<PAGE> 1
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
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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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
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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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
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE> 2
[METACREATIONS LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 26, 1999
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 26, 1999 at 9:30 a.m., local time, at Chaminade Executive
Conference Center, One Chaminade Lane, Santa Cruz, California, for the following
purposes:
1. To elect six 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
4,500,000 shares.
3. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants for the Company for the 1999 fiscal year.
4. 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 April 19, 1999 are
entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person. To
ensure your representation at the meeting, however, you are urged to authorize
your proxy by following one of the following steps as promptly as possible:
1. Complete, date, sign and return the enclosed Proxy Card (a
postage-prepaid envelope enclosed for that purpose); or
2. Vote via the Internet (see the instructions on the enclosed Proxy Card);
or
3. Vote via telephone (toll-free) in the United States and Canada (see the
instructions on the enclosed Proxy Card)
The Internet and telephone voting procedures are designed to authenticate
stockholders' identities, to allow stockholders to vote their shares and to
confirm that their instructions have been properly recorded. The Company has
been advised by counsel that the procedures which have been put in place are
consistent with the requirements of applicable law. Specific instructions to be
followed by any registered stockholder interested in voting via the Internet or
telephone are set forth on the enclosed Proxy Card.
Any stockholder attending the meeting may vote in person even if he or she
has returned a Proxy Card or voted via the Internet or telephone.
FOR THE BOARD OF DIRECTORS
JEFFREY D. SAPER
Secretary
Carpinteria, California
April 23, 1999
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, OR
VOTE VIA THE INTERNET OR TELEPHONE.
<PAGE> 3
METACREATIONS CORPORATION
6303 CARPINTERIA AVENUE
CARPINTERIA, CALIFORNIA 93013
(805) 566-6200
------------------------
PROXY STATEMENT FOR 1999
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 26, 1999 at 9:30 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
Chaminade Executive Conference Center, One Chaminade Lane, Santa Cruz,
California.
These proxy solicitation materials and the Company's Annual Report to
Stockholders for the year ended December 31, 1998, including financial
statements, were mailed on or about April 23, 1999 to all stockholders entitled
to vote at the meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on April 19, 1999 (the
"Record Date") are entitled to notice of and to vote at the meeting. At the
Record Date, 24,418,888 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, whether the proxy was given by telephone,
via the Internet or by returning the Proxy Card. The proxy may be revoked by
delivering to the Secretary of the Company a written notice of revocation or a
duly executed proxy bearing a later date, or by making an authorized Internet or
telephone communication on a later date in accordance with the instructions on
the enclosed Proxy Card. It may also be revoked by attendance at 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.
<PAGE> 4
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 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 2000 Annual Meeting must be received by
the Company no later than December 23, 1999 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 Board of Directors has approved an amendment to the Company's Bylaws to
provide that the authorized number of directors shall initially be seven (7)
with such number to be further determined by the Board from time to time. The
Board has determined that effective as of the date of the 1999 Annual Meeting of
Stockholders, the number of directors will be fixed at six (6) and a board of
six 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 six 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, Jr. 65 President of S-J Venture Capital Company and
President of S-J Transportation Company
Bert Kolde 44 Vice Chairman of Trail Blazers Inc., Oregon Arena
Corporation, Football Northwest and First & Goal,
Inc.
William H. Lane III 60 President of Canyon Vista, Inc.
Gary L. Lauer 46 President and Chief Executive Officer of the
Company
Howard L. Morgan 53 President of The Arca Group, Inc. and General
Partner of idealab! Corp.
Mark Zimmer 42 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
Asymetrix Learning Systems, Inc., a software development company, and currently
serves as its Chairman. Mr. Kolde is also a director of Beyond.com Corporation,
CyberSource Corporation, and Vulcan Ventures, Inc.
Mr. Lane has been a director of the Company since September 1995. In
addition, Mr. Lane served as interim President and 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, DigitalThink, Inc., and Interactive Microcomputer Software, Inc.
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
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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, and general partner in idealab! Corp., an integrated incubator for
starting and growing Internet businesses. Dr. Morgan is also a director of
Cylink Corporation, Franklin Electronic Publishers, Inc., Infonautics
Corporation, Segue Software Corporation, Kentek Information Systems, Unitronix
Corp., and Quarterdeck Corporation.
Mr. Zimmer became a director and Chief Technology Officer of the Company in
May 1997 in connection with the merger with Fractal Design Corporation
("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 1998.
The Audit Committee consisted of Messrs. Kolde and Lane during fiscal 1998
and held four (4) 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.
During fiscal 1998 prior to the Company's 1998 Annual Meeting, the
Compensation Committee consisted of Arthur Collmeyer, Mr. Lane and Dr. Morgan.
Following the Annual Meeting, the Compensation Committee consisted of Messrs.
Lane and Jones and Dr. Morgan. The Compensation Committee held seven (7)
meetings during fiscal 1998. 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") and monitors stock option activity
for the Company.
Each director 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 1998, except Kai Krause, who attended 69% of the meetings.
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;
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. Effective March 1, 1999, each of Mr. Morgan and Mr. Lane's
consulting fees was reduced to $2,500 per month.
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
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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 1998, Messrs. Collmeyer, Jones, Kolde and Lane 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 $6.625 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 1996 Non-Statutory Stock Plan at an exercise price of $7.9063 per share. In
connection with the Company's exchange of certain outstanding options in
September 1998, Mr. Lauer's options were exchanged for options to purchase
800,000 shares and 200,000 shares of Common Stock, each at an exercise price
equal to $5.09. In May 1998, Mr. Zimmer was granted an option to purchase 40,000
shares of Common Stock under the 1995 Stock Plan at an exercise price of $7.9375
per share. In January 1999, Messrs. Kolde, Lane and Jones 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 $6.625 per share.
REQUIRED VOTE
The six 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 500,000 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. An amendment to the Plan that
increased the number of shares reserved for issuance thereunder by 1,500,000
shares was approved in May 1998. As of April 19, 1999, the Plan has a total of
3,500,000 shares of Common Stock reserved for options or rights to purchase
stock; of the total, 3,244,870 shares are reserved for options or rights to
purchase stock that have been granted pursuant to the Plan and 222,214 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 1,000,000 shares, increasing
the total number of shares issuable under the Plan to 4,500,000. 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
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Common Stock is generally determined with reference to the closing sale
price for the Common Stock (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. Unless
otherwise specified by the Administrator, 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
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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.
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. The maximum federal tax rate
possible for net capital gains on shares held for more than 12 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. The maximum
federal tax rate possible for net capital gains on shares held for more than 12
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:
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected PricewaterhouseCoopers LLP, independent
accountants, to audit the financial statements of the Company for the 1999
fiscal year. This appointment is being presented to the stockholders for
ratification at the Annual Meeting. If the stockholders reject the appointment,
the Board will reconsider its selection. PricewaterhouseCoopers LLP has audited
the Company's financial statements since the Company's inception. A
representative of PricewaterhouseCoopers LLP 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
At the Annual Meeting, the stockholders are being asked to ratify the
Board's appointment of PricewaterhouseCoopers LLP to audit the financial
statements of the Company for the 1999 fiscal year. The affirmative vote of the
holders of a majority of the Votes Cast at the Annual Meeting will be required
to ratify the appointment of PricewaterhouseCoopers LLP.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S ACCOUNTANTS FOR FISCAL 1999 AND
RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
10
<PAGE> 13
ADDITIONAL INFORMATION
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual
compensation and long-term compensation awarded during fiscal 1996, 1997 and
1998 to the Company's Chief Executive Officer and the Company's four other most
highly compensated executive officers, an individual who served as the Company's
Chief Executive Officer during part of 1998, and an individual who was one of
the Company's most highly compensated executive officers but was not serving as
an executive officer at the end of 1998 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------------
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- ---- -------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary Lauer(1)............... 1998 $288,189 $ -- $14,877(8) 1,000,000(10) $ 67,365(15)
President and Chief
Executive Officer
Terance A. Kinninger........ 1998 173,333 18,000(5) 13,088(8) 115,000(11) --
Senior Vice President, 1997 160,750 28,000(6) 9,207(8) 30,000 --
Finance and Operations and 1996 136,667 60,000(7) 4,198(8) 35,000 --
Chief Financial Officer
Kai Krause(2)............... 1998 239,375 -- 28,824(8) 300,000 --
Chief Design Officer 1997 240,000 42,000(6) 26,035(8) 50,000 --
1996 215,680 120,000(7) 15,366(8) 75,000 --
Robert Rice................. 1998 173,333 100,000(5) 7,481(9) 294,500(12) --
Vice President, Business 1997 154,134 100,000(6) 4,607(9) -- --
Development and General 1996 -- -- -- 334,665 --
Counsel
Mark Zimmer................. 1998 239,375 15,000(5) 17,712(8) 40,000 --
Chief Technical Officer 1997 223,199 42,000(6) 16,424(8) 37,657(13) --
1996 200,410 130,625(7) 11,258(8) 26,215 --
John J. Wilczak(3).......... 1998 45,993 -- 34,101(8) -- 240,000(16)
Former President and Chief 1997 240,000 43,750(6) 43,032(8) 89,948(14) --
Executive Officer 1996 215,680 120,000(7) 34,968(8) 50,000 --
Fred Brown(4)............... 1998 116,200 -- 11,762(8) -- 178,013(17)
Former Senior Vice 1997 225,000 61,125(6) 14,887(8) 35,000 --
President, Sales and 1996 225,000 50,000(7) 11,674(8) -- --
Marketing
</TABLE>
Note: William H. Lane III, a Director of the Company, served as interim
President and Chief Operating Officer from January 13, 1998 through
February 20, 1998. Mr. Lane acted as a consultant to the Company during
1998, for which he was paid $48,000.
- ---------------
(1) Mr. Lauer was hired as President and Chief Executive Officer on February
20, 1998.
(2) On April 13, 1999, the Company announced that Mr. Krause will be leaving
the Company.
(3) Mr. Wilczak resigned as Director, President and Chief Executive Officer
effective February 20, 1998. Mr. Wilczak continued to act as a consultant
to the Company until December 31, 1998.
(4) Mr. Brown resigned as Senior Vice President, Sales and Marketing effective
June 30, 1998. Mr. Brown will continue to act as a consultant to the
Company through March 31, 1999.
(5) Represents amount paid in 1999 for services in 1998.
(6) Represents amount paid in 1998 for services in 1997.
(7) Represents amount paid in 1997 for services in 1996.
11
<PAGE> 14
(8) Represents auto allowance and the cost of providing health, life and
disability insurance.
(9) Represents the cost of providing health, life and disability insurance.
(10) In February 1998, Mr. Lauer received options to purchase 800,000 and
200,000 shares of Common Stock. These options were exchanged for a similar
number of options in September 1998.
(11) Includes 65,000 new options granted in exchange for previously outstanding
options.
(12) Includes 244,500 new options granted in exchange for previously outstanding
options.
(13) Includes 19,400 new options granted in exchange for previously outstanding
options.
(14) Includes 39,948 new options granted in exchange for previously outstanding
options.
(15) Represents reimbursement for relocation expenses ($50,000) and other
miscellaneous perquisites.
(16) Represents amount paid as a consultant.
(17) Represents amount paid as severance and as a consultant.
OPTION GRANTS AND EXERCISES
The following tables set forth information regarding stock options granted
to and exercised by the Named Executive Officers during fiscal year 1998, as
well as options held by such officers as of December 31, 1998, the last day of
the Company's 1998 fiscal year. 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.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUES AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM(1)
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION -------------------------------
NAME AND PRINCIPAL POSITION GRANTED FISCAL YEAR BASE PRICE DATE 5% PER YEAR 10% PER YEAR
- --------------------------- ---------- ------------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gary Lauer................ 800,000(2)(3) 11.6% $5.09 2/19/08 $ 128,453(4) $2,444,857(4)
200,000(2)(3) 2.9% 5.09 2/19/08 32,113(4) 611,214(4)
--------- ----
1,000,000 14.5%
Terance A. Kinninger...... 25,000 0.4% 7.94 5/28/08 124,796 316,258
25,000 0.4% 5.09 8/26/08 17,823(4) 103,755(4)
10,000(3) 0.1% 5.09 7/16/06 (2,331)(4) 19,057(4)
25,000(3) 0.4% 5.09 1/1/07 (3,053)(4) 55,534(4)
30,000(3) 0.4% 5.09 6/20/07 (238)(4) 76,597(4)
--------- ----
115,000 1.7%
Kai Krause................ 300,000 4.3% 6.44 1/12/08 1,214,553 3,077,915
Robert Rice............... 25,000 0.4% 7.94 5/28/08 124,796 316,258
25,000 0.4% 5.09 8/26/08 17,823(4) 103,755(4)
244,500(3) 3.5% 5.09 12/31/06 (30,018)(4) 542,658(4)
--------- ----
294,500 4.3%
Mark Zimmer............... 40,000 0.6% 7.94 5/28/08 199,674 506,013
</TABLE>
- ---------------
(1) The dollar amounts in these columns are the result of calculations of the
potential realizable value of each grant of options assuming that the market
price of the underlying security appreciates in value from the date of grant
to the end of the option term at the five percent and ten percent rates set
by the SEC. These amounts are not intended to forecast future appreciation
of the Company's Common Stock.
(2) In February 1998, Mr. Lauer received options to purchase 800,000 and 200,000
shares of Common Stock at an exercise price equal to $7.9063. These options
were exchanged on September 11, 1998 (see note 3).
12
<PAGE> 15
(3) Represents new options granted in exchange for previously outstanding
options. Exercise price of new options exceeded market price of Common Stock
on date of grant. Vesting of options remained the same; however, between
September 11, 1998 and January 20, 1999, exchanged options that were vested
were not eligible for exercise, and between January 21, 1999 and July 21,
1999, the officer may exercise only up to 25% of the exchanged options
vested and available for exercise at January 21, 1999.
(4) Exercise price of new options exceeded market price of Common Stock on date
of grant.
The following table sets forth information with respect to options
exercised during fiscal 1998 by the Named Executive Officers and the value of
unexercised options at December 31, 1998.
OPTION EXERCISES IN FISCAL 1998 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, 1998 AT DECEMBER 31, 1998(1)
ACQUIRED ON VALUE ---------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary Lauer................ -- $ -- -- 1,000,000 $ -- $285,000
Terance A. Kinninger...... -- -- 28,750 115,000 32,344 25,650
Kai Krause................ -- -- 473,021 361,979 1,793,750 --
Robert Rice............... -- -- 90,165 294,500 31,107 76,808
Mark Zimmer............... -- -- 73,058 51,412 182,867 --
John J. Wilczak........... 35,000 294,000 -- -- -- --
Fred Brown................ -- -- 88,136 -- -- --
</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 12/31/98 ($5.375).
TEN-YEAR OPTION REPRICINGS
The following table sets forth certain information with respect to the
Company's exchange of certain outstanding options with certain of its officers
in June 1997 and September 1998. 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
NUMBER OF NUMBER OF MARKET OPTION TERM
SECURITIES SECURITIES PRICE OF EXERCISE REMAINING
UNDERLYING UNDERLYING 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>
Gary Lauer.............................. 9/11/98 200,000 200,000 $ 3.31 $ 7.91 $ 5.09 9(1)
President and Chief Executive Officer 9/11/98 800,000 800,000 3.31 7.91 5.09 9(1)
--------- ---------
1,000,000 1,000,000
Terance Kinninger....................... 9/11/98 10,000 10,000 3.31 13.75 5.09 8(1)
Senior Vice President, Finance and 9/11/98 25,000 25,000 3.31 11.75 5.09 8(1)
Operations and Chief Financial Officer 9/11/98 30,000 30,000 3.31 10.25 5.09 8(1)
--------- ---------
65,000 65,000
Robert Rice............................. 9/11/98 244,500 244,500 3.31 12.50 5.09 8(1)
Vice President, Business Development
and Legal Counsel
Mark Zimmer............................. 6/20/97 26,215 19,400 10.25 19.09 10.25 9
Chief Technical Officer
John J. Wilczak......................... 6/20/97 25,000 19,915 10.25 16.38 10.25 9
Former President and Chief Executive 6/20/97 25,000 20,033 10.25 18.00 10.25 9
Officer --------- ---------
50,000 39,948
</TABLE>
- ---------------
(1) Vesting of options remained the same; however, between September 11, 1998
and January 20, 1999, exchanged options that were vested were not eligible
for exercise, and between January 21, 1999 and
13
<PAGE> 16
July 21, 1999, the officer may exercise only up to 25% of the exchanged
options vested and available for exercise at January 21, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998 prior to the 1998 Annual Meeting, the Compensation
Committee of the Board of Directors consisted of Messrs. Collmeyer and Lane and
Dr. Morgan. Following the Annual Meeting, the Compensation Committee consisted
of Messrs. Jones and Lane and Dr. Morgan. 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,
Kinninger, Krause, Rice and Zimmer. Pursuant to the terms of an employment offer
letter dated February 20, 1998, from the Company to Mr. Lauer, the Company
agreed to pay Mr. Lauer an annual base salary of $350,000 plus a targeted annual
bonus 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. In connection with the Company's exchange of certain
outstanding options in September 1998, Mr. Lauer's options were exchanged for
options to purchase 800,000 shares and 200,000 shares of Common Stock, each at
an exercise price equal to $5.09. 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 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 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 a
letter agreement dated July 16, 1998 from the Company to Mr. Lauer, the Company
agreed to offer Mr. Lauer a collateralized loan of up to $1,000,000 to assist
Mr. Lauer with the purchase of a home in the Santa Barbara, California area. Mr.
Lauer has executed a promissory note dated November 9, 1998 in favor of the
Company in the amount of $1,000,000, collateralized by a first trust deed on Mr.
Lauer's Santa Barbara residence. The note is non-interest bearing and is payable
on February 20, 2002. The letter agreement provides that if Mr. Lauer sells such
Santa Barbara residence on or before February 19, 2002 for a loss, as defined in
the letter agreement, the Company will reimburse Mr. Lauer for such loss.
However, in the event that Mr. Lauer proposes to undertake a sale of the Santa
Barbara residence that would result in such a loss, Mr. Lauer and the Company
will transfer control of the sale to an independent third party. In the event
that such third party is able to broker a sale of the residence for a gain to
Mr. Lauer, as defined in the letter agreement, Mr. Lauer will reimburse the
Company for the third party's expenses in an amount not to exceed his gain. In
connection with the Company's restructuring activities, Mr. Lauer agreed to a
10% salary reduction from September 16, 1998 through December 31, 1998.
Mr. Kinninger's original employment offer letter from the Company dated
June 27, 1995 provided that the Company would pay Mr. Kinninger an annual base
salary of $120,000. Pursuant to the offer letter, the Company granted Mr.
Kinninger options to purchase 65,000 shares of Common Stock at an exercise price
of $4.25 per share. Such options vest over a period of four years, but become
fully vested upon a change in control of the Company. In accordance with the
offer letter, 16,250 shares of Mr. Kinninger's options became fully vested upon
the closing of the Company's initial public offering. In March 1996, the
Company's Board of
14
<PAGE> 17
Directors increased Mr. Kinninger's annual base salary to $140,000. In January
1997, the Company's Board of Directors increased Mr. Kinninger's annual base
salary to $160,000. Mr. Kinninger's employment agreement with the Company was
amended by a severance agreement dated October 31, 1997. Pursuant to the terms
of the agreement, if within one year following a change of control of the
Company, Mr. Kinninger's employment is involuntarily terminated, Mr. Kinninger
is entitled to receive severance payments equal to twelve months of his base
compensation, medical benefits and accelerated vesting of 50% of any then
unvested stock options. In May 1998, the Company's Board of Directors increased
Mr. Kinninger's annual base salary to $180,000. In May 1998, Mr. Kinninger
received an option to purchase 25,000 shares of Common Stock at an exercise
price equal to $7.94. In August 1998, Mr. Kinninger received an option to
purchase 25,000 shares of Common Stock at an exercise price equal to $5.09. In
connection with the Company's exchange of certain outstanding options in
September 1998, certain of Mr. Kinninger's options were exchanged for new
options with exercise prices equal to $5.09. In February 1999, Mr. Kinninger
received a bonus of $18,000 for services performed in 1998.
The Company's employment agreement with Mr. Krause, dated as of January 26,
1994, provided 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 provided 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. In January 1998, Mr. Krause received an option to purchase 300,000
shares of Common Stock at an exercise price of $6.44. In May 1998, Mr. Krause's
annual base salary was increased to $250,000 by the Company's Board of
Directors. In connection with the Company's restructuring activities, Mr. Krause
agreed to a 10% salary reduction from September 16, 1998 through December 31,
1998.
The Company's employment agreement with Mr. Rice, dated December 31, 1996,
provided for employment commencing January 1, 1997 at an annual base salary of
$150,000. The agreement, which expires as of December 31, 1999, guaranteed that
the Company would pay Mr. Rice a bonus of not less than $100,000 for his first
year of employment. With respect to subsequent years of employment, the
agreement provides that the Company will pay Mr. Rice bonuses commensurate with
the bonuses awarded to other senior executives of the Company. Mr. Rice received
an option to purchase 244,500 shares of Common Stock at an exercise price of
$12.50, with one-third of such option to vest at the conclusion of each year,
and an option to purchase 90,165 shares of Common Stock at an exercise price of
$5.03, which was fully vested. In the event that Mr. Rice's employment is
terminated by the Company without cause, or by Mr. Rice for good reason, or
following a change of control, Mr. Rice shall be entitled to accelerated vesting
of 100% of any then unvested stock options. Pursuant to the terms of the
employment offer, if the Company terminates Mr. Rice's employment without cause,
or if Mr. Rice terminates his employment for good reason, prior to December 31,
1999, Mr. Rice is entitled to receive severance pay equal to his base salary and
annual bonus through December 31, 1999 and continuation of coverage of certain
benefits. Pursuant to the terms of the agreement, the Company loaned Mr. Rice
$1,000,000, collateralized by shares of the Company's Common Stock underlying
certain vested and exercisable options held by Mr. Rice. The loan is payable on
December 31, 2002 and bears interest at 5.67%, compounded semi-annually. In May
1998, the Company's Board of Directors increased Mr. Rice's annual base salary
to $185,000. In May 1998, Mr. Rice received an option to purchase 25,000 shares
of Common Stock at an exercise price equal to $7.94. In August 1998, Mr. Rice
received an option to purchase 25,000 shares of Common Stock at an exercise
price equal to $5.09. In connection with the Company's exchange of certain
outstanding options in September 1998, Mr. Rice's option to purchase 244,500
shares of Common Stock was exchanged for an option to purchase 244,500 shares of
Common Stock at an exercise price equal to $5.09. In February 1999, Mr. Rice
received a bonus of $100,000 for services performed in 1998.
15
<PAGE> 18
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. In May 1998, Mr. Zimmer's annual base salary was
increased to $250,000 by the Company's Board of Directors. In May 1998, Mr.
Zimmer received an option to purchase 40,000 shares of Common Stock at an
exercise price of $7.94. In connection with the Company's restructuring
activities, Mr. Zimmer agreed to a 10% salary reduction from September 16, 1998
through December 31, 1998. In November 1998, the Company loaned Mr. Zimmer
$150,000, collateralized by certain shares of common stock of the Company owned
by Mr. Zimmer as well as options to purchase shares of the common stock of the
Company. The loan bears interest semi-annually at 4.47% and is payable on May
18, 2000. In February 1999, Mr. Zimmer received a bonus of $15,000 for services
performed in 1998.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Committee") consisted of Messrs. Collmeyer
and Lane and Dr. Morgan prior to the Company's 1998 Annual Meeting. Following
the Annual Meeting, the Compensation Committee consisted of Messrs. Jones 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.
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 closing 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 September 1998, the Company's Board of Directors approved an option
exchange program whereby certain executive officers that held options with
exercise prices in excess of $5.09 per share were offered the opportunity to
exchange such options for new options at $5.09 per share, which was higher than
the fair
16
<PAGE> 19
market value of the Common Stock on September 11, 1998, the date of the exchange
program. The new options continued to vest in accordance with the vesting
schedules of the exchanged options; however, between September 11, 1998 and
January 20, 1999, exchanged options that were vested were not eligible for
exercise, and between January 21, 1999 and July 21, 1999, any officer may
exercise only up to 25% of the exchanged options vested and available for
exercise at January 21, 1999. 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. Lauer's compensation for fiscal 1998 reflects the Committee's
evaluation of his overall leadership skills and the significant experience he
brings to the Company as its new Chief Executive Officer. In determining Mr.
Lauer's compensation, the Committee considered, among other factors, Mr. Lauer's
prior marketing and management experience at IBM and SGI.
The Company paid Mr. Wilczak a salary of $45,993 through February 20, 1998.
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 performed consulting services as requested by the Company through
December 31, 1998 and the Company paid Mr. Wilczak a quarterly consulting fee of
$60,000.
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
William H. Lane III
Howard L. Morgan
Samuel H. Jones, Jr.
17
<PAGE> 20
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,
1998 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 3 YEAR CUMULATIVE TOTAL RETURN
AMONG METACREATIONS CORPORATION, THE NASDAQ STOCK MARKET --
US INDEX, AND THE NASDAQ COMPUTER AND DATA PROCESSING INDEX
<TABLE>
<CAPTION>
NASDAQ STOCK MARKET - NASDAQ COMPUTER AND
METACREATIONS US 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
12/31/98 20 212 268
</TABLE>
18
<PAGE> 21
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 April
19, 1999 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 SHARES
-------------------------------------------
COMMON STOCK
COMMON VESTED AND PERCENTAGE OF
NAME OF BENEFICIAL OWNER STOCK OPTIONS(1) VESTED OPTIONS TOTAL(3)
- ------------------------ --------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Bert Kolde............... 2,004,000(2) 34,375 2,038,375 8.3%
Samuel H. Jones, Jr...... 1,166,055 24,583 1,190,638 4.9
Kai Krause............... 489,945 486,042 975,987 3.9
Mark Zimmer.............. 332,406 85,340 417,746 1.7
Howard L. Morgan......... 227,500 39,583 267,083 1.1
Robert Rice.............. -- 137,165 137,165 *
William H. Lane III...... 15,000 63,333 78,333 *
Terance A. Kinninger..... 7,400 42,657 50,057 *
Gary Lauer............... 23,676 25,000 48,676 *
John Leddy............... 1,698 -- 1,698 *
--------- ------- --------- ----
All directors and
executive officers as a
group (12 persons)..... 4,267,680(2) 938,078 5,205,758 20.5%
========= ======= ========= ====
</TABLE>
- ---------------
* Percentage of shares beneficially owned is less than one percent of total.
(1) Represents shares issuable upon exercise of options to purchase
MetaCreations Common Stock that are exercisable within 60 days of April 19,
1999.
(2) Includes 2,000,000 shares held by Vulcan Ventures, Inc. Mr. Kolde, a
director of MetaCreations, is a director of Vulcan Ventures, Inc.
(3) 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 April 19, 1999 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 24,418,888 shares of Common Stock
outstanding on April 19, 1999.
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 1998, all
filing requirements applicable to its officers, directors and ten percent
stockholders were satisfied.
19
<PAGE> 22
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 23, 1999
20
<PAGE> 23
DETACH HERE
PROXY
METACREATIONS CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 26, 1999
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 23, 1999, 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 Chaminade Executive Conference Center, One Chaminade
Lane, Santa Cruz, California on May 26, 1999 at 9:30 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 SEE REVERSE
SIDE SIDE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C>
- ----------------- ----------------
VOTE BY TELEPHONE VOTE BY INTERNET
- ----------------- ----------------
It's fast, convenient and immediate It's fast, convenient, and your vote is immediately
Call Toll-Free on a Touch-Tone Phone confirmed and posted
1-877-PRX-VOTE (1-877-779-8683)
FOLLOW THESE FOUR EASY STEPS: FOLLOW THESE FOUR EASY STEPS:
1. READ THE ACCOMPANYING PROXY 1. READ THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS AND PROXY CARD STATEMENT/PROSPECTUS AND PROXY CARD
2. CALL THE TOLL-FREE NUMBER 2. GO TO THE WEBSITE
1-877-PRX-VOTE (1-877-779-8683) FOR HTTP://WWW.EPROXYVOTE.COM/MCRE
SHAREHOLDERS RESIDING OUTSIDE THE UNITED
STATES CALL COLLECT ON A TOUCH-TONE PHONE 3. ENTER YOUR 14-DIGIT VOTER CONTROL NUMBER
1-201-538-8073 LOCATED ON YOUR PROXY CARD ABOVE YOUR NAME
3. ENTER YOUR 14-DIGIT CONTROL NUMBER LOCATED 4. FOLLOW THE INSTRUCTIONS PROVIDED
ON YOUR PROXY CARD ABOVE YOUR NAME
4. FOLLOW THE RECORDED INSTRUCTIONS
YOUR VOTE IS IMPORTANT! YOUR VOTE IS IMPORTANT!
Call 1-877-PRX-VOTE anytime Go to http://www.eproxyvote.com/mcre anytime
DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET
- -----------------------------------------------------------------------------------------------------------------------------------
DETACH HERE
[X] Please mark
Votes as in
this example.
1. Election of Directors
FOR AGAINST ABSTAIN
NOMINEES: (01) Samuel H. Jones Jr., (02) Bert Kolde. 2 To amend the 1995 Stock Plan to add
(03) William H. Lane III, (04) Gary L. Lauer an additional 1,000,000 shares of [ ] [ ] [ ]
(05) Howard L. Morgan and (06) Mark Zimmer Common Stock thereto
FOR WITHHELD
3 To ratify the appointment of [ ] [ ] [ ]
[ ] [ ] PricewaterhouseCoopers LLP as
independent accountants for
MetaCreations for the 1999 fiscal year
MARK HERE
[ ]_________________________________ FOR ADDRESS [ ] 4 To vote or otherwise represent the [ ] [ ] [ ]
For all nominees except as noted above CHANGE AND shares on any and all other business
NOTE BELOW 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 23, 1999.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING
THE ENCLOSED ENVELOPE.
NOTE: Please sign 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:_______________
</TABLE>
