<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
GENERAL MAGIC, INC.
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 011.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
011(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.
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<PAGE> 2
LOGO
420 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
May 21, 1998
To Our Stockholders:
You are cordially invited to attend the Annual Meeting of Stockholders of
GENERAL MAGIC, INC. on June 25, 1998, at The Westin Hotel, 5101 Great America
Parkway, Santa Clara, California at 2:00 p.m., Pacific Daylight Savings Time.
The matters expected to be acted upon at the meeting are described in
detail in the attached Notice of Annual Meeting of Stockholders and Proxy
Statement. Also enclosed is a copy of the 1997 GENERAL MAGIC, INC. Annual
Report, which includes audited financial statements and certain other
information.
It is important that you use this opportunity to take part in the affairs
of GENERAL MAGIC, INC. by voting on the business to come before this meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Returning the proxy does not deprive you of your right to attend the meeting and
vote your shares in person.
We look forward to seeing you at the meeting.
Sincerely,
Steven Markman
Chairman, Chief Executive Officer
and President
<PAGE> 3
LOGO
420 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 25, 1998
Dear Stockholder:
You are invited to attend the Annual Meeting of Stockholders of General
Magic, Inc. (the "Company"), which will be held on June 25, 1998, at 2:00 p.m.
Pacific Daylight Savings Time at The Westin Hotel, 5101 Great America Parkway,
Santa Clara, California, for the following purposes:
1. To elect seven (7) directors to hold office until the 1999 Annual
Meeting and until their successors are elected and qualified.
2. To vote upon a proposal to increase by 4,850,000 shares the aggregate
number of shares issuable under the Company's Amended and Restated 1990
Stock Option Plan.
3. To vote upon a proposal to increase by 250,000 shares the aggregate
number of shares issuable under the Company's 1994 Outside Directors
Stock Option Plan.
4. To ratify the sale and issuance of the Company's 5 1/2% Cumulative
Convertible Series B Preferred Stock.
5. To ratify the appointment of KPMG Peat Marwick LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998.
6. To transact such other business as may properly come before the meeting.
Stockholders of record at the close of business on April 28, 1998, are
entitled to notice of, and to vote at, this meeting and any adjournments
thereof. For ten days prior to the 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 executive offices of the Company.
By Order of the Board of Directors,
MARY E. DOYLE
Secretary
Sunnyvale, California
May 21, 1998
STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. PROXIES ARE REVOCABLE, AND
ANY STOCKHOLDER MAY WITHDRAW HIS OR HER PROXY PRIOR TO THE TIME IT IS VOTED, OR
BY ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE> 4
GENERAL MAGIC, INC.
420 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
------------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
The accompanying proxy is solicited by the Board of Directors of General
Magic, Inc., a Delaware corporation (the "Company"), for use at the Annual
Meeting of Stockholders to be held June 25, 1998, or any adjournment thereof for
the purposes set forth in the accompanying Notice of Annual Meeting of
Stockholders. The date of this Proxy Statement is May 21, 1998, the approximate
date on which this Proxy Statement and the accompanying form of proxy were first
sent or given to stockholders.
GENERAL INFORMATION
Annual Report. An annual report for the year ended December 31, 1997, is
enclosed with this Proxy Statement.
Voting Securities. Only stockholders of record as of the close of business
on April 28, 1998, will be entitled to vote at the meeting and any adjournment
thereof. As of that date, there were 28,818,653 shares of Common Stock of the
Company, par value $0.001 per share, issued and outstanding, 50,000 shares of
Series A Preferred Stock (with voting power of 3,629,000 shares of Common
Stock), par value $0.001 per share, issued and outstanding and 5,000 shares of
Series B Preferred Stock, par value $0.001 per share (with voting power of 5,000
shares of Common Stock), issued and outstanding. The Series A Preferred Stock,
the Series B Preferred Stock and the Common Stock, which vote as a single class,
total 32,452,653 shares of voting stock outstanding as of the record date.
Stockholders may vote in person or by proxy. Each holder is entitled to one vote
for each share of voting stock held on the proposals presented in this Proxy
Statement. The Company's bylaws provide that a majority of all of the shares of
the stock entitled to vote, whether present in person or represented by proxy,
shall constitute a quorum for the transaction of business at the meeting.
Solicitation of Proxies. The cost of soliciting proxies will be borne by
the Company. The Company has retained MacKenzie Partners to assist in the
solicitation of proxies for a fee not to exceed $6,500, plus customary
out-of-pocket expenses. In addition, the Company will solicit stockholders by
mail through its regular employees, and will request banks and brokers, and
other custodians, nominees and fiduciaries, to solicit their customers who have
stock of the Company registered in the names of such persons. The Company will
reimburse such persons for their reasonable, out-of-pocket costs. The Company
may use the services of its officers, directors, and others to solicit proxies,
personally or by telephone, without additional compensation.
Voting of Proxies. All valid proxies received prior to the meeting will be
voted. All shares represented by a proxy will be voted, and where a stockholder
specifies by means of the proxy a choice with respect to any matter to be acted
upon, the shares will be voted in accordance with the specification so made. If
no choice is indicated on the proxy, the shares will be voted in favor of the
proposal. A stockholder giving a proxy has the power to revoke his or her proxy,
at any time prior to the time it is voted, by delivery to the Secretary of the
Company at the Company's principal office, 420 North Mary Avenue, Sunnyvale,
California 94086, of a written instrument revoking the proxy or a duly executed
proxy with a later date, or by attending the meeting and voting in person.
1
<PAGE> 5
PROPOSAL NO. 1
ELECTION OF DIRECTORS
A board of seven (7) directors is to be elected at the Annual Meeting of
Stockholders. Management's nominees for election at the Annual Meeting of
Stockholders to the Board of Directors are Steven Markman, Michael E. Kalogris,
Philip D. Knell, Carl F. Pascarella, Roel Pieper, Dennis F. Strigl and Susan G.
Swenson.
If elected, management's nominees will serve as directors until the
Company's Annual Meeting of Stockholders in 1999 and until their successors are
elected and qualified. If a nominee declines to serve or becomes unavailable to
serve for any reason, or if another vacancy occurs before the election (although
management knows of no reason to anticipate that this will occur), the proxies
may be voted for such substitute nominee as management may designate.
If a quorum is present and voting, the seven (7) nominees for director
receiving the highest number of votes will be elected as directors. Abstentions
and shares held by brokers that are present but not voted because the brokers
were prohibited from exercising discretionary authority, i.e., "broker
non-votes," will be counted as present for purposes of determining if a quorum
is present.
The table below sets forth, for the current directors and for Philip D.
Knell, all of whom are management's nominees for election to the Board of
Directors at this meeting, certain information with respect to age and
background.
<TABLE>
<CAPTION>
DIRECTOR NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
------------- ------------------------- --- --------------
<S> <C> <C> <C>
Steven Markman, Ph.D. Chairman, Chief Executive Officer, President and 52 1996
Director
Michael E. Kalogris Director 48 1997
Philip D. Knell Management's Nominee 53 --
Carl F. Pascarella Director 55 1994
Roel Pieper, Ph.D. Director 42 1996
Dennis F. Strigl Director 52 1997
Susan G. Swenson Director 49 1997
</TABLE>
Steven Markman has served the Company as Chairman, Chief Executive Officer
and President since September 1996. Before joining the Company, Dr. Markman
served Novell, Inc. as Executive Vice President and General Manager of the
Products Group from January 1996 to September 1996, and as the Executive Vice
President and General Manager of the Information Access and Management Group
from August 1994 until January 1996. Dr. Markman was Vice President of
Engineering at First Pacific Networks, Inc. from March 1994 to August 1994, and
was a principal at Venture Consulting from September 1993 through March 1994.
From February 1993 to May 1993, Dr. Markman was acting Chief Executive Officer
of Adaptive Corporation, which was merged with Network Equipment Technologies,
Inc. ("NET") in May 1993. Dr. Markman served as Senior Vice President and
General Manager of the Network Systems Group of NET from April 1991 to May 1993.
Michael E. Kalogris has served as a director of the Company since August
1997. Mr. Kalogris has been Chairman and Chief Executive Officer of Triton
Communications L.L.C. ("Triton") since June 1997. Before joining Triton, Mr.
Kalogris served as President and Chief Executive Officer of Horizon Cellular
Group from October 1991 to February 1997.
Philip D. Knell has been nominated by the Company to serve as a director.
Mr. Knell has served as President and General Manager of the networkMCI
Conferencing division of MCI Communications Corporation since July 1995. From
December 1992 through June 1995, he was President and Chief Executive Officer of
Darome Teleconferencing, Inc.
Carl F. Pascarella has served as a director of the Company since July 1994.
Mr. Pascarella has been President and Chief Executive Officer of VISA U.S.A.
Inc. since September 1993, and served as President of VISA International's
Asia-Pacific region from 1983 until September 1993. Mr. Pascarella is also a
director for BroadVision, Inc.
2
<PAGE> 6
Roel Pieper has served as a director of the Company since March 1996. Dr.
Pieper has been appointed Executive Vice President of Technology, Strategy and
Planning for Philips Electronics N.V., effective May 1998. From September 1997
to January 1998, he served as Senior Vice President and General Manager of the
Worldwide Sales, Marketing, Service and Support Group for Compaq Computer
Corporation. Dr. Pieper was Chief Executive Officer of Tandem Computers
Incorporated ("Tandem") from January 1996 to August 1997. From 1993 until he
joined Tandem in 1996, Dr. Pieper served as President and Chief Executive
Officer of Tandem's wholly-owned subsidiary, UB Networks. Before joining UB
Networks, Dr. Pieper was President and Chief Executive Officer at AT&T's UNIX
Systems Laboratories from January 1991 to August 1993. Dr. Pieper is also a
director of Lincoln National Corporation, Unify Corporation and VERITAS Software
Corporation.
Dennis F. Strigl has served as a director of the Company since August 1997.
Mr. Strigl has been President and Chief Executive Officer of Bell Atlantic
Global Wireless since August 1997, and President and Chief Executive Officer of
Bell Atlantic Mobile since February 1991. Mr. Strigl is also a director of Grupo
Iusacell, S.A.
Susan G. Swenson has served as a director of the Company since August 1997.
Ms. Swenson has been President and Chief Executive Officer of Cellular One since
March 1994. From April 1993 to March 1994, she served as Vice President and
General Manager of Pacific Bell's Northern California regional business unit.
Ms. Swenson is also a director of Wells Fargo & Company.
BOARD OF DIRECTOR'S COMMITTEES AND MEETINGS
During the year ended December 31, 1997, the Board of Directors held six
(6) meetings. Each incumbent director attended at least 75% of the aggregate of
such meetings of the Board and any committee of the Board on which he or she
served, except Carl F. Pascarella.
The Company has a Nominating Committee, an Audit Committee and a
Compensation Committee.
The Nominating Committee's function is to recommend from time to time
candidates for nomination for election as directors of the Company. The members
of the Nominating Committee at the end of fiscal 1997 were Messrs. Markman (ex
officio), Kalogris and Pieper and Ms. Swenson. During the year ended December
31, 1997, the Nominating Committee held one (1) meeting.
The Audit Committee's function is to review with the Company's independent
auditors and management the annual financial statements and independent
auditors' opinion, review the scope and results of the examination of the
Company's financial statements by the independent auditors, approve all
professional services and related fees of the independent auditors, recommend
the retention of the independent auditors to the Board, subject to ratification
by the stockholders, and periodically review the Company's accounting policies
and internal accounting and financial controls. The members of the Audit
Committee at the end of fiscal 1997 were Messrs. Kalogris, Pascarella and
Strigl. During the year ended December 31, 1997, the Audit Committee held two
(2) meetings.
The Compensation Committee's function is to review and approve compensation
levels and stock option grants for employees of the Company. The members of the
Compensation Committee at the end of fiscal 1997 were Messrs. Pascarella and
Pieper and Ms. Swenson. During the year ended December 31, 1997, the
Compensation Committee held two (2) meetings. For additional information
concerning the Compensation Committee, see "COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION."
3
<PAGE> 7
PROPOSAL NO. 2
AMENDMENT OF AMENDED AND RESTATED 1990 STOCK OPTION PLAN
At the Annual Meeting, the stockholders will be asked to approve an
amendment to the Company's Amended and Restated 1990 Stock Option Plan (the
"Option Plan") in order to increase by 4,850,000 the number of shares of the
Company's Common Stock that may be issued thereunder.
As of April 28, 1998, options to purchase an aggregate of 4,632,842 shares
of Common Stock were outstanding and only 562,556 shares remained available for
future grants under the Option Plan, an amount that the Board of Directors
believes to be insufficient to meet the Company's equity incentive objectives.
The Board of Directors believes that the Company's stock option program is an
important factor in attracting and retaining the high caliber employees,
consultants, advisers and other independent contractors essential to the
Company's success and in aligning those individuals' long-term interests with
those of the stockholders. In view of the intense competition in the Company's
industry for highly qualified personnel, the Board of Directors believes that to
attract and retain the best candidates, the Company must offer a competitive
stock option program as a core component of its compensation package. In
addition, stock options serve an important role in motivating their holders to
contribute to the Company's growth. Therefore, the Board of Directors has
amended the Option Plan, subject to the approval of the Company's stockholders,
to increase by 4,850,000 shares the maximum aggregate number of shares issuable
under the Option Plan. This amendment is intended to ensure that the Option Plan
will continue to have available the number of shares necessary to meet these
needs, and the Board of Directors believes that approval of the amendment is in
the best interests of the Company and its stockholders.
SUMMARY OF THE OPTION PLAN, AS AMENDED
The following summary of the Option Plan is qualified in its entirety by
the specific language of the Option Plan, a copy of which is available to any
stockholder upon request.
General. The purpose of the Option Plan is to advance the interests of the
Company and its stockholders by providing an incentive to attract, retain and
reward the Company's employees and consultants and by motivating such persons to
contribute to the Company's growth and profitability. It provides for grants to
employees of incentive stock options, within the meaning of Section 422(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), and grants to
employees and consultants of nonqualified stock options.
Administration. The Option Plan is administered by the Board of Directors
or a duly appointed committee of the Board having such powers as specified by
the Board (referred to collectively as the "Board"). Subject to the provisions
of the Option Plan, the Board determines the persons to whom options are
granted, the number of shares covered by each option, whether the option is to
be an incentive stock option or a nonqualified stock option, the timing and
terms of the exercisability, vesting and expiration of each option, the effect
thereon of an optionee's termination of service, the exercise price of and the
type of consideration to be paid to the Company upon the exercise of each
option, the method for satisfaction of any tax withholding obligation arising in
connection with an option, including by the delivery or withholding of shares of
stock, and all other terms and conditions of each option not inconsistent with
the Option Plan. The Board has the authority to interpret the Option Plan and
any agreement used thereunder, and all determinations of the Board are final and
binding on all persons having an interest in the Option Plan or any option
granted under the plan.
Eligibility. Options may be granted under the Option Plan to employees
(including officers and directors who are also employees) or consultants,
advisors or other independent contractors of the Company or any parent or
subsidiary corporation of the Company. However, incentive stock options may be
granted only to employees. As of April 28, 1998, a total of approximately 150
current employees (including seven executive officers) satisfied the eligibility
requirements for participation in the Option Plan.
Shares Subject to Plan. Subject to adjustment as described below, the
Option Plan currently authorizes the issuance of an aggregate of up to 8,020,000
shares of the Company's authorized but unissued or reacquired Common Stock. The
Board of Directors has amended the Option Plan, subject to stockholder approval,
to increase to 12,870,000 the maximum aggregate number of such shares that may
be issued under the Option
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<PAGE> 8
Plan. If an option expires or is canceled, or if shares subject to repurchase
are repurchased by the Company, the shares subject to the unexercised portion of
the option or the repurchased shares may again become available for issuance
under the Option Plan. In the event of a stock dividend, stock split, reverse
stock split, recapitalization, combination, reclassification, or similar change
in the capital structure of the Company, appropriate adjustments will be made to
the shares subject to the Option Plan and to the number of shares and exercise
price under outstanding options. Section 162(m) of the Code limits the amount of
compensation paid to a corporation's chief executive officer and four other most
highly compensated officers that the corporation may deduct as an expense for
federal income tax purposes. To enable the Company to grant sufficient options
to attract and retain key officers, the Option Plan was amended by the
Compensation Committee of the Board of Directors in November 1996 to eliminate a
limitation on the maximum aggregate number of shares for which options could be
granted to any employee in any fiscal year which would have enabled compensation
related to options granted under the plan to be exempt from the effects of
Section 162(m). Therefore, options granted thereafter under the Option Plan will
not be exempt from the deduction limitation.
Terms and Conditions of Options. Each option granted under the Option Plan
is evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the Option Plan.
Incentive stock options must have an exercise price at least equal to the fair
market value per share of the Common Stock on the date of grant, while
nonqualified stock options must have an exercise price at least equal to 85%
(50% in the case of persons who are not officers or directors of the Company) of
the fair market value per share of the Common Stock on the date of grant.
However, incentive stock options granted to an optionee who at the time owns
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or a subsidiary or parent corporation of the Company (a
"Ten Percent Owner") must have an exercise price equal to at least 110% of the
fair market value per share of the Common Stock on the date of grant. As of
April 28, 1998, the fair market value of the Company's Common Stock, as reported
on the Nasdaq National Market, was $9.391 per share.
Options granted under the Option Plan become vested and exercisable at such
times and subject to such conditions as determined by the Board and generally
must be exercised within ten years of the date of grant. However, an incentive
stock option granted to a Ten Percent Owner must be exercised within five years
from the date of grant. The Option Plan provides that the exercise price of
options may be paid (i) in cash, by check or cash equivalent, (ii) by tender of
certain shares of the Company's stock which have a fair market value on the
exercise date equal to the exercise price, (iii) by a recourse promissory note
in a form approved by the Company, (iv) by the assignment of the proceeds of a
sale of some or all of the shares being acquired upon the exercise of an option,
or (v) by any combination thereof. However, the Board may grant options which do
not permit all of the foregoing forms of consideration to be used in payment of
the exercise price. During the lifetime of the optionee, the option may be
exercised only by the optionee. An option may not be transferred or assigned
except by will or the laws of descent and distribution. An optionee has no
rights as a stockholder with respect to an option grant under the Option Plan
until shares of Common Stock are issued to the optionee upon exercise of the
option.
Change in Control. A "Change in Control" of the Company is deemed to occur
upon any of the following events in which the stockholders of the Company
immediately before such event do not retain immediately after such event,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Company or its successor or the corporation to which the
Company's assets have been transferred: (i) the direct or indirect sale or
exchange by the stockholders of the Company of all or substantially all of the
voting stock of the Company, (ii) a merger in which the Company is a party, or
(iii) the sale, exchange or transfer (including pursuant to a liquidation or
dissolution) of all or substantially all of the assets of the Company. In the
event of a Change in Control, the Board, in its sole discretion, may arrange
with the surviving, continuing or purchasing corporation, as the case may be
(the "Acquiring Corporation"), for the Acquiring Corporation to either assume
the Company's rights and obligations under outstanding stock option agreements
or to substitute options for the Acquiring Corporation's stock for such options.
Any options not assumed, replaced or exercised as of the date of the Change in
Control will terminate.
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<PAGE> 9
Termination or Amendment. No options may be granted under the Option Plan
after August 2, 2000. The Board may terminate or amend the Option Plan or any
grant under the Option Plan at any time, but, without the approval of the
Company's stockholders, the Board may not amend the Option Plan to increase the
number of shares subject to the Option Plan or to change the class of persons
eligible to receive grants under the Option Plan. No amendment may adversely
affect any outstanding option without the optionee's consent unless the
amendment is required to preserve the option's status as an incentive stock
option.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law with respect to stock
options granted under the Option Plan and does not attempt to describe all
possible federal or other tax consequences of such participation or tax
consequences based on particular circumstances.
Incentive Stock Options. An optionee recognizes no taxable income for
regular income tax purposes as the result of the grant or exercise of an
incentive stock option qualifying under Section 422 of the Code. Optionees who
do not dispose of their shares for two years following the date the option was
granted or within one year following the exercise of the option will normally
recognize a long-term or mid-term capital gain or loss equal to the difference,
if any, between the sale price and the purchase price of the shares. If an
optionee satisfies such holding periods upon a sale of the shares, the Company
will not be entitled to any deduction for federal income tax purposes. If an
optionee disposes of shares within two years after the date of grant or within
one year from the date of exercise (a "disqualifying disposition"), the
difference between the fair market value of the shares on the exercise date and
the option exercise price (not to exceed the gain realized on the sale if the
disposition is a transaction with respect to which a loss, if sustained, would
be recognized) will be taxed as ordinary income at the time of disposition. Any
gain in excess of that amount will be a capital gain. If a loss is recognized,
there will be no ordinary income, and such loss will be a capital loss. A
capital gain or loss will be mid-term if the optionee's holding period is more
than 12 months but not more than 18 months and will be long-term if the
optionee's holding period is more than 18 months. In general, long-term capital
gain is subject to lower maximum federal income tax rates than ordinary income.
Any ordinary income recognized by the optionee upon the disqualifying
disposition of the shares generally should be deductible by the Company for
federal income tax purposes, except to the extent such deduction is limited by
applicable provisions of the Code or the regulations thereunder.
The difference between the option exercise price and the fair market value
of the shares on the exercise date of an incentive stock option is an adjustment
in computing the optionee's alternative minimum taxable income and may be
subject to an alternative minimum tax which is paid if such tax exceeds the
regular tax for the year. Special rules may apply with respect to certain
subsequent sales of the shares in a disqualifying disposition, certain basis
adjustments for purposes of computing the alternative minimum taxable income on
a subsequent sale of the shares and certain tax credits which may arise with
respect to optionees subject to the alternative minimum tax.
Nonqualified Stock Options. Options not designated or qualifying as
incentive stock options will be nonqualified stock options. Nonqualified stock
options have no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a
nonqualified stock option, the optionee normally recognizes ordinary income in
the amount of the difference between the option exercise price and the fair
market value of the shares on the exercise date. If the optionee is an employee,
such ordinary income generally is subject to withholding of income and
employment taxes. Upon the sale of stock acquired by the exercise of a
nonqualified stock option, any gain or loss, based on the difference between the
sale price and the fair market value on the exercise date, will be taxed as a
capital gain or loss. A capital gain or loss will be long-term or mid-term
depending on the optionee's holding period, as discussed above. No tax deduction
is available to the Company with respect to the grant of a nonqualified option
or the sale of the stock acquired pursuant to such grant. The Company generally
should be entitled to a deduction equal to the amount of ordinary income
recognized by the optionee as a result of the exercise of a nonqualified option,
except to the extent such deduction is limited by applicable provisions of the
Code or the regulations thereunder.
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<PAGE> 10
NEW PLAN BENEFITS AND ADDITIONAL INFORMATION
As of the date of this Proxy Statement, no options have been granted under
the Option Plan conditioned upon stockholder approval of this proposal. Future
grants under the Option Plan will be made at the discretion of the Board, and,
accordingly, are not yet determinable. In addition, benefits under the Option
Plan will depend on a number of factors, including the fair market value of the
Company's Common Stock on future dates and the exercise decisions made by the
optionees. Consequently it is not possible to determine the benefits that might
be received by optionees receiving discretionary grants under the Option Plan.
The numbers of shares of Common Stock subject to options granted under the
Option Plan to certain persons during the fiscal year ended December 31, 1997,
are as follows: Mary E. Doyle, Jeffrey F. McElroy, Steven D. Schramm, Kevin J.
Surace and James E. White were granted options to purchase 70,000 shares, 60,000
shares, 70,000 shares, 70,000 shares and 50,000 shares, respectively; all
current executive officers as a group were granted options to purchase an
aggregate of 590,000 shares; and all employees, including current officers who
are not executive officers, as a group were granted options to purchase an
aggregate of 2,184,000 shares. During such fiscal year, no options were granted
under the Option Plan to any current director who is not an executive officer,
any nominee for election as a director, or any associate of any such director,
nominee or executive officer, and no person was granted five percent or more of
the total amount of options granted under the Option Plan during that period.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present, either in person or by proxy,
is required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum.
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.
The Board of Directors believes that approval of the increase in the number
of shares issuable under the Option Plan is in the best interests of the Company
and its stockholders for the reasons stated above. THEREFORE, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF AN INCREASE BY
4,850,000 IN THE AGGREGATE MAXIMUM NUMBER OF SHARES ISSUABLE UNDER THE OPTION
PLAN.
7
<PAGE> 11
PROPOSAL NO. 3
AMENDMENT OF 1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
At the Annual Meeting, the stockholders will be asked to approve an
amendment to the Company's 1994 Outside Directors Stock Option Plan (the
"Directors Plan") in order to increase by 250,000 the number of shares of the
Company's Common Stock that may be issued thereunder.
As of April 28, 1998, options to purchase an aggregate of 225,000 shares of
Common Stock were outstanding and only 75,000 shares remained available for
future grants under the Directors Plan. The Board of Directors has amended the
Directors Plan, subject to the approval of the Company's stockholders, to
increase by 250,000 shares the maximum aggregate number of shares issuable under
the Directors Plan. The Board of Directors believes that approval of this
amendment to the Directors Plan is in the best interests of the Company and its
stockholders because the availability of stock options is an important factor in
continuing to attract and retain qualified non-employee directors essential to
the success of the Company.
SUMMARY OF THE DIRECTORS PLAN, AS AMENDED
The following summary of the Directors Plan is qualified in its entirety by
the specific language of the Directors Plan, a copy of which is available to any
stockholder upon request.
General. The purpose of the Directors Plan is to promote the financial
success of the Company by creating an additional incentive for its non-employee
directors through the automatic grant to them of nonqualified stock options.
Administration. The Directors Plan is intended to operate automatically
without discretionary administration. To the extent administration is necessary,
it will be performed by the Board of Directors or a duly appointed committee of
the Board of Directors (referred to collectively as the "Board"). However, the
Board has no discretion to select the non-employee directors of the Company who
are granted options under the Directors Plan, to set the exercise price of such
options, to determine the number of shares for which or the time at which
particular options are granted or to establish the duration of such options. The
Board is authorized to interpret the Directors Plan and options granted
thereunder, and all determinations of the Board are final and binding on all
persons having an interest in the Directors Plan or any option.
Eligibility. A director of the Company is eligible to participate in the
Directors Plan only if the director is (i) at the time of option grant not an
employee of the Company or of any parent or subsidiary corporation of the
Company, (ii) not employed by a shareholder of the Company or a parent or
subsidiary corporation of a shareholder of the Company; and (iii) not employed
by an entity holding a technology license from the Company or by a parent or
subsidiary corporation of such entity. Eligible directors are referred to herein
as "Outside Directors." Currently, the Company has five Outside Directors.
Shares Subject to Plan. Subject to adjustment as described below, currently
no more than 300,000 shares of the authorized but unissued Common Stock of the
Company may be issued under the Directors Plan. The Board of Directors has
amended the Directors Plan, subject to stockholder approval, to increase to
550,000 the maximum aggregate number of such shares that may be issued under the
plan. Upon any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments will be made to the
shares subject to the Directors Plan, to the terms of the automatic option
grants described below, and to outstanding options. If any outstanding option
under the Directors Plan expires or terminates prior to exercise in full or if
shares issued upon the exercise of an option are repurchased by the Company, the
subject shares of Common Stock are returned to the Directors Plan and become
available for future grants.
Automatic Grant of Options. The Directors Plan provides that each person
first elected or appointed as an Outside Director on or after May 23, 1996, will
be automatically granted an option to purchase 40,000 shares of Common Stock on
the day immediately following the day of such initial election or appointment
(an "Initial Option"). The Directors Plan also provides for the automatic annual
grant to each Outside Director on such director's "Anniversary Date" occurring
on or after May 23, 1996, of an additional option to purchase
8
<PAGE> 12
10,000 shares of Common Stock (an "Annual Option"). An Outside Director's
Anniversary Date is either (i) the date 12 months after the date of grant of an
Initial Option to the director and each successive anniversary thereof, or (ii)
if the director did not receive an Initial Option under the Directors Plan, the
date 12 months after the date of the most recent grant of an option to the
director under the Option Plan and each successive anniversary thereof.
Terms and Conditions of Options. Each option granted under the Directors
Plan is evidenced by a written agreement between the Company and the Outside
Director specifying the number of shares subject to the option and the other
terms and conditions of the option, consistent with the requirements of the
Directors Plan. The exercise price of any option granted under the Directors
Plan must equal the fair market value, as determined pursuant to the plan, of a
share of the Company's Common Stock on the date of grant. Generally, the fair
market value of the Common Stock is the closing price per share on the date of
grant as reported on the Nasdaq National Market. As of April 28, 1998, the
closing price of the Company's Common Stock, as reported on the Nasdaq National
Market, was $9.438 per share.
No option granted under the Directors Plan is exercisable after the
expiration of 10 years from the date such option is granted, subject to earlier
termination if the optionee ceases to be a director of the Company or in the
event of a Change in Control of the Company, as discussed below. One-fourth of
the shares subject to an Initial Option vest and become exercisable one year
after the date of grant and the remainder of the shares subject to the option
vest and become exercisable in equal monthly installments over the following 36
months. Shares subject to an Annual Option vest and become exercisable in 12
equal monthly installments, with the first installment vesting 37 months after
the date of grant. An optionee has no rights as a stockholder with respect to
shares subject to an option granted under the Directors Plan until shares of
Common Stock are issued to the optionee upon exercise of the option.
Generally, the exercise price of an option granted under the Directors Plan
may be paid in cash, by check, or in cash equivalent, by the assignment of the
proceeds of a sale of some or all of the shares of Common Stock being acquired
upon the exercise of the option, or by any combination of these. During the
lifetime of the optionee, the option may be exercised only by the optionee. An
option may not be transferred or assigned, except by will or the laws of descent
and distribution.
Change in Control. The Directors Plan provides that a "Change in Control"
of the Company occurs upon any one of the following events: (i) a merger or
consolidation in which the Company is not the surviving corporation, (ii) a
merger or consolidation in which the Company is the surviving corporation where
the stockholders of the Company before such merger or consolidation do not
retain, directly or indirectly, as a result of their ownership of shares of the
Company prior to such event, at least a majority of the beneficial interest in
the Company's voting stock after such merger or consolidation, (iii) the sale,
exchange or transfer of all or substantially all of the assets of the Company,
(iv) the direct or indirect sale or exchange by the stockholders of the Company
of all or substantially all of the stock of the Company where the stockholders
of the Company before such sale or exchange do not retain, directly or
indirectly, as a result of their ownership of shares of the Company prior to
such event, at least a majority of the beneficial interest in the Company's
voting stock after such sale or exchange, or (v) a liquidation or dissolution of
the Company. Upon the occurrence of a Change in Control, the Board may arrange
with the surviving, continuing, successor, or purchasing corporation or parent
corporation thereof (the "Acquiring Corporation") to either assume the
outstanding options or to substitute options for the Acquiring Corporation's
stock for the outstanding options. Any options which are neither assumed or
substituted for by the Acquiring Corporation nor exercised as of the date of the
Change in Control will terminate effective as of such date.
Termination or Amendment. No options may be granted under the Directors
Plan after November 22, 2004. The Board may terminate or amend the Directors
Plan at any time. However, without stockholder approval, the Board may not amend
the Directors Plan to increase the total number of shares of Common Stock
reserved for issuance thereunder or expand the class of persons eligible to
receive options. The provisions of the Directors Plan addressing eligibility to
participate in the Directors Plan and the amount, price and time of the grant of
options may not be amended more than once every six months, other than to
comport
9
<PAGE> 13
to changes in the Code or the rules thereunder. No termination or amendment of
the Directors Plan may adversely affect an outstanding option without the
consent of the optionee.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE
DIRECTORS PLAN
The federal income tax consequences of the options granted under the
Directors Plan are the same as the federal income tax consequences described for
nonqualified stock options granted pursuant to the Option Plan set forth above
under Proposal No. 2.
NEW PLAN BENEFITS AND ADDITIONAL INFORMATION
As of the date of this Proxy Statement, no options have been granted under
the Directors Plan conditioned upon stockholder approval of this proposal.
Future grants under the Directors Plan will be made automatically under the
terms of the plan as described above. However, the benefits that may be received
by current and future Outside Directors under the Directors Plan will depend on
a number of factors, including the fair market value of the Company's Common
Stock on future dates and the exercise decisions made by the optionees.
Consequently it is not possible to determine the dollar value of benefits that
might be received by future optionees under the Directors Plan. In fiscal 1998,
provided that each current Outside Director remains an Outside Director on his
or her respective Anniversary Date under the Directors Plan, Annual Options to
purchase 10,000 shares at an exercise price equal to the fair market value of a
share of the Company's Common Stock on the date of grant will be granted
automatically to each of Messrs. Kalogris, Pascarella, Pieper and Strigl and Ms.
Swenson. However, by letter dated March 12, 1998, Mr. Pascarella has indicated
his intention to cancel all options granted to him pursuant to the Company's
Option Plan and Directors Plan, and to decline any future grants thereunder, as
per the policy of VISA U.S.A. Inc. In addition, provided that Mr. Knell is
elected at the Annual Meeting, an Initial Option to purchase 40,000 shares at an
exercise price equal to the fair market value of a share of the Company's Common
Stock on the date of grant will be granted to him automatically on the day
following the Annual Meeting. During the fiscal year ended December 31, 1997,
the current directors who are not executive officers as a group received options
under the Directors Plan for an aggregate of 140,000 shares of the Company's
Common Stock, including Initial Options for an aggregate of 120,000 shares of
the Company's Common Stock. During such fiscal year, no options were granted
under the Directors Plan to any of the persons named in the Summary Compensation
Table below, any other executive officer, any nominee for election as a
director, any associate of any such director, nominee or executive officer, or
any employee of the Company.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present, either in person or by proxy,
is required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum.
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.
The Board of Directors believes that approval of the increase in the number
of shares issuable under the Directors Plan is in the best interests of the
Company and its stockholders for the reasons stated above. THEREFORE, THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF AN INCREASE BY
250,000 IN THE AGGREGATE MAXIMUM NUMBER OF SHARES ISSUABLE UNDER THE DIRECTORS
PLAN.
10
<PAGE> 14
PROPOSAL NO. 4
RATIFICATION OF SALE AND ISSUANCE OF 5 1/2% CUMULATIVE
CONVERTIBLE SERIES B PREFERRED STOCK
On March 4, 1998, the Company completed a private placement sale of (i)
5,000 shares of its 5 1/2% Cumulative Convertible Series B Preferred Stock with
a liquidation price of $1,000 per share (the "Definitive Series B Shares") and
warrants to purchase an aggregate of 400,000 shares of Common Stock at an
exercise price of $3.38 per share (the "Definitive Warrants"); and (ii) 7,000
shares of Series B Preferred Stock (the issuance of which would occur, if at
all, upon the occurrence of certain events) (the "Contingent Series B Shares")
(the Definitive Series B Shares and Contingent Series B Shares are collectively
referred to as the "Series B Shares") and warrants to purchase shares of Common
Stock (the issuance of which would occur, if at all, upon the purchase of the
Contingent Series B Shares and the occurrence of certain other events) (the
"Contingent Warrants") (the Definitive Warrants and Contingent Warrants are
collectively referred to as the "Warrants") as provided for in the Certificate
of Designation prescribing the rights, preferences, privileges and limitations
of the Series B Shares (the "Series B Certificate of Designation"). As of the
date of this Proxy Statement, no Definitive Series B Shares have been converted
into shares of Common Stock, no Definitive Warrants have been exercised, and no
Contingent Series B Shares or Contingent Warrants have been issued. Copies of
the relevant documents for this private placement sale were filed as exhibits to
the Company's Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on May 1, 1998, and are incorporated herein by reference.
The Board of Directors authorized the sale of the Series B Shares and
Warrants in order to raise proceeds which were applied towards working capital.
SUMMARY TERMS OF THE SERIES B SHARES
The Definitive Series B Shares and Definitive Warrants were issued in
connection with a private equity financing to institutional investors (the
"Investors") pursuant to a certain preferred stock investment agreement (the
"Investment Agreement"). Pursuant to the Investment Agreement and depending on
certain conditions, including the performance of the Company's stock, (i) the
Company has the option to require the Investors to purchase up to 5,000 shares
of the Contingent Series B Shares, and (ii) the Investors have the option to
purchase up to 2,000 shares of the Contingent Series B Shares. The Series B
Shares are convertible into shares of the Company's Common Stock pursuant to a
formula based on dividing (i) the liquidation preference by (ii) the conversion
price, all as set forth in the Series B Certificate of Designation. The
liquidation preference equals the original liquidation price of $1,000 plus any
accrued but unpaid amount of the annual 5 1/2% cumulative dividend. The
conversion price equals the lesser of (a) $3.00 or (b) 85% of the lowest price
of a share of Common Stock at any time during the 5 trading days prior to but
excluding the date of a conversion request by the holder thereof. The Series B
Certificate of Designation entitles holders of Series B Shares, in the event of
any liquidation, dissolution or winding up of the Company, to the liquidation
preference. The Series B Certificate of Designation also gives (i) the Company
the option, in the event of a change in control transaction in which more than
fifty percent (50%) of the voting power of the Company is transferred, to redeem
all of the then outstanding Series B Shares at a per share price equal to one
hundred twenty percent (120%) of the liquidation preference of the Series B
Shares being called for redemption, and (ii) the Investors the right to cause
the Company to redeem any or all of the Series B Shares outstanding for 130% of
the per share liquidation preference upon (a) a change in control transaction,
(b) a "going private" transaction under Rule 13e-3 of the 1934 Securities
Exchange Act, as amended (the "34 Act"), (c) a tender offer by the Company under
Rule 13e-4 of the 34 Act, (d) the Company becoming insolvent, or (e) the
initiation of bankruptcy, reorganization, insolvency or liquidation proceedings
against the Company.
The shares of Common Stock issuable upon conversion of the Series B Shares
or upon exercise of the Warrants may be deemed below market or discounted
securities and thus the issuance of Common Stock may be subject to the
Marketplace Rules of the Nasdaq National Market ("NASDAQ") regarding stockholder
approval of certain discounted securities. Section 4460(i)(1)(D)(ii) of the
Marketplace Rules requires stockholder approval of the sale or issuance by a
company of common stock (or securities convertible into or
11
<PAGE> 15
exercisable for common stock) equal to 20% or more of the common stock or 20% or
more of the voting power outstanding before the issuance for less than the
greater of book or market value of the stock (the "Discounted Securities
Limit"). Accordingly, the Investment Agreement prohibits Investors from
receiving shares of Common Stock upon conversion of the Series B Shares or
exercise of the Warrants in the event that such conversion or exercise, when
aggregated with all prior or concurrent conversions or exercises of Series B
Shares and Warrants would result in the issuance to all Investors of shares of
Common Stock in excess of 19.99% of the shares of capital stock with voting
rights outstanding on the Closing Date (the "Outstanding Closing Date Stock").
As of the Closing Date, there were 26,928,201 shares of the Company's Common
Stock outstanding and 50,000 shares of the Company's Series A Preferred Stock
outstanding (with voting power of 3,629,000 shares of the Company's Common
Stock), for a total of 30,557,201 shares of Outstanding Closing Date Stock,
19.99% of which sum is 6,108,384. In seeking ratification of the issuance of the
Series B Shares and the Warrants, the Company is also seeking approval from its
stockholders to issue shares of Common Stock upon conversion of the Series B
Shares and exercise of the Warrants in excess of the Discounted Securities
Limit, if applicable.
In the event the Company is unable to obtain the stockholder approval
necessary to issue shares of Common Stock in excess of the Discounted Securities
Limit, and the Investors request conversion of the Series B Shares or exercise
of the Warrants in excess of such limit, the Company will be required to redeem
shares in excess of the Discounted Securities Limit. If the Company does not
have the available funds necessary to redeem such shares in excess of the
Discounted Securities Limit, then the Company must issue promissory notes to the
Investors for the amounts that cannot be redeemed. This forced redemption could
have a material adverse effect on the Company's financial condition. In
addition, if the Company is unable to obtain stockholder approval, the Company
will not be able to force the Investors to purchase 5,000 shares of the
Contingent Series B Shares at a price of $1,000 per share, upon the occurrence
of certain events, and the Investors will not have the option to purchase 2,000
shares of the Contingent Series B Shares at a price of $1,000 per share, upon
the occurrence of certain events. Inability to sell the Contingent Series B
Shares could have a material adverse effect on the Company's financial
condition. Therefore, in order to preserve maximum flexibility with respect to
working capital and the potential to raise additional working capital pursuant
to the Investment Agreement, the Company believes that it is in the best
interests of the Company and its stockholders to vote in favor of this proposal.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present, either in person or by proxy,
is required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum,
but will not be counted as having been voted on the proposal.
The Board of Directors believes that ratification of the sale and issuance
of the Series B Shares and the rights, preferences, privileges and limitations
related to such shares, including but not limited to the right of holders of
such shares to receive shares of Common Stock in excess of the Discounted
Securities Limit upon conversion of the Series B Shares or exercise of Warrants,
is in the best interests of the stockholders and the Company for the reasons
stated above. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
"FOR" RATIFICATION OF THE ISSUANCE OF THE SERIES B SHARES.
12
<PAGE> 16
PROPOSAL NO. 5
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected KPMG Peat Marwick LLP as
independent auditors to audit the financial statements of the Company for the
fiscal year ending December 31, 1998. KPMG Peat Marwick LLP has acted in such
capacity since its appointment during the fiscal year ended December 31, 1990. A
representative of KPMG Peat Marwick LLP is expected to be present at the Annual
Meeting with the opportunity to make a statement if the representative desires
to do so, and is expected to be available to respond to appropriate questions.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present, either in person or by proxy,
is required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum,
but will not be counted as having been voted on the proposal. THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPOINTMENT OF KPMG PEAT
MARWICK LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1998.
13
<PAGE> 17
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 1998,
with respect to the beneficial ownership of the Company's Common Stock and
Preferred Stock by (i) each person known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock, (ii) each director and
director nominee of the Company, (iii) the Chief Executive Officer, the four
other highest compensated executive officers of the Company whose salary and
bonus for the year ended December 31, 1997, exceeded $100,000 and a former
executive officer of the Company whose salary and bonus for the year ended
December 31, 1997, exceeded $100,000 but who was not an executive officer at
December 31, 1997 (the "Named Executive Officers") and (iv) all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF PREFERRED STOCK
BENEFICIALLY OWNED(2)(3) BENEFICIALLY OWNED(2)
------------------------- --------------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) SHARES OF CLASS SHARES CLASS
---------------------------------------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS
Sony Corporation(4).......................... 1,778,940 5.2% -- --
7-35 Kitashinagawa
6-Chrome Shinagawa-Ku
Tokyo 141 Japan, MO
Microsoft Corporation(5)..................... 3,629,000 10.5 50,000 90.9%
One Microsoft Way, Bldg. #8
North Office 2211
Redmond, WA 98052
OFFICERS AND DIRECTORS
Steven Markman, Ph.D.(6)..................... 474,838 1.4 -- --
Mary E. Doyle(7)............................. 72,292 * -- --
Michael E. Kalogris.......................... 2,500 * -- --
Philip D. Knell.............................. -- * -- --
Jeffrey F. McElroy(8)........................ 49,376 * -- --
Carl F. Pascarella(9)........................ 29,167 * -- --
Roel Pieper, Ph.D.(10)....................... 19,583 * -- --
Steven D. Schramm(11)........................ 173,770 * -- --
Dennis F. Strigl............................. 1,000 * -- --
Kevin J. Surace(12).......................... 87,379 * -- --
Susan G. Swenson............................. -- * -- --
James E. White(13)........................... 482,650 1.4 -- --
Executive officers and directors as a group
(12 persons)(14)........................... 939,599 2.7 -- --
</TABLE>
- ---------------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is in
care of the Company at 420 North Mary Avenue, Sunnyvale, California 94086.
(2) Except as indicated in the footnotes to this table, the Company believes
that the persons named in the table have sole voting and dispositive power
with respect to all shares of Common Stock and/or Preferred Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
(3) Calculations of percentages of beneficial ownership are based upon
34,431,934 shares as of March 31, 1998, including all issued and
outstanding shares of Common Stock and Common Stock issuable upon
conversion of all outstanding shares of Preferred Stock and exercise of
warrants. Calculations assume the exercise by only the respective named
stockholder of all options to purchase Common Stock held by such
stockholder, if any, which are exercisable within 60 days of March 31,
1998.
14
<PAGE> 18
(4) According to Schedule 13G/A filed with the Securities and Exchange
Commission on February 13, 1997, Sony Corporation has sole power to vote
and dispose of all 1,778,940 shares. The 1,778,940 shares beneficially
owned by Sony Corporation include 428,940 shares of Common Stock held by
Sony Electronics, Inc., a wholly-owned subsidiary of SEL Holdings Inc.,
which is a wholly-owned subsidiary of Sony Corporation of America, which is
a wholly-owned subsidiary of Sony Corporation.
(5) According to Schedule 13G filed with the Securities and Exchange Commission
on March 9, 1998, Microsoft Corp. has sole power to vote and dispose of all
3,629,000 shares. All of such 3,629,000 shares of Common Stock are shares
that may be acquired at any time upon conversion of the 50,000 shares of
Series A Preferred Stock.
(6) Includes 312,500 shares subject to stock options exercisable within 60 days
of March 31, 1998, and 67,500 shares of restricted stock owned by Dr.
Markman which will vest in September 1998.
(7) Includes 64,792 shares subject to stock options exercisable within 60 days
of March 31, 1998.
(8) Includes 49,376 shares subject to stock options exercisable within 60 days
of March 31, 1998.
(9) Includes 29,167 shares subject to stock options exercisable within 60 days
of March 31, 1998. However, by letter dated March 12, 1998, Mr. Pascarella
has indicated his intention to cancel all options granted to him pursuant
to the Company's Option Plan and Directors Plan, and to decline any future
grants thereunder, as per the policy of VISA U.S.A. Inc.
(10) Includes 19,583 shares subject to stock options exercisable within 60 days
of March 31, 1998.
(11) Includes 136,120 shares subject to stock options exercisable within 60 days
of March 31, 1998.
(12) Includes 75,209 shares subject to stock options exercisable within 60 days
of March 31, 1998.
(13) Includes 92,500 shares subject to stock options exercisable within 60 days
of March 31, 1998, and 280,000 shares of restricted stock owned by Mr.
White which will vest in August 1998.
(14) Includes 711,386 shares subject to stock options exercisable within 60 days
of March 31, 1998, held by all current executive officers and directors and
67,500 shares of restricted stock owned by Dr. Markman which will vest in
September 1998.
15
<PAGE> 19
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the total
compensation of the Named Executive Officers for the years ended December 31,
1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
--------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARD(S)($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- -------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Steven Markman, Ph.D.(1)......... 1997 $301,154 $90,000(2) -- -- --
Chairman, Chief Executive 1996 77,307 60,000(3) $155,250(4) 1,500,000(5) $50,000(6)
Officer and President 1995 -- -- -- -- --
Mary E. Doyle(7)................. 1997 180,692 53,055(2) -- 70,000 61,762(8)
Vice President, Business 1996 72,692 12,300(3) -- 200,000(9) 16,253(8)
Affairs,
General Counsel and Secretary 1995 -- -- -- -- --
Jeffrey F. McElroy(10)........... 1997 140,539 28,000(2) -- 60,000 --
Vice President and General 1996 70,000 15,400(3) -- 300,000(11) --
Manager, Internet Applications 1995 -- -- -- -- --
and Services
Steven D. Schramm................ 1997 170,654 50,108(2) -- 70,000 --
Vice President and General 1996 148,365 72,750(3) -- 210,000(12) --
Manager, Communication Products 1995 136,365 51,363(13) -- 37,500 --
Division
Kevin J. Surace(14).............. 1997 192,442 57,221(2) -- 70,000 --
Vice President and General 1996 14,231 -- -- 150,000 --
Manager, Product and Network 1995 -- -- -- -- --
Solutions Division
Former Officer:
James E. White(15)............... 1997 170,654 32,013(2) -- 50,000 --
Vice President and Chief 1996 141,346 59,575(3) -- 127,500(16) --
Technical Officer, Agent 1995 134,904 30,625(13) -- -- --
Technology
</TABLE>
- ---------------
(1) Dr. Markman joined the Company in September 1996.
(2) Includes bonuses earned, but not paid, in fiscal 1997.
(3) Includes bonuses earned, but not paid, in fiscal 1996.
(4) As part of his compensation arrangement, the Company granted Dr. Markman
the right to acquire 135,000 shares of restricted Common Stock for $0.10
per share. In March 1997, Dr. Markman exercised this right and acquired the
restricted stock. 67,500 shares of the restricted stock vested in September
1997. Effective as of the vesting date, Dr. Markman tendered 22,562 shares
to the Company in satisfaction of income and employment tax withholding
obligations. The remaining 67,500 shares of the restricted stock will vest
in September 1998, assuming Dr. Markman's continued employment with the
Company. As of December 31, 1997, Dr. Markman held 67,500 restricted shares
having a value net of his purchase price equal to $86,062.50. The Company
does not currently pay dividends on its Common Stock.
(5) Includes options for an aggregate of 750,000 shares of Common Stock which
were repriced in November 1996, replacing options for an aggregate of
750,000 shares granted earlier in the year.
(6) Represents payment for costs incurred in connection with Dr. Markman's
employment transition.
(7) Ms. Doyle joined the Company in July 1996.
(8) Represents payment for costs incurred in connection with Ms. Doyle's
employment transition.
(9) Includes options for an aggregate of 100,000 shares of Common Stock which
were repriced in November 1996, replacing options for an aggregate of
100,000 shares granted earlier in the year.
(10) Mr. McElroy joined the Company in June 1996 and resigned from the Company
in connection with the closure of its South Carolina offices on January 2,
1998.
16
<PAGE> 20
(11) Includes options for an aggregate of 150,000 shares of Common Stock which
were repriced in November 1996, replacing options for an aggregate of
150,000 shares granted earlier in the year.
(12) Includes options for an aggregate of 37,500 shares of Common Stock which
were repriced in February 1996, replacing options for an aggregate of
37,500 shares granted in 1995, and options for an aggregate of 142,500
shares of Common Stock which were repriced in November 1996, replacing
options for 67,500 shares granted in 1996, 62,500 shares granted in 1994
and 12,500 shares granted in 1993.
(13) Includes bonuses earned, but not paid, in fiscal 1995.
(14) Mr. Surace joined the Company in November 1996.
(15) Effective August 18, 1997, Mr. White resigned as Vice President and Chief
Technical Officer, Agent Technology, and was appointed Chief Technology
Officer of the Company. As a result of this change in Mr. White's duties
and responsibilities, he is no longer an executive officer of the Company.
(16) Includes options for an aggregate of 97,500 shares of Common Stock which
were repriced in November 1996, replacing options for an aggregate of
30,000 shares granted in 1996 and an aggregate of 67,500 shares granted in
1994.
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the year ended
December 31, 1997, to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1997
----------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(3)
OPTIONS IN FISCAL BASE EXPIRATION ---------------------------
NAME GRANTED(1) YEAR PRICE(2) DATE 5% 10%
---- ---------- ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Steven Markman, Ph.D.......... -- -- -- -- -- --
Mary E. Doyle................. 70,000 2.0% $1.0626 4/17/07 $46,778 $118,546
Jeffrey F. McElroy............ 60,000(4) 1.7 1.0626 4/17/07 40,096 101,611
Steven D. Schramm............. 70,000 2.0 1.0626 4/17/07 46,778 118,546
Kevin J. Surace............... 70,000 2.0 1.0626 4/17/07 46,778 118,546
Former Officer:
James E. White................ 50,000 1.4 1.6875 8/18/07 53,063 134,472
</TABLE>
- ---------------
(1) Generally, options granted in 1997 under the Option Plan vest at the rate of
one-fourth on the first anniversary of the date of grant or of the
optionee's hire, as applicable, and 1/48 per month thereafter for each full
month of the continued employment of the option holder.
(2) All options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant.
(3) Potential gains are net of exercise price, but before taxes associated with
the exercise. These amounts represent certain hypothetical gains based on
assumed rates of appreciation, based on the Securities and Exchange
Commission's rules, and do not represent the Company's estimate or
projection of future Common Stock prices. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Company,
overall market conditions and the continued employment of the option holders
through the vesting period. The amounts reflected in this table may not be
achieved.
(4) One-fifth of the options granted to Mr. McElroy in 1997 were vested in
connection with his January 2, 1998, resignation from the Company; the
balance were canceled.
17
<PAGE> 21
The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock during the year ended December
31, 1997, and unexercised options held as of December 31, 1997, by the Named
Executive Officers:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 12/31/97(1) OPTIONS AT 12/31/97(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven Markman, Ph.D........ -- -- 234,375 515,625 -- --
Mary E. Doyle............... -- -- 35,417 134,583 -- $21,868
Jeffrey F. McElroy.......... -- -- 90,625 119,375 -- 18,744
Steven D. Schramm........... 23,750 $ 12,251 104,167 108,333 -- 21,868
Kevin J. Surace............. -- -- 40,626 179,374 -- 21,868
Former Officer:
James E. White.............. 75,000 121,410 85,782 61,718 -- --
</TABLE>
- ---------------
(1) Includes options granted at an exercise price greater than the per share
closing price of $1.375, as reported on the Nasdaq National Market, on
December 31, 1997.
(2) Based on the per share closing price of $1.375, as reported on the Nasdaq
National Market, on December 31, 1997, less exercise price, multiplied by
the number of shares underlying the options.
(3) Based on the fair market price of the Company's Common Stock on the exercise
date, less exercise price, multiplied by the number of shares underlying the
options.
COMPENSATION OF DIRECTORS
Effective June 12, 1997, each eligible outside director, who is not an
employee of the Company or of any parent or subsidiary corporation of the
Company and was a director at time of disbursement, was entitled to receive the
following amounts of cash compensation for his or her services as a director of
the Company: (i) $10,000 per year, payable on the last day of the Company's
fiscal year and (ii) $1,000 or $500 for each regular or special meeting attended
by the eligible outside director in person or by telephone, respectively. In
addition, each eligible outside director was entitled to reimbursement of travel
expenses reasonably incurred by him or her in connection with attending any
regular or special meeting of the Board. Furthermore, the Directors Plan
provides for automatic initial and annual grants of nonqualified stock options
to directors of the Company who are not employees of the Company or of any
affiliated corporation. However, any non-employee director will be ineligible to
participate in the Directors Plan if the director's employer is a stockholder of
the Company or an affiliated corporation of a stockholder of the Company, or if
the director's employer holds a technology license from the Company or is an
affiliated corporation of such license holder. During the fiscal year ended
December 31, 1997, each of Messrs. Kalogris and Strigl and Ms. Swenson received
under the Directors Plan an initial option grant for 40,000 shares of Common
Stock and each of Messrs. Pascarella and Pieper received an annual option grant
for 10,000 shares of Common Stock.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In September 1996, the Company entered into an employment agreement with
Steven Markman commencing September 19, 1996. Dr. Markman serves as the
Company's Chairman of the Board of Directors, President and Chief Executive
Officer for an annual salary of $300,000, and during the first twelve months of
his employment, a guaranteed bonus of not less than twenty percent (20%) of his
then current salary. In accordance with his employment agreement, the Company
granted Dr. Markman options for 750,000 shares of the Company's Common Stock. In
addition, as further required by his employment agreement, the Company granted
Dr. Markman the right to purchase up to 135,000 restricted shares of the
Company's
18
<PAGE> 22
Common Stock at a price of $0.10 per share. Dr. Markman exercised this right in
March 1997. In December 1997, Dr. Markman's agreement was amended to permit him
to surrender shares of Common Stock of the Company having a fair market value
equal to the income and employment tax withholding obligations arising upon the
vesting of Dr. Markman's restricted shares. To the extent the Company issues in
the first two years of Dr. Markman's employment any Common Stock equivalents
other than to employees, consultants or directors, the Company's Board of
Directors is required to make its best efforts (including presenting a plan
share reserve increase to the stockholders in the event the Company's existing
Option Plan has insufficient shares) to grant Dr. Markman additional options to
allow him to maintain his then equivalent percentage ownership on a fully
diluted basis with an exercise price equal to fair market value and subject to
standard vesting. Transactions completed by the Company in February and March,
1998, respectively, entitled Dr. Markman to additional options to acquire shares
under this provision. Either party may terminate the employment agreement at any
time, provided that, if prior to September 19, 2000, the Company terminates the
agreement other than for "cause" or Dr. Markman resigns for "good reason" (as
defined in the agreement), then (i) Dr. Markman will be entitled to receive his
final salary rate for the remaining term of the agreement, provided such period
of salary continuance will not be less than one year or more than two years, as
well as any bonus he would otherwise have earned in the year of his termination,
and (ii) all restricted stock and all stock options previously granted to Dr.
Markman by the Company will continue to vest during the period of salary
continuance, and such stock options will remain exercisable for a period of 18
months following the later of the date Dr. Markman is terminated as the
Company's Chief Executive Officer or the date of such option vesting. If Dr.
Markman's employment is terminated by the Company without cause or if Dr.
Markman resigns for good reason during the period beginning 30 days prior to the
first public announcement that the Company has entered into an agreement that
would result in a change in control (as defined in the agreement) and ending one
year following the change in control, Dr. Markman is entitled to the same
benefits described in the preceding sentence, except that all of his unvested
outstanding stock options and restricted stock will immediately vest.
In October 1997, the Company entered into an "at-will" employment agreement
with James E. White, the Company's Chief Technology Officer. Under the
agreement, Mr. White will receive an annual salary of $170,000, standard
benefits and, subject to his continued employment with the Company, certain
restricted stock and cash bonuses. In addition, the agreement requires the
Company to extend a loan to Mr. White of up to $600,000 to purchase, refinance
or improve a principal residence, secured by such real property and any
restricted stock awards received by Mr. White under the agreement, and bearing
interest at a rate of no less than seven percent per annum. Principal and
interest due under the loan will be accelerated and become payable within a
specified period following any termination of Mr. White's employment. The
agreement requires Mr. White to apply the after-tax proceeds from the sale of
the restricted shares to repayment of loan principal and interest. Provided that
Mr. White remains an employee, the agreement calls for the Company to pay to Mr.
White cash bonuses in two annual installments to be applied to loan repayment to
the extent that the appreciation in the restricted shares on an after-tax basis
is insufficient to enable Mr. White to repay the loan in full. If Mr. White's
employment terminates as a result of his death or disability, resignation for
"good reason" or termination other than for "cause" (as those terms are defined
in the agreement), any restricted shares previously granted to him under the
agreement will vest in full, and, to the extent that the after-tax proceeds from
a sale of the shares is insufficient to repay the loan in full, the Company will
pay to Mr. White a cash bonus in an amount sufficient on an after-tax basis to
repay the loan in full. If Mr. White's employment with the Company terminates
for any other reason, he will be entitled only to compensation and benefits
earned through the date of his termination. The agreement provides that in the
event of the insolvency of the Company or the termination of its business, the
Company will forgive any unpaid balance of the loan and will pay to Mr. White,
in lieu of any other bonus due him under the agreement, an amount equal to the
tax liability incurred by Mr. White upon such discharge of indebtedness to the
Company.
In April 1998, the Board of Directors authorized the Company to enter into
Change of Control Agreements (the "Agreements") with its executive officers
which provide for the payment of certain severance benefits in the event of a
"Change of Control" of the Company (as defined in the Agreements). Each
Agreement provides that in the event of a Change of Control in which the
individual's stock options are not assumed or substituted for by the acquiring
corporation, such options will become fully vested and
19
<PAGE> 23
exercisable as of a date prior to the Change of Control. In addition, each
Agreement provides that severance benefits will be payable to the individual
upon the occurrence of both of the following: (1) a Change of Control of the
Company, and (2) within 12 months after the Change of Control, such individual's
employment is involuntarily terminated by the Company other than for "cause" or
such individual terminates his or her employment for "good reason" (as those
terms are defined in the Agreement). Upon the occurrence of the events described
in the preceding sentence, such individual will be entitled to receive the
following benefits: (a) a lump sum cash payment equal to the sum of (i) his or
her then effective annual base salary, plus (ii) 100% of his or her bonus at the
"on-target" level for the year in which the termination occurs, and (b) full
accelerated vesting of any options to purchase shares of the Company's Common
Stock or any unvested shares of restricted stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective September 19, 1996, Marc Porat resigned as the Company's Chief
Executive Officer and Chairman of the Board of Directors. The Company entered
into a consulting agreement with Dr. Porat effective October 1, 1996, through
September 30, 1997. Under the agreement, Dr. Porat acted as a consultant to the
Company and was paid a monthly consulting fee of $58,333 from October 1, 1996,
through December 31, 1996, and $19,444 from January 1, 1997, through September
30, 1997. Dr. Porat is no longer an employee of the Company. The Company
fulfilled any and all obligations under such agreement as of September 30, 1997.
In each of September 1992 and May 1993, the Company loaned Dr. Porat
$55,000 at interest rates of 5.98% and 5.38% per annum, respectively, pursuant
to promissory notes originally due in 1999 and 2000, secured by 50,000 shares of
the Company's Common Stock. In connection with Dr. Porat's resignation from the
Company, the promissory notes were amended to reflect that the loans are due on
December 31, 1997, and that Dr. Porat is obligated under one note and Ms.
Slater, Dr. Porat's former wife, is obligated under the other note.
The Company has entered into indemnification agreements with each of its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified and to obtain directors' and
officers' insurance if available on reasonable terms. The Company maintains an
insurance policy covering officers and directors of the Company under which the
insurer has agreed to pay the amount of any claim made against the officers or
directors of the Company that such officers or directors may otherwise be
required to pay or for which the Company is required to indemnify such officers
and directors, subject to certain exclusions. The policy has a coverage limit of
$15,000,000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders were complied with, except that an
initial statement of beneficial ownership of securities for Linda A. Hayes was
not timely filed. Additionally, late annual statements of changes in beneficial
ownership were filed in connection with the repricing of certain options of
Martha E. Coleman, Mary E. Doyle, David P. Duckworth, Steven Markman, Jeffrey F.
McElroy, Elena M. Morera, Anthony M. Rutkowski, Steven D. Schramm and James E.
White and for automatic outside director option grants for Jerry Baker, Carl F.
Pascarella and Roel Pieper.
20
<PAGE> 24
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
comprised of three non-employee directors. No member of the Committee is a
current or former officer or employee of the Company. The Committee is
responsible for setting and administering policies and plans governing
compensation of executive officers, including the annual Executive Bonus Plan
and the Option Plan. In addition, the Committee reviews compensation levels of
other management level employees, evaluates the performance of management and
reviews other compensation-related issues.
COMPENSATION PHILOSOPHY
The Company applies a consistent compensation philosophy for all its
employees, including its executive officers. The Company's compensation policy
is designed to enable the Company to attract, retain and reward executive
officers who are likely to contribute to the long-term success of the Company.
The Committee also believes that a strong correlation should exist between
executive compensation, business objectives and overall Company performance, and
seeks to design its total compensation package to elicit the highest degree of
productivity and commitment from all executive officers. Equity-based
compensation is also extremely important to the Committee because it enables
employees, including executive officers, to identify more closely with the
Company and aligns their interests with those of the Company's stockholders.
These results foster a strong employee interest in increasing stockholder value
through Company profitability.
COMPONENTS OF COMPENSATION
There are three components of the Company's executive compensation program
which support the goal of aligning compensation with the value created for the
Company's stockholders while providing incentives to further the Company's
strategic objectives: base salary, performance-based bonuses and stock options.
Base Salary
The Committee strives to offer salaries to its executive officers which are
competitive with salaries offered by companies of similar size, complexity and
market capitalization in the high technology industry in Silicon Valley. Base
salaries are reviewed on an annual basis and are subject to adjustment based
upon the individual's contribution to the Company and changes in salary levels
offered by comparable companies. In determining the salaries of the executive
officers, the Committee considers information provided by the Company's Vice
President of Human Resources, as well as salary surveys, including those
prepared by Radford Associates, an employment compensation consulting firm, and
similar data available from independent sources. In preparing the performance
graph set forth in the section entitled "COMPARISON OF STOCKHOLDER RETURN," the
Company has selected the Hambrecht & Quist Technology Index as its published
industry index; however, the companies included in the Company's salary surveys
are not necessarily those included in this index, because companies in the index
may not compete with the Company for executive talent, and companies which do
compete for executive officers may not be publicly traded.
The Chief Executive Officer is responsible for evaluating the performance
of all other executive officers and recommended salary adjustments for 1997
which were reviewed and approved by the Committee. Evaluations of individual
executive officers were based on predetermined individual goals. In addition to
considering the results of the performance evaluations and information
concerning competitive salaries, the Committee and the Chief Executive Officer
placed significant weight on the financial condition of the Company in
considering salary adjustments.
Bonuses
Target amounts of cash bonuses for each executive officer under the
Company's Executive Bonus Plan are set annually by the Committee. Executive
officers other than the Chief Executive Officer are eligible for 50% of the
target bonus based on the Company's achievement of Company performance targets,
which in 1997 was achievement of the budgeted operating expenses, and 50% based
on achievement of goals set between each executive officer and the Chief
Executive Officer. Performance against the individual goals is
21
<PAGE> 25
determined annually by the Committee based upon advice of the Chief Executive
Officer. Target bonuses in 1997 under the plan for executive officers other than
the Chief Executive Officer, as of the end of the year, represented between
approximately 18% and 36% of annual salary. Bonuses for 1997 were somewhat lower
than target, based on the Committee's determination that executive officers had
achieved individual goals, but that the Company's operating expenses moderately
exceeded plan.
Equity Incentives
The Committee believes that employee equity ownership is highly motivating,
provides a major incentive to employees in building stockholder value and serves
to align the interests of employees with the interests of the Company's
stockholders. In determining the amount of equity compensation to be awarded to
executive officers in any fiscal year, the Committee considers the position of
the officer, the current stock ownership of the officer, the stock ownership of
other officers of the Company, the number of shares which continue to be subject
to vesting under outstanding options, the compensation paid by other similarly
situated companies to their executive officers and the expected future
contribution of the officer to the Company's performance. The Committee gives
primary weight to the officer's position and expected future contributions.
The Committee has considered the provisions of Section 162(m) of the
Internal Revenue Code and related Treasury Department regulations which restrict
deductibility of executive compensation paid to the Company's chief executive
officer and each of the four other most highly compensated executive officers
holding office at the end of any year to the extent such compensation exceeds
$1,000,000 for any of such officers in any year and does not qualify for an
exception under the statute or regulations. To enable the Company to grant
sufficient options to attract and retain key officers, the Committee amended the
Option Plan in November 1996 to eliminate a limitation on the maximum aggregate
number of shares for which options could be granted to any employee in any
fiscal year which would have enabled compensation related to options granted
under the plan to be exempt from the effects of Section 162(m). Therefore,
options granted thereafter under the Option Plan will not be exempt from the
deduction limitation. In making this amendment the Committee considered that in
light of the Company's cumulative net operating loss carry forward it was
unlikely that the Company would have a benefit for the foreseeable future from
the deduction, if any, resulting from excess compensation realized upon the
exercise of executive officers' options. Pursuant to his employment agreement,
Dr. Markman purchased restricted stock at a discount in March 1997; any
compensation that Dr. Markman realized on the vesting of such restricted stock
does not qualify as "performance-based compensation" and will therefore not be
exempt from the limitation on the tax deductibility imposed by Section 162(m).
The Committee believed that the restricted stock was necessary to recruit Dr.
Markman to join the Company. The Committee does not believe that in general
other components of the Company's compensation will be likely to exceed
$1,000,000 for any executive officer in the foreseeable future and therefore
concluded that no further action with respect to qualifying such compensation
for deductibility was necessary at this time. In the future the Committee will
continue to evaluate the advisability of qualifying its executive compensation
for deductibility under applicable tax laws as practicable.
CHANGE OF CONTROL AGREEMENTS
In April 1998, the Committee determined that it was in the best interests
of the Company and its stockholders to adopt Change of Control Agreements to
provide the executive officers of the Company with certain severance benefits
upon termination of employment following a Change of Control of the Company (as
defined in the agreements). The Committee believed that such benefits would
provide the executive officers with enhanced financial security, thereby
providing incentive for such officers to remain employed by the Company during a
period of uncertainty when there is the possibility of or negotiation of a
change of control transaction. Accordingly, the Committee unanimously
recommended adoption of change of control agreements for the Company's executive
officers, the terms of which are described above in the section entitled
"EXECUTIVE COMPENSATION AND OTHER MATTERS -- Employment Contracts and
Termination of Employment and Change in Control Arrangements."
22
<PAGE> 26
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Company and Dr. Markman entered into an employment agreement in
September 1996 following arms-length negotiations and approval by the Committee.
Under the agreement, Dr. Markman is entitled to an annual salary of $300,000 and
a guaranteed bonus of not less than twenty percent (20%) of his then current
salary during the first twelve (12) months of his employment, or $60,000. See
"EXECUTIVE COMPENSATION AND OTHER MATTERS -- Employment Contracts and
Termination of Employment and Change-in-Control Arrangements." In January 1998,
the Committee determined to award Dr. Markman a bonus of $150,000 for the year
ended September 30, 1997, Dr. Markman's first year of employment, or 50% of his
salary, after considering the Company's market value over the period, the
Company's progress towards certain corporate objectives, the divestiture of less
productive portions of the Company's business, certain strategic partner
agreements, Dr. Markman's development of overall corporate strategy and the
hiring of a strong management team. Taking all these factors into account, the
Committee awarded a bonus at the midpoint of the range of the bonus for which
Dr. Markman was eligible. The guaranteed bonus of $60,000 was paid on a monthly
basis over the first year of Dr. Markman's employment and the balance of $90,000
was paid in 1998. In connection with the Committee's determination of Dr.
Markman's 1998 bonus which will be based on achievement of agreed-upon
objectives between the Committee and Dr. Markman, the Committee will also
consider his performance during the last quarter of 1997. The Committee did not
award equity incentives to Dr. Markman during fiscal 1997 in light of the
limited number of shares available for grant under the Option Plan, but intends
to review his equity holdings in fiscal 1998 subject to stockholder approval of
the additional share reserve in the Option Plan to be voted on at this Annual
Meeting. Dr. Markman's employment agreement requires the Company to provide Dr.
Markman with an option for additional shares. See "EXECUTIVE COMPENSATION AND
OTHER MATTERS -- Employment Contracts and Termination of Employment and
Change-in-Control Arrangements." The Committee approved an amendment to Dr.
Markman's employment agreement to enable Dr. Markman to surrender restricted
shares to the Company to cover the tax liability arising on the vesting of his
restricted stock, and the Company made the required cash payment to the IRS.
COMPENSATION COMMITTEE
Carl F. Pascarella
Roel Pieper, Ph.D.
Susan G. Swenson
23
<PAGE> 27
COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual cumulative total
return on the Company's Common Stock with the annual cumulative total return of
the CRSP Total Return Index for the Nasdaq Stock Market (U.S. Companies)
("Nasdaq US") and the H&Q Total Return Technology Index ("H&Q Index") for the
period commencing on February 9, 1995,(1) and ending on December 31, 1997.(2)
COMPARISON OF CUMULATIVE TOTAL RETURN FROM FEBRUARY 9, 1995, THROUGH DECEMBER
31, 1997
GENERAL MAGIC, INC., NASDAQ US AND H&Q INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) GENERAL MAGIC NASDAQ STOCK US H&Q INDEX
<S> <C> <C> <C>
2/9/95 100 100 100
12/29/95 75.89 135.14 141.99
12/31/96 16.52 166.24 176.47
12/31/97 9.82 204.03 206.89
</TABLE>
- ---------------
(1) The Company's initial public offering commenced on February 10, 1995. For
purposes of this presentation, the Company has assumed that its initial
offering price of $14.00 would have been the closing sales price on February
9, 1995, the day prior to commencement of trading.
(2) Assumes that $100.00 was invested on February 9, 1995, in the Company's
Common Stock at the Company's initial offering price of $14.00 and at the
closing sales price for each index on that date and that all dividends were
reinvested. No dividends have been declared on the Company's Common Stock.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
24
<PAGE> 28
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company must be received by the Company at
its offices at 420 North Mary Avenue, Sunnyvale, California 94086, not later
than January 8, 1999, and satisfy the conditions established by the Securities
and Exchange Commission for stockholder proposals to be included in the
Company's proxy statement for that meeting.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting or any adjournment thereof, it is the intention of the persons named
in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.
By Order of the Board of Directors
MARY E. DOYLE
Secretary
May 21, 1998
25
<PAGE> 29
PROXY
GENERAL MAGIC, INC.
420 NORTH MARY AVENUE, SUNNYVALE, CALIFORNIA 94086
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Steven Markman and Mary E. Doyle (the
"Proxies"), and each of them, each with the power to appoint a substitute, and
hereby authorizes each of them to represent and vote as designated, all the
shares of Common Stock of General Magic, Inc. (the "Company") held of record by
the undersigned on April 28, 1998, at the Annual Meeting of Stockholders to be
held on June 25, 1998, or any adjournment thereof.
1. ELECTION OF DIRECTORS.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees
listed below
Steven Markman, Ph.D.
Michael E. Kalgoris
Philip D. Knell
Carl F. Pascarella
Roel Pieper, Ph.D.
Dennis F. Strigl
Susan G. Swenson
2. To vote upon a proposal to increase by 4,850,000 shares the
aggregate number of shares issuable under the Company's Amended and
Restated 1990 Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To vote upon a proposal to increase by 250,000 shares the
aggregate number of shares issuable under the Company's 1994 Outside
Directors Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To ratify the sale and issuance of the Company's 5 1/2% Cumulative
Convertible Series B Preferred Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To ratify the appointment of KPMG Peat Marwick LLP as the
independent auditors of the Company for the fiscal year ending
December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. At their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, the
Proxy will be voted FOR Proposals 1, 2, 3, 4 and 5.
<PAGE> 30
Please sign exactly as your name appears on your stock
certificates. When shares are held by joint tenants, both should sign. When
signing as an attorney, as executor, administrator, trustee or guardian, please
give your full title. If a corporation, please sign in full corporate name, by
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
Dated:____________________________________________ 1998
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Signature
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Signature if held jointly
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU
ARE URGED TO DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE
PROVIDED TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF YOU
ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN THOUGH YOU
HAVE SENT IN YOUR PROXY.
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