<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Continuus Software Corporation
- --------------------------------------------------------------------------------
(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:
- --------------------------------------------------------------------------------
<PAGE> 2
CONTINUUS SOFTWARE CORPORATION
9401 JERONIMO ROAD
IRVINE, CALIFORNIA 92618
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 23, 2000
TO THE STOCKHOLDERS OF CONTINUUS SOFTWARE CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
CONTINUUS SOFTWARE CORPORATION, a Delaware corporation (the "Company"), will be
held on Friday, JUNE 23, 2000 at 10:00 a.m. local time at 9401 Jeronimo Road,
Irvine, California 92618 for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To approve the Company's 1997 Equity Incentive Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 1,000,000 shares.
3. To ratify the selection of Deloitte & Touche LLP as independent auditors
of the Company for its fiscal year ending December 31, 2000.
4. 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 April 26,
2000, 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
/S/ STEVEN L. JOHNSON
Steven L. Johnson
Secretary
Irvine, California
MAY 22, 2000
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE> 3
CONTINUUS SOFTWARE CORPORATION
9401 Jeronimo Road
Irvine, California 92618
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
June 23, 2000
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Continuus Software Corporation, a Delaware corporation ("Continuus" or the
"Company"), for use at the Annual Meeting of Stockholders to be held on June 23,
2000, at 10:00 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 9401 Jeronimo Road,
Irvine, California 92618. The Company intends to mail this proxy statement and
accompanying proxy card on or about May 22, 2000, 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 card 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 April
26, 2000 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on April 26, 2000 the Company had outstanding and entitled to
vote 10,573,167 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. Broker non-votes are counted towards a
quorum, but are not counted for any purpose in determining whether a matter has
been approved.
<PAGE> 4
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, 108
Pacifica, Irvine, California 92618, 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.
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 2001 annual
meeting of stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is December 28, 2000. Stockholders wishing to submit proposals or
director nominations that are not to be included in such proxy statement and
proxy must do so by January 27, 2001, Management will have discretionary
authority to vote all shares for which it has proxies in opposition to such
matter.
2
<PAGE> 5
PROPOSAL 1
ELECTION OF DIRECTORS
There are six nominees for the six Board positions presently authorized
in the Company's Bylaws. Each director to be elected will hold office until the
next annual meeting of stockholders and until his successor is elected and has
qualified, or until such director's earlier death, resignation or removal. Each
nominee listed below is currently a director of the Company. The status of each
nominee as a member of the Company's Board of Directors was confirmed by the
Company's stockholders in connection with the Company's reincorporation in the
State of Delaware.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote. Shares represented by executed
proxies will be voted, if authority to do so is not withheld, for the election
of the six nominees named below. In the event that any 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. Each person nominated for election has agreed to serve if elected and
management has no reason to believe that any nominee will be unable to serve.
3
<PAGE> 6
NOMINEES
The names of the nominees and certain information about them are set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH THE COMPANY
- ---- --- ------------------------------
<S> <C> <C>
John R. Wark 48 President, Chief Executive Officer and Chairman
Fred B. Cox 65 Director
Kevin G. Hall (1) 41 Director
A. Barry Patmore 59 Director
Stewart A. Schuster (1) 54 Director
Sol Zechter 73 Director
</TABLE>
- -----------------
(1) Member of the compensation committee and audit committee
John R. Wark has served as our President, Chief Executive Officer and
Chairman of the board of directors since November 1994. Prior to joining
Continuus, Mr. Wark served as Vice President, Marketing and Development at
Progress Software Corporation, a software development tool and database system
provider, from February 1992 to November 1994. Prior to his tenure with Progress
Software, he served as a Vice President of the Applications Software Division of
Pansophic Systems.
Fred B. Cox has served as a director of Continuus since 1994, prior to
which Mr. Cox served as our President for four years. He is currently the
Chairman of the Board of Directors and co-founder of Emulex Corporation, a
publicly traded designer and manufacturer of products which enhance access to
and storage of electronic data and applications.
Kevin G. Hall has served as a director of Continuus since 1994. Mr. Hall
is a general partner of Norwest Venture Partners, a private investment firm,
where he focuses on software, communications and semiconductors.
A. Barry Patmore has served as a director of Continuus since April 1999.
Mr. Patmore has been a venture partner of Brentwood Venture Capital, a private
investment firm, since April 1999. Mr. Patmore was employed by Andersen
Consulting from 1966 to February 1999, where he served in several positions,
including Office Managing Partner of Southern California and Worldwide Managing
Partner in two divisions. Mr. Patmore is currently a member of the board of
directors of KCET, a public television station and LetsTalk.com, a specialty
retailer of wireless and cellular products.
Stewart A. Schuster has served as a director of Continuus since May
1997. Dr. Schuster has been a venture partner of Brentwood Venture Capital,
since December 1995. Dr. Schuster served as Executive Vice President of
Marketing at Sybase, Inc., a database solutions company, from 1986 to 1995.
Sol Zechter has served as a director of Continuus since 1994, prior to
which Mr. Zechter served as our Chief Executive Officer from 1991 until 1994.
Mr. Zechter served as the Senior Vice President of Emulex from 1982 to 1991.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
4
<PAGE> 7
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1999 the Board of Directors
held eleven meetings and acted by unanimous written consent one time. The Board
has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent auditors 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. Hall and Schuster. It met once during the 1999
fiscal year.
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. Hall and Schuster. Until April 16, 1999, Mr. Cox also served on the
Compensation Committee. It met once and acted by unanimous written consent five
times during the 1999 fiscal year.
5
<PAGE> 8
PROPOSAL 2
APPROVAL OF THE AMENDMENT TO THE 1997 EQUITY INCENTIVE PLAN
In December 1997, the Board adopted the Company's 1997 Equity Incentive
Plan (the "Incentive Plan"), subject to stockholder approval. There are
2,452,830 shares of Common Stock reserved for issuance under the Incentive Plan.
In April 2000, the Board amended the Incentive Plan, subject to
stockholder approval, to increase the number of shares of Common Stock
authorized for issuance under the Incentive Plan from a total of 2,452,830
shares to a total of 3,452,830 shares. The Board adopted this amendment in order
to ensure that the Company can continue to grant stock options at levels
determined appropriate by the Board.
As of April 1, 2000 awards (net of canceled or expired awards) covering
an aggregate of 2,196,775 shares of the Company's Common Stock had been granted
under the Incentive Plan. Only 256,055 shares of Common Stock (plus any shares
that might in the future be returned to the Incentive Plan as a result of
cancellations or expiration of awards or the reacquisition by the Company of
issued shares) remained available for future grant under the Incentive Plan.
Stockholders are requested in this Proposal 2 to approve the amendment
to the Incentive 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 amendment to the Incentive 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 matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the Incentive Plan are outlined below:
GENERAL
The Incentive Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock bonuses and restricted stock purchase awards
(collectively "awards"). Incentive stock options granted under the Incentive
Plan are intended to qualify as "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Nonstatutory stock options granted under the Incentive Plan are not intended to
qualify as incentive stock options under the Code. See "Federal Income Tax
Information" for a discussion of the tax treatment of awards. To date, the
Company has granted only stock options under the Plan.
PURPOSE
The Board adopted the Incentive Plan to provide a means by which
employees, directors and consultants of the Company and its affiliates 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 and its affiliates. All of
the approximately 260 employees, directors and consultants of the Company and
its affiliates are eligible to participate in the Incentive Plan.
ADMINISTRATION
The Board administers the Incentive Plan. Subject to the provisions of
the Incentive Plan, the Board has the power to construe and interpret the
Incentive Plan and to determine the persons to whom and the dates on which
awards will be granted, the number of shares of Common Stock to be subject to
each award, the time or times during the term of each award within which all or
a portion of such award may be exercised, the exercise price, the type of
consideration and other terms of the award.
6
<PAGE> 9
The Board has the power to delegate administration of the Incentive Plan
to a committee composed of not fewer than two members of the Board. In the
discretion of the Board, a committee may consist solely of two or more outside
directors in accordance with Section 162(m) of the Code or solely of two or more
non-employee directors in accordance with Rule 16b-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Board has delegated
administration of the Incentive Plan to the Compensation Committee of the Board.
As used herein with respect to the Incentive Plan, the "Board" refers to any
committee the Board appoints as well as to the Board itself.
The regulations under Section 162(m) of the Code require that the
directors who serve as members of the committee must be "outside directors." The
Incentive Plan provides that, in the Board's discretion, directors serving on
the committee may be "outside directors" within the meaning of Section 162(m).
This limitation would exclude from the 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 Incentive 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). The definition of an "outside
director" under Section 162(m) is generally narrower than the definition of a
"non-employee director" under Rule 16b-3 of the Exchange Act.
ELIGIBILITY
Incentive stock options may be granted under the Incentive Plan only to
employees (including officers) of the Company and its affiliates. Employees
(including officers), directors, and consultants of both the Company and its
affiliates are eligible to receive all other types of awards under the Incentive
Plan.
No incentive stock option may be granted under the Incentive Plan to any
person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the exercise price is at least 110% of the
fair market value of the stock subject to the option on the date of grant and
the term of the option does not exceed five years from the date of grant.
Likewise, no restricted stock award may be granted under the Incentive Plan to
any such 10% stockholder unless the exercise price is at least 100% of the fair
market value of the stock subject to the award. In addition, the aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first time
by a participant during any calendar year (under the Incentive Plan and all
other such plans of the Company and its affiliates) may not exceed $100,000.
No person may be granted options under the Incentive Plan exercisable
for more than 1,000,000 shares of Common Stock during any calendar year
("Section 162(m) Limitation"). However, this limitation applies only after the
closing of the Initial Public Offering and then only upon the earliest to occur
of (i) the first material modification to the Incentive Plan, (ii) the issuance
of all the shares of Common Stock reserved for issuance under the Incentive
Plan, (iii) the expiration of the Incentive Plan, or (iv) the first meeting of
stockholders at which directors are to be elected that occurs after the close of
the third calendar year following the Initial Public Offering, or such other
date required by Section 162(m) of the Code and the rules and regulations
promulgated thereunder.
STOCK SUBJECT TO THE INCENTIVE PLAN
Subject to this Proposal, an aggregate of 2,452,830 shares of Common
Stock is reserved for issuance under the Incentive Plan. If awards granted under
the Incentive Plan expire or otherwise terminate without being exercised, the
shares of Common Stock not acquired pursuant to such awards again becomes
available for issuance under the Incentive Plan. If the Company reacquires
unvested stock issued under the Incentive Plan, the reacquired stock will again
become available for reissuance under the Incentive Plan for awards other than
incentive stock options.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under
the Incentive Plan. Individual option grants may be more restrictive as to any
or all of the permissible terms described below.
Exercise Price; Payment. The exercise price of incentive stock options
may not be less than 100% of the fair market value of the stock subject to the
option on the date of the grant and, in some cases (see "Eligibility" above),
may
7
<PAGE> 10
not be less than 110% of such fair market value. The exercise price of
nonstatutory options may not be less than 85% of the fair market value of the
stock on the date of grant. If options were granted with exercise prices below
market value, deductions for compensation attributable to the exercise of such
options could be limited by Section 162(m) of the Code. See "Federal Income Tax
Information." As of April 3, 2000, the closing price of the Company's Common
Stock as reported on the Nasdaq National Market System was $9.50 per share.
The exercise price of options granted under the Incentive Plan must be
paid either in cash at the time the option is exercised or at the discretion of
the Board, (i) by delivery of other Common Stock of the Company, (ii) pursuant
to a deferred payment arrangement or (iii) in any other form of legal
consideration acceptable to the Board.
Repricing. In the event of a decline in the value of the Company's
Common Stock, the Board has the authority to offer participants the opportunity
to replace outstanding higher priced options with new lower priced options. To
the extent required by Section 162(m) of the Code, a repriced option is deemed
to be canceled and a new option granted. Both the option deemed to be canceled
and the new option deemed to be granted will be counted against the Section
162(m) Limitation.
Option Exercise. Options granted under the Incentive Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the Incentive Plan typically vest
25% at the end of the first year and then in equal quarterly installments over
the next three years during the participant's employment by, or service as a
director or consultant to, the Company or an affiliate (collectively,
"service"). Shares covered by options granted in the future under the Incentive
Plan may be subject to different vesting terms. The Board has the power to
accelerate the time during which an option may vest or be exercised. In
addition, options granted under the Incentive Plan may permit exercise prior to
vesting, but in such event the participant may be required to enter into an
early exercise stock purchase agreement that allows the Company to repurchase
unvested shares, generally at their exercise price, should the participant's
service terminate before vesting. To the extent provided by the terms of an
option, a participant may 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 stock
otherwise issuable to the participant, by delivering already-owned Common Stock
of the Company or by a combination of these means.
Term. The maximum term of options under the Incentive Plan is 10 years,
except that in certain cases (see "Eligibility") the maximum term is five years.
Options under the Incentive Plan generally terminate three months after
termination of the participant's service unless (i) such termination is due to
the participant's disability, in which case the option may, but need not,
provide that it may be exercised (to the extent the option was exercisable at
the time of the termination of service) at any time within 12 months of such
termination; (ii) the participant dies before the participant's service has
terminated, or within three months after termination of such service, in which
case the option may, but need not, provide that it may be exercised (to the
extent the option was exercisable at the time of the participant's death) within
18 months of the participant'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; or (iii)
the option by its terms specifically provides otherwise. A participant may
designate a beneficiary who may exercise the option following the participant's
death. Individual option grants by their terms may provide for exercise within a
longer period of time following termination of service.
The option term generally is extended in the event that exercise of the
option within these periods is prohibited. A participant's option agreement may
provide that if the exercise of the option following the termination of the
participant's service would result in liability under Section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), then the option shall
terminate on the earlier of (i) the expiration of the term of the option or (ii)
the 10th day after the last date on which such exercise would result in such
liability under Section 16(b). A participant's option agreement also may provide
that if the exercise of the option following the termination of the
participant's service would be prohibited because the issuance of stock would
violate the registration requirements under the Securities Act, then the option
will terminate on the earlier of (i) the expiration of the term of the option or
(ii) three months after the termination of the participant's service during
which the exercise of the option would not be in violation of such registration
requirements.
TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
Payment. The Board determines the purchase price under a restricted
stock purchase agreement but the purchase price may not be less than 85% of the
fair market value of the Company's Common Stock on the date of grant. The Board
may award stock bonuses in consideration of past services without a purchase
payment.
8
<PAGE> 11
The purchase price of stock acquired pursuant to a restricted stock
purchase agreement under the Incentive Plan must be paid either in cash at the
time the option is exercised or at the discretion of the Board, (i) by delivery
of other Common Stock of the Company, (ii) pursuant to a deferred payment
arrangement or (iii) in any other form of legal consideration acceptable to the
Board.
Vesting. Shares of stock sold or awarded under the Incentive Plan may,
but need not be, subject to a repurchase option in favor of the Company in
accordance with a vesting schedule as determined by the Board. The Board has the
power to accelerate the vesting of stock acquired pursuant to a restricted stock
purchase agreement under the Incentive Plan.
Restrictions on Transfer. Rights under a stock bonus or restricted stock
bonus agreement may only be transferred by will or the laws of descent and
distribution so long as the stock awarded under the stock bonus or restricted
stock bonus agreement remains subject to the terms of the applicable stock bonus
or restricted stock purchase agreement.
RESTRICTIONS ON TRANSFER
The participant may not transfer an incentive stock option otherwise
than by will or by the laws of descent and distribution. During the lifetime of
the participant, only the participant may exercise an incentive stock option.
The Board may grant nonstatutory stock options that are transferable generally.
Shares subject to repurchase by the Company under an early exercise stock
purchase agreement may be subject to restrictions on transfer that the Board
deems appropriate.
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 Incentive
Plan and outstanding awards. In that event, the Incentive Plan will be
appropriately adjusted as to the class and the maximum number of shares of
Common Stock subject to the Incentive Plan, and outstanding awards will be
adjusted as to the class, number of shares and price per share of Common Stock
subject to such awards.
EFFECT OF CERTAIN CORPORATE EVENTS
The Incentive Plan provides that, in the event of a dissolution,
liquidation or sale of substantially all of the assets of the Company, specified
types of merger, or other corporate reorganization ("change in control"), any
surviving corporation will be required to either assume awards outstanding under
the Incentive Plan or substitute similar awards for those outstanding under the
Incentive Plan. If any surviving corporation declines to assume awards
outstanding under the Incentive Plan, or to substitute similar awards, then,
with respect to participants whose service has not terminated, the vesting and
the time during which such awards may be exercised will be accelerated. An
outstanding award will terminate if the participant does not exercise it before
a change in control. The acceleration of an award 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 Incentive Plan without
stockholder approval or ratification at any time or from time to time. Unless
sooner terminated, the Incentive Plan will terminate in December 2007.
The Board may also amend the Incentive 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 Incentive Plan to satisfy Section 422 of the Code, if applicable,
or Rule 16b-3 of the Exchange Act; (ii) increase the number of shares reserved
for issuance upon exercise of awards; or (iii) change any other provision of the
Incentive Plan in any other way if such modification requires stockholder
approval in order to comply with Rule 16b-3 of the Exchange Act or satisfy the
requirements of Section 422 of the Code or any securities exchange listing
requirements. The Board may submit any other amendment to the Incentive Plan for
stockholder approval, including, but not limited to, amendments intended to
satisfy the requirements of Section 162(m) of the Code
9
<PAGE> 12
regarding the exclusion of performance-based compensation from the limitation on
the deductibility of compensation paid to certain employees.
FEDERAL INCOME TAX INFORMATION
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 participants who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
Incentive Stock Options. Incentive stock options under the Incentive
Plan are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the
participant or the Company by reason of the grant or exercise of an incentive
stock option. However, the exercise of an incentive stock option may increase
the participant's alternative minimum tax liability, if any.
If a participant holds stock acquired through exercise of an incentive
stock option for at least two years from the date on which the option is granted
and at least one year from the date on which the shares are transferred to the
participant upon exercise of the option, any gain or loss on a disposition of
such stock will be a long-term capital gain or loss if the participant held the
stock for more than one year.
Generally, if the participant disposes of the stock before the
expiration of either of these holding periods (a "disqualifying disposition"),
then at the time of disposition the participant will realize taxable ordinary
income equal to the lesser of (i) the excess of the stock's fair market value on
the date of exercise over the exercise price, or (ii) the participant's actual
gain, if any, on the purchase and sale. The participant's additional gain or any
loss upon the disqualifying disposition will be a capital gain or loss, which
will be long-term or short-term depending on whether the stock was held for more
than one year.
To the extent the participant recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
Nonstatutory Stock Options, Restricted Stock Purchase Awards and Stock
Bonuses. Nonstatutory stock options, restricted stock purchase awards and stock
bonuses granted under the Incentive Plan generally have the following federal
income tax consequences:
There are no tax consequences to the participant or the Company by
reason of the grant. Upon acquisition of the stock, the participant normally
will recognize taxable ordinary income equal to the excess, if any, of the
stock's fair market value on the acquisition date over the purchase price.
However, to the extent the stock is subject to certain types of vesting
restrictions, the taxable event will be delayed until the vesting restrictions
lapse unless the participant elects to be taxed on receipt of the stock. With
respect to employees, the Company is generally 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 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 participant.
Upon disposition of the stock, the participant 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 acquisition (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.
Slightly different rules may apply to participants who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
10
<PAGE> 13
Stock Appreciation Rights. No taxable income is realized upon the
receipt of a stock appreciation right, but upon exercise of the stock
appreciation right the fair market value of the shares (or cash in lieu of
shares) received must be treated as compensation taxable as ordinary income to
the participant in the year of such exercise. Generally, with respect to
employees, the Company is required to withhold from the payment made on exercise
of the stock appreciation right or from regular wages or supplemental wage
payments an amount based on the ordinary income recognized. Subject to the
requirement of reasonableness, Section 162(m) of the Code and the satisfaction
of a reporting obligation, the Company will be entitled to a business expense
deduction equal to the taxable ordinary income recognized by the participant.
Potential Limitation on Company Deductions. Section 162(m) of the Code
denies a deduction to any publicly-held corporation for compensation paid to
certain "covered employees" in a taxable year to the extent that compensation to
such covered employee exceeds $1 million. It is possible that compensation
attributable to awards, 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. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options and stock appreciation rights will qualify as
performance-based compensation if the award is granted by a compensation
committee comprised solely of "outside directors" and either (i) the plan
contains a per-employee limitation on the number of shares for which such awards
may be granted during a specified period, the per-employee limitation is
approved by the stockholders, and the exercise price of the award is no less
than the fair market value of the stock on the date of grant, or (ii) the award
is granted (or exercisable) only upon the achievement (as certified in writing
by the compensation committee) of an objective performance goal established in
writing by the compensation committee while the outcome is substantially
uncertain, and the award is approved by stockholders.
Compensation attributable to restricted stock and stock bonuses will
qualify as performance-based compensation, provided that: (i) the award is
granted by a compensation committee comprised solely of "outside directors" and
(ii) the purchase price of the award is no less than the fair market value of
the stock on the date of grant. Stock bonuses qualify as performance-based
compensation under the Treasury regulations only if (i) the award is granted by
a compensation committee comprised solely of "outside directors," (ii) the award
is granted (or exercisable) only upon the achievement of an objective
performance goal established in writing by the compensation committee while the
outcome is substantially uncertain, (iii) the compensation committee certifies
in writing prior to the granting (or exercisability) of the award that the
performance goal has been satisfied and (iv) prior to the granting (or
exercisability) of the award, stockholders have approved the material terms of
the award (including the class of employees eligible for such award, the
business criteria on which the performance goal is based, and the maximum amount
- -- or formula used to calculate the amount -- payable upon attainment of the
performance goal).
NEW PLAN BENEFITS
The following table presents certain information with respect to options
granted under the Incentive Plan for the fiscal year ended December 31, 1999 to
(i) the Company's Chief Executive Officer and its other most highly compensated
executive officers who received grants under the Incentive Plan, (ii) all
executive officers as a group, (iii) all non-employee directors as a group and
(iv) all non-executive officer employees as a group.
11
<PAGE> 14
NEW PLAN BENEFITS
1997 EQUITY INCENTIVE PLAN
<TABLE>
<CAPTION>
NAME AND POSITION NUMBER OF SHARES
- ----------------- UNDERLYING OPTIONS
------------------
<S> <C>
John R. Wark
President and Chief Executive Officer..................... 125,472
James M. Carrigan
Vice President, Research and Development.................. 20,000
David McCann
Vice President, Americas Operations....................... 171,510
William A. Philbin
Vice President, Marketing................................. 20,000
Geoffrey W. Haggart
Former Vice President, European Operations................ 34,434
All Executive Officers as a Group........................... 505,661
All Non-Employee Directors as a Group....................... 47,500
All Non-Executive Officer Employees as a Group.............. 910,699
</TABLE>
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 31, 2000 and
has further directed that management submit the selection of independent
auditors for ratification by the stockholders at the Annual Meeting. Deloitte &
Touche LLP has audited the Company's financial statements since 1994.
Representatives of Deloitte & Touche 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 Deloitte & Touche LLP as
the Company's independent auditors is not required by the Company's By-laws or
otherwise. However, the Board is submitting the selection of Deloitte & Touche
LLP to the stockholders for ratification as a matter of good corporate practice.
If the stockholders fail to ratify the selection, the Audit Committee and the
Board will reconsider whether or not to retain that firm. Even if the selection
is ratified, the Audit Committee and the Board in their discretion may direct
the appointment of different independent auditors 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 Deloitte & Touche 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 3.
12
<PAGE> 15
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of April 1, 2000 by: (i) each
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
BENEFICIAL OWNER NUMBER OF PERCENT OF
SHARES TOTAL
<S> <C> <C>
Kevin G. Hall (2).................................... 1,845,808 17.4%
Norwest Equity Partners IV
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Entities affiliated with
Norwest Equity Partners IV (3)..................... 1,824,888 17.2%
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
London Pacific Life & Annuity Company (6)............ 1,078,166 9.3%
3109 Poplarwood Court, Suite 108
Raleigh, NC 27604
Fred B. Cox (8)...................................... 710,315 6.7%
Stewart A. Schuster (4).............................. 688,405 6.5%
Brentwood Associates VI, L.P.
3000 Sand Hill Road, Building One,
Suite 260
Menlo Park, CA 94025
Entities affiliated with
Brentwood Associates VI, L.P.(5)................... 665,716 6.3%
3000 Sand Hill Road, Building One,
Suite 260
Menlo Park, CA 94025
Advanced Technology Ventures III (7)................. 650,558 6.1%
485 Ramona Street, Suite 200
Palo Alto, CA 94301
Entities affiliated with Accel IV, L.P. (9).......... 574,309 5.4%
428 University Avenue
Palo Alto, CA 94301
Sol Zechter (10)..................................... 445,512 4.2%
John R. Wark (11).................................... 368,887 3.4%
Geoffrey W. Haggart (11)............................. 45,456 *
William A. Philbin (11).............................. 62,166 *
James M. Carrigan (11)............................... 53,066 *
David McCann (11).................................... 36,318 *
A. Barry Patmore (11)................................ 7,500 *
All executive officers and directors as a group (12
persons) (11)........................................ 4,333,404 38.1%
</TABLE>
- -------------------
* Less than one percent.
13
<PAGE> 16
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise
indicated in the footnotes to this table and subject to community
property laws where applicable, the Company believes that each of the
stockholders named in this table has sole voting and investment power
with respect to the shares indicated as beneficially owned. Applicable
percentages are based on 10,569,249 shares outstanding on April 1, 2000,
adjusted as required by rules promulgated by the SEC.
(2) Includes 1,824,888 held by the entities listed in note 3 below and
20,920 shares subject to options exercisable within 60 days of April 1,
2000. Mr. Hall is a general partner of Itasca Partners and Itasca
Partners V, LLP, the general partners of these entities. Mr. Hall
disclaims beneficial ownership of the shares held by the entities listed
in note 1 above, except to the extent of his direct pecuniary interest
in the shares.
(3) Includes 11,815 shares subject to warrants exercisable within 60 days of
April 1, 2000; includes 774,302 shares held by Norwest Equity Partners V
and 9,723 shares subject to warrants exercisable within 60 days of April
1, 2000 held by Norwest Equity Partners V.
(4) Includes 22,689 shares subject to options exercisable within 60 days of
April 1, 2000 and 665,716 shares held by the entities listed in note 5
below. Dr. Schuster disclaims beneficial ownership of the shares held by
the entities listed in note 5 below.
(5) Includes 15,492 shares subject to warrants exercisable within 60 days of
April 1, 2000. Brentwood VI Ventures, L.P. is the general partner of
Brentwood Associates VI, L.P. The general partners of Brentwood VI
Ventures, L.P. are deemed to beneficially own the shares held by
Brentwood Associates VI, L.P. and therefore have voting and investment
power of the shares. The general partners of Brentwood VI Ventures, L.P.
disclaim beneficial ownership of the shares, except to the extent of
their direct pecuniary interest in the shares. Dr. Schuster, a director
of Continuus, is affiliated with Brentwood VI Ventures, L.P.
(6) All 1,078,167 shares are subject to a senior secured convertible
debenture with a conversion price of $5.57 per share held by London
Pacific Life & Annuity Company which may be converted at any time at the
option of London Pacific.
(7) Includes 10,031 shares subject to warrants exercisable within 60 days of
April 1, 2000.
(8) Includes 662,107 shares held by the Cox Living Trust. Also includes
48,208 shares subject to options exercisable within 60 days of April 1,
2000.
(9) Includes 6,271 shares subject to outstanding warrants exercisable within
60 days of April 1, 2000, 24,398 shares held by Accel Investors `95
L.P., 294 shares subject to outstanding warrants exercisable within 60
days of April 1, 2000 held by Accel Investors `95 L.P., 10,778 shares
held by Accel Keiretsu L.P., 130 shares subject to outstanding warrants
exercisable within 60 days of April 1, 2000 held by Accel Keiretsu L.P.,
12,480 shares held by Ellmore C. Patterson Partners and 150 shares
subject to outstanding warrants exercisable within 60 days of March 31,
1999 held by Ellmore C. Patterson Partners.
(10) Includes 110,325 shares held by Sol Zechter as Trustee of the Sheila
Claire Zechter Annuity Trust, 110,325 shares held by Sol Zechter as
Trustee of the Sol Zechter Annuity Trust, 158,345 shares held by Sol
Zechter as Trustee of the Sol Zechter Family Trust, 48,208 shares
subject to options exercisable within 60 days of April 1, 2000.
(11) Includes shares which certain executive officers and directors of the
Company have the right to acquire within 60 days of April 1, 2000
pursuant to outstanding options, as follows:
John R. Wark, 368,887 shares;
William A. Philbin, 61,946 shares;
Geoffrey W. Haggart, 43,456 shares;
David McCann, 35,142;
James M. Carrigan, 53,066 shares; and
14
<PAGE> 17
All executive officers and directors as a group, 777,476 shares.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
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 other equity securities of the Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulation 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 December 31, 2000, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with; except that one
report, covering an aggregate of one transaction, was filed late by Mr. Haggart
and an initial report of ownership was filed late by each of Messrs. Cox,
Zechter, Schuster, Hall, Haggart, Patmore, Carrigan, Wark, Johnson, McCann and
Philbin and Norwest Equity Partners IV, entities affiliated with Brentwood
Associates VI LP and entities affiliated with Advanced Technology Ventures III.
15
<PAGE> 18
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each non-employee director of the Company receives a per meeting fee of
$2,000 (plus $500 for each committee meeting attended by committee members). In
the fiscal year ended December 31, 2000, the total compensation paid to
non-employee directors was $20,000. The members of the Board of Directors are
also eligible for reimbursement for their expenses incurred in connection with
attendance at Board meetings in accordance with Company policy.
Each non-employee director of the Company also receives stock option
grants under the 1997 Equity Incentive Plan (the "1997 Plan"). Options granted
under the 1997 Plan to non-employee directors are intended by the Company not to
qualify as incentive stock options under the Code.
Option grants under the 1997 Plan are non-discretionary. On the date of
each annual meeting of stockholders, but following such annual meeting, each
member of the Company's Board of Directors who is not an employee of the Company
is granted under the 1997 Plan an option to purchase 7,500 shares of Common
Stock of the Company. The exercise price of options granted under the 1997 Plan
is 100% of the fair market value of the Common Stock subject to the option on
the date of the option grant. The options granted to the non-employee directors
under the 1997 Plan vest quarterly from the date of grant of such option over
one year so long as such director continues to serve as a non-employee director
following the date of grant of such option. In the event of a change in control,
as defined in the 1997 Plan, the surviving entity must either assume or
substitute the options. If the surviving entity does not assume or substitute
the options, the vesting of the options shall be accelerated prior to the change
in control and they shall be terminated if not exercised prior to the change in
control.
During the last fiscal year, the Company granted options covering 7,500
shares to each non-employee director of the Company, at an exercise price per
share of $4.375. The fair market value of such Common Stock on the date of grant
was $4.375 per share (based on the closing sales price reported on the Nasdaq
National Market for the date of grant). As of February 10, 2000, no options have
been exercised by directors under the 1997 Plan
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended December 31, 1999
and 1998, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at December 31, 1999 (the "Named Executive Officers"):
16
<PAGE> 19
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- -------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS OPTIONS COMPENSATION
POSITION YEAR ($) ($) (#) ($)(2)
- ---------------------- -------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
John R. Wark
President and Chief 1999 175,000 40,000 125,472
Executive Officer............ 1998 175,000 50,000 42,453
James M. Carrigan
Vice President, 1999 150,000 20,000
Research and Development..... 1998 57,692 10,000 113,208
David McCann
Vice President, 1999 114,985 49,282 171,510
Americas Operations..........
William A. Philbin
Vice President, 1999 150,000 15,000 20,000
Marketing.................... 1998 142,096 46,226
Geoffrey W. Haggart
Former Vice President, 1999 137,411 138,195 34,434 14,549
European Operations (3)...... 1998 124,342 95,739 47,736 14,921
</TABLE>
(1) As permitted by the rules promulgated by the Securities Exchange Commission,
no amounts are shown for 1997.
(2) Consists of a car allowance for Mr. Haggart.
(3) Mr. Haggart resigned from the Company in April, 2000.
17
<PAGE> 20
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1997
Equity Incentive Plan. As of April 1, 2000, options to purchase a total of
2,150,288 shares were outstanding under the Incentive Plan and options to
purchase 256,055 shares remained available for grant thereunder. Options
generally have a term of ten years and vest over a period of four years.
The following tables show for the fiscal year ended December 31, 1999,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR(1)
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF % TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES
UNDERLYING GRANTED TO OF STOCK PRICE
OPTIONS EMPLOYEES EXERCISE APPRECIATION FOR
GRANTED IN FISCAL PRICE EXPIRATION OPTION TERM (4)
NAME YEAR (2) ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John R. Wark........... 75,472 5.3% 6.630 02/15/09 315,239 795,603
50,000 3.5% 4.375 10/22/09 137,813 347,813
James M. Carrigan....... 20,000 1.4% 4.375 10/22/09 55,125 139,125
David McCann (3)........ 139,623 9.9% 6.630 03/24/09 583,191 1,471,864
1,887 0.1% 8.000 04/09/09 9,510 24,003
30,000 2.1% 4.375 10/22/09 82,688 208,688
William A. Philbin...... 20,000 1.4% 4.375 10/22/09 55,125 139,125
Geoffrey W. Haggart..... 9,434 0.7% 3.980 01/15/09 23,655 59,700
25,000 1.8% 4.375 10/22/09 68,906 173,906
</TABLE>
- ------------
(1) The options referenced above become exercisable over a 4-year period with
25% vesting one year from the date of grant and the remaining shares vesting
in equal quarterly installments over the remaining three years.
(2) Based on options to purchase 1,416,360 shares granted to employees in the
fiscal year ended December 31, 1999, including the Named Executive Officers.
(3) Of these, options to purchase 92,453 shares vest as follows: 25% are fully
vested on the grant date and the remaining shares vest in equal quarterly
installments thereafter over the remaining three years. 100% of the
remaining options to purchase 47,170 shares become fully exercisable two
years from the date of grant.
(4) Calculated on the assumption that the market value of the underlying stock
increases at the stated values, compounded annually. The total appreciation
of the options over their 10-year terms at 5% and 10% is 63% and 159%
respectively.
18
<PAGE> 21
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED VALUE FY-END (#) FY-END ($)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------- -------------- -------------------
<S> <C> <C> <C> <C>
John R. Wark........... -- -- 335,671/158,983 3,499,577/1,123,129
James M. Carrigan....... -- -- 41,274/91,934 413,153/872,559
David McCann............ -- -- 28,892/142,618 155,150/830,923
William A. Philbin...... -- -- 75,814/68,714 790,738/642,250
Geoffrey W. Haggart..... 5,000 39,175 42,428/90,780 437,764/835,802
</TABLE>
- ----------------------
(1) Fair market value of the Company's Common Stock at December 31, 1999 ($12.00
per share) minus the exercise price of the options.
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
On May 31, 1997, we entered into a President/CEO Change in Control
Severance Benefits Agreement with John R. Wark. The severance benefit agreement
provides that upon a change in control of Continuus, and the subsequent
termination without cause of Mr. Wark's employment, he is entitled to a
continuation of base salary for twelve months, payment of his applicable target
bonus, accelerated vesting of options and continued health care benefit coverage
as permitted by COBRA, Internal Revenue Code Section 4980B.
We have entered into Executive Change in Control Severance Benefits
Agreements with each of William A. Philbin, Steven L. Johnson, David McCann,
Geoffrey W. Haggart, James M. Carrigan and Paul Van Den Berg. The agreements
provide that upon a change in control of Continuus, and if these executives are
subsequently terminated without cause, they are entitled to a continuation of
base salary for between six and nine months, a portion of their target bonus,
continued or accelerated vesting of options and continued health care benefit
coverage as permitted by COBRA.
Under the terms of the President/CEO Change in Control Severance
Benefits Agreement and the Executive Change in Control Severance Benefits
Agreements, a change in control includes: (i) a sale of all or substantially all
our assets; (ii) a merger in which we are not the surviving corporation; (iii) a
reverse merger where we are the surviving entity, but our common stock
outstanding immediately prior to the merger is converted into other property;
and (iv) the acquisition of the securities representing at least the beneficial
ownership of 50% of the combined voting power entitled to elect our directors.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
During 1999, the Compensation Committee (the "Committee") was comprised
of Messrs. Hall, Schuster and Cox (who served on the Committee only until April
16, 1999). The Committee is responsible for setting and administering the
Company's policies governing annual executive salaries, bonuses (if any) and
stock ownership programs. The Committee evaluates the performance of management
and determines the compensation of the Chief Executive Officer ("CEO") and the
other executive officers of the Company based upon the accomplishment of defined
objectives in the Company's research and product development programs and
achievement of financial targets. The full Board of Directors reviews the
Committee's recommendations regarding the compensation of the CEO and the other
executive officers, except that Mr. Wark does not participate in the review of
his compensation as CEO.
19
<PAGE> 22
EXECUTIVE OFFICER COMPENSATION PROGRAM
The Company's executive officer compensation program consists of base
salary, bonus and long-term compensation in the form of stock options. The
Company's executive officer compensation program is designed to achieve the
following objectives:
- Attract, retain and motivate quality executives who possess the
necessary leadership and management skills.
- Provide an incentive to advance the research and development of
the Company's software products.
- Emphasize stock-based compensation to provide longer-term
motivation by aligning the executives' interests with those of
the Company and its stockholders.
Compensation is based on the level of job responsibility and the level
of the individual's performance as well as the Company's performance. The
Committee endeavors to set executive compensation within a range which the
Committee believes is comparable to the average range of compensation set by
companies of comparable size and stage of development in the software industry.
The group of comparable companies is not necessarily the same as the companies
reflected in the market indices included in the performance graph on page 22 of
this Proxy Statement.
The Committee believes that the Company's executive compensation program
reflects the principles described above and provides executives strong
incentives to maximize Company performance and enhance stockholder value. The
Committee believes that a stock option program to reward performance is an
appropriate method of executive compensation, with relatively modest increases
in base compensation.
BASE SALARY
Base salary levels for each of the Company's executive officers are
reviewed annually. The Company applies various subjective criteria, including
performance of the individual and the Company and relative responsibility and
experience, to determine appropriate base salaries. In evaluating Company
performance, the Committee considers the meeting of certain product milestones,
achieving certain corporate objectives (related to financings, collaborations
and other strategic transactions) and organizational effectiveness. In addition,
the Company compares its executives' base salaries to management salaries at
companies in the software industry, in comparable geographic areas and at
similar stages of growth and considers industry surveys regarding executive
compensation. The Committee uses these criteria as a frame of reference for
annual salary adjustments although other factors are considered, as appropriate,
and no specific weights are ascribed to the factors considered by the Committee.
LONG-TERM INCENTIVE COMPENSATION
The Company's long-term incentive program includes stock options and
other awards granted under the 1997 Plan. Stock options are an important part of
the Company's performance-based compensation. Option grants include vesting
periods (generally over four years) to encourage key employees to continue in
the employ of the Company. Through option grants, executives receive significant
equity incentives to build long-term stockholder value.
The Committee believes that providing management a substantial economic
interest in the long-term appreciation of the Company's Common Stock further
aligns the interests of stockholders and management. The size of option grants
to an individual is primarily determined by such individual's position within
management of the Company, as well as competitive practices at software
companies of comparable size. The Committee also considered the size of grants
to individuals in previous years and internal relativity.
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million paid to certain Named Executive
Officers in a taxable year. Compensation above $1 million may be deducted if it
is "performance-based compensation" within the meaning of the Code. The
Compensation Committee intends to continue to evaluate the effects of Code
Section 162(m) and to comply with the requirements of that statute to the extent
consistent with the best interests of the Company. The Compensation Committee
believes that at the present time it is unlikely that the compensation paid to
any Named Executive Officer in a taxable year which is subject to the deduction
limit will exceed $1 million. Therefore, the Compensation Committee has not yet
established a policy for determining which forms of incentive compensation
awarded to Named Executive Officers will be designed to qualify as
performance-based compensation.
20
<PAGE> 23
CEO COMPENSATION
During 1999, the total compensation program for Mr. John Wark, Chief
Executive Officer of the Company, was largely based on the same components as
for other senior executives of the Company. Each year the Committee reviews the
Chief Executive Officer's existing compensation arrangement, the individual
performance for the calendar year under review, as well as the Company's
performance relative to its peers. During 1999, Mr. Wark was paid a $40,000
bonus and his salary for 2000 will remain at $175,000.
From the members of the Compensation Committee of Continuus Software
Corporation:
Kevin G. Hall
Stewart A. Schuster
21
<PAGE> 24
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our 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 our board of directors or compensation
committee.
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph shows the total stockholder return of an investment
of $100 in cash on July 29, 1999 for (i) the Company's Common Stock, (ii) the
Nasdaq National Market and (iii) the Nasdaq Computer & Data Processing Index
(the "Nasdaq Computer Index"). All values assume reinvestment of the full amount
of all dividends and are calculated as of December 31 of each year:
<TABLE>
<CAPTION>
CONTINUUS SOFTWARE CORP.
Cumulative Total Return
-----------------------
7/29/99 12/31/99
<S> <C> <C>
CONTINUUS SOFTWARE CORPORATION 100.00 150.00
NASDAQ STOCK MARKET (U.S.) 100.00 153.46
NASDAQ COMPUTER & DATA PROCESSING 100.00 184.94
</TABLE>
- -------------
(1) This Section is not "soliciting material," is not deemed filed with the SEC,
and is not to be incorporated by reference into 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 such
filing.
(2) The Nasdaq Computer and Data Processing Index is made up of all companies
with the Standard Industrial Classification (SIC) code 737 (category
description "Computer Programming, Data Processing, and Other Computer
Related Services"). Information regarding the companies comprising this
index is available upon written request to Secretary, Continuus Software
Corporation, 9401 Jeronimo Road, Irvine, California 92618.
22
<PAGE> 25
CERTAIN TRANSACTIONS
Two of our directors, Kevin G. Hall and Stewart A. Schuster, are
affiliated with holders of more than 5% of our capital stock. Mr. Hall is a
general partner of Itasca Partners, the general partner of Norwest Equity
Partners V and Norwest Equity Partners IV. Dr. Schuster is a venture partner of
Brentwood Associates VI, L.P. In the transactions described below, neither Mr.
Hall nor Dr. Schuster received securities as individuals.
In April 1999, we entered into a loan agreement with Silicon Valley Bank
for a revolving line of credit of up to $2,000,000. Four stockholders who
beneficially own more than 5% of our capital stock guaranteed the amounts we
borrowed under the loan agreement. As consideration for the guaranties of the
stockholders, we issued warrants to purchase our common stock in the following
amounts:
<TABLE>
<CAPTION>
DIRECTORS/5% STOCKHOLDERS NUMBER OF
------------------------- WARRANT SHARES
--------------
<S> <C>
Norwest Equity Partners, V (1) 21,538
Brentwood Associates VI, L.P 15,492
Accel IV L.P.(2) 6,845
Advanced Technology Partners III 10,031
</TABLE>
(1) Includes 11,815 warrant shares held by Norwest Equity Partners, IV.
(2) Includes 294 warrant shares held by Accel Investors `95 L.P., 130
warrant shares held by Accel Keiretsu L.P. and 150 warrant shares
held by Ellmore C. Patterson Partners.
In the event the stockholders guaranteeing the amounts borrowed under
the loan agreement must make a payment to Silicon Valley Bank, we will issue
each paying stockholder additional warrants to purchase our common stock in the
following amounts:
<TABLE>
<CAPTION>
DIRECTORS/5% STOCKHOLDERS NUMBER OF
------------------------- WARRANT SHARES
--------------
<S> <C>
Norwest Equity Partners, V (1) 14,358
Brentwood Associates VI, L.P. 10,328
Accel IV L.P. (2) 4,563
Advanced Technology Partners III 6,687
</TABLE>
(1) Includes 7,876 warrant shares we would issue to Norwest Equity
Partners, IV.
(2) Includes 196 warrant shares we would issue to Accel Investors `95
L.P., 86 warrant shares we would issue to Accel Keiretsu L.P.
and 100 warrant shares we would issue to Ellmore C. Patterson
Partners.
The Company has entered into indemnity agreements with certain officers
and directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party be
reason of his position as a director, officer or other agent of the Company, and
otherwise to the full extent permitted under Delaware law and the Company's
Bylaws.
23
<PAGE> 26
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
/S/ STEVEN L. JOHNSON
STEVEN L. JOHNSON
Secretary
May 22, 2000
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 IS AVAILABLE WITHOUT
CHARGE UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, CONTINUUS SOFTWARE
CORPORATION, 9401 JERONIMO ROAD, IRVINE, CALIFORNIA 92618.
24
