1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [ ]
Filed by a Party other than the
Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
Verity, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2. Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3. Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
4. Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5. Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
6. Amount Previously Paid:
- --------------------------------------------------------------------------------
7. Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
8. Filing Party:
- --------------------------------------------------------------------------------
9. Date Filed:
- --------------------------------------------------------------------------------
2
*** PRELIMINARY COPY ***
VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 21, 1999
To The Stockholders Of Verity, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Verity,
Inc., a Delaware corporation (the "Company"), will be held on Tuesday, September
21, 1999 at 11:00 a.m. local time at the Sunnyvale Sheraton, 1100 N. Mathilda
Avenue, Sunnyvale, California for the following purpose:
1. To elect two directors to hold office until the 2002 Annual Meeting of
Stockholders.
2. To approve an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 30,000,000
to 100,000,000 shares and increase the authorized number of shares of
Preferred Stock by five (5) shares to 2,000,000 shares.
3. To approve the Company's 1995 Employee Stock Purchase Plan, as amended,
to increase the aggregate number of shares of Common Stock authorized
for issuance under such plan from 1,300,000 to 2,000,000 shares.
4. To approve the Company's 1995 Stock Option Plan, as amended, to increase
the aggregate number of shares of Common Stock authorized for issuance
under such plan from 4,060,836 to 5,060,836 shares.
5. To approve the Company's 1995 Outside Directors Stock Option Plan, as
amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan from 200,000 to 500,000 shares,
and to increase the annual grant size from 5,000 shares to 20,000
shares.
6. To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Company for its fiscal year ending May 31, 2000.
7. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on August 9, 1999,
as the record date for the determination of stockholders entitled to notice of
and to vote at this Annual Meeting and at any adjournment or postponement
thereof.
By Order of the Board of Directors
[FACSIMILE SIGNATURE]
Timothy J. Moore
Secretary
Sunnyvale, California
August 16, 1999
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
3
*** PRELIMINARY COPY ***
VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
------------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 21, 1999
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Verity, Inc., a Delaware corporation (the "Company"), for use at the Annual
Meeting of Stockholders to be held on September 21, 1999, at 11:00 a.m. local
time (the "Annual Meeting"), or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of Annual Meeting.
The Annual Meeting will be held at the Sunnyvale Sheraton, 1100 N. Mathilda
Avenue, Sunnyvale, California. The Company intends to mail this proxy statement
and accompanying proxy card on or about August 16, 1999, to all stockholders
entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on August
9, 1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on August 9, 1999, the Company had outstanding and entitled to
vote [NUMBER OF SHARES] shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Except for Proposal 2, Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether a matter has been approved. With respect to Proposal 2, broker non-votes
will have the same effect as negative votes.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 894 Ross
Drive, Sunnyvale, CA 94089, a written notice of revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a proxy.
4
STOCKHOLDER PROPOSALS
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2000 annual
meeting of stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is April 18, 2000. The deadline for submitting a stockholder proposal
or a nomination for director that is not to be included in such proxy statement
and proxy is May 24, 2000. Stockholders are also advised to review the Company's
By-laws, which contain additional requirements with respect to advance notice of
stockholder proposals and director nominations.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation and Bylaws provide that the
Board of Directors shall be divided into three classes, each class consisting,
as nearly as possible, of one-third of the total number of directors, with each
class having a three-year term. Vacancies on the Board of Directors may be
filled only by persons elected by a majority of the remaining directors. A
director elected by the Board of Directors to fill a vacancy (including a
vacancy created by an increase in the Board of Directors) shall serve for the
remainder of the full term of the class of directors in which the vacancy
occurred and until such director's successor is elected and qualified.
The Board of Directors is presently composed of four members. There are two
directors in the class whose term of office expires in 1999. The nominees for
election to this class are currently directors of the Company. If elected at the
Annual Meeting, the nominees would serve until the 2002 annual meeting and until
their successors are elected and have qualified, or until such directors'
earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the nominee named below. In the event that such nominee should be
unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. The nominee has agreed to serve if elected, and management has no
reason to believe that such nominee will be unable to serve.
Set forth below is biographical information for the nominee and each person
whose term of office as a director will continue after the Annual Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2002 ANNUAL MEETING
STEVEN M. KRAUSZ, age 44, has served as a member of the Company's Board of
Directors since May 1988. Mr. Krausz has been a general partner of U.S. Venture
Partners III, U.S.V. Entrepreneur Partners and BHMS Partners III since 1985. Mr.
Krausz holds a B.S. in Electrical Engineering and a M.B.A. from Stanford
University.
CHARLES P. WAITE, JR., age 44, has served as a member of the Company's
Board of Directors since May 1988. Mr. Waite has been a general partner of
Olympic Venture Partners II and a vice president of Northwest Venture Services
Corp. since 1987, a general partner of Olympic Venture Partners III since 1994
and a general partner of Olympic Venture Partners IV since 1997. Mr. Waite is
also a director of Cardima, Inc. and several privately held companies. Mr. Waite
holds an A.B. in History from Kenyon College and a M.B.A. from Harvard
University.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
2
5
DIRECTOR CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING
STEPHEN A. MACDONALD, age 53, has served as a member of the Company's Board
of Directors since December 1988. From May 1983 until May 1996, Mr. MacDonald
was employed by Adobe Systems Incorporated where he served as Senior Vice
President and Chief Operating Officer. From May 1996 to April 1998, he served as
President and Chief Executive Officer of Active Software. Mr. MacDonald is
currently a consultant. Mr. MacDonald is a director of Network Computing
Devices, Inc. Mr. MacDonald holds a B.Sc. from Dalhousie University.
DIRECTOR CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
GARY J. SBONA, age 56, has been the Company's President and Chief Executive
Officer since July 1997, a director since May 1998 and the Chairman of the Board
of Directors since March 1999. Since 1974, Mr. Sbona has also served as the
chairman and chief executive officer of Regent Pacific Management Corporation, a
professional services company that is currently providing the Company with
management services. Mr. Sbona holds a B.S. in Business and Engineering from San
Jose State University.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended May 31, 1999, the Board of Directors held nine
meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent accountants at
least annually to review the results of the annual audit and discuss the
financial statements, recommends to the Board the independent auditors to be
retained, and receives and considers the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee is composed of two
non-employee directors: Messrs. Krausz and Waite. It met one time during fiscal
year 1999.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's stock option plans and otherwise determines compensation levels
and performs such other functions regarding compensation as the Board may
delegate. The Compensation Committee is composed of two non-employee directors:
Messrs. Krausz and Waite. It only took actions by unanimous written consent
during fiscal year 1999.
During the fiscal year ended May 31, 1999, each Board member attended 75%
or more of the aggregate of the meetings of the Board and of the committees on
which he served, held during the period for which he was a director or committee
member, respectively.
PROPOSAL 2
APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Restated Certificate of Incorporation to increase the
Company's authorized number of shares of Common Stock from 30,000,000 shares to
100,000,000 shares. The amendment also increases the authorized number of shares
of Preferred Stock by five (5) shares to 2,000,000 shares. As amended, Article
FOURTH, Paragraph 1 of the Corporation's Certificate of Incorporation shall read
in its entirety as follows:
"The Corporation is authorized to issue two classes of shares to be
designated respectively Preferred Stock, having a par value of $0.001 per
share ("Preferred"), and Common Stock, having a par value of $0.001 per
share ("Common"). The total number of shares of Preferred this Corporation
shall have authority to issue is 2,000,000, and the total number of shares
of Common this Corporation shall have authority to issue is 100,000,000."
3
6
The additional Common Stock to be authorized by adoption of the amendment
would have rights identical to the currently outstanding Common Stock of the
Company. Adoption of the proposed amendment and issuance of the Common Stock
would not affect the rights of the holders of currently outstanding Common Stock
of the Company, except for effects incidental to increasing the number of shares
of the Company's Common Stock outstanding, such as dilution of the earnings per
share and voting rights of current holders of Common Stock. If the amendment is
adopted, it will become effective upon filing of a Certificate of Amendment of
the Company's Certificate of Incorporation with the Secretary of State of the
State of Delaware.
In addition to the 12,805,912 shares of Common Stock outstanding at May 31,
1999, the Board of Directors has reserved 6,062,963 shares for issuance upon
exercise of options and rights granted under the Company's stock option and
stock purchase plans.
If the stockholders of the Company approve this Proposal 2, the Board of
Directors plans to consider the advisability of declaring a stock split
distributed to stockholders as a stock dividend. However, the ultimate decision
as to whether or not to declare a stock split, and if so then in which
proportion, will be made only if this Proposal 2 is approved and then will be
dependent upon the Company's stock price at the time, as well as market
conditions and any other conditions the Board of Directors deems relevant.
Consequently, if the stockholders do approve this Proposal 2, there can be no
assurance that the Board of Directors will declare a stock split.
Although at present the Board of Directors has no other plans to issue the
additional shares of Common Stock, it desires to have such shares available to
provide additional flexibility to use its capital stock for business and
financial purposes in the future. The additional shares may be used, without
further stockholder approval, for various purposes including, without
limitation, raising capital, providing equity incentives to employees, officers
or directors, establishing strategic relationships with other companies and
expanding the Company's business or product lines through the acquisition of
other businesses or products.
The additional shares of Common Stock that would become available for
issuance if the proposal were adopted could also be used by the Company to
oppose a hostile takeover attempt or delay or prevent changes in control or
management of the Company. For example, without further stockholder approval,
the Board of Directors could strategically sell shares of Common Stock in a
private transaction to purchasers who would oppose a takeover or favor the
current Board of Directors. In addition, if a person or group of persons
attempted a hostile takeover of the Company, such shares could be issued in
connection with the Company's Rights Agreement, which would allow stockholders
(other than the hostile parties) to purchase the Company's Common Stock at a
discount to the then current market price, which would have a dilutive effect on
the hostile parties. Although this proposal to increase the authorized Common
Stock has been prompted by business and financial considerations and not by the
threat of any hostile takeover attempt (nor is the Board of Directors currently
aware of any such attempts directed at the Company), nevertheless, stockholders
should be aware that approval of this proposal could facilitate future efforts
by the Company to deter or prevent changes in control of the Company, including
transactions in which the stockholders might otherwise receive a premium for
their shares over then current market prices.
The affirmative vote of the holders of a majority of the shares of the
Common Stock will be required to approve this amendment to the Company's
Certificate of Incorporation. As a result, abstentions and broker non-votes will
have the same effect as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
4
7
PROPOSAL 3
APPROVAL OF 1995 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
At the Annual Meeting, the stockholders will be asked to approve an
amendment to the Company's 1995 Employee Stock Purchase Plan (the "Purchase
Plan") to increase by 700,000 the maximum number of shares of Common Stock that
may be issued under the Purchase Plan. The purpose of the Purchase Plan is to
provide employees of the Company with an opportunity to acquire a proprietary
interest in the Company through the purchase of its Common Stock. As of May 31,
1999, an aggregate of 975,069 shares of Common Stock had been issued under the
Purchase Plan and 324,931 shares remained available for future sales. To provide
an adequate reserve of shares to permit the Company to continue offering
employees a stock purchase opportunity, the Board of Directors has amended the
Purchase Plan, subject to stockholder approval.
SUMMARY OF THE PURCHASE PLAN
The following summary of the Purchase Plan, as amended, is qualified in its
entirety by the specific language of the Purchase Plan, a copy of which is
available to any stockholder upon request.
General. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). Each participant in the Purchase Plan is granted at the
beginning of each offering under the Purchase Plan (an "Offering") the right to
purchase through accumulated payroll deductions up to a number of shares of the
Common Stock of the Company (a "Purchase Right") determined on the first day of
the Offering. The Purchase Right is automatically exercised on each purchase
date during the Offering unless the participant has withdrawn from participation
in the Purchase Plan prior to such date.
During the last fiscal year, shares of Common Stock were purchased in the
amounts and at the weighted average prices per share under the Purchase Plan as
follows: Anthony Bettencourt, 3,935 shares ($5.84); Hugh Njemanze, 3,870 shares
($5.84), James Ticehurst, 2,688 shares ($5.35); Ronald Weissman, 4,784 shares
($5.84); Todd Yamami, 2,132 shares ($5.54); all current executive officers as a
group, 17,409 shares ($5.73); and all employees (excluding executive officers)
as a group, 319,644 shares ($5.38).
Shares Subject to Plan. Previously, the stockholders have authorized the
issuance of an aggregate of 1,300,000 shares pursuant to the Purchase Plan. The
Board of Directors has amended the Purchase Plan, subject to stockholder
approval, to increase by 700,000 the maximum number of authorized but unissued
or reacquired shares of Common Stock that may be issued under the Purchase Plan.
Appropriate adjustments will be made to the shares subject to the Purchase Plan
and outstanding Purchase Rights in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification or similar
change in the Company's capital structure and may be made in the event of any
merger, sale of assets or other reorganization of the Company. If any Purchase
Right expires or terminates, the shares subject to the unexercised portion of
such Purchase Right will again be available for issuance under the Purchase
Plan.
Administration. The Purchase Plan is administered by the Board of Directors
or a duly appointed committee of the Board (hereinafter referred to as the
"Board"). Subject to the provisions of the Purchase Plan, the Board determines
the terms and conditions of Purchase Rights granted under the Purchase Plan. The
Board interprets the Purchase Plan and Purchase Rights granted thereunder, and
all determinations of the Board are final and binding on all persons having an
interest in the Purchase Plan or any Purchase Rights. The Purchase Plan
provides, subject to certain limitations, for indemnification by the Company of
any director, officer or employee against all reasonable expenses, including
attorneys' fees, incurred in connection with any legal action arising from such
person's action or failure to act in administering the plan.
Eligibility. Any employee of the Company or of any present or future parent
or subsidiary corporation of the Company designated by the Board for inclusion
in the Purchase Plan is eligible to participate in an Offering under the
Purchase Plan so long as the employee is customarily employed for more than 20
hours per week and more than five months in any calendar year. However, no
employee who owns or holds options to purchase, or as a result of participation
in the Purchase Plan would own or hold options to purchase, five percent or more
of the total combined voting power or value of all classes of stock of the
Company or of any
5
8
parent or subsidiary corporation of the Company is eligible to participate in
the Purchase Plan. As of July 31, 1999, approximately [ ] employees,
including five executive officers, were eligible to participate in the Purchase
Plan.
Offerings. Offerings of Common Stock under the Purchase Plan commence on
one or more dates determined by the Board, generally on or about April 1 and
October 1 of each year (an "Offering Date"), and continue for such periods of
time as established by the Board (an "Offering Period"), provided that no
Offering Period may exceed 27 months. The Board currently limits Offering
Periods to approximately 12 months in duration. Currently each Offering Period
is comprised of two six-month "Purchase Periods" respectively running from about
April 1 to about September 30 and from about October 1 to March 31. The last day
of a Purchase Period is a "Purchase Date." An employee may not participate
simultaneously in more than one Offering.
Participation and Purchase of Shares. Participation in an Offering under
the Purchase Plan is limited to eligible employees who authorize payroll
deductions prior to the date set by the Board. Payroll deductions may not exceed
20% (or such other rate as the Board determines) of an employee's compensation
on any payday during the Offering Period. An employee who becomes a participant
in the Purchase Plan will automatically participate in each subsequent Offering
Period beginning immediately after the last day of the Offering Period in which
he or she is a participant until the employee withdraws from the Purchase Plan,
becomes ineligible to participate, or terminates employment.
Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to that number of shares (rounded to the nearest whole
share) determined by the lesser of (i) multiplying $2,083.33 by the number of
months (rounded to the nearest whole month) in the Offering Period and dividing
the product by the fair market value of a share of Common Stock on the Offering
Date or (ii) multiplying 208.33 shares by the number of months (rounded to the
nearest whole month) in the Offering Period. As a further limitation, no
participant may purchase in any event under the Purchase Plan shares of the
Company's Common Stock having a fair market value exceeding $25,000 in any
calendar year (measured by the fair market value of the Company's Common Stock
on the first day of the Offering Period in which the shares are purchased).
Purchase Rights are nontransferable and may only be exercised by the
participant.
Upon withdrawal, the Company will refund without interest the participant's
accumulated payroll deductions not previously applied to the purchase of shares.
Once a participant withdraws from an Offering, that participant may not again
participate in the same Offering. If the fair market value of a share of Common
Stock on the Offering Date of the current Offering in which employees are
participating is greater than such fair market value on a Purchase Date during
the Offering, then, unless a participant elects otherwise, each participant will
be automatically withdrawn from the current Offering after purchasing shares and
enrolled in the new Offering beginning immediately following such Purchase Date.
On each Purchase Date during an Offering Period, the Company issues to each
participant in the Offering the number of shares of the Company's Common Stock
determined by dividing the amount of payroll deductions accumulated for the
participant during the Purchase Period by the purchase price, limited in any
case by the maximum number of shares subject to the participant's Purchase Right
for that Offering. The price at which shares are sold under the Purchase Plan is
established by the Board but may not be less than 85% of the lesser of the fair
market value per share of Common Stock on the Offering Date or on the Purchase
Date. The fair market value of the Common Stock on any relevant date generally
will be the closing price per share on such date as reported on the Nasdaq
National Market. On July 30, 1999, the closing price per share of Common Stock
was $49.50. Any payroll deductions under the Purchase Plan not applied to the
purchase of shares will be returned to the participant without interest, unless
the amount remaining is less than the amount necessary to purchase a whole share
of Common Stock, in which case the remaining amount may be applied to the next
Purchase Period.
Change in Control. The Purchase Plan provides that, in the event of (i) a
sale or exchange by the stockholders in a single or series of related
transactions of more than 50% of the Company's voting stock, (ii) a merger or
consolidation in which the Company is a party, (iii) the sale, exchange or
transfer of all or substantially all of the assets of the Company, or (iv) a
liquidation or dissolution of the Company wherein,
6
9
upon any such event, the stockholders of the Company immediately before such
event do not retain direct or indirect beneficial ownership of more than 50% of
the total combined voting power of the voting stock of the Company, its
successor, or the corporation to which the assets of the Company were
transferred (a "Transfer of Control"), the surviving, continuing, successor or
purchasing corporation or parent corporation thereof may assume the Company's
rights and obligations under the Purchase Plan or substitute substantially
equivalent Purchase Rights for such corporation's stock. However, if such
corporation elects not to assume or replace the outstanding Purchase Rights, the
Board may adjust the last day of the current Purchase Period to a date on or
before the date of the Transfer of Control. Any Purchase Rights that are not
assumed, replaced, or exercised prior to the Transfer of Control will terminate
on the date of the Transfer of Control.
Termination or Amendment. The Purchase Plan will continue until terminated
by the Board or until all of the shares reserved for issuance under the plan
have been issued. The Board may at any time amend or terminate the Purchase
Plan, except that the approval of the Company's stockholders is required within
twelve months of the adoption of any amendment increasing the number of shares
authorized for issuance under the Purchase Plan, or changing the definition of
the corporations which may be designated by the Board as corporations the
employees of which may participate in the Purchase Plan.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
Purchase Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
Generally, there are no tax consequences to an employee of either becoming
a participant in the Purchase Plan or purchasing shares under the Purchase Plan.
A participant will be taxed on amounts withheld for the purchase of shares of
Common Stock as if such amounts were actually received. The tax consequences of
a disposition of shares vary depending on the period such stock is held before
its disposition. If a participant disposes of shares within two years after the
Offering Date or within one year after the Purchase Date on which the shares are
acquired (a "disqualifying disposition"), the participant recognizes ordinary
income in the year of disposition in an amount equal to the difference between
the fair market value of the shares on the Purchase Date and the purchase price.
Such income may be subject to withholding of tax. Any additional gain or
resulting loss recognized by the participant from the disposition of the shares
is a capital gain or loss. If the participant disposes of shares at least two
years after the Offering Date and at least one year after the Purchase Date on
which the shares are acquired, the participant recognizes ordinary income in the
year of disposition in an amount equal to the lesser of (i) the difference
between the fair market value of the shares on the date of disposition and the
purchase price or (ii) 15% of the fair market value of the shares on the
Offering Date. Any additional gain recognized by the participant on the
disposition of the shares is a capital gain. If the fair market value of the
shares on the date of disposition is less than the purchase price, there is no
ordinary income, and the loss recognized is a capital loss. If the participant
owns the shares at the time of the participant's death, the lesser of (i) the
difference between the fair market value of the shares on the date of death and
the purchase price or (ii) 15% of the fair market value of the shares on the
Offering Date is recognized as ordinary income in the year of the participant's
death.
If the exercise of a Purchase Right does not constitute an exercise
pursuant to an "employee stock purchase plan" under section 423 of the Code, the
exercise of the Purchase Right will be treated as the exercise of a nonstatutory
stock option. The participant would therefore recognize ordinary income on the
Purchase Date equal to the excess of the fair market value of the shares
acquired over the purchase price. Such income is subject to withholding of
income and employment taxes. Any gain or loss recognized on a subsequent sale of
the shares, as measured by the difference between the sale proceeds and the sum
of (i) the purchase price for such shares and (ii) the amount of ordinary income
recognized on the exercise of the Purchase Right, will be treated as a capital
gain or loss, as the case may be.
If the participant disposes of the shares in a disqualifying disposition,
the Company should be entitled to a deduction equal to the amount of ordinary
income recognized by the participant as a result of the disposition,
7
10
except to the extent such deduction is limited by applicable provisions of the
Code or the regulations thereunder. In all other cases, no deduction is allowed
the Company.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the meeting and entitled to vote is
required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum
at the Annual Meeting of Stockholders. Abstentions will have the same effect as
a negative vote on this proposal, but broker non-votes will not be counted for
or against this proposal.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
PROPOSAL 4
APPROVAL OF 1995 STOCK OPTION PLAN, AS AMENDED
The Company established the stock option plan the subject of this proposal
(the "Option Plan") in August 1988. In June 1995, the Board of Directors amended
and restated the Option Plan, extended its term and renamed the Option Plan the
"Verity, Inc. 1995 Stock Option Plan." In 1996, the Board of Directors amended
the Option Plan to (i) increase the number of shares of Common Stock of the
Company authorized for issuance thereunder from 2,910,836 shares to 3,310,836
shares; (ii) provide that the Board of Directors may not decrease the exercise
price of certain stock options or grant a new option in substitution therefor,
without stockholder approval; (iii) provide that the maximum term of certain
stock options granted from such 400,000 share increase (the "1996 Option Reserve
Increase") will be eight years; and (iv) provide that the exercise price per
share of any stock option granted under the Option Plan must equal at least the
fair market value of a share of the Company's Common Stock on the date of grant
of the stock option. The purpose of the Option Plan is to provide an equity
interest for employees, directors and consultants of the Company or any parent
or subsidiary corporation of the Company, in order to give them a greater
personal interest in the success of the business and to provide added incentive
to continue and advance in their employment or service to the Company.
As a result of a series of amendments (excluding the 1,000,000 shares now
proposed for stockholder approval), a total of 4,060,836 shares of Common Stock
have been reserved for issuance under the Option Plan. As of May 31, 1999,
options to purchase 1,700,568 shares of Common Stock granted pursuant to the
Option Plan had been exercised, 2,495,831 shares of Common Stock were reserved
for issuance upon the exercise of outstanding options at a weighted average
exercise price of $12.61 per share, with exercise prices ranging from $1.00 to
$32.50 and 454,178 shares of Common Stock remained available for future option
grants (excluding the 1,000,000 shares now proposed for stockholder approval),
which equaled approximately 3.1% of the total number of shares of Common Stock
outstanding.
During the last fiscal year, shares of Common Stock were granted in the
amounts and at the weighted average prices per share under the Option Plan as
follows: Anthony Bettencourt, 175,000 shares ($17.79); Hugh Njemanze, 75,000
shares ($18.53); James Ticehurst, 80,000 shares ($14.85); Ronald Weissman,
80,000 shares ($19.41); Todd Yamami, 45,000 shares ($21.44); Gary Sbona, 470,000
shares ($18.74); Steven M. Krausz, 50,000 shares ($25.07); Charles P. Waite,
Jr., 50,000 shares ($25.07); all current executive officers as a group, 945,000
shares ($18.43); and all Directors who are not executive officers as a group,
150,000 shares ($25.07).
PROPOSED AMENDMENTS TO THE OPTION PLAN
The Board of Directors has amended the Option Plan, subject to stockholder
approval, to increase the number of shares of Company Common Stock reserved
under the Option Plan by 1,000,000 shares (the "Option Reserve Increase") so
that the total number of shares available for future grants as of May 31, 1999
under the Option Plan would be 1,454,178. The stockholders are now being asked
to approve the Option
8
11
Reserve Increase at the Annual Meeting in order to make available sufficient
shares for continued operation of the Option Plan.
The Company seeks to attract, motivate and retain talented and enterprising
employees by rewarding performance and encouraging behavior that will improve
the Company's profitability. It believes that the Option Plan plays an important
role in achieving these objectives by enabling the Company to provide broad
employee equity interests in the Company. The Company believes that equity
incentives provided by the Option Plan help align the interests of the employees
with the interests of the Company's stockholders, and enhance the Company's
ability to continue recruiting and retaining qualified officers, employees and
consultants essential to the success of the Company. Management believes that
the continued operation of the Option Plan necessitates an increase in the share
reserve under the Option Plan.
The Company has engaged Regent Pacific Management Corporation ("Regent
Pacific") to provide management services to the Company, with employees of
Regent Pacific currently serving as the Company's President and Chief Executive
Officer, Chief Operating Officer, Vice President, Development and Technical
Services, and Vice President of Product Strategy, respectively (See "Employment
Agreements and Termination and Change in Control Agreements" and "Certain
Transactions"). The Company's goal for the longer term is to attract and retain
key executive officers to replace the Regent Pacific personnel. In order to
attract and retain such key management personnel, the Company believes that it
must offer attractive equity incentives and that the number of shares of Common
Stock currently authorized for issuance pursuant to the Option Plan may be
inadequate for such purpose.
SUMMARY OF THE PROVISIONS OF THE OPTION PLAN
The following summary of the Option Plan, as amended, is qualified in its
entirety by the specific language of the Option Plan, a copy of which is
available to any stockholder upon request.
General. The Option Plan provides for the grant of incentive stock options
within the meaning of Section 422 of the Code, and nonstatutory stock options.
As of May 31, 1999, options to purchase 1,700,568 shares of Common Stock granted
pursuant to the Option Plan had been exercised, 2,005,653 shares of Common Stock
were reserved for issuance upon the exercise of outstanding options, and 454,178
shares of Common Stock remained available for future grants.
Shares Subject to Plan. Currently, a maximum of 4,060,836 of the authorized
but unissued or reacquired shares of Common Stock of the Company may be issued
upon the exercise of options granted pursuant to the Option Plan. The Board of
Directors has amended the Option Plan, subject to stockholder approval, to
increase by 1,000,000 the maximum number of shares of Common Stock issuable
thereunder to an aggregate of 5,060,836.
If the stockholders approve the 1,000,000 share increase in the number of
shares authorized for issuance under the Option Plan, 1,454,178 shares of Common
Stock would be available for future option grants as of May 31, 1999, which
equals approximately 11.3% of the total number of shares of Common Stock
outstanding as of that date. The Option Plan imposes a limit under which no
employee may receive in any fiscal year of the Company options to purchase in
excess of 500,000 shares (the "Grant Limit"). The Grant Limit is intended to
comply with Section 162(m) of the Code and the regulations thereunder in order
to preserve the Company's ability to fully deduct any compensation expense
related to options granted under the Option Plan. In the event of any stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments will be made to the shares subject to the Option Plan,
to the Grant Limit and to outstanding options. To the extent any outstanding
option under the Option Plan expires or terminates prior to exercise in full or
if shares issued upon exercise of an option are repurchased by the Company, the
shares of Common Stock for which such option is not exercised or the repurchased
shares are returned to the Option Plan and become available for future grant,
but do not increase the total number of shares authorized for issuance under the
Option Plan.
Administration. The Option Plan is administered by the Board of Directors
or a duly appointed committee of the Board (hereinafter referred to as the
"Board"). The Option Plan provides that with respect
9
12
to the participation of individuals whose transactions in the Company's equity
securities are subject to Section 16 of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Option Plan must be administered in compliance with the
requirements of Rule 16b-3 under the Exchange Act. With respect to persons
covered by Section 162(m) of the Code the Option Plan permits administration in
compliance with Section 162(m) of the Code (for more information on Section
162(m) of the Code, please see the paragraph "Potential Limitation on Company
Deductions" below). Subject to the provisions of the Option Plan, the Board
determines the persons to whom options are to be granted, the number of shares
to be covered by each option, whether an option is to be an incentive stock
option or a nonstatutory stock option, the timing and terms of exercisability of
each option or the vesting of shares acquired upon the exercise of an option,
including the effect thereon of an optionee's termination of service, the
exercise price of and the type of consideration to be paid to the Company upon
the exercise of each option, the duration of each option, and all other terms
and conditions of the options. The Option Plan authorizes the Board to amend,
modify, extend, renew, or grant a new option in substitution for, any option, to
waive any restrictions or conditions applicable to any option or any shares
acquired upon the exercise thereof, and to accelerate, continue, extend or defer
the exercisability of any option or the vesting of any shares acquired upon the
exercise of an option, including with respect to the period following an
optionee's termination of service with the Company. However, the Board may not
decrease the exercise price of a stock option granted from the 1996 Option
Reserve Increase, or grant a new option in substitution therefor having a lower
exercise price without the approval of the stockholders of the Company. Subject
to certain limitations, the Option Plan provides for indemnification by the
Company of any director, officer of employee against all reasonable expenses,
including attorney's fees, incurred in connection with any legal action arising
from such person's action or failure to act in administering the Option Plan.
The Board will interpret the Option Plan and options granted thereunder, and all
determinations of the Board will be final and binding on all persons having an
interest in the Option Plan or any option.
Eligibility. Generally, all employees, directors and consultants of the
Company or of any present or future parent or subsidiary corporations of the
Company are eligible to participate in the Option Plan. As of June 30, 1999, the
Company had approximately 295 employees, including nine executive officers and
four directors. In addition, the Option Plan permits options to be granted to
prospective employees and consultants in connection with written offers of
employment or engagement. Any such options may not become exercisable prior to
such individual's commencement of service. Any person eligible under the Option
Plan may be granted a nonstatutory option. However, only employees may be
granted incentive stock options.
Terms and Conditions of Options. Each option granted under the Option Plan
is evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the Option Plan.
The exercise price per share of each option must equal at least the fair market
value of a share of the Company's Common Stock on the date of grant. The
exercise price of any incentive stock option granted to a person who at the time
of grant owns stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any parent or subsidiary corporation
of the Company (a "Ten Percent Stockholder") must be at least 110% of the fair
market value of a share of the Company's Common Stock on the date of grant. The
Board determines the fair market value of the Company's Common Stock in its sole
discretion.
The option exercise price may be paid in cash, by check, or in cash
equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale or loan with respect to some or all of the
shares of Common Stock being acquired upon the exercise of the option, by means
of a promissory note, by any other lawful consideration approved by the Board,
or by any combination of these. The Board may nevertheless restrict the forms of
payment permitted in connection with any option grant.
Options granted under the Option Plan become exercisable and vested at such
times and subject to such conditions as specified by the Board. Generally,
options granted under the Option Plan are exercisable on and after the date of
grant, subject to the right of the Company to reacquire at the optionee's
exercise price any unvested shares held by the optionee upon termination of
employment or service with the Company or if the optionee attempts to transfer
any unvested shares. Shares subject to options generally vest in installments
10
13
subject to the optionee's continued employment or service. The maximum term of
an incentive stock option or nonstatutory stock option that draws upon shares
from the 1996 Option Reserve Increase under the Option Plan is eight years
unless the incentive stock option is granted to a Ten Percent Stockholder, in
which case the maximum term is five years. The maximum term of any other
incentive stock option granted under the Option Plan is ten years unless granted
to a Ten Percent Stockholder, in which case the maximum term is five years.
Consistent with the Code, the Option Plan does not limit the term of any
nonstatutory stock option not drawing upon shares from the 1996 Option Reserve
Increase. Options are nontransferable by the optionee other than by will or by
the laws of descent and distribution, and are exercisable during the optionee's
lifetime only by the optionee.
Transfer of Control. The Option Plan provides that, in the event of (i) a
sale or exchange by the stockholders of more than 50% of the Company's voting
stock, (ii) a merger or consolidation in which the Company is a party, (iii) the
sale, exchange or transfer of all or substantially all of the assets of the
Company, or (iv) a liquidation or dissolution of the Company wherein, upon any
such event, the stockholders of the Company immediately before such event do not
retain direct or indirect beneficial ownership of more than 50% of the total
combined voting power of the voting stock of the Company, its successor, or the
corporation to which the assets of the Company were transferred in substantially
the same proportions as prior to such event (a "Transfer of Control"), the
acquiring or successor corporation may assume the Company's rights and
obligations under outstanding options or substitute substantially equivalent
options for such corporation's stock. To the extent that the options outstanding
under the Option Plan are not assumed, substituted for, or exercised prior to
the Transfer of Control, they will terminate; provided, however, that the terms
of certain options provide for acceleration of vesting upon such a change in
control (see "Employment Agreements and Termination and Change in Control
Agreements").
Termination and Amendment. The Option Plan will continue in effect until
the earlier of its termination by the Board or the date on which all shares
available for issuance under the Option Plan have been issued and all
restrictions on such shares under the terms of the Plan and the option
agreements have lapsed, provided that all incentive stock options must be
granted prior to July 19, 2006, the date on which the Board approved the
amendment of the Option Plan. The Board may terminate or amend the Option Plan
at any time, but, without stockholder approval, the Board may not amend the
Option Plan to increase the total number of shares of Common Stock issuable
thereunder, change the class of persons eligible to receive incentive stock
options, or expand the class of persons eligible to receive nonstatutory stock
options. No amendment may adversely affect an outstanding option without the
consent of the optionee, unless the amendment is required to preserve the
option's status as an incentive stock option or is necessary to comply with any
applicable law.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OPTION PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
Option Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
Incentive Stock Options. An optionee recognizes no taxable income for
regular income tax purposes as the result of the grant or exercise of an
incentive stock option qualifying under Section 422 of the Code. Optionees who
do not dispose of their shares for two years following the date the option was
granted nor within one year following the exercise of the option will normally
recognize a long-term capital gain or loss equal to the difference, if any,
between the sale price and the purchase price of the shares. If an optionee
satisfies such holding periods upon a sale of the shares, the Company will not
be entitled to any deduction for federal income tax purposes. If an optionee
disposes of shares within two years after the date of grant or within one year
from the date of exercise (a "disqualifying disposition"), the difference
between the fair market value of the shares on the determination date (see
discussion under "Nonstatutory Stock Options" below) and the option exercise
price (not to exceed the gain realized on the sale if the disposition is a
transaction with respect to which a loss, if sustained, would be recognized)
will be taxed as ordinary income at the time of disposition. Any gain in excess
of that amount will be a capital gain. If a loss is recognized, there will be no
ordinary income, and such loss will be a capital loss. A capital gain or loss
will be long-term if the optionee's holding period is more than
11
14
12 months. Any ordinary income recognized by the optionee upon the disqualifying
disposition of the shares generally should be deductible by the Company for
federal income tax purposes, except to the extent such deduction is limited by
applicable provisions of the Code or the regulations thereunder.
The difference between the option exercise price and the fair market value
of the shares on the determination date of an incentive stock option (see
discussion under "Nonstatutory Stock Options" below) is an item of adjustment in
computing the optionee's alternative minimum taxable income and may be subject
to an alternative minimum tax which is paid if such tax exceeds the regular tax
for the year. Special rules may apply with respect to certain subsequent sales
of the shares in a disqualifying disposition, certain basic adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.
Nonstatutory Stock Options. Options not designated or qualifying as
incentive stock options will be nonstatutory stock options. Nonstatutory stock
options have no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a
nonstatutory stock option, the optionee normally recognizes ordinary income in
the amount of the difference between the option exercise price and the fair
market value of the shares on the determination date (as defined below). If the
optionee is an employee, such ordinary income generally is subject to
withholding of income and employment taxes. The "determination date" is the date
on which the option is exercised unless the shares are subject to a substantial
risk of forfeiture and are not transferable, in which case the determination
date is the earlier of (i) the date on which the shares are transferable or (ii)
the date on which the shares are not subject to a substantial risk of
forfeiture. If the determination date will be after the exercise date, the
optionee may elect, pursuant to Section 83(b) of the Code, to have the exercise
date be the determination date by filing an election with the Internal Revenue
Service not later than 30 days after the date the option is exercised. Upon the
sale of stock acquired by the exercise of a nonstatutory stock option, any gain
or loss, based on the difference between the sale price and the fair market
value on the determination date, will be taxed as capital gain or loss. A
capital gain or loss will be long-term if the optionee's holding period is more
than 12 months. No tax deduction is available to the Company with respect to the
grant of a nonstatutory option or the sale of the stock acquired pursuant to
such grant. The Company generally should be entitled to a deduction equal to the
amount of ordinary income recognized by the optionee as a result of the exercise
of a nonstatutory option, except to the extent such deduction is limited by
applicable provisions of the Code or the regulations thereunder.
Potential Limitation on Company Deductions. As part of the Omnibus Budget
Reconciliation Act of 1933, the U.S. Congress amended the Code to add Section
162(m) which denies a deduction to any publicly held corporation for
compensation paid to a covered employee in a taxable year to the extent that
non-performance-based compensation paid to such a covered employee exceeds $1
million. It is possible that compensation attributable to stock options granted
under the Option Plan, when combined with all other types of compensation
received by a covered employee from the Company, may cause this limitation to be
exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation.
Treasury regulations issued under Section 162(m) of the Code provide that
compensation attributable to stock options will qualify as performance-based
compensation if: (i) the stock option plan contains a per-employee limitation on
the number of shares for which stock options may be granted during a specified
period; (ii) the per-employee limitation is approved by the stockholders; (iii)
the stock option is granted by a compensation committee comprised solely of
"outside directors;" and (iv) the exercise price of the stock option is no less
than the fair market value of the stock on the date of grant. The term "outside
directors" excludes from the compensation committee directors who are (i)
current employees of the Company or an affiliate, (ii) former employees of the
Company or an affiliate receiving compensation for past services (other than
benefits under a tax-qualified pension plan), (iii) current and former officers
of the Company or an affiliate, (iv) directors currently receiving direct or
indirect remuneration from the Company or an affiliate in any capacity (other
than as a director), and (v) any other person who is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.
12
15
ADDITIONAL INFORMATION
1996 Nonstatutory Stock Option Plan: In February 1996, the Company's Board
of Directors approved the 1996 Nonstatutory Stock Option Plan. Pursuant to the
1996 Nonstatutory Stock Option Plan, the Board of Directors has the power to
grant nonstatutory stock options to employees, prospective employees,
consultants and prospective consultants; provided, however, that no such grant
may be made to a person who is (i) a holder of 10% or more of the Company's
stock or (ii) an executive officer or director of the Company. In April 1997,
the Company increased the number of shares reserved under the 1996 Nonstatutory
Stock Option Plan from 300,000 to 600,000 shares of Common Stock for issuance to
certain employees and consultants of the Company. In March 1998, the Company
raised the number of shares to 1,860,000 shares of Common Stock for issuance to
certain employees and consultants of the Company. In May 1999, the Company
raised the number of shares to 2,860,000 shares of Common Stock for issuance to
certain employees and consultants of the Company. At May 31, 1999, 487,779
shares of Common Stock were available for grant under the 1996 Nonstatutory
Stock Option Plan.
Outside Directors Plan: In July 1995, the Company's Board of Directors
approved the 1995 Outside Directors Plan and reserved 200,000 shares of Common
Stock for issuance to directors of the Company who are not employees of the
Company. The Outside Directors Plan provides for the automatic granting of
nonqualified stock options to directors of the Company who are not employees of
the Company. The Board is seeking approval of an increase in the number of
shares reserved for issuance under the 1995 Outside Directors Plan in Proposal
5. See Proposal 5 for more details on the terms of the 1995 Outside Directors
Plan.
1997 Stock Option Plan for Verity Canada: In May 1997, the Company's Board
of Directors authorized the adoption of the 1997 Stock Option Plan for Verity
Canada. Under this plan, the Company has reserved 150,000 shares of Common Stock
for issuance to certain employees and consultants of Verity Canada. The terms of
the 1997 Stock Option Plan for Verity Canada are substantially the same as those
of the 1995 Stock Option Plan. In March 1998, the Company increased the number
of shares reserved under the Plan from 150,000 to 390,000 shares of Common Stock
for issuance to certain employees and consultants of the Company. In May 1999,
the Company increased the number of shares reserved under the Plan from 390,000
to 590,000 shares of Common Stock for issuance to certain employees and
consultants of the Company. At May 31, 1999, 199,008 shares of Common Stock were
available for grant under the 1997 Stock Option Plan for Verity Canada.
VOTE REQUIRED AND BOARD OF DIRECTOR'S RECOMMENDATION.
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the meeting and entitled to vote is
required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum
at the Annual Meeting of Stockholders. Abstentions will have the same effect as
a negative vote on this proposal. Broker non-votes will have no effect on the
outcome of this vote.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.
PROPOSAL 5
APPROVAL OF 1995 OUTSIDE DIRECTORS STOCK OPTION PLAN, AS AMENDED
In July 1995, the Company's Board of Directors adopted, and the
stockholders subsequently approved, the Company's 1995 Outside Directors Plan
(the "Directors' Plan") and reserved 200,000 shares of Common Stock for issuance
to directors of the Company who are not employees of the Company. The Outside
Directors Plan provides for the automatic granting of nonqualified stock options
to directors of the Company who are not employees of the Company.
In July 1999, the Board of Directors amended the Directors' Plan, subject
to stockholder approval, to increase the number of shares of Common Stock
authorized for issuance under the Directors' Plan from a
13
16
total of 200,000 shares to a total of 500,000 shares, and to increase the number
of shares granted to each non-employee director each year from 5,000 shares to
20,000 shares. The Board of Directors adopted this amendment in order to ensure
that the Company can continue to attract and retain non-employee directors.
As of July 31, 1999, options (net of canceled or expired options) covering
an aggregate of 150,000 shares of the Company's Common Stock had been granted
under the Directors' Plan. Only 50,000 shares of Common Stock (plus any shares
that might in the future be returned to the Directors' Plan as a result of
cancellations or expiration of options) remained available for future grant
under the Directors' Plan.
Stockholders are requested in this Proposal 5 to approve the amendments to
the Directors' Plan. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve the amendments to the Directors' Plan.
Abstentions will be counted toward the tabulation of votes cast on proposals
presented to the stockholders and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether this proposal has been approved.
SUMMARY OF THE PROVISIONS OF THE DIRECTORS' PLAN
The essential features of the Directors' Plan are outlined below:
GENERAL
The Directors' Plan provides for the automatic grant of nonstatutory stock
options. Options granted under the Directors' Plan are not intended to qualify
as "incentive stock options" within the meaning of Section 422 of the Code. See
"Federal Income Tax Information" for a discussion of the tax treatment of
nonstatutory stock options.
PURPOSE
The Board of Directors adopted the Directors' Plan to provide a means by
which non-employee directors of the Company may be given an opportunity to
purchase stock in the Company, to assist in retaining the services of such
persons, to secure and retain the services of persons capable of filling such
positions and to provide incentives for such persons to exert maximum efforts
for the success of the Company. Three of the current directors of the Company
are eligible to participate in the Directors' Plan.
ADMINISTRATION
The Board of Directors administers the Directors' Plan. The Board has the
power to construe and interpret the Directors' Plan but not to determine the
persons to whom or the dates on which options will be granted, the number of
shares to be subject to each option, the time or times during the term of each
option within which all or a portion of such option may be exercised, the
exercise price, the type of consideration or the other terms of the option
except in the sense of administering the Plan subject to the provisions of the
Plan.
The Board has the power to delegate administration of the Directors' Plan
to a committee of the Board. As used herein with respect to the Directors' Plan,
the "Board" refers to any committee the Board appoints as well as to the Board
itself.
ELIGIBILITY
The Directors' Plan provides that options may be granted only to
non-employee directors of the Company. A "non-employee director" is defined in
the Directors' Plan as a director of the Company who is not otherwise an
employee of the Company or any affiliate.
14
17
STOCK SUBJECT TO THE DIRECTORS' PLAN
Subject to this Proposal, an aggregate of 500,000 shares of Common Stock is
reserved for issuance under the Directors' Plan. If options granted under the
Directors' Plan expire or otherwise terminate without being exercised, the
shares of Common Stock not acquired pursuant to such options again becomes
available for issuance under the Directors' Plan. If the Company reacquires
unvested stock issued under the Directors' Plan, the reacquired stock may be
reissued under the Directors' Plan.
TERMS OF OPTIONS
The following is a description of the terms of options under the Directors'
Plan. Individual option grants may not be more restrictive as to the terms
described below except as otherwise noted.
Automatic Grants. Each person who is first elected or appointed as an
outside director to the Board (excluding any person who is already a director at
the time of first becoming an outside director) on or after the effective date
of the Directors' Plan is automatically granted an option to purchase 20,000
shares of Common Stock on the date of such election or appointment. Thereafter
at each annual meeting of the stockholders, those outside directors with six
months of service as a director (not necessarily as an outside director) who
will be outside directors after such meeting automatically receive a new option
to purchase 20,000 shares of the Company's Common Stock (5,000 shares of the
Company's Common Stock if this Proposal 5 is not approved).
Exercise Price; Payment. The exercise price of options is the fair market
value of the stock subject to the option on the date of the grant. At July 30,
1999, the closing price of the Company's Common Stock as reported on the Nasdaq
National Market System was $49.50 per share.
The exercise price of options granted under the Directors' Plan must be
paid either in cash at the time the option is exercised or (i) by delivery of
other Common Stock of the Company, (ii) by the assignment of the proceeds from a
sale or loan with respect to some or all of the shares being acquired, or (iii)
in any combination of the foregoing.
Repricing. In the event of a decline in the value of the Company's Common
Stock, the Board does not have the authority to offer optionholders the
opportunity to replace outstanding higher-priced options with new lower-priced
options granted under the Directors' Plan.
Option Exercise. Options granted under the Directors' Plan become
exercisable in cumulative increments ("vest") as set out in the Directors' Plan
during the optionholder's continuous service as a director or employee of or
consultant to the Company ("service"). The Board does not have the power to
accelerate the time during which an option may vest without amending the
Directors' Plan. Options granted under the Directors' Plan do not permit
exercise prior to vesting. The Company may require, in its discretion, that an
optionholder satisfy any federal, state or local tax withholding obligation
relating to the exercise of such option by a cash payment upon exercise, by
authorizing the Company to withhold a portion of the Common Stock otherwise
issuable to the optionholder, by delivering already-owned Common Stock of the
Company or by a combination of these means.
Term. The term of options under the Directors' Plan is 10 years. Options
under the Directors' Plan terminate three months after termination of the
optionholder's service unless (i) such termination is due to the optionholder's
disability, in which case the option may be exercised (to the extent the option
was exercisable at the time of the termination of service) at any time within 6
months of such termination; or (ii) the optionholder dies before the
optionholder's service has terminated, or within three months after termination
of such service, in which case the option may be exercised (to the extent the
option was exercisable at the time of the optionholder's death) within 6 months
of the optionholder's death by the person or persons to whom the rights to such
option pass by will or by the laws of descent and distribution. An optionholder
has no right to designate a beneficiary who may exercise the option following
the optionholder's death.
15
18
The option term is extended in the event that exercise of the option within
these periods is prohibited. An optionholder's option agreement provides that if
the exercise of the option following the termination of the optionholder's
service would result in liability under Section 16(b) of the Securities Exchange
Act of 1934 (the "Exchange Act"), then the option will terminate on the earlier
of (i) the expiration of the term of the option, (ii) the 10th day after the
last date on which such exercise would result in such liability under Section
16(b), or (iii) the 190th day after termination of service. An optionholder's
option agreement also provides that if the exercise of the option following the
termination of the optionholder's service would be prohibited by law, then the
option will terminate on the earlier of (i) the expiration of the term of the
option or (ii) three months after the optionholder is notified by the Company
that exercise of the option would not be in violation of applicable law.
Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Directors' Plan as
determined by the Board.
RESTRICTIONS ON TRANSFER
The optionholder may not transfer an option otherwise than by will or by
the laws of descent and distribution. During the lifetime of the optionholder,
an option may be exercised only by the optionholder.
ADJUSTMENT PROVISIONS
Transactions not involving receipt of consideration by the Company, such as
a merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares of Common Stock subject to the Directors'
Plan and outstanding options. In that event, the Directors' Plan will be
appropriately adjusted as to the class and the maximum number of shares of
Common Stock subject to the Directors' Plan, and outstanding options will be
adjusted as to the class, number of shares and price per share of Common Stock
subject to such options.
EFFECT OF CERTAIN CORPORATE EVENTS
The Directors' Plan provides that, in the event of: (i) a sale or exchange
by the stockholders in a single or series of related transactions of more than
50% of the Company's voting stock, (ii) a merger or consolidation in which the
Company is a party, (iii) the sale, exchange or transfer of all or substantially
all of the assets of the Company, or (iv) a liquidation or dissolution of the
Company wherein, upon any such event, the stockholders of the Company
immediately before such event do not retain direct or indirect beneficial
ownership of more than 50% of the total combined voting power of the voting
stock of the Company, its successor, or the corporation to which the assets of
the Company were transferred (a "Transfer of Control"), the surviving,
continuing, successor or purchasing corporation or parent corporation thereof
may assume the outstanding options or substitute substantially equivalent
options to purchase such corporation's stock. Whether or not such corporation
elects to assume or replace outstanding options, the outstanding options will be
immediately exercisable and vested in full ten days prior to the date of the
Transfer of Control (with such exercisability and vesting conditioned on the
consummation of the Transfer of Control). If not exercised, assumed or
substituted then outstanding options will terminate on the date of the Transfer
of Control. The acceleration of an option in the event of an acquisition or
similar corporate event may be viewed as an anti-takeover provision, which may
have the effect of discouraging a proposal to acquire or otherwise obtain
control of the Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Directors' Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Directors' Plan will terminate on the date on which all of the
shares of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed.
16
19
The Board may also amend the Directors' Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by the
Board if the amendment would (i) modify the requirements as to eligibility for
participation (to the extent such modification requires stockholder approval in
order for the Directors' Plan to satisfy Rule 16b-3 of the Exchange Act; (ii)
increase the number of shares reserved for issuance upon exercise of options; or
(iii) change any other provision of the Directors' Plan in any other way if such
modification requires stockholder approval in order to comply with Rule 16b-3 of
the Exchange Act or any securities exchange listing requirements. However, the
Board may not amend the Plan more than once every six months with respect to the
provisions of the Plan that relate to the amount, price and timing of grants,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. The Board may submit
any other amendment to the Directors' Plan for stockholder approval.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE DIRECTORS' PLAN
Stock options granted under the Directors' Plan generally have the
following federal income tax consequences:
There are no tax consequences to the optionholder or the Company by reason
of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory
stock option, the optionholder normally will recognize taxable ordinary income
equal to the excess of the stock's fair market value on the date of exercise
over the option exercise price. Slightly different rules may apply to
optionholders who acquire stock subject to certain repurchase options or whose
options are not exempt on grant from the application of Section 16(b) of the
Exchange Act. If the optionholder becomes an employee, the Company is required
to withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of reasonableness,
the provisions of Section 162(m) of the Code (if then applicable) and the
satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionholder.
Upon disposition of the stock, the optionholder will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon exercise of the option (or vesting of the stock). Such gain or loss will be
long-term or short-term depending on whether the stock was held for more than
one year. Long-term capital gains currently are generally subject to lower tax
rates than ordinary income or short-term capital gains. The maximum long-term
capital gains rate for federal income tax purposes is currently 20% while the
maximum ordinary income rate and short-term capital gains rate is effectively
39.6%. Slightly different rules may apply to optionholders who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 5.
PROPOSAL 6
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ending May 31, 2000 and
has further directed that management submit the selection of independent
accountants for ratification by the stockholders at the Annual Meeting.
PricewaterhouseCoopers LLP, together with Coopers & Lybrand LLP, the predecessor
entity of PricewaterhouseCoopers LLP, has audited the Company's financial
statements since its inception. Representatives of PricewaterhouseCoopers LLP
are expected to be present at the Annual Meeting, will have an opportunity to
make a statement if they so desire and will be available to respond to
appropriate questions.
Stockholder ratification of the selection of PricewaterhouseCoopers LLP as
the Company's independent accountants is not required by the Company's Bylaws or
otherwise. However, the Board of Directors is submitting the selection of
PricewaterhouseCoopers LLP to the stockholders for ratification as a matter of
17
20
good corporate practice. If the stockholders fail to ratify the selection, the
Audit Committee and the Board of Directors will reconsider whether or not to
retain that firm. Even if the selection is ratified, the Audit Committee and the
Board of Directors in their discretion may direct the appointment of different
independent accountants at any time during the year if they determine that such
a change would be in the best interests of the Company and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of PricewaterhouseCoopers LLP. Abstentions
will be counted toward the tabulation of votes cast on proposals presented to
the stockholders and will have the same effect as negative votes. Broker
non-votes are counted towards a quorum, but are not counted for any purpose in
determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 6.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of June 30, 1999 by:
- each director and nominee for director;
- each of the executive officers named in the Summary Compensation Table;
- all directors and executive officers as a group; and
- each person, or group of affiliated persons, known by the Company to be
beneficial owners of 5% or more of its common stock;
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of June 30, 1999 are deemed to be
beneficially owned. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
18
21
Except as indicated in this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. Percentage of ownership is based on 12,937,659 shares of
common stock, outstanding on June 30, 1999. Unless otherwise indicated, the
address of each of the individuals named below is 894 Ross Drive, Sunnyvale,
California 94089.
BENEFICIAL OWNERSHIP
-------------------------
NUMBER OF
NUMBER OF SHARES
SHARES ISSUABLE PERCENT
ACTUALLY PURSUANT TO BENEFICIALLY
NAME OF BENEFICIAL OWNER ISSUED STOCK OPTIONS OWNED
------------------------ --------- ------------- ------------
DIRECTORS AND EXECUTIVE OFFICERS
Gary J. Shona............................................... -- 820,000 5.96%
Anthony J. Bettencourt...................................... 1,497 270,000 2.06
Hugh S. Njemanze............................................ 44,500 164,123 1.59
James E. Ticehurst.......................................... 1,953 103,218 *
Ronald F.E. Weissman........................................ 13,637 153,647 1.28
Steven M. Krausz............................................ -- 75,000 *
Stephen A. MacDonald........................................ 4,201 82,000 *
Charles P. Waite, Jr. ...................................... 4,764 62,000 *
All executive officers and directors as a group (12
persons).................................................. 73,777 1,785,466 12.63%
- ---------------
* Represents less than one percent.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and the Company's other equity securities. Officers, directors and greater than
ten percent stockholders are required by the SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended May 31, 1999, all Section
16(a) filing requirements applicable to the Company's officers, directors and
greater than ten percent beneficial owners were complied with.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors do not receive any cash compensation for their services as
members of the Board of Directors, although they are reimbursed for their
expenses in attending Board and committee meetings. In addition, all Directors
who have served on the Board for more than six months and are not members of
management will receive stock options to purchase 5,000 shares of Common Stock
pursuant to the 1995 Outside Directors Stock Option Plan upon the date of each
annual stockholders' meeting. The exercise price of each option is the fair
market value on the day it is granted. Each option will vest over four years and
generally must be exercised within ten years. The Company is seeking in Proposal
5 to increase the number of shares subject to the automatic grant of stock
options under the 1995 Outside Directors Stock Option Plan to 20,000 shares. For
a further description of the terms of the 1995 Outside Directors Stock Option
Plan, see Proposal 5.
During the last fiscal year, the Company granted options covering 50,000
shares to each of Steven M. Krausz, Stephen A. MacDonald and Charles P. Waite,
Jr., at a weighted average exercise price of $25.07 per share. Five thousand of
these options were granted under the 1995 Outside Directors Stock Option Plan
and the remainder were granted under the 1995 Stock Option Plan. The per share
exercise price of each option is the fair market value of such common stock on
the date of grant (based on the closing sales price reported in the Nasdaq
National Market for the date of grant).
19
22
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended May 31, 1997, 1998 and
1999, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at May 31, 1999 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------- SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION COMPENSATION
--------------------------- ------ -------- -------- ------------ ------------
Gary J. Sbona.............................. 1999 $ 52,000 $ 10,400 470,000 $ 585(1)
President, Chief Executive Officer 1998 15,167 -- 350,000 73(1)
and Chairman of the Board(2) 1997 -- -- -- --
Anthony J. Bettencourt..................... 1999 200,000 200,000 175,000 264(1)
Senior Vice President, 1998 147,051 292,500(4) 150,000 198(1)
Worldwide Sales and Product Marketing(3) 1997 60,633 92,015 50,000 124(1)
Hugh S. Njemanze........................... 1999 196,875 39,375 75,000 408(1)
Chief Technology Officer 1998 171,250 35,000 55,000 408(1)
1997 133,333 0 88,000 324(1)
James E. Ticehurst......................... 1999 136,250 27,250 80,000 1,422(1)
Vice President, Finance and
Administration 1998 106,711 21,342 30,000 994(1)
and Assistant Secretary 1997 79,333 -- 6,100 684(1)
Ronald F.E. Weissman....................... 1999 213,333 42,667 80,000 696(1)
Vice President, Strategy 1998 183,333 40,000 35,000 696(1)
and Corporate Marketing 1997 4,327 15,000 -- 29(1)
- ---------------
(1) Represents premiums paid on behalf of such Named Executive Officer for life
insurance coverage in excess of a base amount of $50,000 in coverage.
(2) Mr. Sbona is partially compensated for his services to the Company by Regent
Management Corporation. See "Certain Transactions" below.
(3) Mr. Bettencourt served as Vice President, Worldwide Sales and Marketing, of
the Company until December 1996. He rejoined the Company in September 1997,
and currently serves as Senior Vice President, Worldwide Sales and
Marketing.
(4) Of such amount, $180,000 represents a signing bonus paid in connection with
Mr. Bettencourt rejoining the Company in September 1997, and $112,500
represents sales commissions earned under a sales commission plan.
20
23
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1995 Stock
Option Plan. As of June 30, 1999, options to purchase a total of 1,972,610
shares were outstanding under the 1995 Stock Option Plan and options to purchase
466,987 shares remained available for grant thereunder.
The following tables show for the fiscal year ended May 31, 1999, certain
information regarding options granted to, exercised by, and held at year end by,
the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF
TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE
NUMBER OF GRANTED TO AT ASSUMED ANNUAL RATES
SECURITIES EMPLOYEES OPTION OF STOCK PRICE APPRECIATION
UNDERLYING IN FISCAL DATE FOR OPTION TERM(3)
OPTIONS YEAR IN EXERCISE MARKET EXPIRATION ----------------------------
NAME GRANTED(1) 1999(2) PRICE VALUE DATE 5% ($) 10% ($)
---- ---------- ---------- -------- ------- ---------- ------------ -------------
Gary J. Sbona........... 260,000 9.45 $ 7.625 $ 7.625 10/20/2006 $ 946,556 $ 2,267,165
210,000 7.63 32.500 32.500 05/25/2007 3,258,633 7,804,993
------- ----- ---------- -----------
470,000 17.07 4,205,189 10,072,158
Anthony J.
Bettencourt........... 50,000 1.82 5.875 5.875 09/01/2006 140,253 335,929
50,000 1.82 7.625 7.625 10/20/2006 182,030 435,993
75,000 2.72 32.500 32.500 05/25/2007 1,163,797 2,787,498
------- ----- ---------- -----------
175,000 6.36 1,486,080 3,559,420
Hugh S. Njemanze........ 30,000 1.09 5.875 5.875 09/01/2006 84,151 201,557
10,000 0.36 7.625 7.625 10/20/2006 36,406 87,199
35,000 1.27 32.500 32.500 05/25/2007 543,106 1,300,832
------- ----- ---------- -----------
75,000 2.72 663,663 1,589,588
James E. Ticehurst...... 25,000 0.91 5.875 5.875 09/01/2006 70,127 167,964
30,000 1.09 7.625 7.625 10/20/2006 109,218 261,596
25,000 0.91 32.500 32.500 05/25/2007 387,932 929,166
------- ----- ---------- -----------
80,000 2.91 567,277 1,358,726
Ronald F.E. Weissman.... 30,000 1.09 5.875 5.875 09/01/2006 84,152 201,558
10,000 0.36 7.625 7.625 10/20/2006 36,406 87,199
40,000 1.45 32.500 32.500 05/25/2007 620,692 1,486,665
------- ----- ---------- -----------
80,000 2.91 741,250 1,775,422
- ---------------
(1) Options granted in fiscal 1999 generally vest over a 12-month period.
(2) Based on an aggregate of 2,802,585 options granted to employees, including
the Named Executive Officers, in fiscal year 1999.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant, 10 years, compounded annually. It is calculated by
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.
21
24
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES ACQUIRED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
NAME ON EXERCISE(1) VALUE REALIZED(2) YEAR END(1) AT FISCAL YEAR END(1)(3)
---- --------------- ----------------- ------------------------- ------------------------
VESTED/UNVESTED VESTED/UNVESTED
Gary J. Sbona ........ 0 $ -- 501,666/318,334 $13,698,837/$2,913,663
Anthony J.
Bettencourt......... 40,000 809,074 119,310/150,690 3,277,878/ 2,122,747
Hugh S. Njemanze...... 80,957 2,388,398 73,379/90,744 2,003,429/ 1,474,751
James E. Ticehurst ... 8,317 149,046 44,033/59,185 1,178,723/ 936,765
Ronald F.E.
Weissman............ 36,353 891,987 54,104/99,543 1,484,395/ 1,659,512
- ---------------
(1) These options are immediately exercisable in full at the date of grant, but
shares purchased upon exercise of unvested options are subject to a
repurchase right in favor of the Company to repurchase unvested shares at
the original issuance price.
(2) Represents the fair market value of the underlying securities on the
exercise date minus the aggregate exercise price of such option.
(3) Calculated on the basis of the fair market value of the underlying
securities as of May 28, 1999, of $33.1875 per share, the last trading day
of fiscal 1999, as reported by the Nasdaq National Market, minus the
aggregate exercise price.
EMPLOYMENT AGREEMENTS AND TERMINATION
AND CHANGE IN CONTROL AGREEMENTS
The 1995 Stock Option Plan provides that, in the event of (a) a sale or
exchange by the stockholders of all or substantially all of the Company's voting
stock or certain mergers or consolidations to which the Company is a party and
in which the Company's stockholders do not retain beneficial ownership of at
least a majority of the Company's or the Company's successor's voting stock, (b)
the sale, exchange or transfer of all or substantially all of the Company's
assets other than to one or more subsidiary corporations, or (c) liquidation or
dissolution of the Company, the Board of Directors may provide for the acquiring
or successor corporation to assume or substitute new options for the options
outstanding under the 1995 Stock Option Plan. To the extent that the options
outstanding under the 1995 Stock Option Plan are not assumed, substituted for,
or exercised prior to such event, they will terminate; provided, however, that
the Company has granted options to certain of its officers, including the Named
Executive Officers, which provide for acceleration of vesting upon such a change
in control.
Under the 1995 Stock Option Plan, the Board of Directors retains discretion
to modify the terms, including the price, of outstanding shares. Options granted
under that plan are immediately exercisable, subject to a right of repurchase in
favor of the Company for all exercised, unvested shares. Generally, 12.5% of the
shares subject to options granted to new employees become vested six months
after the date of commencement of employment and 2.083% of the shares subject to
options vest upon completion of each succeeding full month of continuous
employment with the Company. Shares subject to options granted to existing
employees generally vest at the rate of 2.083% per month for 48 months following
the date of grant. Generally, options have a term of eight (8) years. All
options were granted at fair market value as determined by the Board of
Directors on the date of grant.
On July 31, 1997, Gary J. Sbona was appointed as the Company's President
and Chief Executive Officer, and the Company entered into an agreement with
Regent Pacific Management Corporation, a management firm of which Mr. Sbona is
the chief executive officer, which agreement was subsequently amended. See
"Certain Transactions."
22
25
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is comprised of two
non-employee directors of the Board of Directors, Messrs. Krausz and Waite. The
Committee is responsible for setting and administering policies governing
compensation of executive officers. For all executive officers, the Committee
reviews the performance and compensation levels for executive officers, sets
salary and bonus levels and makes option grants under the Company's 1995 Stock
Option Plan.
COMPENSATION POLICIES GENERALLY
The goals of the Company's executive officer compensation policies are to
attract, retain and reward executive officers who contribute to the Company's
success, to align executive officer compensation with the Company's performance
and to motivate executive officers to achieve the Company's business objectives.
The Company uses salary, executive officer bonuses and stock options to achieve
these goals.
SALARIES AND BONUSES. Salaries are set for each executive officer with
reference to a range of salaries for comparable positions among high technology
companies of similar size and location. Annual salary adjustments take into
account individual executive officers' achievements during the prior fiscal year
towards key Company-wide objectives set annually by the Board of Directors, in
consultation with the Chief Executive Officer, as well as the executive
officers' performance of their individual responsibilities.
Variable cash incentive compensation for fiscal 1999 was provided through
the Company's employee bonus plan for all executive officers except for the
executive officer responsible for sales operations, whose bonus plan for fiscal
1999 was determined based upon negotiations between the officer and the Company.
In accordance with the Committee's goal, fiscal 1999 variable cash incentive
compensation for the bonus plan participants was targeted for up to 20% of the
officer's salary if predetermined corporate revenue and net income objectives
were achieved.
STOCK OPTIONS. The Committee strongly believes that equity ownership by
executive officers provides incentives to build stockholder value and align the
interests of executive officers with the stockholders. Initial stock option
grants to executive officers are subject to four year vesting. The size of the
initial grant has been determined with reference to comparable stock option
compensation offered by similarly sized high technology companies for similar
positions and the responsibilities and expected future contributions of the
executive officer, as well as recruitment considerations. In determining the
size of, or whether to grant, refresher grants, the Committee has considered
each executive officer's performance during the previous periods and expected
contributions during future periods, as well as the relative position and
responsibilities of each executive officer and previous option grants to such
executive officers. Generally, refresher option grants vest monthly over a one
year period from the date of grant. The Committee believes that refresher
options have provided strong incentives for executive officers to remain with
the Company.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION. The Company has considered
regulations of the Internal Revenue Service which restrict deductibility of
executive compensation paid to each of the five most highly compensated
executive officers at the end of any fiscal year to the extent such compensation
exceeds $1,000,000 for any of such officers in any year and does not qualify for
an exception under the statute or proposed regulations. The Committee concluded
in March 1996 that it would be advisable to establish certain restrictions on
the granting of options under the Option Plan to assist in the qualification of
compensation recognized in connection with the exercise of such options for an
exemption; these restrictions were approved at the Special Meeting of
Stockholders held on March 28, 1996. The Committee does not believe that other
components of the Company's compensation will be likely to exceed $1,000,000 for
any executive officer in the foreseeable future and therefore concluded that no
further action with respect to qualifying such compensation for deductibility
was necessary at this time. In the future, the Committee will continue to
evaluate the advisability of qualifying its executive compensation for
deductibility of such compensation. The Committee's policy is to qualify its
executive compensation for deductibility under applicable tax laws as
practicable.
23
26
CHIEF EXECUTIVE OFFICER COMPENSATION
On July 31, 1997, the Company and Regent Pacific Management Corporation
("Regent Pacific") executed an agreement (the "Agreement") pursuant to which
Regent Pacific agreed to provide certain management services to the Company for
a term of 12 months, including a noncancelable period of 26 weeks, in exchange
for a retainer of $200,000 and fees of $50,000 per week. On April 13, 1998, the
Company and Regent Pacific executed an amendment to the Agreement (the
"Amendment"). Pursuant to the Amendment, Regent Pacific increased the size of
the management team provided to the Company; the Company hired Gary J. Sbona as
an employee at a salary of $52,000 per year, effective as of February 16, 1998;
the parties agreed to extend the term of the Agreement to 25 months, including
an extension of the noncancelable period to February 28, 1999; the Company
granted an incentive stock option to Mr. Sbona to purchase 350,000 shares of the
Company's Common Stock; and the Company agreed to release $146,000 of the
retainer to Regent Pacific upon the expiration of the noncancelable period and
Regent Pacific agreed to return $54,000 of the retainer to the Company to offset
Mr. Sbona's salary. The Amendment provides that the Company may terminate the
Agreement upon 60 days written notice to Regent Pacific at any time after the
expiration of the noncancelable period, and that the Company has an option to
extend the Agreement for an additional 26 week period.
In October 1998, the Board of Directors granted Mr. Sbona another option to
purchase an additional 260,000 shares of Common Stock, at an exercise price of
$7.625 per share. In May 1999, the Board of Directors granted Mr. Sbona a third
option to purchase an additional 210,000 shares of Common Stock, at an exercise
price of $32.50 per share. The shares subject to these options vest on a monthly
basis during the 13-month period ending on February 28, 1999, the 12-month
period ending on October 20, 1999, and the 12-month period ending May 25, 2000,
respectively, subject to Mr. Sbona's continued employment as President and Chief
Executive Officer. The shares subject to these options shall fully vest upon the
occurrence of certain change of control transactions or upon a termination of
Mr. Sbona without cause. The options also remain exercisable for one year
following the termination of Mr. Sbona's services.
On March 12, 1999, the Company extended its agreement with Regent Pacific
Management Corporation until August 31, 2000. Under this amended agreement,
Regent Pacific continues to provide certain services to the Company for a fee of
$50,000 per week. The new agreement provides the Company with an option to
further extend the term of this agreement through February 2001.
Compensation Committee
Steven M. Krausz
Charles P. Waite, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Steven M. Krausz and Charles P. Waite, Jr. served as members of the Board
of Directors' compensation committee during the fiscal year ended May 31, 1999.
None of the Company's executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or compensation
committee.
The Company has entered into indemnification agreements with its directors
and officers. Such agreements require the Company to indemnify such individuals
to the fullest extent permitted by law.
24
27
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph shows the total stockholder return of an investment of
$100 in cash on October 6, 1995 for (i) the Company's Common Stock, (ii) the
Nasdaq Stock Market and (iii) the American Stock Exchange Biotechnology Index
(the "AMEX Biotech"). All values assume reinvestment of the full amount of all
dividends and are calculated as of May 31 of each year:
Comparison of 5 year Cumulative Total Return on Investment from October 6,
1995 through May 29, 1999:
COMPARISON OF 44 MONTH CUMULATIVE TOTAL RETURN
AMONG VERITY, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER AND DATA PROCESSING INDEX
NASDAQ STOCK NASDAQ COMPUTER &
VERITY, INC. MARKET (U.S.) DATA PROCESSING
------------ ------------- -----------------
10/6/1995 100 100 100
10/95 199 103 110
11/95 269 105 111
12/95 239 104 109
1/96 205 105 108
2/96 257 109 115
3/96 182 109 114
4/96 186 118 128
5/96 212 124 132
6/96 155 118 127
7/96 118 108 114
8/96 132 114 117
9/96 67 122 130
10/96 64 121 127
11/96 90 129 136
12/96 83 128 135
1/97 76 138 147
2/97 53 130 135
3/97 42 121 125
4/97 30 125 141
5/97 35 139 157
6/97 29 144 160
7/97 35 159 177
8/97 35 159 172
9/97 26 168 175
10/97 28 159 172
11/97 27 160 176
12/97 27 157 165
1/98 24 162 178
2/98 28 178 202
3/98 45 184 219
4/98 51 187 220
5/98 42 177 205
6/98 58 189 242
7/98 56 187 234
8/98 28 150 190
9/98 37 171 228
10/98 59 178 221
11/98 93 196 256
12/98 143 222 295
1/99 184 254 358
2/99 209 231 317
3/99 181 248 355
4/99 189 255 337
5/99 179 249 329
* $100 invested on 10/6/98 in Stock or Index, including reinvestment of
dividends. Fiscal year ending May 31.
- ---------------
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the 1933 Act or the 1934 Act whether made before or after the date
hereof and irrespective of any general incorporation language in any such
filing. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
CERTAIN TRANSACTIONS
On July 31, 1997, Gary J. Sbona was appointed as the Company's President
and Chief Executive Officer, and the Company entered into an agreement with
Regent Pacific Management Corporation, a management firm of which Mr. Sbona is
the chief executive officer. Pursuant to the original agreement, Regent Pacific
agreed to provide management services to the Company, for a fee of $50,000 per
week. The management services included the services of Mr. Sbona as Chief
Executive Officer and President, and at least three other Regent Pacific
personnel as part of the Company's management team. The agreement had a one-year
term
25
28
and the Company retained the option to cancel the agreement after the expiration
of the initial 26-week period, with a minimum compensation to Regent Pacific of
$1.3 million for that initial period. The agreement required that the Company
indemnify Regent Pacific and Mr. Sbona for certain liabilities arising out of
the performance of services under the agreement.
On April 13, 1998, the Company amended its agreement with Regent Pacific to
provide that Mr. Sbona and at least four other Regent Pacific personnel would
serve as part of the Company's management team. The amendment also served to
extend the term of the agreement until August 31, 1999, and to extend the
noncancelable period of the agreement until February 28, 1999.
On March 12, 1999, the Company extended its agreement with Regent Pacific
Management Corporation until August 31, 2000. Under this amended agreement,
Regent Pacific continues to provide certain services to the Company for a fee of
$50,000 per week. The new agreement provides the Company with an option to
further extend the term of this agreement through February 2001.
Mr. Sbona was appointed chairman of the Board of Directors on March 12,
1999. In connection with Mr. Sbona's service as President and Chief Executive
Officer, an employee of Verity, the Company's Board of Directors compensation
committee granted to him an option to purchase 350,000 shares of the Company's
Common Stock, at an exercise price of $5.125 per share. In October 1998, the
Board of Directors granted Mr. Sbona another option to purchase an additional
260,000 shares of the Company's Common Stock, at an exercise price of $7.625 per
share. In May 1999, the Board of Directors granted Mr. Sbona a third option to
purchase an additional 210,000 shares of the Company's Common Stock, at an
exercise price of $32.50 per share. The shares subject to these options vest on
a monthly basis during the 13-month period ending on February 28, 1999, the
12-month period ending on October 20, 1999, and the 12-month period ending May
25, 2000, respectively, subject to Mr. Sbona's continued employment as the
Company's President and Chief Executive Officer. The shares subject to these
options shall fully vest upon the occurrence of certain change of control
transactions or upon a termination of Mr. Sbona without cause. The options also
remain exercisable for one year following the termination of Mr. Sbona's
services.
26
29
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
[FACSIMILE SIGNATURE]
Timothy J. Moore
Secretary
August 16, 1999
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-K FOR THE FISCAL YEAR ENDED MAY 31, 1999 IS AVAILABLE WITHOUT CHARGE
UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, VERITY, INC., 894 ROSS DRIVE,
SUNNYVALE, CALIFORNIA 94089.
27
30
*** PRELIMINARY COPY ***
VERITY, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 21, 1999
The undersigned hereby appoints Gary J. Sbona and James E. Ticehurst,
and each of them, as attorneys and proxies of the undersigned, with full power
of substitution, to vote all of the shares of stock of Verity, Inc. which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders of
Verity, Inc. to be held at the Sunnyvale Sheraton, 1100 N. Mathilda Avenue,
Sunnyvale, California on Tuesday, September 21, 1999 at 11:00 a.m. local time,
and at any and all postponements, continuations and adjournments thereof, with
all powers that the undersigned would possess if personally present, upon and in
respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4, 5 AND 6, AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
PROPOSAL 1: To elect two directors to hold office until the 2002 Annual Meeting
of Stockholders.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary to vote for all nominees
below). listed below.
NOMINEES: Steven M. Krausz, Charles P. Waite, Jr.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S) WRITE SUCH NOMINEE(S)' NAME(S)
BELOW.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 2, 3, 4, 5 AND 6.
PROPOSAL 2: To approve an amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of Common
Stock from 30,000,000 shares to 100,000,000 shares and increase the
authorized number of shares of Preferred Stock by five (5) shares
to 2,000,000 shares.
1.
31
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 3: To approve the Company's 1995 Employee Stock Purchase Plan, as
amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan from 1,300,000 shares to
2,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 4: To approve the Company's 1995 Stock Option Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized
for issuance under such plan from 4,060,836 shares to 5,060,836
shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 5: To approve the Company's 1995 Outside Directors Stock Option Plan,
as amended, to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan from 200,000 shares
to 500,000 shares and to increase the annual grant size from 5,000
shares to 20,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on other side)
2.
32
(Continued from other side)
PROPOSAL 6: To ratify the selection of PricewaterhouseCoopers LLP as
independent accountants of the Company for its fiscal year ending
May 31, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
DATED
------------------- ------------------------------------
SIGNATURE(S)
Please sign exactly as your name
appears hereon. If the stock is
registered in the names of two or
more persons, each should sign.
Executors, administrators, trustees,
guardians and attorneys-in-fact
should add their titles. If signer
is a corporation, please give full
corporate name and have a duly
authorized officer sign, stating
title. If signer is a partnership,
please sign in partnership name by
authorized person.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
3.
33
VERITY, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED THROUGH SEPTEMBER 21, 1999)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Verity, Inc. 1995 Employee Stock Purchase
Plan (the "PLAN") is hereby established effective as of the effective date of
the initial registration by the Company of its Stock under Section 12 of the
Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan to provide Eligible Employees
of the Participating Company Group with an opportunity to acquire a proprietary
interest in the Company through the purchase of Stock. The Company intends that
the Plan shall qualify as an "employee stock purchase plan" under Section 423 of
the Code (including any amendments or replacements of such section), and the
Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed
to administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited, the
Committee shall have all of the powers of the Board granted herein, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Verity, Inc., a Delaware corporation, or
any successor corporation thereto.
(e) "COMPENSATION" means, with respect to an Offering Period
under the Plan, all amounts paid in cash in the forms of base salary,
commissions, overtime, bonuses,
1.
34
annual awards, other incentive payments, shift premiums, and all other
compensation paid in cash during such Offering Period before deduction for any
contributions to any plan maintained by a Participating Company and described in
Section 401(k) or Section 125 of the Code. Compensation shall not include
reimbursements of expenses, allowances, long-term disability, workers'
compensation or any amount deemed received without the actual transfer of cash
or any amounts directly or indirectly paid pursuant to the Plan or any other
stock purchase or stock option plan.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means any person treated as an employee of a
Participating Company for purposes of Section 423 of the Code (including an
officer or a Director who is also treated as an employee); provided, however,
that neither service as a Director nor payment of a director's fee shall be
sufficient to constitute employment for purposes of the Plan. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
a military leave, sick leave or other bona fide leave of absence approved by the
Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee and the effective date of such individual's
employment or termination of employment, as the case may be. All such
determinations by the Company shall be, for purposes of an individual's
participation in or other rights under the Plan as of the time of the Company's
determination, final, binding and conclusive, notwithstanding that the Company
or any governmental agency subsequently makes a contrary determination.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(i) "FAIR MARKET VALUE" means, as of any date, if there is
then a public market for the Stock, the closing sale price of a share of Stock
(or the mean of the closing bid and asked prices if the Stock is so quoted
instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or
such other national or regional securities exchange or market system
constituting the primary market for the Stock, as reported in The Wall Street
Journal or such other source as the Company deems reliable. If the relevant date
does not fall on a day on which the Stock has traded on such securities exchange
or market system, the date on which the Fair Market Value shall be established
shall be the last day on which the Stock was so traded prior to the relevant
date, or such other appropriate day as shall be determined by the Board, in its
sole discretion. If there is then no public market for the Stock, the Fair
Market Value on any relevant date shall be as determined by the Board without
regard to any restriction other than a restriction which, by its terms, will
never lapse. Notwithstanding the foregoing, the Fair Market
2.
35
Value per share of Stock on the Effective Date shall be deemed to be the public
offering price set forth in the final prospectus filed with the Securities and
Exchange Commission in connection with the initial public offering of the Stock.
(j) "OFFERING" means an offering of Stock as provided in
Section 6.
(k) "OFFERING DATE" means, for any Offering Period, the first
day of such Offering Period.
(l) "OFFERING PERIOD" means a period determined in accordance
with Section 6.1.
(m) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee participating in
the Plan.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation which the Board determines should be
included in the Plan. The Board shall have the sole and absolute discretion to
determine from time to time what Parent Corporations or Subsidiary Corporations
shall be Participating Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.
(q) "PURCHASE DATE" means, for any Purchase Period, the last
day of such Purchase Period.
(r) "PURCHASE PERIOD" means a period determined in accordance
with Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of Stock
may be purchased pursuant to the Plan, as determined in accordance with Section
9.
(t) "PURCHASE RIGHT" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan or any Offering at any time during an Offering Period.
(u) "STOCK" means the common stock, par value $0.001, of the
Company, as adjusted from time to time in accordance with Section 4.2.
3.
36
(v) "SUBSCRIPTION AGREEMENT" means a written agreement in such
form as specified by the Company, stating an Employee's election to participate
in the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
(w) "SUBSCRIPTION DATE" means the last business day prior to
the Offering Date of an Offering Period or such earlier date as the Company
shall establish.
(x) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Purchase Right shall be determined by the
Board and shall be final and binding upon all persons having an interest in the
Plan or such Purchase Right. Subject to the provisions of the Plan, the Board
shall determine all of the relevant terms and conditions of Purchase Rights
granted pursuant to the Plan; provided, however, that all Participants granted
Purchase Rights pursuant to the Plan shall have the same rights and privileges
within the meaning of Section 423(b)(5) of the Code. All expenses incurred in
connection with the administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company
may, from time to time, consistent with the Plan and the requirements of Section
423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements
4.
37
of Section 423 of the Code, and (e) determination of the date and manner by
which the Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two million (2,000,000) and shall consist
of authorized but unissued or reacquired shares of the Stock, or any combination
thereof. If an outstanding Purchase Right for any reason expires or is
terminated or canceled, the shares of Stock allocable to the unexercised portion
of such Purchase Right shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and to each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Any Employee of a
Participating Company is eligible to participate in the Plan except the
following:
(a) Employees who are customarily employed by the
Participating Company Group for twenty (20) hours or less per week; or
(b) Employees who are customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 EXCLUSION OF CERTAIN SHAREHOLDERS. Notwithstanding any provision
of the Plan to the contrary, no Employee shall be granted a Purchase Right under
the Plan if, immediately after such grant, such Employee would own or hold
options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%)
5.
38
or more of the total combined voting power or value of all classes of stock of
such corporation, as determined in accordance with Section 423(b)(3) of the
Code. For purposes of this Section 5.2, the attribution rules of Section 424(d)
of the Code shall apply in determining the stock ownership of such Employee.
5.3 EXCLUSION OF LEASED EMPLOYEES. Notwithstanding anything herein
to the contrary, any individual performing services for a Participating Company
solely through a leasing agency or employment agency shall not be deemed an
"Employee" of such Participating Company.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately twelve (12) months
duration or such other duration as the Board shall determine (an "OFFERING
PERIOD"); provided, however that the first Offering Period shall commence on the
Effective Date and end on September 30, 1997 (the "INITIAL OFFERING PERIOD".
Subsequent Offerings shall commence on the first days of April and October of
each year and end on the last days of the first March and September,
respectively, occurring thereafter. Notwithstanding the foregoing, the Board may
establish a different term for one or more Offerings or different commencing or
ending dates for such Offerings; provided, however, that no Offering may exceed
a term of twenty-seven (27) months. If the first or last day of an Offering
Period is not a day on which the national securities exchanges or Nasdaq Stock
Market are open for trading, the Company shall specify the trading day that will
be deemed the first or last day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall consist of two (2)
consecutive purchase periods of approximately six (6) months duration (except
the Initial Offering Period which consisted of four (4) purchase periods
(Effective Date to March 31, 1996; April 1, 1996 to September 30, 1996; October
1, 1996 to March 31, 1997; and April 1, 1997 to September 30, 1997)) or such
other number or duration as the Board shall determine (individually, a "PURCHASE
PERIOD"). A Purchase Period commencing on the first day of April shall end on
the last day of the next following September. A Purchase Period commencing on
the first day of October shall end on the last day of the next following March.
Notwithstanding the foregoing, the Board may establish a different term for one
or more Purchase Periods or different commencing or ending dates for such
Purchase Periods. If the first or last day of a Purchase Period is not a day on
which the national securities exchanges or Nasdaq Stock Market are open for
trading, the Company shall specify the trading day that will be deemed the first
or last day, as the case may be, of the Purchase Period.
6.3 GOVERNMENTAL APPROVAL; STOCKHOLDER APPROVAL. Notwithstanding any
other provision of the Plan to the contrary, any Purchase Right granted pursuant
to the Plan shall be subject to (a) obtaining all necessary governmental
approvals or qualifications of the sale or issuance of the Purchase Rights or
the shares of Stock and (b) obtaining stockholder approval of the Plan.
Notwithstanding the foregoing, stockholder approval shall not be necessary in
order to grant any Purchase Right granted in the Plan's Initial Offering Period;
provided, however, that
6.
39
the exercise of any such Purchase Right shall be subject to obtaining
stockholder approval of the Plan.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless such Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for such subsequent Offering Period. An Employee who becomes
an Eligible Employee after the Offering Date of an Offering Period shall not be
eligible to participate in such Offering Period but may participate in any
subsequent Offering Period provided such Employee is still an Eligible Employee
as of the Offering Date of such subsequent Offering Period.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 12.1 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section 7.2, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement. Eligible
Employees may not participate simultaneously in more than one Offering.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically a Purchase Right consisting of an option to
purchase that number of whole shares of Stock determined by dividing Fifty
Thousand Dollars ($50,000) by the Fair Market Value of a share of Stock on such
Offering Date; provided, however, that such number shall not exceed five
thousand (5,000) shares. No Purchase Right shall be granted on an Offering Date
to any person who is not, on such Offering Date, an Eligible Employee. Shares of
Stock may only be purchased through a Participant's payroll deductions pursuant
to Section 10.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
provisions of Section 8.1, if the Board establishes an Offering Period of less
than twenty-three and one-half (23 1/2) months in duration or more than
twenty-four and one-half (24 1/2) months in
7.
40
duration, then (a) the dollar amount in Section 8.1 shall be determined by
multiplying $2,083.33 by the number of months in the Offering Period and
rounding to the nearest whole dollar, and (b) the share amount in Section 8.1
shall be determined by multiplying 208.33 shares by the number of months in the
Offering Period and rounding to the nearest whole share. For purposes of the
preceding sentence, fractional months shall be rounded to the nearest whole
month.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision
of the Plan to the contrary, no Purchase Right shall entitle a Participant to
purchase shares of Stock under the Plan at a rate which, when aggregated with
such Participant's rights to purchase shares under all other employee stock
purchase plans of a Participating Company intended to meet the requirements of
Section 423 of the Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair
Market Value (or such other limit, if any, as may be imposed by the Code) for
each calendar year in which such Purchase Right has been outstanding at any
time. For purposes of the preceding sentence, the Fair Market Value of shares
purchased during a given Offering Period shall be determined as of the Offering
Date for such Offering Period. The limitation described in this Section 8.3
shall be applied in conformance with applicable regulations under Section
423(b)(8) of the Code.
9. PURCHASE PRICE. The Purchase Price at which each share of Stock may be
acquired in an Offering Period upon the exercise of all or any portion of a
Purchase Right granted with respect to such Offering Period shall be established
by the Board; provided, however, that the Purchase Price shall not be less than
eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share
of Stock on the Offering Date of the Offering Period or (b) the Fair Market
Value of a share of Stock on the Purchase Date. Unless otherwise provided by the
Board prior to the commencement of an Offering Period, the Purchase Price for
that Offering Period shall be eighty-five percent (85%) of the lesser of (a) the
Fair Market Value of a share of Stock on the Offering Date of the Offering
Period, or (b) the Fair Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION. Shares of
Stock which are acquired pursuant to the exercise of all or any portion of a
Purchase Right for an Offering Period may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the Offering
Period.
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set forth
the percentage or dollar amount of the Participant's Compensation to be deducted
on each payday during an Offering Period, which, except as a result of an
election pursuant to Section 10.3 to stop payroll deductions made effective
following the first payday during an Offering, shall be not less than one dollar
($1.00) or more than twenty percent (20%) of the Participant's Compensation
otherwise payable on such payday. Notwithstanding the foregoing, the Board may
change the limits on payroll deductions effective as of any future Offering
Date.
8.
41
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
in the Plan.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the amount
deducted or to stop deductions from his or her Compensation by delivering to the
Company's designated office an amended Subscription Agreement authorizing such
change on or before the "Change Notice Date." The "CHANGE NOTICE DATE" shall
initially be the seventh (7th) day prior to the end of the first pay period for
which such election is to be effective; however, the Company may change such
Change Notice Date from time to time. A Participant who elects to decrease the
rate of his or her payroll deductions to zero percent (0%) shall nevertheless
remain a Participant in the current Offering Period unless such Participant
subsequently withdraws from the Offering or the Plan as provided in Sections
12.1 and 12.2, respectively, or is automatically withdrawn from the Offering as
provided in Section 12.3.
10.4 PARTICIPANT ACCOUNTS. Individual Plan bookkeeping accounts
shall be maintained for each Participant. All payroll deductions from a
Participant's Compensation shall be credited to such account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.5 NO INTEREST PAID. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an
Offering Period, each Participant who has not withdrawn from the Offering or the
Plan or whose participation in the Offering has not terminated on or before such
Purchase Date shall automatically acquire pursuant to the exercise of the
Participant's Purchase Right the number of whole shares of Stock determined by
dividing (a) the total amount of the Participant's payroll deductions
accumulated in the Participant's Plan account during the Offering Period and not
previously applied toward the purchase of Stock by (b) the Purchase Price.
However, in no event shall the number of shares purchased by the Participant
during an Offering Period exceed the number of shares subject to the
Participant's Purchase Right. No shares of Stock shall be purchased on a
Purchase Date by a Participant whose participation in the Offering or the Plan
has terminated on or before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event the number of
shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
9.
42
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which such Purchase Right relates shall expire immediately upon the end of such
Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised all
or part of his or her Purchase Right shall receive, as soon as practicable after
the Purchase Date, a report of such Participant's Plan account setting forth the
total payroll deductions accumulated prior to such exercise, the number of
shares of Stock purchased, the Purchase Price for such shares, the Fair Market
Value of such shares, the date of purchase and cash balance, if any, remaining
immediately after such purchase that is to be refunded or retained in the
Participant's Plan account pursuant to Section 11.4. The report required by this
Section may be delivered in such form and by such means, including by electronic
transmission, as the Company may determine. Each Participant shall be provided
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 WITHDRAWAL FROM AN OFFERING. A Participant may withdraw from an
Offering by signing and delivering to the Company's designated office a written
notice of withdrawal on a form provided by the Company for such purpose. Such
withdrawal may be elected at any time prior to the end of an Offering Period;
provided, however, if a Participant withdraws after the Purchase Date of a
Purchase Period during the Offering, the withdrawal shall
10.
43
not affect shares of Stock acquired by the Participant on such Purchase Date.
Unless otherwise elected by the Participant, withdrawal from an Offering shall
not result in the Participant's withdrawal from the Plan or any succeeding
Offering therein. By withdrawing from an Offering effective as of the close of a
given Purchase Date, a Participant may have shares of Stock purchased on such
Purchase Date and immediately commence participation in the new Offering
commencing immediately after such Purchase Date. A Participant is prohibited
from again participating in an Offering at any time following withdrawal from
such Offering. The Company may impose, from time to time, a requirement that the
notice of withdrawal from the Offering be on file with the Company's designated
office for a reasonable period prior to the effectiveness of the Participant's
withdrawal from an Offering.
12.2 WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the
Plan by signing and delivering to the Company's designated office a written
notice of withdrawal on a form provided by the Company for such purpose. Such
withdrawal may be elected at any time prior to the end of an Offering Period;
provided, however, if a Participant withdraws from the Plan after the Purchase
Date of a Purchase Period, the withdrawal shall not affect shares of Stock
acquired by the Participant on such Purchase Date. A Participant who voluntarily
elects to withdraw from the Plan is prohibited from resuming participation in
the Plan in the same Offering from which he or she withdrew, but may participate
in any subsequent Offering under the Plan by again satisfying the requirements
of Sections 5 and 7.1. The Company may impose, from time to time, a requirement
that the notice of withdrawal from the Plan be on file with the Company's
designated office for a reasonable period prior to the effectiveness of the
Participant's withdrawal from the Plan.
12.3 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value
of a share of Stock on a Purchase Date other than the final Purchase Date of an
Offering is less than the Fair Market Value of a share of Stock on the Offering
Date of the Offering, then every Participant automatically shall be (a)
withdrawn from such Offering at the close of such Purchase Date and after the
acquisition of shares of Stock for the Purchase Period and (b) enrolled in the
Offering commencing on the first business day subsequent to such Purchase Date.
A Participant may elect not to be automatically withdrawn from an Offering
pursuant to this Section 12.3 by delivering to the Company's designated office
not later than the close of business on the Purchase Date a written notice
indicating such election.
12.4 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from an Offering or the Plan pursuant to Sections 12.1 or 12.2,
respectively, or automatic withdrawal from an Offering pursuant to Section 12.3,
the Participant's accumulated payroll deductions which have not been applied
toward the purchase of shares of Stock (except, in the case of an automatic
withdrawal pursuant to Section 12.3, for an amount necessary to purchase an
additional whole share as provided in Section 11.4) shall be returned as soon as
practicable after the withdrawal, without the payment of any interest, to the
Participant, and the Participant's interest in the Offering or the Plan, as
applicable, shall terminate. Such accumulated payroll deductions may not be
applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY. Termination of a
Participant's employment with the Company for any reason, including retirement,
disability or death or the
11.
44
failure of a Participant to remain an Eligible Employee, shall terminate the
Participant's participation in the Plan immediately. In such event, the payroll
deductions credited to the Participant's Plan account since the last Purchase
Date shall, as soon as practicable, be returned to the Participant or, in the
case of the Participant's death, to the Participant's legal representative, and
all of the Participant's rights under the Plan shall terminate. Interest shall
not be paid on sums returned to a Participant pursuant to this Section 13. A
Participant whose participation has been so terminated may again become eligible
to participate in the Plan by again satisfying the requirements of Sections 5
and 7.1.
14. TRANSFER OF CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company a party; (iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or (iv) a liquidation or dissolution of the
Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
(c) EFFECT OF TRANSFER OF CONTROL ON PURCHASE RIGHTS. In the
event of a Transfer of Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may assume the Company's rights and obligations under
the Plan or substitute substantially equivalent Purchase Rights for stock of the
Acquiring Corporation. If the Acquiring Corporation elects not to assume or
substitute for the outstanding Purchase Rights, the Board may, in its sole
discretion and notwithstanding any other provision herein to the contrary,
adjust the Purchase Date of the then current Purchase Period to a date on or
before the date of the Transfer of Control, but shall not adjust the number of
shares of Stock subject to any Purchase Right. All Purchase Rights which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the
12.
45
Transfer of Control nor exercised as of the date of the Transfer of Control
shall terminate and cease to be outstanding effective as of the date of the
Transfer of Control. Notwithstanding the foregoing, if the corporation the stock
of which is subject to the outstanding Purchase Rights immediately prior to an
Ownership Change Event described in Section 15.1(a)(i) constituting a Transfer
of Control is the surviving or continuing corporation and immediately after such
Ownership Change Event less than fifty percent (50%) of the total combined
voting power of its voting stock is held by another corporation or by other
corporations that are members of an affiliated group within the meaning of
section 1504(a) of the Code without regard to the provisions of section 1504(b)
of the Code, the outstanding Purchase Rights shall not terminate unless the
Board otherwise provides in its sole discretion.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS. A Purchase Right may not be
transferred in any manner otherwise than by will or the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. The Company, in its absolute discretion, may impose
such restrictions on the transferability of the shares purchasable upon the
exercise of a Purchase Right as it deems appropriate and any such restriction
shall be set forth in the respective Subscription Agreement and may be referred
to on the certificates evidencing such shares.
16. RESTRICTION ON ISSUANCE OF SHARES. The issuance of shares under the
Plan shall be subject to compliance with all applicable requirements of foreign,
federal or state law with respect to such securities. A Purchase Right may not
be exercised if the issuance of shares upon such exercise would constitute a
violation of any applicable foreign, federal or state securities laws or other
law or regulations. In addition, no Purchase Right may be exercised unless (a) a
registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE. A Participant shall have no
rights as a stockholder by virtue of the Participant's participation in the Plan
until the date of the issuance of a stock certificate for the shares of Stock
being purchased pursuant to the exercise of the Participant's Purchase Right. No
adjustment shall be made for cash dividends or distributions or other rights for
which the record date is prior to the date such stock certificate is issued.
Nothing herein shall confer upon a Participant any right to continue in the
employ of the
13.
46
Participating Company Group or interfere in any way with any right of the
Participating Company Group to terminate the Participant's employment at any
time.
18. LEGENDS. The Company may at any time place legends or other
identifying symbols referencing any applicable foreign, federal or state
securities law restrictions or any provision convenient in the administration of
the Plan on some or all of the certificates representing shares of Stock issued
under the Plan. The Participant shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to a Purchase Right in the possession of the Participant in order to
carry out the provisions of this Section. Unless otherwise specified by the
Company, legends placed on such certificates may include but shall not be
limited to the following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION
TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE STOCK
PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE
CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER
HEREOF MADE ON OR BEFORE _______, ____, THE REGISTERED HOLDER SHALL HOLD ALL
SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE
NAME OF ANY NOMINEE) PRIOR TO THIS DATE."
19. NOTIFICATION OF SALE OF SHARES. The Company may require the
Participant to give the Company prompt notice of any disposition of shares
acquired by exercise of a Purchase Right within two years from the date of
granting such Purchase Right or one year from the date of exercise of such
Purchase Right. The Company may require that until such time as a Participant
disposes of shares acquired upon exercise of a Purchase Right, the Participant
shall hold all such shares in the Participant's name (and not in the name of any
nominee) until the lapse of the time periods with respect to such Purchase Right
referred to in the preceding sentence. The Company may direct that the
certificates evidencing shares acquired by exercise of a Purchase Right refer to
such requirement to give prompt notice of disposition.
20. NOTICES. All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. INDEMNIFICATION. In addition to such other rights of indemnification
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement
14.
47
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time amend
or terminate the Plan, except that (a) such termination shall not affect
Purchase Rights previously granted under the Plan, except as permitted under the
Plan, and (b) no amendment may adversely affect a Purchase Right previously
granted under the Plan (except to the extent permitted by the Plan or as may be
necessary to qualify the Plan as an employee stock purchase plan pursuant to
Section 423 of the Code or to obtain qualification or registration of the shares
of Stock under applicable foreign, federal or state securities laws). In
addition, an amendment to the Plan must be approved by the stockholders of the
Company within twelve (12) months of the adoption of such amendment if such
amendment would authorize the sale of more shares than are authorized for
issuance under the Plan or would change the definition of the corporations that
may be designated by the Board as Participating Companies.
23. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING PURCHASE RIGHTS. Any
other provision of the Plan to the contrary notwithstanding, the terms of the
Plan as in effect prior to its amendment on September 25,1997 shall remain in
effect and apply to all Purchase Rights granted pursuant to the Plan prior to
such amendment.
15.
48
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the
foregoing sets forth the Verity, Inc. 1995 Employee Stock Purchase Plan as duly
adopted by the Board on June 15, 1995 and amended through September 21, 1999.
---------------------------------
Secretary
-----------------------------------
16.
49
VERITY, INC.
1995 STOCK OPTION PLAN
(AS AMENDED THROUGH SEPTEMBER 21, 1999)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Verity, Inc. 1988 Stock Option Plan was
initially established effective as of August 31, 1988 (the "INITIAL PLAN"). The
Initial Plan is hereby amended and restated in its entirety as the Verity, Inc.
1995 Stock Option Plan (the "PLAN") effective immediately prior to the effective
date of the initial registration by the Company of its Stock under Section 12 of
the Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its stockholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Incentive
Stock Options shall be granted, if at all, within ten (10) years from July 19,
1996. Notwithstanding the foregoing, if the maximum number of shares of Stock
issuable pursuant to the Plan as provided in Section 4.1 has been increased at
any time, all Incentive Stock Options shall be granted, if at all, no later than
the last day preceding the tenth (10th) anniversary of the earlier of (a) the
date on which the latest such increase in the maximum number of shares of Stock
issuable under the Plan was approved by the stockholders of the Company or (b)
the date such amendment was adopted by the Board.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" also means
50
such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Verity, Inc., a Delaware corporation, or
any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a
share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(j) "INCENTIVE STOCK OPTION" means an Option intended to be
(as set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(k) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
51
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended
to be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(m) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(n) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(o) "OPTION RESERVE INCREASE" means the increase of four
hundred thousand (400,000) shares of Stock issuable under the Plan which was
approved by the Board on July 19, 1996.
(p) "OPTIONEE" means a person who has been granted one or more
Options.
(q) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(t) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(u) "SECTION 162(m)" means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(v) "STOCK" means the common stock, $0.001 par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.
(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
52
(x) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax
53
withholding obligation arising in connection with the Option or such shares,
including by the withholding or delivery of shares of stock, (iv) the timing,
terms and conditions of the exercisability of the Option or the vesting of any
shares acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option
in substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
provided, however, that without the approval of the Company's stockholders, the
Board may not amend an Option granted from the Option Reserve Increase to
decrease the exercise price thereof, or grant a new Option in substitution
therefor;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of employment or service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
3.3 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating
Company is a "publicly held corporation" within the meaning of Section 162(m),
the Board may establish a Committee of "outside directors" within the meaning of
Section 162(m) to approve the grant of any Option which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income tax
purposes pursuant to Section 162(m).
54
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be five million sixty thousand eight hundred
thirty-six (5,060,836) and shall consist of authorized but unissued or
reacquired shares of Stock or any combination thereof. If an outstanding Option
for any reason expires or is terminated or canceled or shares of Stock acquired,
subject to repurchase, upon the exercise of an Option are repurchased by the
Company, the shares of Stock allocable to the unexercised portion of such
Option, or such repurchased shares of Stock, shall again be available for
issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan, the Option Reserve Increase and to any outstanding Options,
in the Section 162(m) Grant Limit set forth in Section 5.5, and in the exercise
price per share of any outstanding Options. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Options to provide that such Options are exercisable for New Shares. In the
event of any such amendment, the number of shares subject to, and the exercise
price per share of, the outstanding Options shall be adjusted in a fair and
equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded up or down to the nearest whole
number, as determined by the Board, and in no event may the exercise price of
any Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 4.2 shall be final, binding and conclusive.
55
5. ELIGIBILITY AND OPTION LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option.
5.2 DIRECTORS SERVING ON COMMITTEE. At any time that any class of
equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, no member of a Committee established to administer the Plan in
compliance with the "disinterested administration" requirements of Rule 16b-3,
while a member, shall be eligible to be granted an Option.
5.3 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.4 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate
Fair Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.4, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.4, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.4, the Optionee may designate which portion of such Option the
Optionee is exercising and may request that separate certificates representing
each such portion be issued upon the exercise of the Option. In the absence of
such designation, the Optionee shall be deemed to have exercised the Incentive
Stock Option portion
56
of the Option first.
5.5 SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided in
Section 4.2, at any such time as a Participating Company is a "publicly held
corporation" within the meaning of Section 162(m), no Employee shall be granted
one or more Options within any fiscal year of the Company which in the aggregate
are for the purchase of more than five hundred thousand (500,000) shares (the
"SECTION 162(m) GRANT LIMIT").
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Option shall be not less than the Fair Market
Value of a share of Stock on the effective date of grant of the Option, and (b)
no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an
exercise price per share less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying under the
provisions of Section 424(a) of the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Incentive Stock Option shall be exercisable after the expiration of
ten (10) years after the effective date of grant of such Option, (b) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, (c) no Option granted to a prospective Employee or
prospective Consultant may become exercisable prior to the date on which such
person commences service with a Participating Company, and (d) no Option granted
from the Option Reserve Increase shall be exercisable after the expiration of
eight (8) years after the effective date of grant of such Option.
57
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise
58
provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject
to a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
7. STANDARD FORMS OF OPTION AGREEMENT.
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Incentive Stock Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time.
59
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as a "Nonstatutory
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Immediately Exercisable Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, (a) any Incentive Stock
Option granted hereunder (except for Incentive Stock Options granted from the
Option Reserve Increase) shall have a term of ten (10) years from the effective
date of grant of the Option, and (b) any Incentive Stock Option granted from the
Option Reserve Increase shall have a term of eight (8) years from the effective
date of grant of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan. Such authority shall include, but not by
way of limitation, the authority to grant Options which are not immediately
exercisable.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the stockholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
60
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
outstanding Options shall not terminate unless the Board otherwise provides in
its sole discretion.
9. PROVISION OF INFORMATION. Each Optionee shall be given access to
information concerning the Company equivalent to that information generally made
available to the
61
Company's common stockholders.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. INDEMNIFICATION. In addition to such other rights of indemnification
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no expansion in the class of persons
eligible to receive Nonstatutory Stock Options. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option or any
unexercised portion thereof, without the consent of the Optionee, unless such
termination or amendment is required to enable an Option designated as an
Incentive Stock Option to qualify as an Incentive Stock Option or is necessary
to comply with any applicable law or government regulation.
13. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS. Any other
provision of the Plan to the contrary notwithstanding, the terms of the Initial
Plan shall remain in effect and apply to all Options granted pursuant to the
Initial Plan.
62
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing is the Verity, Inc. 1995 Stock Option Plan, as amended
through September 21, 1999.
--------------------------------------
Secretary
--------------------------------------
63
VERITY, INC.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
(AS AMENDED THROUGH SEPTEMBER 21, 1999)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Verity, Inc. 1995 Outside Directors Stock
Option Plan (the "PLAN") is hereby established effective as of the effective
date of the initial registration by the Company of its Stock under Section 12 of
the Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its stockholders by providing an incentive
to attract and retain highly qualified persons to serve as Outside Directors of
the Company and by creating additional incentive for Outside Directors to
promote the growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed
to administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited, the
Committee shall have all of the powers of the Board granted herein, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Verity, Inc., a Delaware corporation, or
any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
1.
64
(f) "DIRECTOR" means a member of the Board or the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(i) "FAIR MARKET VALUE" means, as of any date, if there is
then a public market for the Stock, the closing price of the Stock (or the mean
of the closing bid and asked prices of the Stock if the Stock is so reported
instead) as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date. If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(j) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan.
(k) "OPTIONEE" means a person who has been granted one or more
Options.
(l) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee.
(m) "OUTSIDE DIRECTOR" means a Director of the Company who is
not an Employee.
(n) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
2.
65
(q) "RULE 16B-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or regulation.
(r) "SERVICE" means the Optionee's service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be deemed
to have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(s) "STOCK" means the common stock, par value $0.001, of the
Company, as adjusted from time to time in accordance with Section 4.2.
(t) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(u) CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 LIMITATIONS ON AUTHORITY OF THE BOARD. Notwithstanding any other
provision herein to the contrary, the Board shall have no authority, discretion,
or power to select the Outside Directors who will receive Options, to set the
exercise price of the Options, to determine the number of shares of Stock to be
subject to an Option or the time at which an Option shall be granted, to
establish the duration of an Option, or to alter any other terms or conditions
specified in the Plan, except in the sense of administering the Plan subject to
the provisions of the Plan.
4. SHARES SUBJECT TO PLAN.
3.
66
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be five hundred thousand (500,000) and shall
consist of authorized but unissued shares or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan, to the "Initial Option" and "Anniversary Option" (as
defined in Section 6.1), and to any outstanding Options, and in the exercise
price of any outstanding Options. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Options are exchanged
for, converted into, or otherwise become (whether or not pursuant to a Transfer
of Control as defined in Section 8.1) shares of another corporation (the "NEW
SHARES"), the Board may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the exercise price of, the
outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
exercise price of any Option be decreased to an amount less than the par value,
if any, of the stock subject to the Option.
5. ELIGIBILITY AND TYPE OF OPTIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. An Option shall be granted only to
a person who, at the time of grant, is an Outside Director.
5.2 OPTIONS AUTHORIZED. Options shall be nonstatutory stock options;
that is, options which are not treated as incentive stock options within the
meaning of Section 422(b) of the Code.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 AUTOMATIC GRANT OF OPTIONS. Subject to execution by an Outside
Director of the appropriate Option Agreement, Options shall be granted
automatically and without further action of the Board, as follows:
4.
67
(a) INITIAL OPTION. Each Outside Director first elected or
appointed to the Board on or after the Effective Date shall be granted an Option
to purchase twenty thousand (20,000) shares of Stock on the date of such initial
election or appointment (an "INITIAL OPTION"). Notwithstanding anything herein
to the contrary, a Director of the Company who previously did not qualify as an
Outside Director shall not receive an Initial Option in the event that such
Director subsequently becomes an Outside Director.
(b) ANNUAL OPTION. Each Outside Director (including any
Outside Director first elected or appointed to the Board prior to the Effective
Date or any Director of the Company who previously did not qualify as an Outside
Director but who subsequently becomes an Outside Director) shall be granted, on
the date of each annual meeting of the stockholders of the Company (an "ANNUAL
MEETING") following which such person remains an Outside Director, an Option to
purchase twenty thousand (20,000) shares of Stock (an "ANNUAL OPTION").
Notwithstanding the foregoing, an Outside Director who has not served
continuously as Director of the Company for more than six (6) months prior to
the date of an Annual Meeting shall not receive an Annual Option at such Annual
Meeting.
(c) RIGHT TO DECLINE OPTION. Notwithstanding the foregoing,
any person may elect not to receive an Option by delivering written notice of
such election to the Board no later than the day prior to the date such Option
would otherwise be granted. A person so declining an Option shall receive no
payment or other consideration in lieu of such declined Option. A person who has
declined an Option may revoke such election by delivering written notice of such
revocation to the Board no later than the day prior to the date such Option
would be granted pursuant to Section 6.1(a) or (b), as the case may be.
6.2 EXERCISE PRICE. The exercise price per share of Stock subject to
an Option shall be the Fair Market Value of a share of Stock on the date the
Option is granted.
6.3 EXERCISE PERIOD. Each Option shall terminate and cease to be
exercisable on the date ten (10) years after the date of grant of the Option
unless earlier terminated pursuant to the terms of the Plan or the Option
Agreement.
6.4 RIGHT TO EXERCISE OPTIONS.
(a) INITIAL OPTION. Except as otherwise provided in the Plan
or in the Option Agreement, an Initial Option shall (i) first become exercisable
on the date which is one (1) year after the date on which the Initial Option was
granted (the "INITIAL OPTION VESTING DATE"); and (ii) be exercisable on and
after the Initial Option Vesting Date and prior to the termination thereof in an
amount equal to the number of shares of Stock initially subject to the Initial
Option multiplied by the Vested Ratio as set forth below, less the number of
shares previously acquired upon exercise thereof. The Vested Ratio described in
the preceding sentence shall be determined as follows:
Vested Ratio
Prior to Initial Option Vesting Date 0
5.
68
On Initial Option Vesting Date, 1/4
provided the Optionee's Service
is continuous from the date of grant
of the Initial Option until the
Initial Option Vesting Date
Plus
For each full month of 1/48
of the Optionee's continuous
Service from the Initial
Option Vesting Date until the
Vested Ratio equals 1/1, an
additional
6.5 ANNUAL OPTION. Except as otherwise provided in the Plan or in
the Option Agreement, an Annual Option shall (i) first become exercisable on the
date which is thirty-seven (37) months after the date on which the Annual Option
was granted (the "ANNUAL OPTION VESTING DATE"); and (ii) be exercisable on and
after the Annual Option Vesting Date and prior to the termination thereof in an
amount equal to the number of shares of Stock initially subject to the Annual
Option multiplied by the Vested Ratio as set forth below, less the number of
shares previously acquired upon exercise thereof. The Vested Ratio described in
the preceding sentence shall be determined as follows:
Vested Ratio
Prior to Annual 0
Option Vesting Date
On Annual Option Vesting Date, 1/12
provided the Optionee's Service
is continuous from the date of grant
of the Annual Option until the
Annual Option Vesting Date
Plus
For each full month of 1/12
of the Optionee's continuous
Service from the Annual Option
Vesting Date until the Vested
Ratio equals 1/1, an
additional
6.6 Payment of Exercise Price.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to
6.
69
the Company of shares of Stock owned by the Optionee having a Fair Market Value
not less than the exercise price, (iii) by the assignment of the proceeds of a
sale or loan with respect to some or all of the shares being acquired upon the
exercise of the Option (including, without limitation, through an exercise
complying with the provisions of Regulation T as promulgated from time to time
by the Board of Governors of the Federal Reserve System) (a "CASHLESS
EXERCISE"), or (iv) by any combination thereof.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
6.7 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value equal to all or any part of the federal,
state, local and foreign taxes, if any, required by law to be withheld by the
Participating Company Group with respect to such Option or the shares acquired
upon exercise thereof. Alternatively or in addition, in its sole discretion, the
Company shall have the right to require the Optionee to make adequate provision
for any such tax withholding obligations of the Participating Company Group
arising in connection with the Option or the shares acquired upon exercise
thereof. The Company shall have no obligation to deliver shares of Stock until
the Participating Company Group's tax withholding obligations have been
satisfied.
7. STANDARD FORM OF OPTION AGREEMENT.
7.1 INITIAL OPTION. Unless otherwise provided for by the Board at
the time an Initial Option is granted, each Initial Option shall comply with and
be subject to the terms and conditions set forth in the form of Nonstatutory
Stock Option Agreement for Outside Directors (Initial Option) adopted by the
Board concurrently with its adoption of the Plan and as amended from time to
time.
7.2 ANNUAL OPTION. Unless otherwise provided for by the Board at the
time an Annual Option is granted, each Annual Option shall comply with and be
subject to the terms and conditions set forth in the form of Nonstatutory Stock
Option Agreement for Outside Directors (Annual Option) adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.
70
7.3 AUTHORITY TO VARY TERMS. Subject to the limitations set forth in
Section 3.2, the Board shall have the authority from time to time to vary the
terms of any of the standard forms of Option Agreement described in this Section
7 either in connection with the grant or amendment of an individual Option or in
connection with the authorization of a new standard form or forms; provided,
however, that the terms and conditions of any such new, revised or amended
standard form or forms of Option Agreement shall be in accordance with the terms
of the Plan. Such authority shall include, but not by way of limitation, the
authority to grant Options which are immediately exercisable subject to the
Company's right to repurchase any unvested shares of Stock acquired by the
Optionee upon the exercise of an Option in the event such Optionee's Service is
terminated for any reason. In no event, however, shall the Board be permitted to
vary the terms of any standard form of Option Agreement if such change would
cause the Plan to cease to qualify as a formula plan pursuant to Rule 16b-3 at
any such time as any class of equity security of the Company is registered
pursuant to Section 12 of the Exchange Act.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the stockholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the
8.
71
Company or multiple Ownership Change Events are related, and its determination
shall be final, binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, any unexercisable or unvested portion of the outstanding
Options shall be immediately exercisable and vested in full as of the date ten
(10) days prior to the date of the Transfer of Control. The exercise or vesting
of any Option that was permissible solely by reason of this Section 8.2 shall be
conditioned upon the consummation of the Transfer of Control. In addition, the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may
either assume the Company's rights and obligations under outstanding Options or
substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Transfer of Control and any consideration received pursuant to the
Transfer of Control with respect to such shares shall continue to be subject to
all applicable provisions of the Option Agreement evidencing such Option except
as otherwise provided in such Option Agreement. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the outstanding
Options immediately prior to an Ownership Change Event described in Section
8.1(a)(i) constituting a Transfer of Control is the surviving or continuing
corporation and immediately after such Ownership Change Event less than fifty
percent (50%) of the total combined voting power of its voting stock is held by
another corporation or by other corporations that are members of an affiliated
group within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
10. INDEMNIFICATION. In addition to such other rights of indemnification
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such
9.
72
action, suit or proceeding, such person shall offer to the Company, in writing,
the opportunity at its own expense to handle and defend the same.
11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the total number of shares of
Stock that may be issued under the Plan (except by operation of the provisions
of Section 4.2), and (b) no expansion in the class of persons eligible to
receive Options. Furthermore, to the extent required by Rule 16b-3, provisions
of the Plan addressing eligibility to participate in the Plan and the amount,
price and timing of Options shall not be amended more than once every six (6)
months, other than to comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder. In any event,
no termination or amendment of the Plan may adversely affect any then
outstanding Option, or any unexercised portion thereof, without the consent of
the Optionee, unless such termination or amendment is necessary to comply with
any applicable law or government regulation.
-------------------------------------------
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing sets forth the Verity, Inc. 1995 Outside Directors Stock
Option Plan as duly adopted by the Board on June 15, 1995 and amended through
September 21, 1999.
-------------------------------------------
Secretary
10.