SCHEDULE 14A
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INFORMATION REQUIRED IN PROXY STATEMENT
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AWARE, INC.
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* * * * *
AWARE, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 25, 2005
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 Wednesday, May 25, 2005, beginning at 10:00 a.m., local time,
for the following purposes:
1. To consider and vote upon the election of three Class III
directors;
2. 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, 2005
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,
Michael A. Tzannes
CHIEF EXECUTIVE OFFICER
April 7, 2005
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 25, 2005
This proxy statement relates to the 2005 annual meeting of stockholders
of Aware, Inc. The annual meeting will take place as follows:
DATE: May 25, 2005
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 13, 2005.
PROXY STATEMENT
TABLE OF CONTENTS
ANNUAL MEETING OF STOCKHOLDERS................................................2
Purpose of the annual meeting..............................................2
Record date................................................................2
Quorum.....................................................................2
Vote required; tabulation of votes.........................................2
Revocation of proxies......................................................3
Solicitation of proxies....................................................3
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING................................3
PROPOSAL--ELECTION OF DIRECTORS...............................................3
CORPORATE GOVERNANCE..........................................................4
DIRECTORS AND EXECUTIVE OFFICERS..............................................5
Directors and executive officers...........................................5
Independent directors......................................................7
Committees and meetings of the board.......................................7
Policy regarding board attendance..........................................9
Communications with our board of directors.................................9
Code of ethics.............................................................9
Compensation committee interlocks and insider participation...............10
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.............................10
Director compensation.....................................................10
Executive compensation....................................................10
REPORT OF THE COMPENSATION COMMITTEE.........................................14
Compensation committee report on executive compensation...................14
Performance graph.........................................................16
REPORT OF THE AUDIT COMMITTEE................................................17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS..........................................................19
Principal stockholders....................................................19
Equity compensation plan information......................................20
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE......................22
INDEPENDENT ACCOUNTANTS......................................................23
Fees for professional services............................................23
Attendance at annual meeting..............................................23
Pre-approval policies and procedures......................................23
STOCKHOLDER PROPOSALS........................................................24
AVAILABLE INFORMATION........................................................24
ANNEX A - AUDIT COMMITTEE CHARTER...........................................A-1
1
ANNUAL MEETING OF STOCKHOLDERS
PURPOSE OF THE ANNUAL MEETING
At the annual meeting, Aware will submit one proposal to the
stockholders:
PROPOSAL: To elect three Class III directors for three-year 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, 2005 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
22,987,531 shares of Aware's common stock, which are entitled to cast 22,987,531
votes. A list of stockholders entitled to notice of the 2005 annual meeting is
available for inspection by any stockholder at our principal office at 44
Middlesex Turnpike, Bedford, MA.
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
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.
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.
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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:
o by giving written notice of revocation to the Secretary of Aware
at the following address:
Aware, Inc.
40 Middlesex Turnpike
Bedford, Massachusetts 01730
Attention: Secretary
o by signing and returning another proxy with a later date; or
o by attending the annual meeting and informing the Secretary 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--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 Frederick D. D'Alessio, Adrian F. Kruse, and Edmund C. Reiter, each of
whom is currently a Class III director of Aware. Mr. Reiter serves as Aware's
President. The directors elected at the annual meeting will hold office until
the annual meeting of stockholders in 2008 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
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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
FREDERICK D. D'ALESSIO, ADRIAN F. KRUSE AND EDMUND C. REITER, AS CLASS III
DIRECTORS OF AWARE.
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
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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.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information regarding Aware's directors and
executive officers as of March 31, 2005:
NAME AGE POSITION
--------------------------------- ----- --------------------------------------
John K. Kerr (1)(2)(3)........ 67 Chairman of the board of directors
Michael A. Tzannes (1)........ 43 Chief executive officer and director
Edmund C. Reiter.............. 41 President and director
Robert J. Weiskopf............ 54 Chief financial officer
Richard W. Gross.............. 47 Senior vice president--engineering
Frederick D. D'Alessio (3)(4). 56 Director
David Ehreth (2)(4)........... 55 Director
G. David Forney, Jr.(3)(4).... 65 Director
Adrian F. Kruse (2)........... 65 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. Prior to that, Mr. Kerr held executive and investment
positions in the healthcare information systems industry. Mr. Kerr was general
partner of Grove Investment Partners, a private investment partnership, until
2003. Mr. Kerr received an M.A. and a B.A. from Baylor University.
MICHAEL A. TZANNES has been with Aware since 1990. He has served as
Aware's chief executive officer since April 1998 and has served as a director of
Aware since March 1998. Mr. Tzannes was Aware's president from April 1998 to
March 2001. From 1986 to 1990, he was a staff engineer at Signatron, Inc. 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 been with Aware since 1992. He has served as
Aware's president since March 2001 and as a director of Aware since December
1999. Mr. Reiter served as senior scientist at New England Research, Inc. from
January 1991 to November 1992. Mr. Reiter received a Ph.D. from the
Massachusetts Institute of Technology and a B.S. from Boston College.
5
ROBERT J. WEISKOPF has been Aware's chief financial officer since April
2004. Prior to joining Aware, Mr. Weiskopf served as corporate controller and
director of finance at Lightbridge, Inc. from 2000 to 2004; director of
reporting and an assistant treasurer at Stone & Webster, Inc. from 1999 to 2000;
several financial management positions at Compaq Computer Corporation from 1980
to 1999; and began his career working at Ernst & Young LLP for five years. Mr.
Weiskopf is a Certified Public Accountant and holds a B.S.B.A. and M.S.B.A. in
accounting from the University of Massachusetts at Amherst.
RICHARD W. GROSS has been with Aware since 1993. He has served as senior
vice president of engineering since July 1999. 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 been 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, Network
Equipment Technologies, Hatteras Networks and SS8 Networks. 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 been a director of Aware since November 1997. From
April 1998 until the sale of its assets to Alcatel in October 2003, Mr. Ehreth
was founder, CEO and Chairman of Westwave Communications, Inc., a
telecommunications software company. From 1992 to 1998, Mr. Ehreth served as
division vice president and senior vice president of access products for DSC
Communications Corporation, a manufacturer of access, digital switching,
transport and private network system products for the telecommunications
industry. In 1987, Mr. Ehreth co-founded Optilink Corporation where he served
until 1992 as vice president of engineering. Optilink was a manufacturer of
access systems for the telecommunications industry. Optilink, Inc. was acquired
by DSC in 1992. From 1977 to 1987, Mr. Ehreth held numerous engineering and
management positions at Digital Telephone Systems, a division of Harris
Corporation. Mr. Ehreth studied electrical engineering at the College of Marin
and at California Polytechnic State University.
G. DAVID FORNEY, JR. has been 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 prior to its acquisition by
Motorola in 1977. Mr. Forney is currently Adjunct Professor in the Department of
Electrical Engineering and Computer Sciences at the Massachusetts Institute of
6
Technology. Mr. Forney received an Sc.D. in electrical engineering from the
Massachusetts Institute of Technology and a B.S.E. in electrical engineering
from Princeton University.
ADRIAN F. KRUSE has been 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 are currently no vacancies on the board of
directors. The current term of Aware's Class III directors, Messrs. D'Alessio,
Kruse, and Reiter will expire at the annual meeting to be held on May 25, 2005.
The current terms of Messrs. Tzannes and Forney, Aware's Class I directors, will
expire at the annual meeting to be held in 2006. The current terms of Messrs.
Kerr and Ehreth, Aware's Class II directors, will expire at the annual meeting
to be held in 2007.
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. D'Alessio, Ehreth, Forney, Kerr 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 2004, the board of directors met four 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.
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 secretary; remove any officer or
director; amend the by-laws of Aware; change the principal office of Aware;
authorize
7
the payment of any dividend or distribution to stockholders of Aware; authorize
the reacquisition of capital stock for value; and authorize a merger. In 2004,
the executive committee neither met nor took action by written consent.
COMPENSATION COMMITTEE. Aware's compensation committee is currently
composed of three outside directors, Frederick D. D'Alessio, G. David Forney,
Jr. and John K. Kerr. In 2004, the compensation committee held four meetings and
took action by written consent three times. 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 John K. Kerr. Aware's board of directors has
determined that Mr. Kruse is an audit committee financial expert under
Securities and Exchange Commission rules. In 2004, the audit committee met ten
times and took action by written consent once. In March, 2004, Aware's board of
directors adopted a new Audit Committee Charter, which is included in this proxy
statement as Annex A and 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 2004, the
nominating and corporate governance committee held two meetings 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, in consultation with
our chief executive officer and the chairman of the board, identifies and
reviews candidates for our board of directors and recommends 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 diversity, and such other factors as the committee
shall deem appropriate.
The committee reviews from time to time the appropriate skills and
characteristics required of board 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
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
Secretary 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. As part of
this responsibility, the committee is responsible for
8
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 the committee or imposed by applicable law or listing standards.
The Committee also develops and recommends to the Board governance
principles applicable to the Company and is responsible for leading an annual
review of the performance of both the Board as a whole and its individual
members. The annual Board review took place in December 2004.
POLICY REGARDING BOARD ATTENDANCE
To the extent reasonably practicable, directors are expected to attend
board meetings and meetings of committees on which they serve. Directors are
encouraged to attend Aware's annual meeting of stockholders. Last year, all 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 a majority of Aware's independent directors. Stockholders wishing to
communicate with the board of directors should send correspondence to the
attention of the Chairman of the Board at Aware, Inc., 40 Middlesex Turnpike,
Bedford, Massachusetts 01730, and 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 number
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 of 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 directors. 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 the board
of directors and will be promptly disclosed on our website at www.aware.com.
9
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Aware's compensation committee is currently composed of Messrs.
D'Alessio, Forney and Kerr. Mr. Kerr formerly served as Aware's assistant vice
president of marketing from June 1992 to November 1994. In 2004, 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 2004.
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.
In 2004, Aware compensated its directors through grants of nonqualified
options under its 1996 Stock Option 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
2004 vest on the schedule 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 EXPIRATION
NAME OPTIONS GRANTED PRICE ($/SH)) DATE
---- ---------------- -------------- ----
John K. Kerr 15,000 (1) 2.95 09/08/14
G. David Forney, Jr. 10,000 (1) 2.95 09/08/14
David Ehreth 10,000 (1) 2.95 09/08/14
Frederick D. D'Alessio 10,000 (1) 2.95 09/08/14
Adrian F. Kruse 10,000 (1) 2.95 09/08/14
--------------------------------
(1) The options vest 50% on September 8, 2004, and the remaining 50% in eight
equal quarterly installments of 6.25% beginning as of December 31, 2004.
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 2004 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.
10
Long-term compensation awards represent stock options granted under
Aware's 1996 Stock Option Plan and Aware's 2001 Nonqualified Stock Plan. In
2002, 2003 and 2004, Aware 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 2002, 2003 and 2004: Mr. Tzannes, $5,500, $6,000 and $6,150; Mr.
Reiter, $2,262, $2,913 and $6,150; Mr. Gross, $3,331, $5,174 and $6,150; Mr.
Martin, $3,141, $3,453 and $3,197. Mr. Weiskopf, who became Aware's Chief
Financial Officer and Treasurer in April 2004, received $3,435 in matching
contributions for 2004.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION($)
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ---------------
--------------------------- ---- --------- -------- ----------
Michael A. Tzannes............. 2004 270,000 -- 125,000 6,414
Chief Executive Officer 2003 281,192 -- 453,752 6,274
2002 300,000 -- 150,000 5,800
Edmund C. Reiter............... 2004 252,000 -- 100,000 6,392
President 2003 262,446 -- 326,635 3,165
2002 280,000 -- 130,000 2,511
Richard W. Gross............... 2004 211,500 -- 50,000 6,441
Senior Vice President 2003 220,267 -- 201,501 5,476
2002 235,000 -- 100,000 3,553
David J. Martin (1)............ 2004 106,569 -- 20,000 3,299
Interim Chief Financial Officer 2003 106,050 25,000 26,383 3,550
2002 104,696 -- 10,000 3,240
Robert J. Weiskopf (2)......... 2004 131,538 -- 65,000 3,702
Chief Financial Officer and 2003 -- -- -- --
Treasurer 2002 -- -- -- --
------------------------------------
(1) Mr. Martin served as our interim chief financial officer from October 2003 through April 2004.
(2) Mr. Weiskopf became our chief financial officer in April 2004.
11
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 2004 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 2004, Aware granted employees and directors options to purchase
an aggregate of 1,268,000 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 values shown are net of the option exercise price, but
do not include deductions for taxes or other expenses associated with the
exercise.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATE OF
SECURITIES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---------------------------------------------------------------------------------------------- ------------ ---------------
Michael A. Tzannes........ 36,415 (1) 3.00% 2.95 09/08/14 67,559 171,207
88,585 (1) 7.30% 2.95 09/08/14 164,346 416,486
-------------- --------------- ---------------- ------------- --------------
Total 125,000 10.30% 231,905 587,693
Edmund C. Reiter 22,352 (1) 1.84% 2.95 09/08/14 41,468 105,089
77,648 (1) 6.40% 2.95 09/08/14 144,056 365,065
-------------- --------------- ---------------- ------------- --------------
Total 100,000 8.24% 185,524 470,154
Richard W. Gross.......... 50,000 (1) 4.12% 2.95 09/08/14 92,762 235,077
-------------- --------------- ---------------- ------------- --------------
Total 50,000 4.12% 92,762 235,077
David J. Martin........... 20,000 (1) 1.65% 2.95 09/08/14 37,105 94,031
-------------- --------------- ---------------- ------------- --------------
Total 20,000 1.65% 37,105 94,031
Robert J. Weiskopf........ 50,000 (2) 4.12% 2.89 05/10/14 90,875 230,296
15,000 (1) 1.24% 2.95 09/08/14 27,829 70,523
-------------- --------------- ---------------- ------------- --------------
Total 65,000 5.36% 118,704 300,819
-----------------------------------
(1) The options vest 50% on September 8, 2004, and the remaining 50% in 8 equal quarterly installments of 6.25%,
beginning as of December 31, 2004.
(2) The options vest in 16 equal quarterly installments of 6.25%, beginning as of June 30, 2004.
12
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES. The following table
provides information concerning stock options exercised during 2004 and stock
options held as of December 31, 2004 by the executive officers.
None of the executive officers exercised options in 2004. 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 $4.85 per share, the last sale price of the common stock on December
31, 2004, as reported by the Nasdaq National Market, less the applicable option
exercise prices. Actual gains, if any, will depend on the value of the common
stock on the date of the sale of the shares.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR END($)
ACQUIRED ON VALUE -------------------------- --------------------
NAME EXERCISE (#REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
---- ----------- ------------ -------------- -------------- -------------- ----------------
Michael A. Tzannes...... 0 0 475,741 103,907 775,936 181,673
Edmund C. Reiter........ 0 0 335,696 90,939 548,400 157,684
Richard W. Gross........ 0 0 196,969 54,532 320,211 93,161
David J. Martin......... 0 0 34,038 12,345 57,380 22,305
Robert J. Weiskopf...... 0 0 17,813 47,187 34,407 92,093
13
REPORT OF THE COMPENSATION COMMITTEE
The compensation committee established by the board of directors is
composed of three outside directors, Frederick D. D'Alessio, G. David Forney,
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 2004.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION OBJECTIVES. Aware's executive compensation programs are
generally designed to assure that senior executives of the Company are
compensated effectively in a manner consistent with the strategy of the Company,
competitive practice, and the requirements of appropriate regulatory bodies.
EXECUTIVE COMPENSATION. Aware's executive compensation package for 2004
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 2004, 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 W. Gross and Robert J. Weiskopf. The options granted
to Messrs. Tzannes, Reiter, Gross and Weiskopf 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 economic conditions, Aware's financial performance and each individual's
performance.
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 2004 was to be competitive with other
companies in the industry. The compensation committee
14
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.
POLICY REGARDING SECTION 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 2004, 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.
The compensation committee
Frederick D. D'Alessio
G. David Forney, Jr.
John K. Kerr
15
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 index, the RDG
Technology Composite 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, 1999. 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.
COMPARSION OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG AWARE, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE RDG TECHNOLOGY COMPOSITE INDEX
[PERFORMANCE GRAPH]
* $100 invested on 12/31/99 in stock or
including reinvestment of dividends
Fiscal year ending December 31.
VALUE OF INVESTMENT ($)
-------------------------------------------------------------
12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
-------- -------- -------- -------- -------- --------
Aware, Inc.................................. 100.00 48.80 22.82 5.99 7.99 13.33
Nasdaq Stock Market - U.S................... 100.00 60.09 45.44 26.36 38.55 40.87
RDG Technology Composite.................... 100.00 91.24 77.41 58.09 75.82 84.16
16
REPORT OF THE AUDIT COMMITTEE
The purpose of the audit committee is to assist the board of directors
in its general oversight of Aware's financial reporting process. The Audit
Committee Charter describes in greater detail the full responsibilities of the
committee and is included in this proxy statement as ANNEX A and is available on
Aware's website at www.aware.com. The audit committee is comprised solely of
independent directors as defined by the listing standards of the Nasdaq Stock
Market.
Management is responsible for the preparation, presentation and
integrity of Aware's financial statements; accounting and financial reporting
principles; establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15 (e)); establishing and maintaining internal
control over financial reporting (as defined in Exchange Act Rule 13a-15 (f));
evaluating the effectiveness of disclosure controls and procedures; evaluating
the effectiveness of internal control over financial reporting; and evaluating
any change in internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, internal control over
financial reporting. PricewaterhouseCoopers LLP is responsible for performing an
independent audit of the consolidated financial statements and expressing an
opinion on the conformity of those financial statements with accounting
principles generally accepted in the United States of America, as well as
expressing an opinion on (i) management's assessment of the effectiveness of
internal control over financial reporting and (ii) the effectiveness of internal
control over financial reporting.
During the course of 2004, management completed the documentation,
testing and evaluation of Aware's system of internal control over financial
reporting in response to the requirements set forth in Section 404 of the
Sarbanes-Oxley Act of 2002 and PCAOB Auditing Standard No. 2 regarding the audit
of internal control over financial reporting. The audit committee was kept
apprised of the progress of the evaluation and provided oversight to management
during the process. In connection with this oversight, the committee received
periodic updates provided by management and PricewaterhouseCoopers LLP at
regularly scheduled committee meetings. The committee reviewed the report of
management contained in Aware's Annual Report on Form l0-K for the year ended
December 31, 2004 filed with the Securities and Exchange Commission, as well as
PricewaterhouseCoopers LLP's Report of Independent Registered Public Accounting
Firm included in Aware's Annual Report on Form l0-K related to its audit of (i)
the consolidated financial statements and financial statement schedule, (ii)
management's assessment of the effectiveness of internal control over financial
reporting and (iii) the effectiveness of internal control over financial
reporting. The audit committee continues to oversee Aware's efforts related to
its internal control over financial reporting and management's preparations for
the evaluation in 2005.
The audit committee has reviewed and discussed the consolidated
financial statements with management and PricewaterhouseCoopers LLP, Aware's
independent auditors. The audit committee has discussed with
PricewaterhouseCoopers LLP the matters required to be discussed by Statement on
Auditing Standards No. 61, as amended, "Communication with Audit Committees" and
PCAOB "Auditing Standard No. 2 An Audit of Internal Control Over Financial
Reporting Performed in Conjunction with an Audit of Financial Statements." In
addition, PricewaterhouseCoopers LLP has provided the audit committee with the
written disclosures and
17
the letter required by the Independence Standards Board Standard No.1, as
amended, "Independence Discussions with Audit Committees," and the audit
committee has discussed with PricewaterhouseCoopers LLP their firm's
independence.
Based on the review of the consolidated financial statements and
discussions with and representations from management and PricewaterhouseCoopers
LLP referred to above, the audit committee recommended to the board of directors
that the audited financial statements be included in Aware's Annual Report on
Form 10-K for 2004, for filing with the Securities and Exchange Commission.
The audit committee
Adrian F. Kruse, Chairman
David Ehreth
John K. Kerr
18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
At the close of business on March 31, 2005, there were issued and
outstanding 22,987,531 shares of common stock entitled to cast 22,987,531 votes.
On March 31, 2005, the closing price of Aware's common stock as reported by the
Nasdaq National Market was $4.36 per share.
PRINCIPAL STOCKHOLDERS
The following table provides information about the beneficial ownership
of Aware's common stock as of March 31, 2005 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; and
o all of Aware's current executive officers and directors as a
group.
In accordance with Securities 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, 2005 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 22,987,531 shares of
common stock outstanding as of March 31, 2005. 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, 2005. All shares
included in the "Right to acquire" column represent shares subject to
outstanding stock options exercisable within 60 days after March 31, 2005. The
information as to each person has been furnished by such person.
19
NUMBER OF SHARES BENEFICIALLY OWNED
--------------------------------------------- PERCENT
OUTSTANDING RIGHT TO TOTAL BENEFICIALLY
NAME SHARES ACQUIRE NUMBER OWNED
-------------------------------------------------------------
John S. Stafford, Jr. (1)................... 2,691,527 0 2,691,527 11.7%
230 S. LaSalle Street, Suite 688
Chicago, IL 60604
State of Wisconsin Investment Board (2)..... 1,651,000 0 1,651,000 7.2%
P.O. Box 7842
Madison, WI 53707
Dimensional Fund Advisors Inc (3)........... 1,592,131 0 1,592,131 6.9%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
John K. Kerr .............................. 693,588 133,500 827,088 3.6%
Michael A. Tzannes (4) ..................... 108,215 1,293,710 1,401,925 5.8%
Edmund C. Reiter ........................... 10,161 952,259 962,420 4.0%
Richard W. Gross ........................... 8,000 249,313 257,313 1.1%
Robert J. Weiskopf ......................... 0 21,875 21,875 0.1%
David Ehreth................................ 0 80,437 80,437 0.3%
G. David Forney, Jr......................... 0 94,165 94,165 0.4%
Frederick D. D'Alessio...................... 0 38,625 38,625 0.2%
Adrian F. Kruse............................. 10,000 35,625 45,625 0.2%
-------------------------------------------------------------
All directors and executive officers
as a group (9 persons) .................. 829,964 2,899,509 3,729,473 14.4%
------------------------------------
* Less than one percent.
(1) The number of shares beneficially owned by John S. Stafford, Jr. is based upon information in a Schedule 13G/A
filed by John S. Stafford, Jr. on March 7, 2005.
(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 15, 2005.
(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 9, 2005.
(4) Includes 20,000 shares held by a private charitable foundation, of which Mr. Tzannes and his wife are trustees.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth additional information as of December 31,
2004, 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.
20
NUMBER OF SHARES TO WEIGHTED-AVERAGE NUMBER OF SHARES REMAINING
BE ISSUED UPON EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF OUTSTANDING OUTSTANDING UNDER EQUITY COMPENSATION
OPTIONS, WARRANTS AND OPTIONS, WARRANTS AND PLANS (EXCLUDING SHARES
RIGHTS (#) RIGHTS REFLECTED IN COLUMN (A))(#)
------------------------ --------------------- ----------------------------
PLAN CATEGORY (A) (B) (C)
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS:
1990 Stock Option Plan............. 896 $1.30 0
1996 Stock Option Plan............. 2,848,809 $4.22 1,178,570
1996 Employee Stock
Purchase Plan.................. -- -- 172,680
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS:
2001 Nonqualified Stock Plan....... 1,660,103 $3.47 6,293,809
------------------------------------------------------------------------------
Total............... 4,509,808 $3.94 7,645,059
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 Messrs. D'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.
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.
21
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 (a) the number and kind of shares of stock or
securities with respect to which awards may thereafter be granted, (b) the
number and kind of shares remaining subject to outstanding awards under the
plan, and (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.
SECTION 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 Securities 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 2004, or written representations that
Form 5 was not required for 2004, 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, with
the exception of John S. Stafford, Jr., who failed to file on a timely basis 8
Form 4s with respect to 5 sales and 7 purchases of shares of common stock. The
majority of these transactions involved purchases or sales of 100 shares of
stock and none involved more than 1,400 shares of stock.
22
INDEPENDENT ACCOUNTANTS
The audit committee has selected PricewaterhouseCoopers LLP as
independent accountants to audit the financial statements of Aware for the year
ending December 31, 2005. 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 2004 and 2003.
Audit Fees consist of aggregate fees billed for professional services rendered
for the audit of our annual financial statements and review of the interim
financial statements included in quarterly reports or services that are normally
provided by the independent auditor in connection with statutory and regulatory
filings or engagements for the fiscal years ended December 31, 2004 and December
31, 2003, respectively. In 2004, audit fees also include fees for professional
services rendered for the audits of: (i) management's assessment of the
effectiveness of internal controls over financial reporting and (ii) the
effectiveness of internal controls over financial reporting. 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 review of regulatory
matters 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.
2004 FEES 2003 FEES
--------- ---------
AUDIT FEES ......................... $ 211,000 $ 119,500
AUDIT-RELATED FEES.................. 2,800 14,200
TAX FEES ........................... 0 4,037
ALL OTHER FEES ..................... 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.
PRE-APPROVAL POLICIES AND PROCEDURES
At present, our audit committee approves each engagement for audit or
non-audit services before we engage PricewaterhouseCoopers LLP to provide those
services. However, the audit committee may delegate to members of the committee
the authority to pre-approve audit and non-audit services. The decisions of any
committee member to whom pre-approval authority is delegated must be presented
to the full audit committee at its next scheduled meeting.
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Our audit committee has not established any pre-approval policies or
procedures that would allow our management to engage PricewaterhouseCoopers LLP
to provide any specified services with only an obligation to notify the audit
committee of the engagement for those services. None of the services provided by
PricewaterhouseCoopers LLP for 2003 or 2004 was obtained in reliance on the
waiver of the pre-approval requirement afforded in SEC regulations.
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 15, 2005.
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, 2006.
AVAILABLE INFORMATION
STOCKHOLDERS OF RECORD ON APRIL 1, 2005 WILL RECEIVE COPIES OF THIS
PROXY STATEMENT AND AWARE'S 2004 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. ROBERT J. WEISKOPF, CHIEF
FINANCIAL OFFICER, AWARE, INC., 40 MIDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS
01730
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ANNEX A
AWARE, INC.
AUDIT COMMITTEE CHARTER
I. ORGANIZATION
CHARTER. This charter governs the operations of the Audit Committee (the
"Committee"). The Committee shall review and reassess the charter at least
annually and obtain the approval of 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 maintain free and open communication between
the Committee, independent auditor, and management of the Company.
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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.
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
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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) 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.
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,
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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 ultimate authority and responsibility to engage or
terminate any such independent advisers and to approve the terms of any such
engagement and the fees to be paid to any such adviser. The Committee may also
request that any officer or other employee of the Company, the Company's outside
counsel or any other person meet with any members of, or independent advisers
to, the Committee.
FUNDING. The Company shall provide for appropriate funding, as determined by the
Committee, for payment of
(i) compensation to any independent auditor;
(ii) compensation to advisers employed by the Committee; and
(iii) ordinary administrative expenses of the Committee 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 Committee.
COMMITTEE MEMBERS
Adrian Kruse (Chair)
David Ehreth
John K. Kerr
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