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AWARE, INC.
-----------------------------------------------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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* * * * *
AWARE, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 29, 200327, 2004
Aware, Inc. hereby gives notice that it will hold its annual meeting of
stockholders at the Renaissance Bedford Hotel, 44 Middlesex Turnpike, Bedford,
Massachusetts on Thursday, May 29, 2003,27, 2004, beginning at 10:00 a.m., local time,
for the following purposes:
1. To consider and vote upon the election of two Class III directors;
2. To act upon a proposal to approve the amendment to the Company's 1996
Employee Stock Purchase Plan, as amended, increasing the number of
shares available for issuance under the plan from 100,000 to 350,000;
and
3. To transact such other business as may properly come before the
annual meeting or any adjournment thereof.
The board of directors has fixed the close of business on April 1, 20032004 as
the record date for the determination of the stockholders of Aware entitled to
receive notice of the annual meeting and to vote at the meeting. Only
stockholders of record on that date are entitled to receive notice of the annual
meeting and to vote at the meeting or any adjournment thereof.
By order of the board of directors,
/s/ Michael A. Tzannes
----------------------
MICHAEL A. TZANNES
CHIEF EXECUTIVE OFFICER
April 15, 200313, 2004
Bedford, Massachusetts
YOUR VOTE IS IMPORTANT
PLEASE SIGN AND RETURN THE ENCLOSED PROXY,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
AWARE, INC.
40 MIDDLESEX TURNPIKE
BEDFORD, MASSACHUSETTS 01730
(781) 276-4000
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 29, 200327, 2004
This proxy statement relates to the 20032004 annual meeting of stockholders of
Aware, Inc. The annual meeting will take place as follows:
DATE: May 29, 200327, 2004
TIME: 10:00 a.m.
PLACE: Renaissance Bedford Hotel
44 Middlesex Turnpike
Bedford, Massachusetts
The board of directors of Aware is soliciting proxies for the annual
meeting and adjournments of the annual meeting. If a stockholder returns a
properly executed proxy, the shares represented by the proxy will be voted in
accordance with the stockholder's directions. If a stockholder does not specify
a vote on any proposal, the shares covered by his or her proxy will be voted on
that proposal as management recommends. Aware encourages its stockholders to
vote on all proposals. A stockholder may revoke its proxy at any time before it
has been exercised.
Aware is mailing this proxy statement and the enclosed form of proxy to
stockholders on or about April 15, 2003.13, 2004.
PROXY STATEMENT
TABLE OF CONTENTS
PAGE
ANNUAL MEETING OF STOCKHOLDERS....................................................................................2STOCKHOLDERS...................................................2
Purpose of the annual meeting..................................................................................2meeting.................................................2
Record date....................................................................................................2
Quorum.........................................................................................................2date...................................................................2
Quorum........................................................................2
Vote required; tabulation of votes.............................................................................2votes............................................2
Revocation of proxies..........................................................................................3proxies.........................................................2
Solicitation of proxies........................................................................................3proxies.......................................................3
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING....................................................................3
PROPOSAL 1--ELECTIONMEETING...................................3
PROPOSAL--ELECTION OF DIRECTORS.................................................................................3DIRECTORS..................................................3
CORPORATE GOVERNANCE.............................................................4
DIRECTORS AND EXECUTIVE OFFICERS..................................................................................4OFFICERS.................................................5
Directors and executive officers...............................................................................4officers..............................................5
Independent directors.........................................................7
Committees and meetings of the board...........................................................................6board..........................................7
Policy regarding board attendance.............................................9
Communications with our board of directors....................................9
Code of ethics................................................................9
Compensation committee interlocks and insider participation....................................................7participation...................9
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS..................................................................7OFFICERS.................................9
Director compensation..........................................................................................7compensation.........................................................9
Executive compensation.........................................................................................7compensation.......................................................10
REPORT OF THE COMPENSATION COMMITTEE.............................................................................10COMMITTEE............................................16
Compensation committee report on executive compensation.......................................................10compensation......................16
Performance graph.............................................................................................12graph............................................................19
REPORT OF THE AUDIT COMMITTEE....................................................................................13COMMITTEE...................................................20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS..............................................................................................15MATTERS.............................................................21
Principal stockholders........................................................................................15stockholders.......................................................21
Equity compensation plan information..........................................................................16
PROPOSAL 2--APPROVAL OF AN AMENDMENT TO THE 1996 EMPLOYEE STOCK PURCHASE PLAN....................................18information.........................................22
SECTION 16(A)16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..........................................................22COMPLIANCE.........................24
INDEPENDENT ACCOUNTANTS..........................................................................................22ACCOUNTANTS.........................................................25
Fees for professional services................................................................................22services...............................................25
Attendance at annual meeting..................................................................................22meeting.................................................25
STOCKHOLDER PROPOSALS............................................................................................23PROPOSALS...........................................................25
AVAILABLE INFORMATION............................................................................................23INFORMATION...........................................................26
ANNEX A - AUDIT COMMITTEE CHARTER..............................................A-1
1
ANNUAL MEETING OF STOCKHOLDERS
PURPOSE OF THE ANNUAL MEETING
At the annual meeting, Aware will submit two proposalsone proposal to the stockholders:
PROPOSAL 1:PROPOSAL: To elect two Class III directors for three-year terms; and
PROPOSAL 2: To approve the amendment of the Company's 1996 Employee
Stock Purchase Plan, as amended, to increase the number of
shares available for issuance under the plan from 100,000 to
350,000.terms.
Currently, Aware does not intend to submit any other proposals to the
stockholders at the annual meeting. The board of directors was not aware, a
reasonable time before mailing this proxy statement to stockholders, of any
other business that may be properly presented for action at the annual meeting.
If any other business comes before the annual meeting, the persons present will
have discretionary authority to vote the shares they own or represent by proxy
in accordance with their judgment, to the extent authorized by applicable
regulations.
RECORD DATE
The board of directors of Aware has fixed the close of business on April
1, 20032004 as the record date for the annual meeting. Only stockholders of record
at the close of business on that date are entitled to receive notice of the
meeting and to vote at the meeting or any adjournment of the meeting. At the
close of business on the record date, there were issued and outstanding
22,698,17122,755,006 shares of Aware's common stock, which are entitled to cast 22,698,17122,755,006
votes.
QUORUM
Aware's by-laws provide that a quorum at the annual meeting will be a
majority in interest of all stock issued, outstanding and entitled to vote at
the meeting. Aware will treat shares of common stock represented by a properly
signed and returned proxy as present at the meeting for purposes of determining
the existence of a quorum at the meeting. In general, Aware will count votes
withheld from any nominee for election as director, abstentions and broker
"non-votes" as present or represented for purposes of determining the existence
of a quorum at the meeting. A broker "non-vote" occurs when a broker or nominee
holding shares for a beneficial owner does not vote on a proposal because the
broker or nominee does not have discretionary voting power and has not received
instructions from the beneficial owner with respect to that proposal.
VOTE REQUIRED; TABULATION OF VOTES
PROPOSAL 1. The election of each Class III director will require the affirmative vote
of a plurality of the shares of common stock properly cast on the proposal.
Abstentions, votes withheld from the director-nominee, and broker non-votes will
not count as votes cast for or against the election of the director-nominee and
accordingly will not affect the outcome of the vote.
PROPOSAL 2. Approval of the amendment to our 1996 Employee Stock Purchase
Plan, as amended, increasing the authorized shares under the plan from 100,000
to 350,000 will require the affirmative vote of a majority of the shares of
common stock properly cast on the proposal. Abstentions, votes withheld and
broker non-votes will have the effect of a vote against approval of the
amendment of the 1996 Employee Stock Purchase Plan.
2
Aware's transfer agent, EquiServe Trust Company N.A., will tabulate the
votes at the annual meeting. EquiServe will tabulate separately the vote on each
matter submitted to stockholders.
REVOCATION OF PROXIES
A stockholder who has executed a proxy may revoke the proxy at any time
before it is exercised at the annual meeting in three ways:
2
o by giving written notice of revocation to the Clerk of Aware
at the following address:
Aware, Inc.
40 Middlesex Turnpike
Bedford, Massachusetts 01730
Attention: Clerk
o by signing and returning another proxy with a later date; or
o by attending the annual meeting and informing the Clerk of
Aware in writing that he or she wishes to vote in person.
Mere attendance at the annual meeting will not in and of itself revoke
the proxy. Accordingly, stockholders who have executed and returned proxies in
advance of the annual meeting may change their votes at any time before or at
the annual meeting.
SOLICITATION OF PROXIES
Aware will bear all costs incurred in connection with the solicitation of
proxies for the annual meeting. Aware will reimburse brokers, banks,
fiduciaries, nominees and others for the out-of-pocket expenses and other
reasonable clerical expenses they incur in forwarding proxy materials to
beneficial owners of common stock held in their names. In addition to this
solicitation by mail, Aware's directors, officers and employees may solicit
proxies, without additional remuneration, by telephone, facsimile, electronic
mail, telegraph and in person. Aware expects that the expenses of any special
solicitation will be nominal. At present, Aware does not expect to pay any
compensation to any other person or firm for the solicitation of proxies.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
PROPOSAL 1--ELECTIONPROPOSAL--ELECTION OF DIRECTORS
The board of directors, upon the recommendation of the nominating and
corporate governance committee, has nominated for election as Class III directors
Michael A. TzannesJohn K. Kerr and G. David Forney, Jr.,Ehreth, each of whom is currently a Class III director of
Aware. Mr. Tzannes alsoKerr serves as our chief executive officer.Aware's chairman of the board of directors. The
directors elected at the annual meeting will hold office until the annual
meeting of stockholders in 20062007 and until their successors are duly elected and
qualified.
Each nominee has agreed to serve if elected, and Aware has no reason to
believe that a nominee will be unable to serve. If a nominee is unable or
declines to serve as a director at the time of the annual meeting, proxies will
be voted for another nominee that our board's 3
nominating committee will
designate at that time. Proxies cannot be voted for more than one nominee.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF MICHAEL
A. TZANNESJOHN
K. KERR AND G. DAVID FORNEY, JR.EHRETH AS CLASS III DIRECTORS OF AWARE.
3
CORPORATE GOVERNANCE
In designing its corporate governance structure, Aware seeks to identify
and implement the best practices that will serve the interests of Aware's
business and stockholders, including practices mandated by the Sarbanes-Oxley
Act of 2002 and related rules of the Securities and Exchange Commission and the
Nasdaq Stock Market. You can find Aware's current corporate governance
principles, including Aware's code of ethics and the charters for the standing
committees of Aware's board of directors, on Aware's website at www.aware.com.
The code of ethics applies to not only Aware's principal executive officer,
principal financial officer and principal accounting officer, but also all other
employees, executive officers and directors of Aware. The code of ethics
includes, among other things, provisions covering compliance with laws and
regulations, conflicts of interest, insider trading, proper use of Aware's
assets, confidentiality, discrimination and harassment, accounting and record
keeping, the reporting of illegal or unethical behavior, enforcement of the code
of ethics and discipline for violations of the code of ethics. Aware intends to
continue to modify its policies and practices to address ongoing developments in
the area of corporate governance. Many features of Aware's corporate governance
principles are discussed in other sections of this proxy statement. Some of the
highlights of Aware's corporate governance principles are:
o DIRECTOR AND COMMITTEE INDEPENDENCE. A majority of Aware's directors are
independent directors under the rules of the Nasdaq Stock Market. The
board of directors has determined that Aware's independent directors are
Frederick D. D'Alessio, David Ehreth, G. David Forney, Jr., John K. Kerr
and Adrian F. Kruse. Each member of the audit committee, nominating and
corporate governance committee, and compensation committee meets the
independence requirements of the Nasdaq Stock Market for membership on the
committees on which he serves.
o AUDIT COMMITTEE. Aware's audit committee is directly responsible for
appointing, compensating, overseeing, and, when necessary, terminating
Aware's independent auditors. Aware's independent auditors report directly
to the audit committee. The board of directors has determined that Mr.
Kruse is an audit committee financial expert under the rules of the
Securities and Exchange Commission. Prior approval of the audit committee
is required for all audit services and non-audit services to be provided
by Aware's independent auditors.
o COMMITTEE AUTHORITY. Aware's audit committee, nominating and corporate
governance committee, and compensation committee each have the authority
to retain independent advisors and consultants, with all fees and expenses
to be paid by Aware.
o WHISTLEBLOWER PROCEDURES. Aware's audit committee has adopted procedures
for the treatment of complaints regarding accounting, internal accounting
controls or auditing matters, including procedures for the confidential
and anonymous submission by Aware's directors, officers and employees of
concerns regarding questionable accounting, internal accounting controls
or auditing matters.
4
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information regarding Aware's directors and
executive officers as of March 31, 2003:2004:
NAME AGE POSITION
- ---- --- --------
John K. Kerr (1)(2)(3)(4)........... 65................. 66 Chairman of the board of directors
Michael A. Tzannes (1).............. 4142 Chief executive officer and director
Edmund C. Reiter.................... 3940 President and director
Richard P. Moberg................... 48 ChiefDavid J. Martin..................... 46 Interim chief financial officer and treasurer
Richard W. Gross.................... 4546 Senior vice president--engineering
Frederick D. D'Alessio ............. 54(3)(4)....... 55 Director
David Ehreth (2)(3)(4).............. 53................. 54 Director
G. David Forney, Jr. (2)(3)(4)......... 63...... 64 Director
Adrian F. Kruse (2)................. 64 Director
- ------------------------------------
(1) Member of the executive committee
(2) Member of the audit committee
(3) Member of the compensation committee
(4) Member of the nominating and corporate governance committee
JOHN K. KERR has been a director of Aware since 1990 and chairman of the
board of directors since March 1999. Mr. Kerr previously served as a director of
Aware from 1988 to 1989 and as chairman of the board of directors from November
1992 to March 1994. Mr. Kerr has been general partner of Grove Investment
Partners, a private investment partnership, since 1990. Mr. Kerr received an
M.A. and a B.A. from Baylor University.
MICHAEL A. TZANNES has been Aware's chief executive officer since April
1998 and has served as a director of Aware since March 1998. Mr. Tzannes served
as Aware's president from April 1998 to March 2001. From September 1997 to April
1998, he served as Aware's chief technology officer and general manager of
telecommunications. Mr. Tzannes served as Aware's senior vice president,
telecommunications from April 1996 to September 1997, as Aware's vice president,
telecommunications from December 1992 to April 1996, as a senior member of
Aware's technical staff from January 1991 to November 1992, and as a consultant
to Aware from October 1990 to December 1990. From 1986 to 1990, he was a staff
engineer at Signatron, Inc., a telecommunications technology and systems
developer. Mr. Tzannes received a Ph.D. in electrical engineering from Tufts
University, an M.S. from the University of Michigan at Ann Arbor, and a B.S.
from the University of Patras, Greece.
EDMUND C. REITER has served as Aware's president since March 2001 and as a
director of Aware since December 1999. Mr. Reiter served as a senior vice
president from May 1998 to March 2001, as Aware's vice president, advanced
products from August 1995 to May 1998, as 4
Aware's manager of product development
for still image compression products from June 1994 to August 1995, as a senior
member of Aware's technical staff from November 1993 to June 1994, and as a
member of Aware's technical staff from December 1992 to November 1993. Mr.
Reiter served as senior scientist at New England Research, Inc. from January
1991 to November
5
1992. Mr. Reiter received a Ph.D. from the Massachusetts Institute of Technology
and a B.S. from Boston College.
RICHARD P. MOBERG joined Aware in June 1996DAVID J. MARTIN has served as Aware's interim chief financial officer
and
treasurer. From December 1990 to June 1996,since October 2003. Mr. Moberg held a number of
positions at Lotus Development Corporation, a computer software developer,
including corporateMartin served as Aware's controller from June 1995October 1996 to
June 1996, assistant corporateSeptember 2003. Prior to joining Aware, Mr. Martin served as controller at
Logicraft Information Systems Inc., a developer of CD-ROM networking software
and storage devices, from May 19931994 to June 1995, and director of financial services from
December 1990 to May 1993.1996. Mr. MobergMartin received an M.B.A. from Bentley College
and a B.B.A.B.S. in accounting
from the University of Massachusetts at Amherst.Boston College.
RICHARD W. GROSS was appointed senior vice president - engineering in July
1999. Mr. Gross served as vice president - strategic development from July 1998
to July 1999. Prior to the vice president position, he held various senior level
engineering positions from the time he joined Aware in September 1993 until July
1998. Prior to joining Aware, Mr. Gross was a senior technical staff member at
GTE Laboratories from 1987 to 1993; a technical staff member at the Heinrich
Hertz Institute from 1984 to 1987; and a programmer for IBM, Federal Systems
Division from 1980 to 1984. Mr. Gross received a Ph.D. and M.S. in electrical
engineering from the University of Rhode Island and a B.A. in physics from Holy
Cross College.
FREDERICK D. D'ALESSIO has served as a director of Aware since December
2002. Mr. D'Alessio is currently a general partner at Capitol Management
Partners, a business advisory partnership. Mr. D'Alessio served as president of
the Advanced Services Group for Verizon Communications from July 2000 to
November 2001. The Advanced Services Group included Verizon's Long Distance, DSL
and Internet Service Provider Businesses. From December 1998 to June 2000, Mr.
D'Alessio served as group president consumer services for Bell Atlantic
Communications, responsible for all aspects of Residential Services. From April
1995 to November 1998 Mr. D'Alessio served as president--consumer sales and
services for Bell Atlantic. Mr. D'Alessio currently serves as a director of
Spirent plc. Mr. D'Alessio received a B.S.E.E. and M.S. degree from New Jersey
Institute of Technology and a masters of business administration from Rutgers
University.
DAVID EHRETH has served as a director of Aware since November 1997. Since
April 1998, Mr. Ehreth has served as chairman of Westwave Communications, Inc.,
a telecommunications software company. From April 1998 to July 2002, Mr. Ehreth
also served as president and chief executive officer of Westwave. From June 1992
to August 1998, Mr. Ehreth served as division vice president of the access
division of DSC Communications Corporation, a manufacturer of digital switching,
access, transport and private network system products for the telecommunications
industry. From 1987 to June 1992, Mr. Ehreth served as vice president of
engineering of Optilink, Inc., a manufacturer of access systems for the
telecommunications industry. Optilink, Inc. was acquired by DSC Communications
Corporation in 1990. From 1977 to 1987, Mr. Ehreth held numerous positions in
the Digital Telephone Systems division of Harris Corporation. Mr. Ehreth
received a degree in electrical engineering from College of Marin.
G. DAVID FORNEY, JR. has served as a director of Aware since May 1999. Mr.
Forney was a vice president of Motorola, Inc. from 1977 until his retirement in
January 1999. Mr. Forney was previously vice president of research and
development, and a director of Codex Corporation 5
prior to its acquisition by
Motorola in 1977. Mr. Forney is currently Bernard M. Gordon Adjunct Professor in
the Department of Electrical Engineering and Computer Sciences at the
Massachusetts Institute of Technology. Mr. Forney received an Sc.D. in
electrical engineering
6
from the Massachusetts Institute of Technology and a B.S.E. in electrical
engineering from Princeton University.
ADRIAN F. KRUSE has served as a director of Aware since October 2003. Mr.
Kruse was an audit partner of Ernst & Young LLP, serving clients principally in
the financial services industry, from 1976 until his retirement in March 1998.
From 1967 to 1976, he served audit clients of Ernst & Young LLP in various
capacities. Mr. Kruse is a Certified Public Accountant and holds a B.B.A. degree
from the University of Wisconsin and a J.D. degree from the University of
Wisconsin School of Law. Mr. Kruse also serves as the treasurer and as a
director of the Presbyterian Homes and as a director of MEI, Inc.
The board of directors is divided into three classes, referred to as Class
I, Class II and Class III, each consisting of approximately one-third of the
directors. One class is elected each year at the annual meeting of stockholders
to hold office for a term of three years and until their respective successors
have been duly elected and qualified. The number of directors has been fixed at
seven, and there isare currently one vacancyno vacancies on the board of directors. The
current terms of Messrs. Kerr and Ehreth, Aware's Class II directors, will
expire at the annual meeting to be held on May 27, 2004. The current term of
Aware's Class III directors, Messrs. Reiter, D'Alessio and Kruse, will expire at
the annual meeting to be held in 2005. The current terms of Messrs. Tzannes and
Forney, Aware's Class I directors, will expire at the annual meeting to be held
on May 29, 2003. The current terms of Messrs. Kerr
and Ehreth, Aware's Class II directors, will expire at the annual meeting to be
held in 2004. The current term of Aware's Class III directors, Mr. Reiter and
Mr. D'Alessio, will expire at the annual meeting to be held in 2005.2006.
Executive officers are elected annually by the board of directors and
serve at the discretion of the board or until their respective successors have
been duly elected and qualified. There are no family relationships among Aware's
directors and executive officers.
INDEPENDENT DIRECTORS
A majority of our directors are independent directors under the rules of
the Nasdaq Stock Market. Our board of directors has determined that our
independent directors are Messrs. Kerr, D'Alessio, Ehreth, Forney and Kruse.
Each member of our audit committee, compensation committee, and nominating and
corporate governance committee meets the independence requirements of the Nasdaq
Stock Market for membership on the committees on which he serves.
COMMITTEES AND MEETINGS OF THE BOARD
During 2002,2003, the board of directors met sixfive times and took no action by
written consent. No incumbent director attended fewer than 75% of the total
number of meetings held by the board and committees of the board on which he
served. Aware has a compensation committee, an audit committee, an executive
committee, and a nominating and corporate governance committee.
Aware's compensation committee is
currently composed of two outside directors, David Ehreth and John. K. Kerr.
Aware's audit committee is currently composed of John K. Kerr, David Ehreth and
G. David Forney, Jr.EXECUTIVE COMMITTEE. Aware's executive committee is currently composed of
John K. Kerr and Michael A. Tzannes. The executive committee has all of the
powers of the board of directors except the power to: change the number of
directors or fill vacancies on the board of directors; elect or fill vacancies
in the offices of president, treasurer or clerk; remove any officer or director;
amend the by-laws of Aware; change the principal office of Aware; authorize the
payment of any dividend or distribution to stockholders of Aware; authorize the
reacquisition of capital stock for value; and authorize a merger. In 2003, the
executive committee neither met nor took action by written consent.
7
COMPENSATION COMMITTEE. Aware's nominatingcompensation committee is currently
composed of three outside directors, David Ehreth,Frederick D. D'Alessio, G. David Forney,
Jr. and John K. Kerr. In 2003, the compensation committee held one meeting and
took action by written consent twice. In March, 2004, Aware's board of directors
adopted a Compensation Committee Charter, which is available on Aware's website
at www.aware.com.
AUDIT COMMITTEE. Aware's audit committee is currently composed of Adrian
F. Kruse, David Ehreth and G. David Forney, Jr. Aware's board of directors has
determined that Mr. Kruse is an audit committee financial expert under
Securities and Exchange Commission rules. In 2003, the audit committee met six
times and took no action by written consent. In March, 2004, Aware's board of
directors adopted a new Audit Committee Charter, which is set forth in Annex A
to this proxy statement and also is available on Aware's website at
www.aware.com.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE. Aware's nominating and
corporate governance committee is currently composed of three outside directors,
Frederick D. D'Alessio, David Ehreth and G. David Forney, Jr. In 2003, the
nominating and corporate governance committee held one meeting and took no
action by written consent. In March, 2004, Aware's board of directors adopted a
Nominating and Corporate Governance Committee Charter, which is available on
Aware's website at www.aware.com. Prior to the adoption of the new charter in
March, 2004, Aware's nominating and corporate governance committee was known as
the nominating committee.
The nominating and corporate governance committee, is responsiblein consultation with
our chief executive officer and the chairman of the board, identifies and
reviews candidates for reviewing the qualifications of potential nominees
for election to theour board of directors and recommendingrecommends to our full board
candidates for election to our board. In selecting new directors, the committee
considers any requirements of applicable law or listing standards, a candidate's
strength of character, judgment, business experience and specific area of
expertise, factors relating to the composition of the board (including its size
and structure), principles of directorsdiversity, and such other factors as the electioncommittee
shall deem appropriate.
The committee reviews from time to time the appropriate skills and
characteristics required of directorsboard members in the context of the current make-up
of the board, including such factors as business experience, diversity, and
personal skills in technology, finance, marketing, international business,
financial reporting and other areas that contribute to an effective board.
The committee, in consultation with our chief executive officer and the
Company.chairman of the board, considers and recruits candidates to fill positions on
the board, including as a result of the removal, resignation or retirement of
any director, an increase in the size of the board or otherwise. The committee
also reviews any candidate recommended by stockholders of Aware in light of the
committee's criteria for selection of new directors. Stockholders may make
nominations for the election of directors by delivering notice in writing to the
Clerk of Aware not less than 60 days nor more than 90 days prior to any meeting
of the stockholders called for the election of directors. In 2002,As part of this
responsibility, the executive committee neither met nor took actionis responsible for conducting, subject to
applicable law, any and all inquiries into the background and qualifications of
any candidate for the board and such candidate's compliance with the
independence and other qualification requirements established by written
consent; the nominating committee
held twoor imposed by applicable law or listing standards.
8
POLICY REGARDING BOARD ATTENDANCE
To the extent reasonably practicable, directors are expected to attend
board meetings and took no actionmeetings of committees on which they serve. Directors are
encouraged to attend Aware's annual meeting of stockholders. Last year, one of
our directors attended the annual meeting.
COMMUNICATIONS WITH OUR BOARD OF DIRECTORS
Aware's board of directors has established the following process for
stockholders to communicate directly with the board, and this process has been
approved by written consent;a majority of Aware's independent directors. Stockholders wishing to
communicate with the 6
compensation committee held three meetingsboard of directors should send correspondence to the
attention of the Chairman of the Board at Aware, Inc., 40 Middlesex Turnpike,
Bedford, Massachusetts 01730, and took action by written consent
five times;should include with the correspondence
evidence that the sender of the communication is one of Aware's stockholders.
Satisfactory evidence would include, for example, contemporaneous correspondence
from a brokerage firm indicating the identity of the stockholder and the auditnumber
of shares held. Aware's chairman will review all correspondence confirmed to be
from stockholders and decide whether or not to forward the correspondence or a
summary of the correspondence to the board or a committee met five timesof the board.
Accordingly, Aware's chairman will review all stockholder correspondence, but
the decision to relay that correspondence to the board or a committee of the
board will rest entirely within his discretion.
CODE OF ETHICS
Aware has adopted a code of ethics that applies to all employees, officers
and took no actiondirectors. The code of ethics also contains special ethical obligations
which apply to employees with financial reporting responsibilities, including
Aware's principal executive officer, principal financial officer and principal
accounting officer. Aware's code of ethics includes, among other things,
provisions covering compliance with laws and regulations, conflicts of interest,
insider trading, proper use of Aware's assets, confidentiality, discrimination
and harassment, accounting and record keeping, the reporting of illegal or
unethical behavior, enforcement of the code of ethics and discipline for
violations of the code of ethics. Aware's code of ethics is available on Aware's
website at www.aware.com. Any waiver of any provision of the code of ethics
granted to an executive officer or director may only be made by written
consent.the board of
directors and will be promptly disclosed on our website at www.aware.com.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Aware's compensation committee is currently composed of Messrs. Kerr,
D'Alessio and Ehreth.Forney. Mr. Kerr formerly served as Aware's assistant vice
president of marketing from June 1992 to November 1994. In 2002,2003, no officer or
employee of Aware participated in the deliberations of the compensation
committee concerning the compensation of Aware's executive officers. No
interlocking relationship existed between Aware's board of directors or
compensation committee and the board of directors or compensation committee of
any other company in 2002.2003.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR COMPENSATION
Aware reimburses each director for expenses incurred in attending meetings
of the board of directors but does not pay any separate fees for serving as
directors.
9
In 2002,2003, Aware compensated its directors through grants of nonqualified
options under its 1996 Stock Option Plan and its 2001 Nonqualified Stock Plan.
The exercise price of each option is equal to the closing price of the common
stock on the Nasdaq National Market on the date of grant. Each option has a term
of ten years. The options granted in 20022003 vest on various schedules, as
described in the notes to the table below.
The following table provides information about these grants.
OPTION GRANTS TO DIRECTORS IN LAST FISCAL YEAR
NUMBER OF SECURITIES
UNDERLYING EXERCISE
NAME OPTIONS GRANTED PRICE ($/SH)) EXPIRATION DATE
- ---- --------------- ------------ ---------------
John K. Kerr......................... 10,000Kerr 40,750 (1) $3.39 7/05/122.09 06/02/13
G. David Forney, Jr. ................ 5,00030,000 (1) 3.39 7/05/122.09 06/02/13
David Ehreth......................... 5,000Ehreth 28,500 (1) 3.39 7/05/122.09 06/02/13
Frederick D. D'Alessio...............D'Alessio 12,500 (1) 2.09 06/02/13
Adrian F. Kruse 25,000 (2) 2.48 12/11/123.27 10/14/13
- ----------------------------------------
(1) The options vest in 16 equal quarterly installments of 6.25% beginning as of June 30, 2003.
(2) The options vest in 16 equal quarterly installments of 6.25%, beginning as of December 31, 2003.
- ----------------------------------------
(1) The options vest in 16 equal quarterly installments of 6.25%, beginning as
of September 30, 2002.
(2) The options vest in 16 equal quarterly installments of 6.25%, beginning as
of December 31, 2002.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION. The following table provides
summary information concerning compensation earned for services rendered to
Aware in all capacities during the last three fiscal years by Aware's chief
executive officer in 20022003 and each other executive officer of Aware.
Other annual compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of perquisites and other
personal benefits was less than $50,000 and constituted less than 10% of the
executive officer's total annual salary and bonus.
Long-term compensation awards represent stock options granted under
Aware's 1996 Stock Option Plan and Aware's 2001 Nonqualified Stock Plan. In
2000, 2001, 2002 and 2002,2003, Aware
7
did not make any restricted stock awards, grant any
stock appreciation rights or make any long-term incentive plan payouts.
All other compensation represents group term life insurance premiums paid
by Aware on behalf of the executive officers and the following matching
contributions by Aware under its 401(k) plan for the benefit of the executive
officers in 2000, 2001, 2002 and 2002:2003: Mr. Tzannes, $5,250, $5,100, $5,500 and $5,500;$6,000; Mr.
Reiter, $2,135,$2,262, $2,262, and $2,262;$2,913; Mr. Gross, $3,224, $3,224$3,331 and $3,331;$5,174; Mr.
Martin, $2,873, $3,141 and $3,453; and Mr. Moberg, $3,978, $5,100, $5,500 and $5,500.$4,969.
10
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS ALL
------------------- ------
SECURITIES ALL OTHER
UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) SATION($)
- --------------------------- ---- --------- -------- ---------- ---------
Michael A. Tzannes............. 2003 $281,192 -- 453,752 $6,274
Chief Executive Officer 2002 $300,000300,000 -- 150,000 $5,800
Chief Executive Officer5,800
2001 300,000 -- 174,999 5,388
2000 268,846 -- 120,000 5,412
Edmund C. Reiter............... 2003 262,446 -- 326,635 3,165
President 2002 280,000 -- 130,000 2,511
President 2001 280,000 $750 200,001 2,510
2000 251,442 -- 80,000 2,297
Richard W. Gross............... 2003 220,267 -- 201,501 5,476
Senior Vice President 2002 235,000 -- 100,000 3,553
Senior Vice President 2001 235,000 1,500 114,999 3,446
2000 209,038 750 75,000 3,373David J. Martin (1)............ 2003 106,050 25,000 26,383 3,550
Interim Chief Financial Officer 2002 104,696 -- 10,000 3,240
2001 99,711 -- 15,000 2,933
Richard P. Moberg..............Moberg (2).......... 2003 165,624 -- -- 5,196
Former Chief Financial Officer 2002 225,000 -- 100,000 5,815
Chief Financial Officer and Treasurer 2001 225,000 -- 105,000 5,415
Treasurer 2000 196,442 -- 80,000 4,202(1) Mr. Martin became Aware's interim chief financial officer on October 13, 2003.
(2) Mr. Moberg resigned from his employment with Aware effective as of October 10, 2003.
OPTION GRANTS IN LAST FISCAL YEAR. The following table provides
information concerning stock options granted under the 1996 Stock Option Plan
and the 2001 Nonqualified Stock Plan during 20022003 to each of the executive
officers.
The exercise price of each option is equal to the closing price of the
common stock on the Nasdaq National Market on the date of grant. Each option
vests in installments as described in the "Option grants in last fiscal year"
table below. In 2002,2003, Aware granted employees and directors options to purchase
an aggregate of 1,521,1002,993,963 shares of common stock under its 1996 Stock Option
Plan and 2001 Nonqualified Stock Plan.
The amounts reported in the last two columns represent hypothetical values
that the executive officers could realize upon exercise of the options
immediately before the expiration of their terms, assuming the specified
compounded rates of appreciation of the price of the common stock over the term
of the options. Aware has calculated these numbers based on the rules of the
Securities and Exchange Commission, and they do not represent Aware's estimate
of future stock price growth. Actual gains, if any, on stock option exercises
and common stock holdings will depend on the timing of the exercise and the
future performance of the common stock. The common stock may not achieve the
rates of appreciation assumed in this table and the executive officers may not
receive the amounts reflected in this table. This table does not take into
account any appreciation in the price of the common stock from the date of grant
to the current date. The
11
values shown are net of the option exercise price, but do not include deductions
for taxes or other expenses associated with the exercise.
8
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATE OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE -----------
NAME GRANTED (#) FISCAL YEAR(%year(%) ($/SH)sh) EXPIRATION DATE 5% ($) 10% ($)
- ----------------------- --------------- ---------------- --------------------- ----------------- ----------- --------------- -------------------------
Michael A. Tzannes..... 150,00030,581 (1) 9.86% $3.39 7/05/12 $319,793 $810,4181.02% $ 3.27 10/14/13 $ 62,889 $ 159,374
200,670 (1) 6.70% 3.27 10/14/13 412,675 1,045,799
18,749 (2) 0.63% 3.27 10/14/13 38,557 97,711
41,251 (2) 1.38% 3.27 10/14/13 84,832 214,981
87,501 (3) 2.92% 3.27 10/14/13 179,945 456,015
75,000 (4) 2.51% 3.27 10/14/13 154,236 390,865
--------------------------------- ------------------------
Total 453,752 15.16% 933,134 2,364,746
Edmund C. Reiter....... 130,000Reiter......... 30,581 (1) 8.55 3.39 7/05/12 277,154 702,3621.02% $ 3.27 10/14/13 $ 62,889 $ 159,374
91,052 (1) 3.04% 3.27 10/14/13 187,247 474,521
40,000 (2) 1.34% 3.27 10/14/13 82,259 208,462
100,002 (3) 3.34% 3.27 10/14/13 205,653 521,164
65,000 (4) 2.17% 3.27 10/14/13 133,672 338,750
--------------------------------- ------------------------
Total 326,635 10.91% 671,720 1,702,271
Richard W Gross........ 100,000W. Gross....... 30,581 (1) 6.57 3.39 7/05/12 213,195 540,2791.02% $ 3.27 10/14/13 $ 62,889 $ 159,374
25,919 (1) 0.87% 3.27 10/14/13 53,302 135,078
37,500 (2) 1.25% 3.27 10/14/13 77,118 195,433
57,501 (3) 1.92% 3.27 10/14/13 118,250 299,669
50,000 (4) 1.67% 3.27 10/14/13 102,824 260,577
--------------------------------- -------------------------
Total 201,501 6.73% 414,384 1,050,130
David J. Martin........ 8,783 (1) 0.29% $ 3.27 10/14/13 $ 18,062 $ 45,773
5,100 (2) 0.17% 3.27 10/14/13 10,488 26,579
7,500 (3) 0.25% 3.27 10/14/13 15,424 39,087
5,000 (4) 0.17% 3.27 10/14/13 10,282 26,058
--------------------------------- -------------------------
Total 26,383 0.88% 54,256 137,496
--------------------------------- -------------------------
Richard P. Moberg...... 100,000Moberg........ -- -- -- -- -- --
--------------------------------- -------------------------
- -----------------------------------
(1) 6.57 3.39 7/05/12 213,195 540,279The options vest in full on October 14, 2003.
(2) The options vest 75% on October 14, 2003 and the remaining 25% in four equal quarterly installments of 6.25%,
beginning as of December 31, 2003.
(3) The options vest 50% on October 14, 2003 and the remaining 50% in eight equal quarterly installments of 6.25%
beginning as of December 31, 2003.
(4) The options vest 25% on October 14, 2003 and the remaining 75% in twelve equal quarterly installments of 6.25%
beginning as of December 31, 2003.
- -----------------------------------
(1) The options vest in 16 equal quarterly installments of 6.25%, beginning as
of September 30, 2002.
Each of the officers in the table above participated in a stock option
exchange with Aware in which they agreed to exchange all of their options with
exercise prices of $3.00 or more per share, including all of the options granted
to them in 2002, for new options to be granted by Aware on a date between
October 2, and November 13, 2003. Aware accepted the surrender of their existing
options on April 3, 2003.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES. The following table
provides information concerning stock options exercised during 20022003 and stock
options held as of December 31, 20022003 by the executive officers.
12
None of the executive officers exercised options in 2002.2003. If they had,
however, the value realized upon the exercise of options would be based on the
last sale prices of the common stock on the respective dates of exercise, as
reported by the Nasdaq National Market, less the applicable option exercise
prices. The value of unexercised in-the-money options at fiscal year-end is
based on $2.18$2.91 per share, the last sale price of the common stock on December
31, 2002,2003, as reported by the Nasdaq National Market, less the applicable option
exercise prices. Actual gains, if any, will depend on the value of the common
stock on the date of the sale of the shares.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR END($)
ACQUIRED ON VALUE ------------------------------- -------------------------------
NAME EXERCISE (#)EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- ---- ------------ ---------------------------------- -------------- ---------------- -------------- ----------------
Michael A. Tzannes...... 0 0 675,894 232,501 $788 $0353,552 101,096 1,443 0
Edmund C. Reiter........ 0 0 432,014 221,251230,696 95,939 0 0
Richard W. Gross........ 0 0 241,123 161,876134,937 66,564 0 0
David J. Martin......... 0 0 18,706 7,677 0 0
Richard P. Moberg....... 0 0 267,375 155,6250 0 0 0
TEN-YEAR OPTION REPRICING. The following table sets forth certain
information regarding the repricing, pursuant to a stock option exchange offer,
during 2003 of stock options previously awarded to the executive officers.
Participants in the stock option exchange received new options exercisable for
one share of common stock for every two shares of common stock issuable upon
exercise of a surrendered option. See "Compensation Committee Report on
Executive Compensation" below for further information. The table also includes
information regarding the repricing in 1996 of a stock option held by Mr.
Tzannes.
TEN YEAR OPTION REPRICING
NUMBER OF LENGTH OF ORIGINAL
SECURITIES MARKET PRICE OF EXERCISE PRICE NEW OPTION TERM
UNDERLYING OPTIONS STOCK AT TIME OF AT TIME OF EXERCISE REMAINING AT DATE
NAME DATE REPRICED (#) REPRICING ($) REPRICING ($) PRICE ($) OF REPRICING
- ---- ---- ------------ ------------- ------------- --------- ------------
Michael A. Tzannes...... 10/14/03 453,752 $ 3.27 (1) (2) $ 3.27 (2)
12/05/96 70,000 10.25 15.00 10.25 9 years, 274 days
Edmund C. Reiter........ 10/14/03 326,635 $ 3.27 (1) (3) $ 3.27 (3)
Richard W. Gross........ 10/14/03 201,501 $ 3.27 (1) (4) $ 3.27 (4)
David J. Martin......... 10/14/03 26,383 $ 3.27 (1) (5) $ 3.27 (5)
Richard P. Moberg....... -- -- -- -- -- --
- ----------------
(1) Represents the last sale price of the common stock on October 14, 2003, as
reported by the Nasdaq National Market, which is the date the replacement
options were granted. The last sale price of the common stock on April 3,
2003 (the date on which Aware accepted surrender of existing options
13
pursuant to its stock option exchange program) was $1.78, as reported by
the Nasdaq National Market.
(2) Mr. Tzannes surrendered in the aggregate options for 907,499 shares of
common stock in exchange for the 453,752 options granted on October 14,
2003. Mr. Tzannes surrendered the following options with the following
exercise prices and remaining original option terms: (a) options for
20,000 shares with an exercise price of $10.25 and a remaining term of 3
years, 246 days; (b) options for 20,000 shares with an exercise price of
$12.75 and a remaining term of 4 years, 48 days; (c) an option for 172,500
shares with an exercise price of $11.63 and a remaining term of 5 years,
96 days; (d) an option for 235,000 shares with an exercise price of $26.00
and a remaining term of 5 years, 281 days; (e) an option for 15,000 shares
with an exercise price of $46.19 and a remaining term of 6 years, 89 days;
(f) an option for 100,000 shares with an exercise price of $31.25 and a
remaining term of 6 years, 286 days; (g) an option for 20,000 shares with
an exercise price of $20.38 and a remaining term of 7 years, 198 days; (h)
an option for 58,333 shares with an exercise price of $8.07 and a
remaining term of 8 years, 44 days; (i) an option for 58,333 shares with
an exercise price of $7.42 and a remaining term of 8 years, 107 days; (j)
an option for 58,333 shares with an exercise price of $3.74 and a
remaining term of 8 years, 171 days; and (k) an option for 150,000 shares
with an exercise price of $3.39 and a remaining term of 9 years, 94 days.
(3) Mr. Reiter surrendered in the aggregate options for 653,265 shares of
common stock in exchange for the 326,635 options granted on October 14,
2003. Mr. Reiter surrendered the following options with the following
exercise prices and remaining original option terms: (a) an option for
2,764 shares with an exercise price of $8.25 and a remaining term of 3
years, 50 days; (b) an option for 5,000 shares with an exercise price of
$10.25 and a remaining term of 3 years, 246 days; (c) options for 29,875
shares with an exercise price of $12.75 and a remaining term of 4 years,
48 days; (d) an option for 55,625 shares with an exercise price of $11.63
and a remaining term of 5 years, 96 days; (e) an option for 80,000 shares
with an exercise price of $26.00 and a remaining term of 5 years, 281
days; (f) an option for 70,000 shares with an exercise price of $46.19 and
a remaining term of 6 years, 89 days; (g) an option for 60,000 shares with
an exercise price of $31.25 and a remaining term of 6 years, 286 days; (h)
an option for 20,000 shares with an exercise price of $20.38 and a
remaining term of 7 years, 198 days; (i) an option for 66,667 shares with
an exercise price of $8.07 and a remaining term of 8 years, 44 days; (j)
an option for 66,667 shares with an exercise price of $7.42 and a
remaining term of 8 years, 107 days; (k) an option for 66,667 shares with
an exercise price of $3.74 and a remaining term of 8 years, 171 days; and
(l) an option for 130,000 shares with an exercise price of $3.39 and a
remaining term of 9 years, 94 days.
(4) Mr. Gross surrendered in the aggregate options for 402,999 shares of
common stock in exchange for the 201,501 options granted on October 14,
2003. Mr. Gross surrendered the following options with the following
exercise prices and remaining original option terms: (a) an option for
1,500 shares with an exercise price of $10.25 and a remaining term of 3
years, 246 days; (b) options for 20,000 shares with an exercise price of
$12.75 and a remaining term of 4 years, 48 days; (c) an option for 21,500
shares with an exercise price of $5.50 and a remaining term of 5 years,
152 days; (d) an option for 70,000 shares with an exercise price of $46.19
and a remaining term of 6 years, 89 days; (e) an option for 55,000 shares
with an exercise price of $31.25 and a remaining term of 6 years, 286
days; (f) an option for 20,000 shares with an exercise price of $20.38 and
a remaining term of 7 years, 198 days; (g) an option for 38,333 shares
with an exercise price of $8.07 and a remaining term of 8 years, 44 days;
(h) an option for 38,333 shares with an exercise price of $7.42 and a
remaining term of 8 years, 107 days; (i) an option for 38,333 shares with
an exercise price of $3.74 and a remaining term of 8 years, 171 days; and
(j) an option for 100,000 shares with an exercise price of $3.39 and a
remaining term of 9 years, 94 days.
(5) Mr. Martin surrendered in the aggregate options for 52,763 shares of
common stock in exchange for the 26,383 options granted on October 14,
2003. Mr. Martin surrendered the following options with
14
the following exercise prices and remaining original option terms: (a) an
option for 411 shares with an exercise price of $10.25 and a remaining
term of 3 years, 246 days; (b) options for 7,402 shares with an exercise
price of $12.75 and a remaining term of 4 years, 48 days; (c) an option
for 3,750 shares with an exercise price of $5.50 and a remaining term of 5
years, 152 days; (d) an option for 6,000 shares with an exercise price of
$46.19 and a remaining term of 6 years, 89 days; (e) an option for 8,500
shares with an exercise price of $49.91 and a remaining term of 7 years,
93 days; (f) an option for 1,700 shares with an exercise price of $20.38
and a remaining term of 7 years, 198 days; (g) an option for 5,000 shares
with an exercise price of $8.07 and a remaining term of 8 years, 44 days;
(h) an option for 5,000 shares with an exercise price of $7.42 and a
remaining term of 8 years, 107 days; (i) an option for 5,000 shares with
an exercise price of $3.74 and a remaining term of 8 years, 171 days; and
(j) an option for 10,000 shares with an exercise price of $3.39 and a
remaining term of 9 years, 94 days.
15
REPORT OF THE COMPENSATION COMMITTEE
The compensation committee established by the board of directors is
composed of twothree outside directors, Frederick D. D'Alessio, G. David EhrethForney,
Jr. and John K. Kerr. The compensation committee has general responsibility for
Aware's executive compensation policies and practices, including responsibility
for establishing the specific compensation of Aware's executive officers and
administering Aware's stock plans. The following report summarizes Aware's
executive officer compensation policies for 2002.2003.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION OBJECTIVES. Aware's executive compensation programs are
generally designed to relate executive compensation to improvements in Aware's
financial performance and corresponding increases in stockholder value.
Decisions concerning executive compensation are intended to:
o establish incentives that will link executive officer compensation
to Aware's stock performance and motivate executives to attain
Aware's quarterly and annual financial targets and to promote
Aware's long-term financial success; and
o provide a total compensation package that is competitive within the
industry and that will assist Aware to attract and retain executives
who will contribute to the long-term financial success of Aware.
EXECUTIVE COMPENSATION. Aware's executive compensation package for 20022003
consisted of two principal components: base salary and a stock-based equity
incentive in the form of participation in Aware's stock option plans. Aware's
executive officers were also eligible to participate in other employee benefit
plans, including health and life insurance plans and a 401(k) retirement plan,
on substantially the same terms as other employees who met applicable
eligibility criteria, subject to any legal limitations on the amounts that could
have been contributed or the benefits that could have been paid under these
plans. Aware does not have a management incentive bonus program.
Aware's executive compensation policy emphasizes stock options in order to
align the interests of management with the stockholders' interests in the
financial performance of Aware for fiscal quarters, the fiscal year and the
longer term. In granting stock options, the compensation committee considered in
part the value of options held by the executive officers and the extent to which
the compensation committee believed those options would provide sufficient
motivation to the executive officers to achieve Aware's goals. In 2002,2003, the
compensation committee granted stock options under Aware's 1996 Stock Option
Plan and Aware's 2001 Nonqualified Stock Plan to each of Michael A. Tzannes,
Edmund C. Reiter, Richard P. MobergW. Gross and Richard W. Gross.David J. Martin. The options granted to
Messrs. Tzannes, Reiter, MobergGross and GrossMartin vest as indicated in the table
captioned "Option grants in last fiscal year" above.
In establishing base salaries for executives, the compensation committee
monitors salaries at other companies, particularly companies in the same
industry and companies located in the same geographic area as Aware. In
addition, for each executive the compensation committee considers historic
salary levels, work responsibilities and base salary relative to other
executives at Aware. To some extent, the compensation committee also considers
general
16
economic conditions, Aware's financial performance and each individual's
performance. The
10
compensation committee did not increase the base salaries of Aware's executive
officers in 2002. In connection with an October 2002 workforce reduction by Aware,
each executive officer's salary was reduced by 10%, effective as of January 1,
2003.
CHIEF EXECUTIVE OFFICER COMPENSATION. Consistent with Aware's overall
executive officer compensation policy, Aware's approach to the chief executive
officer's compensation package in 20022003 was to be competitive with other
companies in the industry. The compensation committee believes that this
approach provided additional incentive to Mr. Tzannes to achieve Aware's
performance goals and enhance stockholder value. Mr. Tzannes' salary was
designed to give him assurance of a base level of compensation commensurate with
his position and duration of employment with Aware and competitive with salaries
for officers holding comparable positions in the industry.
REPORT ON REPRICING OF OPTIONS. The compensation committee and the board
of directors believe that Aware can provide the maximum incentive to its
employees, including senior executives, by granting stock options at exercise
prices equal to or not materially greater than the current fair market value of
Aware's common stock. As a result, Aware made a stock option exchange offer to
its employees, including each of the executive officers listed in the table
above captioned "Ten Year Option Repricing." Each of the executive officers
listed in the table, with the exception of Richard P. Moberg, former chief
financial officer and treasurer of Aware, participated in the stock option
exchange with Aware in which they agreed to exchange all of their options with
exercise prices of $3.00 or more per share, including all of the options granted
to them in 2002, for new options to be granted by Aware on a date between
October 2, and November 13, 2003. Aware accepted the surrender of existing
options on April 3, 2003 and granted the new options on October 14, 2003. Mr.
Moberg surrendered his eligible options pursuant to the stock option exchange
but did not receive a grant of any new options because he left the employ of
Aware shortly before the date of grant of the new options. The new options were
granted with an exercise price equal to the closing price of the common stock on
the Nasdaq National Market on the date of grant.
POLICY REGARDING SECTION 162(M)162(m) OF THE INTERNAL REVENUE CODE. Section
162(m) of the Internal Revenue Code limits Aware's ability to deduct, for income
tax purposes, compensation in excess of $1.0 million paid to the chief executive
officer and the three most highly compensated executive officers of Aware (other
than the chief executive officer) in any year, unless the compensation qualifies
as "performance-based compensation." In 2002,2003, the aggregate base salaries,
bonuses and other non-equity compensation of Aware's executive officers did not
exceed the $1.0 million limit. The compensation committee does not expect that
non-equity compensation will exceed the $1.0 million limit in the foreseeable
future. With respect to equity compensation, the compensation committee's policy
with respect to Section 162(m) is that it would prefer to cause compensation to
be deductible by Aware; however, the compensation committee also weighs the need
to provide appropriate incentives to Aware's executive officers against the
potential adverse tax consequences that may result under Section 162(m) from the
grant of compensation that does not qualify as performance-based compensation.
The compensation committee has authorized and may continue to authorize
compensation payments that do not qualify as performance-based compensation and
that are in excess of the limits in circumstances when the committee believes
such payment is appropriate.
17
The compensation committee
Frederick D. D'Alessio
G. David EhrethForney, Jr.
John K. Kerr
1118
PERFORMANCE GRAPH
The following performance graph compares the performance of Aware's
cumulative stockholder return with that of a broad market index, the Nasdaq
Stock Market Index for U.S. Companies, and a published industry indexes,index, the RDG
Technology Composite Index and, through 2001, the J.P. Morgan H&Q Technology
Index (formerly known as the Hambrecht & Quist Technology Index). The J.P.
Morgan H&Q Technology Index was discontinued after 2001.Index. The cumulative stockholder returns for shares of
Aware's common stock and for the market and industry indices are calculated
assuming $100 was invested on December 31, 1997.1998. Aware paid no cash dividends
during the periods shown. The performance of the market and industry indices is
shown on a total return, or dividends reinvested, basis.
COMPARISONCOMPARSION OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG AWARE, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
THE JP MORGAN H & Q TECHNOLOGY INDEX
AND THE RDG TECHNOLOGYTECHOLOGY COMPOSITE INDEX
[PERFORMANCE GRAPH]
* $100 invested on 12/31/98 in stock or index-
including reinvestment of dividends.
Fiscal year ending December 31.
VALUE OF INVESTMENT ($)
-------------------------------------------------------------
12/31/97---------------------------------------------------------------
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- -------- --------
Aware, Inc.................................. $100.00 $265.24 $354.88 $173.17$133.79 $ 80.9865.29 $ 21.27
J.P. Morgan H & Q Technology Index.......... 100.00 140.99 261.48 157.42 124.89 N/A30.53 $8.02 $ 10.69
Nasdaq Stock Market - U.S................... 100.00 155.54 347.38 224.57 155.23 86.34192.96 128.98 67.61 62.17 87.61
RDG Technology Composite.................... 100.00 176.09 348.88 216.36 158.21 93.38157.96 117.38 104.39 76.77 104.01
1219
REPORT OF THE AUDIT COMMITTEE
The audit committee reviews the results and scope of the annual audit of
Aware's financial statements conducted by Aware's independent accountants, the
scope of other services provided by Aware's independent accountants, proposed
changes in Aware's financial and accounting standards and principles, and
Aware's policies and procedures with respect to its internal accounting,
auditing and financial controls. The audit committee also makes recommendations
to the board of directors on the engagement of the independent accountants, as
well as other matters which may come before the audit committee or at the
direction of the board of directors. The audit committee is governed by a
written charter adopted by the board of directors.
The audit committee currently consists of three non-employee directors.
Each member of the audit committee is "independent" within the meaning of the
Nasdaq Stock Market's marketplace rules.
Aware's management is responsible for the financial reporting process,
including the system of internal controls, and for the preparation of financial
statements in accordance with generally accepted accounting principles. Aware's
independent auditors are responsible for auditing those financial statements.
The responsibilitypurpose of the audit committee is to monitor and review these
processes. However,assist the membersboard of the audit committee are not professionally
engageddirectors in
the practice of accounting or auditing and are not experts in the
fields of accounting or auditing, including with respect to auditor
independence. The audit committee has relied, without independent verification,
on the information provided to it and on the representations made by Aware's
management and independent auditors.
In fulfilling its oversight responsibilities, the audit committee discussed
with representatives of PricewaterhouseCoopers LLP, Aware's independent auditors
for 2002, the overall scope and plans for their audit of Aware's financial statementsreporting process. The committee's function
is more fully discussed in its charter.
Management is responsible for 2002. The audit committee met with them, with and without Aware's
management present, to discuss the resultssystems of their audit and their evaluations
of Aware's internaldisclosure controls and
internal control over financial reporting and the overall qualitypreparation of Aware'sthe financial
reporting.statements. The Company's auditors, PricewaterhouseCoopers LLP, are responsible
for performing an independent audit of the Company's financial statements and
expressing an opinion on the conformity of the financial statements with
generally accepted accounting principles.
The committee has reviewed and discussed the unaudited financial
statements for March 31, June 30 and September 30, 2002 and the audited financial statements
of Aware for 20022003 with management and the independent auditors.PricewaterhouseCoopers LLP. The audit committee
has also discussed with the independent auditorsPricewaterhouseCoopers LLP the matters required to be
discussed by Statement of Auditing Standards No. 61,
COMMUNICATION61., as amended, "COMMUNICATION
WITH AUDIT COMMITTEES, as amended.COMMITTEES." In addition, the audit
committee received from
the independent auditorsPricewaterhouseCoopers LLP the written disclosures and the letter required by
Independence Standards Board Standard No. 1, INDEPENDENCE1., "INDEPENDENCE DISCUSSIONS WITH
AUDIT COMMITTEES,COMMITTEES" and discussed their independence with them.
In evaluatingBased upon these reviews and discussions, the independence of our auditors, the audit committee considered
whether the services they provided to Aware beyond their audit and review of
Aware's financial statements were compatible with maintaining their
independence. The audit committee also considered the amount of fees they
received for audit and non-audit services.
Based on the audit committee's review and these meetings, discussions and
reports, and subject to the limitations on the audit committee's role and
responsibilities referred to above and
13
in the audit committee charter, the audit committee recommended to the
board of directors that Aware'sthe audited financial statements for 2002 be included in Aware's
annual reportAnnual Report on Form 10-K.10-K for 2003 for filing with the Securities and Exchange
Commission.
The audit committee
also recommended to the
board of directors that PricewaterhouseCoopers LLP be selected as Aware's
independent auditors for 2003.
The audit committeeAdrian F. Kruse, Chairman
David Ehreth
G. David Forney, Jr.
John K. Kerr
1420
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
At the close of business on March 31, 2003,2004, there were issued and
outstanding 22,698,17122,755,006 shares of common stock entitled to cast 22,698,17122,755,006 votes.
On March 31, 2003,2004, the closing price of Aware's common stock as reported by the
Nasdaq National Market was $1.82$3.95 per share.
PRINCIPAL STOCKHOLDERS
The following table provides information about the beneficial ownership of
Aware's common stock as of March 31, 20032004 by:
o each person known by Aware to own beneficially more than five
percent of Aware's common stock;
o each of Aware's directors;
o each of Aware's executive officers;officers (including Mr. Moberg, Aware's
former chief financial officer and treasurer); and
o all of Aware's current executive officers and directors as a group.
In accordance with SECSecurities and Exchange Commission rules, beneficial
ownership includes any shares for which a person has sole or shared voting power
or investment power and any shares of which the person has the right to acquire
beneficial ownership within 60 days after March 31, 20032004 through the exercise of
any option or otherwise. Except as noted below, Aware believes that the persons
named in the table have sole voting and investment power with respect to the
shares of common stock set forth opposite their names. The inclusion of shares
listed as beneficially owned does not constitute an admission of beneficial
ownership. Percentage of beneficial ownership is based on 22,698,17122,755,006 shares of
common stock outstanding as of March 31, 2003.2004. In calculating a person's
percentage ownership, Aware has treated as outstanding any shares that the
person has the right to acquire within 60 days of March 31, 2003.2004. All shares
included in the "Right to acquire" column represent shares subject to
outstanding stock options exercisable within 60 days after March 31, 2003.2004. The
information as to each person has been furnished by such person.
1521
NUMBER OF SHARES BENEFICIALLY OWNED
----------------------------------- PERCENT
OUTSTANDING RIGHT TO TOTAL BENEFICIALLY
NAME SHARES ACQUIRE NUMBER OWNED
- ---- ------ ------- ------ -----
John SpringsS. Stafford, IIIJr. (1)................... 1,748,782.................. 2,531,524 0 1,748,782 7.7%2,531,524 11.1%
230 S. LaSalle Street, Suite 688
Chicago, IL 60604
State of Wisconsin Investment Board (2).............. 1,651,000 0 1,651,000 7.37.3%
P.O. Box 7842
Madison, WI 53707
Dimensional Fund Advisors Inc (3)................ 1,504,659.......... 1,473,394 0 1,504,659 6.61,473,394 6.5%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
James M. Stafford (4)............................ 1,358,251 0 1,358,251 6.0
230 S. LaSalle Street, Suite 688
Chicago, IL 60604
John K. Kerr (5).................................(4)........................... 741,626 61,186 802,812 3.581,686 823,312 3.6%
Michael A. Tzannes (6) (7)....................... 104,238 704,643 808,881 3.5(5) .................... 106,238 367,459 473,697 2.0%
Edmund C. Reiter (7)....................................................... 10,161 462,013 472,174 2.0
Richard P. Moberg (7)............................ 5,226 287,687 292,913 1.3243,509 253,670 1.1%
Richard W. Gross (7)....................................................... 8,000 263,622 271,622 1.2144,000 152,000 0.7%
David Ehreth.....................................J. Martin ........................... 80 19,807 19,887 0.1%
David Ehreth............................... 0 51,055 51,055 *60,680 60,680 0.3%
G. David Forney, Jr..............................Jr........................ 0 43,121 43,121 *60,935 60,935 0.3%
Frederick D. D'Alessio...........................D'Alessio..................... 0 12,500 12,500 0.1%
Adrian F. Kruse............................ 0 3,125 3,125 *0.0%
Richard P. Moberg.......................... 0 0 0 0.0%
All directors and executive officers
as a group (8(9 persons)........................ 869,251 1,876,452 2,745,703 11.2
- ------------------------------------
* Less than one percent.
(1) The number of shares beneficially owned by John Springs Stafford, III is
based upon information in a Schedule 13G filed by John Springs Stafford,
III on February 14, 2003.
(2) The number of shares beneficially owned by the State of Wisconsin
Investment Board is based upon information in a Schedule 13G filed by the
State of Wisconsin Investment Board on February 11, 2003.
(3) The number of shares beneficially owned by Dimensional Fund Advisors Inc.
is based upon information in a Schedule 13G filed by Dimensional Fund
Advisors Inc. on February 10, 2003.
(4) The number of shares beneficially owned by James M. Stafford is based upon
information in a Schedule 13G filed by James M. Stafford on February 14,
2003................... 866,105 993,701 1,859,806 7.8%
- ------------------------------------
* Less than one percent.
(1) The number of shares beneficially owned by John S. Stafford, Jr. is based upon information in a
Schedule 13G filed by John S. Stafford, Jr. on February 13, 2004.
(2) The number of shares beneficially owned by the State of Wisconsin Investment Board is based upon
information in a Schedule 13G filed by the State of Wisconsin Investment Board on February 11, 2004.
(3) The number of shares beneficially owned by Dimensional Fund Advisors Inc. is based upon information
in a Schedule 13G filed by Dimensional Fund Advisors Inc. on February 6, 2004.
(4) Includes 240,193 shares held by Grove Investment Partners, of which Mr. Kerr is a general partner.
(5) Includes 240,193 shares held by Grove Investment Partners, of which Mr.
Kerr is a general partner.
(6) Includes 20,000 shares held by a private charitable foundation, of which Mr. Tzannes and his wife are
trustees.
(7) The number of shares listed in the "right to acquire" column includes
options which the holder has now agreed to exchange, as part of Aware's
stock option exchange offer, for new options to be granted on a date
between October 2, and November 13, 2003. Aware accepted the surrender of
the holder's eligible existing options on April 3, 2003.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth additional information as of December 31,
2002,2003, regarding securities authorized for issuance under our existing equity
compensation plans and arrangements, divided between plans approved by our
stockholders and plans or arrangements that were not required to be and were not
submitted to our stockholders for approval.
The equity compensation plans approved by our stockholders are our 1990
Stock Option Plan, 1996 Stock Option Plan and 1996 Employee Stock Purchase Plan.
Our 2001 Nonqualified Stock Plan was not approved by our stockholders. Our board
of directors approved the 2001 Nonqualified Stock Plan in April 2001 and amended
it in July 2002.
1622
NUMBER OF SHARES TO WEIGHTED-AVERAGE NUMBER OF SHARES REMAINING
BE ISSUED UPON WEIGHTED-AVERAGE AVAILABLE FOR FUTURE
EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF OUTSTANDING OUTSTANDING UNDER EQUITY
OUTSTANDING OPTIONS, OUTSTANDING COMPENSATION PLANS
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND OPTIONS, WARRANTS AND PLANS (EXCLUDING SHARES REFLECTED
PLAN CATEGORY RIGHTS (#) RIGHTS ($) REFLECTED IN COLUMN (A)) (#)
- -------------------------------------- --------------------------------------------- ------------------------ -----------------------------------------------------------
(A) (B) (C)
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS:
1990 Stock Option Plan............Plan.......... 896 $ 1.30$1.30 0
1996 Stock Option Plan............ 3,422,822 29.72 678,740Plan.......... 1,720,181 5.22 2,381,381
1996 Employee Stock
Purchase Plan................. -- -- 20,303Plan.............. __ __ 221,117
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS:
2001 Nonqualified Stock Plan...... 3,418,828 5.20 4,573,925
-------------------------------------------------------------------------------
Total.............. 6,842,546 $17.47 5,272,968Plan..... 1,746,852 3.55 6,242,964
--------------------------------------------------------------------------------
Total............. 3,467,929 $4.38 8,845,462
On March 3, 2003, Aware initiated a stock option exchange offer in which
employees were offered the opportunity to exchange options granted under the
1996 Stock Option Plan and the 2001 Nonqualified Stock Plan, with exercise
prices of $3.00 or more, for new options to be granted by Aware on a date
between October 2, and November 13, 2003. Aware accepted the surrender of
options from participating employees on April 3, 2003. The cancellation of
surrendered options and the future grant of new options are not reflected in the
table above, which is accurate as of December 31, 2002.
DESCRIPTION OF THE 2001 NONQUALIFIED STOCK PLAN
The following summary of some of the provisions of the 2001 Nonqualified
Stock Plan, as amended, is qualified in its entirety by reference to the full
text of the plan. The 2001 plan permits the grant of (1) nonqualified stock
options, which are options that do not qualify as incentive stock options, (2)
restricted stock awards, (3) unrestricted stock awards and (4) performance share
awards. The maximum number of shares of common stock issuable in connection with
awards granted under the 2001 plan is 8,000,000 shares.
The 2001 plan is administered by a committee consisting of at least two
directors who are both "non-employee directors" within the meaning of Rule 16b-3
under the Securities Exchange Act. Except as specifically reserved to the board
under the terms of the 2001 plan, the committee has full and final authority to
operate, manage and administer the 2001 plan on behalf of Aware. Aware's
compensation committee, currently consisting of Mssrs. EhrethD'Alessio, Forney and
Kerr, administers the 2001 plan.
The committee fixes the term of each stock option granted under the 2001
plan at the time of grant. No stock option shall be exercisable more than 10
years after the date of grant. The committee has the authority to determine the
time or times at which stock options granted under the plan may be exercised.
With respect to grants of restricted stock, the committee will specify at the
time of grant the dates or performance goals on which the non-transferability of
the restricted stock and Aware's right of repurchase shall lapse. With respect
to performance share awards, the committee shall determine the performance goals
applicable under each award and the time period over which performance is to be
measured.
17
The committee will determine at the time of grant the exercise price per
share of the common stock covered by an option grant, or the purchase price per
share of restricted or unrestricted stock. The exercise price per share of a
stock option and the purchase price per share of a restricted stock grant may
not be less than fair market value on the date of grant.
23
Except as otherwise provided, stock options granted under the 2001 plan
are not exercisable following termination of the holder's employment. The 2001
plan provides that in the event of termination of an option holder's employment,
options will be exercisable, to the extent of the number of shares then vested,
(a) for one year following the termination of the holder's employment if such
termination is the result of permanent and total disability, (b) by the holder's
executors, administrators or any person to whom the option may be transferred by
will or by the laws of descent and distribution, for one year following the
termination of employment if such termination is the result of the holder's
death, (c) for 30 days after the date of termination of the holder's employment
by us without "cause," as defined in the 2001 plan, or (d) for 30 days after the
date of voluntary termination by the holder of the holder's employment. However,
in no event will a new option be exercisable after its expiration date.
In the event that Aware effects a stock dividend, stock split or similar
change in capitalization affecting its stock, the committee shall make
appropriate adjustments in (i)(a) the number and kind of shares of stock or
securities with respect to which awards may thereafter be granted, (ii)(b) the
number and kind of shares remaining subject to outstanding awards under the
plan, and (iii)(c) the option or purchase price in respect of such shares. The 2001
plan provides that if Aware merges, consolidates, dissolves or liquidates, the
committee may, in its sole discretion, as to any outstanding award, make such
substitution or adjustment in the total number of shares reserved for issuance
and in the number and purchase price of shares subject to such awards as it may
determine, or accelerate, amend or terminate such awards upon such terms and
conditions as it shall provide.
The board of directors of Aware may amend or discontinue the 2001 plan at
any time. The committee may at any time amend or cancel an outstanding award
granted under the plan. In either case, no such action may adversely affect
rights under any outstanding award without the holder's consent.
PROPOSAL 2--APPROVAL OF AN AMENDMENT TO THE 1996 EMPLOYEE
STOCK PURCHASE PLAN
Aware's 1996 Employee Stock Purchase Plan was originally adopted by the
board of directors on May 23, 1996 and approved by Aware's stockholders on June
6, 1996. The plan was later amended by the board of directors on May 27, 1998.
On February 21, 2003, the board of directors amended the 1996 Employee
Stock Purchase Plan to eliminate the lockup provisions preventing employees from
selling or transferring shares purchased under the plan for a period of three
months and preventing directors and officers from selling or transferring shares
purchased under the plan for a period of six months, and to increase the number
of shares which an employee may be granted in any single offering period from
500 to 1000 shares. On February 21, 2003, the board of directors also amended
the 1996 Employee Stock Purchase Plan to increase the number of shares
authorized for issuance under the plan from 100,000 to 350,000, subject to
stockholder approval.
18
The plan authorizes the board of directors to amend the plan at any time.
The board of directors is seeking stockholder approval of the increase in the
number of shares authorized under the plan for the following reasons: (1) to
ensure that the plan will continue to be qualified under Section 423 of the
Internal Revenue Code, which provides favorable tax treatment to employees with
respect to shares purchased under the plan; (2) to enable Aware to deduct for
federal income tax purposes the full amount of any compensation expense arising
from the exercise of options granted under the plan; and (3) to comply with the
rules of the Nasdaq National Market.
As a publicly held corporation, Aware is subject to Section 162(m) of the
Internal Revenue Code, which prohibits Aware from claiming a deduction on its
federal income tax return for compensation in excess of $1 million paid in any
given fiscal year to the chief executive officer and the four most highly
compensated executive officers (other than the chief executive officer) at the
end of that fiscal year. The $1 million limitation does not apply to
"performance-based compensation." Under the rules promulgated by the Internal
Revenue Service, shares of common stock issued under a plan that has been
approved by the stockholders of a publicly held corporation and that meets
certain criteria will qualify as "performance-based compensation" under Section
162(m).
In addition, the Nasdaq Stock Market Marketplace Rules require Nasdaq
National Market Issuers to obtain stockholder approval of material amendments to
certain employee stock purchase plans. In order to ensure that Aware is
complying with these rules, Aware is submitting the amendment to the 1996
Employee Stock Option Plan increasing the number of shares that may be issued
under the plan for stockholder approval. If the stockholders do not approve
Proposal 2, the total number of shares that may be issued under the plan will
remain at 100,000.
The 1996 Employee Stock Purchase Plan is intended to provide a method of
broad-based equity compensation whereby employees of Aware will have an
opportunity to acquire an ownership interest, or increase an existing ownership
interest, in Aware through the purchase of shares of common stock. The board of
directors, including the members of the compensation committee, believes that
Aware will derive substantial benefits from increasing the aggregate number of
shares that Aware can issue under the 1996 Employee Stock Purchase Plan. The
board of directors believes that the proposed amendment, by enabling Aware to
issue additional shares under the plan, will enable Aware to further align the
interests of Aware's current executive officers and other employees with the
interests of the stockholders. The board also believes that the proposed
amendment will assist Aware in attracting and retaining key employees by
enabling it to offer competitive compensation packages.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE
THE AMENDMENT TO AWARE'S 1996 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED, TO
INCREASE THE NUMBER OF SHARES AVAILABLE FOR ISSUANCE UNDER THE PLAN FROM 100,000
TO 350,000.
GENERAL PLAN INFORMATION
The following summary of the 1996 Employee Stock Purchase Plan is qualified
in all respects by reference to the full text of the 1996 Employee Stock
Purchase Plan, which is set forth in Annex A to this proxy.
19
The 1996 Employee Stock Option Plan is administered by the compensation
committee of the board of directors. The current members of the compensation
committee are Mssrs. Ehreth and Kerr. The members of the compensation committee
are "non-employee directors" as that term is defined in the rules of the
Securities and Exchange Commission. Aware intends that the 1996 Employee Stock
Purchase Plan will qualify as an "employee stock purchase plan" under Section
423 of the Internal Revenue Code. The provisions of the employee stock purchase
plan shall, accordingly, be construed so as to extend and limit participation in
a manner consistent with the requirements of that section of the Code.
All of Aware's employees who have completed six months of continuous
service are eligible to participate in the employee stock purchase plan.
Employees who own stock and hold outstanding options to purchase stock
representing 5 percent or more of the total combined voting power of all classes
of Aware stock are not eligible to participate in the employee stock purchase
plan. As of April 1, 2003, approximately 118 employees were eligible to
participate in the plan. No employee is allowed to purchase shares of common
stock worth more than $25,000, based on the fair market value of the common
stock at the time such option is granted, in any calendar year.
Eligible employees will have the right to purchase stock under the employee
stock purchase plan in a series of six month offerings. The compensation
committee is authorized to determine the applicable commencement date and
termination date of each offering. An employee may participate in any one or
more of the offerings without limiting or requiring participation in any other
offering.
During each offering period under the plan, participating employees will be
entitled to purchase shares of common stock through payroll deductions. At the
commencement of each designated offering period, an eligible employee may elect
to have deductions made between 1% and 6%, in increments of 1%, from his or her
pay on each payday during the offering period. On the last business day of the
offering period, the employee will be deemed to have exercised the option, at
the option price, to the extent of accumulated payroll deductions, provided
however, that the employee may in no event purchase a number of shares in excess
of the number equal to (i) the dollar amount held in the employee's account
under the plan, multiplied by 2, divided by (ii) 85% of the fair market value of
the common stock on the applicable offering commencement date. The option price
shall be the lower of (i) 85% of the last trading price of the common stock as
reported by the Nasdaq National Market System on the offering commencement date;
and (ii) 85% of the last trading price of the common stock as reported by the
Nasdaq National Market System on the offering termination date.
A participating employee may designate a beneficiary who is to receive
common stock issued under the employee stock purchase plan, and may change such
designation at any time by giving written notice to the Treasurer of Aware. Upon
the death of a participating employee, the beneficiary will receive any stock or
cash credited to the deceased participant under the employee stock purchase
plan. In the absence of a validly designated beneficiary, such common stock or
cash will be delivered to the executor or administrator of the estate of the
participant. No beneficiary shall, prior to the death of the participant by whom
he or she has been designated, acquire any interest in the common stock or cash
credited to the participant under the employee stock purchase plan.
20
AMENDMENT OF THE 1996 EMPLOYEE STOCK PURCHASE PLAN
The board of directors may at any time terminate or amend the plan. No such
termination shall affect options previously granted, nor may an amendment make
any change in any option theretofore granted which would adversely affect the
rights of any participant holding options under the plan.
FEDERAL INCOME TAX INFORMATION WITH RESPECT TO THE 1996 EMPLOYEE STOCK
PURCHASE PLAN
The following discussion is intended only as a brief overview of certain of
the current federal income tax laws applicable to the 1996 Employee Stock
Purchase Plan. Employees should consult their tax advisors concerning their own
federal income tax situations, as well as concerning state tax aspects of the
acquisition of shares of Common Stock pursuant to the plan. No state tax matters
are addressed in the following discussion.
If an employee acquires shares under the 1996 Employee Stock Purchase Plan
and does not dispose of them within two years after the commencement of the
offering pursuant to which the shares were acquired, nor within one year after
the date on which the shares were acquired, any gain realized upon subsequent
disposition will be taxable as a long-term capital gain, except that the portion
of such gain equal to the lesser of (a) the excess of the fair market value of
the shares on the date of disposition over the amount paid upon purchase of the
shares, or (b) the excess of the fair market value of the shares on the offering
commencement date over the amount paid upon purchase of the shares, is taxable
as ordinary income. There is no corresponding deduction for Aware, however. If
the employee disposes of the shares at a price less than the price at which he
or she acquired the shares, the employee realizes no ordinary income and has a
long-term capital loss measured by the difference between the purchase price and
the selling price.
If an employee disposes of shares acquired pursuant to the 1996 Employee
Stock Purchase Plan within two years after the commencement date of the offering
pursuant to which the shares were acquired, or within one year after the date on
which the shares were acquired, the difference between the purchase price and
the fair market value of the shares at the time of purchase will be taxable to
him or her as ordinary income in the year of disposition. In this event, Aware
may deduct from its gross income an amount equal to the amount treated as
ordinary income to each such employee. Any excess of the selling price over the
fair market value at the time the employee purchased the shares will be taxable
as long-term or short-term capital gain, depending upon the period for which the
shares were held. If any shares are disposed of within either the two-year or
one-year period at a price less than the fair market value at the time of
purchase, the same amount of ordinary income (i.e., the difference between the
purchase price and the fair market value of the shares at the time of purchase)
is realized, and a capital loss is recognized equal to the difference between
the fair market value of the shares at the time of purchase and the selling
price.
If a participating employee should die while owning shares acquired under
the 1996 Employee Stock Purchase Plan, ordinary income may be reportable on his
or her final income tax return.
21
The 1996 Employee Stock Purchase Plan is not subject to the provisions of
the Employee Retirement Income Security Act of 1974, nor is the plan qualified
under Section 401(a) of the Internal Revenue Code.
NEW PLAN BENEFITS
If the stockholders approve Proposal 2, 350,000 shares of Aware common
stock will be authorized for issuance under the plan. Because participation in
the plan is voluntary, we are unable to determine the dollar value and number of
shares or amounts that will be received by or allocated to any of the plan
participants as a result of the increase in the number of shares subject to
purchase under the plan. If the proposed amendment had been in effect in 2002,
it would not have affected the number of shares received by or allocated to
participants in that year.
SECTION 16(A)16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Aware's
executive officers and directors, as well as persons who beneficially own more
than ten percent of Aware's common stock, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Regulations of
the SECSecurities and Exchange Commission require these executive officers,
directors and stockholders to furnish Aware with copies of all Section 16(a)
forms they file.
Based solely upon a review of the Forms 3, 4 and 5 and amendments thereto
furnished to Aware with respect to 2002,2003, or written representations that Form 5
was not required for 2002,2003, Aware believes that all Section 16(a) filing
requirements applicable to its executive officers, directors and
greater-than-ten-percent stockholders were fulfilled in a timely manner.manner, with
the exception of: (a) John S. Stafford, Jr. failed to file on a timely basis a
Form 3 with respect to his holdings of Aware stock as of March 19, 2003, the
date on which he first exceeded 10% ownership of Aware stock, and Mr. Stafford
failed to file on a timely basis multiple Form 4s, all with respect to the
acquisition of shares of common stock; Mr. Stafford filed a Form 5 on February
17, 2004 covering all of his 2003 reportable transactions, and (b) each of
Frederick D. D'Alessio, David Ehreth, G. David Forney, Jr. and John K. Kerr,
directors of Aware, failed to file on a timely basis a Form 4 with respect to
the acquisition of an option granted to each
24
individual to acquire shares of common stock; Mssrs. D'Alessio, Ehreth, Forney
and Kerr each filed a Form 5 on February 12, 2004 with respect to these
transactions.
INDEPENDENT ACCOUNTANTS
The board of directorsaudit committee has selected PricewaterhouseCoopers LLP as independent
accountants to audit the financial statements of Aware for the year ending
December 31, 2003.2004. PricewaterhouseCoopers LLP has served as Aware's principal
independent accountants since May, 1999.
FEES FOR PROFESSIONAL SERVICES
The following table provides the fees Aware paid to PricewaterhouseCoopers
LLP for professional services rendered for 2003 and 2002. Audit feesFees consist of
aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP in connection with theirfor the audit of Aware'sour
annual financial statements and their review of Aware'sthe interim financial statements
included in Aware's quarterly reports on Form 10-Qor services that are normally provided by the
independent auditor in connection with statutory and regulatory filings or
engagements for 2002.the fiscal years ended December 31, 2003 and December 31, 2002,
respectively. Audit-Related fees consist of aggregate fees billed for assurance
and related services, such as employee benefit plan audits, that are reasonably
related to the performance of the audit or review of our financial statements
and are not reported under "Audit Fees." Tax Fees consist of aggregate fees
billed for professional services for tax compliance, tax advice and tax
planning. All Other Fees consist of aggregate fees billed for products and
services provided by the independent auditor, other than those disclosed above.
2003 Fees 2002 Fees
--------- ---------
AUDIT FEES ........................................................ $98,750
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION................................ $ 119,500 $108,750
AUDIT-RELATED FEES......................... 14,200 13,250
TAX FEES ...... 0.................................. 4,037 3,500
ALL OTHER FEES .................................................... 26,750*
* Includes an audit of Aware's 401(k) plan............................. 0 0
ATTENDANCE AT ANNUAL MEETING
Aware expects that representatives of PricewaterhouseCoopers LLP will be
present at the annual meeting. They will have an opportunity to make a statement
if they desire to do so and will be available to respond to appropriate
questions from stockholders.
22
STOCKHOLDER PROPOSALS
If any stockholder would like to include any proposal in Aware's proxy
materials for its next annual meeting of stockholders or special meeting in lieu
thereof, the stockholder must comply with the requirements of Rule 14a-8 under
the Securities Exchange Act of 1934. Among other requirements, Aware must
receive the proposal at its executive offices no later than December 16, 2003.2004.
If any stockholder would like to submit a proposal for that meeting outside the
processes of Rule 14a-8, notice of the proposal will be considered untimely
under Rule 14a-4(c)(1) if Aware receives the notice after March 1, 2004.2005.
25
AVAILABLE INFORMATION
STOCKHOLDERS OF RECORD ON APRIL 1, 20032004 WILL RECEIVE COPIES OF THIS PROXY
STATEMENT AND AWARE'S 20022003 ANNUAL REPORT TO STOCKHOLDERS, WHICH CONTAINS
DETAILED FINANCIAL INFORMATION CONCERNING AWARE. AWARE WILL MAIL, WITHOUT
CHARGE, A COPY OF AWARE'S ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS) TO ANY
STOCKHOLDER WHOSE PROXY AWARE IS SOLICITING IF THE STOCKHOLDER REQUESTS IT IN
WRITING. PLEASE SUBMIT ANY SUCH WRITTEN REQUEST TO MR. RICHARD P. MOBERG,DAVID J. MARTIN, INTERIM
CHIEF FINANCIAL OFFICER, AND TREASURER, AWARE, INC., 40 MIDDLESEX TURNPIKE, BEDFORD,
MASSACHUSETTS 01730.
2326
ANNEX A
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AWARE, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(as amended May 27, 1998 and February 21, 2003)
1. PURPOSE
The 1996 Aware, Inc. Employee Stock Purchase Plan (the "Plan") is
intended to provide a method whereby employees of Aware, Inc. (the "Company")
will have an opportunity to acquire an ownership interest (or increase an
existing ownership interest) inAUDIT COMMITTEE CHARTER
AS APPROVED BY THE BOARD OF DIRECTORS
MARCH 4, 2004
I. ORGANIZATION
CHARTER. This charter governs the Company through the purchase of sharesoperations of the Common Stock of the Company. It is the intention of the Company that the
Plan qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amendedAudit Committee (the
"Code""Committee"). The provisionsCommittee shall review and reassess the charter at least
annually and obtain the approval of the
Plan shall, accordingly, be construed so as to extend and limit participation in
a manner consistent with the requirements of that section of the Code.
2. DEFINITIONS
(a) "Board" means the Board of Directors (the "Board"). This
charter supercedes all prior charters of the Committee.
MEMBERS. The Committee members shall be members of, and appointed by, the Board
and shall consist of at least three directors, each of whom shall meet the
independence and other requirements of applicable law and the listing standards
of The Nasdaq Stock Market, Inc. ("Nasdaq"). Committee members shall be subject
to annual reconfirmation and may be removed by the Board at any time. The Board
shall also designate a Committee Chairperson.
MEETINGS. In order to discharge its responsibilities, the Committee shall each
year establish a schedule of meetings; additional meetings may be scheduled as
required.
QUORUM; ACTION BY COMMITTEE. A quorum of any Committee meeting shall be at least
two members. All determinations of the Committee shall be made by a majority of
its members present at a meeting duly called and held, except as specifically
provided herein (or where only two members are present, by unanimous vote). A
decision or determination of the Committee reduced to writing and signed by all
of the members of the Committee shall be fully as effective as if it had been
made at a meeting duly called and held.
AGENDA, MINUTES AND REPORTS. An agenda, together with materials relating to the
subject matter of each meeting, shall be sent to members of the Committee prior
to each meeting. Minutes for all meetings of the Committee shall be prepared to
document the Committee's discharge of its responsibilities. The minutes shall be
circulated in draft form to all Committee members to ensure an accurate final
record, shall be approved at a subsequent meeting of the Committee and shall be
distributed periodically to the full Board. The Committee shall make regular
reports to the Board.
II. PURPOSE
The Committee shall provide assistance to the Board in fulfilling their
oversight responsibility to the shareholders, the investment community, and
others relating to: the integrity of the Company's financial statements; the
systems of disclosure controls and internal controls over financial reporting;
the performance of the Company's independent auditor; the independent auditor's
qualifications and independence; and the Company's compliance with ethics
policies and legal and regulatory requirements. In so doing, it is the
responsibility of the Committee to
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maintain free and open communication between the Committee, independent auditor,
and management of the Company.
III. DUTIES AND RESPONSIBILITIES
The primary responsibility of the Committee is to oversee the Company's
financial reporting process on behalf of the Board and report the results of
their activities to the Board. While the Committee has the responsibilities and
powers set forth in this charter, it is not the duty of the Committee to plan or
conduct audits or to determine that the Company's financial statements are
complete and accurate and are in accordance with generally accepted accounting
principles, nor can the Committee certify that the independent auditor is
"independent" under applicable rules. Management is responsible for the
preparation, presentation, and integrity of the Company's financial statements
and for the appropriateness of the accounting principles and reporting policies
that are used by the Company. The independent auditor is responsible for
auditing the Company's financial statements and for reviewing the Company's
unaudited interim financial statements.
The Committee, in carrying out its responsibilities, believes its policies and
procedures should remain flexible, in order to best react to changing conditions
and circumstances. The Committee should take appropriate actions to set the
overall corporate "tone" for quality financial reporting, sound business risk
practices, and ethical behavior. The following shall be the principal duties and
responsibilities of the Committee. These are set forth as a guide with the
understanding that the Committee may supplement them as appropriate.
The Committee shall be directly responsible for the appointment, compensation,
retention, and termination of the independent auditor, and the independent
auditor must report directly to the Committee. The Committee also shall be
directly responsible for the oversight of the work of the independent auditor,
including resolution of disagreements between management and the auditor
regarding financial reporting. The Committee shall pre-approve all audit and
non-audit services provided by the independent auditor and shall not engage the
independent auditor to perform the specific non-audit services proscribed by law
or regulation. The Committee may delegate pre-approval authority to a member of
the Committee. The decisions of any Committee member to whom pre-approval
authority is delegated must be presented to the full Committee at its next
scheduled meeting.
At least annually, the Committee shall obtain and review a report or reports by
the independent auditor describing:
o The firm's internal quality control procedures; and
o All relationships between the independent auditor and the Company
consistent with Independence Standards Board Standard 1 (to assess
the auditor's independence).
The Committee will actively engage in a dialogue with the auditor with respect
to any disclosed relationships or services that may impact the objectivity and
independence of the auditor and take appropriate action to oversee the
independence of the auditor.
The Committee shall set clear hiring policies for employees or former employees
of the independent auditor that meet the SEC regulations and stock exchange
listing standards.
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The Committee shall discuss with the independent auditor the overall scope and
plans for the audit, including the adequacy of staffing and compensation, the
result of the annual audit examination and accompanying management letters, and
the results of the independent auditor's procedures with respect to interim
periods. Also, the Committee shall discuss with management and the independent
auditor (a) the adequacy and effectiveness of the Company's internal control
over financial reporting (including any significant deficiencies and significant
changes in internal control over financial reporting reported to the Committee
by the independent auditor or management); and (b) "Code"the adequacy and
effectiveness of the Company's disclosure controls and procedures, and
management reports thereon.
The Committee shall meet separately periodically with management and the
independent auditor to discuss issues and concerns warranting Committee
attention. The Committee shall provide sufficient opportunity for the
independent auditor to meet privately with the members of the Committee. The
Committee shall review with the independent auditor any audit problems or
difficulties and management's response.
The Committee shall receive and review reports from the independent auditor,
prior to the filing of its audit report with the SEC, on all critical accounting
policies and practices of the Company, all material alternative treatments of
financial information within generally accepted accounting principles that have
been discussed with management, including the ramifications of the use of such
alternative treatments and disclosures and the treatment preferred by the
independent auditor, and other material written communications between the
independent auditor and management.
The Committee shall review and discuss with management and the independent
auditor earnings press releases, as well as financial information and earnings
guidance provided to analysts and rating agencies.
The Committee shall review with management and the independent auditor the year
end audited financial statements and interim financial statements, and
disclosures under Management's Discussion and Analysis of Financial Condition
and Results of Operations to be included in the Company's Annual Reports on Form
10-K and Quarterly Reports on Form 10-Q, including their judgment about the
quality, not just the acceptability, of accounting principles, the
reasonableness of significant judgments, and the clarity of the disclosures in
the financial statements. Also, the Committee shall discuss the results of the
annual audit and the quarterly review and any other matters required to be
communicated to the Committee by the independent auditor under generally
accepted auditing standards. If deemed appropriate, the Committee shall
recommend to the Board that the audited financial statements be included in the
Annual Report on Form 10-K for the year.
The Committee shall inquire of management of the Company as to any material
violations of securities laws, breaches of fiduciary duty or violations of the
Company's code of ethics.
The Committee shall review and approve all related party transactions. For these
purposes, the term "related party transaction" shall refer to transactions
required to be disclosed pursuant to Securities and Exchange Commission
Regulation S-K, Item 404.
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The Committee shall establish procedures for the receipt, retention, and
treatment of complaints received by the Company regarding accounting, internal
accounting controls, or auditing matters, and the confidential, anonymous
submission by employees of the Company of concerns regarding questionable
accounting or auditing matters.
The Committee shall receive corporate attorneys' reports of evidence of a
material violation of securities laws or breaches of fiduciary duty.
The Committee shall prepare its report to be included in the Company's annual
proxy statement as required by SEC regulations.
The Committee shall perform an evaluation of its performance at least annually
to determine whether it is functioning effectively.
IV. OTHER
ACCESS TO RECORDS, ADVISERS AND OTHERS. In discharging its responsibilities, the
Committee shall have full access to any relevant records of the Company and may
retain, at Company expense, independent advisers (including legal counsel,
accountants and consultants) as it determines necessary to carry out its duties.
The Committee shall have the meaning set forth in Paragraph 1.
(c) "Committee" meansultimate authority and responsibility to engage or
terminate any such independent advisers and to approve the Compensation Committee of the Board.
(d) "Common Stock" means the common stock, par value $.01 per
share, of the Company.
(e) "Company" shall also include any Subsidiary (as hereinafter
defined) of Aware, Inc. designated as a participant in the Plan by the Board,
unless the context otherwise requires.
(f) "Compensation" means, for the purposeterms of any Offering pursuantsuch
engagement and the fees to this Plan, base pay in effect as of the Offering Commencement Date (as
hereinafter defined). Compensation shall not includebe paid to any deferred compensationsuch adviser. The Committee may also
request that any officer or other than contributions by an individual through a salary reduction agreement
to a cash or deferred plan pursuant to Section 401(k) of the Code or to a
cafeteria plan pursuant to Section 125 of the Code.
(g) "Employee" means any person who is customarily employed by the
Company for more than 20 hours per week and more than five months in any
calendar year.
(h) "Offering" shall have the meaning set forth in Paragraph 4.
(i) "Offering Commencement Date" shall have the meaning set forth
in Paragraph 4.
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(j) "Offering Termination Date" shall have the meaning set forth in
Paragraph 4.
(k) "Plan" shall have the meaning set forth in Paragraph 1.
(l) "Subsidiary" shall mean any present or future corporation which
is or would constitute a "subsidiary corporation" as that term is defined in
Section 425 of the Code.
3. ELIGIBILITY
(a) Participation in the Plan is completely voluntary.
Participation in any one or more of the Offerings under the Plan shall neither
limit, nor require, participation in any other Offering (as hereinafter
defined).
(b) Each employee of the Company, shall be eligible to participate
in the Plan on the first Offering Commencement Date, as hereinafter defined,
following the completion of six months of continuous service with the Company.
Notwithstanding the foregoing, no employee shall be granted an option under the
Plan:
(i) if, immediately after the grant, such employee would
own stock, and/or hold outstanding options to purchase stock, possessing 5% or
more of the total combined voting power or value of all classes of stock of the
CompanyCompany's outside
counsel or any Subsidiary;other person meet with any members of, or independent advisers
to, the Committee.
FUNDING. The Company shall provide for purposes of this Paragraph, the rules of Section
424(d) of the Code shall apply in determining the stock ownership of any
employee;
(ii) which permits his rights to purchase stock under
all Section 423 employee stock purchase plans of the Company and its
Subsidiaries to exceed $25,000 of the fair market value of the stock (determined
at the time such option is granted) for each calendar year in which such option
is outstanding; for purposes of this Paragraph, the rules of Section 423(b)(8)
of the Code shall apply; or
(iii) which permits his rights to purchase stock under all
Section 423 employee stock purchase plans of the Company and its Subsidiaries to
exceed 1,000 shares of Common Stock during any single Offering.
4. OFFERING DATES
The right to purchase stock hereunder shall be made available by a
series of six-month offerings (the "Offering" or "Offerings") to employees
eligible in accordance with Paragraph 3 hereof. The Committee will, in its
discretion, determine the applicable date of commencement ("Offering
Commencement Date") and termination date ("Offering Termination Date") for each
Offering. Participation in any one or more of the Offerings under the Plan shall
neither limit, nor require, participation in any other Offering.
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5. PARTICIPATION
Any eligible employee may become a participant by completing a
payroll deduction authorization form provided by the Company and filing it with
the Company's Treasurer 20 days prior to each applicable Offering Commencement
Date,appropriate funding, as determined by the
Committee, pursuantfor payment of
(i) compensation to Paragraph 4.
6. PAYROLL DEDUCTIONS
(a) At the time a participant files an authorization for a payroll
deduction, the participant shall electany independent auditor;
(ii) compensation to have deductions made from his or her
pay on each payday during any Offering in which he or she is a participant, at a
specified percentage of his or her Compensation as determined on the applicable
Offering Commencement Date; said percentage shall be in increments of one
percent up to a maximum percentage of six percent.
(b) Payroll deductions for a participant shall commence on the
Offering Commencement Date when the applicable authorization for a payroll
deduction becomes effective and shall end on the Offering Termination Date of
the Offering to which such authorization is applicable, unless sooner terminated
by the participant as provided in Paragraph 9.
(c) All payroll deductions made for a participant shall be credited
to his or her account under the Plan. A participant may not make any separate
cash payment into such account.
(d) A participant may withdraw from the Plan at any time during the
applicable Offering period; provided, however, that a participant who is an
officer or director of the Company and who withdraws from the Plan during any
Offering period will not be eligible for the grant of any subsequent option
under the Plan for a period of six months.
7. GRANTING OF OPTION
(a) Except as set forth in Paragraph 7(c) hereof, on the Offering
Commencement Date of each Offering, a participating employee shall be deemed to
have been granted an option to purchase a maximum number of shares of the Common
Stock equal to an amount determined as follows: (i) 85% of the market value per
share of the Common Stock on the applicable Offering Commencement Date shall be
divided into an amount equal to the sum of (x) the percentage of the employee's
Compensation which he or she has elected to have withheld (multiplied by the
employee's Compensation over the Offering period) plus (y) any amounts in the
employee's account on the Offering Commencement Date that have been carried
forward from prior Offerings; multiplied by (ii) two. Such market value per
share of the Common Stock shall be determined as provided in clause (i) of
Paragraph 7(b).
(b) The option price of the Common Stock purchased with payroll
deductions made during each such Offering for a participant therein shall be the
lower of:
(i) 85% of the average of the bid and the asked prices as
reported by the Nasdaq Stock Market in the Wall Street Journal, or, if the
Common Stock is designated as a
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national market security by the National Association of Securities Dealers, Inc.
("NASD"), the last trading price of the Common Stock as reported by the Nasdaq
National Market System in the Wall Street Journal, or, if the Common Stock is
listed on an exchange, the closing price of the Common Stock on the exchange on
the Offering Commencement Date applicable to such Offering (or on the next
regular business date on which shares of the Common Stock shall be traded, in
the event that no shares of the Common Stock have been traded on the Offering
Commencement Date); or if the Common Stock is not quoted on Nasdaq, not
designated as a Nasdaq national market security and not listed on an exchange,
85% of the fair market value on the Offering Commencement Date as determinedadvisers employed by the Committee; and
(ii) 85%(iii) ordinary administrative expenses of the averageCommittee that are necessary
or appropriate in carrying out its duties.
DELEGATION. The Committee may delegate any of its responsibilities to a
subcommittee comprised of one or more members of the bid and the asked prices as
reported by Nasdaq in the Wall Street Journal, or, if the Common Stock is
designated as a national market security by the NASD, the last trading price of
the Common Stock as reported by the Nasdaq National Market System in the Wall
Street Journal, or, if the Common Stock is listed on an exchange, the closing
price of the Common Stock on the exchange on the Offering Termination Date
applicable to such Offering (or on the next regular business date on which
shares of the Common Stock shall be traded, in the event that no shares of the
Common Stock shall have been traded on the Offering Termination Date); or if the
Common Stock is not quoted on Nasdaq, not designated as a Nasdaq national market
security and not listed on an exchange, 85% of the fair market value on the
Offering Termination Date as determined by the Committee.
(c) A participant who is an officer or director of the Company and
who elects pursuant to Paragraph 8(a) with respect to any Offering not to
exercise an option deemed to have been granted pursuant to this Paragraph 7,
shall not be eligible for the grant of an option hereunder for a period of six
months.
8. EXERCISE OF OPTION
(a) Unless a participant gives written notice to the Treasurer of
the Company as hereinafter provided, his or her option for the purchase of
Common Stock with payroll deductions made during any Offering will be deemed to
have been exercised automatically on the Offering Termination Date applicable to
such Offering for the purchase of the number of full shares of Common Stock
which the accumulated payroll deductions in his or her account at that time
(plus any amounts in his or her account that have been carried forward from
prior Offerings) will purchase at the applicable option price (but not in excess
of the number of shares for which options have been granted to the employee,
pursuant to Paragraph 7(a)), and any excess in his account at that time, other
than amounts representing fractional shares, will be returned to him.
(b) Fractional shares will not be issued under the Plan and any
accumulated payroll deductions which would have been used to purchase fractional
shares shall be automatically carried forward to the next Offering unless the
participant elects, by written notice to the Treasurer of the Company, to have
the excess cash returned to the participant.COMMITTEE MEMBERS
Adrian Kruse (Chair)
David Ehreth
G. David Forney, Jr.
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9. WITHDRAWAL AND TERMINATION
(a) Prior to the Offering Termination Date for an Offering, any
participant may withdraw the payroll deductions credited to his or her account
under the Plan for such Offering by giving written notice to the Treasurer of
the Company. All of the participant's payroll deductions credited to such
account will be paid to the participant promptly after receipt of notice of
withdrawal, without interest, and no future payroll deductions will be made from
his or her pay during such Offering. The Company will treat any attempt to
borrow by a participant on the security of accumulated payroll deductions as an
election to withdraw such deductions.
(b) Except as set forth in Paragraphs 6(d) and 7(c), a
participant's election not to participate in, or withdrawal from, any Offering
will not have any effect upon his or her eligibility to participate in any
succeeding Offering or in any similar plan which may hereafter be adopted by the
Company.
(c) Upon termination of the participant's employment for any
reason, including retirement but excluding death, the payroll deductions
credited to his or her account will be returned to the participant, or, in the
case of his or her death, to the person or persons entitled thereto under
Paragraph 13.
(d) Upon termination of the participant's employment because of
death, his or her beneficiary (as defined in Paragraph 13) shall have the right
to elect, by written notice given to the Company's Treasurer prior to the
expiration of a period of 90 days commencing with the date of the death of the
participant, either:
(i) to withdraw all of the payroll deductions credited to
the participant's account under the Plan; or
(ii) to exercise the participant's option for the purchase
of stock on the Offering Termination Date next following the date of the
participant's death for the purchase of the number of full shares which the
accumulated payroll deductions in the participant's account at the date of the
participant's death will purchase at the applicable option price (subject to the
limitation contained in Paragraph 7(a)), and any excess in such account will be
returned to said beneficiary. In the event that no such written notice of
election shall be duly received by the office of the Company's Treasurer, the
beneficiary shall automatically be deemed to have elected to withdraw the
payroll deductions credited to the participant's account at the date of the
participant's death and the same will be paid promptly to said beneficiary.
10. INTEREST
No interest will be paid or allowed on any money paid into the Plan
or credited to the account of any participating employee.
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11. STOCK
(a) The maximum number of shares of Common Stock available for
issuance and purchase by employees under the Plan, subject to adjustment upon
changes in capitalization of the Company as provided in Paragraph 16, shall be
350,000 shares of Common Stock, $.01 par value per share, of the Company. If the
total number of shares for which options are exercised on any Offering
Termination Date in accordance with Paragraph 8 exceeds the number of shares
that remain available for issuance and purchase by employees under the Plan, the
Company shall make a PRO RATA allocation of the shares available for delivery
and distribution in an equitable manner, with the balances of payroll deductions
credited to the account of each participant under the Plan carried forward to
the next Offering or returned to the participant at his or her discretion, by
giving written notice to the Treasurer to this effect.
(b) The participant will have no interest in the stock covered by
his or her option until such option has been exercised.
12. ADMINISTRATION
The Plan shall be administered by the Committee. The interpretation
and construction of any provision of the Plan and adoption of rules and
regulations for administering the Plan shall be made by the Committee.
Determinations made by the Committee with respect to any matter or provision
contained in the Plan shall be final, conclusive and binding upon the Company
and upon all participants, their heirs or legal representatives. Any rule or
regulation adopted by the Committee shall remain in full force and effect unless
and until altered, amended, or repealed by the Committee.
13. DESIGNATION OF BENEFICIARY
A participant shall file with the Treasurer of the Company a
written designation of a beneficiary who is to receive any Common Stock and/or
cash under the Plan. Such designation of beneficiary may be changed by the
participant at any time by written notice. Upon the death of a participant and
upon receipt by the Company of proof of the identity and existence of a
beneficiary validly designated by the participant under the Plan, the Company
shall deliver such Common Stock and/or cash to such beneficiary. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such Common Stock and/or cash to the executor or
administrator of the estate of the participant. No beneficiary shall, prior to
the death of the participant by whom he or she has been designated, acquire any
interest in the Common Stock and/or cash credited to the participant under the
Plan.
14. TRANSFERABILITY
Neither payroll deductions credited to a participant's account nor
any rights with regard to the exercise of an option or to receive Common Stock
under the Plan may be assigned, transferred, pledged, or otherwise disposed of
in any way by the participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge, or other
A-6
disposition shall be without effect, except that the Company may treat such act
as an election to withdraw funds in accordance with Paragraph 8(b).
15. USE OF FUNDS
All payroll deductions received or held by the Company under this
Plan may be used by the Company for any corporate purpose, and the Company shall
not be obligated to segregate such payroll deductions.
16. EFFECT OF CHANGES OF COMMON STOCK
If the Company shall subdivide or reclassify the Common Stock which
has been or may be optioned under this Plan, or shall declare thereon any
dividend payable in shares of such Common Stock, or shall take any other action
of a similar nature affecting such Common Stock, then the number and class of
shares of Common Stock which may thereafter be optioned (in the aggregate and to
any participant) shall be adjusted accordingly and in the case of each option
outstanding at the time of any such action, the number and class of shares which
may thereafter be purchased pursuant to such option and the option price per
share shall be adjusted to such extent as may be determined by the Committee,
following consultation with the Company's independent public accountants and
counsel, to be necessary to preserve the rights of the holder of such option.
17. AMENDMENT OR TERMINATION
The Board may at any time terminate or amend the Plan. No such
termination shall affect options previously granted, nor may an amendment make
any change in any option theretofore granted which would adversely affect the
rights of any participant holding options under the Plan.
18. NOTICES
All notices or other communications by a participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received by the Treasurer of the Company.
19. MERGER OR CONSOLIDATION
If the Company shall at any time merge into or consolidate with
another corporation, the holder of each option then outstanding will thereafter
be entitled to receive at the next Offering Termination Date, upon the exercise
of such option and for each share as to which such option shall be exercised,
the securities or property which a holder of one share of the Common Stock was
entitled to upon and at the time of such merger or consolidation. In accordance
with this Paragraph and Paragraph 16, the Committee shall determine the kind and
amount of such securities or property which such holder of an option shall be
entitled to receive. A sale of all or substantially all of the assets of the
Company shall be deemed a merger or consolidation for the foregoing purposes.
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20. APPROVAL OF STOCKHOLDERS
The Plan is subject to the approval of the stockholders of the
Company by written consent or at their next annual meeting or at any special
meeting of the stockholders for which one of the purposes of such a special
meeting shall be to act upon the Plan.
21. GOVERNMENTAL AND OTHER REGULATIONS
The Plan, and the grant and exercise of the rights to purchase
shares hereunder, and the Company's obligation to sell and deliver shares upon
the exercise of rights to purchase shares, shall be subject to all applicable
federal, state and foreign laws, rules and regulations, and to such approvals by
any regulatory or governmental agency as may, in the opinion of counsel for the
Company, be required. The Plan shall be governed by, and construed and enforced
in accordance with, the provisions of Sections 421, 423 and 424 of the Code and
the substantive laws of the Commonwealth of Massachusetts. In the event of any
inconsistency between such provisions of the Code and any such laws, said
provisions of the Code shall govern to the extent necessary to preserve the
favorable federal income tax treatment afforded employee stock purchase plans
under Section 423 of the Code.
* * *
A-8
AWARE, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 29, 2003.27, 2004.
The undersigned stockholder of Aware, Inc. (the "Company"), revoking all
prior proxies, hereby appoints Michael A. Tzannes, Richard P. MobergEdmund C. Reiter and William
R. Kolb, or any of them acting singly, proxies, with full power of substitution,
to vote all shares of capital stock of the Company which the undersigned is
entitled to vote at the Annual Meeting of Stockholders to be held at the
Renaissance Bedford Hotel, 44 Middlesex Turnpike, Bedford, Massachusetts, on
Thursday, May 29, 2003,27, 2004, beginning at 10:00 A.M., local time, and at any
adjournments thereof, upon matters set forth in the Notice of Annual Meeting of
Stockholders dated April 15, 200313, 2004 and the related Proxy Statement, copies of
which have been received by the undersigned, and in their discretion upon any
business that may properly come before the Annual Meeting or any adjournments
thereof. Attendance of the undersigned at the Annual Meeting or any adjournment
thereof will not be deemed to revoke this proxy unless the undersigned shall
affirmatively indicate in writing the intention of the undersigned to vote the
shares represented hereby in person prior to the exercise of this proxy.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN WITH RESPECT TO EITHER OF THE PROPOSALSPROPOSAL SET FORTH ON THE REVERSE SIDE,
WILL BE VOTED FOR EACH SUCHTHE PROPOSAL OR OTHERWISE IN ACCORDANCE WITH THE
RECOMMENDATION OF THE BOARD OF DIRECTORS.
Please promptly date and sign this proxy and mail it in the enclosed envelope to
ensure representation of your shares. No postage need be affixed if mailed in
the United States.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
Please sign exactly as your name(s) appear(s) on your stock certificate. If
shares are held as joint tenants, both should sign. If stockholder is a
corporation, please sign full corporate name by president or other authorized
officer and, if a partnership, please sign full partnership name by an
authorized partner or other authorized person. If signing as attorney, executor,
administrator, trustee or guardian, please give full title as such.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
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Please complete and return the proxy card below.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AWARE, INC.
A STOCKHOLDER WISHING TO VOTE IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD OF DIRECTORS NEED ONLY SIGN AND DATE
THIS PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
DETACH HERE
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[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
- --------------------------------------
AWARE, INC.
- --------------------------------------
1. To elect Michael A. TzannesJohn K. Kerr and G. David Forney, Jr.Ehreth as Class III directors of the
Company.
[ ] FOR ALL NOMINEES
[ ] WITHHELD FROM ALL NOMINEES
[ ]:________________________________] :____________________________________
FOR ALL NOMINEES EXCEPT AS WRITTEN ABOVE
2. To approve an amendment to the Company's 1996 Employee Stock Purchase Plan
to increase the number of shares of common stock authorized for issuance
under the plan from 100,000 to 350,000 shares.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
RECORD DATE SHARES:
Mark box at right if you plan to attend the Annual Meeting. [ ]
Mark box at right if an address change or comment has been noted on [ ]
the reverse side of this card.
Please be sure to sign and date this Proxy. Date
-------------------Date_______________
- ------------------------------ -----------------------------------------------------------
Stockholder sign here Co-owner sign here
DETACH CARD DETACH CARD
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