<PAGE>
ON TECHNOLOGY CORPORATION
ONE CAMBRIDGE CENTER
CAMBRIDGE, MA 02142
Dear Stockholder:
The Annual Meeting of Stockholders (the "Meeting") of ON Technology
Corporation (the "Company") will be held at Fleet National Bank, 75 State
Street, Boston, Massachusetts at 10:00 a.m., Eastern Daylight Time, on
Thursday, April 30, 1998.
At the Meeting, you will be asked to consider and vote upon the election of
a director to serve until the annual meeting in the year 2001, to approve an
amendment to the Company's 1992 Employee and Consultant Stock Option Plan (the
"Stock Option Plan") to increase the number of shares available under the
Stock Option Plan from 3,300,000 shares to 3,800,000 shares, and to ratify the
Board of Directors' selection of Arthur Andersen LLP as the Company's
independent auditors.
In the material accompanying this letter, you will find a Notice of Annual
Meeting of Stockholders, a Proxy Statement relating to the actions to be taken
by the Company's stockholders at the Meeting and a Proxy. The Proxy Statement
more fully describes and includes information about the matters for
consideration at the Meeting.
All stockholders are cordially invited to attend the Meeting in person.
However, whether or not you plan to attend the Meeting, please complete, sign,
date and return your Proxy in the enclosed envelope. If you attend the
Meeting, you may vote in person as you wish, even though you have previously
returned your Proxy. It is important that your shares be represented and voted
at the Meeting.
Sincerely,
/s/ Herman Delatte
Herman DeLatte
President and Chief Executive
Officer
<PAGE>
ON TECHNOLOGY CORPORATION
ONE CAMBRIDGE CENTER
CAMBRIDGE, MASSACHUSETTS 02142
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 30, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of ON
Technology Corporation, a Delaware corporation (the "Company"), which will be
held at Fleet National Bank, 75 State Street, Boston, Massachusetts at 10:00
a.m., Eastern Daylight Time, on Thursday, April 30, 1998, for the following
purposes:
1. To elect one Class III director to serve until the Company's Annual
Meeting of Stockholders in 2001 and until his successor is duly elected and
qualified;
2. To approve and ratify an amendment to the Company's 1992 Employee and
Consultant Stock Option Plan (the "Stock Option Plan") to increase the
number of shares authorized for issuance under the Stock Option Plan from
3,300,000 shares to 3,800,000 shares;
3. To ratify the selection of Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998; and
4. To transact such other business that may properly come before the
Meeting or any postponement or adjournment thereof.
Stockholders of record at the close of business on March 6, 1998 are
entitled to notice of, and to vote at, this Annual Meeting of Stockholders and
any postponement or adjournment thereof. For ten days prior to this Annual
Meeting, a complete list of the stockholders entitled to vote at the meeting
will be available for examination by any stockholder for any purpose relating
to the meeting during ordinary business hours at the principal offices of the
Company.
By Order of the Board of Directors
/s/ John M. Bogdan
JOHN M. BOGDAN
Secretary
Cambridge, Massachusetts
March 30, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED REPLY ENVELOPE. BY RETURNING YOUR PROXY CARD, YOU WILL ASSURE
REPRESENTATION OF YOUR SHARES AT THE MEETING. IF YOU ATTEND THE MEETING, YOU
MAY, OF COURSE, VOTE YOUR SHARES IN PERSON EVEN THOUGH YOU HAVE SENT IN YOUR
PROXY. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A
BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST
OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE>
ON TECHNOLOGY CORPORATION
ONE CAMBRIDGE CENTER
CAMBRIDGE, MASSACHUSETTS 02142
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors (the "Board") of proxies to be voted at the Annual Meeting
of Stockholders of the Company to be held at Fleet National Bank, 75 State
Street, Boston, Massachusetts, at 10:00 a.m., Eastern Daylight Time, on
Thursday, April 30, 1998, and at any adjournment thereof (the "Meeting"), for
the purposes set forth in the accompanying Notice of Annual Meeting. This
Proxy Statement and the accompanying proxy card are being mailed on or about
March 30, 1998, to the stockholders of record as of the close of business on
March 6, 1998 (the "Record Date").
GENERAL INFORMATION
SOLICITATION OF PROXIES
The cost of soliciting proxies from stockholders will be borne by the
Company. Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
common stock beneficially owned by others to forward to such beneficial
owners. The Company may reimburse persons representing beneficial owners of
Common Stock for their costs of forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be
supplemented by telephone, telegram or personal solicitation by directors,
officers or employees of the Company.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked in writing
(including by delivery of a later dated proxy) or in person by notifying the
Secretary of the Meeting, in writing, at any time prior to the voting of the
proxy.
VOTING OF PROXIES
If the enclosed proxy card is properly executed and returned to the Company,
all shares represented thereby will be voted as indicated therein. If a proxy
is returned without instructions it will be voted FOR the nominee named
therein, FOR the approval of the amendment to the Stock Option Plan and FOR
the ratification of Arthur Andersen LLP as the independent auditors of the
Company for the fiscal year ending December 31, 1998.
VOTING RIGHTS AND OUTSTANDING SHARES
On the Record Date there were 12,226,920 outstanding shares of Common Stock
(excluding 15,000 shares held in treasury), which is the only class of stock
outstanding and entitled to vote at the Meeting. The holders of such shares
will be entitled to cast one vote for each share held of record as of the
Record Date. On the Record Date, the closing sales price of the Common Stock
on the Nasdaq National Market was $1.59375 per share.
The holders of a majority of the shares of Common Stock issued, 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 will be counted for purposes of determining
whether a quorum exists at the Meeting.
<PAGE>
The affirmative vote of the holders of a plurality of the shares of Common
Stock voting on the matter is required for the election of directors. The
affirmative vote of the holders of a majority of the shares of Common Stock
present, in person or by proxy, and entitled to vote is required to approve
the amendment to the Stock Option Plan and to ratify the selection of Arthur
Andersen LLP as the Company's independent auditors. Abstentions and shares
held by brokers that are present, but not voted because the brokers do not
have the discretionary authority to vote such shares as to a particular
matter, i.e., "broker non-votes," will be counted as present for purposes of
determining if a quorum is present. Abstentions will have the same effect as a
negative vote. Broker non-votes, on the other hand, will have no effect on the
outcome of the vote.
2
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth, as of March 6, 1998, certain information
relating to the beneficial ownership of Common Stock by (i) each person known
by the Company to own beneficially more than 5% of the Company's Common Stock;
(ii) each director of the Company; (iii) the Company's current Chief Executive
Officer, former Chief Executive Officer and each of the five other most highly
compensated executive officers of the Company serving as of December 31, 1997,
as well as two former highly compensated executive officers of the Company
whose employment was terminated prior to December 31, 1997 (collectively, the
"Named Executive Officers"); and (iv) the directors and Named Executive
Officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(2)
------------------------ --------------------- ---------------
<S> <C> <C>
Herman DeLatte.......................... 175,000 1.40%
Christopher A. Risley(3)................ 1,326,524 10.59
Loren K. Platzman(4).................... 993,479 7.93
Charles River Partnership VI(5)......... 701,846 5.61
c/o Charles River Ventures, Inc.
1000 Winter Street, Suite 3300
Waltham, MA 02154
T. Chad Roll(6)......................... 69,954 *
John A. Rizzi........................... 44,500 *
Edward W. Green(6)...................... 19,000 *
John M. Bogdan(7)....................... 87,017 *
Ivan J. O'Sullivan(8)................... 281,199 2.25
James A. Batson......................... 5,000 *
Roy T. Sanford(6)....................... 6,000 *
R. Stephen Cheheyl(9)(10)............... 28,716 *
Brian T. Horey(9)(10)(11)............... 434,752 3.47
William C. Hulley(9)(10)(12)............ 497,626 3.97
Michael J. Zak(5)(9)(10)................ 645,837 5.16
All directors and executive officers as
a group (13 persons)(13)............... 3,621,125 28.92
</TABLE>
- --------
* Less than 1%
(1) Except as indicated in the footnotes to this table, 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, subject to
community property laws, where applicable.
(2) The percentages shown in this column are calculated from the 12,226,920
shares of Common Stock actually outstanding on March 6, 1998 (excluding
15,000 shares held in treasury), in addition to 294,724 options held by
the persons set forth in this table that are issuable within 60 days from
March 6, 1998.
3
<PAGE>
(3) Includes 286,195 shares of Common Stock held by The Risley Family Limited
Partnership (the "RFLP"). Mr. Risley is a general partner of the RFLP, in
which he holds a 1% general partnership interest. As the general partner,
he has sole voting and investment control over the shares of Common Stock
held by the RFLP. The Risley Children's Trust (the "Risley Trust"), an
irrevocable trust for the benefit of Mr. Risley's children, is the
limited partner of the RFLP. Mr. Risley has no investment or voting
control over the Risley Trust and disclaims beneficial ownership of the
Risley Trust's 99% limited partnership interest in the RFLP.
(4) Includes 300,000 shares held by Platzman Family Investments L.L.P. and
100,000 shares held by the Loren Platzman and Kathleen Platzman
Charitable Remainder Unitrust.
(5) Includes 529,538 shares of Common Stock held by Charles River Partnership
VI, 93,445 shares of Common Stock held by Charles River Partnership VI-A,
an affiliate of Charles River Partnership VI, 9,138 shares held by
Michael J. Zak, 26,184 shares held by John T. Neises, 29,825 shares held
by Richard M. Burnes, Jr. and 13,716 shares issuable upon the exercise of
options held by Mr. Zak. See Notes 9 and 10. Michael J. Zak is a director
of the Company and a general partner of Charles River Partnership VI and
Charles River Partnership VI-A. Richard M. Burnes, Jr. and John T. Neises
are also general partners of the general partner of Charles River
Partnership VI and Charles River Partnership VI-A. Charles River
Partnership VI disclaims beneficial ownership of the shares held by
Charles River Partnership VI-A and the shares held by Messrs. Zak, Burnes
and Neises. Charles River Partnership VI-A disclaims beneficial ownership
of the shares held by Charles River Partnership VI and the shares held by
Messrs. Zak, Burnes and Neises. Messrs. Zak, Burnes and Neises each
disclaim beneficial ownership with respect to the shares held by Charles
River Partnership VI and VI-A, except to the extent of his respective
proportionate pecuniary interest therein, and each also disclaims
beneficial ownership with respect to shares held by each of the other
general partners.
(6) All shares are issuable upon the exercise of options.
(7) Includes 67,919 shares issuable upon exercise of options.
(8) Includes 76,987 shares issuable upon the exercise of options.
(9) Includes 9,166 shares issuable upon exercise of options received under
the Company's 1995 Directors Stock Option Plan.
(10) Includes 4,550 shares issuable upon the exercise of options under the
Company's 1992 Employee and Consultant Stock Option Plan.
(11) Includes 421,036 shares of Common Stock directly held by Lawrence,
Tyrrell, Ortale & Smith II, L.P. ("LTOS"). Also includes 13,716 shares
issuable upon the exercise of options ("option shares") held by Mr.
Horey. See Notes 9 and 10. Mr. Horey, a director of the Company, is a
general partner of LTOS II Partners, the general partner of LTOS.
Pursuant to Mr. Horey's partnership agreement with LTOS, LTOS has a
beneficial interest in such option shares.
(12) Consists of 483,910 shares of Common Stock held directly by The P/A Fund,
L.P. William C. Hulley, a director of the Company, is a general partner
of Adams Capital Management, Inc., a managing partner of The P/A Fund,
L.P. Mr. Hulley disclaims beneficial ownership of the shares held by The
P/A Fund, L.P. Mr. Hulley assigned all options he received pursuant to
the Company's Director Stock Option Plan and pursuant to the Company's
1992 Employee and Consultant Stock Option Plan to The P/A Fund, L.P. and,
accordingly, disclaims beneficial ownership with respect to shares
issuable upon the exercise of such options. See Notes 9 and 10.
(13) Includes an aggregate of 294,724 shares of Common Stock issuable pursuant
to options exercisable within 60 days from March 6, 1998. Includes
1,824,978 shares held by affiliates of certain officers and directors of
the Company with respect to which such officers and directors disclaim
beneficial ownership.
4
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL I)
The Company has a classified Board of Directors consisting of two Class I
Directors, two Class II directors and two Class III directors. The Class I,
Class II and Class III directors currently serve until the annual meetings of
stockholders to be held in 1999, 2000 and 1998, respectively, and until their
respective successors are duly elected and qualified. At each annual meeting,
directors are elected for a full term of three years to succeed those whose
terms are expiring.
The term of office for both Class III directors is currently expiring and,
for personal reasons, Mr. Cheheyl has decided not to seek reelection to the
Company's Board of Directors. Only one nominee for director has been
recommended for election at the Meeting. The persons named in the proxy will
vote to elect as director Mr. Risley, unless the proxy is marked otherwise. In
accordance with the Company's Articles and the By-laws, as well as applicable
Delaware law, the vacant Class III directorship may be filled without a vote
of the Company's stockholders by a majority of the directors then in office.
The Class III director will be elected to hold office until the Annual
Meeting of Stockholders in 2001 and until his successor is duly elected and
qualified. The nominee has indicated his willingness to serve, if elected;
however, if the nominee should be unable to serve, the proxies may be voted
for a substitute nominee designated by the Board of Directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
IN FAVOR OF THE NAMED NOMINEE
5
<PAGE>
BOARD OF DIRECTORS
The table below sets forth for the current directors, including the Class
III nominee to be elected at this Meeting, certain information with respect to
age and background.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITION WITH THE COMPANY
- ---- --- -------- -------------------------
<S> <C> <C> <C>
Class I Directors:
William C. Hulley................. 39 1994 Director, Chairman of the Board
Herman DeLatte.................... 43 1997 President, CEO and Director
Class II Directors:
Michael J. Zak.................... 44 1992 Director
Brian T. Horey.................... 38 1993 Director
Nominee for Class III Director
to be elected at the
Annual Meeting:
Christopher A. Risley............. 48 1985 Director
</TABLE>
EXECUTIVE OFFICERS
The executive officers of the Company as of March 6, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Herman DeLatte.................. 43 President and Chief Executive Officer
John M. Bogdan.................. 50 Chief Financial Officer, Chief Accounting
Officer, Vice President, Finance, Treasurer
and Secretary
Edward W. Green................. 55 Vice President, Groupware
Roy T. Sanford.................. 43 Vice President, Marketing and Alliances
</TABLE>
On February 11, 1998, the Company consummated the sale of certain of its
security products and related assets, pursuant to an Asset Purchase Agreement,
to Elron Software, Inc. ("Elron"). In connection with the consummation of the
sale, Messrs. O' Sullivan and Roll left their employment with the Company and
began employment with Elron. The Company has not yet indentified qualified
candidates to fill these vacancies.
BUSINESS EXPERIENCE OF OFFICERS, DIRECTORS AND NOMINEES FOR DIRECTOR
Herman DeLatte has served as President and Director of the Company since
September 1997 and as Chief Executive Officer of the Company since November
1997. Mr. DeLatte joined the Board of Directors of the Company to fill a
vacancy left when Allan Wallack resigned as a Director. Prior to joining the
Company, Mr. DeLatte was employed by Micrografx Inc. as Chief Operating
Officer from September 1994 to May 1997 and as Vice President, Europe, from
August 1991 to September 1994. From May 1997 to September 1997 Mr. DeLatte
enjoyed some personal time.
John M. Bogdan has served as Chief Financial Officer, Vice President,
Finance and Secretary of the Company since October 1994; as Treasurer since
May 1995 and Chief Accounting Officer since April 1996. From September 1986 to
October 1994, Mr. Bogdan was Vice President, Finance, and Chief Financial
Officer of Concord Communications, Inc., a data communications firm.
6
<PAGE>
Edward W. Green has served as Vice President, Groupware, of the Company
since October 1997 and was Vice President, Engineering, from February 1997 to
October 1997. Prior to joining the Company, Mr. Green served as a Vice
President with Dataware Technologies, Inc., from December 1994 to February
1997 and as a Vice President at Infinium Software, Inc. from December 1991 to
December 1994.
Roy T. Sanford has served as Vice President, Marketing and Alliances, of the
Company since April 1997. Prior to joining the Company, Mr. Sanford served as
Director, Enterprise Alliance Program for EMC Corporation from September 1993
to April 1997. From July 1990 to September 1993 he served as Director of
Integrating Products for Bull HN Information Systems, Inc. where he was
responsible for product and industry marketing for domestic manufacturing and
commercial industries.
Christopher A. Risley served as President, Chief Executive Officer and as a
Director of the Company from May 1985 through August 1997. Mr. Risley
continues to serve as a Director of the Company. Prior to joining the Company,
Mr. Risley served as a consultant in the areas of marketing, corporate
strategies and United States acquisitions to large European companies.
Brian T. Horey has been a director since June 1993. Mr. Horey has been a
general partner of LSH Partners III, a venture capital partnership, since May
1995 and a general partner of Tontine Associates, L.L.C. since January 1998.
He has also served as a general partner of the venture capital partnerships of
LTOS II Partners and Lawrence Venture Partners, the general partner of
Lawrence, Tyrrell, Ortale & Smith II, L.P., and Lawrence, Tyrrell, Ortale &
Smith, since July 1990 and December 1988, respectively. Mr. Horey is a
Director of the New York New Media Association, Inc., a non-profit
corporation.
William C. Hulley has been a director since June 1994 and Chairman of the
Board of Directors of the Company since July 1997. Mr. Hulley was employed
from 1989 until 1994 by Fostin Capital Corp., a venture capital company, and
has been a General Partner of Fostin Capital Partners since 1993. Mr. Hulley
co-founded Adams Capital Management, Inc., a private venture capital company,
in 1994 and is a Vice President and General Partner. Adams Capital Management
is a managing partner of several venture capital partnerships, including The
P/A Fund. Mr. Hulley is a director of several private companies and not-for-
profit corporations.
Michael J. Zak has been a director of the Company since July 1992. Mr. Zak
has been employed by Charles River Ventures, Inc., a venture capital firm,
since November 1991 and has been a general partner of the general partner of
Charles River Partnership VI and VI-A since July 1993. Mr. Zak was Vice
President of Marketing and Product Development at Concord Communications,
Inc., a data communications firm, from March 1986 to October 1991.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established two standing committees, the
Compensation Committee and the Audit Committee. The Board of Directors does
not maintain a Nominating Committee or a committee performing similar
functions. The Compensation Committee is comprised of three members of the
Board of Directors: Messrs. Zak, Cheheyl and Horey. With Mr. Cheheyl's
decision not to seek reelection to the Board of Directors, one vacancy will
exist on the Compensation Committee that can be filled by the vote of the
majority of the Board of Directors. The principal functions of the
Compensation Committee are to review the Company's compensation programs and
policies, to establish compensation for the Company's executive officers, to
review and approve annual bonuses to be paid to such executive officers and to
administer the stock option plans.
7
<PAGE>
The Audit Committee is comprised of three members of the Board of Directors:
Messrs. Risley, Horey and Hulley. The principal functions of the Audit
Committee are to nominate the accounting firm to be appointed as the Company's
independent certified public accountants and to review the plan and scope of
the audit, the report of the audit upon its completion and the adequacy of the
Company's internal accounting procedures and controls. The Audit Committee
also maintains a continuing review of the nature and extent of all services
provided to the Company by such accountants and evaluates their fees and the
effects of such services upon their independence.
MEETINGS AND COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive a fee of $4,000 for
attendance at each regular and special meeting of the Board of Directors, a
fee of $2,000 for attendance at each meeting of the Audit or Compensation
Committees if the director is a member of such committee, and a fee of $650
for attendance at each telephonic meeting of the Board of Directors or the
Audit or Compensation Committees, if the director is a member of such
committee. Each of Messrs. Zak, Horey, Hulley and Cheheyl elected during 1997,
in lieu of cash for attendance at certain telephonic Board and committee
meetings during 1997, to receive options to purchase 1,950 shares of Common
Stock under the 1992 Employee and Consultants Stock Option Plan at an exercise
price per share equal to $1 less then the fair market value of the Company's
Common Stock on the date of grant. These options are fully exercisable.
Directors who are not employees of the Company are additionally reimbursed for
out-of-pocket expenses incurred in attending Board of Directors meetings and
are eligible to receive options under the Company's 1995 Directors Stock
Option Plan. Directors who are employees of the Company are not compensated
for their service on the Board or any committee thereof. Mr. Risley has waived
any fees he would be entitled to for his service as a director from the time
his employment with the Company terminated through August 31, 1998. The Board
of Directors met in person seven times and the Board of Directors, the
Compensation Committee and the Audit Committee met by telephonic means six,
five and four times, respectively, during 1997.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were satisfied, except that Ivan
O'Sullivan, a former executive officer of the Company, failed to file a Form 4
on or prior to June 10, 1997, to reflect one sale transaction during May 1997.
Such required filing was made on June 25, 1997.
8
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth information with respect to the compensation,
for the last three fiscal years, of the Company's current and past Chief
Executive Officers, each of the five other most highly compensated executive
officers who received compensation in excess of $100,000 during fiscal year
1997 and were employed by the Company as of December 31, 1997, and two other
highly compensated executive officers who received compensation in excess of
$100,000 during fiscal year 1997 but were no longer employed by the Company as
of December 31, 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
LONG-TERM
COMPENSATION
SECURITIES ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- --------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Herman DeLatte(1)........... 1997 $83,333 $62,500 375,000 --
President and Chief Execu-
tive Officer 1996 -- -- -- --
1995 -- -- -- --
Christopher A. Risley(2).... 1997 110,567 50,000 -- $114,415
President and Chief Execu-
tive Officer 1996 155,000 55,936 -- --
1995 170,000 55,000 -- --
John M. Bogdan.............. 1997 133,750 41,796 43,419 --
Chief Financial Officer,
Chief Accounting Officer, 1996 125,000 34,366 20,000 --
Vice President, Finance,
Treasurer and Secretary 1995 120,000 35,000 -- --
T. Chad Roll(3)............. 1997 151,474 45,458 93,000 --
Vice President, Inside
Sales 1996 124,799 37,770 23,500 --
1995 66,850 6,905 5,000 --
Ivan J. O'Sullivan(4)....... 1997 164,613 56,822 66,838 --
Vice President, Worlwide
Marketing 1996 150,000 55,936 30,000 --
1995 120,000 75,000 -- --
Edward W. Green(5).......... 1997 122,500 31,229 90,000 --
Vice President, Groupware 1996 -- -- -- --
1995 -- -- -- --
Roy T. Sanford(6)........... 1997 106,827 40,635 80,000 --
Vice President, Marketing
and Alliances 1996 -- -- -- --
1995 -- -- -- --
John A. Rizzi(7)............ 1997 109,469 50,000 18,333 78,673
Vice President, Worldwide
Sales 1996 150,000 55,936 30,000 --
1995 120,000 75,000 16,666 --
James A. Batson(9).......... 1997 89,167 33,333 35,000 60,724
Vice President, Engineering 1996 125,000 33,271 10,000 --
1995 82,308 40,000 75,000 --
</TABLE>
- --------
(1) Mr. DeLatte joined the Company as President on September 1, 1997 and was
appointed to the office of Chief Executive Officer in November 1997. Mr.
DeLatte's compensation reflects amounts accrued during 1997.
9
<PAGE>
(2) Mr. Risley's employment with the Company as President and Chief Executive
Officer terminated effective August 29, 1997. Amounts reported as all
other compensation reflect $80,415 in severance payments received by Mr.
Risley pursuant to his employment agreement with the Company and $34,000
in consulting payments received by Mr. Risley for his services in
facilitating the transaction with Elron Software, Inc.
(3) Mr. Roll began his employment with the Company in June 1995 and left the
Company's employ on February 11, 1998 upon consummation of the sale of
certain of the Company's assets to Elron Software, Inc. The options
awarded to Mr. Roll in 1997 include 13,000 options that were repriced in
July 1997.
(4) Mr. O'Sullivan left the Company's employ on February 11, 1998 upon
consummation of the sale of certain of the Company's assets to Elron
Software, Inc. The options awarded to Mr. O'Sullivan in 1997 include
10,000 options that were repriced in July 1997.
(5) Mr. Green joined the Company as Vice President, Engineering, in February
1997 and was made Vice President, Groupware, in October 1997.
(6) Mr. Sanford joined the Company as Vice President, Marketing and Alliances,
in April 1997.
(7) Mr. Rizzi's employment with the Company as Vice President, Sales,
terminated effective August 29, 1997. All options awarded to Mr. Rizzi
were options that were repriced in July 1997. Amounts reported as all
other compensation reflect amounts received by Mr. Rizzi during 1997 as
severance payments pursuant to his employment agreement with the Company.
(8) Mr. Batson's employment with the Company as Vice President, Engineering,
began in May 1995, continued as Vice President, Product Strategy, as of
February 1997, and terminated effective August 29, 1997. All options
awarded to Mr. Batson were options that were repriced in July 1997.
Amounts reported as all other compensation reflect amounts received by Mr.
Batson during 1997 as severance payments pursuant to his employment
agreement with the Company.
10
<PAGE>
STOCK OPTION GRANTS IN FISCAL YEAR 1997
The following table shows information with respect to stock options granted
to each Named Executive Officer during fiscal year 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
----------------------------------------------- -----------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED(1) YEAR ($/SHARE)(2) DATE 5% ($) 10% ($)
- ---- ---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Herman DeLatte.......... 250,000(3) 11.76% $2.0625 11/20/07 $ 839,899 $ 1,337,398
125,000(3) 5.88 2.0625 11/20/07 419,949 668,699
Christopher A. Risley... -- -- -- -- -- --
John M. Bogdan.......... 20,000(3) .94 2.875 07/30/07 93,661 149,140
20,000(4) .94 2.875 07/30/07 93,661 149,140
3,419(5) .16 .01 04/28/07 56 89
T. Chad Roll............ 40,000(3) 1.88 2.875 07/30/07 187,323 298,280
40,000(4) 1.88 2.875 07/30/07 187,323 298,280
10,000(6) .47 2.875 07/24/06 46,831 74,570
1,000(6) .04 2.875 8/14/05 4,683 7,457
1,500(6) .07 2.875 4/20/05 7,025 11,186
500(6) .02 2.875 4/11/06 2,342 3,729
Ivan J. O'Sullivan...... 30,000(3) 1.41 2.875 07/30/07 140,492 223,710
20,000(4) .94 2.875 07/30/07 93,661 149,140
6,838(5) .32 .01 04/28/07 28,020 44,167
9,406(6) .44 2.875 02/01/06 44,049 70,141
594(6) .02 2.875 02/01/06 2,782 4,429
Edward W. Green......... 15,000(3) .70 2.875 07/30/07 70,246 111,855
5,000(4) .20 2.875 07/30/07 23,415 37,285
70,000(3) 3.29 2.5156 02/17/07 286,835 456,737
Roy T. Sanford.......... 30,000(3) 1.41 2.875 7/30/07 140,492 223,710
20,000(3) .94 2.0625 11/20/07 67,192 106,992
30,000(3) 1.41 2.5156 4/15/07 122,929 195,745
John A. Rizzi........... 8,333(6) .39 2.875 01/24/05 39,024 62,139
10,000(6) .47 2.875 02/01/06 46,831 74,570
James A. Batson......... 11,111(6) .52 2.875 07/30/07 52,034 82,855
23,889(6) 1.11 2.875 04/24/05 111,873 178,141
</TABLE>
11
<PAGE>
- --------
(1) The options were granted under the Company's 1992 Employee and Consultant
Stock Option Plan. Options are generally subject to the employee's
continued employment. The exercise of options will be accelerated in the
event of certain occurrences including the sale of the Company, the sale
of all or substantially all of the Company's assets or a change in control
of the Company. An individual's eligibility to exercise vested options
generally terminates 90 days after the termination of such individual's
employment relationship with the Company.
(2) The exercise price per share of each option was determined by the Board of
Directors to be equal to the fair market value per share of Common Stock
at the date of grant.
(3) The options become exercisable over a four-year period, 25% on the first
anniversary of the date of grant and 5% at the end of each of the
following three month periods.
(4) The options became fully vested on February 11, 1998 with the consummation
of the transaction with Elron Software, Inc. Seventy per cent of these
options are currently exercisable and the remaining 30% vest in equal
installments on April 30, July 30 and October 30, 1998.
(5) The options become fully exercisable on the first anniversary of the date
of grant.
(6) These options were granted by the Company prior to calendar year 1997 and
repriced by the Company on July 30, 1997.
EMPLOYMENT AGREEMENTS
The Company entered into Employment Agreements in May 1995 with, inter alia,
each of Messrs. Bogdan and O'Sullivan. These Employment Agreements are each
for a three year term, fix base compensation for the employee and provide for
salary increases and bonuses as the Company's Board of Directors may determine
from time to time. Each of the Employment Agreements provides that upon
termination without cause or upon expiration and non-renewal of the agreement,
the employees shall receive severance pay in an amount equal to his aggregate
compensation (including bonuses earned for the prior four quarters) for the
preceding 12 months, together with a continuation of benefits for such 12
month period. The Employment Agreements also provide for health, life
insurance and similar benefits. The Employment Agreements require that for a
period of 12 months after any employment termination, the employee will not
directly or indirectly carry on, be engaged in or have any financial interest
in, any business involved in LAN-based groupware applications or workgroup
utilities. The Company and Mr. O'Sullivan mutually agreed to terminate Mr.
O'Sullivan's Employment Agreement as of February 11, 1998 when Mr. O'Sullivan
left his employment with the Company and joined Elron Software, Inc. ("Elron")
pursuant to the terms of that certain Asset Purchase Agreement by and among
the Company and Elron dated October 29, 1997.
Mr. DeLatte joined the Company as President in September 1997 pursuant to
the terms of an Offer Letter dated July 31, 1997 (the "DeLatte Offer") and Mr.
Green joined the Company as Vice President, Engineering, in February 1997
pursuant to the terms of an Offer Letter dated January 30, 1997 (the "Green
Offer"). While no formal employment agreement exists between the Company and
either Mr. DeLatte or Mr. Green, both the DeLatte Offer and the Green Offer
provide for salary increases and bonuses as the Company's Board of Directors
may determine from time to time. The DeLatte Offer also provides that upon
termination without cause, Mr. DeLatte shall continue to receive his then-
current salary and benefits for a twelve month period. The Green Offer
provides that if Mr. Green's employment is terminated in connection with a
transaction resulting in a change of control of the Company, he shall be
entitled to a severance payment equal to six months' salary and if his
employment is terminated without cause, Mr. Green shall be entitled to a
severance payment equal to three months' salary.
12
<PAGE>
The employment relationships between the Company and each of Messrs. Risley,
Rizzi and Batson terminated in August 1997. Pursuant to the terms of their
employment agreements with the Company, each of these individuals is entitled
to receive severance payments of $241,244, $236,020 and $182,173,
respectively. These payments are being made by the Company over a twelve month
period that commenced in September 1997. Each individual is also entitled to
continue receiving benefits, including insurance coverage, similar to those
received at the time the employment relationship ceased for the twelve month
period.
The following table shows information with respect to stock options held as
of December 31, 1997 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL-YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($) (1)
------------------------- -------------------------
VALUE
SHARES ACQUIRED REALIZED
NAME ON EXERCISE (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Herman DeLatte.......... 375,000
Christopher A. Risley...
John M. Bogdan.......... -- -- 34,167 91,753 -- $4,453
T. Chad Roll............ 3,750 91,750
Ivan J. O'Sullivan...... 11,667 28,176 17,921 76,191 3,085 8,923
Edward W. Green......... -- -- -- 90,000 -- --
Roy T. Sanford.......... 80,000
John A. Rizzi...........
James A. Batson.........
</TABLE>
- --------
(1) Calculated based on the fair market value per share of the underlying
securities at December 31, 1997 ($1.3125) minus the per share exercise
price.
(2) Calculated based on the fair market value of the underlying securities on
the exercise date minus the exercise price of such options.
13
<PAGE>
On July 30, 1997 the Company adjusted the exercise price of its stock
options previously awarded to its employees, including certain of its
executive officers. This adjustment was accomplished by allowing employees
holding out-of-the-money options to surrender the old options and receive new
options with a lower exercise price. The employees had to elect to make this
adjustment. Not all employees made this election; a total of 65,295 options
were affected and the new exercise price is $2.875 for all such options. There
were no option repricings in any prior fiscal year by the Company. The
Compensation Committee of the Company's Board of Directors determined that
such an election to adjust the option price was desirable as a result of the
decline in the price per share of the Company's Common Stock, as it is traded
on the Nasdaq National Market. The repricing of such options is intended to
help the Company retain and motivate its current employees. The following
table sets forth all such repricings of options held by any executive
officers.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
MARKET
NUMBER OF PRICE EXERCISE LENGTH OF
SECURITIES OF STOCK AT PRICE AT ORIGINAL
UNDERLYING TIME OF TIME OF OPTION TERM
OPTIONS/ REPRICING REPRICING NEW REMAINING AT
SARS OR OR EXERCISE DATE OF
REPRICED OR AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE AMENDED (#) $ $ $ AMENDMENT
- ---- ----------- ----------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Herman DeLatte.......... -- -- -- -- -- --
Christopher A. Risley... -- -- -- -- -- --
John M. Bogdan.......... -- -- -- -- -- --
T. Chad Roll............ 07/30/97 10,000 $2.875 $ 8.25 $2.875 4 Years
07/30/97 1,000 $2.875 $ 16.125 $2.875 3 Years
07/30/97 1,500 $2.875 $ 9.00 $2.875 3 Years
07/30/97 500 $2.875 $10.8125 $2.875 4 Years
Ivan J. O'Sullivan...... 07/30/97 9,406 $2.875 $ 15.125 $2.875 4 Years
07/30/97 594 $2.875 $ 15.125 $2.875 4 Years
Edward W. Green......... -- -- -- -- -- --
Roy T. Sanford.......... -- -- -- -- -- --
John A. Rizzi(1)........ 07/30/97 8,333 $2.875 $ 6.00 $2.875 3 Years
07/30/97 8,927 $2.875 $ 15.125 $2.875 4 Years
07/30/97 1,073 $2.875 $ 15.125 $2.875 4 Years
James A. Batson(1)...... 07/30/97 2,889 $2.875 $ 9.00 $2.875 3 Years
07/30/97 6,389 $2.875 $ 9.00 $2.875 3 Years
07/30/97 11,111 $2.875 $ 9.00 $2.875 3 Years
07/30/97 5,555 $2.875 $ 9.00 $2.875 3 Years
07/30/97 9,056 $2.875 $ 9.00 $2.875 3 Years
</TABLE>
- --------
(1) Each of Messrs. Rizzi's and Batson's employment with the Company
terminated August 29, 1997.
14
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Company's executive compensation program is determined by the
Compensation Committee of the Board of Directors (the "Compensation
Committee"), which is comprised of non-employee directors. The Compensation
Committee approves compensation policies for the executive officers of the
Company and oversees the general compensation policies of the Company. The
Compensation Committee has furnished the following report:
COMPENSATION PHILOSOPHY AND GOALS
During 1997, the Compensation Committee's use of the different components of
executive compensation evolved to reflect the changing business circumstances
of the Company. At the start of 1997, the Compensation Committee focused on
the retention of key managers and endeavored to create a competitive cash
compensation program for all executive officers of the Company. As the year
progressed and the Company engaged in a restructuring and determined to divest
certain of its assets to Elron Software, Inc., the Compensation Committee
determined that the executive compensation program would need to be modified
to reward the executive officers for successfully managing the existing
business while simultaneously encouraging the sale of certain assets. To
achieve this goal, the Compensation Committee relied on the use of equity
incentives to executive officers.
Despite the evolving needs of the Company, the goals of the Company's
executive compensation program remain constant: to attract, retain and
motivate the most talented individuals available in the Company's marketplace.
The elements of compensation encompassed in the program include base salary,
annual cash incentive compensation and awards of stock options under the
Company's incentive compensation plans. The competitiveness of the Company's
executive compensation approach is reviewed annually and validated with
external salary surveys conducted by outside consultants.
The Company utilizes four guiding principles for its executive compensation
approach, which are set forth below. These principles are established to
design, fund and administer the program and form the framework for decision
making.
Stockholder Interests--The financial interests of the stockholders are
the major consideration in the design, funding and administration of all
executive compensation programs.
Executive Compensation--The value of all tangible compensation
components to the executive compensation program are considered in the
aggregate. Consideration of individual components is only performed in the
context of the total executive compensation program.
Group and Individual Achievement--The Company's performance-based
executive compensation program reflects a balancing of group and
individual achievement.
Sustained Performance--An emphasis is placed on the long-term executive
compensation incentives while maintaining an annual cash compensation
program capable of producing focus on near-term results and milestones.
COMPONENTS OF COMPENSATION
Target Annual Cash Compensation. Each executive position in the Company is
compared to similar positions in comparable companies for which data are
available. From this comparison, annual target cash compensation is set to
reflect compensation standards in the industry. The Compensation Committee
gathers data
15
<PAGE>
from independent consultants and, after conferring with the President of the
Company on the salaries for senior management (excluding his own salary), sets
annual salary levels in the first quarter of each year. The target annual cash
compensation is broken into two separate components: a base salary and an
incentive bonus. During 1997, the Compensation Committee reviewed the target
annual cash compensation levels of all executive officers who were employed at
the Company and, based on the performance of the Company and these executives,
approved increases of 7% to 10% for such executive officers (excluding two,
who enjoyed increases of 23% and 48% to reflect their increased executive
responsibilities).
In reviewing the comparable levels of compensation for chief executive
officers, the Compensation Committee determined that Mr. Risley's compensation
as the Company's Chief Executive Officer was, once again, at the low end of
the range of salaries offered to chief executive officers of comparable
companies, as identified by independent consultants. In discussions with Mr.
Risley, he once again stressed his view that because of his role as founder of
the Company and his position as a major shareholder, he preferred that his
financial gain from the Company come over the long term in the form of stock
appreciation rather than in the short term in the form of cash compensation.
During 1997, Mr. Risley's employment as the Company's President and Chief
Executive Officer ceased and the Company recruited and retained the services
of Herman DeLatte to serve as Mr. Risley's successor. In negotiating the
salary, bonus and equity components of Mr. DeLatte's compensation package, the
Compensation Committee relied on its own business judgment as well as the
compensation surveys and advice of the independent consultants. As a result,
Mr. DeLatte's cash compensation is within the range of salaries offered to
chief executive officers of comparable companies and his equity compensation
is structured to reward Mr. DeLatte upon the Company's financial success.
Base Salary. In general, the Compensation Committee sets the base salary
component of total target annual cash compensation at approximately 75% of the
total cash compensation for executive officers. The intention of the
Compensation Committee is to leave a significant portion of target annual cash
compensation subject to the performance of the Company.
Incentive Bonus. The Compensation Committee awards incentive bonuses as part
of total annual cash compensation based on two objectives: the achievement by
the Company of certain financial targets for annual revenue and operating
income and the achievement by individual executives of certain strategic
objectives. The Company's financial objectives relate entirely to an annual
business plan that is submitted in December by the executive team and the
individual executive's strategic objectives relate to goals established by the
executive and members of the Board of Directors for personal success within
the Company. The bonus system is intended to stimulate successful execution of
the annual business plan. The bonus plan allows for quarterly (partial)
payments of executive bonuses, with the balance of executive bonuses payable
only after completion of the audit following each fiscal year. No incentive
bonuses are paid unless achievement is at least 90% of the annual business
plan at various milestones throughout each fiscal year. Additionally, during
1997, the Compensation Committee, upon the recommendation of the independent
consultants utilized by the Company to review executive compensation, awarded
retention bonuses to two executives in the aggregate amount of $25,000.
Equity Incentives. The Compensation Committee believes that the executive
compensation program of the Company must motivate the executive officers of
the Company to create core economic value which results in long-term
appreciation in the price of the Common Stock, thus aligning the interests of
employees with the interests of the Company's stockholders and providing a
strong incentive for key executive to remain in the employ of the Company.
Additionally, the appropriate use of equity incentives is a valuable tool in
recruiting
16
<PAGE>
new executives for the Company. The Compensation Committee believes that, in
the case of a growth-oriented business such as the Company, a substantial
portion of the compensation of executive officers should be contingent on
appreciation in value of the stockholders' investments. Based on the foregoing
principles, the Compensation Committee awarded options for 375,000 shares to
Herman DeLatte, 56,838 shares to Ivan O'Sullivan, 43,419 shares to John M.
Bogdan, 80,000 shares to T. Chad Roll, options for 90,000 shares to Edward W.
Green and options for 80,000 shares to Roy T. Sanford. Additionally, the
evolution in the Company's business focus, both as a result of a restructuring
in July 1997 and the subsequent sale of certain of the Company's assets to
Elron Software, Inc., the Compensation Committee determined that a repricing
of options held by employees, including those held by executive officers of
the Company, was appropriate and the acceleration of the vesting of options
held by employees, including those held by executive officers of the Company,
was appropriate. Additionally, the option agreements held by employees of the
Company, including those held by executive officers, was amended by the
Compensation Committee on January 13, 1998 to allow for acceleration of the
vesting of options upon the occurrence of an Organic Event (as defined in the
Stock Option Plan) after an individual has been employed by the Company for
three months, rather than twelve months.
The Committee believes that for calendar 1997 the remaining key executives
of the Company had adequate stock and option packages to provide them with an
appropriate incentive to maximize short-term and long-term shareholder value.
The Committee intends to review the status of equity incentives for senior
executives in 1998 and thereafter to insure that key executives of the Company
are appropriately motivated and rewarded.
CERTAIN TAX CONSIDERATIONS
Section 162(m) of the Internal Revenue Code of 1986 generally disallows a
tax deduction to publicly held companies for compensation in excess of
$1,000,000 paid to the chief executive officer and the four other most highly
compensated executive officers. Compensation based on performance is not
subject to this deduction limit, if certain requirements are met. Based on the
compensation awarded to Mr. DeLatte, Mr. Risley and the other executive
officers of the Company, it does not appear that the Section 162(m) limitation
will have a significant impact on the Company in the near term. The
Compensation Committee plans to structure the incentive compensation part,
which currently consists of the annual cash incentive compensation and the
stock option plan, of its compensation program to comply with Section 162(m).
The Compensation Committee
Michael J. Zak
Brian T. Horey
R. Stephen Cheheyl
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Zak, Horey and Cheheyl. With Mr. Cheheyl's decision not to be
reelected to the Board of Directors, there will be a vacancy on the
Compensation Committee, which can be filled by the vote of a majority of the
members of the Board of Directors. Mr. Zak is a general partner of the general
partner of Charles River Partnership VI, an investor that holds more than five
percent (5%) of the Company's Common Stock. Each of the current non-employee
directors is entitled to receive compensation in the form of cash and options
to purchase Common Stock for their services as directors. Mr. Zak and Mr.
Horey, on July 31, 1995, and Mr. Cheheyl, on August 4, 1995, have received
options to purchase 10,000 shares of Common Stock under the Directors Plan,
which will be exercisable in 12
17
<PAGE>
equal quarterly installments on the date of grant and the last day of each of
the 11 fiscal quarters commencing with the first full fiscal quarter after the
date of grant at a per share price equal to the initial public offering price.
Additionally, each of Messrs. Zak, Horey and Cheheyl elected during 1997, in
lieu of cash for attendance at certain telephonic board and committee meetings
during 1997, to receive options to purchase 1,950 shares of Common Stock under
the 1992 Employee and Consultants Stock Option Plan (the "Plan") at a price
per share equal to $1 less than the fair market value of the Company's Common
Stock on the date of grant. These options are fully exercisable. Each of
Messrs. Zak, Horey and Cheheyl made a similar election during 1996 to receive
options to purchase 2,600 shares of Common Stock under the Plan in lieu of
cash for attendance at telephonic board and committee meetings during 1996.
The exercise price per share of the options is $1 less than the fair market
value of the Company's Common Stock on the date of grant and the options are
fully exercisable. No director or executive officer of the Company and no
member of its Compensation Committee is, or was during the year ended December
31, 1997, a director or compensation committee member of any other business
entity that had a director that sits on the Company's Board of Directors or
Compensation Committee.
18
<PAGE>
COMPARISON OF STOCKHOLDER RETURN
The line graph below compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total return of the Nasdaq Total
U.S. Index and the Nasdaq Computer and Data Processing Index, resulting from
an initial assumed investment of $100 in each, and assuming the reinvestment
of any dividends, for the period beginning on the date of the Company's
initial public offering on August 1, 1995 and ending on December 31, 1997.
Stock price performance shown in the Performance Graph for the Common Stock is
historical and not necessarily indicative of future price performance. The
Common Stock was sold at its initial offering at a price of $15.00 per share,
and the closing sales price of the Common Stock on the Nasdaq National Market
on December 31, 1997, was $1.3125.
[LINE GRAPH APPEARS HERE]
1 = August 1, 1995
2 = December 31, 1995
3 = December 31, 1996
4 = December 31, 1997
19
<PAGE>
AMENDMENT TO THE 1992 EMPLOYEE AND CONSULTANT STOCK OPTION PLAN
(PROPOSAL II)
PROPOSED AMENDMENT TO THE COMPANY'S 1992 EMPLOYEE AND CONSULTANT STOCK OPTION
PLAN
On March 5, 1998, the Compensation Committee of the Board of Directors of
the Company, pursuant to authority granted to them by the Board, approved an
amendment to the 1992 Employee and Consultant Stock Option Plan (the "Stock
Option Plan") to provide for an increase in the number of shares available for
issuance pursuant to the Stock Option Plan from 3,300,000 shares to 3,800,000
shares. This number of authorized shares represents the total number of
options to purchase shares available under the Stock Option Plan regardless of
the number of options previously granted, whether exercised or not by such
optionees. As of March 6, 1998, the Company had only 357,564 shares remaining
available for the grant of additional options. This amendment to the Stock
Option Plan remains subject to approval by the stockholders of the Company at
this Annual Meeting. Assuming the presence of a quorum, the affirmative vote
of the holders of a majority of the outstanding shares of Common Stock present
at the Annual Meeting, in person or by proxy, is necessary to approve the
amendment to the Stock Option Plan.
DESCRIPTION OF THE 1992 EMPLOYEE AND CONSULTANT STOCK OPTION PLAN
The Stock Option Plan was originally adopted by the Company's Board of
Directors (the "Board") and the stockholders of the Company on July 29, 1992.
The Stock Option Plan has been amended by the Board and the stockholders of
the Company effective May 6, 1994, May 18, 1995, April 30, 1996 and April 30,
1997. The Stock Option Plan, as amended, provides for the grant of options
which will qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986 (as amended, the "Code") and nonstatutory stock
options, which will not so qualify. The purpose of the Stock Option Plan is to
secure for the Company and its stockholders the benefits arising from capital
stock ownership by employees, officers and directors of, and certain
consultants or advisors to, the Company who are expected to contribute to the
future growth and success of the Company.
ADMINISTRATION OF THE STOCK OPTION PLAN
The Stock Option Plan is administered by the Board, whose construction and
interpretation of the terms and provisions of the Stock Option Plan, and the
option agreements issued pursuant to the Stock Option Plan, is final and
conclusive. The Board has the authority to adopt, amend and repeal rules and
regulations relating to the Stock Option Plan and to determine the terms and
conditions of the respective option agreements and to make all other
determinations as it shall deem necessary or desirable for the administration
of the Stock Option Plan. No member of the Board may be liable for any action
or determination relating to the Stock Option Plan made in good faith. The
Board has, to the full extent permitted by or consistent with applicable laws
and regulations (including, without limitation, applicable state law and Rule
16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), or any successor rule ("Rule 16b-3")), delegated any or all of its
powers under the Stock Option Plan to the Compensation Committee. In such
event, all references to the Board in the Sections of this Proxy Statement
dealing with the Stock Option Plan shall mean such Compensation Committee or
the Board.
The Board may, in its sole discretion, grant options to purchase shares of
the Company's Common Stock and issue shares upon exercise of such options as
provided in the Stock Option Plan. With respect to the grantof options under
the Stock Option Plan to officers or directors of the Company (as defined for
purposes of Rule 16b-3), the selection of the recipient, the timing of the
option grant, the exercise price of the option and the
20
<PAGE>
number of shares subject to the option must be determined by either (1) the
Board, of which all the members shall be disinterested persons or (ii) a
committee of two or more directors having full authority to act, all of the
members of which shall be disinterested persons. For purposes of the Stock
Option Plan, a director shall be deemed to be a "disinterested person" within
the meaning of Rule 16b-3, as such term is interpreted from time to time.
SHARES SUBJECT TO THE STOCK OPTION PLAN
The total number of shares that have been authorized for issuance under the
Stock Option Plan is 3,300,000. As of March 6, 1998, 357,564 shares were
available for issuance under the Stock Option Plan pursuant to options
currently outstanding or options available for grant. If an option granted
under the Stock Option Plan expires or is terminated without having been
exercised in full, the shares allocable to the unexercised portion of such
option shall again become available for grant pursuant to the Stock Option
Plan.
The Stock Option Plan contains provisions for the disposition of options in
the event of a consolidation, merger or sale of substantially all of the
assets of the Company in which outstanding shares of Common Stock are
exchanged for securities, cash or property of any other corporation or
business entity or in the event of a liquidation of the Company.
The Board may grant options under the Stock Option Plan in substitution for
options held by employees of another corporation who become employees of the
Company, or a subsidiary of the Company, as a result of a merger or
consolidation of the employing corporation with the Company, or a subsidiary
of the Company, or as a result of the acquisition by the Company, or one of
its subsidiaries, of property or stock of the employing corporation. The
substitute options may be granted on such terms as the Board considers
appropriate in the circumstances.
If the outstanding shares of Common Stock of the Company are changed by
reason of any merger, consolidations, sale of substantially all of the assets
of the Company, reorganization, recapitalization, reclassification, stock
dividend, stock-split, reverse stock-split, or other similar capital change in
the Company's capital stock, the Board may appropriately adjust (i) the
maximum number and kind of shares reserved for issuance under the Stock Option
Plan, (ii) the number and kind of shares or other securities subject to then
outstanding options under the Stock Option Plan, and (iii) the price for each
share subject to any then outstanding options under the Stock Option Plan,
without changing the aggregate purchase price as to which such options remain
exercisable, provided that no such adjustment shall be made if such adjustment
would cause the Stock Option Plan to fail to comply with Section 422A of the
Code or with Rule 16b-3.
GENERAL TERMS AND CONDITIONS OF THE STOCK OPTION PLAN
Types of Options. The Stock Option Plan provides for the granting of options
which will qualify as incentive stock options under Section 422 of the Code
and nonstatutory stock options, which will not so qualify.
Option Agreements. Each recipient of an option must execute an option
agreement which indicates whether the option is an incentive stock option or a
nonstatutory option and which contains the specific terms applicable to such
option, including the exercise price, duration, time and method of exercise
and such other terms and conditions of the grant as may be determined by the
Board in accordance with the Stock Option Plan. The terms applicable to a
specific grant may vary among participants in the Stock Option Plan.
21
<PAGE>
Option Exercise Price. The option exercise prices for all options granted
under the Stock Option Plan are determined by the Board. In the case of an
incentive stock option, this price may not be less than 100% (or 110% in the
case of an option granted to a person holding more than 10% of the total
combined voting power of all classes of stock of the Company) of the fair
market value of the Common Stock on the date of grant.
Nontransferability of Options. Options granted under the Stock Option Plan
shall not be assignable or transferable by the person to whom it is granted,
either voluntarily or by operation of law, except (i) by will or the laws of
descent and distribution, (ii) pursuant to a qualified domestic relations
order (as defined in the Code) or (iii) pursuant to Title I of the Employee
Retirement Income Security Act, or the rules thereunder. During the life of
the optionholder, the option shall be exercisable only by the optionholder.
Duration of Options. Each option shall expire on such date as the Board
shall be set forth in the applicable option agreement. In the case of an
incentive stock option, this expiration date may not be more than ten years
from the date on which the option is granted (or five years in the case of
options granted to persons holding more than 10% of the voting power of stock
of the Company).
Exercise of Options. The period or periods during which any option granted
under the Stock Option Plan may be exercised shall be determined by the Board.
Options generally become exercisable over a four-year period beginning on the
first anniversary of either the date of grant or the date of hire of an
employee and continuing thereafter in equal quarterly installments. An option
shall be considered outstanding until it has been either fully exercised or
cancelled or has expired by reason of the lapse of time.
Terms of Payment. The purchase price of any shares of Common Stock purchased
upon exercise of an option shall be paid in full, at the time of purchase, by
delivery of cash or a check payable to the Company, or by such other methods
as may be provided in the optionholder's option agreement.
Termination of Employment. The Board shall determine the period of time
during which an optionholder may exercise an option following such
optionholder's termination of employment, death or disability. Such periods
shall be set forth in each optionholder's option agreement. No incentive stock
option may be exercised unless, at the time of such exercise, the optionholder
is, and has been continuously since the date of grant of his or her option,
employed by the Company, except that:
(a) an incentive stock option may be exercised within the period of three
months after the date the optionholder ceases to be an employee of the
Company (unless his or her option agreement specifies a shorter period or a
longer period, in which case an exercise after such three-month period
shall be treated as the exercise of a non-qualified option);
(b) if the optionholder dies while employed by the Company, or within
three months after the optionholder ceases to be an employee of the
Company, the incentive stock option may be exercised by the person to whom
it is transferred by will or the laws of descent and distribution within
the period of one year after the date of death (unless a shorter period is
specified in the applicable option agreement); and
(c) if the optionholder becomes disabled (as defined in Section 22(e)(3)
of the Code or any successor provision thereto) while employed by the
Company, the incentive stock option may be exercised within the period of
one year after the date the optionholder ceases to be employed because of
such disability (unless a shorter period is specified in the applicable
option agreement).
Notwithstanding the above, no option is exercisable after the expiration
period as determined by the Board at the time of the option grant.
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Limitations on the Incentive Stock Options. In addition to the provisions
concerning incentive stock options which are described above, if an incentive
stock option granted to any employee under the Stock Option Plan becomes
exercisable for the first time by any employee during any one calendar year
such that the aggregate fair market value of the Common Stock with respect to
which incentive stock options are exercisable exceeds $100,000, the options to
acquire stock in excess of the $100,000 shall be treated as nonstatutory stock
options.
Additional Restrictions. The Board may include additional provisions in any
option agreement under the Stock Option Plan, including restrictions on
transfer, repurchase rights, commitments to pay cash bonuses, to make or
arrange for loans or to transfer other property to optionholders upon the
exercise of options, or such other provisions as determined by the Board in
accordance with the Stock Option Plan; provided that such additional
provisions shall not be inconsistent with any other term or condition of the
Stock Option Plan and shall not cause any incentive stock options granted
under the Stock Option Plan to fail to qualify as incentive stock options
within the meaning of Section 422 of the Code.
Acceleration, Extension. The Board has the authority to accelerate the date
on which an option granted under the Stock Option Plan may be exercised or to
extend the dates during which an option granted under the Stock Option Plan
may be exercised.
Cancellation and New Grant of Options. The Board has the authority to
effect, at any time and from time to time, with the consent of the affected
optionholders, (i) the cancellation of any or all outstanding options under
the Stock Option Plan and (ii) the grant in substitution therefor of new
options under the Stock Option Plan covering the same or different numbers of
shares of Common Stock and having an option exercise price per share which may
be lower or higher than the exercise price per share of the cancelled options.
Eligibility. Options under the Stock Option Plan may be granted to persons
who are, at the time of the grant, employees of or consultants to (including
any officers and directors who are employees of or consultants to), the
Company or any of its subsidiaries, provided, that incentive stock options may
only be granted to persons who are eligible to receive such options under
Section 422A of the Code. A person who has been granted an option may, if he
is otherwise eligible, be granted an additional option or options if the Board
shall so determine. The Stock Option Plan provides additional limitations on
the options that may be granted to a person who hold, directly or indirectly,
more than 10% of the combined voting power of all classes of stock of the
Company.
Subject to adjustments as set forth in the Stock Option Plan, no employee
shall receive options to purchase more than 500,000 shares of common stock
during the ten-year term of the Stock Option Plan. For purposes of calculating
this maximum number, (i) an option shall continue to be treated as outstanding
despite its repricing, cancellation or expiration and (ii) the repricing of an
outstanding option or issuance of a new option in substitution for a cancelled
option shall be deemed to constitute the grant of a new additional option
separate from the original grant of the option that is repriced.
GENERAL RESTRICTIONS
Participants in the Stock Option Plan generally have no rights as
stockholders in shares of Common Stock until certificates for those shares
have been issued. No certificates for Common Stock will be issued under the
Stock Option Plan unless and until, in the opinion of counsel for the Company,
any applicable registration requirements of the Securities Act, any applicable
listing requirements of any national securities exchange upon which stock of
the same class is then listed, and any other requirements of law or of any
regulatory bodies having jurisdiction over such issuance and delivery, shall
have been fully complied with. Participants may be required to represent and
agree in writing, for themselves and for their transferees, that the stock
acquired by him or them under the Stock Option Plan is being acquired for
investment purposes.
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Nothing contained in the Stock Option Plan confers upon any participant any
rights with respect to his or her employment by the Company.
The Stock Option Plan does not provide that any person has or may create a
lien on any funds, securities or other property held under the Stock Option
Plan.
EFFECTIVE DATE; AMENDMENT; TERMINATION
The Stock Option Plan was adopted by the Board and the stockholders of the
Company on July 29, 1992. The Stock Option Plan was amended by the Board and
the stockholders of the Company effective May 6, 1994 and was again amended by
the Board and the stockholders effective on May 18, 1995, April 30, 1996 and
April 30, 1997.
The Stock Option Plan shall terminate upon the earlier of (i) the close of
business on the day next preceding the tenth anniversary of the date of its
adoption by the Board of Directors, or (ii) the date on which all shares
available for issuance under the Stock Option Plan shall have been issued
pursuant to the exercise or cancellation of options granted under the Stock
Option Plan. If the date of termination is determined under (i) above, then
options outstanding on such date shall continue to have force and effect in
accordance with and subject to the terms and conditions of the Stock Option
Plan and the appropriate option agreements.
The Board has the power to amend the Stock Option Plan. No amendment may be
made without stockholder approval if such approval is necessary to comply with
any applicable tax or regulatory requirement, including Section 422 of the
Code and Rule 16b-3 of the Exchange Act or any successor provisions thereto.
The termination or any modification or amendment of the Stock Option Plan
shall not, without the consent of an optionholder affect his or her rights
under an option previously granted to him or her. With the consent of the
optionholder affected, the Board may amend outstanding option agreements in a
manner not inconsistent with the Stock Option Plan. The Board has the right to
amend or modify (i) the terms and provisions of the Stock Option Plan and of
any outstanding incentive stock option granted under the Stock Option Plan to
the extent necessary to qualify any or all such options for such favorable
federal income tax treatment (including deferral of taxation upon exercise) as
may be afforded incentive stock options under Section 422 of the Code and (ii)
the terms and provisions of the Stock Option Plan and of any outstanding
option to the extent necessary to ensure the qualification of the Stock Option
Plan under Rule 16b-3.
FEDERAL INCOME TAX TREATMENT OF STOCK OPTIONS
The following is a summary of the federal income tax treatment of incentive
stock options and non-qualified stock options. This summary is general and
does not apply to gifts or any dispositions other than sales. Also, under
certain circumstances, an optionholder may be entitled to a credit for
alternative minimum tax previously paid. Additionally, in some individual
cases, it will be important to consider the state and foreign tax consequences
of participation in the Stock Option Plan and the effect, if any, of gift,
estate and inheritance taxes.
Incentive Stock Options. No taxable income will be recognized by the
optionholder upon the grant or exercise of an incentive stock option granted
under the Stock Option Plan (provided the difference between the option
exercise price and the fair market value of the stock on the date of exercise
must be included in the optionee's "alternative minimum taxable income" as
described below), and no corresponding expense deduction will be available to
the Company. Generally, if an optionholder holds shares acquired upon the
exercise of an incentive stock option until the later of (i) two years from
the grant of the option and (ii) one year from the date
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of transfer of the purchased shares to him or her (the "Statutory Holding
Period"), any gain recognized by the optionholder upon a sale of such shares
will be treated as a capital gain. The gain recognized upon the sale is the
difference between the option price and the sale price of the stock. The net
federal income tax effect on the holder of incentive stock options is to
defer, until the stock is sold, taxation of any increase in the stock's value
from the time of grant to the time of exercise, and to cause all such increase
to be treated as capital gain.
If the optionholder sells the stock prior to the expiration of the Statutory
Holding Period (a "disqualifying disposition"), he or she will realize taxable
income at ordinary income tax rates in an amount equal to the lesser of (i)
the fair market value of the stock on the date of exercise less the option
price or (ii) the amount realized on sale less the option price, and the
Company will receive a corresponding business expense deduction. Any
additional gain will be treated as long-term capital gain if the shares are
held for more than one year prior to the sale and as short-term capital gain
if the shares are held for a shorter period. If the optionholder sells the
stock for less than the option price, he or she will recognize a capital loss
equal to the difference between the sale price and the option price. The loss
will be a long-term capital loss if the shares are held for more than one year
prior to the sale and as a short-term capital loss if the shares are held for
a shorter period.
Special rules may apply to options held by directors and officers. If the
optionholder making a disqualifying disposition is a person required to file
reports under Section 16(a) of the Exchange Act, and the option was exercised
within six months of the date of grant, the amount of taxable income realized
at ordinary income tax rates (and the amount of the Company's business expense
deduction) will be equal to the lesser of (i) the fair market value of the
shares on the date that is six months after the date of grant less the option
price or (ii) the amount realized on sale less the option price.
For purposes of the "alternative minimum tax" applicable to individuals, the
exercise of an incentive stock option is treated in the same manner as the
exercise of a nonstatutory stock option. Thus, an optionholder must, in the
year of option exercise, include the difference between the exercise price and
the fair market value of the stock on the date of exercise in alternative
minimum taxable income. The alternative minimum tax is imposed upon an
individual's alternative minimum taxable income at a rate of 24%, but only to
the extent that such tax exceeds the taxpayer's regular income tax liability
for the taxable year.
Non-Statutory Stock Options. No taxable income is recognized by the
optionholder upon the grant of a nonstatutory option. The optionee must
recognize as ordinary income in the year in which the option is exercised the
amount by which the fair market value of the purchased shares on the date of
exercised exceeds the option price (and the Company is required to file
reports under Section 16(a) of the Securities Exchange Act of 1934, as
amended. If such a person (executive officers and directors of the Company)
exercised the option within six months of the date of grant, upon exercise of
such option, no income will be recognized by the optionholder until six months
have expired from the date the option was granted, and the income then
recognized will include any appreciation in the value of the shares during the
period between the date of exercise and the date six months after the date of
the grant, unless the optionholder makes an election under Section 83(b) of
the Internal Revenue Code of 1986, as amended (the "Code") to have the
difference between the exercise price and fair market value at the time of
exercise recognized as ordinary income as of the time of exercise.
The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee. Any additional gain or
any loss recognized upon the subsequent disposition of the purchased shares
will be a capital gain or loss, and will be a long-term gain or loss if the
shares are held for more than one year.
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Withholding. The Company has the right to deduct from any payments otherwise
due to an optionholder any federal, state or local taxes required by law to be
withheld with respect to any shares issued upon exercise of options under the
Stock Option Plan.
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
The Stock Option Plan is qualified under Section 401(a) of the Code and the
Company believes that the Stock Option Plan is not subject to the Employee
Retirement Income Security Act of 1974.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
IN FAVOR OF PROPOSAL II
RATIFICATION OF ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT AUDITORS
(PROPOSAL III)
The Board of Directors has selected Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998, and has
further directed that management submit the selection of independent auditors
for ratification by the stockholders at the Annual Meeting. Arthur Andersen
LLP has acted as the Company's auditors since 1987. Representatives of Arthur
Andersen LLP will be present at the Annual Meeting, will have an opportunity
to make a statement if they desire to do so, and will be available to respond
to appropriate questions.
Stockholder ratification of the selection of Arthur Andersen LLP is not
required by the Company's By-laws or otherwise. The Board of Directors,
however, is submitting the selection of Arthur Andersen LLP to the
stockholders as a matter of good corporate practice. If the stockholders fail
to ratify the selection, the Audit Committee and the Board of Directors will
reconsider whether or not to retain such firm. Even if the selection is
ratified, the Audit Committee and the Board, in their discretion, may direct
the appointment of a different independent accounting firm at any time during
the year if they determine that such a change would be in the best interest of
the Company and its stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
IN FAVOR OF PROPOSAL III
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING OF STOCKHOLDERS
Proposals of stockholders that are intended to be presented at the Company's
Annual Meeting of Stockholders in 1999 must be received at the Company's
executive offices in Cambridge, Massachusetts no later than December 31, 1998,
to be included in the proxy statement and proxy card related to such meeting.
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OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for action
at the Annual Meeting, other than the matters set forth herein. Should any
other matter requiring a vote of shareholders arise, the proxies in the
enclosed form of proxy confer upon the person or persons entitled to vote the
shares represented by such proxies discretionary authority to vote the same in
accordance with the best judgment.
By Order of the Board of Directors
/s/ John M. Bogdan
John M. Bogdan
Secretary
March 30, 1998
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 IS
AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO: INVESTOR RELATIONS, ON
TECHNOLOGY CORPORATION, ONE CAMBRIDGE CENTER, CAMBRIDGE MASSACHUSETTS 02142
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