<PAGE>
SCHEDULE 14A
(RULE 14-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
BREAKAWAY SOLUTIONS, INC.
-----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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</TABLE>
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 11, 2000
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of
Breakaway Solutions, Inc., a Delaware corporation (the "Company"), will be held
on Thursday, May 11, 2000 at 10:30 a.m., local time, at the offices of Hale and
Dorr LLP, 60 State Street, Boston, Massachusetts (the "Meeting") for the purpose
of considering and voting upon the following matters:
1. To elect two Class I Directors to serve for the ensuing three years;
2. To ratify the appointment of KPMG LLP as independent auditors of the
Company for the current year; and
3. To transact such other business as may properly come before the Meeting
and any adjournment or adjournments thereof.
The Board of Directors has no knowledge of any other business to be
transacted at the Meeting.
The Board of Directors has fixed the close of business on Monday, March 20,
2000 as the record date for the determination of stockholders entitled to notice
of and to vote at the Meeting and at any adjournment or adjournments thereof.
The stock transfer books of the Company remain open.
A copy of the Company's Annual Report to Stockholders for the year ended
December 31, 1999, which contains consolidated financial statements and other
information of interest to stockholders, accompanies this Notice and the
enclosed Proxy Statement.
All stockholders are cordially invited to attend the Meeting.
By Order of the Board of Directors,
/s/ Kevin Comerford
Kevin Comerford, SECRETARY
April 20, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE
IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF
THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE>
BREAKAWAY SOLUTIONS, INC.
50 ROWES WHARF
BOSTON, MASSACHUSETTS 02110
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 11, 2000
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board of Directors") of Breakaway
Solutions, Inc. (the "Company") for use at the Annual Meeting of Stockholders to
be held on Thursday, May 11, 2000 at 10:30 a.m. at the offices of Hale and Dorr
LLP, 60 State Street, Boston, Massachusetts and at any adjournment or
adjournments thereof (the "Meeting"). Except as otherwise indicated, all
information in this Proxy Statement reflects a two-for-one stock split in the
form of a stock dividend paid on March 23, 2000 to the holders of record of the
Company's common stock, $0.000125 par value per share (the "Common Stock"), as
of March 7, 2000.
All proxies will be voted in accordance with the instructions of the
stockholder. If no choice is specified, the proxies will be voted in favor of
the matters set forth in the Notice of Meeting accompanying this Proxy
Statement. Any proxy may be revoked by a stockholder at any time before its
exercise by delivery of a written revocation to the Secretary of the Company.
Attendance at the Meeting will not itself be deemed to revoke a proxy unless the
stockholder gives affirmative notice at the Meeting that the stockholder intends
to revoke the proxy and vote in person.
On March 20, 1999, the record date for determination of stockholders
entitled to vote at the Meeting (the "Record Date"), there were outstanding and
entitled to vote an aggregate of 35,126,730 shares of Common Stock. Each share
entitles the record holder to one vote on each of the matters to be voted upon
at the Meeting.
THE NOTICE OF MEETING, THIS PROXY STATEMENT, THE ENCLOSED PROXY AND THE
COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1999 ARE
FIRST BEING SENT OR GIVEN TO STOCKHOLDERS ON OR ABOUT APRIL 20, 2000. THE
COMPANY WILL, UPON WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT CHARGE A
COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999, AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS. PLEASE
ADDRESS ALL SUCH REQUESTS TO BREAKAWAY SOLUTIONS, INC., 50 ROWES WHARF, BOSTON,
MASSACHUSETTS 02110, ATTENTION: MANAGER OF INVESTOR RELATIONS. EXHIBITS WILL BE
PROVIDED UPON WRITTEN REQUEST AND PAYMENT OF AN APPROPRIATE PROCESSING FEE.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 15, 2000 with
respect to the beneficial ownership of shares of Common Stock by (i) each person
known to the Company to own beneficially more than 5% of the outstanding shares
of Common Stock, (ii) the directors of the Company, (iii) the Chief Executive
Officer and the four other most highly compensated executive officers who were
serving as executive officers on December 31, 1999 (the "Named Executive
<PAGE>
Officers"), and (iv) all directors and executive officers of the Company as of
December 31, 1999, as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
-----------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER NUMBER OF SHARES CLASS
- ------------------------ ---------------- ----------
<S> <C> <C>
5% STOCKHOLDERS
Christopher H. Greendale(2)................................. 15,239,474 40.4%
Walter W. Buckley, III(3)................................... 13,962,674 38.3
Internet Capital Group, Inc.(4)............................. 13,962,674 38.3
Frank Selldorff(5).......................................... 7,394,400 16.5
Gordon Brooks(6)............................................ 5,348,312 12.9
William Loftus(7)........................................... 1,855,232 5.1
OTHER DIRECTORS AND EXECUTIVE OFFICERS:
Janet S. Tremlett(8)........................................ 93,000 *
Kevin Comerford(9).......................................... 54,000 *
All executive officers and directors as a group (16)
persons,
including two former executive officers)(10).............. 32,766,422 71.5
</TABLE>
- ------------------------
* Less than 1%.
(1) The inclusion herein of any shares of Common Stock deemed beneficially owned
does not constitute an admission of beneficial ownership of those shares.
Unless otherwise indicated, to the knowledge of the Company based upon
information provided by such persons, each person listed above has sole
voting and investment power with respect to the shares listed. For purposes
of this table, each person is deemed to beneficially own any shares subject
to stock options, warrants or other securities convertible into Common
Stock, held by such person which are currently exercisable (or convertible)
or exercisable (or convertible, within 60 days after March 15, 2000.
(2) Consists of 1,276,800 shares issuable upon exercise of outstanding stock
options held by Mr. Greendale and 13,962,674 shares beneficially owned by
Internet Capital Group, Inc. ("Internet Capital Group"). Mr. Greendale is a
Managing Director of Internet Capital Group. Mr. Greendale disclaims
beneficial ownership of all shares held by Internet Capital Group.
Mr. Greendale's address is c/o Breakaway Solutions, Inc., 50 Rowes Wharf,
Boston, Massachusetts 02110.
(3) Consists of 13,962,674 shares beneficially owned by Internet Capital Group.
Mr. Buckley is President, Chief Executive Officer and a director of Internet
Capital Group. Mr. Buckley disclaims beneficial ownership of all shares held
by Internet Capital Group. Mr. Buckley's address is c/o Breakaway
Solutions, Inc., 50 Rowes Wharf, Boston, Massachusetts 02110.
(4) Includes 147,744 shares issuable upon the exercise of a warrant. The address
of Internet Capital Group is 800 The SafeGuard Building, 435 Devon Park
Drive, Wayne, Pennsylvania 19087.
(5) Includes 1,200,000 shares issuable upon exercise of outstanding options held
by Mr. Selldorf. Mr. Selldorf's address is c/o Breakaway Solutions, Inc., 50
Rowes Wharf, Boston, Massachusetts 02110.
2
<PAGE>
(6) Includes 4,780,660 shares issuable upon exercise of outstanding stock
options held by Mr. Brooks. Mr. Brooks' address is c/o Breakaway
Solutions, Inc., 50 Rowes Wharf, Boston, Massachusetts 02110.
(7) Mr. Loftus' address is c/o Breakaway Solutions, Inc., 50 Rowes Wharf,
Boston, Massachusetts 02110.
(8) Includes 38,000 shares issuable upon exercise of outstanding options held by
Ms. Tremlett.
(9) Consists of 54,000 shares issuable upon exercise of outstanding options held
by Mr. Comerford.
(10) Includes an aggregate of 9,541,214 shares issuable upon exercise of
outstanding stock options held by such executive officers and directors.
Also includes 147,744 shares issuable upon the exercise of a warrant held by
Internet Capital Group and 13,814,930 shares held by Internet Capital Group,
all of which are attributable to two of our directors.
VOTES REQUIRED
The holders of a majority of the shares of Common Stock issued and
outstanding and entitled to vote at the Meeting shall constitute a quorum for
the transaction of business at the Meeting. Shares of Common Stock present in
person or represented by proxy (including shares which abstain or do not vote
with respect to one or more of the matters presented for stockholder approval)
will be counted for purposes of determining whether a quorum exists at the
Meeting.
The affirmative vote of the holders of a plurality of the votes cast by the
stockholders entitled to vote at the Meeting is required for the election of
directors. The affirmative vote of the holders of a majority of the shares of
Common Stock present or represented by proxy and voting on the matter is
required to ratify the appointment of the Company's independent auditors.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter, and will also not
be counted as votes cast or shares voting on such matter. Accordingly,
abstentions and "broker non-votes" will have no effect on the voting on the
election of directors, which requires the affirmative vote of a plurality of the
votes cast or shares voting on a matter. Abstentions and "broker non-votes" will
have no effect on the voting on the ratification of the appointment of the
Company's independent auditors, which requires the affirmative vote of a
majority of the votes cast or shares voting on the matter.
PROPOSAL 1--ELECTION OF DIRECTORS
The Company has a classified Board of Directors consisting of two Class I
directors, one Class II director and one Class III director. The Class I,
Class II and Class III directors will serve until the annual meeting of
stockholders to be held in 2000, 2001 and 2002, respectively, and until their
respective successors are elected and qualified. At each annual meeting of
stockholders, directors are elected for a full term of three years to succeed
those whose terms are expiring. The persons named in the enclosed proxy will
vote to elect, as Class I directors, Gordon Brooks and Christopher H. Greendale,
the two director nominees named below, unless the proxy is marked otherwise.
Messrs. Brooks and Greendale are currently directors of the Company.
3
<PAGE>
Each Class I director will be elected to hold office until the 2003 annual
meeting of stockholders and until his successor is elected and qualified. Each
of the nominees has indicated his willingness to serve, if elected; however, if
any nominee should be unable to serve, the person acting under the proxy may
vote the proxy for a substitute nominee. The Board of Directors has no reason to
believe that any of the nominees will be unable to serve if elected.
For each member of the Board of Directors, including those who are nominees
for election as Class I directors, there follows information given by each
concerning his principal occupation and business experience for at least the
past five years, the names of other public reporting companies of which he
serves as a director and his age and length of service as a director of the
Company. Other than that John A. Loftus, the Company's Vice President,
e-Solutions, and William Loftus, the Company's Senior Vice President,
Operations, are brothers, there are no family relationships among any of the
directors, nominees for director and executive officers of the Company.
NOMINEES FOR CLASS I DIRECTORS
GORDON BROOKS, 42, has served as the Company's President and Chief Executive
Officer since October 1998 and as a member of the Board of Directors since
January 1999. From June 1991 to September 1998, Mr. Brooks served as Senior Vice
President, Sales, Field Marketing and Operations of Cambridge Technology
Partners (Massachusetts), Inc., an international management consulting and
systems integration company ("Cambridge Technology Partners").
CHRISTOPHER H. GREENDALE, 48, has served as Chairman of the Board of
Directors since January 1999. Also since January 1999, Mr. Greendale has served
as a Managing Director of Internet Capital Group, Inc., a business-to-business
e-commerce company and our affiliate ("Internet Capital Group"). From
January 1998 to December 1998, Mr. Greendale was engaged as an independent
management consultant. In 1991, Mr. Greendale co-founded Cambridge Technology
Partners, where he served in various capacities from 1991 through
December 1997, most recently as Executive Vice President, Marketing.
Mr. Greendale serves as a director of Clarify Inc., Context Integration, Inc.,
and Servicesoft Technologies, Inc.
THE BOARD OF DIRECTORS BELIEVES THAT THE ELECTION OF GORDON BOOKS AND
CHRISTOPHER H. GREENDALE AS CLASS I DIRECTORS TO HOLD OFFICE UNTIL THE 2003
ANNUAL MEETING OF STOCKHOLDERS AND UNTIL HIS SUCCESSOR IS ELECTED AND QUALIFIED
IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A
VOTE FOR ALL OF THE NOMINEES FOR DIRECTOR.
CLASS II DIRECTOR (TERM EXPIRES AT 2001 ANNUAL MEETING)
FRANK SELLDORFF, 38, founded the Company in 1992 and served as Chairman of
the Board of Directors and Chief Executive Officer from 1992 through
October 1998. From November 1998 through March 1999, Mr. Selldorff served as the
Company's Executive Vice President, Strategic Development, and from
November 1998 through June 1999 he served as the Company's Co-Chairman of the
Board of Directors. Mr. Selldorff is currently co-founder and managing partner
of Reach Internet Incubator, LLP, a venture fund and Internet incubation focused
on seed-stage, business-to-business Internet enterprises.
4
<PAGE>
CLASS III DIRECTOR (TERM EXPIRES AT 2002 ANNUAL MEETING)
WALTER W. BUCKLEY, III, 39, has served as one of the Company's directors
since January 1999. Mr. Buckley is a co-founder, and has served as President and
Chief Executive Officer and a director of Internet Capital Group since
March 1996. From 1991 to February 1996, Mr. Buckley served as Vice President of
Acquisitions of Safeguard Scientifics, Inc., a developer and operator of
emerging growth information technology companies. Mr. Buckley serves as a
director of eMerge Interactive, Inc., PaperExchange.com, Inc., Safeguard
Scientifics, Inc., VerticalNet, Inc. and Who? Vision Systems, Inc.
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The Board of Directors met seven times during 1999. All directors attended
at least 75% of the meetings of the Board of Directors and of the committees on
which they served.
The Board of Directors has a standing Audit Committee (the "Audit
Committee"), which reviews the results and scope of the audit and other services
provided by the Company's independent auditors. The Audit Committee held one
meeting during 1999. The current members of the Audit Committee are
Messrs. Greendale and Selldorff.
In October 1999, the Board of Directors established a standing Compensation
Committee (the "Compensation Committee"), which provides recommendations to the
Board of Directors regarding compensation programs of the Company and
administers certain of the Company's plans. The Compensation Committee held one
meeting during 1999. The current members of the Compensation Committee are
Mr. Greendale and Mr. Buckley.
DIRECTOR COMPENSATION
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the Board of Directors and any meetings of its committees.
We may, in our discretion, grant stock options and other equity awards to our
non-employee directors from time to time under our stock incentive plans. We
have granted the following options to Christopher H. Greendale under the
Company's 1999 Stock Incentive Plan, as amended, all of which have vested in
full:
- An option to purchase 168,000 shares of common stock at an exercise price
of $0.34 on July 1, 1998; and
- An option to purchase 1,108,800 shares of common stock at an exercise
price of $0.89 on February 18, 1999.
COMPENSATION OF EXECUTIVE OFFICERS
EMPLOYMENT ARRANGEMENTS
On November 13, 1998, the Company entered into an employment agreement with
Gordon Brooks, the Company's President and Chief Executive Officer. Mr. Brooks
receives a base salary of $25,000 per month and is eligible to receive an annual
performance bonus of up to $125,000. If Mr. Brooks' employment is terminated by
the Company without cause, he will continue to receive his base salary for a
period of twelve months. In December 1999, the Company granted Mr. Brooks
additional options to purchase 350,000 shares of Common Stock at a per share
exercise price of $28.93. In December 1999, the Board of Directors authorized an
unsecured loan to Mr. Brooks in the amount
5
<PAGE>
of $1 million. This loan is evidenced by a promissory note which is due,
together with interest at a rate of 6.21% per annum, upon the first to occur of:
- 30 days after he ceases to be employed by the Company for any reason other
than his death or disability;
- February 16, 2003; or
- an event of default by Mr. Brooks which includes, among other things, any
violation of the non-competition, non-solicitation or confidentiality
provisions of his employment agreement.
If Mr. Brooks dies or becomes permanently disabled, the loan becomes due,
together with accrued and unpaid interest, six months thereafter.
On April 28, 1999, pursuant to the terms of a separation agreement of the
same date, Frank Selldorff resigned as the Company's Executive Vice President,
Strategic Development, in which capacity he coordinated the Company's
acquisition strategy and planned corporate development initiatives. Under the
terms of this agreement, Mr. Selldorff agreed to continue to serve as one of the
Company's directors and agreed to waive his right under his December 11, 1998
employment agreement to receive severance payments equal to one year's salary.
In connection with Mr. Selldorff's resignation, his employment agreement
terminated. Prior to his resignation, the Company granted Mr. Selldorff stock
options to purchase 2,400,000 shares of Common Stock at a per share exercise
price of $0.34.
On May 29, 1998, the Company entered into an employment agreement with Kevin
Comerford, the Company's Vice President, Administration, Chief Financial
Officer, Treasurer and Secretary. Mr. Comerford receives a monthly salary of
$15,000 and is eligible to receive a bonus of up to 30% of his base salary. In
addition, in September 1999 the Company granted to Mr. Comerford options to
purchase 80,000 shares of Common Stock at a per share exercise price of $5.07.
On February 11, 1999, the Company entered into a one year employment
agreement with Janet S. Tremlett, the Company's Vice President, Strategy
Solutions. This agreement will automatically renew itself for successive one
year periods unless Ms. Tremlett resigns or the Company terminates her
employment. Ms. Tremlett receives a base salary of $14,833 per month and is
eligible to receive a performance bonus of up to 30% of her annual salary,
subject to meeting specified performance targets. If Ms. Tremlett is terminated
by the Company without cause, she will continue to receive her salary for an
additional seven and one-half months. Pursuant to her employment agreement the
Company granted to Ms. Tremlett stock options to purchase 144,000 shares of
Common Stock at a per share exercise price of $0.89. In September 1999 the
Company granted Ms. Tremlett options to purchase 80,000 shares of our common
stock at a per share exercise price of $5.07 per share.
On February 17, 1999, the Company entered into an employment agreement with
Christopher Harding, the Company's Vice President, Worldwide Field Operations
and Alliances. Under the terms of this agreement, Mr. Harding's employment shall
continue until March 2001, and the agreement will renew itself for a two year
term expiring March 2003 unless Mr. Harding resigns or the Company terminates
his employment. Mr. Harding received a bonus of $50,000 upon commencing his
employment and receives a base salary of $18,333 per month. In addition, he is
eligible to receive a target bonus equal to 30% of his base salary based on the
Company's profitability. Pursuant to his employment agreement the Company
granted to Mr. Harding stock options to purchase 1,212,500 shares of Common
Stock, at a per share exercise price of $0.89, all of which vested upon the
closing of the Company's initial public offering in October 1999. If
Mr. Harding is terminated by the Company
6
<PAGE>
without cause or if Mr. Harding terminates his employment for good reason, he
will be entitled to receive payments in an amount up to one year's salary.
On March 25, 1999, the Company entered into an employment agreement with
Babak Farzami, the Company's Vice President, Corporate Development. Mr. Farzami
receives a base salary of $15,833 per month and is eligible to receive a bonus
of up to 30% of his annual salary, subject to meeting specified performance
targets. In addition, the Company granted to Mr. Farzami stock options to
purchase 676,816 shares of Common Stock at a per share exercise price of $0.98.
If Mr. Farzami's employment is terminated by the Company without cause, he will
be entitled to:
- payments equal to six months of his base salary;
- a payment equal to his most recent cash bonus; and
- acceleration of vesting with respect to shares of Common Stock and options
to purchase Common Stock held by Mr. Farzami at the time of his
termination which would have vested if his employment with the Company had
continued uninterrupted for an additional 12 months.
On March 25, 1999, the Company entered into an employment agreement with Dev
Ittycheria, the Company's Vice President, Application Hosting Services.
Mr. Ittycheria receives a base salary of $15,833 per month and is eligible to
receive a bonus of up to 30% of his annual salary, subject to meeting specified
performance targets. In addition, the Company granted to Mr. Ittycheria stock
options to purchase 507,612 shares of Common Stock at a per share exercise price
of $0.98. If Mr. Ittycheria's employment is terminated by the Company without
cause, he will be entitled to:
- payments equal to six months of his base salary;
- a payment equal to his most recent cash bonus; and
- acceleration of vesting with respect to shares of Common Stock and options
to purchase Common Stock held by Mr. Ittycheria at the time of his
termination which would have vested if his employment with the Company had
continued uninterrupted for an additional twelve months.
On May 14, 1999, the Company entered into an employment agreement with
William Loftus, the Company's Senior Vice President, Operations. William Loftus
receives a base salary of $16,667 per month and is eligible to receive a bonus
of up to 30% of his annual salary, subject to meeting specified performance
targets. Upon the occurrence of a change of control of the Company, any options
granted to William Loftus to purchase Common Stock will automatically vest in
full. If William Loftus' employment is terminated by the Company without cause
or if his compensation and benefits are materially reduced, he will be entitled
to:
- payments equal to nine months of his base salary;
- payments equal to the pro rated amount of his quarterly profit sharing
payment; and
- acceleration of vesting of options to purchase Common Stock held by
William Loftus at the time of his termination which would have vested if
his employment with the Company had continued uninterrupted for an
additional 12 months.
On September 12, 1999, the Company entered into an employment agreement with
Adam Sholley, the Company's Vice President Chief Marketing Officer. The
agreement is for one year and automatically renews unless Mr. Sholley resigns or
the Company terminates his employment.
7
<PAGE>
Mr. Sholley receives a base salary of $16,667 per month and is eligible to
receive a bonus of up to 30% of his annual salary. In connection with his
employment, Mr. Sholley has been granted stock options to purchase 220,000
shares of Common Stock at a per share exercise price of $5.50. If after one year
the Company terminates Mr. Sholley's employment without cause, he will be
entitled to payments equal to six months of his base salary. In addition, after
one year Mr. Sholley may resign and treat his resignation as a termination by
the Company without cause, upon the occurrence of any of the following events:
- his salary or bonus eligibility is materially reduced; or
- a change in control of the Company or sale of all or substantially all of
the Company's assets.
On March 6, 2000, the Board of Directors appointed John A. Loftus as the
Company's Vice President, e-Solutions. On May 14, 1999 the Company entered into
an employment agreement with John A. Loftus. John A. Loftus receives a base
salary of $16,667 per month. John A. Loftus is eligible to receive a bonus of up
to 25% of his annual salary, subject to meeting specified performance targets.
In addition, in May 1999 the Company granted to John A. Loftus stock options to
purchase 33,812 shares of Common Stock at a per price share of $1.18.
On March 6, 2000, the Board of Directors appointed Mr. Stedman as the
Company's Vice President, North American Field Operations. In addition, in
May 1999, the Company granted Mr. Stedman stock options to purchase 80,000
shares of Common Stock at a per price share of $1.09. In December 1999, the
Company granted Mr. Stedman stock options to purchase 30,000 shares of Common
Stock at a per price share of $28.80. In March 2000, the Company granted
Mr. Stedman stock options to purchase 70,000 shares of Common Stock at a per
price share of $62.78.
On January 26, 2000, the Company entered into an employment agreement with
Maureen Ellenberger which provides that, effective immediately after the
March 31, 2000 closing of the Company's acquisition of Eggrock Partners, Inc.
("Eggrock"), Ms. Ellenberger has been appointed the Company's Vice President,
Chief People and Innovation Officer. Ms. Ellenberger's agreement provides for a
base salary of $15,000 per month, and she is eligible to receive an annual bonus
of up to 25% of her annual salary. If Ms. Ellenberger's employment is
terminated:
- by the Company without cause;
- by Ms. Ellenberger for good reason;
- by Ms. Ellberger following a change in control of the Company, or a sale
of all or substantially all of the Company's assets;
- by mutual agreement; or
- by the Company in the event of Ms. Ellenberger's death or disability,
then Ms. Ellenberger will continue to be paid her salary for six months and she
will be paid any bonus for which she is eligible at such time. Ms. Ellenberger
received 1,151,662 shares of Common Stock upon the closing of the Company's
acquisition of Eggrock. See "Certain Relationships and Related
Transactions-Eggrock Partners, Inc."
8
<PAGE>
SUMMARY COMPENSATION
The following table sets forth certain information with respect to the
compensation of each of the Named Executive Officers for the years ended
December 31, 1998 and December 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM AWARDS
----------------------------
NUMBER OF
SHARES OF
ANNUAL COMMON
COMPENSATION(1) STOCK
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS(2) YEAR SALARY($) BONUS($)(3) OPTIONS(4) COMPENSATION(5)
- ------------------------------- ---- --------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Gordon Brooks(6)...................... 1999 250,000 79,500 350,000 --
President and Chief Executive 1998 21,795 125 4,893,596 --
Officer
William Loftus(7)..................... 1999 133,333 44,407 -- $346,678(8)
Vice President, Internet Solutions
Christopher Harding(9)................ 1999 219,053 97,734 1,212,500 --
Vice President, Worldwide Field
Operations and Alliances
Kevin Comerford(10)................... 1999 180,000 57,365 80,000 --
Chief Financial Officer, Treasurer 1998 69,048 125 216,000 --
and Secretary
Janet S. Tremlett(11)................. 1999 178,000 56,566 224,000 --
Vice President, Strategy Solutions
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table above does not include (i) medical,
group life or other benefits which are available to all of the Company's
salaried employees, and (ii) perquisites and other personal benefits,
securities or property which do not exceed the lesser of $50,000 or 10% of
the total annual salary and bonuses for each of the Named Executive
Officers.
(2) Unless otherwise noted, lists the principal position with the Company as of
December 31, 1999.
(3) Unless otherwise noted, represents amounts awarded as annual variable
incentive plan distributions.
(4) Reflects the grant of options to purchase Common Stock.
(5) Unless otherwise noted, represents Company contributions to the Company's
401(k) Plan.
(6) Mr. Brooks joined the Company as an executive officer in October 1998.
(7) William Loftus joined the Company as an executive officer in May 1999. In
March 2000, the Board of Directors appointed Mr. Loftus Senior Vice
President, Operations.
(8) This amount represents an amount loaned to William Loftus by the Company for
the payment of taxes. William Loftus had a large tax obligation in 1999 due
to his election to include in income in 1999 the fair market value of shares
of stock that he received in connection with the sale of WPL
Laboratories, Inc. to the Company in May 1999. The loan bears interest at
the rate of 8.75% per
9
<PAGE>
annum and is secured by William Loftus's stock in the Company. William
Loftus has no personal liability for the loan beyond the stock he has
pledged. All principal and accrued interest on the loan is due on the first
to occur of (i) the sale by William Loftus of any of the pledged shares and
(ii) the fourth anniversary of the note. See "Certain Relationships and
Related Transactions-Acquisitions-WPL Laboratories, Inc."
(9) Mr. Harding joined the Company as an executive officer in March 1999.
(10) Mr. Comerford joined the Company as an executive officer in June 1998.
(11) Ms. Tremlett joined the Company as an executive officer in January 1999.
OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options during the year ended December 31, 1999 to each of the Named
Executive Officers. The Company granted no stock appreciation rights during the
year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------------------- AT ASSUMED ANNUAL RATES
PERCENT OF OF STOCK PRICE
NUMBER OF SHARES TOTAL OPTIONS EXERCISE APPRECIATION FOR OPTION
OF COMMON STOCK GRANTED TO PRICE PER TERM (1)
UNDERLYING OPTIONS EMPLOYEES IN SHARE EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR (2) DATE 5% 10%
- ---- ------------------ ------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gordon Brooks............... 350,000(3) 4.2% $28.93 12/10/99 $6,372,623 $16,144,722
William Loftus.............. -- -- -- -- -- --
Christopher Harding......... 1,212,500(4) 14.5 0.89 2/17/09 675,222 1,711,144
Kevin Comerford............. 80,000(5) 1.0 5.07 9/3/09 254,702 645,466
Janet S. Tremlett........... 144,000(6) 1.7 0.89 2/11/09 80,741 205,056
80,000(7) 1.0 5.07 9/3/09 210,728 648,960
</TABLE>
- ------------------------
(1) As required by the rules of the Securities and Exchange Commission, amounts
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
the prescribed assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date. Actual gains, if any, on stock option exercises will depend
on the future performance of the Common Stock and the date on which the
options are exercised. No gain to the optionees is possible without an
appreciation in stock price, which will benefit all stockholders
commensurately.
(2) Equal to the per share fair market value of the underlying shares of Common
Stock on the date of grant.
(3) 25% of these options will vest on December 10, 2000, with the remaining
shares vesting at a rate of 2.08% per month over 36 months.
(4) All of these options vested on the closing of the Company's initial public
offering in October 1999.
(5) 25% of these options will vest on September 3, 2000 with the remaining
shares vesting at a rate of 2.08% per month over 36 months.
10
<PAGE>
(6) 25% of these options, or 36,000 shares, vested on April 1, 1999, with the
remaining shares vesting at a rate of 2.08% per month over the 36 month
period following April 1, 1999.
(7) 25% of these options will vest on September 3, 2000, with the remaining
shares vesting at a rate of 2.08% per month.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning options
exercised during 1999 and the number and value of unexercised stock options held
by each of the Named Executive Officers as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT YEAR-END AT YEAR-END($)(1)
ACQUIRED ON REALIZED --------------------------- ----------------------------
NAME EXERCISE(#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gordon Brooks.................. 112,940 $10,165 4,780,660 350,000 $170,239,303 $2,651,250
William Loftus................. -- -- -- -- -- --
Christopher Harding............ -- -- 1,212,500 -- 43,177,125 --
Kevin Comerford................ -- -- 54,000 242,000 4,553,190 8,367,810
Janet S. Tremlett.............. -- -- 78,000 218,000 3,051,945 8,465,735
</TABLE>
- ------------------------
(1) Based on the aggregate fair market value of the underlying shares of Common
Stock on December 31, 1999 ($73.00 per share), less the aggregate option
exercise price.
(2) Represents the difference between the aggregate fair market value of the
underlying shares of Common Stock on the date of exercise and the aggregate
exercise price.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL
Prior to the establishment of the Compensation Committee in October 1999,
decisions concerning compensation of executive officers were made by the Board
of Directors, including Gordon Brooks, the Company's President and Chief
Executive Officer. Since October 1999, the Compensation Committee has been
primarily responsible for recommending compensation policies with respect to the
Company's executive officers, and for making decisions about awards under
certain of the Company's stock-based compensation plans. With respect to
deliberations, recommendations and decisions regarding executive compensation
prior to October 1999, all references in this report to the Compensation
Committee shall be deemed to be references to the entire Board of Directors.
Each member of the Compensation Committee is a "non-employee director" within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and an "outside director" within the meaning of
Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). This report addresses the Company's
compensation policies for 1999 as they affected the Company's President and
Chief Executive Officer and the Company's other executive officers, including
the Named Executive Officers.
11
<PAGE>
COMPENSATION POLICIES
The Compensation Committee's objectives are to provide an executive
compensation program that aligns executive compensation with the achievement of
specific Company goals. The Compensation Committee believes that executive
compensation should also recognize individual performance and responsibility,
underscore the importance of shareholder value creation and assist the Company
in attracting and retaining talented executives in an increasingly competitive
industry environment.
Compensation decisions are generally determined following a review of
factors that the Compensation Committee believes are relevant, including
external competitive data, the Company's achievement data, external and internal
compensation surveys and studies, the Company's achievements over the past year,
the individual's contributions to the Company's success, any significant changes
in role or responsibility, and the internal equity of compensation
relationships.
In general, the Compensation Committee intends that the overall total
compensation opportunities provided to the executive officers should reflect
competitive compensation for executives with corresponding responsibilities in
comparable firms providing similar services. To the extent determined to be
appropriate, the Compensation Committee also considers general economic
conditions, economic conditions particular to the Company's industry, the
Company's financial performance, and the individual's performance in
establishing the compensation opportunities of the executive officers. Total
compensation opportunities for the executive officers are adjusted over time as
necessary to meet this objective. Actual compensation earned by the executive
officers reflects both their contributions to the Company's creation of actual
shareholder value and the Company's actual financial performance.
The competitiveness of the Company's total compensation program--including
base salaries, annual cash bonuses, and long-term stock-based incentives--may be
periodically assessed with the assistance of one or more outside compensation
consultants. Data for external comparisons are drawn from a number of sources,
including the publicly available disclosures of selected comparable firms with
similar products and national compensation surveys of information technology
firms of similar size.
While the targeted total compensation levels for the executive officers are
intended to be competitive, compensation paid in any particular year may be more
or less than the average, depending upon the Company's actual performance and
other competitive factors.
COMPENSATION COMPONENTS
The principal components of compensation for the Company's executive
officers are cash compensation, in the form of salary and variable pay, and
non-cash compensation, in the form of stock options. In order to attract and
retain qualified executives, the Compensation Committee has and may continue to
approve employment agreements between the Company and its executive officers.
CASH COMPENSATION
Cash compensation in the form of salary is intended to reflect an
executive's knowledge, skills, and level of responsibility as well as the
economic and business conditions affecting the Company. The salary of each
executive, including Mr. Brooks, was determined by the Compensation Committee
with assistance provided by surveys provided by a number of outside consulting
firms that specialize in the recruitment and retention of executives and the
development of executive compensation packages. These determinations reflected
current competitive market conditions, as well as the Company's desire
12
<PAGE>
to have a fully functioning executive team prior to its initial public offering
in October 1999. All of the Company's executive officers are parties to
employment agreements with the Company that set minimum base salaries and other
terms of compensation for such officers. See "Compensation of Executive
Officers--Employment Arrangements."
The Company's variable incentive plan is guided by the overall financial
performance of the Company, for example the achievement of revenue and/or other
financial objectives, as well as each executive's achievement of specific goals,
such as an executive's ability to achieve closure on critical projects, to
attain required results and to contribute positively to the Company's culture.
The Company believes all of these factors are critical to ensuring the strong
financial performance of the Company as a whole, and thus help define an
executive's total performance and corresponding plan distribution. All variable
incentive awards are made at the discretion of the Compensation Committee. While
all executive officers of the Company have a target amount for a variable
incentive plan distribution, there is no pre-set amount allocated and available
in a pool for executive officers. During 1999, variable incentive plan
distributions were paid on a quarterly basis.
NON-CASH COMPENSATION
The Compensation Committee utilizes stock options as a long term, non-cash
incentive and as a means of aligning the long-term interests of executives with
those of the Company's stockholders. Stock options are awarded based upon the
market price of the Common Stock on the date of grant. Therefore, they do not
become valuable to the holder unless the trading price of the Common Stock
increases above the price on the date of grant. The number of stock options
granted to an executive as a form of non-cash compensation is determined by
taking into consideration factors such as (i) the number of stock options
previously granted to that executive; (ii) that executive's remaining
exercisable options and; (iii) the value of such remaining options, as compared
to the anticipated value that the executive may contribute to the Company in the
future. For certain of the Company's executive officers who received shares of
Common Stock as stockholders of a company which the Company acquired, the grant
of stock options may not have as valuable of an incentive effect. In these
cases, the Compensation Committee may recommend increased variable incentive
compensation in order to provide an executive with appropriate incentive.
Stock options are not necessarily granted to executive officers on an annual
basis. In 1999, the Company granted options to purchase an aggregate of
3,822,924 shares of Common Stock to nine executive officers, six of which joined
the Company during 1999, as the Company developed its executive management team
to accommodate its expanding business opportunities and administer its
responsibilities as a publicly held company.
COMPENSATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND OTHER EXECUTIVE
OFFICERS
The Compensation Committee considered the data from surveys provided by
outside consulting firms and the other criteria set forth above as a basis for
its subjective assessment that the salaries, variable compensation and stock
option elements of compensation established by it for 1999, including the base
salary ($250,000), variable incentive plan distribution ($60,125) and stock
options (350,000) of Mr. Brooks, were appropriate and were comparable to the
salaries, bonuses and stock options of executive officers of companies similar
to those of the Company.
13
<PAGE>
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) generally disallows a tax deduction to public companies for
compensation in excess of $1.0 million paid to the company's chief executive
officer and four other most highly compensated executive officers. Certain
performance-based compensation is excluded from this limitation. The
Compensation Committee periodically reviews the potential consequences of
Section 162(m) and may structure the performance-based portion of its executive
compensation to comply with certain exemptions in Section 162(m). However, the
Compensation Committee reserves the right to use its judgment to authorize
compensation payments that do not comply with the exemptions in Section 162(m)
when the Compensation Committee believes that such payments are appropriate and
in the best interests of the stockholders, after taking into consideration
changing business conditions or the officer's performance. In any event, there
can be no assurance that compensation attributable to stock options and
restricted stock granted under the Company's stock plans will be exempt from
Section 162(m).
Christopher H. Greendale
Gordon Brooks
Walter W. Buckley, III
Frank Selldorff
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Through September 1999, decisions concerning compensation of executive
officers were made by the Board of Directors which included Gordon Brooks, the
President and Chief Executive Officer of the Company, and Frank Selldorff, a
former executive officer of the Company. In October 1999, the Company
established a Compensation Committee consisting of Christopher H. Greendale and
Walter W. Buckley, III. Thereafter decisions concerning compensation of
executive officers were made by the Compensation Committee. No executive officer
of the Company has served as a director or member of the Compensation Committee
(or other committee serving an equivalent function) of any other entity, whose
executive officers served on the Board of Directors or the compensation
committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INTERNET CAPITAL GROUP
As of March 15, 2000, Internet Capital Group beneficially owned 38.3% of the
Common Stock. The Company's Chairman of the Board of Directors, Christopher H.
Greendale, serves as a Managing Director of Operations of Internet Capital Group
and another of our directors, Walter W. Buckley, III, is a co-founder and serves
as President, Chief Executive Officer and a director of Internet Capital Group.
Internet Capital Group held approximately 13.5% of the outstanding capital stock
of Applica Corporation ("Applica") immediately prior to our acquisition of
Applica and received 193,938 shares of Common Stock in exchange for its Applica
stock. See "Certain Relationships and Related Transactions-Acquisitions-Applica
Corporation."
On May 13, 1999, in connection with Internet Capital Group providing the
Company with a $4.0 million loan, the Company issued Internet Capital Group a
warrant to purchase up to 147,744 shares of Common Stock at a per share exercise
price of $4.07, as adjusted from time to time. Internet Capital Group
subsequently converted this promissory note into shares of the Company's
Series B Preferred Stock, all of which automatically converted to Common Stock
upon the consummation of the
14
<PAGE>
Company's initial public offering in October 1999. The warrant expires on
September 30, 2006. The shares issuable upon exercise of this warrant are
subject to antidilution protection, including for issuances of the Company's
securities at a per share price below the warrant exercise price.
Internet Capital Group has registration rights with respect to all shares of
Common Stock it owns under a registration rights agreement with certain other of
the Company's stockholders. Under the terms of that agreement, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, those holders are entitled to notice of and to include
shares of Common Stock in the registration. Additionally, the holders are also
entitled to specified demand registration rights pursuant to which they may
require the Company on up to two occasions to file a registration statement
under the Securities Act with respect to shares of Common Stock, and the Company
is required to use its best efforts to effect that registration. Further,
holders may require the Company to file an unlimited number of additional
registration statements on Form S-3. The Company will bear all of the expenses
incurred in connection with all exercises of these registration rights, other
than expenses incurred in connection with requested registrations on Form S-3
after the fourth request.
The Company provides services to Internet Capital Group and some of Internet
Capital Group's affiliated entities. During the fiscal year ended December 31,
1999, our total revenues derived from engagements with Internet Capital Group
and its affiliates were approximately $4,548,000.
ACQUISITIONS
APPLICA CORPORATION. On March 25, 1999, the Company entered into an
Agreement and Plan of Reorganization with Applica pursuant to which Applica
merged with and into the Company. Under the terms of the agreement, the Company
issued an aggregate of 1,447,398 shares of Common Stock to the former
stockholders of Applica, including:
- 193,938 shares to Internet Capital Group;
- 331,230 shares to the Company's Vice President, Corporate Development,
Babak Farzami;
- 248,424 shares to the Company's Vice President, Application Hosting
Services, Dev Ittycheria; and
- 72,368 shares held in escrow to secure indemnification obligations to the
Company under the agreement.
WPL LABORATORIES, INC. On May 17, 1999, the Company entered into an
Agreement and Plan of Reorganization with WPL Laboratories, Inc. ("WPL"), Celtic
Acquisition Corp. ("Celtic"), William Loftus, John A. Loftus, David Perme and
Kevin Sheehan pursuant to which WPL merged with and into Celtic. Celtic is a
wholly owned subsidiary of the Company formed for the purpose of acquiring WPL.
William Loftus is the Company's Senior Vice President, Operations and John A.
Loftus, William Loftus' brother, is the Company's Vice President, e- Solutions.
The purchase price consisted of cash in the aggregate amount of $4,999,860
and 2,728,280 shares of Common Stock, of which $3,399,905 in cash and 1,855,232
shares were issued to William Loftus and $999,972 in cash and 545,656 shares
were issued to John A. Loftus. One-half of the aggregate cash consideration was
paid at the closing of the acquisition. Twenty-five percent of the cash
consideration will be paid pro rata to the former WPL stockholders on May 17,
2000 and the remaining 75% will be
15
<PAGE>
paid pro rata to the former WPL stockholders in equal monthly installments over
the next 36 months for as long as the recipient does not voluntarily terminate
his employment with us and is not terminated by us for cause.
713,548 of the shares of Common Stock issued to William Loftus and 209,866
of the shares of Common Stock issued to John A. Loftus are subject to the terms
of Restricted Stock Agreements, granting the Company a repurchase right for
these shares in the event William Loftus' or John A. Loftus' employment at the
Company is terminated voluntarily by William Loftus or John A. Loftus, as
appropriate, or for cause by the Company. The Company's right of repurchase
expires as to 25% of the shares subject to each agreement on May 14, 2000 and as
to the remaining 75% of the shares ratably over the ensuing 36 months. The
Company's repurchase rights under these agreements terminate upon a change in
control of the Company or if William Loftus or John A. Loftus, as appropriate,
is terminated by the Company for reasons other than for cause.
The Company agreed to loan $346,785 to William Loftus and $104,809 to John
A. Loftus at the prime interest rate plus one percent in order to fund their tax
liabilities associated with this transaction. Each of William Loftus and John A.
Loftus issued to the Company a promissory note secured by a pledge of 685,008
and 201,472 shares of Common Stock, respectively, as security for these loans.
Pursuant to our acquisition of WPL, the Company assumed WPL options held by
Daniel Loftus, John Loftus, Sr. and Veena Loftus, each of whom are members of
William Loftus' and John A. Loftus' immediate family. These options became
exercisable pursuant to their terms in the following amounts:
- Daniel Loftus' option became exercisable for 8,452 shares of Common Stock
at a per share exercise price of $1.18;
- John Loftus, Sr.'s option became exercisable for 8,452 shares of Common
Stock at a per share exercise price of $1.18; and
- Veena Loftus' option became exercisable for 16,904 shares of Common Stock
at a per share exercise price of $1.18.
EGGROCK PARTNERS, INC.
On January 26, 2000, the Company entered into an Agreement and Plan of
Merger with Eggrock and Benedict Acquisition Corp., a wholly owned subsidiary of
the Company pursuant to which on March 31, 2000, Benedict Acquisition Corp.
merged with and into Eggrock with Eggrock surviving as the Company's wholly
owned subsidiary. As consideration for the acquisition, the Company issued
approximately 6,176,332 shares of Common Stock to the former Eggrock
stockholders and assumed options to purchase an aggregate of approximately
1,095,621 shares of Common Stock.
Immediately after the closing, Maureen Ellenberger, the President of
Eggrock, was appointed the Company's Vice President, Chief People and Innovation
Officer. Of the approximately 6,176,332 shares of Common Stock issued in the
acquisition of Eggrock, Ms. Ellenberger received 1,151,662 shares. Half of
Ms. Ellenberger's shares are subject to the terms of a Restricted Stock
Agreement, granting the Company a repurchase right for the shares in the event
Ms. Ellenberger's employment at the Company is terminated voluntarily by
Ms. Ellenberger without good reason or for cause by the Company. The Company's
right to repurchase expires as to 25% of the shares subject to the agreement one
year after the closing of the acquisition of Eggrock and as to the remaining 75%
of the shares ratably over the ensuing 36 months. The Company's repurchase
rights under these agreements terminate upon a change
16
<PAGE>
of control of the Company or if Ms. Ellenberger is terminated by the Company for
reasons other than for cause.
FRANK SELLDORFF
Frank Selldorff is the Company's founder, a former Chairman of our Board of
Directors, a former Chief Executive Officer and executive officer of the
Company, and presently serves as one of the Company's directors. As of
March 15, 2000, Mr. Selldorff beneficially owned 16.5% of the Common Stock.
On May 26, 1999, Mr. Selldorff exercised a stock option to purchase
1,200,000 shares of Common Stock at a per share purchase price of $0.34 per
share.
On January 4, 1999, the Company changed its federal income tax status from
an S corporation to a C corporation. In connection with this change, the Company
entered into an agreement with Mr. Selldorff to facilitate its change in tax
status. Pursuant to this agreement, Mr. Selldorff agreed to indemnify the
Company for all income tax liability prior to January 4, 1999 related to its
failure to qualify as an S corporation, up to a maximum of $365,000.
GORDON BROOKS
Gordon Brooks, the Company's President and Chief Executive Officer and a
director, beneficially owned 12.9% of the Common Stock as of March 15, 2000. On
March 5, 1999, Mr. Brooks exercised a stock option to purchase 112,940 shares of
Common Stock at a per share purchase price of $0.89.
EMPLOYMENT ARRANGEMENTS
The Company has entered into employment and certain other compensatory
arrangements with many of its executive officers. See "Executive
Compensation-Employment Arrangements."
STOCK OPTIONS
As of December 31, 1999, the Company had outstanding options under the
Company's 1998 Stock Plan and 1999 Stock Incentive Plan, as amended, to purchase
an aggregate of 11,012,982 shares of Common Stock held by the Company's
directors and executive officers at a per share weighted average exercise price
of $1.96. In addition, effective March 19, 1999 the Company issued to Thomas
Harding, a member of Christopher Harding's immediate family, an option to
purchase 24,000 shares of Common Stock at a per share exercise price of $0.98.
17
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The following graph compares the cumulative total stockholder return on the
Common Stock with the cumulative return of (i) the Morgan Stanley High Tech 35
Index and (ii) the Nasdaq Stock Market Index. The graph assumes the investment
of $100 on October 6, 1999, the date on which the Common Stock was first
publicly traded, in the Common Stock, the Morgan Stanley High Tech 35 Index and
the Nasdaq Stock Market Index and assumes dividends are reinvested. The
measurement point is the last trading day for the fiscal year ending
December 31, 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OCTOBER 6, 1999 DECEMBER 31, 1999
<S> <C> <C>
Breakaway Solutions, Inc. $100.00 $180.69
Nasdaq Stock Market Index - US $100.00 $142.42
Morgan Stanley High Tech 35 $100.00 $97.79
</TABLE>
18
<PAGE>
PROPOSAL 2--RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, at the recommendation of the Audit Committee, has
selected the firm of KPMG LLP ("KPMG") as the Company's independent auditors for
the fiscal year ending December 31, 2000. KPMG audited the Company's financial
statements for the fiscal year ended December 31, 1999. Although stockholder
approval of the Board's selection of KPMG is not required by law, the Board
believes that it is advisable to give stockholders an opportunity to ratify this
selection. If this proposal is not approved at the Meeting, the Board will
reconsider its selection of KPMG.
Representatives of KPMG are expected to be present at the Meeting and will
have the opportunity to make a statement if they desire to do so and will also
be available to respond to appropriate questions from stockholders.
THE BOARD OF DIRECTORS BELIEVES THAT THE RATIFICATION OF KPMG AS THE
COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR 2000 IS IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE FOR THIS PROPOSAL.
CHANGES IN INDEPENDENT AUDITORS
The Company retained its current independent auditors, KPMG, and replaced
Brown & Brown, LLP ("Brown & Brown") in May 1999. Brown & Brown had been
retained to audit the Company's financial statements as of and for the year
ended December 31, 1998. In January 1999, the Company retained Brown & Brown as
its independent auditors, replacing Arthur Andersen LLP ("Arthur Andersen").
Arthur Andersen had been retained to audit the Company's financial statements as
of and for the year ended December 31, 1997. The Board of Directors approved
each of the changes in the Company's independent auditors. KPMG has reaudited
the Company's financial statements as of and for the years ended December 31,
1997 and December 31, 1998.
During the years in which the Company retained Brown & Brown and Arthur
Andersen and through the periods prior to each of their replacement, the Company
had no disagreements with either of Brown & Brown or Arthur Andersen on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Brown & Brown or Arthur Andersen, as appropriate, would have
caused either of them to make reference thereto in their report on the financial
statements for such years. The reports of the Company's financial statements of
Brown & Brown, as of December 31, 1998 and for the year then ended, and of
Arthur Andersen, as of December 31, 1997 and for the year then ended, did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors, executive officers and holders
of more than 10% of the Common Stock ("Reporting Persons") to file with
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Based solely on its review of copies of Section 16(a) reports filed by the
Reporting Persons and furnished to the Company or written representations from
certain reporting persons that no Form 5 filing was
19
<PAGE>
required for such person, the Company believes that during 1999 all filings
required to be made by the Reporting Persons were timely made in accordance with
the requirements of the Exchange Act.
STOCKHOLDER PROPOSALS FOR 2000 MEETING
Written notice of proposals of stockholders submitted outside the processes
of Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), for consideration at the Meeting must have been received by the
Company on or before March 2, 2000, in order to be considered timely for
purposes of Rule 14a-4 under the Exchange Act. The persons designated in the
Company's proxy card will be granted discretionary authority with respect to any
stockholder proposal with respect to which the Company does not receive timely
notice. Stockholder proposals submitted pursuant to Rule 14a-8 under the
Exchange Act for inclusion in the Company's proxy materials for its 2001 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than December 21, 2000.
OTHER MATTERS
The Board of Directors knows of no other business which will be presented
for consideration at the Meeting other than that described above. However, if
any other business should come before the Meeting, it is the intention of the
persons named in the enclosed proxy card to vote, or otherwise act, in
accordance with their best judgment on such matters.
The Company will bear the costs of soliciting proxies. In addition to
solicitations by mail, the Company's directors, officers and regular employees
may, without additional remuneration, solicit proxies by telephone, facsimile
and personal interviews. The Company will also request brokerage houses,
custodians, nominees and fiduciaries to forward copies of the proxy materials to
those persons for whom they hold shares and request instructions for voting the
proxies. The Company will reimburse such brokerage houses and other persons for
their reasonable expenses in connection with this distribution.
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE
WILL GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR SHARES
PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXY CARDS.
By Order of the Board of Directors
/s/ Kevin Comerford
Kevin Comerford, Secretary
April 20, 2000
20
<PAGE>
APPENDIX A
BREAKAWAY SOLUTIONS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
2000 ANNUAL MEETING OF STOCKHOLDERS
MAY 11, 2000
The undersigned, revoking all prior proxies, hereby appoints Gordon Brooks,
Christopher H. Greendale and Kevin Comerford, and each of them, with full
power of substitution, as proxies for the undersigned to act and to vote at
the Annual Meeting of Stockholders of Breakaway Solutions, Inc. (the
"Company") to be held on May 11, 2000 and at any adjournment or adjournments
thereof as designated herein upon all matters referred to on the reverse side
of this Proxy and as described in the Proxy Statement for the Meeting and, in
their discretion, upon any other matters that may properly come before the
Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS MADE, THE PROXIES WILL VOTE
FOR THE ELECTION OF THE DIRECTOR NOMINEES AND FOR PROPOSAL 2.
PLEASE VOTE, DATE AND SIGN ON THE REVERSE SIDE OF THIS PROXY AND
RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
<PAGE>
April 20, 2000
Dear Stockholder:
Please take note of the important information enclosed with this Proxy. There
are a number of issues related to the management and operation of your
company that require your immediate attention and approval. These are
discussed in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your right to
vote your shares.
Please mark the boxes on this Proxy to indicate how your shares will be
voted. Then sign the card, detach it and return it in the enclosed
postage-page envelope.
Your vote must be received prior to the Annual Meeting of Stockholders to be
held on May 11, 2000.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Breakaway Solutions, Inc.
DETACH HERE
PLEASE MARK
/x/ VOTES AS IN
THIS EXAMPLE.
<TABLE>
<S> <C>
1. ELECTION OF TWO CLASS I DIRECTORS TO SERVE
FOR THE ENSUING THREE YEARS.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU THE BOARD OF DIRECTORS RECOMMENDS THAT YOU
INSTRUCT THE PROXIES TO VOTE FOR ALL OF THE INSTRUCT THE PROXIES TO VOTE FOR PROPOSAL
NOMINEES LISTED BELOW. NO. 2.
Nominees: (01) Gordon Brooks and FOR AGAINST ABSTAIN
(02) Christopher H. Greendale 2. Ratification of the appointment of KPMG / / / / / /
LLP as independent auditors of the Company
FOR WITHHELD for the current year.
ALL / / / / FROM ALL
NOMINEES NOMINEES
/ / _______________________ MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
For all nominees except
as noted above MARK BOX AT RIGHT FOR COMMENTS AND NOTE BELOW / /
---------------------------------
---------------------------------
---------------------------------
Please sign exactly as name(s) appear(s) hereon. Joint owners
should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such. If a corporation or partnership, please sign by
authorized person.
- ----------------- --------- ------------------ --------
SIGNATURE DATE SIGNATURE DATE
</TABLE>
