<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section14(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(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SOFTWARE ARTISTRY, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
MERRILL CORPORATION
- --------------------------------------------------------------------------------
(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)(1)
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:
------------------------------------------------------------------------
<PAGE>
[LOGO]
SOFTWARE ARTISTRY, INC.
9449 PRIORITY WAY WEST DRIVE, SUITE 100
INDIANAPOLIS, INDIANA 46240
------------------------
NOTICE OF 1997 ANNUAL MEETING OF SHAREHOLDERS
APRIL 25, 1997
------------------------
The 1997 Annual Meeting of Shareholders of Software Artistry, Inc. will be
held at the Ritz Charles, 12156 N. Meridian Street, Carmel, Indiana at 2:00
p.m., on Friday, April 25, 1997, for the following purposes:
1. To elect four Directors;
2. To consider and act upon the Proposed Amendment to the Amended and
Restated Incentive Stock Option Plan; and
3. To transact any other business that may properly come before the Annual
Meeting or any adjournment thereof.
Shareholders of record at the close of business on February 26, 1997, are
entitled to notice of, and to vote at, the 1997 Annual Meeting.
WHETHER OR NOT YOU PLAN TO BE PERSONALLY PRESENT AT THE MEETING, PLEASE
COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE. IF YOU LATER DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT
ANY TIME BEFORE IT IS EXERCISED.
By Order of the Board of Directors,
Thomas E. Vanneman
SECRETARY
Indianapolis, Indiana
March 25, 1997
<PAGE>
PROXY STATEMENT
ANNUAL MEETING AND PROXY SOLICITATION INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Software Artistry, Inc., an Indiana
corporation (the "Company"), for use at the 1997 Annual Meeting of Shareholders
to be held on April 25, 1997 (the "Annual Meeting), and at any adjournments
thereof. This Proxy Statement, a proxy card, and the Annual Report of the
Company, including audited financial statements for its fiscal year ended
December 31, 1996, are being sent to all shareholders of record as of the close
of business on February 26, 1997, for delivery beginning on or about March 21,
1997. Although the Annual Report and this Proxy Statement are being mailed
together, the Annual Report is not part of the Proxy Statement.
At the close of business on February 26, 1997, there were 7,041,451 shares
of Common Stock of the Company outstanding and the closing price on the NASDAQ
National Market System was $8.13. Only holders of record of the shares
outstanding at such time will be entitled to vote at the meeting. The presence
at the meeting of at least a majority of such shares, either in person or by
proxy, is required for a quorum. Proxies are solicited to give all shareholders
who are entitled to vote on matters that come before the meeting the opportunity
to do so, whether or not they choose to attend the meeting in person.
If you are a shareholder of record, you may vote by using the proxy card
enclosed with this Proxy Statement. When your proxy card is returned properly
signed, the shares represented will be voted according to your directions. You
can specify how you want your shares voted on each proposal by marking the
appropriate boxes on the proxy card. The proposals are identified by number and
a general subject title on the proxy card. Please review the voting instructions
on the proxy card and read the text of the proposals and the position of the
Board of Directors in the Proxy Statement prior to marking your vote. If your
proxy card is signed and returned without specifying either a vote or an
abstention on any proposal, it will be voted according to the recommendation of
the Board of Directors on that proposal. That recommendation is shown for each
proposal on the proxy card. For the reasons stated in more detail later in the
Proxy Statement, the Board of Directors recommends a vote FOR each of the four
persons nominated to serve as a Director , and FOR approval of the Proposed
Amendment to the Amended and Restated Incentive Stock Option Plan. If you hold
shares of Common Stock through a brokerage firm or other intermediary, you must
provide instructions on voting to your nominee holder.
The Board of Directors knows of no other matters which are to be presented
at the meeting. However, if any other matters are properly presented for action,
the proxies named on the proxy card will be authorized by your proxy to vote on
them in their discretion.
On each matter properly brought before the meeting, shareholders will be
entitled to one vote for each share of Common Stock held. Under Indiana law and
the Company's Restated Articles of Incorporation and Bylaws, if a quorum exists
at the meeting, the four nominees for Director who receive the greatest number
of votes cast in the election of Directors will be elected, and the Proposed
Amendment to the Amended and Restated Incentive Stock Option Plan will be
approved if holders of a majority of the shares represented in person or by
proxy at the meeting vote in favor of the proposal.
Shareholders may abstain from voting for one or more of the nominees for
Director and may abstain from voting on the Proposed Amendment to the Amended
and Restated Incentive Stock Option Plan. Abstention from voting for a nominee
for Director will be disregarded in determining the four nominees for Director
who receive the greatest number of votes cast. Abstention from voting on the
Proposed Amendment to the Amended and Restated Incentive Stock Option Plan will
have the same effect as a vote against the proposal, since holders of a majority
of the shares represented at the meeting must vote in favor of the proposal in
order for it to be approved.
1
<PAGE>
Brokerage firms and other intermediaries holding shares of Common Stock in
street name for customers are generally required to vote such shares in the
manner directed by their customers. In the absence of timely directions,
brokerage firms and other intermediaries will generally have discretion to vote
their customer's shares in the election of Directors and on the Proposed
Amendment to the Amended and Restated Incentive Stock Option Plan. If a
brokerage firm or other intermediary does not vote for a nominee for Director,
this non-vote will be disregarded in determining the four nominees for Director
who receive the greatest number of votes cast. Abstention from voting on the
proposal to approve the Proposed Amendment to the Amended and Restated Incentive
Stock Option Plan will have the same effect as a vote against the proposal,
since holders of a majority of the shares represented at the meeting must vote
in favor of each such proposal in order for it to be approved.
If you execute a proxy, you may revoke it by taking one of the following
three actions: (i) by giving written notice of the revocation to the Secretary
of the Company at its principal executive offices prior to the meeting; (ii) by
executing a proxy with a later date and delivering it to the Secretary of the
Company at its principal executive offices prior to the meeting; or (iii) by
personally attending and voting at the meeting.
The Company will bear the expense of preparing, printing and distributing
proxy materials to its shareholders. In addition to solicitations by mail, a
number of regular employees of the Company may solicit proxies on behalf of the
Board of Directors in person or by telephone. The Company will also reimburse
brokerage firms and other intermediaries for their expenses in forwarding proxy
materials to beneficial owners of the Company's Common Stock.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of a Board of
Directors currently consisting of four Directors. The following individuals are
currently serving as Directors: Jerry Baker, Lawrence W. Olson, Joseph A.
Piscopo, and W. Scott Webber. The Board of Directors has responsibility for
establishing broad corporate policies and for the overall performance of the
Company. It is not, however, involved in operating details on a day to day
basis. The Board is kept advised of the Company's business through regular
reports and discussions with the Company's executive officers between meetings.
The Board of Directors determines the number of Directors which may not be
less than three nor more than nine members. The Board of Directors has fixed the
number of Directors at four members.
MEETINGS OF THE BOARD
The Board meets on a regularly scheduled basis during the year to review
significant developments affecting the Company and to act on matters requiring
Board approval. It also holds special meetings when an important matter requires
Board action between regularly scheduled meetings. The Board of Directors met
six times during the Company's fiscal year ended December 31, 1996. No incumbent
member attended fewer than 75% of the total number of meetings of the Board of
Directors and of any Board committees of which he was a member during that
fiscal year.
COMPENSATION OF DIRECTORS
Each Director who is not also an employee of the Company (an "Independent
Director") receives an annual fee of $2,500, payable quarterly, and a fee of
$300 for each Board of Directors meeting attended.
In addition, under the Amended Nonstatutory Stock Option Incentive Plan
approved by the shareholders in 1996, a stock option grant covering 6,000 shares
of Common Stock is automatically made to each Independent Director on the
initial date and each anniversary of the Director's election to the Board of
Directors. The exercise price under each option is the fair market value of the
Company's Common Stock on the date of grant. The grant vests at the rate of
2,000 shares on each anniversary date of such grant, provided the Director
continues to serve on the Board.
2
<PAGE>
During the year ended December 31, 1996, Mr. Piscopo received options for
2,500 shares on January 22, 1996 at an exercise price of $14.25 per share and
which were vested on that date, and options for 6,000 shares on January 22,
1996, his Board membership anniversary date, at an exercise price of $14.25 per
share and which will vest at the rate of 2,000 shares on January 22, 1997, 1998
and 1999. Mr. Baker received options for 6,000 shares on July 26, 1996, his
Board membership anniversary date, at an exercise price of $7.75 per share and
which will vest at the rate of 2,000 shares on July 26, 1997, 1998, and 1999.
Mr. Olson received options for 6,000 shares on October 28, 1996, his Board
membership anniversary date, at an exercise price of $8.88 per share and which
will vest at the rate of 2,000 shares on October 28, 1997, 1998, and 1999.
On January 19, 1996 and April 19, 1996, certain of the unexercised and
unvested options were cancelled and re-issued as follows: Mr. Piscopo's option
for 3,500 shares granted October 18, 1995 at an exercise price of $17.75 per
share was replaced on April 19, 1996 with a new option for 3,500 shares at an
exercise price of $6.88 per share, with vesting of 1,750 shares on April 19,
1997 and 1,750 shares on April 19, 1998. Mr. Piscopo's option for 6,000 shares
granted January 22, 1996 at an exercise price of $14.25 per share was replaced
on April 19, 1996 with a new option for 6,000 shares at an exercise price of
$6.88 per share, with vesting of 2,000 shares on April 19, 1997, 1998 and 1999.
Mr. Baker's option for 2,500 shares at $24.00 per share granted July 26, 1995
was replaced on January 19, 1996 with a new option for 2,500 shares at $13.75
per share, and that option was replaced on April 19, 1996 with a new option for
2,500 shares at $6.88 per share, with full vesting on April 19, 1997. Mr.
Baker's option for 3,500 shares granted October 18, 1995 at an exercise price of
$17.75 per share was replaced on April 19, 1996 with a new option for 3,500
shares at an exercise price of $6.88 per share, with vesting of 1,750 shares on
April 19, 1997 and 1,750 shares on April 19, 1998. Mr. Olson's option for 6,000
shares granted October 28, 1995 at an exercise price of $15.75 per share was
replaced on April 19, 1996 with a new option for 6,000 shares at an exercise
price of $6.88 per share, with vesting of 2,000 shares on April 19, 1997, 1998
and 1999. See "Repricing of Options."
COMMITTEES OF THE BOARD
Committees of the Board consist of an Audit Committee and a Compensation
Committee. The Audit Committee, currently composed of Messrs. Baker, Olson and
Piscopo, consults with and reviews the services provided by the Company's
independent auditors. The Audit Committee met twice during the fiscal year ended
December 31, 1996. The Compensation Committee, composed of Messrs. Baker, Olson
and Piscopo, reviews and recommends to the Board the compensation and benefits
to be provided to the Company's executive officers and reviews general policy
matters relating to employee compensation and benefits. The Compensation
Committee met three times during the fiscal year ended December 31, 1996.
NOMINEES FOR DIRECTOR
The following individuals, each of whom currently serves as a Director of
the Company, have been nominated for re-election at the Annual Meeting:
JERRY BAKER, age 46, has served as a Director of the Company since July
1995. He is currently CEO of Network Computer, Inc., a subsidiary of Oracle
Corporation, a major software vendor headquartered in Redwood Shores,
California. His 12-year career at Oracle has included responsibility for product
development, performance analysis, porting, product management, and marketing
for strategic business units covering the UNIX, desktop, and proprietary
marketplaces. He has also been responsible for technology and marketing
relationships with strategic hardware and software vendors and has frequently
represented Oracle at financial analyst conferences and industry events.
LAWRENCE W. OLSON, age 51, has served as a Director of the Company since
1994. Mr. Olson has been President of Corporate Counselors, Inc., a private
management consulting company, since 1992; President, CEO, and a director of
Natural Golf Corporation, a private golf equipment manufacturing company, since
3
<PAGE>
1995; and serves as a Director of American Chartered Bank and BK, Controls Inc.,
an electrical parts distributor. Mr. Olson was President and CEO from 1983 to
1992 of LPC, Inc., a Pitney Bowes computer software subsidiary.
JOSEPH A. PISCOPO, age 52, has served as a Director of the Company since
1992 and as Chairman of the Board since January 1, 1996. He has been
self-employed as an outside director and investor in a variety of public and
private corporations since 1987, including: Open Port Technology, Inc. a private
software company based in Chicago, since 1995; Microsystems Engineering Company,
a private software firm based in Lombard, Illinois, since 1993; National Sleep
Alert, Inc., a private publishing company based in Oak Brook, Illinois, since
1992; and Hobson Hollow, Inc., a private real estate developer in Naperville,
Illinois, since 1988. Mr. Piscopo was the founder of Pansophic Systems, Inc., a
software firm, in 1969, and served as its President, Chairman, and Chief
Executive Officer until his retirement in 1987. Pansophic was acquired and
merged into Computer Associates in 1991.
W. SCOTT WEBBER, age 43, has served as President and a Director of the
Company since January 1991, and as Chief Executive Officer since December 1994.
From 1981 to 1990, Mr. Webber was employed by Pansophic Systems, Inc., a
computer software company, most recently as Director, North American Sales
Operations. Mr. Webber serves on the Board of Directors of the Indiana Software
Association. He holds a MM degree from Northwestern University and a BA degree
from Carleton University, Ottawa, Canada.
4
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS
OWNERSHIP INFORMATION
The following table sets forth, as of February 26, 1997, certain information
regarding beneficial ownership of the Company's Common Stock by (i) each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) each Director of the Company, (iii) the Chief
Executive Officer and the other executive officers named in the Summary
Compensation Table under "Executive Officers", and (iv) all of the Company's
executive officers and Directors as a group. Unless otherwise noted, the named
beneficial owner has sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK PERCENT OF
BENEFICIALLY COMMON STOCK
NAME (1) OWNED OUTSTANDING
- ------------------------------------------------------------------------------ ----------------- --------------
<S> <C> <C>
Jerry Baker (2)............................................................... 2,500 *
Lawrence W. Olson (3)......................................................... 4,500 *
Joseph A. Piscopo (4)......................................................... 589,094 7.75%
W. Scott Webber (5)........................................................... 496,720 6.53%
Steven M. Ehrlich (6)......................................................... 48,148 *
Jeremiah Fleming.............................................................. 11,000 *
Stephen Head.................................................................. 28,650 *
Michael J. Robbins (7)........................................................ 205,160 2.70%
All Directors and executive officers
as a group (10 persons)...................................................... 1,403,495 18.46%
ADDITIONAL 5% SHAREHOLDERS
- ------------------------------------------------------------------------------
Donald E. Brown, M.D. (8)..................................................... 1,262,020 16.60%
10022 Fox Trace
Zionsville, IN 46277
Joseph M. Adams (9)........................................................... 430,453 5.66%
177 Wellington Parkway
Noblesville, IN 46060
Wellington Management Company, LLP (10)....................................... 583,300 7.67%
</TABLE>
- ------------------------
* Less than 1% of the outstanding Common Stock.
(1) The business address of all Directors and executive officers is care of
Software Artistry, Inc., 9449 Priority Way West Drive, Indianapolis, IN
46240.
(2) Includes 2,500 shares subject to options exercisable within 60 days of
February 26, 1997.
(3) Includes 4,500 shares subject to options exercisable within 60 days of
February 26, 1997.
(4) Includes 13,750 shares subject to options exercisable within 60 days of
February 26, 1997.
(5) Includes 297,820 shares subject to options exercisable within 60 days of
February 26, 1997.
(6) Includes 38,148 shares subject to options exercisable within 60 days of
February 26, 1997.
(7) Includes 205,160 shares subject to options exercisable within 60 days of
February 26, 1997.
(8) Based solely on Dr. Brown's Schedule 13-G dated January 10, 1997. Although
company records reflect Dr. Brown has options for the purchase of 120,070
shares, which options are currently exercisable, the Schedule 13-G does not
indicate whether such options are included in the 1,262,020 shares reported
herein.
(9) Based on most recent Schedule 13-G delivered to the Company, dated April 8,
1996.
(10) Based solely on Schedule 13-G, dated January 24, 1997.
5
<PAGE>
SECTION 16(A) OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors, executive officers, and holders of more than 10% of the Company's
Common Stock (collectively the "Reporting Persons") to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock of the Company. Such Reporting Persons are required by
regulations of the Commission to furnish the Company with copies of all such
filings.
Based solely on a review of copies of reports filed by the Reporting Persons
pursuant to Section 16(a) of the Exchange Act, or written representations from
certain Reporting Persons that no Form 5 filing was required for such person,
the Company believes that all Reporting Persons complied with all Section 16(a)
requirements in the fiscal year ended December 31, 1996, except that (i) Mr.
Fleming filed one late Form 5, and (ii) Dr. Brown filed one late Form 4
reporting three transactions.
EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information regarding the dollar value of all
compensation received for services rendered in all capacities of the Company for
the Chief Executive Officer, the four other highest paid executive officers of
the Company [and an additional individual who would have been a named executive
officer of the Company but for the fact that he was not serving as an executive
officer of the Company on December 31, 1996] for the fiscal year ended December
31, 1996, and the immediately preceding fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------ -------------
OTHER SECURITIES
ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (# OF SHARES)
- ------------------------------------------------------- --------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
W. Scott Webber 1996 220,000 8,291(1) 1,099(2) 120,000(4)
President and Chief Executive Officer 1995 198,750 192,166(1) -- --
1994 181,250 121,919(1) -- --
Steven M. Ehrlich 1996 115,000 37,704(1) 1,099(2) 60,000(5)
Vice President, 1995 98,870 38,043 -- 20,000
ESM Business Unit 1994 80,720 40,461 -- --
Jeremiah J. Fleming 1996 123,333 62,948(1) -- 68,750(6)
Former Vice President, 1995 100,000 109,241(1) -- 26,250
Domestic Sales 1994 60,000 148,202(1) -- 5,000
Stephen R. Head 1996 116,250 -- -- 60,000(5)
Former Vice President, Finance, 1995 109,167 67,982 -- 20,000
Chief Financial Officer, 1994 94,552 40,310 -- 47,500
Secretary, and Treasurer
Michael J. Robbins 1996 150,000 377,267 31,634(2 (3) 80,000(7)
Senior Vice Preisident, 1995 130,000 -- 178,202(3) 20,000
Worldwide Operations 1994 115,717 143,489(1) -- --
</TABLE>
- ------------------------------
(1) Includes participation in the annual Company-sponsored trip awarded to
persons meeting specified sales quotas and/or tax preparation expense.
(2) Represents expense for tax preparation.
(3) Paid in connection with overseas assignment, including tax equalization.
(4) In 1996, a total of 60,000 new options were granted and 60,000 options were
subsequently exchanged, with vesting to re-start as of the new date of
issue.
6
<PAGE>
(5) In 1996, a total of 10,000 new options were granted and 50,000 options were
exchanged, with vesting to re-start as of the new date of issue.
(6) In 1996, a total of 10,000 new options were granted and 58,750 options were
exchanged, with vesting to re-start as of the new date of issue.
(7) In 1996, a total of 20,000 new options were granted and 60,000 options were
exchanged, with vesting to re-start as of the new date of issue.
OPTION GRANTS
The following table shows information concerning stock options granted to
the Named Executive Officers during the Company's fiscal year ended December 31,
1996.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---------------------------------- --------------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Webber................... 60,000 5.01% $ 13.75 1/19/06 $ 518,838 $ 1,314
60,000(3) 5.01% 6.88 4/19/06 259,608 657,897
Steven M. Ehrlich................. 10,000 .84% 13.75 1/19/06 86,473 219,139
20,000(3) 1.67% 13.75 1/19/06 172,946 438,279
10,000(3) .84% 6.88 4/19/06 43,268 109,649
20,000(3) 1.67% 6.88 4/19/06 86,536 219,299
Jeremiah Fleming 10,000 .84% 13.75 1/19/06 88,473 65,790
20,000(2) 1.67% 13.75 1/19/06 172,946 438,279
10,000(3) .84% 6.88 4/19/06 43,268 109,649
20,000(3) 1.67% 6.88 4/19/06 86,536 219,299
6,250(2) .52% 6.88 4/19/06 27,042 68,531
2,500(2) .21% 6.88 4/19/06 10,817 27,412
Stephen Head...................... 10,000 .84% 13.75 1/19/06 86,473 219,139
20,000(3) 1.67% 13.75 1/19/06 172,946 438,279
10,000(3) .84% 6.88 4/19/06 43,268 109,649
20,000(3) 1.67% 6.88 4/19/06 86,536 219,299
Michael J. Robbins................ 20,000 1.67% 13.75 1/19/06 172,946 438,279
20,000(2) 1.67% 13.75 1/19/06 172,946 438,279
20,000(3) 1.67% 6.88 4/19/06 86,535 219,299
20,000(3) 1.67% 6.88 4/19/06 86,535 219,299
</TABLE>
- ------------------------
(1) Generally, options granted under the Stock Option Plans before December 10,
1996 are exercisable over a five-year period, 20% each year, and are subject
to the employee's continued employment. Options granted after December 10,
1996 are exercisable over a two-year period, 25% every six months and are
subject to the employee's continued employment. Stock options are issued at
fair market value on the date of grant. The exercisability of the options
will be accelerated in the event of certain occurrences, including the sale
of the Company or a significant merger.
(2) Options granted prior to 1996 which were cancelled and re-issued April 19,
1996, with vesting to re-start as of the new date of issue.
(3) Options either newly granted or cancelled and re-issued on January 19, 1996
were subsequently exchanged for new options on April 19, 1996, with vesting
to re-start as of the new date of issue.
7
<PAGE>
OPTION EXERCISES
The following table shows information concerning stock options exercised by
the Named Executive Officers during the Company's year ended December 31, 1996,
including the aggregate value of any gains realized on such exercise. The table
also shows information regarding the number and value of unexercised options
held by the Named Executive Officers at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2)
ON REALIZED -------------------------- ---------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ------------ ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Webber................ 0 0 285,820 60,000 $ 1,725,797 $ 15,000
Steven Ehrlich................. 5,000 $ 56,350 32,148 30,000 $ 183,921 $ 7,500
Jeremiah Fleming............... 11,000 $ 135,930 9,000 38,750 $ 43,928 $ 9,688
Stephen Head................... 28,750 $ 143,550 0 0 0 0
Michael J. Robbins............. 10,000 $ 120,200 197,160 40,000 $ 1,266,377 $ 10,000
</TABLE>
- ------------------------
(1) Calculated based on the fair market value of the underlying securities on
the exercise date minus the exercise price of such options.
(2) The closing price for the Company's Common Stock as of December 31, 1996,
the last day of trading in 1996, on the NASDAQ National Market System was
$7 1/8 per share.
REPRICING OF OPTIONS
In January and April, 1996, as a result of broad declines in the fair market
value of the Company's stock, the Compensation Committee and the Board of
Directors determined that it was in the best interests of the Company to offer
certain current option holders, including executive officers and independent
directors (see "Compensation of Directors") the opportunity to exchange certain
unexercised and unvested stock options for new options with an exercise price
equal to the then current fair market value. Under the approved changes,
optionees who agreed to the cancellation of their outstanding options received
in exchange a new option exercisable for the same number of shares at an
exercise price equal to the fair market value of the Company's Common Stock on
the date of the exchange. Therefore, in effect, optionees who agreed to the
exchange received a lower exercise price and gave up any vesting accrued through
the date of their canceled options.
On January 19, 1996 the Compensation Committee and the Board of Directors
approved the offer to exchange outstanding unexercised and unvested options that
were previously granted with exercise prices above $20.00 per share for the same
number of shares with an exercise price of $13.75 per share, the fair market
value on January 19, 1996, with vesting to restart as of that date. On April 19,
1996 the Compensation Committee and the Board of Directors approved the offer to
exchange outstanding unexercised and unvested options that were previously
granted with exercise prices above the current market price with new options for
the same number of shares with an exercise price of $6.88 per share, the fair
market value on April 19, 1996, with vesting to restart as of that date. See
"Compensation of Directors", the "Ten-Year Option/SAR Repricing" table, and the
"Report of the Compensation Committee on Repricing of Options."
8
<PAGE>
The following table provides the specified information concerning all
repricings of options to purchase the Company's Common Stock held by any
executive officer of the Company since March 2, 1995, the date of the Company's
initial public offering. All repriced options are at the full fair market value
of the Company's Stock on the date of repricing. Repriced options vest ratably
over a five-year period beginning on the date of repricing. Optionees forfeit
any accrued vesting on their canceled options. See the "Report of the
Compensation Committee on Repricing of Options" for additional information.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES EXERCISE LENGTH OF
UNDERLYING MARKET PRICE OF PRICE AT TIME ORIGINAL OPTION
OPTIONS/SARS STOCK AT TIME OF REPRICING NEW TERM REMAINING AT
REPRICED OR OF REPRICING OR OR AMENDMENT EXERCISE DATE OF REPRICING
NAME AND POSITION DATE AMENDED(#) AMENDMENT ($) ($) PRICE ($) OR AMENDMENT
- -------------------------------- --------- --------------- --------------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Webber................. 4/19/96 60,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
President and Chief Executive
Officer
Steven Ehrlich.................. 1/19/96 10,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Vice President 4/19/96 30,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Jeremiah Fleming................ 1/19/96 20,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Former VP, Sales 4/19/96 30,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
4/19/96 6,250 $ 6.88 $ 7.40 $ 6.88 104 mos.
4/19/96 2,500 $ 6.88 $ 7.35 $ 6.88 104 mos.
Stephen R. Head................. 1/19/96 10,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Former VP, CFO Secretary & 4/19/96 30,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Treasurer
Gary E. Lemke................... 1/19/96 20,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Former VP, Marketing 4/19/96 50,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Scott McCorkle.................. 4/19/96 1,000 $ 6.88 $ 13.88 $ 6.88 115 mos.
Vice President 4/19/96 1,000 $ 6.88 $ 15.00 $ 6.88 115 mos.
Michael J. Robbins.............. 1/19/96 20,000 $ 13.75 $ 20.13 $ 13.75 112 mos.
Sr. Vice President, Worldwide 4/19/96 40,000 $ 6.88 $ 13.75 $ 6.88 117 mos.
Operations
</TABLE>
EMPLOYMENT AND OTHER EMPLOYEE RELATED CONTRACTS
Certain executive officers have employment agreements with the Company. The
Agreements fix each officer's base compensation, provide for salary increases
and bonuses as the Company's Board of Directors may determine from time to time,
provide for participation in such employee benefit plans as the Company may
adopt from time to time for its personnel generally, provide for reimbursement
of travel and other expenses in connection with such officers' employment, and,
in certain circumstances, allow for specified relocation fees and education
reimbursement. The agreements have no specified terms but are terminable by the
Company with or without just cause, as defined in the employment agreements.
Upon termination without just cause, the officer is entitled to severance pay
equal to such officer's base salary at the time of termination and continued
medical insurance coverage for 12 months or until such officer obtains
employment, whichever period is less. If so terminated without just cause, the
Company would be obligated to pay the indicated amounts to the following
executive officers: W. Scott Webber, $240,000; Steven M. Ehrlich $140,000; and
Michael J. Robbins, $190,000. The agreements also contain confidentiality and
non-compete provisions between the Company and such officers for the terms and
guidelines as set forth in each agreement.
9
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is the Report of the Compensation Committee of the Board of
Directors, describing the compensation policies and rationale applicable to the
Company's executive officers with respect to compensation paid to such executive
officers for the year ended December 31, 1996. This report is not "soliciting
material," is not deemed filed with the Securities and Exchange Commission, and
is not to be incorporated by reference in any filing of the Company under the
Securities Act of 1993 or the Securities Exchange Act of 1934.
PURPOSE OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
recommending to the Board of Directors compensation levels for the executive
officers for each fiscal year based upon a consistent set of policies and
procedures.
COMPENSATION COMMITTEE STRUCTURE
The Compensation Committee is currently made up of three (3) independent,
non-employee members of the Board of Directors who meet during the fourth
quarter of each fiscal year to set executive officer salaries and other
compensation, and at other times as deemed necessary.
OBJECTIVES OF THE COMPENSATION PROGRAM
The objectives of the compensation program are: (i) to provide a means for
the Company to attract and retain high-quality executives; (ii) to tie executive
compensation directly to the Company's business and performance objectives;
(iii) to align the financial interests of the Company's executive officers with
the financial interest of shareholders; and (iv) to reward outstanding
individual performance that contributes to the long-term success of the Company.
ELEMENTS OF COMPENSATION
Each executive officer's compensation package is comprised of three
elements: (i) base compensation, which reflects individual responsibility and is
designed primarily to be competitive with salary levels of a comparative group;
(ii) annual bonus plan compensation payable in cash and tied generally to the
achievement of financial performance goals as established by the Board of
Directors; and (iii) long-term stock-based incentive compensation which
emphasizes a focus on Company growth and increased shareholder value.
BASE SALARIES. In order to retain executives and other key employees, and
to be able to attract additional well-qualified executives when the need arises,
the Company strives to offer salaries, health care and other employee benefit
programs to its executives and other key employees which are comparable to those
offered to persons with similar skills and responsibilities by competing
businesses. In recommending salaries for executive officers, the Committee: (i)
reviews the historical performance of the officers and (ii) reviews available
information, including information published in secondary sources, regarding
prevailing salaries and compensation programs offered by competing businesses
which it believes are comparable to the Company in terms of size, revenue,
financial performance and industry group. Many, though not all, of these
competing businesses are publicly traded.
REVENUE BONUS. Certain officers of the Company (V.P. North American Sales,
V.P. European Operations, and V.P. Asia Pacific Operations) are paid a cash
bonus, on a quarterly basis, upon the achievement of their assigned revenue
targets on a year-to-date basis. The annual bonuses for achievement of all
targets range from $50,000 to $85,000 for each officer.
ANNUAL BONUS COMPENSATION. The Board of Directors establishes, on an annual
basis, a cash incentive program for each of the Company's executive officers.
The Compensation Committee recommended and
10
<PAGE>
the Board of Directors approved an annual incentive bonus compensation structure
for fiscal year 1997 which is based upon the attainment of annual operating
income goals and increased revenue growth for the year.
LONG-TERM STOCK-BASED INCENTIVE COMPENSATION. Long-term incentives are
provided through stock option grants which are based upon factors that the
Compensation Committee deems appropriate, including aligning the interests of
each executive officer with those of the shareholders and providing each
individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the business. Each grant
generally allows the officer to acquire shares of the Company's Common Stock at
a fixed price per share (the market price on the grant date) over a specified
period of time (up to 10 years). Options granted before December 10, 1996
generally vest in equal installments over a five year period, contingent upon
the executive officer's continued employment with the Company. Options granted
after December 10, 1996 are generally vested at six month intervals over a
two-year period, contingent upon the executive officer's continued employment.
Accordingly, options will provide a return to the executive officer only if the
executive officer remains employed by the Company during the vesting period, and
then only to the extent the market price of the shares appreciates over the
option term. The size of the option grant to each executive officer, based on
the aggregate exercise price, is somewhat subjective and generally is set at a
level that the Committee deems appropriate in order to create a meaningful
opportunity for stock ownership based upon the individual's current position
with the Company, but also takes into account (i) comparable awards to
individuals in similar positions in the industry as reflected in generally
available information, (ii) the individual's potential for future responsibility
and promotion over the option term, and (iii) the individual's personal
performance in recent periods. The Committee also takes into account the number
of vested and unvested options held by each executive officer in order to
maintain an appropriate amount of equity incentive for that individual. However,
the Committee does not adhere to any specific guidelines as to the relative
option holdings of the Company's executive officers. See "Executive
Compensation--Repricing of Options".
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Webber's base salary and incentive compensation were established in
accordance with the criteria described above. Mr. Webber's base salary for 1996
as President and Chief Executive Officer was $220,000. In setting this amount,
the Board of Directors took into account: (i) its belief that Mr. Webber is the
Chief Executive Officer of a leading software company and has significant and
broad-based experience in the software industry; (ii) the scope of Mr. Webber's
responsibilities, and (iii) its confidence in Mr. Webber to lead the Company's
growth in the future. The base salary is set to provide a compensation level
considered by the Compensation Committee to be comparable to a selected group of
other software companies.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162 of the Internal Revenue Code of 1986, as amended (the "IRC"),
limits the federal income tax deductibility of compensation paid to the
Company's Chief Executive Officer and to each of the other four most highly
compensated executive officers. The Company may deduct such compensation only to
the extent that during any fiscal year the compensation paid to any such
individual does not exceed $1 million, unless compensation is performance-based
and meets certain specified conditions (including shareholder approval). Based
on the Company's current compensation plans and policies and recently released
regulations interpreting Section 162 of the IRC, the Company and the Committee
do not believe that, for the near future, the aggregate amount of compensation
payable to executives will exceed the $1 million limit.
11
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF OPTIONS
In January and April, 1996 the Compensation Committee considered the options
held by the Company's executive officers, independent directors and employees
and the fact that the 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 Company's Option Plans having exercise prices well above the recent
trading prices for the Common Stock. The Committee took into account information
presented by management showing that employee turnover had significantly
increased in each of the most recent fiscal years. The Committee was advised
that management believed that turnover was increasing 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, because options granted to new hires at other companies
would be granted at current trading prices, providing more opportunity for
appreciation than the Company's options.
The Committee believed that (i) the Company's success in the future will
depend in large part on its ability to retain a number of its highly skilled
technical, managerial and marketing personnel, (ii) competition for such
personnel is intense, (iii) the loss of key employees could have a significant
adverse impact on the Company's business, and (iv) it is important and
cost-effective to provide equity incentives to independent directors, employees
and executive officers of the Company to improve the Company's performance and
the value of the Company for its shareholders. The Committee considered granting
new options to existing 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 shareholders. The Committee also
recognized that an exchange of existing options with exercise prices higher than
fair market value for options at fair market value would provide additional
incentive to employees because of the increased potential for appreciation and
also recognized that the Committee could require restarted vesting in the
exchange options, so that optionees participating in the exchange would have
incentives to remain with the Company. On balance, considering all of these
factors, the Committee determined it to be in the best interests of the Company
and its shareholders to restore the incentive for independent directors,
employees and executive officers to remain with the Company and to exert their
maximum efforts on behalf of the Company by granting replacement stock options
under its Stock Options Plans for those options with exercise prices above
recent trading prices, at the optionee's option, and with restarted vesting.
Accordingly, in January, 1996 and April, 1996 the Committee and the Board of
Directors approved an offer to all employees of the Company, including executive
officers and independent directors to exchange certain outstanding options with
exercise prices above the then current trading price for options with an
exercise price equal to the current trading price, with vesting commencing on
the date of the exchange. All exchanged options will terminate no later than ten
(10) years from the date of exchange. Accordingly, optionees who participated in
the exchange received a lower exercise price in exchange for their forfeiting
any accrued vesting on their exchanged options.
The offer to exchange options on January 19, 1996 was applicable only to
previously granted options with exercise prices above $20.00 per share. A total
of 126,500 options with exercise prices from $20.13 to $24.25 per share were
exchanged for an equal number of shares at an exercise price of $13.75, the
closing price of the Company's stock on January 19, 1996.
The offer to exchange options on April 19, 1996 was applicable to previously
granted unvested and unexercised options with exercise prices above $6.88 per
share. A total of 431,738 options with exercise prices from $7.35 to $17.75 per
share were exchanged for an equal number of shares at an exercise price of $6.88
per share, the closing price of the Company's stock on April 19, 1996.
See "Executive Compensation--Repricing of Options", "Board of
Directors--Compensation of Directors", and the "Executive Compensation--Ten-Year
Option/SAR Repricings" table for additional information.
12
<PAGE>
CONCLUSION
Through the programs described above, a significant portion of the Company's
executive compensation is linked directly to corporate performance as well as,
with respect to stock options, stock appreciation. In 1996, as in previous
years, a substantial portion of the Company's targeted executive compensation
consisted of performance-based variable elements. The Compensation Committee
intends to continue the policy of linking executive officer compensation to
Company performance and returns to shareholders, recognizing that the ups and
downs of the business cycle from time to time may result in an imbalance for a
particular period.
By the Compensation Committee,
Joseph A. Piscopo, CHAIRMAN
Lawrence W. Olson
Jerry Baker
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the Compensation Committee
consisted of Joseph A. Piscopo, Jerry Baker, and Lawrence W. Olson. The Company
is not aware of any interlocks or insider participation required to be disclosed
under applicable rules of the Securities and Exchange Commission.
13
<PAGE>
COMPARATIVE PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Company's
Common Stock during the period from the Company's initial public offering
through December 31, 1996, with the Prepackaged Software (SIC Code 7372) Index
("SIC Code 7372 Index") and the cumulative total return on the NASDAQ Stock
Market (U.S. Companies) Index ("NASDAQ Market Index"). The comparison assumes
$100.00 was invested on March 3, 1995 in the Company's Common Stock and in each
of the foregoing indices and assumes any dividends were reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN (1) (2)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SOFTWARE ARTISTRY,
INC. SIC CODE INDEX NASDAQ MARKET INDEX
<S> <C> <C> <C>
3/3/95 100 100 100
3/31/95 115.66 107.69 104.74
6/30/95 107.23 128.62 114.59
9/30/95 91.57 138.89 127.68
12/31/95 72.29 146.28 126.65
3/31/96 56.63 152.55 132.5
6/30/96 33.13 172.06 142.32
9/30/96 34.94 181.15 146.24
</TABLE>
ASSUMES $100 INVESTED ON MARCH 3, 1995
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 1996
<TABLE>
<CAPTION>
INDEX DESCRIPTION 3/3/95 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Software Artistry, Inc.............. $ 100 115.66 107.23 91.57 72.29 56.63 33.13
SIC Code 7372 Index................. $ 100 107.69 128.62 138.89 146.28 152.55 172.06
NASDAQ Market Index................. $ 100 104.74 114.59 127.68 126.65 132.50 142.32
<CAPTION>
INDEX DESCRIPTION 9/30/96
- ------------------------------------ -----------
<S> <C>
Software Artistry, Inc.............. 34.94
SIC Code 7372 Index................. 181.15
NASDAQ Market Index................. 146.24
</TABLE>
- ------------------------
(1) Prior to March 3, 1995, the Company's Common Stock was not publicly traded.
Comparative data is provided only for the period since that date. This graph
is not "soliciting material," is not deemed filed with the Securities and
Exchange Commission, and is not to be incorporated by reference in any
filing of the Company under the Securities Act of 1933 or the Securities
Exchange Act of 1934 whether made before or after the date hereof and
irrespective of any general incorporation language in any such filing.
(2) The stock price performance shown on the graph is not necessarily indicative
of future price performance. Information used for this graph was obtained
from Media General Financial Services, Richmond, Virginia, a source believed
to be reliable, but the Company is not responsible for any error or
omissions in such information.
PROPOSAL 1 -- ELECTION OF DIRECTORS
Four Directors are to be elected at the Annual Meeting, to serve until the
1998 Annual Meeting of Shareholders or until their earlier retirement,
resignation, or removal. Jerry Baker, Lawrence W. Olson,
14
<PAGE>
Joseph A. Piscopo, and W. Scott Webber, all of whom are currently Directors of
the Company, have been nominated by the Board of Directors for election at the
Annual Meeting. The accompanying proxy will be voted for these nominees, except
where authority to so vote is withheld. Should any nominee be unable to serve,
the proxy will be voted for such person as is designated by the Board of
Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES NAMED IN
PROPOSAL 1.
PROPOSAL 2 -- PROPOSED AMENDMENT TO THE INCENTIVE
STOCK OPTION PLAN
Shareholders are being asked to approve an increase in the number of shares
of Common Stock authorized for issuance pursuant to the Company's Amended and
Restated Incentive Stock Option Plan ("Incentive Plan"). The Incentive Plan
currently provides that options to acquire an aggregate of 1,875,000 shares of
Common Stock may be granted thereunder. The Incentive Plan was amended and
restated on December 9, 1994, and approved by the shareholders of the
Corporation December 9, 1994.
SUMMARY OF AMENDMENT
The Board of Directors has amended the Incentive Plan to provide for the
issuance of options to acquire an additional 200,000 shares of Common Stock (for
an aggregate of 2,075,000 shares of Common Stock) and directed that this
amendment be submitted to the shareholders of the Corporation for their
approval. As of December 31, 1996, options to purchase 1,795,067 shares of
Common Stock have been granted under the Incentive Plan. The approval of the
increase in the number of shares of Common Stock available for grant under the
Incentive Plan will require the affirmative vote of a majority of the shares of
Common Stock and entitled to vote at the Annual Meeting. If not approved by
shareholders at the Annual Meeting, certain grants made under the Incentive Plan
during and after the last fiscal year may be null and void. Under the Incentive
Plan, stock options may be granted only to full-time employees of the Company
and its subsidiaries, including officers.
SUMMARY OF MATERIAL PROVISIONS OF THE INCENTIVE PLAN
GENERAL. The Incentive Plan is intended to provide continuing long-term
incentives to selected eligible key employees, including officers, to provide a
means of rewarding outstanding performance by such individuals, and to enable
the Company to attract and retain key personnel. See also "Executive
Compensation."
ADMINISTRATION. The Incentive Plan is administered by the Board of
Directors or a committee appointed thereby, a majority of the members of which
must be members of the Board and none of whom are eligible to participate in the
Incentive Plan. The Board or committee may interpret the Incentive Plan and,
subject to its provisions, may prescribe, amend and rescind rules and make all
other determinations necessary or desirable for the administration of the
Incentive Plan. Subject to certain limits set forth in the Incentive Plan, the
Board or committee has complete discretion to select participants, establish the
manner in which options are granted and exercised, and otherwise prescribe all
of the terms and provisions of options granted under the Incentive Plan.
ELIGIBILITY. Only full-time employees, including officers, of the Company
and its subsidiaries are eligible to participate in the Incentive Plan. As of
December 31, 1996, the Company and its subsidiaries had approximately 237
full-time employees.
STOCK SUBJECT TO INCENTIVE PLAN. The Incentive Plan covers an aggregate of
1,875,000 shares of Common Stock (as adjusted for a 5 for 4 stock split in
January 1995). As of December 31, 1996, options for 1,795,067 shares of Common
Stock had been granted under the Incentive Plan. The Board of Directors shall
15
<PAGE>
make appropriate adjustments in the number of shares subject to the Incentive
Plan and outstanding options in the event of a recapitalization,
reclassification, stock split, combination of shares (reverse stock split) or
dividend or other distribution payable in Common Stock after the Incentive Plan
becomes effective.
VESTING AND TERM. Before December 10, 1996, options granted under the
Incentive Plan generally vest and become exercisable at the rate of 20% of the
option shares on the first, second, third, fourth and fifth anniversary date of
the grant conditioned upon continued employment with the Company. Options
granted after December 10, 1996 are exercisable over a two year period, 25%
every six months. Vesting is accelerated and options become exercisable in the
event of a "change of control" of the Company as defined in the Incentive Plan.
The options generally have a term of ten years (five years for employees owning
more than 10% of the Company's Common Stock) from the date of grant.
AMENDMENT. The Incentive Plan may be amended by the Board of Directors
except that, without shareholder approval, no amendment shall increase the
number of shares available under the Incentive Plan except for certain specified
adjustments, change the designation of the class of persons eligible to be
granted options under the Incentive Plan, or materially increase the benefits
accruing to participants under the Incentive Plan.
FEDERAL TAX CONSEQUENCES. Options under the Incentive Plan are intended to
qualify as "incentive stock options" within the meaning of section 422 of the
Internal Revenue Code. In accordance with section 422 of the Code, the term of
any option granted under the Incentive Plan may not exceed ten (10) years. With
respect to any employee who owns stock possessing more than ten percent (10%) of
the voting power of the outstanding stock of the Company, the term of any option
may be no longer than five (5) years. The aggregate fair market value of the
Common Stock (determined at the date of the option grant) with respect to which
incentive stock options are exercisable for the first time by any individual
during any calendar year may not exceed $100,000. The exercise price of all
options granted under the Incentive Plan must not be less than the fair market
value per share on the date of grant (unless the Optionee owns ten percent (10%)
or more of the voting power of the outstanding stock of the Company in which
case the exercise price must not be less than one hundred ten percent (110%) of
the fair market value per share on the date of grant).
The grant and exercise of an option under the Incentive Plan does not result
in taxable income to the Optionee provided that the Optionee observes the
following holding periods and restrictions. In order for the option to be a
qualified incentive option, the Optionee must hold the stock acquired pursuant
to the option for a period of two (2) years from the date of the option grant
and one (1) year from the date of the option exercise. Any failure to satisfy
the holding periods and restrictions results in the loss of the qualified status
of the option and such option would be treated as a nonqualified option.
Provided that the Optionee observes the aforementioned holding periods, the sale
of the option stock by the Optionee results in taxable long-term capital gain
income to the Optionee in an amount equal to the difference between the option
sales and the option exercise price.
The Incentive Plan is not a stock bonus, pension or profit-sharing plan and
is not subject to or qualified under section 401(a) of the Internal Revenue Code
or any or the provisions of the Employment Retirement Income Security Act of
1974 ("ERISA").
BOARD OF DIRECTORS RECOMMENDATION
The Board of Directors believes that the Company's future success depends
upon its ability to attract and retain the highest caliber personnel and to use
their capabilities to the fullest extent possible by encouraging their
dedication to the Corporation's interest and welfare. The Board believes that
one of the best ways to attain these objectives is to give key employees an
opportunity to acquire a proprietary interest in the Corporation by purchasing
shares of Common Stock through the exercise of options granted under
arrangements such as the Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL NO. 2
16
<PAGE>
INDEPENDENT ACCOUNTANTS AND AUDIT MATTERS
The firm of Ernst & Young LLP has audited the accounts of the Company since
1993. In addition, the firm has rendered other services, including the
retrospective review of financial statements and related information contained
in quarterly reports provided to shareholders and the SEC. The Board of
Directors has not yet selected an accounting firm for 1997 but, consistent with
prior practice, anticipates making such selection before December 31, 1997.
A representative of Ernst & Young LLP is expected to be present at the
Annual Meeting, will have the opportunity to make a statement, and will be
available to respond to appropriate questions from shareholders.
SHAREHOLDER PROPOSAL FOR 1998 ANNUAL MEETING
An eligible shareholder who desires to have a qualified proposal considered
for inclusion in the proxy statement prepared in connection with the Company's
1998 Annual Meeting of Shareholders must deliver a copy of the proposal to the
Secretary of the Company, at the Company's principal executive offices, no later
than December 31, 1997. A shareholder must have been a record or beneficial
owner of at least one percent of the Company's outstanding Common Stock, or
shares of Common Stock having a market value of at least $1,000, for a period of
at least one year prior to submitting the proposal, and the shareholder must
continue to hold the shares through the date on which the meeting is held.
OTHER BUSINESS
The Board of Directors knows of no other business that will come before the
Annual Meeting for action except as described in the accompanying Notice of 1997
Annual Meeting of Shareholders. However, as to any such business, the persons
designated as proxies in the enclosed proxy will have discretionary authority to
act in their best judgment.
17
<PAGE>
SOFTWARE ARTISTRY, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1997 ANNUAL MEETING ON APRIL 25, 1997
PROXY
The undersigned constitutes and appoints Thomas E. Vanneman, Joseph A. Piscopo
and W. Scott Webber and each of them, his true and lawful agents and proxies
with full power of substitution in each, to represent the undersigned at the
1997 Annual Meeting of stockholders of Software Artistry, Inc. to be held at the
Ritz Charles, 12156 N. Meridian Street, Indianapolis, Indiana at 2:00 p.m., on
Friday April 25, 1997, and at any adjournments thereof, on all matters coming
before said meeting.
Election of Directors, Nominees:
Jerry Baker, Lawrence W. Olson,
Joseph A. Piscopo, and W. Scott Webber
(change of address)
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
(If you have written in the above space, please mark the corresponding box on
the reverse side of this card.)
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES.
SEE REVERSE SIDE. IF YOU DO NOT MARK ANY BOXES, THIS PROXY WILL BE VOTED IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXY COMMITTEE
CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
See Reverse side
X
Please mark your
votes as in this
example.
SHARES IN YOUR NAME
FOR WITHHELD
1. Election
of Directors / / / /
FOR AGAINST ABSTAIN
2. Proposal to approve the
Amendment to the
Amended and Restated
Incentive Stock
Option Plan. / / / / / /
FOR AGAINST ABSTAIN
3. In their discretion, the proxies are
authorized to vote upon such other
business that may properly come
before the meeting or any adjournment
thereof. / / / / / /
For, except vote withheld from the following nominee(s):
- --------------------------------------
/ / Change of
Address
SIGNATURE(S)-------------------------------------- DATE ------------
SIGNATURE(S)-------------------------------------- DATE ------------
Note: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
