UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
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AWARE, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
NOT APPLICABLE
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AWARE, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 23, 2007
Aware, Inc. hereby gives notice that it will hold its annual meeting of
stockholders at the Bedford Glen Hotel, 44 Middlesex Turnpike, Bedford,
Massachusetts on Wednesday, May 23, 2007, beginning at 10:00 a.m., local time,
for the following purposes:
1. To consider and vote upon the election of two Class II
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 3, 2007
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 6, 2007
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 23, 2007
This proxy statement relates to the 2007 annual meeting of stockholders
of Aware, Inc. The annual meeting will take place as follows:
DATE: May 23, 2007
TIME: 10:00 a.m.
PLACE: Bedford Glen 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, 2007.
PROXY STATEMENT
TABLE OF CONTENTS
ANNUAL MEETING OF STOCKHOLDERS............................................3
Purpose of the annual meeting..........................................3
Record date............................................................3
Quorum.................................................................3
Vote required; tabulation of votes.....................................3
Revocation of proxies..................................................4
Solicitation of proxies................................................4
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING............................4
PROPOSAL--ELECTION OF DIRECTORS...........................................4
CORPORATE GOVERNANCE......................................................5
DIRECTORS AND EXECUTIVE OFFICERS..........................................6
Directors and executive officers.......................................6
Certain relationships and related transacations........................8
Committees and meetings of the board...................................9
Policy regarding board attendance.....................................10
Communications with our board of directors............................10
Code of ethics........................................................11
Compensation committee interlocks and insider participation...........11
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS.........................11
COMPENSATION DISCUSSION AND ANALYSIS.....................................11
COMPENSATION COMMITTEE REPORT............................................17
EXECUTIVE COMPENSATION...................................................18
DIRECTOR COMPENSATION....................................................22
REPORT OF THE AUDIT COMMITTEE............................................24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS...............................26
Principal stockholders................................................26
Equity compensation plan information..................................27
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..................29
INDEPENDENT ACCOUNTANTS..................................................30
Fees for professional services........................................30
Attendance at annual meeting..........................................30
Pre-approval policies and procedures..................................30
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STOCKHOLDER PROPOSALS....................................................31
AVAILABLE INFORMATION....................................................31
ANNEX A - AUDIT COMMITTEE CHARTER.......................................A-1
ANNEX B - COMPENSATION COMMITTEE CHARTER................................B-1
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ANNUAL MEETING OF STOCKHOLDERS
PURPOSE OF THE ANNUAL MEETING
At the annual meeting, Aware will submit one proposal to the
stockholders:
PROPOSAL: To elect two Class II 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
3, 2007 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
23,698,962 shares of Aware's common stock, which are entitled to cast 23,698,962
votes. A list of stockholders entitled to notice of the 2007 annual meeting is
available for inspection by any stockholder at our principal office at 40
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 II 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, Computershare Trust Co., Inc., will tabulate the
votes at the annual meeting. Computershare 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 II directors
John K. Kerr and Mark G. McGrath, each of whom is currently a Class II director
of Aware. Mr. Kerr serves as Aware's chairman. The directors elected at the
annual meeting will hold office until the annual meeting of stockholders in 2010
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
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annual meeting, proxies will be voted for another nominee that our board's
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 JOHN
K. KERR AND MARK G. MCGRATH, AS CLASS II 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, G.
David Forney, Jr., John K. Kerr , Mark G. McGrath and Adrian F.
Kruse. The board of directors also determined that David Ehreth
was an independent director during his tenure as a director.
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
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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, 2007:
NAME AGE POSITION
---------------------------------- --- ------------------------------------
John K. Kerr (1)(2)(3)(4)......... 69 Chairman of the board of directors
Michael A. Tzannes (1)............ 45 Chief executive officer and director
Edmund C. Reiter.................. 43 President and director
Keith E. Farris................... 59 Chief financial officer
Richard W. Gross.................. 49 Senior vice president--engineering
Frederick D. D'Alessio (2)(3)..... 58 Director
G. David Forney, Jr.(3)(4)........ 67 Director
Adrian F. Kruse (2)(4)............ 67 Director
Mark G. McGrath (3)............... 60 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 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.
KEITH E. FARRIS has been Aware's chief financial officer since May 2006.
Prior to joining Aware, Mr. Farris served as vice president of finance and chief
financial officer at Lojack Corporation from 2000 to 2006; as vice president of
finance and chief financial officer at Arkwright, Inc. from
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1996 to 2000; several financial management positions at Digital Computer
Corporation from 1981 to 1996; as director of internal audit at Modular Computer
Systems from 1978 to 1981; and began his career working at Ernst & Young LLP for
four years. Mr. Farris is a Certified Public Accountant, a member of the
American Institute of CPAs and Financial Executives International. Mr. Farris
holds a B.A. in business management and MBA from Northeastern University.
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 Network Equipment
Technologies 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.
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
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.
MARK G. MCGRATH has been a director of Aware since September 2006. Mr.
McGrath retired as a Director of McKinsey & Company, a private management
consulting firm, in December 2004, having served in that firm for twenty-seven
years. Mr. McGrath led the firm's Americas' Consumer Goods Practice from January
1998 until December 2003. Mr. McGrath has served as a senior advisor with
Gleacher Partners LLC, a firm providing strategic advisory services to
corporations, in a part time capacity since January 2005. Mr. McGrath currently
serves as a Director of GATX Corporation, as a Director of the Lincoln Park Zoo,
on the Advisory Council for the University of Chicago's Graduate
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School of Business and on two Advisory Councils at the University of Notre Dame:
the Kroc Peace Institute and as chair of the Kellogg International Studies
Institute. Mr. McGrath holds a B.B.A. in Accounting from the University of Notre
Dame and an M.B.A. in Finance from the University of Chicago.
David Ehreth, a director of Aware since November 1997, resigned from his
position as a director of Aware on March 10, 2006. Robert J. Weiskopf, the chief
financial officer of Aware since April 2004, resigned from his position as chief
financial officer of Aware on May 30, 2006.
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 terms of Messrs. Tzannes and Forney, Aware's Class I
directors, will expire at the annual meeting to be held in 2009. The current
term of Messrs. Kerr and McGrath, Aware's Class II directors, will expire at the
annual meeting to be held on May 23, 2007. The current terms of Messrs.
D'Alessio, Kruse, and Reiter, Aware's Class III directors, will expire at the
annual meeting to be held in 2008.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2007, the Board formally adopted a written policy with respect
to related person transactions to document procedures pursuant to which such
transactions are reviewed and approved. The policy applies to any transaction in
which (1) the Company is a participant, (2) any related person has a direct or
indirect material interest and (3) the amount involved exceeds $120,000, but
excludes any transactions available to all employees or shareholders of the
Company on the same terms. The Audit Committee, with assistance from the
Company's General Counsel, is responsible for reviewing and approving any
related person transaction. The policy requires that the Audit Committee must
approve any related party transaction subject to the policy before commencement
of the related party transaction. The policy states that the Audit Committee
will approve only those related person transactions that the Audit Committee
determines are beneficial to the Company and the terms of which are fair to the
Company.
In 2006, the Company had two transactions with related persons. Marcos
Tzannes, the brother of Michael Tzannes, Aware's CEO, has been employed by Aware
since February 8, 1993 and currently serves in the role of Vice President,
Strategic Technology. In 2006, Marcos Tzannes' total compensation was $258,499
which included salary based upon his position within the Company, background and
years of experience, income from the exercise and sale of company stock pursuant
to the Company stock option plans, the value of stock options granted pursuant
to the Company stock option plans (based on a Black-Scholes value), the value of
an unrestricted stock award as part of an employee unrestricted stock award
program and company contributions for standard company benefits. Alexis Tzannes,
the brother of Michael Tzannes, Aware's CEO, has been employed by Aware since
August 2, 1999 and currently serves in the role of Principal Engineer. In 2006,
Alexis Tzannes' total
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compensation was $126,042 which included salary based upon his position within
the Company, background and years of experience, the value of stock options
granted pursuant to the Company stock option plans (based on a Black-Scholes
value), the value of an unrestricted stock award as part of an employee
unrestricted stock award program, and company contributions for standard company
benefits. The FAS 123(R) compensation expense recorded in 2006 for Marcos
Tzannes was $29,014 and for Alexis Tzannes was $8,178.
COMMITTEES AND MEETINGS OF THE BOARD
During 2006, the board of directors met four times and took action by
written consent twice. 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 the payment of any dividend or distribution to stockholders of Aware;
authorize the reacquisition of capital stock for value; and authorize a merger.
In 2006, the executive committee neither met nor took action by written consent.
COMPENSATION COMMITTEE. Aware's compensation committee is currently
composed of four outside directors, Frederick D. D'Alessio, G. David Forney,
Jr., Mark G. McGrath and John K. Kerr who serves as chairman. In 2006, the
compensation committee held five meetings and took action by written consent
seven times. In March 2004, Aware's board of directors adopted a Compensation
Committee Charter, which it amended in March 2007. The Compensation Committee
Charter, as amended, is available on Aware's website at www.aware.com.
AUDIT COMMITTEE. Aware's audit committee is currently composed of
Frederick D. D'Alessio, John K. Kerr and Adrian F. Kruse who serves as chairman.
Aware's board of directors has determined that Mr. Kruse is an audit committee
financial expert under Securities and Exchange Commission rules. In 2006, the
audit committee met eight times and took no action by written consent. In March,
2004, Aware's board of directors adopted a new Audit Committee Charter, which 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,
John K. Kerr, Adrian F. Kruse and G. David Forney, Jr. who serves as chairman.
In 2006, 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.
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
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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. John K. Kerr, Aware's chairman, recommended Mark G. McGrath to the
Nominating and Corporate Governance Committee for nomination as a director.
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 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 2006.
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.
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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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Aware's compensation committee is currently composed of Messrs.
D'Alessio, Forney, McGrath and Kerr. Mr. Kerr formerly served as Aware's
assistant vice president of marketing from June 1992 to November 1994. In 2006,
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 2006.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
COMPENSATION DISCUSSION AND ANALYSIS
OVERVIEW. The Compensation Committee has the responsibility to review the
performance and development of Company management in achieving corporate goals
and objectives and 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 the appropriate regulatory bodies.
Toward that end, the Compensation Committee oversees, reviews and administers
all compensation, equity and employee benefit plans and programs. The
Compensation Committee is responsible for reviewing annually and determining the
individual elements of total compensation for the Company's chief executive
officer and all other corporate officers. The Compensation Committee may
delegate any of its responsibilities to a subcommittee of one or more members of
the Committee, the chief executive officer or to a committee of senior executive
officers when appropriate and consistent with applicable law. The Compensation
Committee acts pursuant to a charter that has been approved by the board of
directors.
COMPENSATION PROGRAM OBJECTIVES. The objectives of the Company's executive
compensation programs are to attract, motivate and retain executives who drive
the Company's success and 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. The
executive compensation programs are designed to reward individuals for advancing
business strategies, further developing the Company and its people, and the
achievement of individual and Company performance goals. In 2006, the
Compensation Committee took into consideration the Company's achievement of
certain revenue targets in determining the potential bonus for Michael A.
11
Tzannes, the Company's chief executive officer, and Edmund C. Reiter, the
Company's president. The Compensation Committee also took into consideration the
roles of Mr. Tzannes and Mr. Reiter in the completion of new licensing business
relationships in determining a cash bonus for each in 2006. The Compensation
Committee also takes into consideration the individual's performance in
determining the compensation elements for each of the Company's Named Executive
Officers.
ROLE OF EXECUTIVE OFFICERS IN DETERMINING EXECUTIVE COMPENSATION. The Company's
CEO assists the Compensation Committee in determining executive compensation
including recommendations for executive officer compensation. The Compensation
Committee makes the final determination on executive compensation for all the
Company's executives, including the Named Executive Officers shown in the tables
under Executive Compensation.
CORPORATE PERFORMANCE GOALS. The Company utilizes corporate performance goals in
reviewing the overall compensation for executives. More specifically, the
Company utilizes corporate performance goals primarily in determining the amount
of the cash incentive award to give to executives. The Company structures the
cash incentive award program to executives based upon a percentage attainment of
certain corporate performance goals. During 2006, the Company's achievement of
revenue growth was deemed a key corporate performance goal. The Compensation
Committee may in its discretion increase or reduce awards or payments based upon
executive performance. For 2007, the Compensation Committee has determined that
reaching certain operational targets and/or certain financial targets such as
revenue, operating income and/or earnings per share are key corporate
performance goals.
OPTION GRANT TIMING/PRICING. The Company's practice with regard to the granting
of stock options is to typically grant stock options in the following
circumstances: 1) at regularly scheduled board meetings; 2) upon the new hire of
certain employees or directors; and 3) subsequent to the annual performance or
compensation review of employees, executives, directors and officers soon after
one of the Company's quiet period ends. The Company's quiet period begins two
weeks prior to the end of a fiscal quarter and ends two days after the Company
announces financial results for said fiscal quarter. Historically, it has been
the Company's practice to price options based on the closing price of the Aware
common stock on the date that the Compensation Committee executes a Compensation
Committee consent granting the stock options.
COMPENSATION BENCHMARKING. In 2005, the Compensation Committee contracted with
Hewitt Associates, a third party compensation consultant to compile director and
officer compensation data and information. Hewitt Associates gathered benchmark
information with respect to cash and equity-based compensation from a list of
comparable companies (the "Compensation Peer Group"). The Compensation Peer
Group is comprised of companies with similar products or business models and
comparable enterprise values to the Company. The Compensation Peer Group was
selected by the Company, reviewed by Hewitt Associates and was approved by the
Compensation Committee. In 2006, the Company updated the compensation data and
information using publicly available compensation information. The companies
comprising the Compensation Peer Group for 2006 were:
Ampex Corporation Portal Software, Inc.
Captaris, Inc. S1 Corporation
12
Centillium Communications, Inc. Seachange International
Endwave Corporation Supportsoft, Inc.
Metasolv, Inc. Terayon Communication Systems
MIPS Technologies, Inc. Tollgrade Communications, Inc.
Monolithic, Inc. Transmeta Corporation
Nestor, Inc. Transwitch Corporation
Netopia, Inc. Tut Systems, Inc.
Netscout Systems, Inc. Watchguard Technologies, Inc.
Optical Communication Products, Inc.
The 2006 Compensation Peer Group differed from the 2005 Compensation Peer Group
as follows: Brooktrout, Inc., Concord Communications, Inc., Paradyne Networks,
Inc. and Proxim Corp. were removed while Nestor, Inc., Netscout Systems, Inc.,
S1 Corporation and Seachange International were added to the Compensation Peer
Group.
The following compensation elements are benchmarked: (i) total annual cash
compensation (base salary and bonus) and (ii) three-year average compensation
from long-term incentives (restricted stock grants, performance plans and stock
option grants) based upon the Black Scholes or actual value of such incentives.
Stock option grants are also benchmarked by reviewing (i) a three year average
of the number of options granted, (ii) a three year average of the number of
shares granted as a percentage of total shares outstanding and (iii) number of
shares held as a percentage of total shares outstanding. The 2006 benchmark data
was compiled from compensation information for 2004 fiscal years from the
Compensation Peer Group companies. The Compensation Committee utilizes this
information in determining the compensation and stock option grants to its
executive officers.
COMPENSATION PROGRAM ELEMENTS. The Company's executive compensation package for
2006 consisted of two principal elements: cash and a stock-based equity
incentive in the form of participation in the Company's stock option plans. The
cash element includes base salary and any cash incentive or bonus award earned
for performance goals achieved during the year.
SALARY
The salary element of the Company's executive compensation policy is designed to
give executives assurance of a base level of compensation commensurate with the
executive's position and duration of employment with the Company and competitive
with salaries for officers holding comparable positions in the industry. In
2006, Mr. Tzannes, the Company's chief executive officer, was awarded a base
salary increase from $300,000 to $375,000; Edmund C. Reiter, the Company's
president, was awarded a base salary increase from $280,000 to $310,000 and
Richard W. Gross, the Company's senior vice president of engineering, was
awarded a base salary increase from $235,000 to $250,000 in recognition of their
individual contributions to the Company and compensation relative to others in
the industry.
13
The salary increases were also based upon a review of the salaries of comparable
positions in the Compensation Peer Group.
Mr. Tzannes' salary is between the median and 75th percentile of other chief
executive officers in the Compensation Peer Group. Mr. Reiter's salary is above
the 75th percentile of other presidents (or comparable executives) in the
Compensation Peer Group. Mr. Gross' salary is competitive with other senior
engineering executive with similar levels of responsibility and experience.
On May 31, 2006, Keith E. Farris joined the Company as its chief financial
officer and treasurer. Mr. Farris was awarded a base salary of $210,000. Mr.
Farris' salary is between the 25th percentile and the median of other chief
financial officers in the Compensation Peer Group. Mr. Farris replaced Robert J.
Weiskopf who served as the Company's chief financial officer and treasurer until
May 30, 2006. Mr. Weiskopf received $85,317 in salary and $75,000 in severance
payments in 2006.
CASH INCENTIVE COMPENSATION
The annual cash incentive program is designed to provide executives with
competitive compensation linked to Company performance goals. In March 2006, the
Compensation Committee approved a potential bonus for 2006 of up to $100,000
each to Mr. Tzannes, chief executive officer, and Mr. Reiter, president, subject
to the discretion of the Board of Directors based upon the Company's achievement
of certain revenue targets for 2006. The award granted to Mr. Tzannes based upon
the Board of Directors' discretion consisted of $70,325 for achieving certain
revenue targets for the Company's business and an additional $17,805 for his
role in leading the Company to its second best year in the Company's history.
The compensation was earned in 2006 and approved and paid in February 2007. In
March 2006, the Compensation Committee also approved a bonus of $25,000 to Mr.
Tzannes for his role in the completion of new licensing business relationships.
The compensation was earned in 2006 and approved and paid in March 2006. Mr.
Tzannes' cash incentive was above the 75th percentile of other chief executives
in the Compensation Peer Group. The award granted to Mr. Reiter based upon the
Board of Directors' discretion consisted of an award of $75,000 for exceeding
certain product line revenue targets and an additional $14,000 for his role in
helping the Company achieve substantial growth and advancement of the business
in 2006. The compensation was earned in 2006 and approved and paid in February
2007. In March 2006, the Compensation Committee also approved a bonus of $25,000
to Mr. Reiter for his role in the completion of new licensing business
relationships. The compensation was earned in 2006 and approved and paid in
March 2006. Mr. Reiter's cash incentive was between the median and the 75th
percentile of other presidents (or comparable executives) in the Compensation
Peer Group.
In February 2007, the Compensation Committee approved a potential bonus for 2007
of up to $125,000, $200,000, $35,000 and $25,000 to Michael A. Tzannes, CEO,
Edmund C. Reiter, President, Keith E. Farris, CFO, and Richard W. Gross, SVP,
Engineering, respectively, subject to the Board of Director's discretion, based
upon the Company reaching certain revenue and/or earnings targets as well as
each executive achieving certain operational goals. For each executive, up to
70% of the eligible bonus is earned by achieving certain revenue and/or earnings
targets and up to 30% for achieving certain operational goals.
14
STOCK-BASED EQUITY INCENTIVE COMPENSATION
The Company emphasizes stock options in order to align the interests of
management with the stockholders' interests in the financial performance of the
Company for fiscal quarters, the fiscal year and the longer term. In determining
stock option grants, the Company considers the three-year average value
resulting from long-term incentive compensation such as restricted stock grants,
performance plans and stock option grants made at companies in the Compensation
Peer Group. The value of stock options is based upon the Black-Scholes formula.
The Company also considers in part the value of options held by the executive
officers and the extent to which the Company believed those options would
provide sufficient motivation to the executive officers to achieve the Company's
goals. In 2005, the Company granted stock option awards to Mr. Tzannes of
800,000 options and Mr. Reiter of 600,000 options to give these executives a
level of stock-based equity incentive compensation commensurate with the
executive's position and competitive with the three year average stock-based
equity incentive compensation of comparable executives at Compensation Peer
Group companies. In 2006, no stock options were granted to either Mr. Tzannes or
Mr. Reiter. The three year average value of stock-based equity incentive
compensation for Mr. Tzannes was at the 75th percentile of other chief
executives in the Compensation Peer Group and for Mr. Reiter was between the
median and 75th percentile of presidents (or comparable officers) in the
Compensation Peer Group. In 2006, the Company granted stock options in the
amount of 75,000 to Keith E. Farris, CFO upon his joining the Company in May
2006. The grant to Mr. Farris was targeted between the 25th percentile and the
median of CFOs in the Compensation Peer Group. Richard W. Gross, SVP,
Engineering was granted 40,000 stock options in recognition of his individual
contributions to the Company.
In determining the fair value of each option grant, the Company used the
following assumptions:
Year ended December 31,
2006 2005 2004 2003
----------- ----------- ------------- -----------
Average risk-free interest rate............. 4.55-4.99% 4.05% 3.74% 2.97%
Expected life of option grants.............. 3.25-6.25 3-5 years 5 years 5 years
years
Expected volatility of underlying stock..... 60%-67% 67%-87% 93% 95%
Expected dividend yield..................... - - - -
OTHER COMPENSATION
The Company's executive officers are 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.
SALARY & BONUS IN PROPORTION TO TOTAL COMPENSATION
In 2006, the salary and cash incentive compensation for Mr. Tzannes represented
approximately 84% of his total compensation. In 2006, the salary and cash
incentive compensation for Mr. Reiter represented approximately 85% of his total
compensation. Mr. Tzannes and Mr. Reiter did not receive any stock-based
compensation in 2006. In 2006, the salary and cash incentive
15
compensation for Mr. Gross represented approximately 76% of his total
compensation. In 2006, the salary and cash incentive compensation for Mr. Farris
represented approximately 69% of his total compensation. Mr. Farris joined the
Company in May 2006.
COMPENSATION PROGRAM ELEMENTS RATIONALE. In establishing compensation for
executives, the Company's Compensation Committee monitors salaries, other cash
compensation and stock options at other companies, particularly companies with
similar enterprise value and companies in the same industry. In addition, for
each executive the Compensation Committee considers historic salary levels, work
responsibilities and compensation relative to other executives at the Company.
The Compensation Committee also considers general economic conditions, the
Company's performance and each individual's performance. Finally, the
Compensation Committee utilizes market benchmark information described earlier
in recommending the compensation and stock option grants to its executive
officers so that their overall compensation is competitive with comparable
companies.
The Company's selection of the cash and stock-based equity incentive as the
primary elements of executive compensation is in furtherance of the Company's
compensation program objectives. The cash element, including the base salary and
cash incentive program, along with the stock-based equity incentive element help
the Company to achieve the objective of attracting, motivating and retaining
executives who drive the Company's success. The Company has determined that the
aforementioned elements help to achieve the Company's compensation objectives
and that additional compensation elements are not required.
IMPACT OF ACCOUNTING AND TAX TREATMENTS ON COMPENSATION. The Company reviews the
compensation provided to executive officers in conjunction with the potential
tax consequences that may result with respect to certain compensation elements.
For example, Section 162(m) of the Internal Revenue Code limits the Company's
ability to deduct, for income tax purposes, compensation in excess of $1.0
million paid to the chief executive officer and the four most highly compensated
executive officers of the Company (other than the chief executive officer) in
any year, unless the compensation qualifies as "performance-based compensation."
Equity awards that the Company grants under its 2001 Nonqualified Stock Plan do
not qualify as "performance-based compensation" because the Plan has not been
approved by the Company's stockholders. In 2006, the aggregate base salaries,
bonuses and other non-equity compensation of the Company's executive officers
did not exceed the $1.0 million limit. The Compensation Committee does not
expect that non-equity compensation will exceed the $1.0 million limit in the
foreseeable future. With respect to equity compensation, the Compensation
Committee's policy with respect to Section 162(m) is that it would prefer to
cause compensation to be deductible by the Company; however, the Compensation
committee also weighs the need to provide appropriate incentives to the
Company's executive officers against the potential adverse tax consequences that
may result under Section 162(m) from the grant of compensation that does not
qualify as performance-based compensation. The Compensation Committee has
authorized and may continue to authorize compensation payments that do not
qualify as performance-based compensation and that are in excess of the limits
in circumstances when the Compensation Committee believes such payment is
appropriate.
16
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company has reviewed and discussed the
Compensation Discussion and Analysis with management, and based on such review
and discussion, the Compensation Committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in this Proxy
Statement.
The Compensation Committee
John K. Kerr, Chairman
G. David Forney, Jr.
Frederick D. D'Alessio
Mark G. McGrath
17
EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation earned
for services rendered to Aware in all capacities for the fiscal year ended
December 31, 2006 by Aware's chief executive officer, each person who served as
Aware's chief financial officer during 2006 and each other executive officer of
Aware:
SUMMARY COMPENSATION TABLE FOR 2006
NON-EQUITY
STOCK OPTION INCENTIVE PLAN
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) AWARDS($)(1) COMPENSATION ($)(2)
--------------------------- ---- --------- -------- --------- ------------ -------------------
Michael A. Tzannes 2006 364,327 - - 84,244 113,130
Chief Executive Officer
Edmund C. Reiter 2006 305,731 - - 69,647 114,000
President
Richard W. Gross 2006 247,865 - - 70,220 -
Senior Vice President, Engineering
Keith E. Farris (4) 2006 123,577 - - 52,402 -
Chief Financial Officer
and Treasurer
Robert J. Weiskopf(5) 2006 160,317 - - 8,669 -
Chief Financial Officer
and Treasurer
CHANGE IN PENSION
VALUE AND
NONQUALIFIED
DEFERRED
COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION EARNINGS ($) COMPENSATION ($)(3) TOTAL ($)
---------------------------- ----------------- ------------------- ---------
Michael A. Tzannes - 7,050 568,751
Chief Executive Officer
Edmund C. Reiter - 7,022 496,400
President
Richard W. Gross - 6,805 324,890
Senior Vice President, Engineering
Keith E. Farris (4) - 3,891 179,870
Chief Financial Officer
and Treasurer
Robert J. Weiskopf(5) - 2,702 171,688
Chief Financial Officer
and Treasurer
----------------------------------
(1) Represents the dollar amount of expense recognized for financial
statement reporting purposes with respect to 2006 attributable to stock
options in accordance with FAS 123(R) but with no discount for estimated
forfeitures. For an explanation regarding the method of valuation of the
Company's option awards, see the heading "Stock-based equity incentive
compensation" in our Compensation Discussion and Analysis.
(2) For a discussion of the Non-Equity Incentive Plan Compensation for Mr.
Tzannes and Mr. Reiter, please see "Cash Incentive Compensation" in our
Compensation Discussion and Analysis.
(3) 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 named executive officers in 2006; Michael Tzannes-$6,600; Edmund
Reiter-$6,600; Richard Gross-$6,453; Keith Farris-$3,707; and Robert
Weiskopf-$2,560. Perquisites and other benefits were less than $10,000
in the aggregate for each named executive officer.
(4) Mr. Farris became our chief financial officer on May 31, 2006.
18
(5) Mr. Weiskopf resigned as our chief financial officer on May 30, 2006.
The amount paid to Mr. Weiskopf included a severance payment of $75,000.
Mr. Weiskopf also forfeited upon his resignation unvested stock options
to purchase an aggregate of 26,875 shares of Aware's common stock.
GRANTS OF PLAN-BASED AWARDS IN 2006
All Other Grant
Stock All Other Date
Awards: Option Fair
Estimated Future Payouts Number Awards: Exercise Value of
Under Estimated Future Payouts of Number of or Base Stock
Non-Equity Incentive Plan Under Shares of Securities Price of and
Grant Awards Equity Incentive Plan Awards Stock or Underlying Option Option
Threshold Target Maximum Threshold Target Maximum Units Option Awards Awards
Name Date ($) ($) ($)(1) (#) (#) (#) (#) (#)(2) ($/Sh) ($)(3)
---- ---- --- --- ------ --- --- --- ------- ------ ------ ------
Michael A. N/A - - 125,000 - - - - - - -
Tzannes
Edmund C. N/A - - 125,000 - - - - - - -
Reiter
Richard W. 02/22/2006 - - - - - - - 40,000 $5.58 110,084
Gross
Keith E. 05/31/2006 - - - - - - - 75,000 $5.69 279,488
Farris
Robert J. - - - - - - - - - -
Weiskopf
(1) For a discussion of the Non-Equity Incentive Plan Compensation for
Mr. Tzannes and Mr. Reiter, please see "Cash Incentive Compensation" in
our Compensation Discussion and Analysis.
(2) The option grant to Richard Gross vests in sixteen (16) quarterly
installments through December 31, 2009 with an expiration date of
February 22, 2010. The option grant to Keith Farris vests in sixteen
(16) quarterly installments through March 31, 2010 with an expiration
date of May 31, 2016.
(3) The value of option awards is calculated in accordance with FAS
123(R) and using a Black-Scholes valuation model with the following
assumptions: exercise price and fair market value of $5.58, volatility
of 67%, expected term of 3.25 years, and risk-free interest rate of
4.55% for the option award to Mr. Gross, and exercise price and fair
market value of $5.69, volatility of 66%, expected term of 6.25 years,
and risk-free interest rate of 4.99% for the option award to Mr. Farris.
19
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
The following table summarizes the stock options outstanding as of December 31,
2006 held by our named executive officers. Our named executive officers did not
hold any restricted stock or other equity incentive plan awards as of December
31, 2006.
--------------------------------------------------------------------------
OPTION AWARDS
--------------------------------------------------------------------------
EQUITY
INCENTIVE PLAN
AWARDS:
NUMBER OF
NUMBER OF NUMBER OF SECURITIES
SECURITIES SECURITIES UNDERLYING
UNDERLYING UNDERLYING UNEXERCISED
UNEXERCISED UNEXERCISED UNEARNED OPTION OPTION
OPTIONS (#) OPTIONS (#) OPTIONS (#) EXERCISE EXPIRATION
NAME EXERCISABLE UNEXERCISABLE UNEXERCISABLE PRICE ($) DATE
---- ----------- ------------- ------------- --------- ----
Michael A. Tzannes
453,752 - - $3.27 10/14/13
125,000 - - $2.95 9/8/14
800,000 - - $6.07 2/9/15
Edmund C. Reiter
326,635 - - $3.27 10/14/13
100,000 - - $2.95 09/08/14
600,000 - - $6.07 02/09/15
Richard W. Gross
201,581 - - $3.27 10/14/13
50,000 - - $2.95 9/8/14
42,500 - - $6.07 2/9/15
10,000 30,000(1) - $5.58 2/22/10
Keith E. Farris
14,062 60,938(2) - $5.69 5/31/2016
Robert J. Weiskopf
- - - - -
----------------------------------------------------------------------------
STOCK AWARDS
----------------------------------------------------------------------------
EQUITY EQUITY
INCENTIVE PLAN INCENTIVE PLAN
AWARDS: AWARDS:
NUMBER OF MARKET OR
UNEARNED PAYOUT VALUE
NUMBER OF MARKET VALUE OF SHARES, UNITS OF UNEARNED
SHARES OR SHARES OR UNITS OR OTHER SHARES, UNITS
UNITS OF STOCK OF STOCK THAT RIGHTS THAT OR OTHER RIGHTS
THAT HAVE NOT HAVE NOT HAVE NOT THAT HAVE
NAME VESTED (#) VESTED ($) VESTED (#) NOT VESTED ($)
---- ---------- ---------- ---------- --------------
Michael A. Tzannes
- - - -
- - - -
- - - -
Edmund C. Reiter
- - - -
- - - -
- - - -
Richard W. Gross
- - - -
- - - -
- - - -
- - - -
Keith E. Farris
- - - -
Robert J. Weiskopf - - - -
(1) Vests in 12 quarterly installments on the last day of each
quarter from March 31, 2007 through December 31, 2009.
(2) Vests in 13 quarterly installments on the last day of each
quarter from March 31, 2007 through March 31, 2010.
20
OPTION EXERCISES AND STOCK VESTED IN 2006
The following table summarizes the options exercised during the year ended
December 31, 2006 and the value realized upon exercise:
---------------------------------- -----------------------------------
OPTION AWARDS STOCK AWARDS
---------------------------------- -----------------------------------
VALUE VALUE
NUMBER OF SHARES REALIZED NUMBER OF SHARES REALIZED
ACQUIRED ON EXERCISE ON EXERCISE ACQUIRED ON VESTING ON VESTING
NAME (#) ($) (#) ($)
-------------------- ----------- ------------------- ----------
Michael A.
Tzannes
- - - -
Edmund C. Reiter
- - - -
Richard W. Gross
- - - -
Keith E. Farris
- - - -
Robert J.
Weiskopf
13,125 37,800 - -
25,000 73,500 - -
POST-EMPLOYMENT COMPENSATION
PENSION BENEFITS TABLE
We do not have any tax-qualified or non-qualified defined benefit plans or
supplemental executive retirement plans.
NON-QUALIFIED DEFERRED COMPENSATION TABLE
We do not have any non-qualified defined contribution plans or other
non-qualified deferred compensation plans.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Aware's executive officers do not have any agreements different from other
employees with respect to payments or benefits received as a result of a
termination, retirement and change in control. The payments and benefits include
accrued vacation pay and health plan continuation. There are no severance
payments or acceleration in the vesting of stock options that are required as a
result of a termination, retirement or change in control.
21
DIRECTOR COMPENSATION
In 2006, each non-employee director other than Mark G. McGrath received
an annual retainer of $15,000 for serving as a director. The retainer was paid
at the annual meeting of stockholders in May 2006. Mr. McGrath became a director
in September 2006. Aware also reimburses each director for expenses incurred in
attending meetings of the board of directors. Members of the Board of Directors
will not receive an annual retainer for 2007.
In February 2006, the Board of Directors of Aware approved a
Compensation Committee recommendation to compensate non-employee directors
through grants of nonqualified options under Aware's 1996 Stock Option Plan.
Each non-employee director received a grant of 5,000 options for serving as a
director of Aware. Additional options were provided to the Board chair as well
as chairs of the Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee. The exercise price of each option is equal to
the closing price of the common stock on the Nasdaq Global Market on the date of
grant. Each option has a term of four years. The options granted in 2006 vest
over a period of four years. The following table provides information about
these grants.
DIRECTOR COMPENSATION TABLE FOR 2006
CHANGE IN PENSION
VALUE AND
NON- EQUITY NONQUALIFIED
FEES EARNED OPTION INCENTIVE PLAN DEFERRED ALL OTHER
OR PAID IN STOCK AWARDS COMPENSATION COMPENSATION COMPENSATION TOTAL
NAME CASH ($) AWARDS ($) ($)(7) ($) EARNINGS ($) ($) COMPENSATION ($)
---------------------- ----------- ---------- --------- -------------- ------------------ ------------- ----------------
John K. Kerr(1) 15,000 - 39,923 - - - 54,923
G. David Forney, Jr.(2) 15,000 - 22,792 - - - 37,792
David Ehreth (3) 25,000 - - - - - 25,000
Frederick D.
D'Alessio(4) 15,000 - 21,096 - - - 36,096
Adrian F. Kruse(5) 15,000 - 27,642 - - - 42,642
Mark G. McGrath(6) - - 9,385 - - - 9,385
(1) In 2006, John K. Kerr received 5,000 options for serving as a director
of Aware, 12,500 options for serving as chairman of the board of
directors and 4,000 options for serving as chairman of the compensation
committee. 184,750 options were outstanding as of 12/31/06, of which
166,078 were exercisable as of 12/31/06.
(2) In 2006, G. David Forney, Jr. received 5,000 options for serving as a
director of Aware and 3,000 options for serving as chairman of the
nominating and corporate governance committee. 122,999 options were
outstanding as of 12/31/06, of which 115,124 were exercisable as of
12/31/06.
(3) On March 10, 2006, David Ehreth, a director of Aware, Inc., tendered his
resignation from the board of directors. In recognition of his years of
service, the board of directors of Aware approved a payment of $25,000.
In 2006, Mr. Ehreth received 5,000 options for serving as a director of
Aware. No options were outstanding or exercisable as of 12/31/06.
22
(4) In 2006, Frederick D. D'Alessio received 5,000 options for serving as a
director of Aware. 63,000 options were outstanding as of 12/31/06, of
which 58,648 were exercisable as of 12/31/06.
(5) In 2006, Adrian F. Kruse received 5,000 options for serving as a
director of Aware and 7,500 options for serving as chairman of the audit
committee. 67,500 options were outstanding as of 12/31/06, of which
53,437 were exercisable as of 12/31/06.
(6) Mark G. McGrath became a director of Aware on September 6, 2006. On his
appointment, Mr. McGrath received 25,000 options. 25,000 options were
outstanding as of 12/31/06, of which 3,125 were exercisable as of
12/31/06.
(7) Represents the dollar amount of expense recognized for financial
statement reporting purposes with respect to 2006 attributable to stock
options in accordance with FAS 123(R) but with no discount for estimated
forfeitures. For an explanation regarding the method of valuation of the
Company's option awards, see the heading "Stock-based equity incentive
compensation" in our Compensation Discussion and Analysis. The grant
date fair value of stock and option awards granted in 2006 were as
follows: Mr. Kerr-$59,170; Mr. Forney-$22,017; Mr. Ehreth-$13,761; Mr.
D'Alessio-$13,761; Mr. Kruse-$34,401 and Mr. McGrath-$75,078. Option
awards valued in each case calculated in accordance with FAS 123(R) and
using a Black-Scholes valuation model with the following assumptions:
exercise price and fair market value of $5.58, volatility of 67%,
expected term of 3.25 years, and risk-free rate of 4.55% for the option
awards to Messrs. Kerr, Forney, Ehreth, D'Alessio and Kruse, and
exercise price and fair market value of $5.30, volatility of 64%,
expected term of 4.75 years, and risk-free rate of 4.84% for the option
award to Mr. McGrath.
23
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 2006, 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, 2006 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 2007.
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 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.
24
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 2006, for filing with the Securities and Exchange Commission.
The audit committee
Adrian F. Kruse, Chairman
Frederick D. D'Alessio
John K. Kerr
25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
At the close of business on March 31, 2007, there were issued and
outstanding 23,698,962 shares of common stock entitled to cast 23,698,962 votes.
On March 31, 2007, the closing price of Aware's common stock as reported by the
Nasdaq Global Market was $6.19 per share.
PRINCIPAL STOCKHOLDERS
The following table provides information about the beneficial ownership
of Aware's common stock as of March 31, 2007 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, 2007 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 23,698,962 shares of
common stock outstanding as of March 31, 2007. 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, 2007. All shares
included in the "Right to acquire" column represent shares subject to
outstanding stock options exercisable within 60 days after March 31, 2007. The
information as to each person has been furnished by such person.
26
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 11.4%
230 S. LaSalle Street, Suite 688
Chicago, IL 60604
Dimensional Fund Advisors Inc (2)........... 1,589,435 0 1,589,435 6.7%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
State of Wisconsin Investment Board (3)..... 1,239,470 0 1,239,470 5.2%
P.O. Box 7842
Madison, WI 53707
John K. Kerr .............................. 693,588 184,750 878,338 3.7%
Michael A. Tzannes (4) ..................... 111,033 1,353,752 1,464,785 6.2%
Edmund C. Reiter ........................... 10,161 1,006,010 1,016,171 4.3%
Richard W. Gross ........................... 8,000 334,001 342,001 1.4%
Keith A. Farris ............................ 0 75,000 75,000 *
Mark G. McGrath............................. 149,613 25,000 174,613 *
G. David Forney, Jr......................... 0 122,999 122,999 *
Frederick D. D'Alessio...................... 0 63,000 63,000 *
Adrian F. Kruse............................. 10,000 67,500 77,500 *
------------- ------------- ------------- -------------
All directors and executive officers
as a group (9 persons) .................. 982,395 3,232,012 4,214,407 17.8%
------------------------------------
* Less than one percent.
(1) The number of shares beneficially owned by John S. Stafford, Jr. is
based upon information in a Schedule 13G/A filed by John S. Stafford,
Jr. on March 9, 2005.
(2) The number of shares beneficially owned by Dimensional Fund Advisors
Inc. is based upon information in a Schedule 13G/A filed by Dimensional
Fund Advisors Inc. on February 9, 2007.
(3) The number of shares beneficially owned by the State of Wisconsin
Investment Board is based upon information in a Schedule 13G/A filed by
the State of Wisconsin Investment Board on February 12, 2007.
(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,
2006, 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 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.
27
NUMBER OF SHARES TO NUMBER OF SHARES REMAINING
BE ISSUED UPON WEIGHTED-AVERAGE AVAILABLE FOR FUTURE
EXERCISE OF EXERCISE PRICE OF ISSUANCE UNDER EQUITY
OUTSTANDING OPTIONS, OUTSTANDING COMPENSATION PLANS
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND (EXCLUDING SHARES REFLECTED
PLAN CATEGORY (#) RIGHTS ($) IN COLUMN (A)) (#)
--------------------- ---------------------- ---------------------------
(a) (b) (c)
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS:
1996 Stock Option Plan......... 3,408,319 $4.88 --
1996 Employee Stock
Purchase Plan.............. -- -- 137,487
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS:
2001 Nonqualified Stock Plan... 3,081,493 $4.72 4,616,107
--------------------- ---------------------- ---------------------------
Total........... 6,489,812 $4.80 4,753,594
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,
McGrath 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
28
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.
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 2006, or written representations that Form 5
was not required for 2006, 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.
29
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, 2007. 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 2006 and 2005.
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, 2006 and December
31, 2005, respectively. In 2005 & 2006, 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.
All Other Fees in 2006 included $17,100 related to Aware's implementation of FAS
123(R) and $40,455 related to the review of certain revenue contracts.
2006 FEES 2005 FEES
--------- ---------
AUDIT FEES ............................. $ 242,600 $ 203,000
AUDIT-RELATED FEES...................... 0 0
TAX FEES ............................... 0 0
ALL OTHER FEES ......................... 57,555 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.
30
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 2005 or 2006 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 14, 2007.
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 February 27, 2008.
AVAILABLE INFORMATION
STOCKHOLDERS OF RECORD ON APRIL 3, 2007 WILL RECEIVE COPIES OF THIS
PROXY STATEMENT AND AWARE'S 2006 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. KEITH E. FARRIS, CHIEF
FINANCIAL OFFICER, AWARE, INC., 40 MIDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS
01730.
31
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 supersedes 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.
A-1
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:
The firm's internal quality control procedures; and
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.
A-2
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) 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.
A-3
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 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)
Frederick D. D'Alessio
John K. Kerr
A-4
ANNEX B
Aware, Inc.
Compensation Committee Charter
as Approved by the Board of Directors
(as amended March 15, 2007)
I. ORGANIZATION
CHARTER. At least annually, this charter shall be reviewed and reassessed by the
Compensation Committee (the "Committee") and any proposed changes shall be
submitted to the Board of Directors (the "Board") for approval. This charter
supersedes all prior charters of the Committee.
MEMBERS. The members of the Committee shall be appointed by the Board and shall
meet the independence and other requirements of applicable law and the listing
standards of The Nasdaq Stock Market, Inc., the requirements of an "outside
director" for purposes of Section 162(m) of the Internal Revenue Code of 1986,
as amended, and the requirements of a "non-employee director" for purposes of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Committee shall consist of at least two members. Committee members
will be subject to annual reconfirmation and may be removed by the Board at any
time.
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). Any
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's basic responsibility is to review the performance and
development of Company management in achieving corporate goals and objectives
and to assure that senior executives of
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the Company are compensated effectively in a manner consistent with the strategy
of the Company, competitive practice, and the requirements of the appropriate
regulatory bodies. Toward that end, the Committee will oversee, review and
administer all compensation, equity and employee benefit plans and programs.
III. RESPONSIBILITIES AND DUTIES
In carrying out its purpose, the Committee will have the following
responsibilities and duties:
o Review annually and approve the Company's compensation strategy
to ensure that employees of the Company are rewarded
appropriately for their contributions to the Company's financial
performance and corresponding increases in stockholder value.
o Review annually and approve corporate goals and objectives
relevant to executive compensation and evaluate performance in
light of those goals.
o Review annually and determine the individual elements of total
compensation for the Chief Executive Officer and all other
corporate officers, review and discuss with the Company's
management the Compensation Discussion and Analysis (CD&A) to be
included in the Company's annual proxy statement and whether to
recommend to the Board that the CD&A be included in the proxy
statement and communicate in the annual Board Compensation
Committee Report to stockholders the factors and criteria on
which the Chief Executive Officer and all other corporate
officers' compensation for the last year was based.
o Review and approve compensation for non-employee members of the
Board, including stock compensation.
o Review and make recommendations with respect to stockholder
proposals relating to compensation matters.
o Make and approve stock option grants and other discretionary
awards under the Company's stock option or other equity
incentive plans to all persons who are Board members or
executive officers.
o Grant stock options and other discretionary awards under the
Company's stock option or other equity incentive plans to all
other eligible individuals in the Company's service.
o Amend the provisions of the Company's stock option or other
equity incentive plans, to the extent authorized by the Board,
and make recommendations to the Board with respect to incentive
compensation and equity-based plans.
o Approve for submission to the stockholders stock option or other
equity incentive plans or amendments thereto.
o Perform an evaluation of its performance at least annually to
determine whether it is functioning effectively.
o Carry out such other duties as may be delegated to it by the
Board from time to time.
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Notwithstanding the foregoing, any action of the Committee may be subject to
Board review and may be revised, modified or rescinded by the Board.
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.
DELEGATION. The Committee may delegate any of its responsibilities to a
subcommittee comprised of one or more members of the Committee, the Chief
Executive Officer or to a committee of senior executive officers when
appropriate and consistent with applicable law except that the Committee shall
not delegate its responsibilities with respect to the grant of stock options
under the Company's stock option plans to any person who is an "officer" of the
Company for purposes of Section 16 of the Exchange Act.
COMMITTEE MEMBERS
John K. Kerr (Chair)
Fred D'Alessio
G. David Forney
Mark G. McGrath
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DESIGNATION (IF ANY)
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[BAR CODE]
Using a BLACK INK pen, mark your votes with an X as shown in this example. [X]
Please do not write outside the designated areas.
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ANNUAL MEETING PROXY CARD
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\/ PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN \/
THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.
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A TO ELECT THE FOLLOWING CLASS II DIRECTORS OF AWARE -- THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR ALL THE LISTED NOMINEES.
1. Nominees: FOR WITHHOLD FOR WITHHOLD
01 - John K. Kerr [_] [_] 02 - Mark G. Mc Grath [_] [_]
B NON-VOTING ITEMS
CHANGE OF ADDRESS -- Please print your new address below. COMMENTS -- Please print your comments below. MEETING ATTENDANCE
|-------------------------------------------------------| |-------------------------------------------| Mark the box to the
| | | | right if you plan [_]
|-------------------------------------------------------| |-------------------------------------------| to attend the Annual
Meeting.
C AUTHORIZED SIGNATURES -- THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE
COUNTED. -- DATE AND SIGN BELOW
Please sign exactly as name(s) appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, corporate officer, trustee,
guardian, or custodian, please give full title.
Date (mm/dd/yyyy) -- Please Signature 1 -- Please Signature 2 -- Please
print date below. keep signature within the box. keep signature within the box.
|-------------------------| |----------------------------| |-----------------------------|
| / / | | | | |
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C 1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO
[BAR CODE] 2 0 D V 0 1 3 1 5 1 1 ACCOMMODATE 140 CHARACTERS) MR A SAMPLE
AND MR A SAMPLE AND MR A SAMPLE AND MR
A SAMPLE AND MR A SAMPLE AND MR A SAMPLE
AND MR A SAMPLE AND MR A SAMPLE AND
\/ PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN \/
THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.
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PROXY -- AWARE, INC.
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AWARE, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 23, 2007
The undersigned stockholder of Aware, Inc. (the "Company"), revoking all prior
proxies, hereby appoints Michael A. Tzannes, Edmund 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 Bedford
Glen Hotel, 44 Middlesex Turnpike, Bedford, Massachusetts, on Wednesday, May 23,
2007, 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 6,
2007 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 THE PROPOSALS SET FORTH ON THE REVERSE SIDE,
WILL BE VOTED FOR THE PROPOSAL OR OTHERWISE IN ACCORDANCE WITH THE
RECOMMENDATION OF THE BOARD OF DIRECTORS.
Please promptly sign and date 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.
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.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.