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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(a)(2)
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to
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/ $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / 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.
(1) Amount Previously Paid:
-
(2) Form, Schedule or Registration Statement No.:
-
(3) Filing Party:
-
(4) Date Filed:
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[VERITY LOGO]
894 ROSS AVENUE
SUNNYVALE, CA 94089
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 16, 1996
To the Stockholders of Verity, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Verity, Inc. (the "Company") will be held on Monday, September 16, 1996, at
11:00 a.m. at the Sheraton Four Points Hotel, 1100 N. Mathilda Avenue,
Sunnyvale, California, for the following purposes:
1. To elect two (2) members of the Board of Directors to hold
office until the 1999 Annual Meeting of Stockholders and until
their respective successors are elected and qualified;
2. To consider and vote upon a proposal to amend the 1995 Stock
Option Plan (the "Option Plan") of the Company to 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;
3. To consider and vote upon a proposal to amend the 1995
Employee Stock Purchase Plan (the "Purchase Plan") of the
Company to increase the number of shares of Common Stock of
the Company authorized for issuance thereunder from 250,000
shares to 500,000 shares;
4. To vote upon a proposal to ratify the appointment of Coopers &
Lybrand LLP as the Company's independent public accountants
for the year ending May 31, 1997; and
5. To transact such other business as may properly come before
the meeting.
Stockholders of record at the close of business on August 15, 1996 are
entitled to notice of, and to vote at, this meeting and any adjournments
thereof. For ten days prior to the meeting, a complete list of the stockholders
entitled to vote at the meeting will be available for examination by any
stockholder for any purpose relating to the meeting during ordinary business
hours at the principal office of Verity, Inc.
By Order of the Board of Directors
/s/ Philippe F. Courtot
PHILIPPE F. COURTOT
Chairman of the Board and Chief Executive Officer
Sunnyvale, California
August 16, 1996
STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. PROXIES ARE REVOCABLE, AND
ANY STOCKHOLDER MAY WITHDRAW HIS OR HER PROXY PRIOR TO THE TIME IT IS VOTED, OR
BY ATTENDING THE MEETING AND VOTING IN PERSON.
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VERITY, INC.
894 ROSS AVENUE
SUNNYVALE, CA 94089
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
AUGUST 16, 1996
The accompanying proxy is solicited by the Board of Directors of
Verity, Inc., a Delaware corporation (the "Company"), for use at the 1996 Annual
Meeting of Stockholders to be held September 16, 1996, or any adjournment
thereof, for the purposes set forth in the accompanying Notice of Annual
Meeting. The date of this Proxy Statement is August 16, 1996, the approximate
date on which this Proxy Statement and the accompanying form of proxy were first
sent or given to stockholders.
GENERAL INFORMATION
Annual Report. An annual report for the year ended May 31, 1996, is
enclosed with this Proxy Statement.
Voting Securities. Only stockholders of record as of the close of
business on August 15, 1996 will be entitled to vote at the meeting and any
adjournment thereof. As of that date, there were 10,776,838 shares of Common
Stock of the Company, par value $.001 per share, issued and outstanding.
Stockholders may vote in person or by proxy. Each holder of shares of Common
Stock is entitled to one vote for each share of stock held on the proposals
presented in this Proxy Statement. The Company's bylaws provide that a majority
of all of the shares of the stock entitled to vote, whether present in person or
represented by proxy, shall constitute a quorum for the transaction of business
at the meeting.
Solicitation of Proxies. The cost of soliciting proxies will be borne
by the Company. In addition to soliciting stockholders by mail through its
regular employees, the Company may request banks and brokers, and other
custodians, nominees and fiduciaries, to solicit their customers who have stock
of the Company registered in the names of such persons and will reimburse them
for their reasonable, out-of-pocket costs. The Company may use the services of
its officers, directors, and others to solicit proxies, personally or by
telephone, without additional compensation.
Voting of Proxies. All valid proxies received prior to the meeting will
be voted. All shares represented by a proxy will be voted, and where a
stockholder specifies by means of the proxy a choice with respect to any matter
to be acted upon, the shares will be voted in accordance with the specification
so made. If no choice is indicated on the proxy, the shares will be voted in
favor of the proposal. A stockholder giving a proxy has the power to revoke his
or her proxy, at any time prior to the time it is voted, by delivery to the
Secretary of the Company of a written instrument revoking the proxy or a duly
executed proxy with a later date, or by attending the meeting and voting in
person.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of July 31,
1996, with respect to the beneficial ownership of the Company's Common Stock by
(i) each director of the Company, (ii) the Chief Executive Officer, the three
other highest compensated executive officers of the Company whose salary and
bonus for the year ended May 31, 1996 exceeded $100,000 and two former executive
officers whose salary and bonus for the year ended May 31, 1996 exceeded
$100,000 but who were not executive officers at May 31, 1996 (the "Named
Executive Officers"), (iii) all directors and executive officers of the Company
as a group, and (iv) each person known by the Company to own more than 5% of the
Company's Common Stock.
Shares Beneficially
Beneficial Owners (1) Owned
- --------------------- ---------------------
Number Percent
--------- -------
5% STOCKHOLDERS
Amerindo Investment Advisors and Affiliates (2)............... 2,023,274 18.8%
One Embarcadero Center, Suite 2300
San Francisco, California 94111
Essex Investment Management Company (3)....................... 725,180 6.7%
125 High Street
Boston, Massachusetts 02110
OFFICERS AND DIRECTORS
Philippe F. Courtot (4)....................................... 845,196 7.8%
Donald C. McCauley (5)........................................ 124,520 1.2%
Susan P. Barsamian (6)........................................ 51,075 *
John W. Lehman (7)............................................ 108,789 1.0%
Steven M. Krausz ............................................. 500 *
Anthony J. Bettencourt (8).................................... 89,684 *
Christopher Helgeson (9)...................................... 51,668 *
Stephen A. MacDonald (10)..................................... 13,700 *
Charles P. Waite, Jr. (11).................................... 266,318 2.5%
All officers and directors as a group (8 persons) (12)........ 1,627,229 14.7%
- -----------------------
* Represents less than one percent.
(1) 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 or warrants held by
that person that are currently exercisable, or become exercisable
within 60 days following July 31, 1996, are deemed outstanding.
However, such shares are not deemed outstanding for purposes of
computing the percentage ownership of any other person. All options
held by the individuals named in the table are immediately exercisable,
subject to a right of repurchase in favor of the Company for all
exercised unvested shares. Except as indicated in the footnotes to the
table, the persons named in the table have sole voting and
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investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws. Unless
otherwise indicated, the individuals in the table may be contacted c/o
Verity, Inc., 894 Ross Avenue, Sunnyvale, CA 94089.
(2) As reported to the Company by the Stockholder.
(3) As reported to the Company by the Stockholder.
(4) Includes 22,100 shares issuable upon exercise of options. Includes
18,878 shares subject to a right of repurchase in favor of the Company
which lapses over time. Includes 40,000 shares held by Mai Courtot, a
family member of Mr. Courtot.
(5) Includes 50,100 shares issuable upon exercise of options. Includes
27,500 shares subject to a right of repurchase in favor of the
Company which lapses over time.
(6) Includes 5,000 shares held by a trust for the benefit of Ms.
Barsamian's husband. Ms. Barsamian disclaims beneficial ownership of
such shares except to the extent of any pecuniary interest therein
which she may have. Ms. Barsamian was Vice President, Marketing, of the
Company until February 1996; she is no longer an employee of the
Company.
(7) Mr. Lehman was Vice President, International Operations, of the Company
until April 1996; he is no longer an employee of the Company.
(8) Includes 89,684 shares issuable upon exercise of options.
(9) Mr. Helgeson was Vice President, Research and Development, of the
Company during the fiscal year ended May 31, 1995; he is no longer an
employee of the Company.
(10) Includes 7,000 shares issuable upon exercise of options. In addition,
includes 2,210 shares held by Mr. MacDonald as the trustee of a family
trust. As trustee, Mr. MacDonald may be deemed to be the beneficial
owner of such shares, but Mr. MacDonald disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest therein.
(11) Includes 166,666 shares held by Olympic Venture Partners III, L.P.,
94,555 shares held by Olympic Venture Partners II and 5,097 shares held
by OVP III Entrepreneurs Fund. Mr. Waite, as general partner of Olympic
Venture Partners, may be deemed to beneficially own such shares, but
Mr. Waite disclaims beneficial ownership of all such shares except to
the extent of his pecuniary interest therein.
(12) Includes 243,884 shares issuable upon exercise of options. Also
includes 46,378 shares subject to a repurchase right in favor of the
Company which lapses over time.
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ELECTION OF DIRECTORS
The Company has a classified Board of Directors consisting of two Class
I directors (Steven M. Krausz and Charles P. Waite, Jr.), one Class II Director
(Stephen A. MacDonald), and one Class III director (Philippe F. Courtot), who
will serve until the Annual Meetings of Stockholders to be held in 1996, 1997
and 1998, respectively, and until their respective successors are duly elected
and qualified. At each Annual Meeting of Stockholders, directors are elected for
a full term of three years to succeed those directors whose terms expire on the
Annual Meeting dates.
Management's nominees for election at the Annual Meeting of
Stockholders to Class I of the Board of Directors are Steven Mr. Krausz and
Charles P. Waite, Jr. If elected, the nominees will serve as directors until the
Company's Annual Meeting of Stockholders in 1999, and until their successors are
elected and qualified. If either nominee declines to serve or becomes
unavailable for any reason, or if a vacancy occurs before the election (although
Management knows of no reason to anticipate that this will occur), the proxies
may be voted for such substitute nominees as Management may designate.
If a quorum is present and voting, the two nominees for Class I
director receiving the highest number of votes will be elected as Class I
directors. Abstentions and shares held by brokers that are present, but not
voted because the brokers were prohibited from exercising discretionary
authority, i.e., "broker non-votes," will be counted as present for the purposes
of determining if a quorum is present.
The tables below sets forth for the current directors, including the
Class I nominees to be elected at this meeting, certain information with respect
to age and background.
NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
---- ------------------------- --- --------------
Class I directors to be elected at the 1996 Annual Meeting of Stockholders:
Steven M. Krausz Director 41 1988
Charles P. Waite, Jr. Director 41 1988
Class II director to be elected at the 1997 Annual Meeting of Stockholders:
Steven A. MacDonald Director 50 1988
Class III director to be elected at the 1998 Annual Meeting of Stockholders.
Philippe F. Courtot Chairman of the Board, 51 1993
President, Chief Executive
Officer and Director
Steven M. 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
is also a director of Photon Dynamics, Inc.
Charles P. Waite, Jr. has been a General Partner of Olympic Venture
Partners II and a Vice President of Northwest Venture Services Corp. since 1987
and a General Partner of Olympic Venture Partners III since 1994. Mr. Waite is
also a director of CellPro Incorporated.
Stephen A. MacDonald has served as President and Chief Executive
Officer of Active Software since May 1996. From 1983 to 1996, Mr. MacDonald was
employed by Adobe Systems Incorporated, where he served most recently as Senior
Vice President and Chief Operating Officer. Mr. MacDonald is a director of
Network Computing Devices, Inc.
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Philippe F. Courtot joined the Company in August 1993 as President and
Chief Executive Officer, and was elected Chairman of the Board in August 1995.
Prior to joining the Company, Mr. Courtot served as Executive Vice President and
General Manager of cc:Mail, a division of Lotus Development Corporation, from
May 1991 to June 1992 and as President and Chief Executive Officer of cc:Mail
from March 1989 to May 1991. From June 1992 to August 1993, Mr. Courtot worked
as an independent consultant on discrete projects and also served as a member of
the Board of Directors for two private, high-technology companies. From July
1987 to January 1989, Mr. Courtot served as Executive Vice President and General
Manager of Radiology Division, ADAC Laboratories. Prior to that time, Mr.
Courtot served as Chief Executive Officer of Thomson-CGR Medical, a producer of
radiology and magnetic resonance imaging equipment.
During fiscal 1996, the Board held twelve meetings. No director serving
on the Board in 1996 attended fewer than 75% of such meetings of the Board and
the Committees on which he serves.
The Company has an Audit Committee and a Compensation Committee.
The Audit Committee's function is to review with the Company's
independent accountants and management the annual financial statements and
independent accountants' opinion, review the scope and results of the
examination of the Company's financial statements by the independent
accountants, approve all professional services and related fees performed by the
independent accountants, recommend the retention of the independent accountants
to the Board, subject to ratification by the stockholders, and periodically
review the Company's accounting policies and internal accounting and financial
controls. The members of the Audit Committee are Messrs. Krausz and Waite.
During fiscal 1996, the Audit Committee held two meetings.
The Compensation Committee's function is to review and establish salary
levels for executive officers, including the Chief Executive Officer, and
certain other management employees and to grant stock options. The members of
the Compensation Committee are Messrs. Krausz and Waite. During fiscal 1996, the
Compensation Committee held four meetings. For additional information concerning
the Compensation Committee, see "REPORT OF THE COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION."
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EXECUTIVE COMPENSATION AND OTHER MATTERS
The following summary compensation table sets forth the compensation
paid by the Company during the fiscal year ended May 31, 1996 to the Named
Executive Officers:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------- ---- -------- -------- ------------ ---------------
Philippe F. Courtot.................... 1996 $225,000 -- 22,100 $1,152
President and Chief Executive 1995 221,250 -- -- 1,152
Officer
Donald C. McCauley..................... 1996 139,154 -- 50,100 408
Vice President and Chief 1995 145,779(2) -- 60,000 --
Financial Officer (3)
Anthony J. Bettencourt................. 1996 98,538 $120,363 100,100 204
Vice President, Sales 1995 -- --
Christopher Helgeson(4)................ 1996 143,281 -- 150,100 460
1995 -- -- -- --
Former Officers:
Susan P. Barsamian(5).................. 1996 117,629 16,231 5,100 187
1995 114,322 36,998 50,000 221
John W. Lehman(6)...................... 1996 75,801 43,286 100 665
1995 89,600 55,541 -- 585
- ---------------------
(1) Represents premiums paid on behalf of the Named Executive Officers for
life insurance coverage in excess of a base amount of $50,000 in
coverage.
(2) Includes $141,625 paid to Mr. McCauley for his services as a consultant
to the Company prior to his engagement as a full time employee of the
Company.
(3) Mr. McCauley served as Chief Financial Officer of the Company on a
consulting basis until May 1995, at which time he joined the Company as
an employee and was elected a Vice President.
(4) Mr. Helgeson was Vice President, Research and Development, of the
Company until July 1996; he is no longer an employee of the Company.
(5) Ms. Barsamian was Vice President, Marketing, of the Company until
February 1996; she is no longer an employee of the Company.
(6) Mr. Lehman was Vice President, International Operations, of the Company
until April 1996; he is no longer an employee of the Company.
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The following table provides information concerning grants of options
to purchase the Company's Common Stock made during the fiscal year ended May 31,
1996 to the Named Executive Officers:
OPTION GRANTS IN FISCAL 1996 (1)
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR
OPTIONS IN FISCAL PRICE PER EXPIRATION OPTION TERM(2)
-------------------------
NAME GRANTED(3) 1996 SHARE DATE 5% 10%
- ---- ---------- ------ ----- ---------- ---------- ----------
Philippe F. Courtot 22,100 1.3% $13.20 10/5/05 $ 183,461 $ 464,927
Donald C. McCauley 100 * 12.00 10/5/05 755 1,912
50,000 2.9 34.75 2/6/06 1,092,704 2,769,128
Anthony J. Bettencourt 50,000 2.9 2.00 6/23/05 62,889 159,374
100 * 12.00 10/5/05 755 1,912
50,000 2.9 34.75 2/6/06 1,092,704 2,769,128
Christopher Helgeson 100,000 5.8 1.50 6/10/05 94,334 239,061
100 * 12.00 10/05/05 755 1,912
50,000 2.9 34.75 2/06/06 1,092,704 2,769,128
Former Officers:
Susan P. Barsamian 5,000 * 1.50 6/10/05 4,717 11,953
100 * 12.00 10/5/05 755 1,912
John W. Lehman 100 * 12.00 10/05/95 755 1,912
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*Less than 1%
(1) All options granted in fiscal 1996 were granted under the Company's
1995 Stock Option Plan. Under such 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 options granted to
new employees become vested six months after the initial vesting date,
and 2.083% of the options vest upon completion of each succeeding full
month of continuous employment with the Company. Additional options
granted to continuing employees generally vest at the rate of 2.083%
per month for 48 months following the date of grant. All options were
granted at fair market value as determined by the Board of Directors of
the Company on the date of grant. See " -- Termination and Change of
Control Arrangements".
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are mandated by
rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of the future Common Stock price.
This table does not take into account any appreciation in the price of
the Common Stock to date.
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(3) In July 1996, as a result of a broad decline in the fair market value
of the Company's common stock, the Compensation Committee determined
that it was in the best interests of the Company to offer to all
current option holders, including executive officers whom the Committee
considered separately, the opportunity to exchange outstanding options
with an exercise price above the then current price for options with an
exercise price equal to the then current fair market value. For details
concerning the repricings of options see "REPORT OF THE COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION -- Repricing of Stock Options
Following the End of Fiscal 1996."
OPTION EXERCISES AND FISCAL 1996 YEAR-END VALUES
The following table provides the specified information concerning
exercises of options to purchase the Company's Common Stock in the fiscal year
ended May 31, 1996, and unexercised options held as of May 31, 1995 by the Named
Executive Officers:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS OPTIONS AT
ACQUIRED AT 05/31/96(2) 05/31/96(3)
--------------------
ON VALUE
EXERCISE REALIZED(1) VESTED UNVESTED VESTED UNVESTED
-------- ----------- ------ -------- ------ --------
Philippe F. Courtot....... -- -- 14 86 $ 365 $ 2,240
3,208 18,792 83,568 489,532
Donald C. McCauley........ 60,000 $105,000 14 86 382 2,344
3,125 46,875 14,063 210,938
Anthony J. Bettencourt.... 10,416 327,185 1,042 38,542 38,815 1,435,690
14 86 382 2,344
3125 46,875 14,063 210,938
Christopher Helgeson...... 100,000 140,000 14 86 382 2,344
3,125 46,875 14,063 210,938
Former Officers:
Susan P. Barsamian (4).... 45,000 83,107 0 0 0 0
John W. Lehman............ 14,100 416,275 0 0 0 0
- ------------------------
(1) "Value Realized" represents the fair market value of the underlying
securities on the exercise date minus the aggregate exercise price of
such options.
(2) These options are immediately exercisable in full at the date of grant,
but shares purchased on exercise of unvested options are subject to a
repurchase right in favor of the Company which lapses ratably over four
years and entitles the Company to repurchase unvested shares at the
original issuance price.
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(3) Calculated on the basis of the fair market value of the underlying
securities as of May 31, 1996 of $39.25 per share, the last trading day
of fiscal 1996, as reported by the Nasdaq National Market, minus the
aggregate exercise price.
(4) Does not include 35,000 shares repurchased by the Company at the
original purchase price on February 6, 1996 pursuant to the terms of
Ms. Barsamian's separation agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Steven M. Krausz and Charles P. Waite, Jr. served as members of the
Board of Directors' Compensation Committee (the "Committee") during the fiscal
year end May 31, 1996. The Board of Directors of the Company, of which Philippe
F. Courtot, Chairman of the Board and Chief Executive of the Company, was and is
a member, fulfilled all functions of the Compensation Committee with regard to
compensation of the executive officers of the Company in fiscal 1996 prior to
the creation of the Committee in June 1995.
In August 1995, the Company sold shares of Series H Preferred Stock
convertible into 435,582 shares of Common Stock at a price per share of $7.50 to
a group of investors including Adobe Systems Incorporated and entities
affiliated with Olympic Venture Partners ("Olympic"). Adobe and Olympic
purchased Series H Preferred Stock convertible into 23,120 and 77,916 shares,
respectively, for an aggregate purchase price of $173,400 and $584,370,
respectively.
Stephen A. MacDonald, a director of the Company, is a former Vice
President and Chief Operating Officer of Adobe. Charles P. Waite, Jr., a
director of the Company and a member of the Compensation Committee of the Board
of Directors, is a general partner of Olympic.
Certain of the officers and directors and their affiliates and certain
other holders of the Company's Preferred Stock are entitled to registration
rights with respect to the Common Stock issued or issuable upon conversion
thereof.
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.
See " -- Certain Relationships and Related Transactions;" "Employment
Agreements and Termination and Change of Control Arrangements."
EMPLOYMENT AGREEMENTS AND TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
The Option Plan provides that, in the event of (i) 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 in which the
stockholders of the Company do not retain beneficial ownership of at least a
majority of the voting stock of the Company or its successor, (ii) the sale,
exchange or transfer of all or substantially all of the assets of the Company
other than to one or more subsidiary corporations, or (iii) liquidation or
dissolution of the Company, the Board of Directors of the Company may provide
for the acquiring or successor corporation to assume or substitute new options
for the options outstanding under the Option Plan. To the extent that the
options outstanding under the Option Plan are not assumed, substituted for, or
exercised prior to such event, they will terminate.
In July 1993, the Company entered into an employment agreement with
Philippe F. Courtot, the Company's President and Chief Executive Officer. Under
the agreement, Mr. Courtot receives an annual base salary of $225,000, subject
to annual review by the Board of Directors and adjustment based upon various
factors, including Mr. Courtot's performance and the Company's profitability.
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DIRECTOR COMPENSATION
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 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1995, in connection with the purchase of Common Stock upon
exercise of stock options granted to Philip C. Nelson, the Company's Chief
Technology Officer, under the Option Plan, the Company loaned to Mr. Nelson
$127,000 at an interest rate of 6.83% pursuant to a full recourse promissory
note due on the earlier of (i) June 22, 1999 or (ii) the date Mr. Nelson's
employment with the Company is terminated. The loan is secured by 123,971 shares
of Common Stock. Mr. Nelson was elected the Company's Chief Technology Officer
in August 1996.
In July 1995, in connection with the purchase of Common Stock upon the
exercise of a stock option granted to Donald C. McCauley under the Option Plan,
the Company loaned to Mr. McCauley $62,000 at an interest rate of 6.28% pursuant
to a full recourse promissory note due on the earlier of (i) July 28, 1999 or
(ii) the date Mr. McCauley's employment with the Company is terminated. The loan
is secured by 60,000 shares of Common Stock.
See " -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions."
CHANGES TO BENEFIT PLANS
On July 12, 1996, the Board of Directors amended the Option Plan,
subject to stockholder approval, to increase the shares reserved for issuance
under the Option Plan. Since this amendment, Messrs. Courtot, McCauley,
Bettencourt, Helgeson and Lehman and Ms. Barsamian have not received any stock
option grants; all current executive officers as a group (5 persons) received
stock option grants for 25,000 shares and all employees other than current
executive officers received stock option grants for 230,000 shares. Mr.
Helgeson's and Mr. Bettencourt's grants represented 8.7% and 5.8%, respectively,
of the options granted under the Option plan in fiscal 1996; no other employee
received more than 5% of the options granted under the Option Plan in fiscal
1996. Non-employee directors are not eligible to participate in the Option Plan.
The Board of Directors has amended the 1995 Employee Stock Purchase
Plan (the "Purchase Plan"), subject to stockholder approval, to increase the
shares reserved for issuance under the Purchase Plan. Since this amendment, no
shares have been purchased under the Purchase Plan. Non-employee directors are
not eligible to participate in the Purchase Plan. No employee purchased more
than 5% of the total stock purchased under the Purchase Plan.
The following table sets forth stock options received under the Option
Plan and shares acquired under the Purchase Plan during the fiscal year ended
May 31, 1996, by (1) the Named Executive Officers; (2) all current executive
officers as a group; (3) all current directors who are not executive officers as
a group; and (4) all employees, including all officers who are not executive
officers, as a group. Grants under the Option Plan are made at the discretion of
the Board of Directors, and purchases of stock under the Purchase Plan are made
at the discretion of the participants. Accordingly, future grants under the
Option Plan and future purchases under the Purchase Plan are not yet
determinable.
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NEW PLAN BENEFITS
Verity, Inc. 1995 Verity, Inc. 1995
Stock Option Plan(1) Stock Purchase Plan(2)
----------------- -------------------
Name and Exercise Price Number of Purchase Price Number of
Principal Position Per Share Shares Per Share Shares
------------------ --------- ------ --------- ------
Philippe F. Courtot............................ $13.20 22,100 -- 0
President and Chief Executive Officer
Donald C. McCauley............................. 12.00 100 $10.20 1,323
Vice President and Chief Financial Officer 34.75 50,000
Anthony J. Bettencourt......................... 2.00 50,000 10.20 2,450
Vice President, Sales 12.00 100
34.75 50,000
Christopher Helgeson(3)........................ 1.50 100,000 10.20 1,568
12.00 100
34.75 50,000
Susan P. Barsamian (4)......................... 1.50 5,000 -- 0
12.00 100
John W. Lehman(5).............................. 12.00 100 10.20 1,346
All Executive Officers as a Group.............. 2.00 - 34.75 247,400 10.20 4,998
(5 persons)
All Outside Directors as a Group............... -- 0 -- 0
(3 persons)
All Non-Executive Officer Employees as a 1.50 - 34.75 1,062,770 10.20 73,904
Group
- ----------------------
(1) Only employees, employee directors and independent contractors of, and
consultants to, the Company are eligible to participate in the Option
Plan.
(2) Only employees and employee directors of the Company are eligible to
participate in the Purchase Plan.
(3) Mr. Helgeson was Vice President, Research and Development, of the
Company during the fiscal year ended May 31, 1996; he is no longer an
employee of the Company.
(4) Ms. Barsamian was Vice President, Marketing, of the Company until
February 1996; she is no longer an employee of the Company.
(5) Mr. Lehman was Vice President, International Operations, of the Company
until April 1996; he is no longer an employee of the Company.
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REPORT OF THE COMPENSATION COMMITTEE
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. 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 Board of Directors of the Company, of which Philippe F. Courtot,
Chairman of the Board and Chief Executive of the Company, was and is a member,
fulfilled all functions of the Compensation Committee with regard to
compensation of the executive officers of the Company in fiscal 1996 prior to
the formation of the Committee in June 1995.
Commencing with the 1997 fiscal year compensation setting process, the
Committee will review compensation surveys and other data to enable the
Committee to compare the Company's compensation package with that of
similar-sized high technology companies in the Company's geographical area.
SALARY AND BONUSES. In fiscal 1996, the Company hired three executive
officers whose salaries and bonuses were determined based upon negotiations
between the individual executive officers and the Company. At the end of fiscal
1995, the Company hired an executive officer whose salary and bonus were also
determined based upon negotiations between the executive officer and the
Company. Bonuses awarded in fiscal 1996 to three of the Company's executive
officers in the areas of sales and marketing were based upon the achievement of
certain overall sales goals and certain territorial sales goals by the Company.
The salaries and services of these four executive officers and two other
executive officers who are no longer employees of the Company were not reviewed
again in fiscal 1996. With input from Mr. Courtot, the Committee may adjust the
salary and bonus arrangements of individual executive officers based upon
performance and responsibilities, in light of surveys of compensation paid to
executive officers of similar-sized high technology companies in the Company's
geographical area.
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. The size of an initial
option grant to an executive officer has generally been determined with
reference to similar-sized high technology companies in the Company's
geographical area for similar positions, the responsibilities and future
contributions of the executive officer, as well as recruitment considerations.
In this regard, during 1996 options were granted to three executive officers,
after negotiation with each such executive officer upon such executive officer
commencing employment with the Company. During 1996, additional options were
also granted to four executive officers based upon the favorable financial
performance of the Company, the achievement of certain sales goals and the
assumption of additional responsibilities by each executive officer. The Company
also granted options to purchase 100 shares of Common Stock to all employees,
including executive officers, upon the completion of the Company's initial
public offering.
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 Compensation
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
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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.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Courtot has served as the Company's Chief Executive Officer since
August 1993. In July 1993, the Company entered into an employment agreement with
Mr. Courtot which sets Mr. Courtot's salary at its current rate, subject to
annual review by the Compensation Committee and adjustment based upon various
factors, including Mr. Courtot's performance and the Company's profitability. In
1996, Mr. Courtot's salary was reviewed by the Board of Directors prior to the
Company's public offering and no change was made in Mr. Courtot's salary. In
October 1995, upon the Committee's recommendation, the Board of Directors
granted Mr. Courtot options to purchase 22,000 shares of the Company's Common
Stock based upon a review of his performance and his existing equity ownership.
See " -- Employment Agreements and Termination and Change of Control
Arrangements."
REPRICING OF STOCK OPTIONS FOLLOWING THE END OF FISCAL 1996
In July 1996, the Compensation Committee considered the options held by
the Company's executive officers and employees and the fact that a broad decline
in the price of the Common Stock of the Company had resulted in a substantial
number of stock options granted pursuant to the Option Plan having exercise
prices well above the recent historical trading prices for the Common Stock. The
Committee was advised by management that management believed that key employee
turnover was likely to increase in part because the Company's total compensation
package for long-term employees, which included substantial options with
exercise prices well above the current trading price, was less attractive than
compensation offered by other companies in the same geographic location. This is
because options granted to new hires at other companies would likely be granted
at current trading prices, providing more opportunity for appreciation than the
Company's options.
The Committee believed that the Company's success in the future would
depend in large part on its ability to retain a number of its highly skilled
technical, managerial and marketing personnel and the loss of key employees
could have significant adverse impact on the Company's business. The Committee
also believed that unless an adjustment was made in option prices, existing
employees holding options would perceive a substantial inequity in comparison to
new employees granted stock options with exercise prices set at the current,
lower fair market value of the Company's Common Stock and that employee morale
would suffer as a consequence. The Committee concluded that it was important and
cost-effective to provide equity incentives to employees and executive officers
of the Company to improve the Company's performance and the value of the Company
for its stockholders. The Committee considered granting new options selectively
to current key employees at fair market value, but recognized that the size of
the option grants required to offset the decline in market price would result in
significant additional dilution to stockholders. The Committee recognized that
an exchange of existing options with exercise prices higher than fair market
value for options at fair market value would provide additional incentives to
employees because of the increased potential for appreciation. The Committee
also recognized that the new options could require completion of an extension of
the options vesting schedule for up to three months providing optionees
participating in the exchange with an added incentive to remain with the
Company. Considering these factors, the Committee determined that it was in the
best interests of the Company and its stockholders to restore the incentives for
employees and executive officers to remain as employees of the Company and to
exert their maximum efforts on behalf of the Company by granting
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replacement stock options under the Option Plan for those options with exercise
prices above recent trading prices, with restarted vesting and exercise prices
equal to $19.50, the closing sale price of the Company's Common Stock preceding
the Committee's approval of the repricing. The replacement options are subject
to termination if the optionee fails to agree within a reasonable period to the
cancellation of the old options to be replaced.
Accordingly, in July 1996, the Committee approved an offer to all
employees of the Company, including executive officers whom the Committee
considered separately, to exchange outstanding options with exercise prices
above the then current trading price for options with an exercise price of
$19.50 per share, with the schedule for such replacement options extended by up
to three months. The Committee approved new vesting for the replacement options
as follows: replacement options shall have a new vesting schedule commencing
three months after the original commencement date, but commencing no later than
July 12, 1996. All replacement options will terminate no later than ten (10)
years from the date of grant, but will terminate earlier if the optionee fails
to agree within a reasonable period to the cancellation of the old options to be
replaced. Accordingly, optionees who participated in the exchange received a
lower exercise price in exchange for forfeiting vesting under their old options.
The offer to exchange options will be completed in August 1996; in total,
options for 795,660 shares with exercise prices ranging from $34.75 per share to
$38.00 per share may be exchanged for options for an equal number of shares at
an exercise price of $19.50 per share, the closing price of the Company's Common
Stock on July 12, 1996, the date of the Committee's approval of the repricing.
COMPENSATION COMMITTEE
Steven M. Krausz
Charles P. Waite, Jr.
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COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change
in the cumulative total return on the Company's Common Stock with the cumulative
total return of the Nasdaq Stock Market Index (U.S. companies only) and the
Nasdaq Computer & Data Processing Stocks Index for the period commencing on
October 6, 1995, the first day of trading following the date of the Company's
initial public offering, and ending on May 31, 1996.
COMPARISON OF CUMULATIVE TOTAL RETURN
FROM OCTOBER 6, 1995 THROUGH MAY 31, 19961
VERITY, INC. NASDAQ STOCK MARKET - U.S. INDEX,
NASDAQ COMPUTER & DATA PROCESSING STOCKS INDEX
[LINE CHART]
October 6, 1995 May 31, 1996
--------------- ------------
Verity, Inc. $100.00 $327.08
Nasdaq Stock Market - U.S. Index $100.00 $123.75
Nasdaq Computer & Data Processing Stocks Index $100.00 $131.80
- --------
(1) Assumes that $100.00 was invested on October 6, 1995 in the Company's
Common Stock and each index. Stockholder returns over the indicated
period should not be considered indicative of future stockholder
returns.
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PROPOSAL TWO
APPROVAL OF AMENDMENT TO
VERITY, INC. 1995 STOCK OPTION PLAN
The Company established 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." 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 of May 31, 1996, 2,910,836 shares of
Common Stock were reserved for issuance upon the exercise of outstanding options
at a weighted average exercise price of $17.97 per share, with exercise prices
ranging from $0.45 to $36.50, and 866,257 shares of Common Stock remained
available for future option grants (excluding the 400,000 shares now proposed
for stockholder approval), which equaled approximately 8.0% of the total number
of shares of Common Stock outstanding.
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 400,000 shares (the "Option Reserve Increase")
so that the total number of shares available for future grants as of May 31,
1996 under the Option Plan would be 1,266,257. The Board of Directors has also
approved amendments to the Option Plan which provide that (i) the Board may not
decrease the exercise price of a stock option granted from the Option Reserve
Increase, or grant a new option in substitution therefor, without stockholder
approval; (ii) the maximum term of a stock option granted the from the Option
Reserve Increase under the Option Plan will be eight years; and (iii) the
exercise price of 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. In the future, the Board of
Directors may approve further amendments to the Option Plan to eliminate
provisions made unnecessary by, or to add provisions permitted by, Rule 16b-3
under the Securities Exchange Act of 1934, as recently amended by Securities and
Exchange Commission Release No. 34-37260 ("New Rule 16b-3"). The Company must
bring its plans under which officers and directors may acquire equity securities
of the Company into compliance with New Rule 16b-3 on or before November 1,
1996. The stockholders are now being asked to approve the Option 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.
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 Internal Revenue Code of 1986,
as amended (the "Code"), and nonstatutory stock
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options. As of May 31, 1996, options to purchase 847,595 shares of Common Stock
granted pursuant to the Option Plan had been exercised, 2,910,836 shares of
Common Stock were reserved for issuance upon the exercise of outstanding
options, and 866,257 shares of Common Stock remained available for future
grants.
Shares Subject to Plan. Currently, a maximum of 2,910,836 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 400,000 the maximum number of shares of Common Stock issuable
thereunder to an aggregate of 3,310,836.
If the stockholders approve the 400,000 shares increase in the number
of shares authorized for issuance under the Option Plan, 1,266,257 shares of
Common Stock would be available for future option grants as of May 31, 1996,
which equals approximately 11.7% 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.
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 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. 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
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 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
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
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Option Plan. However, the Option Plan provides that no director serving on a
committee intended to administer the plan in compliance with Rule 16b-3 under
the Exchange Act may be granted an option under the Option Plan. As of May 31,
1996, the Company had approximately 216 employees, including 5 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
subject to the optionee's continued employment or service. The maximum term of
an incentive stock option or nonstatutory stock option granted from the 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 granted
from the 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 shareholders 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 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.
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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.
Termination or 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 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 adjustment in
computing the optionee's alternative minimum taxable income and may be subject
to an alternative minimum tax which is paid if such tax exceeds the regular tax
for the year. Special rules may apply with respect to certain subsequent sales
of the shares in a disqualifying disposition, certain basis adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.
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
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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 is 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.
ADDITIONAL INFORMATION.
On February 6, 1996, the Board of Directors of the Company adopted the
Verity, Inc. 1996 Nonstatutory Stock Option Plan (the "1996 Plan"). Pursuant to
the 1996 Plan, the Board of Directors has the power to grant nonstatutory stock
options to employees, prospective employees, consultants and prospective
consultants of the Company; provided, however, that no such grant may be made
under the 1996 Plan 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. As of
May 31, 1996, 300,000 shares of the Company's Common Stock were reserved for
issuance under the 1996 Plan, and options to purchase an aggregate of 215,500
shares of the Company's Common Stock at weighted average exercise price of
$34.90 per share were outstanding.
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. Broker non-votes will have no effect on the
outcome of this vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THIS PROPOSAL TO AMEND VERITY'S 1995 STOCK OPTION PLAN TO INCREASE
THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE
THEREUNDER FROM 2,910,836 TO 3,310,836.
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PROPOSAL THREE
APPROVAL OF AMENDMENT TO
VERITY, INC. 1995 EMPLOYEE STOCK PURCHASE PLAN
The Company established the 1995 Employee Stock Purchase Plan in June
1995. Management believes that the availability of an adequate number of shares
under the Purchase Plan is an important factor in attracting and retaining
qualified employees essential to the success of the Company. As of May 31, 1996,
there were 168,000 shares available for issuance under the Purchase Plan. The
Board of Directors has amended the Purchase Plan, subject to stockholder
approval, to increase the maximum number of shares of the Common Stock of the
Company issuable under the Purchase Plan from 250,000 shares to 500,000 shares.
In the future, the Board of Directors may approve further amendments to the
Purchase Plan to eliminate provisions made unnecessarily by, or to add
provisions permitted by, New Rule 16b-3.
SUMMARY OF THE PROVISIONS 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 Code. Each participant in the Purchase
Plan is granted at the beginning of each offering under the 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 the
last day of each purchase period during the Offering unless the participant has
withdrawn from participation in the Offering or in the Purchase Plan prior to
such date.
Shares Subject to Plan. Currently, a maximum of 250,000 of the
Company's authorized but unissued or reacquired shares of Common Stock may be
issued under the Purchase Plan, subject to appropriate adjustment in the event
of a stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the Company's capital
structure or 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. The Board of Directors has amended the
Purchase Plan, subject to stockholder approval, to increase by 250,000 the
maximum number of shares of Common Stock issuable thereunder to an aggregate of
500,000.
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 plan.
The Board will interpret the Purchase Plan and Purchase Rights granted
thereunder, and all determinations of the Board will be final and binding on all
persons having an interest in the Purchase Plan or any Purchase Rights.
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 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 parent or subsidiary corporation of the Company is entitled to
participate in the Purchase Plan.
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Offerings. Generally, each Offering of Common Stock under the Purchase
Plan is for a period of 24 months (an "Offering Period"). Offering Periods will
generally commence on or about April 1 and October 1 of each year (an "Offering
Date"). However, the first Offering Period commenced on October 5, 1996 and ends
on September 30, 1997. Generally, each Offering Period is comprised of four
six-month "Purchase Periods" ending on or about the last days of March and
September (a "Purchase Date"). The Board may establish a different term for one
or more Offerings or different commencement or ending dates for any Offering
Period or Purchase Period, provided that no Offering Period may exceed 27
months.
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 Offering Date. Payroll deductions may not exceed 20% (or
such other rate as the Board determines) of an employee's compensation for any
pay period during the Offering Period. Once an employee becomes a participant in
the Purchase Plan, that employee will automatically participate in each
successive Offering Period until such time as that employee withdraws from the
Purchase Plan, becomes ineligible to participate in the Purchase Plan, or
terminates employment.
Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to the lesser of that number of whole shares determined by
dividing $50,000 by the fair market value of a share of Common Stock on the
Offering Date or 5,000 shares, provided that these dollar and share amounts will
be prorated for any Offering Period that is less than 23 1/2 months in duration.
No participant may purchase 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).
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 that Purchase Period by the purchase price, limited in
any case by the number of shares subject to the participant's Purchase Right for
that Offering. The price per share at which shares are sold at the end of a
Purchase Period generally equals 85% of the lesser of the fair market value per
share of the Company's 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. Any payroll deductions under the Purchase Plan not applied to
the purchase of shares will be returned to the participant, 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.
A participant may withdraw from an Offering at any time without
affecting his or her eligibility to participate in future Offerings. However,
once a participant withdraws from an Offering, that participant may not again
participate in the same Offering.
Transfer of Control. The Purchase Plan provides that, in the event of
(i) a sale or exchange by the shareholders 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 shareholders 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 acquiring or successor corporation
may assume the Company's rights and obligations under the Purchase Plan or
substitute substantially equivalent Purchase Rights for such corporation's
stock. If the acquiring or successor corporation elects not to assume or
substitute for the outstanding Purchase Rights, the Board may adjust the last
day of the current Purchase Period to a
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date on or before the date of the Transfer of Control. Any Purchase Rights that
are not assumed, substituted for, or exercised prior to the Transfer of Control
will terminate.
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 shareholders 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. 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.
A capital gain or loss will be long-term if the participant holds the
shares for more than 12 months and short-term if the participant holds the
shares for 12 months or less. Both long-term and short-term capital gains are at
present generally subject to the same tax rates as ordinary income, except that
long-term capital gains are currently subject to a maximum tax rate of 28%.
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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,
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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THIS PROPOSAL TO AMEND VERITY'S 1995 EMPLOYEE STOCK PURCHASE PLAN TO INCREASE
THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE
THEREUNDER FROM 250,000 TO 500,000.
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PROPOSAL FOUR
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has selected Coopers & Lybrand
LLP as independent accountants to audit the financial statements of the Company
for the year ending May 31, 1997. Coopers & Lybrand LLP has acted as the
Company's independent auditors since the Company's inception. A representative
of Coopers & Lybrand LLP is expected to be present at the Annual Meeting with
the opportunity to make a statement if the representative desires to do so, and
is expected to be available to respond to appropriate questions.
The affirmative vote of a majority of the votes cast at the Annual
Meeting of Stockholders, at which a quorum representing a majority of all
outstanding shares of Common Stock of the Company is present and voting, either
in person or by proxy, is required for approval of this proposal. Abstentions
and broker non-votes will each be counted as present for purposes of determining
the presence of a quorum. Neither abstentions nor broker non-votes will have any
effect on the outcome of this vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
APPOINTMENT OF COOPERS & LYBRAND LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDING MAY 31, 1997.
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company must be received by the Company at
its offices at 894 Ross Avenue, Sunnyvale, California 94089, not later than
April 17, 1997, and satisfy the conditions established by the Securities and
Exchange Commission for stockholder proposals to be included in the Company's
proxy statement for that meeting.
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TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board
of Directors intends to present or knows that others will present at the meeting
is as set forth above. If any other matter or matters are properly brought
before the meeting, or any adjournment thereof, it is the intention of the
persons named in the accompanying form of proxy to vote the proxy on such
matters in accordance with their best judgment.
By Order of the Board of Directors
/s/ Philippe F. Courtot
Philippe F. Courtot
Chairman of the Board and
Chief Executive Officer
August 16, 1996
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VERITY, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
P
R
O The undersigned hereby appoints Philippe F. Courtot and Donald
X C. McCauley, and each of them, with full power of substitution to represent
Y the undersigned and to vote all of the shares of stock in Verity, Inc.
(the "Company") which the undersigned is entitled to vote at the Annual
Meeting of Stockholders of said Company to be held at the Sheraton Four
Points Hotel, 1100 N. Mathilda Avenue, Sunnyvale, California on Monday,
September 16, 1996 at 11:00 a.m., Pacific Standard Time, and at any
adjournment thereof (1) as hereinafter specified upon the proposals listed
on the reverse side and as more particularly described in the Company's
Proxy Statement, receipt of which is hereby acknowledged, and (2) in their
discretion upon such other matters as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2, 3
AND 4.
----------------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE | SEE REVERSE |
| SIDE |
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30
DETACH HERE
PLEASE MARK
/X/ VOTES AS IN
THIS EXAMPLE
A vote FOR the following proposals is recommended by the Board of Directors:
1. Election of Directors
Nominees: Steven M. Krause and Charles P. Waite, Jr.
FOR WITHHOLD
----- --------
/ / / /
MARK HERE
/ / FOR ADDRESS
----------------------------------- CHANGE AND / /
For both nominees except as noted above NOTE BELOW
FOR AGAINST ABSTAIN
------- ------- -------
2. To approve an amendment to the 1995 Stock / / / / / /
Option Plan of the Company to 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.
FOR AGAINST ABSTAIN
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3. To approve an amendment to the 1995 Employee / / / / / /
Stock Purchase Plan of the Company to increase
the number of shares of Common Stock of the
Company authorized for issuance thereunder
from 250,000 shares to 500,000 shares.
FOR AGAINST ABSTAIN
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4. To approve the selection of Coopers & Lybrand / / / / / /
L.L.P. as the Company's independent public
accountants for the current fiscal year.
Even if you are planning to attend the meeting in person, you are urged to sign
and mail the Proxy in the return envelope so that your stock may be represented
at the meeting.
Sign exactly as your name(s) appears on your stock certificate. If shares of
stock stand on record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above Proxy. If shares of stock are held of record by
a corporation, the Proxy should be executed by the President or Vice President
and the Secretary or Assistant Secretary and the corporate seal should be
aligned thereto. Executors or administrators or other fiduciaries who execute
the above Proxy for a deceased stockholder should give their full title.
Please date the Proxy.
Signature Date: Signature: Date:
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