, Jr., age 49, has served as our Vice President and General
Counsel since June 1998. Mr. Webb is also Vice President and General Counsel of
Peregrine/Bridge Transfer Corporation. From August 1989 through May 1998, Mr.
Webb was a partner in the law firm of Fulbright & Jaworski LLP. Mr. Webb holds a
B.S. in Electrical Engineering from Rice University and a J.D. from the
University of Texas at Austin.
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EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth for the periods indicated the compensation
earned by our Chief Executive Officer and each of our four other most highly
compensated executive officers (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM AWARDS
ANNUAL COMPENSATION ----------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- -------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joe Backer
President and Chief 2000 $130,000 $165,971 -- 300,000 --
Executive Officer................ 1999 $130,000 $144,087 -- -- --
Peter Schaeffer 2000 $100,000 $47,078 -- 25,000 --
Chief Technology Officer......... 1999 $100,000 $35,256 -- -- --
John S. Reiland 2000 $110,000 $35,309 -- -- --
Chief Financial Officer.......... 1999 $110,000 $27,878 -- 30,000 --
Don Pate 2000 $100,000 $120,701 -- -- --
Vice President -- Worldwide
Sales.......................... 1999 $100,000 $160,686 -- 60,000 --
Jonathan J. Reed 2000 $115,000 $34,206 -- -- --
Vice President of Marketing...... 1999 $115,000 $14,454 -- 58,450 --
</TABLE>
---------------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Executive Officers
that are available generally to all of our salaried employees, and may not
include certain perquisites and other personal benefits received by the
Named Executive Officers that do not exceed the lesser of $50,000 or ten
percent (10%) of any such officer's salary and bonus disclosed in the table.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended March 31, 2000 to the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
NUMBER OF SECURITIES % OF TOTAL OPTION TERM(7)
UNDERLYING OPTIONS OPTIONS GRANTED EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED IN FISCAL 2000(4) PER SHARE DATE(6) 5% 10%
---- -------------------- ----------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joe Backer(1)............ 200,000 18.8% $16.75(5) 10/22/09 $2,106,797 $5,339,037
Joe Backer(2)............ 100,000 9.4% $16.75(5) 10/22/09 $1,053,398 $2,669,519
Peter Schaeffer(3)....... 25,000 2.4% $30.00(5) 01/01/10 $ 471,671 $1,195,307
John S. Reiland.......... -- -- -- -- -- --
Don Pate................. -- -- -- -- -- --
Jonathan J. Reed......... -- -- -- -- -- --
</TABLE>
---------------
(1) The options vest equally in 25,000 share increments over eight quarters
beginning December 31, 2000.
(2) The options vest in 50,000 share increments on March 31, 2000 and March 31,
2001, with this vesting schedule contingent upon meeting certain performance
objectives. The Compensation Committee determined that such financial
objectives were not met and all 100,000 options were cancelled in June 2000.
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<PAGE> 11
(3) The options held by Mr. Schaeffer vest over a four-year period with
twenty-five percent (25%) vesting at the first, second, third and fourth
anniversaries of the award date.
(4) Based on a total of 1,062,057 options granted during the fiscal year ended
March 31, 2000. During the fiscal year ended March 31, 2000, 315,023
outstanding options were forfeited.
(5) The option exercise price for the common stock is based on the fair market
value on the date of grant as determined pursuant to the terms of the 1999
Long-Term Incentive Plan.
(6) Options may terminate before their expiration date upon death, disability or
termination of employment of the optionee.
(7) In accordance with the rules of the Commission, shown are the gains or
"option spreads" that would exist for the respective options granted. These
gains are based on the assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the
full option term. These assumed compound rates of stock price appreciation
are mandated by the rules of the Commission and do not represent our
estimate or projection of future prices of our common stock.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
information concerning the number of shares received during fiscal 2000 upon
exercise of options and the aggregate dollar amount received from such exercise,
as well as the number and value of securities underlying unexercised options
held on March 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING OPTIONS VALUE OF IN-THE-MONEY
AT YEAR END(#) OPTIONS AT YEAR-END($)(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joe Backer........... -- -- 303,000 200,000 $ 9,110,900 $3,250,000
Peter Schaeffer...... -- -- 395,835 25,000 $12,983,388 $ 75,000
John S. Reiland...... -- -- 20,687 35,687 $ 587,409 $ 897,159
Don Pate............. -- -- 54,563 58,187 $ 1,607,416 $1,361,784
Jonathan J. Reed..... -- -- 19,957 47,398 $ 492,313 $1,070,123
</TABLE>
---------------
(1) Based on the difference between the option exercise price and the fair
market value of NEON's common stock on the exercise date as determined
pursuant to the terms of the 1993 Stock Option Plan and 1999 Long-Term
Incentive Plan.
(2) Based on the difference between the option exercise price and the closing
sale price of $33.00 of our common stock as reported on the Nasdaq National
Market on March 31, 2000, the last trading day of our 2000 fiscal year,
multiplied by the number of shares underlying the options.
8
<PAGE> 12
COMPENSATION COMMITTEE REPORT
Decisions on compensation of our executive officers generally are made by
the four-member Compensation Committee of our Board of Directors. Each member of
the current Compensation Committee is a non-employee director. All decisions by
the Compensation Committee relating to compensation of our executive officers
are reviewed by the Board of Directors. Decisions with respect to awards under
certain of NEON's employee benefit plans are made solely by the Compensation
Committee in order for such awards to satisfy applicable legal and regulatory
considerations. Set forth below is a report prepared by Messrs. Moores, Noell,
van den Berg and Holcomb in their capacity as all of the members of the
Compensation Committee addressing our compensation policies for fiscal 2000 as
they affected our executive officers, including our Chief Executive Officer, Mr.
Backer.
Compensation Philosophy. The Compensation Committee's executive
compensation policies are designed to provide a conservative base salary
complemented with a bonus system to reward those executives with competitive
levels of compensation when compared with similar positions at companies
similarly situated, thus integrating pay with the Company's annual and long-term
performance goals, rewarding above average corporate performance, recognizing
individual initiative and achievements, and assisting NEON in attracting and
retaining qualified executives. Targeted levels of total executive compensation
are generally set at levels that the Compensation Committee believes to be
consistent with others in NEON's industry, although actual compensation levels
in any particular year may be above or below those of NEON's competitors,
depending upon NEON's performance.
Grant of Stock Awards. The Compensation Committee endorses the position
that stock ownership by management and performance-based compensation
arrangements are beneficial in aligning management's and stockholders' interests
in the enhancement of stockholder value and helps to attract and retain these
persons, and takes this factor into account in designing the compensation
packages of the Company's executive officers. Under NEON's 1999 Long-Term
Incentive Plan, which has previously been approved by our stockholders, the
Company may grant incentive stock options and non-qualified stock options to
purchase NEON common stock, stock appreciation rights, restricted stock and
performance units to key employees of NEON. Options are exercisable over a
period of time in accordance with the terms of option agreements entered into at
the time of the grant. Stock options provide value to the recipients only if and
when the market price of NEON's common stock increases above the option grant
price.
Base Salary and Incentive Bonus Compensation. In addition to stock-based
awards in the form of option grants, there are two components of NEON's
non-stock-based compensation program. First, executive officers receive an
annual base salary, which is believed to be consistent with similar positions at
similar companies in the industry. Second, executive officers are eligible to
receive an annual bonus comprised of (i) an amount, up to a maximum established
amount per year, awarded based upon the executive's meeting and exceeding
established performance and other corporate goals set by the Compensation
Committee, and/or (ii) an amount equal to a percentage of sales based upon
NEON's sales performance. The Compensation Committee believes these principal
components of NEON's compensation plan are commensurate with others in the
industry.
Fiscal 2000 Chief Executive Officer Compensation. The Compensation
Committee considers several factors in establishing our Chief Executive
Officer's compensation package, including compensation practices in the
industry, performance level, contributions toward achievement of strategic goals
and NEON's overall financial and operating success. Mr. Backer's compensation
for fiscal 2000 as President and Chief Executive Officer principally consisted
of a base salary and bonus. Mr. Backer's base salary for fiscal 2000 was
established by the Compensation Committee based upon factors described above
relating to executive officers in general. The bonus paid to Mr. Backer in
fiscal 2000 was determined as a percentage of sales based upon the sales
performance of the Company. Mr. Backer does not participate in the Compensation
Committee's decision regarding his compensation.
Limit on the Deductibility of Executive Compensation. In 1993, Congress
amended the Internal Revenue Code to add Section 162(m). Section 162(m) of the
Internal Revenue Code limits the deductibility of compensation paid to specified
executive officers to $1,000,000 per officer in any one year. Compensation
9
<PAGE> 13
which qualifies as performance based compensation does not have to be taken into
account for the purposes of this limitation. The Compensation Committee intends
to recommend action in connection with NEON's benefit plans and salary and bonus
policies to address this issue if and when circumstances require.
Submitted by the Compensation
Committee
John J. Moores
Charles E. Noell, III
Norris van den Berg
Richard Holcomb
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Moores, Noell, van den Berg and Holcomb served on NEON's
Compensation Committee during fiscal 2000 and are continuing to serve on that
committee. These individuals do not serve as officers or employees of NEON. The
following sets forth interlocks involving the executive officers and directors
of NEON.
NEON Interlocks with Peregrine/Bridge Transfer Corporation. Messrs. Backer,
Noell and van den Berg serve as directors of Peregrine/Bridge Transfer
Corporation. Messrs. Backer and Reiland serve as the Chief Executive Officer and
President and the Chief Financial Officer, respectively, of Peregrine/Bridge
Transfer Corporation and Mr. Backer serves on the Compensation Committee of
Peregrine/Bridge Transfer Corporation. Mr. Webb serves as the Vice President and
General Counsel of Peregrine/Bridge Transfer Corporation, for which Mr. Webb
received an annual salary of $180,000 and a $100,000 bonus from Peregrine/Bridge
Transfer Corporation.
A services agreement between NEON and Peregrine/Bridge Transfer Corporation
provides that Peregrine/Bridge Transfer Corporation will pay NEON for general
and administrative services supplied to it by NEON, for the time spent by our
management developing and implementing Peregrine/Bridge Transfer Corporation's
product development and marketing strategy and for the use of available space in
NEON's offices from time to time. The services agreement is terminable on 30
days' notice by either party. Peregrine/ Bridge Transfer Corporation pays NEON
$33,995 per month under the services agreement. For fiscal 1998, 1999 and 2000,
$287,076, $287,076 and $287,940, respectively, was paid by Peregrine/Bridge
Transfer Corporation to NEON under this arrangement. The scope of and charge for
such services were determined pursuant to negotiations between NEON's officers
and the non-employee directors of Peregrine/Bridge Transfer Corporation, and we
believe that the fees for the services provided by NEON to Peregrine/Bridge
Transfer Corporation are no less favorable than those that would be obtained
from an unaffiliated entity in an arm's-length negotiation.
NEON Interlocks with Skunkware, Inc. Messrs. Backer, Noell, Moores and van
den Berg serve as the directors of Skunkware, Inc., the sole stockholder of
Peregrine/Bridge Transfer Corporation. Mr. Backer also serves as the Chief
Executive Officer and President of Skunkware, Inc. and on the compensation
committee of Skunkware, Inc. Mr. Reiland serves as the Chief Financial Officer
of Skunkware, Inc.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of July 14, 2000, for:
- each person or group who is known by us to beneficially own more than 5%
of the outstanding shares of our common stock;
- each of our Directors;
10
<PAGE> 14
- each of our Named Executive Officers named in the Summary Compensation
Table; and
- all of our Directors and executive officers as a group.
The percentage of shares owned provided in the table is based on 9,434,969
shares outstanding as of July 14, 2000. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Except
as indicated by footnote, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. The determination of whether these persons have sole
voting and investment power is based on information provided by them. In
computing an individual's beneficial ownership, the number of shares of common
stock subject to options held by that individual that are exercisable within 60
days of July 14, 2000 are also deemed outstanding. These shares, however, are
not deemed outstanding for the purpose of computing the beneficial ownership of
any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME NUMBER PERCENT
---- ---------- -------
<S> <C> <C>
Directors and Officers:
John J. Moores(1)........................................ 3,351,842 35.5%
Charles E. Noell III..................................... 221,969 2.4%
Norris van den Berg...................................... 101,660 1.1%
Richard Holcomb(2)....................................... 13,800 *
Joe Backer(3)............................................ 398,000 4.1%
Peter Schaeffer.......................................... 441,335 4.7%
John S. Reiland(4)....................................... 60,250 *
Don Pate(5).............................................. 54,563 *
Jonathan J. Reed(6)...................................... 26,508 *
George H. Ellis.......................................... -- --
All executive officers and directors as a group (11
persons)(7)........................................... 4,719,097 47.4%
</TABLE>
---------------
* Less than 1%
(1) Includes 120,000 shares held by Rebecca Moores, the wife of Mr. Moores, and
339,265 shares of common stock owned by various family trusts for which Mr.
Moores serves as trustee, as to which Mr. Moores disclaims beneficial
ownership.
(2) Includes 13,800 shares of common stock issuable upon exercise of outstanding
stock options that are presently exercisable or will become exercisable
within 60 days of July 14, 2000.
(3) Includes 20,000 shares held by John Backer and Kristin Backer, the children
of Mr. Backer, as to which Mr. Backer disclaims beneficial ownership.
Includes 378,000 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of July 14, 2000.
(4) Includes 2,125 shares held by Amy Reiland, the daughter of Mr. Reiland, as
to which Mr. Reiland disclaims beneficial ownership. Includes 33,874 shares
of common stock issuable upon exercise of outstanding stock options that are
presently exercisable or will become exercisable within 60 days of July 14,
2000.
(5) Includes 54,563 shares of common stock issuable upon exercise of outstanding
stock options that are presently exercisable or will become exercisable
within 60 days of July 14, 2000.
(6) Includes 23,163 shares of common stock issuable upon exercise of outstanding
stock options that are presently exercisable or will become exercisable
within 60 days of July 14, 2000.
(7) Includes 500,435 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of July 14, 2000.
11
<PAGE> 15
CERTAIN TRANSACTIONS
Peregrine/Bridge Transfer Corporation Agreements
NEON entered into a distributor agreement with Peregrine/Bridge Transfer
Corporation, a database software company, in January 1996. Previously under the
distributor agreement, NEON marketed and sublicensed certain Enterprise
Subsystem Management products under a non-exclusive worldwide license from
Peregrine/Bridge Transfer Corporation. The distributor agreement provided that
NEON pay license fees for licensed products and for maintenance and support and
upgrade services equal to 50% of the revenues received by NEON. NEON incurred
license fees of $448,917, $703,337 and $979,246 to Peregrine/Bridge Transfer
Corporation in fiscal 1998, 1999 and 2000, respectively.
In December 1998, NEON and Peregrine/Bridge Transfer Corporation amended
the distributor agreement. The amended agreement grants us an exclusive,
worldwide license to market and sublicense Enterprise Subsystem Management
products, with the exception of limited co-marketing rights held by IBM relating
to one of the Peregrine/Bridge Transfer Corporation Enterprise Subsystem
Management products. The amended distributor agreement has an initial term
through March 31, 2004. The amended agreement grants us first refusal rights to
acquire Peregrine/Bridge Transfer Corporation by matching any third-party offer
that Peregrine/Bridge Transfer Corporation or its stockholder chooses to accept,
and an option to acquire Peregrine/Bridge Transfer Corporation that is
exercisable on or after January 1, 2002 or such earlier date that we have paid
Peregrine/Bridge Transfer Corporation license fees totaling $10.0 million or
more in any single fiscal year. Beginning April 1, 1999, the amended agreement
provides for us to make quarterly advances in respect of anticipated license
fees, with the advances to be in equal quarterly payments based on annualized
license fee amounts of $1.0 million, $2.0 million, $3.0 million, $4.0 million
and $5.0 million for fiscal 2000, 2001, 2002, 2003 and 2004, respectively.
Following the date, if any, in each quarter when the license fees earned equal
the aggregate amount of quarterly advances outstanding on the first day of such
quarter, the license fee that we pay under the agreement decreases from 50% to
40% of the revenues received by us, with the decrease continuing in effect until
the start of the next quarter. Upon any termination or expiration of the
distributor agreement, any advances then outstanding are to be refunded to us by
Peregrine/Bridge Transfer Corporation.
As described above, NEON has a services agreement with Peregrine/Bridge
Transfer Corporation pursuant to which Peregrine/Bridge Transfer Corporation
pays NEON for certain services supplied to it by NEON.
Due to the timing of cash payments between the two parties related to the
distributor agreement and the services agreement described in the preceding two
paragraphs, NEON had accounts receivable (payable)-related party balances of
$181,112, $278,817 and ($6,942) as of March 31, 1998, 1999 and 2000,
respectively.
Other Directorships
Members of our Board of Directors also serve as officers or directors of
other software or computing companies such as Peregrine Systems, which supplies
software that automates the management of data such as inventory/configuration
management, order and catalog management and financial management. NEON and
Peregrine Systems, while both software companies, are not sufficiently similar
in their operations to be competitors. We do not believe that the concurrent
service of our directors as officers and/or directors of these entities poses
potential conflicts of interest.
12
<PAGE> 16
PERFORMANCE GRAPH
The following graph compares the annual cumulative total stockholder return
on an investment of $100 on March 5, 1999 (the date of the Company's initial
public offering) in our common stock, based on the market price of the common
stock, with the cumulative total return of a similar investment in companies on
the Nasdaq Stock Market (U.S.) Index and the Chase H & Q Computer Software
Index.
[PERF. GRAPH]
<TABLE>
<CAPTION>
Cumulative Total Return
--------------------------------------------------------------------------------
3/99 3/00
--------------------------------------------------------------------------------
<S> <C> <C> <C>
NEON SYSTEMS, INC. 100.00 366.67 220.00
NASDAQ STOCK MARKET (U.S.) 100.00 105.31 195.74
CHASE H & Q COMPUTER SOFTWARE 100.00 97.82 234.85
</TABLE>
13
<PAGE> 17
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Act requires that our executive officers and
directors, and beneficial owners of more than ten percent (10%) of any class of
equity security registered pursuant to the Securities Act of 1933, as amended,
make certain filings with the Commission and the Company. We believe, based on
information provided to us by the reporting persons, that during fiscal 2000,
all directors, officers and ten percent (10%) beneficial owners timely complied
with such filing requirements, except that George Ellis, who was appointed as a
director in January 2000, filed a late Form 3 on March 3, 2000.
PROPOSAL TWO
RATIFICATION OF INDEPENDENT AUDITORS
You are asked to ratify the appointment by the Board of Directors of KPMG
LLP as independent auditors for the fiscal year ending March 31, 2001. The
selection was based upon the recommendation of our audit committee.
Representatives of KPMG LLP will be present at the annual meeting to
respond to appropriate questions from stockholders and to make a statement if
they desire.
Adoption of Proposal Two requires approval by the holders of a majority of
shares of common stock present in person or represented by proxy, and entitled
to vote at the annual meeting. Abstentions may be specified on this proposal to
ratify the selection of the independent auditors. Abstentions will be considered
present and entitled to vote at the annual meeting but will not be counted as
votes cast in the affirmative. Abstentions will have the effect of a negative
vote for this proposal to ratify the selection of the independent auditors.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
OTHER MATTERS
We do not know of any matter other than those discussed in the foregoing
materials contemplated for action at the annual meeting. Should any other matter
be properly brought before the annual meeting, the persons authorized under the
proxies will vote and act according to their best judgment.
ANNUAL REPORT ON FORM 10-K
UPON WRITTEN REQUEST OF ANY BENEFICIAL STOCKHOLDER OR STOCKHOLDER OF
RECORD, A COPY OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH
31, 2000 (INCLUDING THE EXHIBITS, FINANCIAL STATEMENTS AND THE SCHEDULES
THERETO) REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 13A-1 UNDER THE SECURITIES EXCHANGE ACT OF 1934, MAY BE
OBTAINED, WITHOUT CHARGE, FROM JOHN REILAND, CHIEF FINANCIAL OFFICER, 14100
SOUTHWEST FREEWAY, SUITE 500, SUGAR LAND, TEXAS, 77478; FACSIMILE (281)
242-3880.
By Order of the Board of Directors
/s/ JOHN S. REILAND
JOHN S. REILAND,
Secretary
Sugar Land, Texas: July 21, 2000
14
<PAGE> 18
EXHIBIT A
NEON SYSTEMS, INC.
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
ARTICLE I
PURPOSE AND SCOPE
The board of directors (the "Board") of NEON Systems, Inc. ("NEON") has
established a committee of the Board known as the audit committee (the
"Committee"). This charter has been adopted by the Board to govern the
operations of the Committee. The primary purpose of the Committee is to assist
the Board in fulfilling its oversight responsibilities by reviewing financial
information to be provided to the stockholders and others, the systems of
internal accounting and financial controls that management and the Board have
established, and the audit process.
ARTICLE II
ORGANIZATION
The Committee shall consist of at least three members of the Board. The
members shall be appointed by the Board. The Board shall also designate a
chairperson of the Committee who shall preside at meetings of the Committee.
Each Committee member shall serve for a period of one year, or until such time
as his or her successor has been duly named, or until such member's earlier
resignation or removal. The duties and responsibilities of a Committee member
shall be in addition to those duties set out for a member of the Board. The
Committee shall meet at least four times per year in person or by telephone, and
the Chairman may, at his or her discretion, call special meetings of the
Committee.
The Board shall appoint committee members in compliance with the
independence and other requirements of the Nasdaq Market rules (the "Nasdaq
Rules") governing audit committee function and compliance. An independent member
is any person other than an officer, employee or any other individual having a
relationship that, in the opinion of the Board, would interfere with the
exercise of independent judgement. Subject to the applicable Nasdaq Rules and
the Regulations of the Securities and Exchange Commission (the "SEC"), in cases
where the Committee reasonably believes it to be in the best interests of NEON,
a non-independent director who is financially literate may be nominated provided
(a) a majority of Committee members are independent and (b) the chairperson of
the Committee is independent.
QUALIFICATIONS OF MEMBERS
The members of the Committee also must meet the following qualifications by
not later than the time period prescribed by the SEC and Nasdaq:
- Each member of the Committee must be financially literate or must become so
within a reasonable period of time after appointment, in either case as
determined by the Board in its business judgment. Financial literacy includes
the ability to read and understand fundamental financial statements, including
a balance sheet, income statement and cash flow statement.
- At least one member of the Committee must have past or current employment
experience in finance or accounting, requisite professional certification in
accounting or any other comparable certification or background which results
in financial sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with financial
oversight responsibilities.
A-1
<PAGE> 19
DISQUALIFICATION
Subject to the Nasdaq Rules and applicable SEC Regulations, a director with
any of the following relationships shall not be eligible to serve on the
Committee:
- Employee of NEON or any of its affiliates in the current or past three years;
- Employee of an entity that is a current parent or corporate predecessor of
NEON or was the parent or corporate predecessor of NEON in the past three
years;
- Immediate family member of an individual who is, or has been in the past three
years, employed by NEON or any of its affiliates as an executive officer;
- Executive of another business organization where any NEON executive serves on
that business organization's compensation committee;
- Partner in, controlling shareholder or executive officer of any for-profit
business organization to which NEON made or from which NEON received payments
that exceeded five percent (5%) of NEON's or the business organization's gross
revenues for that year, or $200,000, whichever is more, in any of the past
three years; or
- Person who accepted any compensation from NEON or any of its affiliates in
excess of $60,000 during the previous fiscal year (other than compensation for
board service, benefits under a tax qualified retirement plan or
non-discretionary compensation).
ARTICLE III
RELATIONSHIP WITH OUTSIDE AUDITOR
The outside auditors are ultimately accountable to the Committee and the
Board, as representatives of the stockholders. The Committee and the Board have
the ultimate authority and responsibility to select (or nominate for stockholder
approval), evaluate and, when appropriate, replace the outside auditors. On an
annual basis, the Committee shall require the outside auditors to submit to the
Committee a formal written statement consistent with Independence Standards
Board Standard Number 1 disclosing all relationships between NEON and the
outside auditors. The Committee shall review and discuss any such relationships
with the outside auditors and recommend to the Board appropriate action to
ensure the independence of the outside auditors.
NEON's management is responsible for preparing NEON's financial statements.
The outside auditors' responsibility is to audit those financial statements in
accordance with Generally Accepted Auditing Standards and express a resulting
opinion as to whether those financial statements are materially in accordance
with Generally Accepted Accounting Principles applied on a consistent basis. The
activities of the Committee are in no way designed to supersede or alter this
traditional responsibility. The Board recognizes that NEON's management, as well
as outside auditors, have more time, knowledge and more detailed information
regarding NEON than do Committee members. Consequently, in carrying out its
oversight responsibilities, the Committee is not providing any expert or special
assurance as to NEON's financial statements nor any professional certification
as to the outside auditors' work.
ARTICLE IV
POWERS AND RESPONSIBILITIES
In general, the Committee shall provide assistance to the Board in the
general oversight of NEON's financial matters relating to NEON's financial
statements and the financial reporting process, the systems of internal
accounting and financial controls, the internal audit function and the annual
independent audit of NEON's financial statements. The Committee also shall have
the responsibilities set forth below. The Committee shall have the power to
discharge all such responsibilities and to take any action incidental thereto
and to investigate any matter brought to its attention. The Committee shall have
full access to the books,
A-2
<PAGE> 20
records and personnel of NEON. The Committee shall also have the power to retain
independent counsel or other experts in connection with its responsibilities.
The expenses incurred by the Committee in performing its responsibilities,
including the fees and expenses of any such counsel and experts, shall be paid
by NEON.
REVIEW OF DOCUMENTS AND REPORTS
- The Committee shall annually review, reassess the adequacy of and obtain
approval of its charter by the Board.
- The Committee and management shall review NEON's annual report on Form 10-K,
including NEON's audited year end financial statements to be included therein,
before its release and consider whether the information is adequate and
consistent with the members' knowledge about NEON and its operations.
- The Committee shall review the internal reports to management prepared by the
internal auditing function and management's response.
- The Committee shall review NEON's quarterly reports on Form 10-Q, including
NEON's interim financial statements to be included therein, prior to their
filing or prior to the release of earnings and consider whether the
information is adequate and consistent with the members' knowledge about NEON
and its operations.
OUTSIDE AUDITORS
- The Committee shall review with the outside auditors the scope, approach and
results of the annual auditing engagement.
- The Committee shall review and discuss with the outside auditors matters
required to be discussed by Statement of Auditing Standards ("SAS") No. 61.
OPEN COMMUNICATION POLICY
The Committee shall maintain an open avenue of communication between
management, the Board and outside auditors through which to consider:
- The integrity of NEON's financial reporting processes, both internal and
external;
- The quality and appropriateness, not just the acceptability, of NEON's
financial reporting process;
- The impact of certain items (including timing of transactions, selection of
accounting policies, estimates, judgments, uncertainties and unusual
transactions) on the representational faithfulness, neutrality and consistency
of the accounting information provided in financial statements; and
- Any significant difficulties encountered during the course of the audit,
including restrictions on the scope of work or access to required information.
DISCLOSURE TO THE NASD
The Committee must submit a one-time written certification to the NASD
which:
- Asserts the independence of all Committee members (or specifies the Board's
determination to include a non-independent director on the Committee);
- Affirms the financial literacy of all Committee members;
- Affirms the accounting or related financial management expertise of one
Committee member; and
- Affirms the annual review and reevaluation of the adequacy of the Committee
charter.
A-3
<PAGE> 21
SEC DISCLOSURE
Pursuant to Item 306 of Regulation S-K promulgated by the SEC, the
Committee shall prepare a report to be included in NEON's annual proxy
statement. The report must state:
- Whether the Committee has reviewed and discussed the audited financial
statements with management;
- Whether the Committee has discussed with the outside auditors the matters
required to be discussed by SAS No. 61;
- Whether the Committee has received the written disclosure and letter from the
outside auditors disclosing all relationships they have with NEON and whether
the relationships have been discussed; and
- Whether the Committee has discussed with the outside auditors the outside
auditors' independence.
The report also shall include a statement whether, based on such review and
discussions referred to above, the members of the Committee recommended to the
Board that the audited financials be included in NEON's Annual Report on Form
10-K for filing with the SEC. The report shall include all names of the
Committee members. If the Board determines that it is in the best interests of
NEON and its stockholders to allow a non-independent director to serve as a
Committee member, NEON also must disclose in the next proxy statement the nature
of the non-independent relationship and the reasons for the Board's
determination to include the non-independent member.
NEON's annual proxy statement shall also include a statement as to whether
NEON has adopted an audit committee charter. A copy of the charter shall be
filed with the proxy statement once every three years.
ARTICLE V
MISCELLANEOUS
The Committee may perform any other activities consistent with this charter
and NEON's charter, bylaws and governing law as the Committee or Board deems
necessary or appropriate.
By Order of the Board of Directors
A-4
<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSALS OUTLINED IN THIS PROXY STATEMENT. Please mark
your vote as [X]
indicated in
this example.
1. Elect two Class I Directors to the Board Class I Directors, Joe Backer and Charles E. Noel, III, whose terms will
of Directors: expire at the annual meeting to be held August 22, 2000.
FOR all nominees WITHHOLD (Instruction: To withhold authority to vote for any individual nominee,
listed to the right AUTHORITY write that nominee's name on the space provided below.)
(except as marked to vote for all nominees
to the contrary) listed to the right
[ ] [ ] ----------------------------------------------------------------------------
2. Ratify the selection of KPMG LLP as independent 3. Transact any other business that is properly brought before the
auditors for the fiscal year ending March 31, 2001; meeting
and
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Dated , 2000
----------------------------------------
----------------------------------------------------
----------------------------------------------------
Signature of Stockholder
</TABLE>
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o FOLD AND DETACH HERE o
VOTE BY TELEPHONE OR INTERNET
QUICK *** EASY *** IMMEDIATE
YOUR VOTE IS IMPORTANT! - YOU CAN VOTE IN ONE OF THREE WAYS:
1. TO VOTE BY PHONE: Call toll-free 1-800-840-1208 on a touch tone telephone
24 HOURS A DAY-7 DAYS A WEEK
There is NO CHARGE to you for this call. - Have your proxy card in hand.
You will be asked to enter a Control Number, which is located in the box in the
lower right hand corner of this form.
OPTION 1: To vote as the Board of Directors recommends on ALL
proposals, press 1.
WHEN ASKED, PLEASE CONFIRM BY PRESSING 1.
OPTION 2: If you choose to vote on each proposal separately,
press 0. You will hear these instructions:
Proposal 1 - To vote FOR ALL nominees, press 1; to
WITHHOLD FOR ALL nominees, press 9.
To WITHHOLD FOR AN INDIVIDUAL nominee, Press 0 and listen
to the instructions.
Proposal 2 - To vote FOR, press 1; AGAINST, press 9;
ABSTAIN, press 0.
WHEN ASKED, PLEASE CONFIRM BY PRESSING 1.
OR
2. VOTE BY INTERNET: Follow the instructions at our Website Address:
http://www.eproxy.com/nesy
3. VOTE BY PROXY: Mark, sign and date your proxy card and return promptly
in the enclosed envelope.
NOTE: If you vote by internet or telephone, THERE IS NO NEED TO MAIL
BACK your Proxy Card.
THANK YOU FOR VOTING.
<PAGE> 23
[NEON SYSTEMS, INC. LETTERHEAD]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 22, 2000
Dear Stockholders:
On Tuesday, August 22, 2000, NEON Systems, Inc. will hold its annual
meeting of stockholders at Sugar Creek Country Club, 420 Sugar Creek Boulevard,
Sugar Land, Texas. The meeting will begin at 9:00 a.m., Sugar Land, Texas time.
Only stockholders that own stock at the close of business on July 14, 2000
can vote at the meeting.
--------------------------------------------------------------------------------
o FOLD AND DETACH HERE o
IMPORTANCE NOTICE:
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD OR VOTE VIA THE INTERNET OR TELEPHONE FOLLOWING THE INSTRUCTIONS ON THE
PROXY CARD.
