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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
METACREATIONS CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(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:
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(2) Aggregate number of securities to which transaction applies:
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(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
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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[LOGO]
METACREATIONS CORPORATION
The Visual Computing Software Company
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 6, 1998
TO THE STOCKHOLDERS OF METACREATIONS CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
MetaCreations Corporation, a Delaware corporation (the "Company"), will be held
on Wednesday, May 6, 1998, at 10:00 a.m., local time, at Fess Parker's Red Lion
Resort at 633 E. Cabrillo Boulevard, Santa Barbara, California, for the
following purposes:
1. To elect seven directors to serve for the ensuing year and until their
successors are duly elected and qualified.
2. To amend the 1995 Stock Plan to increase the number of shares of Common
Stock reserved for issuance thereunder from 3,500,000 shares to
5,000,000 shares.
3. To amend the 1995 Employee Stock Purchase Plan to increase the number of
shares of Common Stock reserved for issuance thereunder from 125,000
shares to 425,000 shares.
4. To ratify the appointment of Coopers & Lybrand L.L.P. as independent
accountants for the Company for the 1998 fiscal year.
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 16, 1998 are
entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, please sign and return
the enclosed proxy as promptly as possible in the postage-prepaid envelope
enclosed for that purpose. Any stockholder attending the meeting may vote in
person even if he or she has returned a proxy.
FOR THE BOARD OF DIRECTORS
JEFFREY D. SAPER
Secretary
Carpinteria, California
April 6, 1998
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IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO
COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
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METACREATIONS CORPORATION
6303 CARPINTERIA AVENUE
CARPINTERIA, CALIFORNIA 93013
(805) 566-6200
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PROXY STATEMENT FOR 1998
ANNUAL MEETING OF STOCKHOLDERS
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of
MetaCreations Corporation (the "Company") for use at the Annual Meeting of
Stockholders to be held May 6, 1998 at 10:00 a.m., local time, or at any
adjournment thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at
Fess Parker's Red Lion Resort at 633 E. Cabrillo Boulevard, Santa Barbara,
California.
These proxy solicitation materials and the Company's Annual Report to
Stockholders for the year ended December 31, 1997, including financial
statements, were mailed on or about April 6, 1998 to all stockholders entitled
to vote at the meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on March 16, 1998 (the
"Record Date") are entitled to notice of and to vote at the meeting. At the
Record Date, 23,639,834 shares of the Company's Common Stock, $0.001 par value,
were issued and outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person.
VOTING AND SOLICITATION
Proxies properly executed, duly returned to the Company and not revoked,
will be voted in accordance with the specifications made. Where no
specifications are given, such proxies will be voted as the management of the
Company may propose. If any matter not described in this Proxy Statement is
properly presented for action at the meeting, the persons named in the enclosed
form of proxy will have discretionary authority to vote according to their best
judgment.
Each stockholder is entitled to one vote for each share of Common Stock on
all matters presented at the meeting. Stockholders do not have the right to
cumulative voting in the election of directors.
The cost of soliciting proxies will be borne by the Company. The Company
may also reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may also be solicited by certain of the Company's
directors, officers, and employees, without additional compensation, personally
or by telephone or telegram.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares
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that are voted "FOR," "AGAINST," "WITHHELD" or "ABSTAIN" are treated as being
present at the meeting for purposes of establishing a quorum and are also
treated as shares entitled to vote at the Annual Meeting (the "Votes Cast") with
respect to such matter.
Although there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
The Delaware Supreme Court has held that, while broker non-votes should be
counted for purposes of determining the presence or absence of a quorum for the
transaction of business, broker non-votes should not be counted for purposes of
determining the number of Votes Cast with respect to the particular proposal on
which the broker has expressly not voted. The Company intends to treat broker
non-votes in a manner consistent with such holding. Thus, a broker non-vote will
not affect the outcome of the voting on a proposal.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's 1999 Annual Meeting must be received by
the Company no later than December 7, 1998 to be considered for inclusion in the
proxy statement and form of proxy relating to that meeting.
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PROPOSAL ONE:
ELECTION OF DIRECTORS
NOMINEES
The number of directors authorized by the Company's Bylaws is currently
fixed by the Board at nine. However, the Board of Directors has approved an
amendment to the Company's Bylaws that fixes the authorized number of directors
at seven, effective at the time of the Annual Meeting of Stockholders, and a
board of seven directors is to be elected at the Annual Meeting of Stockholders.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them for the Company's seven nominees named below, all of whom are currently
directors of the Company. If any nominee of the Company is unable or declines to
serve as a director at the time of the Annual Meeting of Stockholders, the
proxies will be voted for the nominee designated by the present Board of
Directors to fill the vacancy. It is not expected that any nominee will be
unable or will decline to serve as a director. The term of office of each person
elected as a director will continue until the next Annual Meeting of
Stockholders or until a successor has been elected and qualified.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Samuel H. Jones, 64 President of S-J Venture Capital Company and President of
Jr............... S-J Transportation Company
Bert Kolde......... 43 Vice Chairman of Trail Blazers Inc. and Oregon Arena Corp.
and Advisor at Paul Allen Group
Kai Krause......... 41 Chief Design Officer of the Company
William H. Lane 59 President of Canyon Vista, Inc.
III..............
Gary L. Lauer...... 45 President and Chief Executive Officer of the Company
Howard L. Morgan... 52 President of The Arca Group, Inc. and General Partner of
Renaissance Partners
Mark Zimmer........ 41 Chief Technology Officer of the Company
</TABLE>
Except as set forth below, each nominee has been engaged in his principal
occupation described above during the past five years. There is no family
relationship among any directors or executive officers of the Company.
Mr. Jones has been a director of the Company since April 1992. He has been
President of S-J Venture Capital Company since 1991 and President of S-J
Transportation Company, an industrial waste transportation company, since 1971.
Mr. Jones is a director of Fulton Financial Corp. and Jevic Transportation, Inc.
Mr. Kolde has been a director of the Company since January 1995. Mr. Kolde
is currently the Vice Chairman of Trail Blazers Inc. and of the Oregon Arena
Corporation, an arena operations firm, positions he has held since May 1988 and
January 1991, respectively. Mr. Kolde is also the Vice Chairman of Football
Northwest and of First & Goal, Inc., positions he has held since April 1996 and
July 1997, respectively. From 1985 to 1994, Mr. Kolde served as President of the
Asymetrix Corporation, a software development company. Mr. Kolde is also a
director of Precision Systems, Inc.
Mr. Krause co-founded the Company and has been a director since 1992. For
more than eleven years prior to joining the Company on a full-time basis in
1993, Mr. Krause designed and developed graphics, audio and systems software as
an independent consultant. Mr. Krause attended college in Essen, West Germany,
where he majored in foreign languages, math and philosophy. He also attended the
Music Conservatory where he studied classical piano.
Mr. Lane has been a director of the Company since September 1995. In
addition, Mr. Lane served as Chief Operating Officer of the Company from January
1998 to February 1998. Mr. Lane is currently the President of Canyon Vista,
Inc., a management consulting company. Mr. Lane retired from Intuit Inc. in July
1996, having served as its Vice President, Chief Financial Officer, Secretary
and Treasurer from January 1994 to April 1996. Mr. Lane served in a similar
capacity at ChipSoft, a tax preparation software company, from July 1991 until
its acquisition by Intuit in December 1993. Mr. Lane is also a director of
Expert Software, Inc., Quarterdeck Corporation and Storm Technology, Inc.
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Mr. Lauer joined the Company as director, President and Chief Executive
Officer in February 1998. From 1988 to 1997, Mr. Lauer served in various
capacities at Silicon Graphics, Inc. ("SGI"), including Vice President, North
American Marketing; Vice President and subsequently Senior Vice President, North
American Field Operations; and most recently as President of SGI's World Trade
Group and Executive Vice President of Worldwide Field Operations. Prior to
joining SGI, Mr. Lauer was with International Business Machines Corporation
("IBM") for eleven years where he held a variety of senior management positions,
the last of which included responsibility for field operations for IBM's U.S.
Marketing and Services Group in the Silicon Valley.
Dr. Morgan has been a director of the Company since April 1992. Dr. Morgan
is President of The Arca Group, Inc., a consulting and investment management
firm. Dr. Morgan is also a director of Cylink Corporation, Franklin Electronic
Publishers, Inc., Infonautics Corporation, Neoware Corp., Quarterdeck
Corporation, Segue Software Corporation, Kentek Information Systems, and
Unitronix Corp.
Mr. Zimmer became a director and Chief Technology Officer of the Company in
May 1997 in connection with the merger with Fractal. In addition to co-founding
Fractal in April 1991, Mr. Zimmer was its Chief Executive Officer and a director
since its inception. Mr. Zimmer also served as Fractal's President from March
1993 until May 1996, and resumed the position in February 1997 until the merger
with MetaCreations in May 1997. In 1985, Mr. Zimmer founded Fractal Software, a
predecessor of Fractal and was a partner in Fractal Software from 1985 to 1990.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held thirteen (13) meetings during
fiscal 1997.
The Audit Committee consisted of Messrs. Kolde and Lane during fiscal 1997
and held three meetings. The Audit Committee reviews the financial statements
and the internal financial reporting system and controls of the Company with the
Company's management and independent auditors, recommends resolutions for any
disputes between the Company's management and its auditors, and reviews other
matters relating to the relationship of the Company with the auditors, including
their engagement and discharge. For fiscal 1998, the Audit Committee consists of
Messrs. Kolde and Lane.
The Compensation Committee consisted of Messrs. Lane and Wilczak and Dr.
Morgan during fiscal 1997 prior to the merger with Fractal. Following the merger
with Fractal, the Compensation Committee consisted of Arthur Collmeyer, Mr. Lane
and Dr. Morgan. The Compensation Committee held four meetings during fiscal
1997. The Compensation Committee develops and monitors compensation arrangements
for the officers and directors of the Company, including preparation of proper
reports or other disclosure required by the Compensation Committee in accordance
with applicable proxy or other rules of the Securities and Exchange Commission
("SEC"). The Compensation Committee currently consists of Messrs. Lane and
Collmeyer and Dr. Morgan.
The Option Committee consisted of Dr. Morgan and William J. Schroeder and
held two meetings during fiscal 1997 prior to the merger with Fractal, at which
time it was combined into the Compensation Committee. The Option Committee
administered the stock option and purchase plans of the Company in accordance
with the terms of such plans and the grants and issuance of awards thereunder,
including stock options, stock units, restricted stock and stock appreciation
rights. The Option Committee also reviewed and made recommendations to the Board
of Directors for changes in the Company's compensation and benefit plans and
practices, which recommendations were then submitted to the Board of Directors.
Each director, other than Mr. Krause, attended at least 75% of the
aggregate of the total number of meetings of the Board of Directors held during
such director's term of office during fiscal 1997.
COMPENSATION OF DIRECTORS
The Company reimburses each of its non-employee directors as follows: each
non-employee director is paid (i) $2,500 at the end of each fiscal quarter in
which he or she is a director, (ii) $1,000 for each regular Board meeting he or
she attends, and (iii) $500 for each Board committee meeting he or she attends;
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provided, however, that if more than one committee meeting is held on the same
day or a Board meeting and one or more committee meetings are held on the same
day, no more than the initial $500 or $1,000, as the case may be, is paid to any
director for all such meetings attended by such director on such date. Effective
March 1, 1997, Dr. Morgan began receiving a monthly consulting fee of $4,500 for
services rendered to the Company. In addition, effective February 1, 1997, Mr.
Lane began receiving a monthly consulting fee of $4,000 for services rendered to
the Company.
Non-employee directors participate in the Company's 1995 Director Option
Plan (the "Director Plan"). Under the Director Plan, each non-employee director
who joins the Board in the future will automatically be granted a nonstatutory
option to purchase 20,000 shares of Common Stock on the date upon which such
person first becomes a director. In addition, each non-employee director,
including current non-employee directors, automatically receives a nonstatutory
option to purchase 5,000 shares of Common Stock on January 1 of each year,
provided the director has been a member of the Board for at least six months.
The exercise price of each option granted under the Director Plan is equal to
the fair market value of the Common Stock on the date of grant. The 20,000 share
grant vests at a rate of one-eighth of the option shares upon the end of the
first six-month period after the date of grant and one-forty-eighth of the
option shares per month thereafter; provided the optionee remains a director of
the Company. The 5,000 share grant vests at the rate of one-half of the option
shares upon the end of the first six-month period after the date of grant and
one-twelfth of the option shares per month thereafter; provided the optionee
remains a director of the Company. Options granted under the Director Plan have
a term of ten (10) years unless terminated sooner, whether upon termination of
the optionee's status as a director or otherwise pursuant to the Director Plan.
In January 1997, Messrs. Jones, Kolde, Lane and Schroeder and Dr. Morgan
were each granted an option to purchase 5,000 shares of Common Stock under the
Director Plan at an exercise price of $12.875 per share. In May 1997, Mr.
Collmeyer was granted an option to purchase 20,000 shares of Common Stock under
the Director Plan at an exercise price of $11.75 per share. In July 1997,
Messrs. Jones, Kolde and Lane and Dr. Morgan were each granted an option to
purchase 20,000 shares of Common Stock under the 1995 Stock Plan at an exercise
price of $11.00 per share. In January 1998, Messrs. Collmeyer, Kolde, Jones, and
Lane and Dr. Morgan were each granted an option to purchase 5,000 shares under
the Director Plan at an exercise price of $10.75 per share. In January 1998, Mr.
Krause was granted an option to purchase 300,000 shares of Common Stock under
the 1995 Stock Plan at an exercise price of $6.4375 per share. In February 1998,
Mr. Lane and Dr. Morgan were granted options to purchase 25,000 and 15,000
shares of Common Stock, respectively, under the 1995 Stock Plan at an exercise
price of $7.9063 per share. In February 1998, Mr. Lauer was granted options to
purchase 200,000 shares of Common Stock and 800,000 shares of Common Stock under
the 1995 Stock Plan at an exercise price of $7.9063 per share.
REQUIRED VOTE
The seven candidates receiving the highest number of "FOR" votes shall be
elected to the Company's Board of Directors. An abstention will have the same
effect as a vote withheld for the election of directors, and, pursuant to
Delaware law, a broker non-vote will not be treated as voting in person or by
proxy on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE NOMINEES SET FORTH ABOVE.
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PROPOSAL TWO:
AMENDMENT TO THE 1995 STOCK PLAN
The Company's 1995 Stock Plan (the "Plan") was approved by the Board of
Directors in October 1995 and was approved by the Company's stockholders in
November 1995. The Plan initially reserved 2,000,000 shares of Common Stock for
issuance thereunder subject to stockholder approval. An amendment to the Plan
that increased the number of shares reserved for issuance thereunder by
1,500,000 shares was approved in May 1997. As of March 16, 1998, the Plan has a
total of 3,500,000 shares of Common Stock reserved for options or rights to
purchase stock; of the total, 1,927,424 shares are reserved for options or
rights to purchase stock that have been granted pursuant to the Plan and 61,629
shares are remaining.
At the annual meeting, the stockholders are being requested to consider and
approve the proposed amendment to the Plan to increase the number of shares of
Common Stock reserved for issuance thereunder by 1,500,000 shares, increasing
the total number of shares issuable under the Plan to 5,000,000. The proposed
increase in the number of shares of Common Stock reserved for issuance under the
Plan is to establish a reserve for stock option grants to new employees or
consultants that may be hired, granting stock options to key employees in
connection with their continued services with the Company and granting options
to key employees of businesses that the Company may seek to acquire in the
future.
SUMMARY OF THE 1995 PLAN
General. The purpose of the Plan is to attract and retain the best
available personnel for positions of substantial responsibility with the
Company, to provide additional incentive to the employees, directors and
consultants of the Company and to promote the success of the Company's business.
Options and stock purchase rights may be granted under the Plan. Options granted
under the Plan may be either "incentive stock options," as defined in Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonstatutory stock options.
Administration. The Plan may generally be administered by the Board or a
Committee appointed by the Board (as applicable, the "Administrator").
Eligibility; Limitations. Nonstatutory stock options and stock purchase
rights may be granted under the Plan to employees, directors and consultants of
the Company and any parent or subsidiary of the Company. Incentive stock options
may be granted only to employees. The Administrator, in its discretion, selects
the employees, directors and consultants to whom options and stock purchase
rights may be granted, the time or times at which such options and stock
purchase rights shall be granted, and the number of shares subject to each such
grant.
Section 162(m) of the Code places limits on the deductibility for federal
income tax purposes of compensation paid to certain executive officers of the
Company. In order to preserve the Company's ability to deduct the compensation
income associated with options and stock purchase rights granted to such
persons, the Plan provides that no employee may be granted, in any fiscal year
of the Company, options and stock purchase rights to purchase more than 300,000
shares of Common Stock. Notwithstanding this limit, however, in connection with
such individual's initial employment with the Company, he or she may be granted
options and stock purchase rights to purchase up to an additional 150,000 shares
of Common Stock.
Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between the Company and the optionee, and is subject to the following
additional terms and conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted. The exercise price of an
incentive stock option may not be less than 100% of the fair market value
of the Common Stock on the date such option is granted; provided, however,
the exercise price of an incentive stock option granted to a 10%
stockholder may not be less than 110% of the fair market value of the
Common Stock on the date such option is granted. The fair market value of
the Common Stock is generally determined with reference to the closing sale
price for the Common Stock
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(or the closing bid if no sales were reported) on the last market trading
day prior to the date the option is granted.
(b) Exercise of Option; Form of Consideration. The Administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. The means of payment for
shares issued upon exercise of an option is specified in each option
agreement. The Plan permits payment to be made by cash, check, promissory
note, other shares of Common Stock of the Company (with some restrictions),
cashless exercises, a reduction in the amount of any Company liability to
the optionee, any other form of consideration permitted by applicable law,
or any combination thereof.
(c) Term of Option. The term of an option is specified in each option
agreement. The term of an incentive stock option may be no more than ten
(10) years from the date of grant; provided that in the case of an
incentive stock option granted to a 10% stockholder, the term of the option
may be no more than five (5) years from the date of grant. No option may be
exercised after the expiration of its term.
(d) Termination of Employment. If an optionee's employment, director
or consulting relationship terminates for any reason (other than death or
disability), then all options held by the optionee under the Plan expire on
the earlier of (i) the date set forth in his or her notice of grant or (ii)
the expiration date of such option. To the extent the option is exercisable
at the time the optionee's service relationship with the Company
terminates, the optionee may exercise all or part of his or her option at
any time before the option expires.
(e) Death or Disability. If an optionee's employment, director or
consulting relationship terminates as a result of death or disability, then
all options held by such optionee under the Plan expire on the earlier of
(i) 12 months from the date of such termination or (ii) the expiration date
of such option. The optionee (or the optionee's estate or the person who
acquires the right to exercise the option by bequest or inheritance), may
exercise all or part of the option at any time before such expiration to
the extent that the option was exercisable at the time of such termination.
(f) Nontransferability of Options and Stock Purchase Rights: Options
and stock purchase rights granted under the Plan are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the optionee's lifetime only by the optionee.
(g) Other Provisions: The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Administrator.
Stock Purchase Rights ("SPRs"). In the case of SPRs, unless the
Administrator determines otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall lapse
at a rate determined by the Administrator.
Adjustments Upon Changes in Capitalization. In the event that the stock of
the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of stock
subject to the Plan, the number and class of shares of stock subject to any
option or stock purchase right outstanding under the Plan, and the exercise
price of any such outstanding option or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The Administrator may, in its discretion
provide that each optionee shall have the right to exercise all of the
optionee's options and stock purchase rights, including those not otherwise
exercisable, until a date fixed by the Board prior to the consummation of the
liquidation or dissolution.
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In connection with any merger, or sale of assets, each outstanding option
or stock purchase right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the successor corporation refuses
to assume the options and stock purchase rights or to substitute substantially
equivalent options and stock purchase rights, the optionee shall have the right
to exercise the option or stock purchase right as to all the optioned stock,
including shares not otherwise exercisable. In such event, the Administrator
shall notify the optionee that the option or stock purchase right is fully
exercisable for fifteen (15) days from the date of such notice and that the
option or stock purchase right terminates upon expiration of such period.
Amendment and Termination of the Plan. The Board may amend, alter, suspend
or terminate the Plan, or any part thereof, at any time and for any reason.
However, the Company shall obtain stockholder approval for any amendment to the
Plan to the extent necessary to comply with Section 422 of the Code, or any
other applicable law, rule or regulation. No such action by the Board or
stockholders may alter or impair any option or stock purchase right previously
granted under the Plan without the written consent of the optionee. Unless
terminated earlier, the Plan shall terminate ten (10) years from the date of its
approval by the stockholders or the Board of the Company, whichever is earlier.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise may subject the optionee to the
alternative minimum tax. Upon a disposition of the shares more than two years
after grant of the option and one year after exercise of the option, any gain or
loss is treated as long-term capital gain or loss. Net capital gains on shares
held between 12 and 18 months are currently taxed at a maximum federal rate of
28%. The maximum federal tax rate possible for net capital gains on shares held
for more than 18 months is 20%. Capital losses are allowed in full against
capital gains and up to $3,000 against other income. If these holding periods
are not satisfied, the optionee recognizes ordinary income at the time of
disposition equal to the difference between the exercise price and the lower of
(i) the fair market value of the shares at the date of the option exercise or
(ii) the sale price of the shares. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated as ordinary
income is treated as long-term or short-term capital gain or loss, depending on
the holding period. A different rule for measuring ordinary income upon such a
premature disposition may apply if the optionee is also an officer, director or
10% stockholder of the Company. The Company is entitled to a deduction in the
same amount as the ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
of the Company is subject to tax withholding by the Company. The Company is
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee. Upon a disposition of such shares by the optionee, any difference
between the sale price and the optionee's exercise price, to the extent not
recognized as taxable income as provided above, is treated as long-term or
short-term capital gain or loss, depending on the holding period. Net capital
gains on shares held between 12 and 18 months are currently taxed at a maximum
federal rate of 28%. The maximum federal tax rate possible for net capital gains
on shares held for more than 18 months is 20%. Capital losses are allowed in
full against capital gains and up to $3,000 against other income.
Stock Purchase Rights. SPRs will generally be taxed in the same manner as
nonstatutory stock options. However, restricted stock is generally purchased
upon the exercise of an SPR. At the time of purchase, restricted stock is
subject to a "substantial risk of forfeiture" within the meaning of Section 83
of the Code. As a result, the purchaser will not recognize ordinary income at
the time of purchase. Instead, the purchaser will recognize ordinary income on
the dates when stock ceases to be subject to a substantial risk of forfeiture.
The stock will generally cease to be subject to a substantial risk of forfeiture
when it is no longer subject to the Company's right to repurchase the stock upon
the purchaser's termination of employment with the Company. At such times, the
purchaser will recognize ordinary income measured as the difference between the
purchase
8
<PAGE> 11
price and the fair market value of the stock on the date the stock is no longer
subject to a substantial risk of forfeiture.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and the beginning of any capital gain holding period
by timely filing an election pursuant to Section 83(b) of the Code. In such
event, the ordinary income recognized, if any, is measured as the difference
between the purchase price and the fair market value of the stock on the date of
purchase, and the capital gain holding period commences on such date. The
ordinary income recognized by a purchaser who is an employee will be subject to
tax withholding by the Company. Different rules may apply if the purchaser is
also an officer, director or 10% stockholder of the Company.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF STOCK PURCHASE RIGHTS AND THE COMPANY WITH RESPECT TO
THE GRANT AND EXERCISE OF OPTIONS AND STOCK PURCHASE RIGHTS UNDER THE PLAN. IT
DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF
THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF
ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE EMPLOYEE OR CONSULTANT
MAY RESIDE.
REQUIRED VOTE
At the Annual Meeting, the stockholders are being asked to approve an
amendment to increase the number of shares available under the Plan. The
affirmative vote of the holders of a majority of the Votes Cast at the Annual
Meeting will be required to approve the adoption of the Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE AMENDMENT TO THE COMPANY'S PLAN.
9
<PAGE> 12
PROPOSAL THREE:
AMENDMENT TO THE 1995 EMPLOYEE
STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the "Purchase Plan") was approved by
the Board of Directors in October 1995 and was approved by the Company's
stockholders in November 1995. The Purchase Plan initially reserved 125,000
shares of Common Stock for issuance thereunder subject to stockholder approval.
As of March 16, 1998, 57,822 shares of Common Stock have been issued pursuant to
the Plan.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment to the Purchase Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by 300,000 shares,
bringing the total number of shares issuable under the Purchase Plan to 425,000.
The Board believes that the amendment will enable the Company to continue its
policy of widespread employee stock ownership as a means to motive high levels
of performance and to recognize key employee accomplishments.
SUMMARY OF THE PURCHASE PLAN
General. The purpose of the Purchase Plan is to provide employees with an
opportunity to purchase Common Stock of the Company through payroll deductions.
Administration. The Purchase Plan may be administered by the Board or a
committee appointed by the Board. All questions of interpretation or application
of the Purchase Plan are determined by the Board or its appointed committee, and
its decisions are final, conclusive and binding upon all participants.
Eligibility. Each employee of the Company (including officers), whose
customary employment with the Company is at least twenty (20) hours per week and
more than five (5) months in any calendar year, is eligible to participate in an
Offering Period (as defined below); provided, however, that no employee shall be
granted an option under the Purchase Plan (i) to the extent that, immediately
after the grant, such employee would own 5% of either the voting power or value
of the stock of the Company, or (ii) to the extent that his or her rights to
purchase stock under all employee stock purchase plans of the Company accrues at
a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock
(determined at the fair market value of the shares at the time such option is
granted) for each calendar year. Eligible employees become participants in the
Purchase Plan by filing with the Company a subscription agreement authorizing
payroll deductions prior to the beginning of each Offering Period unless a later
time for filing the subscription agreement has been set by the Board.
Participation in an Offering. The Purchase Plan is implemented by offering
periods lasting for two (2) years (an "Offering Period"), with a new Offering
Period commencing on or after April 1 and October 1 of each year. Common Stock
may be purchased under the Purchase Plan every six (6) months (a "Purchase
Period"), unless the participant withdraws or terminates employment earlier. To
the extent the fair market value of the Common Stock on any exercise date in an
Offering Period is lower than the fair market value of the Common Stock on the
first day of the Offering Period, then all participants in such Offering Period
will be automatically withdrawn from such Offering Period immediately after the
exercise of their options on such exercise date and automatically re-enrolled in
the immediately following Offering Period as of the first day thereof. The Board
may change the duration of the Purchase Periods or the length or date of
commencement of an Offering Period. To participate in the Purchase Plan, each
eligible employee must authorize payroll deductions pursuant to the Purchase
Plan. Such payroll deductions may not exceed 10% of a participant's
compensation. Once an employee becomes a participant in the Purchase Plan, the
employee will automatically participate in each successive Offering Period until
such time as the employee withdraws from the Purchase Plan or the employee's
employment with the Company terminates. At the beginning of each Offering
Period, each participant is automatically granted options to purchase shares of
the Company's Common Stock. The option expires at the end of the Purchase Period
or upon termination of employment, whichever is earlier, but
10
<PAGE> 13
is exercised at the end of each Purchase Period to the extent of the payroll
deductions accumulated during such Purchase Period. The number of shares subject
to the option may not exceed the number of shares determined by dividing $12,500
by the fair market value of a share on the Enrollment Date on the first day of
the Purchase Period.
Purchase Price, Shares Purchased. Shares of Common Stock may be purchased
under the Purchase Plan at a price not less than 85% of the lesser of the fair
market value of the Common Stock on (i) the first day of the Offering Period or
(ii) the last day of Purchase Period. The "fair market value" of the Common
Stock on any relevant date will be the closing price per share as reported on
The Nasdaq National Market (or the mean of the closing bid and asked prices, if
no sales were reported) as quoted on such exchange or reported in The Wall
Street Journal. The number of shares of Common Stock a participant purchases in
each Purchase Period is determined by dividing the total amount of payroll
deductions withheld from the participant's compensation during that Purchase
Period by the purchase price.
Termination of Employment. Termination of a participant's employment for
any reason, including disability or death, or the failure of the participant to
remain in the continuous scheduled employ of the Company for at least 20 hours
per week, cancels his or her option and participation in the Purchase Plan
immediately. In such event, the payroll deductions credited to the participant's
account will be returned to him or her or, in the case of death, to the person
or persons entitled thereto as provided in the Purchase Plan.
Adjustment Upon Change in Capitalization, Change in Control. In the event
that the stock of the Company is changed by reason of any stock split, reverse
stock split, stock dividend, combination, reclassification or other change in
the capital structure of the Company effected without the receipt of
consideration, appropriate proportional adjustments shall be made in the number
and class of shares of stock subject to the Purchase Plan, the number and class
of shares of stock subject to options outstanding under the Purchase Plan, and
the exercise price of any such outstanding options. Any such adjustment shall be
made by the Board, whose determination shall be conclusive. Notwithstanding the
above, in connection with any merger or acquisition of assets involving the
Company, each option subject to the Purchase Plan shall be assumed or an
equivalent option shall be substituted by such successor corporation unless the
Board determines, in lieu of such assumption or substitution, to shorten any
Offering Periods or Purchase Periods then in progress to a new exercise date and
notify each participant that his or her option shall be exercised automatically
on the new exercise date, unless prior to such date the participant has
withdrawn from the Offering Period.
Amendment and Termination of the Plan. The Board of Directors may at any
time terminate or amend the Purchase Plan. An Offering Period may be terminated
by the Board of Directors at the end of any Purchase Period if the Board
determines that termination of the Purchase Plan is in the best interests of the
Company and its stockholders. No amendment shall be effective unless it is
approved by the holders of a majority of the votes cast at a duly held
stockholders' meeting, if such amendment would require stockholder approval in
order to comply with Section 423 of the Code. The Purchase Plan will terminate
in 2005.
Withdrawal. Generally, a participant may withdraw from an Offering Period
at any time without affecting his or her eligibility to participate in future
Offering Periods. However, once a participant withdraws from a particular
offering, that participant may not participate again in the same offering.
Federal Tax Information for Purchase Plan. The Purchase Plan, and the right
of participants to make purchases thereunder, is intended to qualify under the
provisions of Sections 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant until the shares purchased under the
Purchase Plan are sold or otherwise disposed of. Upon sale or other disposition
of the shares, the participant will generally be subject to tax and the amount
of the tax will depend upon the holding period. If the shares are sold or
otherwise disposed of more than two (2) years from the first day of the Offering
Period or more than one (1) year from the date of transfer of the stock to the
participant, then the participant will recognize ordinary income measured as the
lesser of (i) the excess of the fair market value of the shares at the time of
such sale or disposition over the purchase price, or (ii) an amount equal to 15%
of the fair market value of the shares as of the first day of the Offering
Period. Any additional gain will be treated as long-term capital gain. If the
shares are sold or otherwise disposed of before the expiration of this holding
period, the participant will
11
<PAGE> 14
recognize ordinary income generally measured as the excess of the fair market
value of the shares on the date the shares are purchased over the purchase
price. Any additional gain or loss on such sale or disposition will be long-term
or short-term capital gain or loss, depending on the holding period. Net capital
gains on shares held between 12 and 18 months are currently taxed at a maximum
federal rate of 28%. Net capital gains on shares held for more than 18 months
are capped at 20%. Capital losses are allowed in full against capital gains and
up to $3,000 against other income. The Company is not entitled to a deduction
for amounts taxed as ordinary income or capital gain to a participant except to
the extent of ordinary income is recognized by participants upon a sale or
disposition of shares prior to the expiration of the holding period(s) described
above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED UNDER
THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE
CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF A
PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY IN
WHICH THE PARTICIPANT MAY RESIDE.
REQUIRED VOTE
At the Annual Meeting, the stockholders are being asked to approve an
amendment to increase the number of shares available under the Purchase Plan.
The affirmative vote of a majority of the Votes Cast at the Annual Meeting will
be required to approve the amendment to the Purchase Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE AMENDMENT TO THE COMPANY'S PURCHASE PLAN.
12
<PAGE> 15
PROPOSAL FOUR:
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Coopers & Lybrand L.L.P., independent
accountants, to audit the financial statements of the Company for the 1998
fiscal year. This appointment is being presented to the stockholders for
ratification at the meeting. If the stockholders reject the appointment, the
Board will reconsider its selection. Coopers & Lybrand L.L.P. has audited the
Company's financial statements since the Company's inception. A representative
of Coopers & Lybrand L.L.P. is expected to be present at the meeting, will have
the opportunity to make a statement, and is expected to be available to respond
to appropriate questions.
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The affirmative vote of a majority of the Votes Cast on the proposal at the
Annual Meeting is required to ratify the Board's appointment. An abstention will
have the same effect as a vote against the appointment of the independent
auditors, and, pursuant to Delaware law, a broker non-vote will not be treated
as voting in person or by proxy on the proposal.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE APPOINTMENT OF COOPERS
& LYBRAND L.L.P. AS THE COMPANY'S ACCOUNTANTS FOR FISCAL 1998 AND RECOMMENDS
THAT THE STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
13
<PAGE> 16
ADDITIONAL INFORMATION
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to stock
option grants during fiscal 1995, 1996 and 1997 to the Company's Chief Executive
Officer and the Company's four other most highly compensated executive officers
(collectively, the "Named Executive Officers"). In accordance with the rules of
the SEC, also shown below is the potential realizable value over the term of the
option (the period from the grant date to the expiration date) based on assumed
rates of stock appreciation from the option exercise price of 5% and 10%,
compounded annually. These amounts are based on certain assumed rates of
appreciation and do not represent the Company's estimate of future stock price.
Actual gains, if any, on stock option exercises will depend on the future
performance of the Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------------------- -----------------------
RESTRICTED SECURITIES
FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(6) AWARDS OPTIONS COMPENSATION
- --------------------------- ------ ------- --------- --------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Wilczak(1).......... 1997 240,000 43,750(3) 43,032 - 124,948 -
President and Chief 1996 215,680 120,000(4) 34,968 - 85,000 -
Executive Officer 1995 194,720 - 21,775 - 35,000 -
Kai Krause (2).............. 1997 240,000 42,000(3) 26,035 - 535,000 -
Chief Design Officer 1996 215,680 120,000(4) 15,366 - 485,000 -
1995 195,070 - 8,232 - 410,000 -
Mark Zimmer................. 1997 223,199 42,000(3) 16,424 - 84,470 -
Chief Technical Officer 1996 200,410 130,625(4) 11,258 - 73,028 -
1995 180,520 75,000(5) 4,946 - 46,813 -
Thomas Hedges............... 1997 185,240 33,250(3) 17,795 - 77,054 -
Chief Systems Architect 1996 179,942 87,750(4) 11,629 - 65,538 -
1995 133,810 56,250(5) 4,165 - 46,813 -
Fred Brown.................. 1997 225,000 61,125(3) 14,887 - 118,000 -
Senior Vice President, 1996 225,000 50,000(4) 11,674 - 105,000 -
Sales and Marketing 1995 4,327 - - - 110,000 -
</TABLE>
- ---------------
(1) Subsequent to December 31, 1997, Mr. Wilczak announced his resignation as
Director, President and Chief Executive Officer effective February 20, 1998.
Additionally, on February 20, 1998, 89,948 of Mr. Wilczak's 124,948
outstanding options to purchase the Company's Common Stock were canceled.
Mr. Wilczak will continue to act as a consultant to the Company until
December 31, 1998.
(2) On January 15, 1998, Mr. Krause was granted an option to purchase 300,000
shares of the Company's Common Stock at an exercise price of $6.4375. One
third of the option vests on each of January 12, 2001, July 12, 2002, and
January 12, 2003.
(3) Represents amount paid in 1998 for services in 1997.
(4) Represents amount paid in 1997 for services in 1996.
(5) Represents amount paid in 1996 for services in 1995.
(6) Represents auto allowance and the cost of providing health, life and
disability insurance.
14
<PAGE> 17
OPTIONS GRANTS AND EXERCISES
The following tables set forth information regarding stock options granted
to and exercised by the Named Executive Officers during fiscal year 1997, as
well as options held by such officers as of December 31, 1997, the last day of
the Company's 1997 fiscal year.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUES AT
----------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION TERM(1)
UNDERLYING GRANTED TO EXERCISE ------------------------
OPTIONS EMPLOYEES IN OR BASE EXPIRATION 5% PER 10% PER
NAME GRANTED FISCAL YEAR PRICE DATE YEAR YEAR
---- ---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John J. Wilczak......... 50,000 1.5% $10.25 06/20/07 $322,875 $814,875
19,915(2) 0.6% 10.25 06/20/07 128,601 324,565
20,033(2) 0.6% 10.25 06/20/07 129,363 326,488
------ ---
89,948 2.7%
Kai Krause.............. 50,000 1.5% 10.25 06/20/07 322,875 814,875
Mark Zimmer............. 18,257 0.5% 7.16 04/25/07 82,356 207,851
19,400(2) 0.6% 10.25 06/20/07 125,276 316,172
------ ---
37,657 1.1%
Thomas Hedges........... 16,384 0.5% 7.16 04/25/07 73,907 186,527
13,857(2) 0.4% 10.25 06/20/07 89,482 225,834
------ ---
30,241 0.9%
Fred Brown.............. 15,000 0.4% 11.75 01/01/07 111,038 280,238
20,000 0.6% 10.25 06/20/07 129,150 325,950
------ ---
35,000 1.0%
</TABLE>
- ---------------
(1) The dollar amounts in these columns are the result of calculations at the
five percent and ten percent rates set by the SEC and are not intended to
forecast future appreciation of the Company's Common Stock.
(2) Represents new options granted in exchange for previously outstanding
options. The fair value of the new options granted equaled the fair value of
the options exchanged, as computed using a Black Scholes valuation model.
The following table sets forth information with respect to options
exercised during fiscal 1997 by the Named Executive Officers and the value of
unexercised options at December 31, 1997.
OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 1997 AT DECEMBER 31, 1997
ACQUIRED ON VALUE ------------------------------ -------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
---- ----------- -------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John J. Wilczak...... -- $ -- 35,000 89,948 $ 350,875 $ 78,705
Kai Krause........... -- -- 341,563 193,437 3,199,925 995,075
Mark Zimmer.......... -- -- 46,813 37,657 452,042 89,360
Thomas Hedges........ -- -- 46,813 30,241 452,042 77,084
Fred Brown........... 12,000 82,875 35,857 82,143 112,053 164,822
</TABLE>
- ---------------
(1) The value of unexercised, in-the-money options is the difference between the
exercise price of the options and the fair market value of the Company's
Common Stock at 12/31/97 ($11.125).
15
<PAGE> 18
TEN-YEAR OPTION REPRICINGS
The following table sets forth certain information with respect to the
Company's exchange of outstanding options with certain of its officers in June
1997. For further information with respect to such option exchanges see "Report
of the Compensation Committee of the Board of Directors."
TEN YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
OPTION
NUMBER OF NUMBER OF MARKET TERM
SECURITIES SECURITIES PRICE EXERCISE REMAINING
UNDERLYING UNDERLYING OF STOCK AT PRICE AT NEW AT DATE OF
OPTIONS OPTIONS TIME OF TIME OF EXERCISE EXCHANGE
NAME AND PRINCIPAL POSITION DATE EXCHANGED ISSUED EXCHANGE EXCHANGE PRICE (IN YEARS)
--------------------------- ------- ------------ ------------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Wilczak.................... 6/20/97 25,000 19,915 $10.25 $16.38 $10.25 9
President and Chief Executive 6/20/97 25,000 20,033 $10.25 $18.00 $10.25 9
Officer
------ ------
50,000 39,948
Mark Zimmer........................ 6/20/97 26,215 19,400 $10.25 $19.09 $10.25 9
Chief Technical Officer
Thomas Hedges...................... 6/20/97 18,725 13,857 $10.25 $19.09 $10.25 9
Chief Systems Architect
Pierre Berkaloff................... 6/20/97 22,470 15,291 $10.25 $21.36 $10.25 9
Vice President, Engineering 6/20/97 18,725 14,925 $10.25 $17.19 $10.25 9
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Collmeyer and Lane and Dr. Morgan. During fiscal 1997 the Compensation
Committee of the Board of Directors consisted of Messrs. Jones and Kolde and Dr.
Morgan prior to the acquisition of Fractal and Messrs. Collmeyer and Lane and
Dr. Morgan following the acquisition of Fractal. None of the members of the
Compensation Committee was an officer or employee of the Company. No
interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of directors
or compensation committee.
EMPLOYMENT ARRANGEMENTS
The Company has entered into employment agreements with Messrs. Lauer,
Brown, Hedges, Krause and Zimmer. Pursuant to the terms of an employment offer
letter dated February 20, 1998, from the Company to Mr. Lauer, the Company will
pay Mr. Lauer an annual base salary of $350,000, plus a targeted bonus of
$125,000 for 1998. The payment of future bonuses will be determined by the
Compensation Committee of the Company's Board of Directors. The Company pays
premiums on a term life insurance policy on Mr. Lauer in the amount of
$1,000,000, the beneficiaries of which may be designated by Mr. Lauer. Mr. Lauer
received an option to purchase 800,000 shares of Common Stock at an exercise
price equal to $7.9063, with 30% of such option to vest at the conclusion of one
year and 1/36 of the remaining option to vest monthly thereafter. Mr. Lauer also
received an option to purchase 200,000 additional shares of Common Stock at a
price equal to $7.9063, with such option to vest at the conclusion of four years
of employment, with possible accelerated vesting based upon achievement of
performance goals. Pursuant to the terms of the employment offer, if the Company
terminates Mr. Lauer's employment without cause, Mr. Lauer is entitled to
receive severance pay equal to twelve months of his base salary, and accelerated
vesting of 50% of then unvested options. In the event of a change of control of
the Company during the first year of Mr. Lauer's employment that results in
termination of Mr. Lauer's employment without cause, resignation due to the
change of control, or a material change in duties, Mr. Lauer is entitled to
receive severance payments equal to twelve months of his base compensation plus
standard employee benefits for twelve months, and accelerated vesting of 50% of
any then unvested options. In the event of a change in control of the Company
between the first and beginning of the fourth years of Mr. Lauer's employment
that results in termination without cause, resignation due to the change of
control, or a material change in duties, Mr. Lauer is entitled to receive
severance payments equal to
16
<PAGE> 19
twelve months of his base compensation plus standard employee benefits for
twelve months, and accelerated vesting of 100% of any then unvested stock
options.
Pursuant to the terms of an employment offer letter dated November 12, 1995
from the Company to Mr. Brown, the Company paid Mr. Brown a signing bonus equal
to $25,000, monthly consulting fees of $11,250 from November 13, 1995 to January
14, 1996 and an annual base salary of $225,000 thereafter. Pursuant to the offer
letter, Mr. Brown has received options to purchase 110,000 shares of Common
Stock at an exercise price of $8.00 per share, with such options vesting over a
45-month period beginning July 15, 1996, but 50% of the unvested portion of such
options become fully vested upon a change in control of the Company, and the
balance of such unvested options become fully vested if Mr. Brown's employment
is terminated within one year after a change in control of the Company. In
addition, in the event of such termination upon a change in control, Mr. Brown
is entitled to receive severance pay equal to nine months of his base salary. In
October 1997, Mr. Brown's annual base salary was increased to $234,000 by the
Company's Board of Directors.
Pursuant to the terms of an employment offer letter dated February 11, 1998
from the Company to Mr. Hedges, following the closing of the acquisition of
Fractal in May 1997, Mr. Hedges commenced employment with the Company at an
annual base salary of $190,000. Mr. Hedges received a bonus of $33,250 in 1998
for fiscal 1997.
The Company's employment agreement with Mr. Krause, dated as of January 26,
1994, provides for an annual base salary of $160,000, with the opportunity to
participate in any incentive or bonus plans adopted in the discretion of the
Board of Directors. The agreement provides for an employment term through
December 31, 1998. Pursuant to the agreement, the Company pays premiums on a
term life insurance policy on Mr. Krause in the amount of $3,000,000, the
beneficiaries of which may be designated by Mr. Krause. The employment agreement
may be terminated by the Company at any time upon a material breach of Mr.
Krause's obligations to perform under the agreement, including failure to
perform by reason of illness, incapacity or otherwise. In May 1995, Mr. Krause's
annual base salary was increased to $195,000 by the Company's Board of
Directors. In January 1996, Mr. Krause's annual base salary was increased to
$215,000 by the Company's Board of Directors. In January 1997, Mr. Krause's
annual base salary was increased to $240,000 by the Company's Board of
Directors.
Pursuant to the terms of an employment offer letter dated February 11, 1998
from the Company to Mr. Zimmer, following the closing of the acquisition of
Fractal in May 1997, Mr. Zimmer commenced employment with the Company at an
annual base salary of $240,000. Mr. Zimmer received a bonus of $42,000 in 1998
for fiscal 1997.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Committee") consisted of Messrs. Lane and
Wilczak and Dr. Morgan during fiscal 1997 prior to the acquisition of Fractal.
Following the acquisition of Fractal in May 1997, the Compensation Committee
consisted of Messrs. Collmeyer and Lane and Dr. Morgan. The Committee
recommends, subject to the Board's approval, compensation for executive officers
and evaluates performance of management.
Compensation Philosophy
The Company operates in the competitive and rapidly changing environment of
high technology businesses. The Committee seeks to establish compensation
policies that allow the Company flexibility to respond to changes in its
business environment. The Company's compensation philosophy is based on the
belief that achievement in this environment is enhanced by the coordinated
efforts of all individuals working toward common objectives. The goals of the
Company's compensation program are to align compensation with the Company's
business objectives and performance, to foster teamwork and to enable the
Company to attract, retain and reward employees who contribute to the Company's
long-term success.
17
<PAGE> 20
Compensation Components
The Company's executive officers are compensated with a salary, and are
eligible for bonus and stock option awards. The Committee assesses the past
performance and anticipated future contribution, and considers the total
compensation (earned or potentially available) of each executive officer in
establishing each element of compensation.
Salary. The salaries of the executive officers, including the Chief
Executive Officer, are determined annually by the Committee with reference to
several surveys of salaries paid to executive with similar responsibilities at
comparable companies, generally in the high technology industry. The peer group
for each executive officer is composed of executives whose responsibilities are
similar in scope and content. The Company seeks to set executive compensation
levels that are competitive with the average levels of peer group compensation.
Bonus. The Company has a discretionary key employee incentive pool pursuant
to which executive officers and a limited number of key employees may receive
annual cash bonuses. Targets for sales growth and operating income influence the
amount of the pool. Individual payments are made based on the Company's
achievement of these targets and upon the individual's personal and departmental
performance.
Stock options. Stock options awards are designed to align the interests of
executives with the long-term interests of the stockholders. The Committee
approves option grants subject to vesting periods (usually 48 months) to retain
executives and encourage sustained contributions. The exercise price of options
are not less than the market price on the date of grant. These options will
acquire value only to the extent that the price of the Company's Common Stock
increases relative to the market price at the date of grant.
In June 1997, the Company's Board of Directors approved an option exchange
program whereby employees that held options with exercise prices in excess of
$11.125 were offered the opportunity to exchange such options for new options at
$11.125 per share, which was the fair market value of the Common Stock on June
11, 1997, the date of the exchange program. In addition, in June 1997, the
Company's Board of Directors approved an option exchange program whereby all
executive officers that held options with exercise prices in excess of $10.25
per share were offered the opportunity to exchange such options for a reduced
number of new options at $10.25 per share, which was the fair market value of
the Common Stock on June 20, 1997, the date of the exchange program. In order to
participate in the option exchange programs, employees and officers were
required to extend by one year the vesting commencement date of their options.
The Board undertook these actions in light of the then recent reduction in the
trading price of the Company's Common Stock and in consideration of the
importance to the Company of retaining its employees and officers by offering
them appropriate equity incentives. The Board also considered the highly
competitive environment for obtaining and retaining qualified employees and
officers and the overall benefit to the Company's stockholders from a highly
motivated group of employees and officers.
Chief Executive Officer's Compensation
Mr. Wilczak's salary and stock option grant for fiscal 1997 reflect the
Committee's evaluation of his overall leadership of the Company. The Committee
considered, among other factors, the continued strong year-to-year growth of
revenues and profitability, the release of new products and versions of existing
products, and the expansion of sales through domestic distribution channels.
The Company paid Mr. Wilczak a base salary of $240,000 for 1997. Mr.
Wilczak received a bonus of $43,750 in 1998 for fiscal 1997. In June 1997, Mr.
Wilczak was granted an option to purchase 50,000 shares of Common Stock at a
price of $10.25, which represented the fair market value of the Common Stock on
the date of grant.
The Company and Mr. Wilczak entered into a consulting and release agreement
dated February 20, 1998, pursuant to which Mr. Wilczak resigned from his
position as Chief Executive Officer of the Company effective February 20, 1998,
and Company benefits terminated on that date. Pursuant to the agreement, Mr.
Wilczak will perform consulting services as requested by the Company through
December 31, 1998 and the Company will pay Mr. Wilczak a quarterly consulting
fee of $60,000.
18
<PAGE> 21
The Committee has considered the potential impact of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), and proposed regulations
thereunder (the "Section"). The Section disallows a tax deduction for any
publicly-held corporation for individual compensation exceeding $1 million in
any taxable year for any of the Named Executive Officers, unless such
compensation is performance-based. The Company's policy is to qualify, to the
extent reasonable, its executive officers' compensation for deductibility under
applicable tax laws. However, the Committee believes that its primary
responsibility is to provide a compensation program that will attract, retain
and reward the executive talent necessary to the Company's success.
Consequently, the Committee recognizes that the loss of a tax deduction could be
necessary in some circumstances.
COMPENSATION COMMITTEE
Arthur Collmeyer
William H. Lane III
Howard L. Morgan
19
<PAGE> 22
STOCK PERFORMANCE GRAPH
STOCKHOLDER RETURN COMPARISON
The graph below compares the cumulative total return on the Company's
Common Stock for the period commencing December 12, 1995 and ending December 31,
1997 compared to the CRSP Total Return Index for the Nasdaq Stock Market (U.S.
companies) and the CRSP Total Return Index for the Nasdaq Computer and Data
Processing Services Stocks (SIC 737). The graph assumes that $100 was invested
on the date of the Company's initial public offering, December 12, 1995, and
that all dividends are reinvested. Historic stock price performance should not
be considered indicative of future stock price performance.
COMPARISON OF 2 YEAR CUMULATIVE TOTAL RETURN*
AMONG METACREATIONS CORPORATION, THE NASDAQ STOCK MARKET--US INDEX,
AND THE NASDAQ COMPUTER AND DATA PROCESSING INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ STOCK NASDAQ COMPUTER
(FISCAL YEAR COVERED) METACREATIONS MARKET--US AND DATA PROCESSING
<S> <C> <C> <C>
12/12/95 100 100 100
12/31/95 96 100 98
12/31/96 44 123 122
12/31/97 41 151 149
</TABLE>
20
<PAGE> 23
SECURITY OWNERSHIP
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of March
16, 1998 by (i) each beneficial owner of more than 5% of the Company's Common
Stock, (ii) each director and each nominee, (iii) each Named Executive Officer
and (iv) all directors and executive officers as a group. Except as otherwise
indicated, each person has sole voting and investment power with respect to all
shares shown as beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES TOTAL(17)
------------------------------------ --------- ----------
<S> <C> <C>
Bert Kolde(1).................................. 2,023,836 8.6%
Samuel H. Jones, Jr.(2)........................ 1,139,805 4.8%
Kai Krause(3).................................. 905,465 3.8%
Thomas Hedges(4)............................... 585,041 2.5%
Mark Zimmer(5)................................. 393,782 1.7%
Howard L. Morgan(6)............................ 256,250 1.1%
Robert Rice(7)................................. 171,665 *
Alexander Migdal(8)............................ 100,833 *
Pierre Berkaloff(9)............................ 57,534 *
William H. Lane III(10)........................ 52,083 *
Fred Brown(11)................................. 48,714 *
Terance A. Kinninger(12)....................... 45,004 *
Arthur Collmeyer(13)........................... 35,758 *
Frank Casanova(14)............................. 27,686 *
Sallie Olmsted(15)............................. 24,097 *
Gary Lauer..................................... -- *
--------- ----
All directors and executive officers as a group
(16 persons)(16)............................. 5,867,553 23.8%
========= ====
</TABLE>
- ---------------
* Percentage of shares beneficially owned is less than one percent of total.
(1) Includes 2,000,000 shares held by Vulcan Ventures, Inc. Mr. Kolde, a
director of MetaCreations, is a director of Vulcan Ventures, Inc. Includes
19,836 shares issuable to Mr. Kolde upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(2) Includes 13,750 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(3) Includes 390,521 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(4) Includes 50,908 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(5) Includes 51,376 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(6) Includes 28,750 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(7) Includes 171,665 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(8) Includes 100,833 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(9) Includes 8,688 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
21
<PAGE> 24
(10) Includes 47,083 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(11) Includes 48,714 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(12) Includes 37,604 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(13) Includes 28,268 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(14) Includes 27,083 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(15) Includes 24,097 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998.
(16) Includes 1,049,176 shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of March 16,
1998 and 2,000,000 shares held by Vulcan Ventures, Inc.
(17) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within sixty (60) days of March 16, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite
such stockholder's name. Percentage ownership is based on 23,639,834 shares
of Common Stock outstanding on March 16, 1998.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent (10%) of a registered class of the
Company's equity securities to file an initial report of ownership on Form 3 and
changes in ownership on Form 4 or 5 with the SEC and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than ten
percent stockholders are also required by SEC rules to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of the
copies of such forms received by it, or written representations from certain
reporting persons, the Company believes that, with respect to fiscal 1997, all
filing requirements applicable to its officers, directors and ten percent
stockholders were satisfied.
OTHER MATTERS
The Company knows of no other matters to be submitted at the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Board of Directors of the Company may recommend.
THE BOARD OF DIRECTORS
Carpinteria, California
April 6, 1998
22
<PAGE> 25
DETACH HERE
PROXY
METACREATIONS CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 6, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of MetaCreations Corporation, a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders dated April 6, 1998, and hereby appoints Gary L. Lauer and Terance
A. Kinninger, and each of them, proxies and attorneys-in-fact, with full power
to each of substitution, on behalf of the undersigned, to represent the
undersigned at the Annual Meeting of Stockholders of MetaCreations Corporation
to be held at Fess Parker's Red Lion Resort, 633 E. Cabrillo Boulevard, Santa
Barbara, California, on May 6, 1998 at 10:00 a.m., local time, and at any
adjournment or adjournments thereof, and to vote all shares of Common Stock that
the undersigned would be entitled to vote if then and there personally present,
on all matters set forth on the reverse side hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATION IS INDICATED, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR EACH OF THE PERSONS AND THE
PROPOSALS ON THE REVERSE SIDE HEREOF AND FOR SUCH OTHER MATTERS AS MAY PROPERLY
COME BEFORE THE MEETING AS THE PROXY HOLDERS DEEM ADVISABLE.
- --------------- ---------------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
- --------------- ---------------
<PAGE> 26
DETACH HERE
Please mark
[X] votes as in
this example.
1. Election of Directors.
Nominees: Samuel H. Jones, Jr., Bert Kolde, Kai Krause, William H. Lane III,
Gary L. Lauer, Howard L. Morgan and Mark Zimmer
FOR WITHHELD
[ ] [ ]
MARK HERE
FOR ADDRESS
[ ] ______________________________________ CHANGE AND [ ]
For all nominees except as noted above NOTE BELOW
FOR AGAINST WITHHELD
2. To amend the 1995 Stock Plan to add an additional [ ] [ ] [ ]
1,500,000 shares of Common Stock thereto.
3. To amend the 1995 Employee Stock Purchase Plan [ ] [ ] [ ]
to add an additional 300,000 shares of Common
Stock thereto.
4. To ratify the appointment of Coopers & Lybrand [ ] [ ] [ ]
L.L.P., as independent accountants for MetaCreations
for the 1998 fiscal year.
5. To vote or otherwise represent the shares on any [ ] [ ] [ ]
and all other business which may properly come
before the meeting or any adjournment or
adjournments thereof, according to their discretion
and in their discretion.
The undersigned acknowledges receipt of the Notice of Annual Meeting dated
April 6, 1998.
Please mark, sign, and date and return the proxy card promptly using the
enclosed envelope.
NOTE: Please exactly as name appears on your stock certificate. If the stock is
registered in the names of two or more persons, each should sign. Executors,
administrators, trustees, guardians, attorneys and corporate officers should
insert their titles.
Signature: ______________ Date: _______ Signature: ______________ Date: _______
