<PAGE> 1
VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 25, 1997
To the Stockholders of Verity, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Verity,
Inc. (the "Company") will be held on Thursday, September 25, 1997, at 11:00 a.m.
at the Sheraton Four Points Hotel, 1100 N. Mathilda Avenue, Sunnyvale,
California, for the following purposes:
1. To elect one (1) member of the Board of Directors to hold office until
the 2000 Annual Meeting of Stockholders and until his successor is
elected and qualified;
2. To consider and vote upon a proposal to amend the 1995 Employee Stock
Purchase Plan of the Company to increase the number of shares of Common
Stock of the Company authorized for issuance thereunder from 500,000
shares to 1,300,000 shares;
3. To vote upon a proposal to ratify the appointment of Coopers & Lybrand
LLP as the Company's independent public accountants for the year ending
May 31, 1998; and
4. To transact such other business as may properly come before the meeting.
Stockholders of record at the close of business on July 31, 1997 are
entitled to notice of, and to vote at, this meeting and any adjournments
thereof. For ten days prior to the meeting, a complete list of the stockholders
entitled to vote at the meeting will be available for examination by any
stockholder for any purpose relating to the meeting during ordinary business
hours at the principal office of Verity, Inc.
By Order of the Board of Directors
/s/ Timothy J. Moore
--------------------------
Timothy J. Moore,
Secretary
Sunnyvale, California
August 27, 1997
STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
AND RETURN IT IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. PROXIES ARE REVOCABLE,
AND ANY STOCKHOLDER MAY WITHDRAW HIS OR HER PROXY PRIOR TO THE TIME IT IS VOTED,
OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE> 2
VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
------------------------
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
AUGUST 27, 1997
The accompanying proxy is solicited by the Board of Directors of Verity,
Inc., a Delaware corporation (the "Company"), for use at the 1997 Annual Meeting
of Stockholders to be held September 25, 1997, or any adjournment thereof, for
the purposes set forth in the accompanying Notice of Annual Meeting. The date of
this Proxy Statement is August 27, 1997, the approximate date on which this
Proxy Statement and the accompanying form of proxy were first sent or given to
stockholders.
GENERAL INFORMATION
Annual Report. An annual report for the year ended May 31, 1997, is
enclosed with this Proxy Statement.
Voting Securities. Only stockholders of record as of the close of business
on July 31, 1997 will be entitled to vote at the meeting and any adjournment
thereof. As of that date, there were 11,039,291 shares of Common Stock of the
Company, par value $.001 per share, issued and outstanding. Stockholders may
vote in person or by proxy. Each holder of shares of Common Stock is entitled to
one vote for each share of stock held on the proposals presented in this Proxy
Statement. The Company's bylaws provide that a majority of all of the shares of
the stock entitled to vote, whether present in person or represented by proxy,
shall constitute a quorum for the transaction of business at the meeting.
Solicitation of Proxies. The cost of soliciting proxies will be borne by
the Company. In addition to soliciting stockholders by mail through its regular
employees, the Company may request banks and brokers, and other custodians,
nominees and fiduciaries, to solicit their customers who have stock of the
Company registered in the names of such persons and will reimburse them for
their reasonable, out-of-pocket costs. The Company may use the services of its
officers, directors and others to solicit proxies, personally or by telephone,
without additional compensation.
Voting of Proxies. All valid proxies received prior to the meeting will be
voted. All shares represented by a proxy will be voted, and where a stockholder
specifies by means of the proxy a choice with respect to any matter to be acted
upon, the shares will be voted in accordance with the specification so made. If
no choice is indicated on the proxy, the shares will be voted in favor of the
proposal. A stockholder giving a proxy has the power to revoke his or her proxy,
at any time prior to the time it is voted, by delivery to the Secretary of the
Company of a written instrument revoking the proxy or a duly executed proxy with
a later date, or by attending the meeting and voting in person.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of July 31, 1997,
with respect to the beneficial ownership of the Company's Common Stock by (i)
each director of the Company, (ii) the Chief Executive Officer during the year
ended May 31, 1997, the four other most highly compensated executive officers of
the Company whose salary and bonus for the year ended May 31, 1997 exceeded
$100,000 and two former executive officers whose salary and bonus for the year
ended May 31, 1997 exceeded $100,000 but who were not executive officers at May
31, 1997 (the "Named Executive Officers"), (iii) all directors and executive
<PAGE> 3
officers of the Company as a group, and (iv) each person known by the Company to
own more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
---------------------
BENEFICIAL OWNERS(1) NUMBER PERCENT
--------------------------------------------------------- --------- -------
<S> <C> <C>
5% STOCKHOLDERS
Amerindo Investment Advisors and Affiliates(2)........... 1,625,974 14.7%
One Embarcadero Center, Suite 2300
San Francisco, California 94111
The Capital Group Companies, Inc.(3)..................... 748,800 6.8%
333 South Hope Street
Los Angeles, California 90071
OFFICERS AND DIRECTORS
Philippe F. Courtot(4)................................... 847,264 7.7%
Donald C. McCauley(5).................................... 137,067 1.2%
Timothy J. Moore(6)...................................... 80,310 *
Richard Lo(7)............................................ 82,025 *
Hugh S. Njemanze(8)...................................... 123,542 1.1%
Anthony J. Bettencourt(9)................................ 0 *
Dennis McEvoy(10)........................................ 73,334 *
Steven M. Krausz (11).................................... 20,500 *
Stephen A. MacDonald(12)................................. 29,710 *
Charles P. Waite, Jr.(13)................................ 186,763 1.7%
Dominique Trempont(14)................................... 25,300 *
All officers and directors as a group (13 persons)(15)... 1,798,980 15.3%
</TABLE>
- ---------------
* Represents less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants held by that person
that are currently exercisable, or become exercisable within 60 days
following July 31, 1997, are deemed outstanding. However, such shares are
not deemed outstanding for purposes of computing the percentage ownership
of any other person. All options held by the individuals named in the table
are immediately exercisable, subject to a right of repurchase in favor of
the Company for all exercised, unvested shares. Except as indicated in the
footnotes to the table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws. Unless
otherwise indicated, the individuals in the table may be contacted c/o
Verity, Inc., 894 Ross Drive, Sunnyvale, CA 94089.
(2) As reported to the Company by the Stockholder.
(3) As reported to the Company by the Stockholder.
(4) Includes 9,668 shares issuable upon exercise of options. Includes 40,000
shares held by Mai Courtot, a family member of Mr. Courtot; includes
783,096 shares held subject to the Company's security interest securing
payments under a note. Mr. Courtot served as President and Chief Executive
Officer of the Company until July 31, 1997; he is no longer an employee of
the Company. Mr. Courtot resigned as a director on August 21, 1997.
(5) Includes 59,280 shares issuable upon exercise of options.
(6) Includes 76,000 shares issuable upon exercise of options.
(7) Includes 77,880 shares issuable upon exercise of options.
(8) Includes 119,080 shares issuable upon exercise of options.
2
<PAGE> 4
(9) Mr. Bettencourt was Vice President, Worldwide Sales and Marketing of the
Company until December 1996; he is no longer an employee of the Company.
(10) Represents 73,334 shares issuable upon exercise of options. Mr. McEvoy was
Executive Vice President of the Company until February 1997; he is no
longer an employee of the Company.
(11) Includes 20,000 shares issuable upon exercise of options.
(12) Includes 27,000 shares issuable upon exercise of options. In addition,
includes 2,210 shares held by Mr. MacDonald as the trustee of a family
trust. As trustee, Mr. MacDonald may be deemed to be the beneficial owner
of such shares, but Mr. MacDonald disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(13) Includes 20,000 shares issuable upon exercise of options. In addition,
includes 66,666 shares held by Olympic Venture Partners III, L.P., 100,000
shares held by Olympic Venture Partners II and 97 shares held by OVP III
Entrepreneurs Fund. Mr. Waite, as general partner of Olympic Venture
Partners, may be deemed to beneficially own such shares, but Mr. Waite
disclaims beneficial ownership of all such shares except to the extent of
his pecuniary interest therein.
(14) Includes 20,000 shares issuable upon exercise of options. Mr. Trempont
resigned as a director on August 1, 1997.
(15) Includes 691,428 shares issuable upon exercise of options.
3
<PAGE> 5
PROPOSAL ONE
ELECTION OF DIRECTORS
The Company has a classified Board of Directors divided into three classes.
The Class I, Class II and Class III directors are elected to serve until the
Annual Meetings of Stockholders to be held in 1999, 1997 and 1998, respectively,
and until their respective successors are duly elected and qualified. Each class
of directors consists of one or two directors. The Class I directors are Steven
M. Krausz and Charles P. Waite, Jr.; the Class II director is Stephen A.
MacDonald; and the Class III director position is currently vacant. At each
Annual Meeting of Stockholders, directors are elected for a full term of three
years to succeed those directors whose terms expire on the Annual Meeting dates.
Dominique Trempont resigned as a Class II director of the Company on August 1,
1997, and the Board subsequently reduced Class II to one director. Philippe
Courtot resigned as a Class III director of the Company on August 21, 1997.
Management's nominee for election at the Annual Meeting of Stockholders to
Class II of the Board of Directors is Stephen A. MacDonald. If elected, the
nominee will serve as director until the Company's Annual Meeting of
Stockholders in 2000, and until his successor is elected and qualified. If the
nominee declines to serve or becomes unavailable for any reason, or if a vacancy
occurs before the election (although Management knows of no reason to anticipate
that this will occur), the proxies may be voted for such substitute nominee as
Management may designate.
If a quorum is present and voting, the nominee for Class II director
receiving the highest number of votes will be elected as Class II director.
Abstentions and shares held by brokers that are present, but not voted because
the brokers were prohibited from exercising discretionary authority, i.e.,
"broker non-votes," will be counted as present for the purposes of determining
if a quorum is present.
The tables below sets forth for the current directors, including the Class
II nominee to be elected at this meeting, certain information with respect to
age and background.
<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
- -------------------------------------------------- ------------------------- ---- --------------
<S> <C> <C> <C>
Class I directors to be elected at the 1999 Annual Meeting of Stockholders:
Steven M. Krausz................................ Director 42 1988
Charles P. Waite, Jr............................ Director 42 1988
Class II director to be elected at the 1997 Annual Meeting of Stockholders:
Stephen A. MacDonald............................ Director 51 1988
</TABLE>
STEVEN M. KRAUSZ has been a General Partner of U.S. Venture Partners III,
U.S.V. Entrepreneur Partners and BHMS Partners III since 1985. Mr. Krausz is
also a director of Photon Dynamics, Inc.
CHARLES P. WAITE, JR. has been a General Partner of Olympic Venture
Partners II and a Vice President of Northwest Venture Services Corp. since 1987
and a General Partner of Olympic Venture Partners III since 1994. Mr. Waite is
also a director of CellPro Incorporated and Cardima, Inc.
STEPHEN A. MACDONALD has served as President and Chief Executive Officer of
Active Software since May 1996. From 1983 to 1996, Mr. MacDonald was employed by
Adobe Systems Incorporated, where he served most recently as Senior Vice
President and Chief Operating Officer. Mr. MacDonald is a director of Network
Computing Devices, Inc.
During fiscal 1997, the Board held thirteen meetings. No director serving
on the Board in fiscal 1997 attended fewer than 75% of such meetings of the
Board and the Committees on which he serves.
The Company has an Audit Committee and a Compensation Committee.
The Audit Committee's function is to review with the Company's independent
accountants and management the annual financial statements and independent
accountants' opinion, review the scope and results of the examination of the
Company's financial statements by the independent accountants, approve all
professional services and related fees performed by the independent accountants,
recommend the retention of the independent accountants to the Board, subject to
ratification by the stockholders, and periodically review the Company's
accounting policies and internal accounting and financial controls. The members
of the Audit Committee are Messrs. Krausz and Waite. During fiscal 1997, the
Audit Committee held one meeting.
4
<PAGE> 6
The Compensation Committee's function is to review and establish salary
levels for executive officers, including the Chief Executive Officer, and
certain other management employees and to grant stock options. The members of
the Compensation Committee are Messrs. Krausz and Waite. During fiscal 1997, the
Compensation Committee held one meeting. For additional information concerning
the Compensation Committee, see "REPORT OF THE COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION" and "REPORT OF THE COMPENSATION COMMITTEE ON REPRICING
OF STOCK OPTIONS."
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following summary compensation table sets forth the compensation paid
by the Company during the fiscal year ended May 31, 1997 to the Named Executive
Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
------------------------------ SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- ---------------------------------- ------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Philippe F. Courtot............... 1997 $225,000 $ 0 -- $ 1,152
Former President and 1996 $225,000 $ 0 22,100 $ 1,152
Chief Executive Officer(2) 1995 $221,250 $ 0 -- $ 1,152
Donald C. McCauley................ 1997 $142,050 $ 0 133,280(5) $ 528
Vice President and 1996 $139,154 $ 0 50,100(6) $ 408
Chief Financial Officer(3) 1995 $145,779(4) -- 60,000 --
Timothy J. Moore.................. 1997 $150,000 $ 100,00(7) 171,000(8) $ 324
Vice President, Strategic 1996 $ 46,057 $ 25,000 75,000(9) $ 88
Investments, General Counsel 1995 -- -- -- --
and Secretary
Richard Lo........................ 1997 $ 92,500 $ 35,103(10) 154,880(11) $ 190
Vice President, U.S. Sales 1996 $ 47,992 $ 54,405(10) 9,100(12) $ 78
1995 -- -- -- --
Hugh S. Njemanze.................. 1997 $133,333 $ 0 88,080(13) $ 324
Vice President, Desktop and 1996 $120,833 $ 0 20,100(14) $ 275
Enterprise Products and Chief 1995 $100,000 $ 0 38,000 $ 213
Technology Officer
Former Officers:
Anthony J. Bettencourt(15)...... 1997 $ 60,633 $ 92,015(10) 50,000(16) $ 124
1996 $ 98,538 $120,363(10) 100,100(17) $ 204
1995 -- -- -- --
Dennis McEvoy(18)............... 1997 $ 97,236 $ 50,000 160,000(19) $64,078(20)
1996 -- -- -- --
1995 -- -- -- --
</TABLE>
- ---------------
(1) Represents premiums paid on behalf of the Named Executive Officers for life
insurance coverage in excess of a base amount of $50,000 in coverage.
(2) Mr. Courtot served as President and Chief Executive Officer of the Company
until July 31, 1997; he resigned as a director of the Company on August 21,
1997. Gary J. Sbona replaced Mr. Courtot as President and Chief Executive
Officer. See "Certain Relationships and Related Transactions" below.
5
<PAGE> 7
(3) Mr. McCauley served as Chief Financial Officer of the Company on a
consulting basis until May 1995, at which time he joined the Company as an
employee and was elected a Vice President.
(4) Includes $141,625 paid to Mr. McCauley for his services as a consultant to
the Company prior to his engagement as a full-time employee of the Company.
(5) Includes options to purchase an aggregate of 59,280 shares granted on March
17, 1997 replacing an option to purchase 24,000 shares granted on October
30, 1996, an option to purchase 100 shares granted on October 5, 1995 and
an option to purchase 50,000 shares granted on July 12, 1996. Also includes
the option to purchase 50,000 shares granted on July 12, 1996 replacing an
option to purchase 50,000 shares granted in February 1996. Options to
purchase 124,100 shares were canceled in connection with the repricings.
See "EXECUTIVE COMPENSATION AND OTHER MATTERS -- Ten-Year Option Repricing"
and "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
REPRICING OF OPTIONS."
(6) Represents an option to purchase 100 shares that was repriced and thus
eliminated on March 17, 1997 and an option to purchase 50,000 shares that
was repriced and thus eliminated on July 12, 1996. See footnote 5 above.
(7) Mr. Moore joined the Company in February 1996; Mr. Moore's bonus was paid
pursuant to his offer letter.
(8) Includes options to purchase an aggregate of 76,000 shares granted on March
17, 1997 replacing an option to purchase 20,000 shares granted on September
16, 1996. Also includes an option to purchase 75,000 shares granted on July
12, 1996 replacing an option to purchase 75,000 shares granted on February
6, 1996. Options to purchase 170,000 shares were canceled in connection
with the repricing. See "EXECUTIVE COMPENSATION AND OTHER
MATTERS -- Ten-Year Option Repricing" and "REPORT OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS."
(9) Represents an option to purchase 75,000 shares that was repriced and thus
eliminated on July 12, 1996. See footnote 8 above.
(10) These amounts represent sales commissions earned under a sales commission
plan.
(11) Includes options to purchase an aggregate of 68,880 shares granted on March
17, 1997 replacing an option to purchase 11,000 shares granted on September
16, 1996, an option to purchase 75,000 shares granted on November 19, 1996,
and an option to purchase 100 shares granted in October 1995. Options to
purchase 86,100 shares were canceled in connection with the repricing. See
"EXECUTIVE COMPENSATION AND OTHER MATTERS -- Ten-Year Option Repricing" and
"REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
REPRICING OF OPTIONS."
(12) Includes an option to purchase 100 shares that was repriced and thus
eliminated on March 17, 1997. See footnote 11 above.
(13) Includes options to purchase an aggregate of 28,080 shares granted on March
17, 1997 replacing an option to purchase 35,000 shares granted on July 12,
1996 and an option to purchase 100 shares granted in October 1995. Options
to purchase 35,100 shares were canceled in connection with the repricing.
See "EXECUTIVE COMPENSATION AND OTHER MATTERS -- Ten-Year Option Repricing"
and "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
REPRICING OF OPTIONS."
(14) Includes an option to purchase 100 shares that was repriced and thus
eliminated on March 17, 1997. See footnote 13 above.
(15) Mr. Bettencourt was Vice President, Worldwide Sales and Marketing, of the
Company until December 1996; he is no longer an employee of the Company.
(16) Represents an option to purchase an aggregate of 50,000 shares granted on
March 17, 1997 replacing an option to purchase 50,000 shares granted in
February 1996. An option to purchase 50,000 shares was canceled in
connection with the repricing. See "EXECUTIVE COMPENSATION AND OTHER
6
<PAGE> 8
MATTERS -- Ten-Year Option Repricing" and "REPORT OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS." Options to
purchase 42,709 shares were canceled on December 24, 1996 and options to
purchase 7,291 shares were canceled on January 24, 1997, both in connection
with Mr. Bettencourt's departure from the Company.
(17) Includes an option to purchase 50,000 shares that was repriced and thus
eliminated on July 12, 1996. See footnote 16 above.
(18) Mr. McEvoy was Executive Vice President of the Company until February 1997;
he is no longer an employee of the Company.
(19) Options to purchase 86,666 shares were canceled on February 14, 1997 in
connection with the termination of Mr. McEvoy's employment with the
Company.
(20) Includes $63,760 paid to Mr. McEvoy for his services as a consultant to the
Company after termination of his employment with the Company.
The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended May 31,
1997 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(2)
OPTIONS FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED(#)(1) 1997 ($/SH) DATE 5%($) 10%($)
- -------------------------- ------------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Philippe F. Courtot....... 0 -- -- -- -- --
Donald C. McCauley........ 50,000(3)(4) 1.1% $19.50 7/11/06 $ 613,172 $1,553,899
24,000 * $11.50 10/30/06 $ 173,575 $ 439,873
80(5)(6) * $ 7.75 3/17/05 $ 296 $ 709
40,000(5)(7) * $ 7.75 3/17/05 $ 148,011 $ 354,513
19,200(5)(8) * $ 7.75 3/17/05 $ 71,045 $ 170,166
Timothy J. Moore.......... 75,000(3)(9) 1.6 $19.50 7/11/06 $ 919,758 $2,330,848
20,000 * $11.00 9/16/04 $ 105,040 251,590
60,000(5)(10) 1.3 $ 7.75 3/17/05 $ 222,017 $ 531,769
16,000(5)(11) * $ 7.75 3/17/05 $ 59,204 $ 141,805
Richard Lo................ 11,000 * $11.00 9/16/04 $ 57,772 $ 138,374
75,000 1.6 $12.88 11/19/04 $ 461,043 $1,104,278
80(5)(12) * $ 7.75 3/17/05 $ 296 $ 709
8,800(5)(13) * $ 7.75 3/17/05 $ 32,562 $ 77,993
60,000(5)(14) 1.3 $ 7.75 3/17/05 $ 222,017 $ 531,769
Hugh S. Njemanze.......... 35,000(3) * $19.50 7/11/06 $ 429,221 $1,087,729
25,000 * $10.38 2/20/05 $ 123,840 $ 296,618
80(5)(15) * $ 7.75 3/17/05 $ 296 $ 709
28,000(5)(16) * $ 7.75 3/17/05 $ 103,608 $ 248,159
Former Officers:
Anthony J. Bettencourt.... 50,000(3)(17) 1.1 $19.50 7/11/06 $ 613,172 $1,553,899
Dennis McEvoy............. 160,000 3.4 $11.00 9/16/06 $1,106,855 $2,804,987
</TABLE>
- ---------------
* Represents less than one percent.
(1) All options granted in fiscal 1997 were granted under the Company's 1995
Stock Option Plan (the "Option Plan"). Under the Option Plan, the Board of
Directors retains discretion to modify the terms, including the price, of
outstanding shares. Options granted under that plan are immediately
exercisable, subject to a right of repurchase in favor of the Company for
all exercised, unvested shares. Generally, 12.5% of the shares subject to
options granted to new employees become vested six months after the date of
commencement of employment and 2.083% of the shares subject to options vest
upon
7
<PAGE> 9
completion of each succeeding full month of continuous employment with the
Company. Shares subject to options granted to existing employees generally
vest at the rate of 2.083% per month for 48 months following the date of
grant. Generally, options have a term of eight (8) years. All options were
granted at fair market value as determined by the Board of Directors of the
Company on the date of grant. See "-- Employment Agreements and Termination
and Change of Control Arrangements".
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common stock price. This table does
not take into account any appreciation in the price of the Common Stock to
date.
(3) In July 1996, as a result of a broad decline in the fair market value of
the Company's Common Stock, the Compensation Committee determined that it
was in the best interests of the Company to offer to all current employees
who were option holders, including executive officers whom the Committee
considered separately, the opportunity to exchange outstanding options with
an exercise price above the then current market price for options with an
exercise price equal to the then current fair market value. For details
concerning the repricings of options, see "REPORT OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS" and "EXECUTIVE
COMPENSATION AND OTHER MATTERS -- Ten-Year Options Repricing" table.
(4) Reflects options that were repriced in July 1996, replacing options granted
in February 1996.
(5) In March 1997, as a result of a broad decline in the fair market value of
the Company's common stock, the Compensation Committee determined that it
was in the best interests of the Company to offer to all current employees
who were option holders, including executive officers whom the Committee
considered separately, the opportunity to exchange outstanding options with
an exercise price above the then current market price for options with an
exercise price equal to the then current fair market value. For details
concerning the repricings of options, see "REPORT OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS" and "EXECUTIVE
COMPENSATION AND OTHER MATTERS -- Ten-Year Options Repricing" table.
(6) Reflects options that were repriced in March 1997, replacing options
granted in October 1995.
(7) Reflects options that were repriced in March 1997, replacing options
granted in July 1996.
(8) Reflects options that were repriced in March 1997, replacing options
granted in October 1996.
(9) Reflects options that were repriced in July 1996, replacing options granted
in February 1996.
(10) Reflects options that were repriced in March 1997, replacing options
granted in July 1996.
(11) Reflects options that were repriced in March 1997, replacing options
granted in September 1996.
(12) Reflects options that were repriced in March 1997, replacing options
granted in October 1995.
(13) Reflects options that were repriced in March 1997, replacing options
granted in September 1996.
(14) Reflects options that were repriced in March 1997, replacing options
granted in November 1996.
(15) Reflects options that were repriced in March 1997, replacing options
granted in October 1995.
(16) Reflects options that were repriced in March 1997, replacing options
granted in July 1996.
(17) Reflects options that were repriced in July 1996, replacing options granted
in February 1996.
8
<PAGE> 10
OPTION EXERCISES AND FISCAL 1996 YEAR-END VALUES
The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock in the fiscal year ended May
31, 1997, and unexercised options held as of May 31, 1997 by the Named Executive
Officers:
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-
SHARES UNEXERCISED MONEY OPTIONS AT FY-
ACQUIRED OPTIONS AT FY-END(2) END($)(3)
ON VALUE -------------------- -------------------------
EXERCISE(#) REALIZED($)(1) VESTED UNVESTED VESTED(4) UNVESTED(4)
----------- -------------- ------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Philippe F. Courtot....... -- -- 8,747 13,353 -- --
Donald C. McCauley(5)..... -- -- 15,629 43,651 -- --
Timothy J. Moore.......... -- -- 18,916 57,084 -- --
Richard Lo................ -- -- 12,934 64,947 $ 5,905 $ 7,595
Hugh S. Njemanze.......... -- -- 50,735 68,345 $227,699 $116,651
Former Officers:
Anthony J. Bettencourt.... 18,779 $126,200 -- -- -- --
Dennis McEvoy............. -- -- 73,334 -- -- --
</TABLE>
- ---------------
(1) "Value Realized" represents the fair market value of the underlying
securities on the exercise date minus the aggregate exercise price of such
options.
(2) These options are immediately exercisable in full at the date of grant, but
shares purchased on exercise of unvested options are subject to a repurchase
right in favor of the Company which lapses ratably over four years and
entitles the Company to repurchase unvested shares at the original issuance
price.
(3) Calculated on the basis of the fair market value of the underlying
securities as of May 30, 1997 of $6.50 per share, the last trading day of
fiscal 1997, as reported by the Nasdaq National Market, minus the aggregate
exercise price.
(4) Does not include options that had an exercise price greater than the per
share closing price of $6.50 as reported by the Nasdaq National Market, on
May 30, 1997.
(5) All of the shares subject to Mr. McCauley's stock options became fully
vested upon the change in management occasioned by the departure of Mr.
Courtot as Chief Executive Officer in July 1997. See "Employment Agreements
and Change of Control Arrangements" below.
9
<PAGE> 11
The following table provides the specified information concerning all
repricings of options to purchase the Company's Common Stock held by any
executive officer of the Company since October 6, 1995, the date of the
Company's initial public offering:
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF ORIGINAL
SECURITIES MARKET PRICE EXERCISE OPTION TERM
UNDERLYING OF STOCK AT PRICE REMAINING AT DATE
OPTIONS TIME OF AT TIME OF NEW OF REPRICING OR
REPRICED OR REPRICING OR REPRICING OR EXERCISE AMENDMENT
NAME AND POSITION DATE AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($) (MONTHS)
- ---------------------- ------- ------------ ------------ ------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Jurgen Annevelink..... 3/17/97(1) 52,000 $ 7.75 $ 15.000 $ 7.75 93
Vice President,
Internet and Online
Products
Richard Lo............ 3/17/97(1) 80 $ 7.75 $ 12.000 $ 7.75 102
Vice President, U.S.
Sales 8,800 $ 7.75 $ 11.000 $ 7.75 90
60,000 $ 7.75 $ 12.875 $ 7.75 92
Donald C. McCauley.... 7/11/96(2) 50,000 $19.50 $ 34.750 $ 19.50 114
Vice President and 3/17/97(1) 80 $ 7.75 $ 12.000 $ 7.75 102
Chief Financial
Officer 40,000 $ 7.75 $ 19.500 $ 7.75 111
19,200 $ 7.75 $ 11.500 $ 7.75 91
Timothy J. Moore...... 7/11/96(2) 75,000 $19.50 $ 34.750 $ 19.50 114
Vice President,
Strategic 3/17/97(1) 60,000 $ 7.75 $ 19.500 $ 7.75 111
Investments, 16,000 $ 7.75 $ 11.000 $ 7.75 90
General Counsel and
Secretary
Hugh S. Njemanze...... 3/17/97(1) 80 $ 7.75 $ 12.000 $ 7.75 102
Vice President,
Desktop 28,000 $ 7.75 $ 19.500 $ 7.75 111
and Enterprise
Products and Chief
Technology Officer
Gilles Samoun......... 7/11/96(2) 10,000 $19.50 $ 31.000 $ 19.50 116
Vice President,
European 3/17/97(1) 80 $ 7.75 $ 12.000 $ 7.75 102
Operations 8,000 $ 7.75 $ 19.500 $ 7.75 111
4,000 $ 7.75 $ 11.500 $ 7.75 91
16,000 $ 7.75 $ 10.375 $ 7.75 95
David L. Weld, Jr..... 3/17/97(1) 12,240 $ 7.75 $ 15.375 $ 7.75 94
President of Verity
Applications Business
Unit.
Former Executive
Officers(3):
Anthony J.
Bettencourt(4)...... 7/11/96(2) 50,000 $19.50 $ 34.750 $ 19.50 114
Philip C. Nelson(5)... 3/17/97(1) 80 $ 7.75 $ 12.000 $ 7.75 102
20,000 $ 7.75 $ 19.500 $ 7.75 111
</TABLE>
- ---------------
(1) Options that were repriced in March 1997 continue to vest in accordance with
their original vesting schedule. See also "REPORT OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS."
(2) Options that were repriced in July 1996 were subject to a new vesting
schedule commencing three months after the original vesting commencement
date, but commencing no later than July 19, 1997. Such options held by
persons still employed by the Company were further repriced in March 1997.
See also "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
REPRICING OF OPTIONS."
(3) None of the options granted to these former executive officers of the
Company were exercised by such former officers.
10
<PAGE> 12
(4) Anthony J. Bettencourt was Vice President, Worldwide Sales and Marketing, of
the Company until December 1996; he is no longer an employee of the Company.
(5) Philip C. Nelson was Chief Technology Officer of the Company until July
1997; he is no longer an employee of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Steven M. Krausz and Charles P. Waite, Jr. served as members of the Board
of Directors' Compensation Committee (the "Committee") during the fiscal year
ended May 31, 1997.
The Company has entered into indemnification agreements with its directors
and officers. Such agreements require the Company to indemnify such individuals
to the fullest extent permitted by law.
See "-- Certain Relationships and Related Transactions" and "Employment
Agreements and Termination and Change of Control Arrangements."
EMPLOYMENT AGREEMENTS AND TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
The Option Plan provides that, in the event of (i) a sale or exchange by
the stockholders of all or substantially all of the Company's voting stock or
certain mergers or consolidations to which the Company is a party in which the
stockholders of the Company do not retain beneficial ownership of at least a
majority of the voting stock of the Company or its successor, (ii) the sale,
exchange or transfer of all or substantially all of the assets of the Company
other than to one or more subsidiary corporations, or (iii) liquidation or
dissolution of the Company, the Board of Directors of the Company may provide
for the acquiring or successor corporation to assume or substitute new options
for the options outstanding under the Option Plan. To the extent that the
options outstanding under the Option Plan are not assumed, substituted for, or
exercised prior to such event, they will terminate.
In July 1993, the Company entered into an employment agreement with
Philippe F. Courtot, the Company's President and Chief Executive Officer. Under
the agreement, Mr. Courtot received an annual base salary of $225,000, subject
to annual review by the Board of Directors and adjustment based upon various
factors, including Mr. Courtot's performance and the Company's profitability.
Pursuant to an offer letter between the Company and Donald C. McCauley, the
Company's Vice President and Chief Financial Officer, Mr. McCauley's stock
options became fully vested upon the change in management occasioned by the
departure of Mr. Courtot as Chief Executive Officer.
Under an agreement between the Company and Richard Lo, Mr. Lo. has an
option to receive severance benefits equal to six months' salary, plus vesting
of outstanding stock options and the continued exercisability of such stock
options for the term thereof, if Mr. Lo elects to terminate his employment with
the Company during September 1997.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as
members of the Board of Directors, although they are reimbursed for their
expenses in attending Board and committee meetings. In addition, all directors
who have served on the Board for more than six months and are not members of
management will receive stock options to purchase 5,000 shares of Common Stock
pursuant to the 1995 Outside Directors Stock Option Plan upon the date of each
annual stockholders' meeting. On September 16, 1996, the Board of Directors
granted each non-employee director of the Company an additional stock option for
15,000 shares of Common Stock on the same terms and conditions as options
granted under the Outside Directors Stock Option Plan, at an exercise price of
$11.50, which was the closing sales price on the date of grant.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 31, 1997, Gary J. Sbona replaced Philippe F. Courtot as the
Company's President and Chief Executive Officer, and the Company entered into an
agreement with Regent Pacific Management Corporation
11
<PAGE> 13
("Regent Pacific"), a management firm of which Mr. Sbona is the Chief Executive
Officer. Pursuant to the agreement, Regent Pacific will provide management
services to the Company, including the services of Mr. Sbona as Chief Executive
Officer and President and at least three other Regent Pacific personnel as part
of the management team. The agreement has a one year term and may be canceled by
the Company after expiration of the initial 26 week period, with a minimum
compensation to Regent Pacific of $1,300,000 for that initial period. The
agreement requires that the Company indemnify Regent Pacific and Mr. Sbona for
certain liabilities arising out of the performance of services under the
agreement. Mr. Sbona does not receive compensation directly from the Company for
his services as an officer of the Company, but is instead compensated directly
by Regent Pacific.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders were complied with, except that one
annual statement of changes in beneficial ownership for Anthony J. Bettencourt,
a former officer of the Company, reporting one exempt transaction was not timely
filed.
CHANGES TO BENEFIT PLANS
On August 20, 1997, the Board of Directors amended the 1995 Employee Stock
Purchase Plan (the "Purchase Plan"), subject to stockholder approval, to
increase the shares reserved for issuance under the Purchase Plan. See "PROPOSAL
TWO -- APPROVAL OF AMENDMENT TO VERITY, INC. 1995 EMPLOYEE STOCK PURCHASE PLAN."
Since the date of this amendment, no shares have been purchased under the
Purchase Plan. Nonemployee directors are not eligible to participate in the
Purchase Plan. No employee purchased 5% or more of the cumulative shares
acquired under the Purchase Plan.
12
<PAGE> 14
The following table sets forth shares acquired under the Purchase Plan
during the fiscal year ended May 31, 1997, by (1) the Named Executive Officers;
(2) all current executive officers as a group; (3) all current directors who are
not executive officers as a group; and (4) all employees, including all officers
who are not executive officers, as a group. Purchases of stock under the
Purchase Plan are made at the discretion of the participants. Accordingly,
future purchases under the Purchase Plan are not yet determinable.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
VERITY, INC. 1995
STOCK PURCHASE
PLAN(1)
---------------------
PURCHASE
NAME AND PRICE NUMBER OF
PRINCIPAL POSITION PER SHARE SHARES
--------------------------------------------------------- --------- ---------
<S> <C> <C>
Philippe F. Courtot(2)................................... -- --
Former President and Chief Executive Officer
Donald C. McCauley....................................... $ 10.2000 1,127
Vice President and Chief Financial Officer $ 6.5875 2,240
Timothy J. Moore......................................... $ 10.5188 740
Vice President, Strategic Investments, $ 6.5875 2,002
General Counsel and Secretary
Richard Lo............................................... $ 10.2000 2,450
Vice President, U.S. Sales $ 6.5875 3,077
Hugh S. Njemanze......................................... $ 10.2000 1,225
Vice President, Desktop and Enterprise $ 6.5875 2,012
Products, and Chief Technology Officer
Anthony J. Bettencourt(3)................................ $ 10.2000 2,450
Dennis McEvoy(4)......................................... -- --
All Executive Officers as a Group........................ $ 10.2000 9,555
(11 persons) $ 6.5875 12,906
$ 10.5188 740
All Outside Directors as a Group......................... -- --
(4 persons)
All Non-Executive Officer Employees as a Group........... $ 6.5875 221,936
$ 10.5188
</TABLE>
- ---------------
(1) Only employees of the Company are eligible to participate in the Purchase
Plan.
(2) Mr. Courtot served as President and Chief Executive Officer until July 31,
1997; he is no longer an employee of the Company.
(3) Mr. Bettencourt was Vice President, Worldwide Sales and Marketing, of the
Company until December 1996; he is no longer an employee of the Company.
(4) Mr. McEvoy was Executive Vice President of the Company until February 1997;
he is no longer an employee of the Company.
13
<PAGE> 15
REPORT OF THE COMPENSATION COMMITTEE
ON REPRICING OF OPTIONS
On two separate occasions in fiscal 1997, the Compensation Committee
considered the options held by the Company's executive officers and employees
and the fact that a broad decline in the price of the Common Stock of the
Company had resulted in a substantial number of stock options granted pursuant
to the Option Plan having exercise prices well above the recent historical
trading prices for the Common Stock.
In July 1996, the Committee was advised by management that management
believed that key employee turnover was likely to increase in part because the
Company's total compensation package for long-term employees, which included
substantial options with exercise prices well above the current trading price,
was less attractive than compensation offered by other companies in the same
geographic location. This is because options granted to new hires at other
companies would likely be granted at current trading prices, providing more
opportunity for appreciation than the Company's options.
The Committee believed that the Company's success in the future would
depend in large part on its ability to retain a number of its highly skilled
technical, managerial and marketing personnel and the loss of key employees
could have significant adverse impact on the Company's business. The Committee
also believed that unless an adjustment was made in option prices, existing
employees holding options would perceive a substantial inequity in comparison to
new employees granted stock options with exercise prices set at the current,
lower fair market value of the Company's Common Stock and that employee morale
would suffer as a consequence. The Committee concluded that it was important and
cost-effective to provide equity incentives to employees and executive officers
of the Company to improve the Company's performance and the value of the Company
for its stockholders. The Committee considered granting new options selectively
to current key employees at fair market value, but recognized that the size of
the option grants required to offset the decline in market price would result in
significant additional dilution to stockholders. The Committee recognized that
an exchange of existing options with exercise prices higher than fair market
value for options at fair market value would provide additional incentives to
employees because of the increased potential for appreciation. The Committee
also recognized that the new options could require completion of an extension of
the options vesting schedule for up to three months, providing optionees
participating in the exchange with an added incentive to remain with the
Company. Considering these factors, the Committee determined that it was in the
best interests of the Company and its stockholders to restore the incentives for
employees and executive officers to remain as employees of the Company and to
exert their maximum efforts on behalf of the Company by granting replacement
stock options under the Option Plan for those options with exercise prices above
recent trading prices, with restarted vesting and exercise prices equal to
$19.50, the closing sale price of the Company's Common Stock preceding the
Committee's approval of the repricing. The replacement options are subject to
termination if the optionee fails to agree within a reasonable period to the
cancellation of the old options to be replaced.
Accordingly, in July 1996, the Committee approved an offer to all employees
of the Company, including executive officers whom the Committee considered
separately, to exchange outstanding options with exercise prices above the then
current trading price for options with an exercise price of $19.50 per share,
with the vesting schedule for such replacement options extended by up to three
months. The Committee approved new vesting for the replacement options as
follows: replacement options shall have a new vesting schedule commencing three
months after the original commencement date, but commencing no later than July
12, 1996. All replacement options will terminate no later than eight (8) years
from the date of grant. Accordingly, optionees who participated in the exchange
received a lower exercise price in exchange for forfeiting vesting under their
old options. The offer to exchange options was completed in August 1996; in
total, options for 795,660 shares with exercise prices ranging from $31.00 per
share to $38.00 per share have been exchanged for options for an equal number of
shares at an exercise price of $19.50 per share, the closing price of the
Company's Common Stock on July 12, 1996, the date of the Committee's approval of
the repricing.
During the first two quarters of fiscal 1997, a continuing decline in the
price of the Common Stock of the Company had again resulted in a substantial
number of stock options granted pursuant to the Option Plan, including
replacement options granted in connection with the repricing in July 1996,
having exercise prices
14
<PAGE> 16
well above the recent historical trading prices for the Common Stock. In March
1997, the Committee was again advised by management that management believed
that key employee turnover was likely to increase in part because the Company's
total compensation package for long-term employees, which included substantial
options with exercise prices well above the current trading price, was less
attractive than compensation offered by other companies in the same geographic
location.
The Committee again considered all of the factors it had considered in
connection with the repricing in July 1996. The Committee considered granting
new options selectively to current key employees at fair market value, but
recognized that the size of the option grants required to offset the decline in
market price would result in significant additional dilution to stockholders.
The Committee recognized that an exchange of existing options with exercise
prices higher than fair market value for options at fair market value would
provide additional incentives to employees because of the increased potential
for appreciation. The Committee also recognized that the continued reduction in
stock price eroded stockholder value and that it was important to balance the
goal of retention of key employees with the dilution to stockholders. Under
these circumstances, the Committee decided to condition the repricing on
optionees agreeing to receive options for 80% of the shares subject to the
options being repriced. The Committee determined to grant replacement stock
options under the Option Plan to employees holding options with exercise prices
above recent trading prices. The exercise price per share for the replacement
options was set equal to $7.75, the closing sale price of the Company's Common
Stock preceding the Committee's approval of the repricing. The replacement
options were subject to termination if the optionee failed to agree within a
reasonable period to the cancellation of the old options to be replaced.
Accordingly, in March 1997, the Committee approved an offer to all
employees of the Company, including executive officers whom the Committee
considered separately, to exchange outstanding options with exercise prices
above the then current trading price for options equal to eighty percent (80%)
of such outstanding options with an exercise price of $7.75 per share, with the
schedule and vesting for such replacement options to remain the same. All
replacement options will terminate no later than eight (8) years from the date
of grant. Accordingly, optionees who participated in the exchange received a
lower exercise price in exchange for forfeiting twenty percent (20%) of their
old options. The offer to exchange options was completed by March 31, 1997; in
total, options for 1,738,419 shares with exercise prices ranging from $10.375
per share to $19.50 per share were exchanged for options for an equal number of
shares at an exercise price of $7.75 per share, the closing price of the
Company's Common Stock on March 17, 1997, the date of the Committee's approval
of the repricing.
COMPENSATION COMMITTEE
Steven M. Krausz
Charles P. Waite, Jr.
15
<PAGE> 17
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is comprised of two
non-employee directors of the Board of Directors, Messrs. Krausz and Waite. The
Committee is responsible for setting and administering policies governing
compensation of executive officers. For all executive officers, the Committee
reviews the performance and compensation levels for executive officers, sets
salary and bonus levels and makes option grants under the Company's 1995 Stock
Option Plan.
COMPENSATION POLICIES GENERALLY
The goals of the Company's executive officer compensation policies are to
attract, retain and reward executive officers who contribute to the Company's
success, to align executive officer compensation with the Company's performance
and to motivate executive officers to achieve the Company's business objectives.
The Company uses salary, executive officer bonuses and stock options to achieve
these goals.
SALARY AND BONUSES. Salaries are set for each executive officer with
reference to a range of salaries for comparable positions among high technology
companies of similar size and location. Annual salary adjustments take into
account individual executive officers' achievements during the prior fiscal year
towards key Company-wide objectives set annually by the Board of Directors, in
consultation with the Chief Executive Officer, as well as the executive
officers' performance of their individual responsibilities.
Variable cash incentive compensation for fiscal 1997 was provided through
the Company's employee bonus plan for all executive officers except for the
Chief Executive Officer, the executive officers responsible for sales
operations, who were compensated through sales commission plans, and another
executive officer, whose bonus plan for fiscal 1997 was determined based upon
negotiations between the officer and the Company. In accordance with the
Committee's goal, fiscal 1997 variable cash incentive compensation for the bonus
plan participants was targeted for up to 20% of the officer's salary if
predetermined corporate revenue and net income objectives were achieved. The
corporate financial goals were not met in fiscal 1997 and, accordingly, no
bonuses were paid under the plan, although one executive officer received a
bonus pursuant to his offer letter.
In fiscal 1997, the Company also hired certain executive officers whose
cash and equity incentive compensation was determined based upon a combination
of the executive compensation policies of the Company described above and
negotiations between the individual executive officers and the Company.
STOCK OPTIONS. The Committee strongly believes that equity ownership by
executive officers provides incentives to build stockholder value and align the
interests of executive officers with the stockholders. Initial stock option
grants to executive officers are subject to four year vesting. The size of the
initial grant has been determined with reference to comparable stock option
compensation offered by similarly-sized high technology companies for similar
positions and the responsibilities and expected future contributions of the
executive officer, as well as recruitment considerations. In determining the
size of, or whether to grant, refresher grants, the Committee has considered
each executive officer's performance during the previous periods and expected
contributions during future periods, as well as the relative position and
responsibilities of each executive officer and previous option grants to such
executive officers. Generally, refresher option grants vest monthly over a four
year period from the date of grant. The Committee believes that refresher
options have provided strong incentives for executive officers to remain with
the Company.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION. The Company has considered
regulations of the Internal Revenue Service which restrict deductibility of
executive compensation paid to each of the five most highly compensated
executive officers at the end of any fiscal year to the extent such compensation
exceeds $1,000,000 for any of such officers in any year and does not qualify for
an exception under the statute or proposed regulations. The Committee concluded
in March 1996 that it would be advisable to establish certain restrictions on
the granting of options under the Option Plan to assist in the qualification of
compensation recognized in connection with the exercise of such options for an
exemption; these restrictions were approved at the Special Meeting of
Stockholders held on March 28, 1996. The Committee does not believe that other
16
<PAGE> 18
components of the Company's compensation will be likely to exceed $1,000,000 for
any executive officer in the foreseeable future and therefore concluded that no
further action with respect to qualifying such compensation for deductibility
was necessary at this time. In the future, the Committee will continue to
evaluate the advisability of qualifying its executive compensation for
deductibility of such compensation. The Committee's policy is to qualify its
executive compensation for deductibility under applicable tax laws as
practicable.
CHIEF EXECUTIVE OFFICER COMPENSATION
Philippe F. Courtot served as the Company's Chief Executive Officer from
August 1993 until July 1997. In July 1993, the Company entered into an
employment agreement with Mr. Courtot which set Mr. Courtot's cash compensation
at $225,000, subject to annual review by the Compensation Committee and
adjustment based on the executive officer compensation policies of the Company
described above. In fiscal 1997, Mr. Courtot's compensation was reviewed by the
Committee and no change was made in Mr. Courtot's compensation. Mr. Courtot did
not receive a bonus in fiscal 1997 in light of the Company's performance
relative to operating targets set by the Board of Directors. The Committee also
considered Mr. Courtot's option holdings, and in light of his current holdings,
determined that no further grants would be made in fiscal 1997. Mr. Courtot was
succeeded by Gary J. Sbona as President and Chief Executive Officer in July
1997. Mr. Sbona does not receive compensation directly from the Company for his
services as an officer of the Company, but is instead compensated directly by
Regent Pacific, pursuant to its management services agreement with the Company.
See " Employment Agreements and Termination and Change of Control Arrangements"
and "Certain Relationships and Related Transactions."
COMPENSATION COMMITTEE
Steven M. Krausz
Charles P. Waite, Jr.
17
<PAGE> 19
COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the cumulative
total return of the Nasdaq Stock Market Index (U.S. companies only) and the
Nasdaq Computer & Data Processing Stocks Index for the period commencing on
October 6, 1995, the first day of trading following the date of the Company's
initial public offering, and ending on May 30, 1997.
COMPARISON OF CUMULATIVE TOTAL RETURN
FROM OCTOBER 6, 1995 THROUGH MAY 30, 1997(1)
VERITY, INC. NASDAQ STOCK MARKET - U.S. INDEX,
NASDAQ COMPUTER & DATA PROCESSING STOCKS INDEX
<TABLE>
<CAPTION>
10/06/95 05/31/96 05/30/97
<S> <C> <C> <C>
Verity, Inc. $100.00 $212.20 $ 35.10
Nasdaq Stock Market - U.S. Index $100.00 $123.80 $139.50
Nasdaq Computer & Data Processing Stocks Index $100.00 $131.80 $157.00
</TABLE>
- ---------------
(1) Assumes that $100.00 was invested on October 6, 1995 in the Company's Common
Stock and each index. Stockholder returns over the indicated period should
not be considered indicative of future stockholder returns.
18
<PAGE> 20
PROPOSAL TWO
APPROVAL OF AMENDMENT TO
VERITY, INC. 1995 EMPLOYEE STOCK PURCHASE PLAN
At the Annual Meeting, the stockholders will be asked to approve an
amendment to the Company's 1995 Employee Stock Purchase Plan (the "Purchase
Plan") to increase by 800,000 the maximum number of shares of Common Stock that
may be issued under the plan. The purpose of the Purchase Plan is to provide
employees of the Company with an opportunity to acquire a proprietary interest
in the Company through the purchase of its Common Stock. As of May 31, 1997, an
aggregate of 323,542 shares of Common Stock had been issued under the Purchase
Plan and 176,458 shares remained available for future sales. To provide an
adequate reserve of shares to permit the Company to continue offering employees
a stock purchase opportunity, the Board of Directors has amended the Purchase
Plan, subject to stockholder approval.
SUMMARY OF THE PURCHASE PLAN
The following summary of the Purchase Plan, as amended, is qualified in its
entirety by the specific language of the Purchase Plan, a copy of which is
available to any stockholder upon request.
General. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Code. Each participant in the Purchase
Plan is granted at the beginning of each offering under the plan (an "Offering")
the right to purchase through accumulated payroll deductions up to a number of
shares of the Common Stock of the Company (a "Purchase Right") determined on the
first day of the Offering. The Purchase Right is automatically exercised on each
purchase date during the Offering unless the participant has withdrawn from
participation in the Purchase Plan prior to such date.
Shares Subject to Plan. Previously, the stockholders have authorized the
issuance of an aggregate of 500,000 shares pursuant to the Purchase Plan. The
Board of Directors has amended the Purchase Plan, subject to stockholder
approval, to increase by 800,000 the maximum number of authorized but unissued
or reacquired shares of Common Stock that may be issued under the plan.
Appropriate adjustments will be made to the shares subject to the Purchase Plan
and outstanding Purchase Rights in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification or similar
change in the Company's capital structure or in the event of any merger, sale of
assets or other reorganization of the Company. If any Purchase Right expires or
terminates, the shares subject to the unexercised portion of such Purchase Right
will again be available for issuance under the Purchase Plan.
Administration. The Purchase Plan is administered by the Board of Directors
or a duly appointed committee of the Board (hereinafter referred to as the
"Board"). Subject to the provisions of the Purchase Plan, the Board determines
the terms and conditions of Purchase Rights granted under the plan. The Board
interprets the Purchase Plan and Purchase Rights granted thereunder, and all
determinations of the Board are final and binding on all persons having an
interest in the Purchase Plan or any Purchase Rights. The Purchase Plan
provides, subject to certain limitations, for indemnification by the Company of
any director, officer or employee against all reasonable expenses, including
attorneys' fees, incurred in connection with any legal action arising from such
person's action or failure to act in administering the plan.
Eligibility. Any employee of the Company or of any present or future parent
or subsidiary corporation of the Company designated by the Board for inclusion
in the Purchase Plan is eligible to participate in an Offering under the plan so
long as the employee is customarily employed for more than 20 hours per week and
more than five months in any calendar year. However, no employee who owns or
holds options to purchase, or as a result of participation in the Purchase Plan
would own or hold options to purchase, five percent or more of the total
combined voting power or value of all classes of stock of the Company or of any
parent or subsidiary corporation of the Company is eligible to participate in
the Purchase Plan. As of July 31, 1997, approximately 310 employees, including
eight executive officers, were eligible to participate in the Purchase Plan.
Offerings. Offerings of Common Stock under the Purchase Plan commence on
one or more dates determined by the Board, generally on or about April 1 and
October 1 of each year (an "Offering Date"), and continue for such periods of
time as established by the Board (an "Offering Period"), provided that no
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Offering Period may exceed 27 months. Offering Periods commencing prior to
October 1, 1997 have generally been 24 months in duration. However, subject to
stockholder approval of this proposal, the Board intends to limit Offering
Periods commencing on or after October 1, 1997 to approximately 12 months in
duration. Each Offering Period is comprised of a number of six-month "Purchase
Periods" generally ending on or about the last days of March and September (a
"Purchase Date") of each year. An employee may not participate simultaneously in
more than one Offering.
Participation and Purchase of Shares. Participation in an Offering under
the Purchase Plan is limited to eligible employees who authorize payroll
deductions prior to the Offering Date. Payroll deductions may not exceed 20% (or
such other rate as the Board determines) of an employee's compensation on any
payday during the Offering Period. An employee who becomes a participant in the
Purchase Plan will automatically participate in each subsequent Offering Period
beginning immediately after the last day of the Offering Period in which he or
she is a participant until the employee withdraws from the Purchase Plan,
becomes ineligible to participate, or terminates employment.
Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to that number of shares (rounded to the nearest whole
share) determined by the lesser of (i) multiplying $2,083.33 by the number of
months (rounded to the nearest whole month) in the Offering Period and dividing
the product by the fair market value of a share of Common Stock on the Offering
Date or (ii) multiplying 208.33 shares by the number of months (rounded to the
nearest whole month) in the Offering Period. Upon withdrawal, the Company will
refund without interest the participant's accumulated payroll deductions not
previously applied to the purchase of shares. Once a participant withdraws from
an Offering, that participant may not again participate in the same Offering. If
the fair market value of a share of Common Stock on the Offering Date of the
current Offering in which employees are participating is greater than such fair
market value on a Purchase Date during the Offering, then, unless a participant
elects otherwise, each participant will be automatically withdrawn from the
current Offering after purchasing shares and enrolled in the new Offering
beginning immediately following such Purchase Date.
Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to the lesser of that number of whole shares determined by
dividing $50,000 by the fair market value of a share of Common Stock on the
Offering Date or 5,000 shares, provided that these dollar and share amounts will
be prorated if the duration of an Offering Period is varied by the Board. As a
further limitation, no participant may purchase in any event under the Purchase
Plan shares of the Company's Common Stock having a fair market value exceeding
$25,000 in any calendar year (measured by the fair market value of the Company's
Common Stock on the first day of the Offering Period in which the shares are
purchased). Purchase Rights are nontransferable and may only be exercised by the
participant.
On each Purchase Date during an Offering Period, the Company issues to each
participant in the Offering the number of shares of the Company's Common Stock
determined by dividing the amount of payroll deductions accumulated for the
participant during the Purchase Period by the purchase price, limited in any
case by the number of shares subject to the participant's Purchase Right for
that Offering. The price at which shares are sold under the Purchase Plan is
established by the Board but may not be less than 85% of the lesser of the fair
market value per share of Common Stock on the Offering Date or on the Purchase
Date. The fair market value of the Common Stock on any relevant date generally
will be the closing price per share on such date as reported on the Nasdaq
National Market. On July 31, 1997, the closing price per share of Common Stock
was $6.50. Any payroll deductions under the Purchase Plan not applied to the
purchase of shares will be returned to the participant without interest, unless
the amount remaining is less than the amount necessary to purchase a whole share
of Common Stock, in which case the remaining amount may be applied to the next
Purchase Period.
Change in Control. The Purchase Plan provides that, in the event of (i) a
sale or exchange by the stockholders in a single or series of related
transactions of more than 50% of the Company's voting stock, (ii) a merger or
consolidation in which the Company is a party, (iii) the sale, exchange or
transfer of all or substantially all of the assets of the Company, or (iv) a
liquidation or dissolution of the Company wherein, upon any such event, the
stockholders of the Company immediately before such event do not retain direct
or
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indirect beneficial ownership of more than 50% of the total combined voting
power of the voting stock of the Company, its successor, or the corporation to
which the assets of the Company were transferred (a "Transfer of Control"), the
surviving, continuing, successor or purchasing corporation or parent corporation
thereof may assume the Company's rights and obligations under the Purchase Plan
or substitute substantially equivalent Purchase Rights for such corporation's
stock. However, if such corporation elects not to assume or replace the
outstanding Purchase Rights, the Board may adjust the last day of the current
Purchase Period to a date on or before the date of the Transfer of Control. Any
Purchase Rights that are not assumed, replaced, or exercised prior to the
Transfer of Control will terminate.
Termination or Amendment. The Purchase Plan will continue until terminated
by the Board or until all of the shares reserved for issuance under the plan
have been issued. The Board may at any time amend or terminate the Purchase
Plan, except that the approval of the Company's stockholders is required within
twelve months of the adoption of any amendment increasing the number of shares
authorized for issuance under the Purchase Plan, or changing the definition of
the corporations which may be designated by the Board as corporations the
employees of which may participate in the Purchase Plan.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
Purchase Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
Generally, there are no tax consequences to an employee of either becoming
a participant in the Purchase Plan or purchasing shares under the Purchase Plan.
The tax consequences of a disposition of shares vary depending on the period
such stock is held before its disposition. If a participant disposes of shares
within two years after the Offering Date or within one year after the Purchase
Date on which the shares are acquired (a "disqualifying disposition"), the
participant recognizes ordinary income in the year of disposition in an amount
equal to the difference between the fair market value of the shares on the
Purchase Date and the purchase price. Such income may be subject to withholding
of tax. Any additional gain or resulting loss recognized by the participant from
the disposition of the shares is a capital gain or loss. If the participant
disposes of shares at least two years after the Offering Date and at least one
year after the Purchase Date on which the shares are acquired, the participant
recognizes ordinary income in the year of disposition in an amount equal to the
lesser of (i) the difference between the fair market value of the shares on the
date of disposition and the purchase price or (ii) 15% of the fair market value
of the shares on the Offering Date. Any additional gain recognized by the
participant on the disposition of the shares is a capital gain. If the fair
market value of the shares on the date of disposition is less than the purchase
price, there is no ordinary income, and the loss recognized is a capital loss.
If the participant owns the shares at the time of the participant's death, the
lesser of (i) the difference between the fair market value of the shares on the
date of death and the purchase price or (ii) 15% of the fair market value of the
shares on the Offering Date is recognized as ordinary income in the year of the
participant's death.
If the exercise of a Purchase Right does not constitute an exercise
pursuant to an "employee stock purchase plan" under section 423 of the Code, the
exercise of the Purchase Right will be treated as the exercise of a nonstatutory
stock option. The participant would therefore recognize ordinary income on the
Purchase Date equal to the excess of the fair market value of the shares
acquired over the purchase price. Such income is subject to withholding of
income and employment taxes. Any gain or loss recognized on a subsequent sale of
the shares, as measured by the difference between the sale proceeds and the sum
of (i) the purchase price for such shares and (ii) the amount of ordinary income
recognized on the exercise of the Purchase Right, will be treated as a capital
gain or loss, as the case may be.
If the participant disposes of the shares in a disqualifying disposition,
the Company should be entitled to a deduction equal to the amount of ordinary
income recognized by the participant as a result of the disposition, except to
the extent such deduction is limited by applicable provisions of the Code or the
regulations thereunder. In all other cases, no deduction is allowed the Company.
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VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the meeting and entitled to vote is
required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum
at the Annual Meeting of Stockholders. Abstentions will have the same effect as
a negative vote on this proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THIS
PROPOSAL TO AMEND VERITY'S 1995 EMPLOYEE STOCK PURCHASE PLAN TO INCREASE BY
800,000 THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE THEREUNDER.
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<PAGE> 24
PROPOSAL THREE
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has selected Coopers & Lybrand LLP as
independent accountants to audit the financial statements of the Company for the
year ending May 31, 1998. Coopers & Lybrand LLP has acted as the Company's
independent auditors since the Company's inception. A representative of Coopers
& Lybrand LLP is expected to be present at the Annual Meeting with the
opportunity to make a statement if the representative desires to do so, and is
expected to be available to respond to appropriate questions.
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders, at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present and voting, either in person or
by proxy, is required for approval of this proposal. Abstentions and broker
non-votes will each be counted as present for purposes of determining the
presence of a quorum. Neither abstentions nor broker non-votes will have any
effect on the outcome of this vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPOINTMENT
OF COOPERS & LYBRAND LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE YEAR
ENDING MAY 31, 1998.
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company must be received by the Company at
its offices at 894 Ross Drive, Sunnyvale, California 94089, not later than April
3, 1997, and satisfy the conditions established by the Securities and Exchange
Commission for stockholder proposals to be included in the Company's proxy
statement for that meeting.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting, or any adjournment thereof, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.
By Order of the Board of Directors
/s/ Timothy J. Moore
----------------------------
TIMOTHY J. MOORE,
Secretary
August 27, 1997
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VERITY, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
P SOLICITED BY THE BOARD OF DIRECTORS
R
The undersigned hereby appoints Gary J. Sbona and Donald C. McCauley,
O and each of them, with full power of substitution to represent the
undersigned and to vote all of the shares of stock in Verity, Inc. (the
X "Company") which the undersigned is entitled to vote at the Annual Meeting
of Stockholders of said Company to be held at the Sheraton Four Points
Y Hotel, 1100 N. Mathilda Avenue, Sunnyvale, California on Thursday,
September 25, 1997 at 11:00 a.m., Pacific Standard Time, and at any
adjournment thereof (1) as hereinafter specified upon the proposals listed
on the reverse side and as more particularly described in the Company's
Proxy Statement, receipt of which is hereby acknowledeged, and (2) in their
discretion upon such other matters as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2 AND 3.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE [SEE REVERSE SIDE]
<PAGE> 26
[X] Please mark votes as in this example.
A vote FOR the following proposals is recommended by the Board of Directors:
1. Election of Class II Director FOR WITHHELD
NOMINEE: Stephen A. MacDonald [ ] [ ]
2. To approve an amendement to the FOR AGAINST ABSTAIN
1995 Employee Stock Purchase Plan of [ ] [ ] [ ]
the Company to increase the number
of shares of Common Stock of the
Company authorized for issuance
thereunder from 500,000 shares to
1,300,000 shares.
3. To approve the selection of Coopers FOR AGAINST ABSTAIN
& Lybrand L.L.P. as the Company's [ ] [ ] [ ]
independent public accountants for
the current fiscal year.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Even if you are planning to attend the meeting in person, you are urged to sign
and mail the Proxy in the return envelope so that your stock may be represented
at the meeting.
Sign exactly as your name(s) appears on your stock certificate, if shares of
stock stand on record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above Proxy. If shares of stock are held of record by a
corporation, the Proxy should be executed by the President or Vice President
and the Secretary or Assistant Secretary, and the corporate seal should be
affixed thereto. Executors or administrators or other fiduciaries who execute
the above Proxy for a deceased stockholder should give their full title. Please
date the Proxy.
Signature:________________________________ Date:_______________
Signature:________________________________ Date:_______________
