<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 [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
VERITY, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 26, 2000
To The Stockholders Of Verity, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Verity, Inc.,
a Delaware corporation, will be held on Tuesday, September 26, 2000 at 11:00
a.m. local time at the Sunnyvale Sheraton, 1100 N. Mathilda Avenue, Sunnyvale,
California for the following purpose:
1. To elect two directors to hold office until the 2003 Annual Meeting of
Stockholders.
2. To approve an amendment to our Certificate of Incorporation to increase
the authorized number of shares of Common Stock from 100,000,000 to
200,000,000 shares.
3. To approve our 1995 Stock Option Plan, as amended, to increase the
aggregate number of shares of Common Stock authorized for issuance
under such plan from 10,121,672 to 12,121,672 shares.
4. To ratify the selection of PricewaterhouseCoopers LLP as our
independent accountants for our fiscal year ending May 31, 2001.
5. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on August 1,
2000, as the record date for the determination of stockholders entitled to
notice of and to vote at this Annual Meeting and at any adjournment or
postponement thereof.
By Order of the Board of Directors
/S/ GORDON C. ATKINSON
Gordon C. Atkinson
Secretary
Sunnyvale, California
August 18, 2000
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 3
VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
September 26, 2000
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Verity, Inc., a Delaware corporation, for use at the Annual Meeting of
Stockholders to be held on September 26, 2000, at 11:00 a.m. local time, or at
any adjournment or postponement thereof, for the purposes set forth herein and
in the accompanying Notice of Annual Meeting. The Annual Meeting will be held at
the Sunnyvale Sheraton, 1100 N. Mathilda Avenue, Sunnyvale, California. We
intend to mail this proxy statement and accompanying proxy card on or about
August 18, 2000, to all stockholders entitled to vote at the Annual Meeting.
SOLICITATION
We will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. We may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by our directors, officers or other regular employees. No
additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
August 1, 2000 will be entitled to notice of and to vote at the Annual Meeting.
At the close of business on August 1, 2000, we had outstanding and entitled to
vote 32,657,754 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to
one vote for each share held on all matters to be voted upon at the Annual
Meeting. All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Except for Proposal 2, Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether a matter has been approved. With respect to Proposal 2, broker non-votes
will have the same effect as negative votes.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted. It may be revoked by filing with
our Secretary at our principal executive office, 894 Ross Drive, Sunnyvale, CA
94089, a written notice of revocation or a duly executed proxy bearing a later
date, or it may be revoked by attending the meeting and voting in person.
Attendance at the meeting will not, by itself, revoke a proxy.
STOCKHOLDER PROPOSALS
The deadline for submitting a stockholder proposal for inclusion in our
proxy statement and form of proxy for our 2001 annual meeting of stockholders
pursuant to Rule 14a-8 of the Securities and Exchange Commission is April 20,
<PAGE> 4
2001. The deadline for submitting a stockholder proposal or a nomination for
director that is not to be included in such proxy statement and proxy is also
April 20, 2001. Stockholders are also advised to review our By-laws, which
contain additional requirements with respect to advance notice of stockholder
proposals and director nominations.
PROPOSAL 1
ELECTION OF DIRECTORS
Our Certificate of Incorporation and Bylaws provide that our Board of
Directors shall be divided into three classes, each class consisting, as nearly
as possible, of one-third of the total number of directors, with each class
having a three-year term. Vacancies on our Board of Directors may be filled only
by persons elected by a majority of the remaining directors. A director elected
by the Board of Directors to fill a vacancy (including a vacancy created by an
increase in the Board of Directors) shall serve for the remainder of the full
term of the class of directors in which the vacancy occurred and until such
director's successor is elected and qualified.
Our Board of Directors is presently composed of six members. There are
two directors in the class whose term of office expires in 2000. The nominees
for election to this class, Stephen A. MacDonald and Anthony J. Bettencourt, are
currently members of our Board of Directors. Mr. MacDonald was previously
elected by the stockholders and Mr. Bettencourt was by our Board in September
1999. If elected at the Annual Meeting, the nominees would serve until the 2003
annual meeting and until their successors are elected and have qualified, or
until such directors' earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the nominee named below. In the event that such nominee should be
unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. The nominee has agreed to serve if elected, and management has no
reason to believe that such nominee will be unable to serve.
Set forth below is biographical information for each nominee and each
person whose term of office as a director will continue after the Annual
Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2003 ANNUAL MEETING
STEPHEN A. MACDONALD, age 54, has served as a member of our Board of
Directors since December 1988. From May 1983 until May 1996, Mr. MacDonald was
employed by Adobe Systems Incorporated, a software company, where he served as
Senior Vice President and Chief Operating Officer. From May 1996 to April 1998,
he served as President and Chief Executive Officer of Active Software, Inc., a
software company. Mr. MacDonald is currently a consultant. Mr. MacDonald is a
director of Network Computing Devices, Inc., a computer hardware and software
company. Mr. MacDonald holds a B.Sc. from Dalhousie University.
ANTHONY J. BETTENCOURT, age 39, has served as a member of our Board of
Directors since September 1999. Mr. Bettencourt joined our company in July 1995
as Vice President of North American sales. He was subsequently promoted to Vice
President of Worldwide Sales and Marketing and served in this position until his
departure in December 1996. From December 1996 to September 1997, Mr.
Bettencourt served as an officer of OnLive! Technologies, a private technology
company. Mr. Bettencourt rejoined our company in September 1997 as Senior Vice
President, Worldwide Sales and was appointed to the position of President in
September 1999. Prior to joining our company, Mr. Bettencourt served as vice
president of sales for Versant Object Technology, a database management company,
from 1992 to June 1995. Mr. Bettencourt holds a B.A. from Santa Clara
University.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
2.
<PAGE> 5
DIRECTOR CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
GARY J. SBONA, age 57, has served as our Chief Executive Officer since
July 1997, as a member of our Board of Directors since May 1998 and as Chairman
of the Board of Directors since March 1999. He also served as our President from
July 1997 to September 1999. Mr. Sbona currently serves as Chairman and Chief
Executive Officer of Auspex Systems Inc., a network attached storage company,
and as a Director of 3D Systems Corporation, a solid imaging and mass
customization company. Since 1974, Mr. Sbona also serves as chairman and chief
executive officer of Regent Pacific Management Corporation, a professional
services firm that is currently providing us with management services.
KARL C. POWELL, age 57, has served as a member of our Board of
Directors since August 2000. Mr. Powell also serves as president and chief
executive officer of N H M & P, Inc, a newly-formed Oregon corporation engaged
in the development of software management tools. Mr. Powell was a co-founder of
Sequent Computer Systems, Inc. and served as director from 1983 until 1999, when
it was acquired by IBM. He also served as chairman of the board of Sequent
Computer Systems and as chief executive officer from the company's inception.
Mr. Powell holds a B.S. in Mechanical Engineering from the U.S. Merchant Marine
Academy.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING
STEVEN M. KRAUSZ, age 45, has served as a member of our Board of
Directors since May 1988. Mr. Krausz has been a general partner of the venture
capital firms U.S. Venture Partners III, IV,V, VI and VII, U.S.V. Entrepreneur
Partners and BHMS Partners III since 1985. Mr. Krausz holds a B.S. in Electrical
Engineering and a M.B.A. from Stanford University.
CHARLES P. WAITE, JR., age 45, has served as a member of our Board of
Directors since May 1988. Mr. Waite has been a general partner of Olympic
Venture Partners II and a vice president of Northwest Venture Services Corp.
since 1987, a general partner of Olympic Venture Partners III since 1994 and a
general partner of Olympic Venture Partners IV since 1997, all of which are
venture capital firms. Mr. Waite is also a director of Loudeye Technologies,
Inc., WatchGuard Technologies, Inc. and several privately held companies. Mr.
Waite holds an A.B. in History from Kenyon College and a M.B.A. from Harvard
University.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended May 31, 2000, our Board of Directors held
nine meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with our independent accountants at least
annually to review the results of the annual audit and discuss the financial
statements, recommends to the Board the independent auditors to be retained, and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is currently composed of three
non-employee directors: Messrs. Krausz, MacDonald and Waite; Mr. MacDonald
joined the Audit Committee on June 15, 2000. It met one time during fiscal year
2000.
The Compensation Committee makes recommendations concerning salaries
and incentive compensation, awards stock options to employees and consultants
under our stock option plans and otherwise determines compensation levels and
performs such other functions regarding compensation as the Board may delegate.
The Compensation Committee is composed of two non-employee directors: Messrs.
Krausz and Waite. It only took actions by unanimous written consent during
fiscal year 2000.
During the fiscal year ended May 31, 2000, each director attended 75%
or more of the aggregate of the meetings of the Board and of the committees on
which he served, held during the period for which he was a director or committee
member, respectively.
3.
<PAGE> 6
PROPOSAL 2
APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
Our Board of Directors has adopted, subject to stockholder approval, an
amendment to our Certificate of Incorporation to increase the authorized number
of shares of our Common Stock from 100,000,000 shares to 200,000,000 shares. As
amended, Article FOURTH, Paragraph 1 of our Certificate of Incorporation shall
read in its entirety as follows:
"The Corporation is authorized to issue two classes of shares
to be designated respectively Preferred Stock, having a par value of
$0.001 per share ("Preferred"), and Common Stock, having a par value of
$0.001 per share ("Common"). The total number of shares of Preferred
this Corporation shall have authority to issue is 1,999,995, and the
total number of shares of Common this Corporation shall have authority
to issue is 200,000,000."
The additional Common Stock to be authorized by adoption of the
amendment would have rights identical to our currently outstanding Common Stock.
Adoption of the proposed amendment and issuance of the Common Stock would not
affect the rights of the holders of our currently outstanding Common Stock,
except for effects incidental to increasing the number of shares of our Common
Stock outstanding, such as dilution of the earnings per share and voting rights
of current holders of Common Stock. If the amendment is adopted, it will become
effective upon filing of a Certificate of Amendment of our Certificate of
Incorporation with the Secretary of State of the State of Delaware.
In addition to the 31,605,640 shares of Common Stock outstanding at May
31, 2000, our Board of Directors has reserved 16,431,323 shares for issuance
upon exercise of options and rights granted under our stock option and stock
purchase plans.
Although at present the Board of Directors has no plans to issue the
additional shares of Common Stock, it desires to have such shares available to
provide additional flexibility to use its capital stock for business and
financial purposes in the future. The additional shares may be used, without
further stockholder approval, for various purposes including, without
limitation, declaring a stock dividend, raising capital, providing equity
incentives to employees, officers or directors, establishing strategic
relationships with other companies and expanding our business or product lines
through the acquisition of other businesses or products.
The additional shares of Common Stock that would become available for
issuance if the proposal were adopted could also be used by us to oppose a
hostile takeover attempt or delay or prevent changes in our control or
management. For example, without further stockholder approval, the Board of
Directors could strategically sell shares of Common Stock in a private
transaction to purchasers who would oppose a takeover or favor the current Board
of Directors. In addition, if a person or group of persons attempted a hostile
takeover of us, such shares could be issued in connection with our Rights
Agreement, which would allow stockholders (other than the hostile parties) to
purchase our Common Stock at a discount to the then current market price, which
would have a dilutive effect on the hostile parties. Although this proposal to
increase the authorized Common Stock has been prompted by business and financial
considerations and not by the threat of any hostile takeover attempt (nor is the
Board of Directors currently aware of any such attempts directed at us),
nevertheless, stockholders should be aware that approval of proposal could
facilitate future efforts by us to deter or prevent changes in our control,
including transactions in which the stockholders might otherwise receive a
premium for their shares over then current market prices.
The affirmative vote of the holders of a majority of the shares of the
Common Stock will be required to approve this amendment to our Certificate of
Incorporation. As a result, abstentions and broker non-votes will have the same
effect as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
4.
<PAGE> 7
PROPOSAL 3
APPROVAL OF 1995 STOCK OPTION PLAN, AS AMENDED
We established the stock option plan the subject of this proposal in
August 1988. In June 1995, our Board of Directors amended and restated this
stock option plan, extended its term and renamed it the "Verity, Inc. 1995 Stock
Option Plan." In 1996, our Board of Directors amended the 1995 Stock Option Plan
to (i) increase the number of shares of our Common Stock authorized for issuance
thereunder from 2,910,836 shares to 3,310,836 shares; (ii) provide that the
Board of Directors may not decrease the exercise price of certain stock options
or grant a new option in substitution therefor, without stockholder approval;
(iii) provide that the maximum term of certain stock options granted will be
eight years; and (iv) provide that the exercise price per share of any stock
option granted under the 1995 Stock Option Plan must equal at least the fair
market value of a share of our Common Stock on the date of grant of the stock
option. The purpose of the 1995 Stock Option Plan is to provide an equity
interest for our employees, directors and consultants or any parent or
subsidiary corporation of us, in order to give them a greater personal interest
in the success of the business and to provide added incentive to continue and
advance in their employment or service to us.
As a result of a series of amendments and a two-for-one stock split
declared in October 1999 (excluding the 2,000,000 shares now proposed for
stockholder approval), a total of 10,121,672 shares of Common Stock have been
reserved for issuance under the 1995 Stock Option Plan. As of May 31, 2000,
options to purchase 4,676,387 shares of Common Stock granted pursuant to the
1995 Stock Option Plan had been exercised (of which 199,126 shares were
repurchased by us), 4,667,361 shares of Common Stock were reserved for issuance
upon the exercise of outstanding options at a weighted average exercise price of
$17.99 per share, with exercise prices ranging from $0.57 to $31.75, and 977,050
shares of Common Stock remained available for future option grants (excluding
the 2,000,000 shares now proposed for stockholder approval), which equaled
approximately 3.07% of the total number of shares of Common Stock outstanding.
During the last fiscal year, shares of Common Stock were granted in the
amounts and at the weighted average prices per share under the 1995 Stock Option
Plan as follows: Gary Sbona, 1,000,000 shares ($30.93); Anthony Bettencourt,
401,000 shares ($30.02); Hugh Njemanze 151,000 shares ($31.06); James Ticehurst,
151,000 shares ($31.06); Ronald Weissman, 100,000 shares ($30.75); Todd Yamami,
151,000 shares ($31.06); Steven M. Krausz, 110,000 shares ($31.27); Charles P.
Waite, Jr., 110,000 shares ($31.27); Stephen A. MacDonald, 110,000 ($31.27); all
current executive officers as a group, 1,954,000 shares ($30.88); and all
Directors who are not executive officers as a group, 330,000 shares ($31.27).
PROPOSED AMENDMENTS TO THE OPTION PLAN
Our Board of Directors has amended the 1995 Stock Option Plan, subject
to stockholder approval, to increase the number of shares of our Common Stock
reserved under the 1995 Stock Option Plan by 2,000,000 shares so that the total
number of shares available for future grants as of May 31, 2000 under the 1995
Stock Option Plan would be 2,977,050. The stockholders are now being asked to
approve the increase at the Annual Meeting in order to make available sufficient
shares for continued operation of the 1995 Stock Option Plan.
We seek to attract, motivate and retain talented and enterprising
employees by rewarding performance and encouraging behavior that will improve
our profitability. We believe that the 1995 Stock Option Plan plays an important
role in achieving these objectives by enabling us to provide broad employee
equity interests in us. We believe that equity incentives provided by the 1995
Stock Option Plan help align the interests of our employees with the interests
of our stockholders, and enhance our ability to continue recruiting and
retaining qualified officers, employees and consultants essential to our
success. Our management believes that the continued operation of the 1995 Stock
Option Plan necessitates an increase in the share reserve under the 1995 Stock
Option Plan.
We have engaged Regent Pacific Management Corporation ("Regent
Pacific") to provide us management services, with employees of Regent Pacific
currently serving as our Chief Executive Officer and Chief Operating Officer,
respectively (See "Employment Agreements and Termination and Change in Control
Agreements" and "Certain Transactions"). Our goal for the longer term is to
attract and retain key executive officers to replace the Regent Pacific
personnel. In order to attract and retain such key management personnel, we
believe that we must offer attractive equity
5.
<PAGE> 8
incentives and that the number of shares of Common Stock currently authorized
for issuance pursuant to the 1995 Stock Option Plan may be inadequate for such
purpose.
SUMMARY OF THE PROVISIONS OF THE OPTION PLAN
The following summary of the 1995 Stock Option Plan, as amended, is
qualified in its entirety by the specific language of the 1995 Stock Option
Plan, a copy of which is available to any stockholder upon request.
General. The 1995 Stock Option Plan provides for the grant of incentive
stock options within the meaning of Section 422 of the Code, and nonstatutory
stock options. As of May 31, 2000, options to purchase 4,676,387 shares of
Common Stock granted pursuant to the 1995 Stock Option Plan had been exercised
(of which 199,126 shares were repurchased by us), 4,674,361 shares of Common
Stock were reserved for issuance upon the exercise of outstanding options, and
977,050 shares of Common Stock remained available for future grants.
Shares Subject to Plan. Currently, a maximum of 10,121,672 of the
authorized but unissued or reacquired shares of our Common Stock may be issued
upon the exercise of options granted pursuant to the 1995 Stock Option Plan. Our
Board of Directors has amended the 1995 Stock Option Plan, subject to
stockholder approval, to increase by 2,000,000 the maximum number of shares of
Common Stock issuable thereunder to an aggregate of 12,121,672.
If our stockholders approve the 2,000,000 share increase in the number
of shares authorized for issuance under the 1995 Stock Option Plan, 2,977,050
shares of our Common Stock would be available for future option grants as of May
31, 2000, which equals approximately 9.4% of the total number of shares of our
Common Stock outstanding as of that date. The 1995 Stock Option Plan imposes a
limit under which no employee may receive in any of our fiscal years options to
purchase in excess of 1,000,000 shares. The grant limit is intended to comply
with Section 162(m) of the Code and the regulations thereunder in order to
preserve our ability to fully deduct any compensation expense related to options
granted under the 1995 Stock Option Plan. In the event of any stock dividend,
stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in our capital structure, appropriate
adjustments will be made to the shares subject to the 1995 Stock Option Plan, to
the grant limit and to outstanding options. To the extent any outstanding option
under the 1995 Stock Option Plan expires or terminates prior to exercise in full
or if shares issued upon exercise of an option are repurchased by us, the shares
of Common Stock for which such option is not exercised or the repurchased shares
are returned to the 1995 Stock Option Plan and become available for future
grant, but do not increase the total number of shares authorized for issuance
under the 1995 Stock Option Plan.
Administration. The 1995 Stock Option Plan is administered by our Board
of Directors or a duly appointed committee of the Board. The 1995 Stock Option
Plan provides that with respect to the participation of individuals whose
transactions in our equity securities are subject to Section 16 of the
Securities Exchange Act of 1934, the 1995 Stock Option Plan must be administered
in compliance with the requirements of Rule 16b-3 under the Exchange Act. With
respect to persons covered by Section 162(m) of the Code the 1995 Stock Option
Plan permits administration in compliance with Section 162(m) of the Code (for
more information on Section 162(m) of the Code, please see the paragraph
"Potential Limitation on Our Deductions" below). Subject to the provisions of
the 1995 Stock Option Plan, our Board determines the persons to whom options are
to be granted, the number of shares to be covered by each option, whether an
option is to be an incentive stock option or a nonstatutory stock option, the
timing and terms of exercisability of each option or the vesting of shares
acquired upon the exercise of an option, including the effect thereon of an
optionee's termination of service, the exercise price of and the type of
consideration to be paid to us upon the exercise of each option, the duration of
each option, and all other terms and conditions of the options. The 1995 Stock
Option Plan authorizes our Board to amend, modify, extend, renew, or grant a new
option in substitution for, any option, to waive any restrictions or conditions
applicable to any option or any shares acquired upon the exercise thereof, and
to accelerate, continue, extend or defer the exercisability of any option or the
vesting of any shares acquired upon the exercise of an option, including with
respect to the period following an optionee's termination of service with us.
However, the Board may not decrease the exercise price of a stock option granted
from the option reserve increase (or from the prior increase to the share
reserve), or grant a new option in substitution therefor having a lower exercise
price without the approval of our stockholders. Subject to certain limitations,
the 1995 Stock Option Plan provides for our indemnification of any director,
officer of employee against all reasonable expenses, including attorney's fees,
incurred in connection with any legal action arising from such person's action
or failure to act in administering the 1995 Stock Option Plan. Our Board will
interpret the 1995 Stock Option Plan and options granted thereunder, and all
determinations of the Board will be final and binding on all persons having an
interest in the 1995 Stock Option Plan or any option.
6.
<PAGE> 9
Eligibility. Generally, all of our employees, directors and consultants
or of any of our present or future parent or subsidiary corporations are
eligible to participate in the 1995 Stock Option Plan. As of June 30, 2000, we
had approximately 367 employees, including seven executive officers, eight
corporate officers and five directors. In addition, the 1995 Stock Option Plan
permits options to be granted to prospective employees and consultants in
connection with written offers of employment or engagement. Any such options may
not become exercisable prior to such individual's commencement of service. Any
person eligible under the 1995 Stock Option Plan may be granted a nonstatutory
option. However, only employees may be granted incentive stock options.
Terms and Conditions of Options. Each option granted under the 1995
Stock Option Plan is evidenced by a written agreement between us and the
optionee specifying the number of shares subject to the option and the other
terms and conditions of the option, consistent with the requirements of the 1995
Stock Option Plan. The exercise price per share of each option must equal at
least the fair market value of a share of our Common Stock on the date of grant.
The exercise price of any incentive stock option granted to a person who at the
time of grant owns stock possessing more than 10% of the total combined voting
power of all classes of our stock or any parent or subsidiary corporation of us
must be at least 110% of the fair market value of a share of our Common Stock on
the date of grant. Our Board determines the fair market value of the our Common
Stock in its sole discretion.
The option exercise price may be paid in cash, by check, or in cash
equivalent, by tender of shares of our Common Stock owned by the optionee having
a fair market value not less than the exercise price, by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares of Common
Stock being acquired upon the exercise of the option, by means of a promissory
note, by any other lawful consideration approved by the Board, or by any
combination of these. The Board may nevertheless restrict the forms of payment
permitted in connection with any option grant.
Options granted under the 1995 Stock Option Plan become exercisable and
vested at such times and subject to such conditions as specified by the Board.
Generally, options granted under the 1995 Stock Option Plan are exercisable on
and after the date of grant, subject to our right to reacquire at the optionee's
exercise price any unvested shares held by the optionee upon termination of
employment or service with us or if the optionee attempts to transfer any
unvested shares. Shares subject to options generally vest in installments
subject to the optionee's continued employment or service. The maximum term of
an incentive stock option or nonstatutory stock option that draws upon shares
from the option reserve increase (and also the prior increase to the share
reserve) under the 1995 Stock Option Plan is eight years unless the incentive
stock option is granted to a ten percent stockholder, in which case the maximum
term is five years. The maximum term of any other incentive stock option granted
under the 1995 Stock Option Plan is ten years unless granted to a ten percent
stockholder, in which case the maximum term is five years. Consistent with the
Code, the 1995 Stock Option Plan does not limit the term of any nonstatutory
stock option not drawing upon shares from the option reserve increase (and the
prior increase to the share reserve). Options are nontransferable by the
optionee other than by will or by the laws of descent and distribution, and are
exercisable during the optionee's lifetime only by the optionee.
Transfer of Control. The 1995 Stock Option Plan provides that, in the
event of (i) a sale or exchange by the stockholders of more than 50% of our
voting stock, (ii) a merger or consolidation in which we are a party, (iii) the
sale, exchange or transfer of all or substantially all of our assets, or (iv) a
liquidation or dissolution of us wherein, upon any such event, our stockholders
immediately before such event do not retain direct or indirect beneficial
ownership of more than 50% of the total combined voting power of our voting
stock, our successor, or the corporation to which our assets were transferred in
substantially the same proportions as prior to such event, the acquiring or
successor corporation may assume our rights and obligations under outstanding
options or substitute substantially equivalent options for such corporation's
stock. To the extent that the options outstanding under the 1995 Stock Option
Plan are not assumed, substituted for, or exercised prior to the transfer of
control, they will terminate; provided, however, that the terms of certain
options provide for acceleration of vesting upon such a change in control (see
"Employment Agreements and Termination and Change in Control Agreements").
Termination and Amendment. The 1995 Stock Option Plan will continue in
effect until the earlier of its termination by the Board or the date on which
all shares available for issuance under the 1995 Stock Option Plan have been
issued and all restrictions on such shares under the terms of the Plan and the
option agreements have lapsed, provided that all incentive stock options must be
granted prior to July 19, 2006, the date on which the Board approved the
amendment of the 1995 Stock Option Plan. The Board may terminate or amend the
1995 Stock Option Plan at any time, but, without stockholder approval, the Board
may not amend the 1995 Stock Option Plan to increase the total number of shares
of Common Stock issuable thereunder, change the class of persons eligible to
receive incentive stock options, or
7.
<PAGE> 10
expand the class of persons eligible to receive nonstatutory stock options. No
amendment may adversely affect an outstanding option without the consent of the
optionee, unless the amendment is required to preserve the option's status as an
incentive stock option or is necessary to comply with any applicable law.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OPTION 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 1995 Stock Option Plan and does not attempt to describe all possible
federal or other tax consequences of such participation or tax consequences
based on particular circumstances.
Incentive Stock Options. An optionee recognizes no taxable income for
regular income tax purposes as the result of the grant or exercise of an
incentive stock option qualifying under Section 422 of the Code. Optionees who
do not dispose of their shares for two years following the date the option was
granted nor within one year following the exercise of the option will normally
recognize a long-term capital gain or loss equal to the difference, if any,
between the sale price and the purchase price of the shares. If an optionee
satisfies such holding periods upon a sale of the shares, we will not be
entitled to any deduction for federal income tax purposes. If an optionee
disposes of shares within two years after the date of grant or within one year
from the date of exercise, the difference between the fair market value of the
shares on the determination date (see discussion under "Nonstatutory Stock
Options" below) and the option exercise price (not to exceed the gain realized
on the sale if the disposition is a transaction with respect to which a loss, if
sustained, would be recognized) will be taxed as ordinary income at the time of
disposition. Any gain in excess of that amount will be a capital gain. If a loss
is recognized, there will be no ordinary income, and such loss will be a capital
loss. A capital gain or loss will be long-term if the optionee's holding period
is more than 12 months. Any ordinary income recognized by the optionee upon such
a disqualifying disposition of the shares generally should be deductible by us
for federal income tax purposes, except to the extent such deduction is limited
by applicable provisions of the Code or the regulations thereunder.
The difference between the option exercise price and the fair market
value of the shares on the determination date of an incentive stock option (see
discussion under "Nonstatutory Stock Options" below) is an item of adjustment in
computing the optionee's alternative minimum taxable income and may be subject
to an alternative minimum tax which is paid if such tax exceeds the regular tax
for the year. Special rules may apply with respect to certain subsequent sales
of the shares in a disqualifying disposition, certain basic adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.
Nonstatutory Stock Options. Options not designated or qualifying as
incentive stock options will be nonstatutory stock options. Nonstatutory stock
options have no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a
nonstatutory stock option, the optionee normally recognizes ordinary income in
the amount of the difference between the option exercise price and the fair
market value of the shares on the determination date (as defined below). If the
optionee is an employee, such ordinary income generally is subject to
withholding of income and employment taxes. The "determination date" is the date
on which the option is exercised unless the shares are subject to a substantial
risk of forfeiture and are not transferable, in which case the determination
date is the earlier of (i) the date on which the shares are transferable or (ii)
the date on which the shares are not subject to a substantial risk of
forfeiture. If the determination date will be after the exercise date, the
optionee may elect, pursuant to Section 83(b) of the Code, to have the exercise
date be the determination date by filing an election with the Internal Revenue
Service not later than 30 days after the date the option is exercised. Upon the
sale of stock acquired by the exercise of a nonstatutory stock option, any gain
or loss, based on the difference between the sale price and the fair market
value on the determination date, will be taxed as capital gain or loss. A
capital gain or loss will be long-term if the optionee's holding period is more
than 12 months. No tax deduction is available to us with respect to the grant of
a nonstatutory option or the sale of the stock acquired pursuant to such grant.
We generally should be entitled to a deduction equal to the amount of ordinary
income recognized by the optionee as a result of the exercise of a nonstatutory
option, except to the extent such deduction is limited by applicable provisions
of the Code or the regulations thereunder.
Potential Limitation on Our Deductions. As part of the Omnibus Budget
Reconciliation Act of 1933, the U.S. Congress amended the Code to add Section
162(m) which denies a deduction to any publicly held corporation for
compensation paid to a covered employee in a taxable year to the extent that
non-performance-based compensation paid to such a covered employee exceeds $1
million. It is possible that compensation attributable to stock options granted
under
8.
<PAGE> 11
the 1995 Stock Option Plan, when combined with all other types of compensation
received by any of our covered employees, may cause this limitation to be
exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation.
Treasury regulations issued under Section 162(m) of the Code provide that
compensation attributable to stock options will qualify as performance-based
compensation if: (i) the stock option plan contains a per-employee limitation on
the number of shares for which stock options may be granted during a specified
period; (ii) the per-employee limitation is approved by the stockholders; (iii)
the stock option is granted by a compensation committee comprised solely of
"outside directors;" and (iv) the exercise price of the stock option is no less
than the fair market value of the stock on the date of grant. The term "outside
directors" excludes from the compensation committee directors who are (i)
current employees of us or an affiliate, (ii) former employees of us or an
affiliate receiving compensation for past services (other than benefits under a
tax-qualified pension plan), (iii) current and former officers of us or an
affiliate, (iv) directors currently receiving direct or indirect remuneration
from us or an affiliate in any capacity (other than as a director), and (v) any
other person who is otherwise considered an "outside director" for purposes of
Section 162(m) of the Code.
ADDITIONAL INFORMATION
1996 Nonstatutory Stock Option Plan: In February 1996, our Board of
Directors approved the 1996 Nonstatutory Stock Option Plan. Pursuant to the 1996
Nonstatutory Stock Option Plan, the Board of Directors has the power to grant
nonstatutory stock options to employees, prospective employees, consultants and
prospective consultants; provided, however, that no such grant may be made to a
person who is (i) a holder of 10% or more of our stock or (ii) one of our
executive officers or directors. As a result of a series of amendments and a
two-for-one stock split declared in October 1999, at May 31, 2000 a total of
8,420,000 shares of Common Stock were reserved for issuance to certain of our
employees and consultants. At May 31, 2000, 522,681 shares of Common Stock were
available for grant under our 1996 Nonstatutory Stock Option Plan. In June 2000,
an additional 2,000,000 shares were reserved for issuance under the 1996
Nonstatutory Stock Option Plan.
Outside Directors Plan: In 1995, our Board of Directors and
stockholders approved, and in 1999 amended, the 1995 Outside Directors Plan.
Under this plan there are reserved 1,000,000 shares of Common Stock for issuance
to our directors who are not employees. The Outside Directors Plan provides for
the automatic granting of nonqualified stock options to our directors who are
not our employees. Under the Outside Directors Plan, each person who is first
elected or appointed as an outside director to the Board (excluding any person
who is already a director at the time of first becoming an outside director) is
automatically granted an option to purchase 40,000 shares of Common Stock on the
date of such election or appointment. Thereafter at each annual meeting of the
stockholders, those outside directors with six months of service as a director
(not necessarily as an outside director) who will be outside directors after
such meeting automatically receive a new option to purchase 40,000 shares of our
Common Stock. As a result of one amendment and a two-for-one stock split
declared in October 1999, a total of 1,000,000 shares of Common Stock have been
reserved for issuance to our directors who are not our employees. At May 31,
2000, 370,000 shares of Common Stock were available for grant under the 1995
Outside Directors Plan.
1997 Stock Option Plan for Verity Canada: In May 1997, our Board of
Directors authorized the adoption of the 1997 Stock Option Plan for Verity
Canada. The terms of the 1997 Stock Option Plan for Verity Canada are
substantially the same as those of the 1995 Stock Option Plan. As a result of a
series of amendments and a two-for-one stock split declared in October 1999, at
May 31, 2000 a total of 1,480,000 shares of Common Stock were reserved for
issuance to certain employees and consultants of Verity Canada. At May 31, 2000,
200,884 shares of Common Stock were available for grant under the 1997 Stock
Option Plan for Verity Canada. In June 2000, an additional 500,000 shares were
reserved for issuance under the 1997 Stock Option Plan for Verity Canada.
VOTE REQUIRED AND BOARD OF DIRECTOR'S 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. Broker non-votes will have no effect on the
outcome of this vote.
9.
<PAGE> 12
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
10.
<PAGE> 13
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Our Board of Directors has selected PricewaterhouseCoopers LLP as our
independent accountants for our fiscal year ending May 31, 2001 and has further
directed that management submit the selection of independent accountants for
ratification by the stockholders at the Annual Meeting. PricewaterhouseCoopers
LLP, together with Coopers & Lybrand LLP, the predecessor entity of
PricewaterhouseCoopers LLP, has audited our financial statements since our
inception. Representatives of PricewaterhouseCoopers LLP are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
Stockholder ratification of the selection of PricewaterhouseCoopers LLP
as our independent accountants is not required by our Bylaws or otherwise.
However, the Board of Directors is submitting the selection of
PricewaterhouseCoopers LLP to the stockholders for ratification as a matter of
good corporate practice. If the stockholders fail to ratify the selection, the
Audit Committee and the Board of Directors will reconsider whether or not to
retain that firm. Even if the selection is ratified, the Audit Committee and the
Board of Directors in their discretion may direct the appointment of different
independent accountants at any time during the year if they determine that such
a change would be in the best interests of us and our stockholders.
The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and entitled to vote at the Annual Meeting
will be required to ratify the selection of PricewaterhouseCoopers LLP.
Abstentions will be counted toward the tabulation of votes cast on proposals
presented to the stockholders and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.
11.
<PAGE> 14
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our Common Stock as of June 30, 2000 by:
- each director and nominee for director;
- each of the executive officers named in the Summary Compensation Table;
- all directors and executive officers as a group; and
- each person, or group of affiliated persons, known by us to be
beneficial owners of 5% or more of our Common Stock.
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 held by that person that are currently
exercisable or exercisable within 60 days of June 30, 2000 are deemed to be
beneficially owned. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
Except as indicated in 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 of ownership is based on 32,006,887 shares of
Common Stock, outstanding on June 30, 2000. Unless otherwise indicated, the
address of each of the individuals named below is 894 Ross Drive, Sunnyvale,
California 94089.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------------------------------
SHARES ISSUABLE
PURSUANT TO OPTIONS
AND WARRANTS NUMBER OF
EXERCISABLE WITHIN SHARES (INCLUDING
60 DAYS OF NUMBER SHOWN IN FIRST PERCENTAGE
BENEFICIAL OWNER JUNE 30, 2000 COLUMN) OF TOTAL
---------------- --------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
<S> <C> <C> <C>
Gary J. Sbona............................... 1,893,000 1,893,000 5.58%
Anthony J. Bettencourt...................... 653,000 658,439 2.02
Hugh S. Njemanze............................ 275,784 366,776 1.14
James E. Ticehurst.......................... 252,436 257,887 *
Ronald F.E. Weissman........................ 299,294 315,319 *
Todd K. Yamami.............................. 165,956 174,391 *
Steven M. Krausz............................ 212,600 212,600 *
Stephen A. MacDonald........................ 232,000 245,400 *
Charles P. Waite, Jr........................ 178,959 178,959 *
5% STOCKHOLDERS
Franklin Resources, Inc. (1)................ 2,089,094 2,089,094 6.13
All directors and executive officers as
a group (9 persons)...................... 4,163,029 4,302,771 11.90
</TABLE>
---------
*Represents beneficial ownership of less than 1% of the outstanding shares of
our common stock.
12.
<PAGE> 15
(1) Franklin Advisors, Inc., an investment advisor to Franklin Resources, Inc.,
has sole voting power and investment power with respect to 2,042,400 of
these shares and, consequently, may be deemed to beneficially own these
shares. Franklin Management, Inc. has sole investment power with respect to
46,694 of these shares and, consequently, may be deemed to beneficially own
these shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. own in
excess of 10% of the common stock of Franklin Resources, Inc. and,
consequently, may be deemed to beneficially own the shares held by Franklin
Resources, Inc. Franklin Advisors, Inc., Franklin Management, Inc. and
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. disclaim beneficial
ownership of the shares held by Franklin Resources, Inc. Franklin Resources,
Inc. is located at 777 Mariners Island Boulevard, San Mateo, California
94404.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent of a registered class of our
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of our common stock and other equity securities.
Officers, directors and greater than ten percent stockholders are required by
the SEC regulations to furnish us with copies of all Section 16(a) forms they
file.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during our fiscal year ended May 31, 2000, all Section 16(a) filing
requirements applicable to our officers, directors and greater than ten percent
beneficial owners were complied with.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each of our non-employee Directors receives an annual retainer of
$25,000. Directors are also reimbursed for their expenses in attending Board and
committee meetings. Each person who is first elected or appointed as a
non-employee Director (excluding any person who is already a director at the
time of first becoming a non-employee director) is automatically granted an
option to purchase 40,000 shares of Common Stock on the date of such election or
appointment pursuant to the 1995 Outside Directors Stock Option Plan. 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 40,000
shares of Common Stock upon the date of each annual stockholders' meeting. The
exercise price of each option is the fair market value on the day it is granted.
Each option will vest over four years and generally must be exercised within ten
years.
During the last fiscal year, we granted options covering 110,000 shares
to each of Steven M. Krausz, Stephen A. MacDonald and Charles P. Waite, Jr. at a
weighted average exercise price of $31.27 per share. All 330,000 of these
options were granted under the 1995 Outside Directors Stock Option Plan. See
"Additional Information" under Proposal 3 for further information on the 1995
Outside Directors Stock Option Plan. The per share exercise price of each option
is the fair market value of such common stock on the date of grant (based on the
closing sales price reported in the Nasdaq National Market for the date of
grant).
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended May 31, 1998, 1999
and 2000, compensation awarded or paid to, or earned by, our Chief Executive
Officer, our other four most highly compensated executive officers at May 31,
2000 and a former executive officer who was no longer serving as one of our
executive officers at May 31, 2000:
13.
<PAGE> 16
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- -------------
SECURITIES
UNDERLYING All Other
NAME AND PRINCIPAL POSITION YEAR Salary Bonus OPTIONS Compensation(1)
--------------------------- ---- ------ ----- ------- ---------------
<S> <C> <C> <C> <C> <C>
Gary J. Sbona............................. 2000 $52,000 $10,400 1,000,000 $ 356
Chief Executive Officer and 1999 52,000 10,400 470,000 585
Chairman of the Board(2) 1998 15,167 0 350,000 73
Anthony J. Bettencourt.................... 2000 270,833 150,000(4) 401,000 230
President(3) 1999 200,000 200,000 175,000 264
1998 147,051 292,500(5) 150,000 198
Hugh S. Njemanze.......................... 2000 221,875 44,375 151,000 254
Chief Technology Officer 1999 196,875 39,375 75,000 408
1998 171,250 35,000 55,000 408
James E. Ticehurst........................ 2000 158,333 31,667 151,000 1,096
Vice President, Administration and 1999 136,250 27,250 80,000 1,422
Support Operations, and Asst. Secretary 1998 106,711 21,342 30,000 994
Ronald F.E. Weissman...................... 2000 221,082 42,667 100,000 427
Vice President, Strategy and 1999 213,333 40,000 80,000 696
Corporate Marketing(6) 1998 183,333 40,000 35,000 696
Todd K. Yamami............................ 2000 128,333 25,667 151,000 194
Vice President, Corporate Controller and 1999 104,166 20,833 90,000 176
Chief Accounting Officer 1998 82,808 16,561 30,000 135
</TABLE>
-------------
(1) Represents premiums paid on behalf of such executive officer for life
insurance coverage in excess of a base amount of $50,000 in coverage.
(2) Mr. Sbona is partially compensated for his services to us by Regent
Management Corporation. See "Certain Transactions" below.
(3) Mr. Bettencourt served as our as Senior Vice President, Worldwide Sales
and Marketing from September 1997 to September 1999 and as our
President since September 1999.
(4) $150,000 represents sales commissions earned under a sales plan.
(5) Of such amount, $180,000 represents a signing bonus paid in connection
with Mr. Bettencourt rejoining us in September 1997, and $112,500
represents sales commissions earned under a sales commission plan.
(6) Mr. Weissman served as our Vice President, Strategy and Corporate
Marketing until April 2000 and would have been one of our four most
highly paid executive officers but for the fact he was not serving as
an executive officer as of the end of our most recent fiscal year.
14.
<PAGE> 17
STOCK OPTION GRANTS AND EXERCISES
We grant options to our executive officers under our 1995 Stock Option
Plan. As of June 30, 2000, options to purchase a total of 4,408,465 shares were
outstanding under the 1995 Stock Option Plan and options to purchase 977,050
shares remained available for grant thereunder.
The following tables show for the fiscal year ended May 31, 2000,
certain information regarding options granted to, exercised by, and held at year
end by, the individuals listed in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------ ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTION EMPLOYEES IN Price per EXPIRATION ---------------
NAME GRANTED (1) FISCAL YEAR (2) Share DATE 5% 10%
---- ----------- ---------------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Gary J. Sbona................... 606,000 9.23% $30.75 10/18/07 $ 8,897,143 $23,310,206
394,000 6.01 31.75 01/25/08 5,972,729 14,305,724
------------------------------ ---------------------------
1,000,000 15.24 14,869,872 37,615,930
Anthony J. Bettencourt......... 200,000 3.05 28.81 09/21/07 2,751,337 6,589,931
100,000 1.52 30.75 10/18/07 1,468,175 3,516,536
100,000 1.52 31.75 01/25/08 1,515,921 3,630,894
1,000 0.02 28.25 04/18/08 13,488 32,306
------------------------------ ---------------------------
401,000 6.11 5,748,921 13,769,667
Hugh S. Njemanze............... 100,000 1.52 30.75 10/18/07 1,468,175 3,516,536
50,000 0.76 31.75 01/25/08 757,961 1,815,447
1,000 0.02 28.25 04/18/08 13,488 32,306
------------------------------ ---------------------------
151,000 2.30 2,239,624 5,364,289
James E. Ticehurst............. 100,000 1.52 30.75 10/18/07 1,468,175 3,516,536
50,000 0.76 31.75 01/25/08 757,961 1,815,447
1,000 0.02 28.25 04/18/08 13,488 32,306
------------------------------ ---------------------------
151,000 2.30 2,239,624 5,364,289
Ronald F.E. Weissman........... 100,000 1.52 30.75 10/18/07 1,468,175 3,516,536
Todd K. Yamami................. 100,000 1.52 30.75 10/18/07 1,468,175 3,516,536
50,000 0.76 31.75 01/25/08 757,961 1,815,447
1,000 0.02 28.25 04/18/08 13,488 32,306
------------------------------ ---------------------------
151,000 2.30 2,239,624 5,364,289
</TABLE>
(1) Options granted in fiscal 2000 generally vest over a 24-month period,
except for the options granted on January 25, 2000 and April 18, 2000
which vest over a 12-month period.
(2) Based on an aggregate of 6,566,8450 options granted to employees,
including the individuals listed in the Summary Compensation Table, in
fiscal year 2000.
15.
<PAGE> 18
(3) The potential realizable value is calculated based on the term of the
option at its time of grant, 10 years, compounded annually. It is
calculated by assuming that the stock price on the date of grant
appreciates at the indicated annual rate, compounded annually for the
entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION
VALUES
<TABLE>
<CAPTION>
SHARES VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
EXERCISE (1) (2) OPTIONS AT FISCAL YEAR END (1) AT FISCAL YEAR END (1) (3)
--------------------------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary J. Sbona.............. 386,000 $9,237,872 1,562,083 691,917 $33,503,291 $1,813,084
Anthony J. Bettencourt..... 125,000 2,963,104 521,789 294,211 10,562,652 1,709,656
Hugh S. Njemanze........... 80,000 1,719,103 263,742 135,504 5,934,990 1,195,659
James E. Ticehurst......... 58,000 1,469,835 183,058 116,378 3,633,525 637,005
Ronald F.E. Weissman....... 98,000 2,449,715 199,960 109,334 4,275,286 1,403,551
Todd K. Yamami............. 56,000 1,465,683 96,128 109,828 1,043,320 431,281
</TABLE>
---------------
(1) These options are immediately exercisable in full at the date of grant, but
shares purchased upon exercise of unvested options are subject to a
repurchase right in our favor to repurchase unvested shares at the original
issuance price.
(2) Represents the fair market value of the underlying securities on the
exercise date minus the aggregate exercise price of such option.
(3) Calculated on the basis of the fair market value of the underlying
securities as of May 31, 2000, equal to $33.75 per share, the last trading
day of fiscal 2000, as reported by the Nasdaq National Market, minus the
aggregate exercise price.
EMPLOYMENT AGREEMENTS AND TERMINATION AND CHANGE IN CONTROL AGREEMENTS
Our 1995 Stock Option Plan provides that, in the event of (a) a sale or
exchange by the stockholders of all or substantially all of our voting stock or
certain mergers or consolidations to which we are a party and in which our
stockholders do not retain beneficial ownership of at least a majority of our or
our successor's voting stock, (b) the sale, exchange or transfer of all or
substantially all of our assets other than to one or more subsidiary
corporations, or (c) our liquidation or dissolution, the Board of Directors may
provide for the acquiring or successor corporation to assume or substitute new
options for the options outstanding under the 1995 Stock Option Plan. To the
extent that the options outstanding under the 1995 Stock Option Plan are not
assumed, substituted for, or exercised prior to such event, they will terminate;
provided, however, that we have granted options to certain of our officers,
including the individuals listed in the Summary Compensation Table, which
provide for acceleration of vesting upon such a change in control.
Under the 1995 Stock 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 us 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 completion of each succeeding full month of
continuous employment with us. 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 on the date of grant.
On July 31, 1997, Gary J. Sbona was appointed as our President and
Chief Executive Officer, and we entered into an agreement with Regent Pacific
Management Corporation, a management firm of which Mr. Sbona is the chief
executive officer, which agreement was subsequently amended. See "Certain
Transactions."
16.
<PAGE> 19
On September 23, 1999, we entered into a letter agreement with Anthony
J. Bettencourt to serve as President. See "Certain Transactions."
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The Compensation 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 our 1995 Stock Option Plan.
COMPENSATION POLICIES GENERALLY
The goals of our executive officer compensation policies are to
attract, retain and reward executive officers who contribute to our success, to
align executive officer compensation with our performance and to motivate
executive officers to achieve our business objectives. We use salary, executive
officer bonuses and stock options to achieve these goals.
SALARIES 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 2000 was provided
through our employee bonus plan for all executive officers except for our
President, whose bonus plan for fiscal 2000 was determined based upon
negotiations between the officer and us. In accordance with the committee's
goal, fiscal 2000 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.
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 one
year period from the date of grant. The committee believes that refresher
options have provided strong incentives for executive officers to remain with
us.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION. We have 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 1995 Stock 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
components of our 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
17.
<PAGE> 20
On July 31, 1997, Mr. Gary J. Sbona was appointed as our President and
Chief Executive Officer, and we entered into an agreement with Regent Pacific
Management Corporation, a management firm of which Mr. Sbona is the Chief
Executive Officer. The terms of the agreement were reached in arms-length
negotiations with Regent Pacific Management Corporation. Pursuant to the
original agreement, Regent Pacific provided us management services at a fee of
$50,000 per week, including the services of Mr. Sbona as Chief Executive Officer
and President and other Regent Pacific personnel as part of our management team.
The agreement had a one-year term and could be canceled by us after the
expiration of the initial 26-week period, with a minimum compensation to Regent
Pacific of $1.3 million for that initial period. As a result of a series of
amendments, the agreement has been extended through August 31, 2001. Under this
amended agreement, Regent Pacific continues to provide us the services of Mr.
Sbona as Chairman and Chief Executive Officer of Verity, and continues to
provide us additional Regent Pacific management services. The agreement provides
us with an option to further extend the term of this agreement through February
2002.
Mr. Sbona became an employee of Verity in February 1998 and receives a
salary of $52,000 per year, or $1,000 per week. The Board determined Mr. Sbona's
salary taking into consideration the value of the services rendered to Verity
and Mr. Sbona's interest in the amounts paid to Regent Pacific Management
Corporation. Mr. Sbona also received a bonus of $10,400 in fiscal 2000 based on
these same considerations.
In connection with Mr. Sbona's service as our Chief Executive Officer,
in our fiscal year ending May 31, 2000 our Board granted Mr. Sbona options to
purchase 606,000 shares and 394,000 shares of our Common Stock, at an exercise
price of $30.75 and $31.75 per share, respectively, which was the fair market
value of our Common Stock on the date of grant. The shares subject to such
options will vest entirely upon certain change of control transactions or upon a
termination of Mr. Sbona without cause. The options will also remain exercisable
for one year following the termination of Mr. Sbona's services. These options
were issued to Mr. Sbona after a determination by the Board that such options
were appropriate and advisable to retain Mr. Sbona's services.
Compensation Committee
Steven M. Krausz
Charles P. Waite, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Steven M. Krausz and Charles P. Waite, Jr. served as members of our
Board of Directors' compensation committee during the fiscal year ended May 31,
2000.
None of our executive officers serves as a member of the Board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our Board of Directors or compensation
committee.
We have entered into indemnification agreements with our directors and
officers. Such agreements require us to indemnify such individuals to the
fullest extent permitted by law.
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph shows the total stockholder return of an investment
of $100 in cash on October 6, 1995 for (i) our Common Stock, (ii) the Nasdaq
Stock Market and (iii) the American Stock Exchange Biotechnology Index (the
"AMEX Biotech"). All values assume reinvestment of the full amount of all
dividends and are calculated as of May 31 of each year:
Comparison of 5 year Cumulative Total Return on Investment from May 30, 1996
through May 31, 2000:
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any of our filings under the
1933 Act or the 1934 Act whether made before or after the date hereof and
irrespective of any general incorporation language in any such filing.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
18.
<PAGE> 21
COMPARISON OF 56 MONTH CUMULATIVE TOTAL RETURN*
AMONG VERITY, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
<TABLE>
<CAPTION>
10/6/95 10/95 11/95 12/95 1/96 2/96 3/96 4/96 5/96 6/96 7/96 8/96
------- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VERITY, INC. 100 199 269 239 205 257 182 186 212 155 118 132
NASDAQ STOCK MARKET (U.S.) 100 103 105 104 105 109 109 118 124 118 108 114
NASDAQ COMPUTER & DATA PROCESSING 100 110 111 109 108 115 114 128 132 127 114 117
</TABLE>
<TABLE>
<CAPTION>
9/96 10/96 11/96 12/96
---- ----- ----- -----
<S> <C> <C> <C> <C>
VERITY, INC. 67 64 90 83
NASDAQ STOCK MARKET (U.S.) 122 121 129 128
NASDAQ COMPUTER & DATA PROCESSING 130 127 136 135
</TABLE>
<TABLE>
<CAPTION>
1/97 2/97 3/97 4/97 5/97 6/97 7/97 8/97 9/97 10/97 11/97 12/97
---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VERITY, INC. 76 53 42 30 35 29 35 35 26 28 27 27
NASDAQ STOCK MARKET (U.S.) 138 130 121 125 139 144 159 159 168 159 160 157
NASDAQ COMPUTER & DATA PROCESSING 147 135 125 141 157 160 177 172 175 172 176 165
</TABLE>
<TABLE>
<CAPTION>
1/98 2/98 3/98 4/98 5/98 6/98 7/98 8/98 9/98 10/98 11/98 12/98
---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VERITY, INC. 24 28 45 51 42 58 56 28 37 59 93 143
NASDAQ STOCK MARKET (U.S.) 162 178 184 187 177 189 187 150 171 178 196 222
NASDAQ COMPUTER & DATA PROCESSING 178 202 219 220 205 242 234 190 227 221 256 295
</TABLE>
<TABLE>
<CAPTION>
1/99 2/99 3/99 4/99 5/99 6/99 7/99 8/99 9/99 10/99 11/99 12/99
---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VERITY, INC. 184 209 181 189 179 293 268 264 372 372 559 460
NASDAQ STOCK MARKET (U.S.) 254 231 249 257 250 272 267 278 279 301 338 412
NASDAQ COMPUTER & DATA PROCESSING 357 317 356 338 330 370 350 366 384 413 482 653
</TABLE>
<TABLE>
<CAPTION>
1/00 2/00 3/00 4/00 5/00
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
VERITY, INC. 368 577 441 351 365
NASDAQ STOCK MARKET (U.S.) 397 473 463 390 343
NASDAQ COMPUTER & DATA PROCESSING 580 687 645 494 434
</TABLE>
--------
*$100 INVESTED ON 10/6/95 IN STOCK OR INDEX --
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING MAY 31.
19.
<PAGE> 22
CERTAIN TRANSACTIONS
On July 31, 1997, Mr. Gary J. Sbona was appointed as our President and
Chief Executive Officer, and we entered into an agreement with Regent Pacific
Management Corporation, a management firm of which Mr. Sbona is the Chairman and
Chief Executive Officer. Pursuant to the original agreement, Regent Pacific
agreed to provide us management services, at a fee of $50,000 per week,
including the services of Mr. Sbona as Chief Executive Officer and President and
other Regent Pacific personnel as part of our management team. The agreement had
a one-year term and we retained the option to cancel the agreement after the
expiration of the initial 26-week period, with a minimum compensation to Regent
Pacific of $1.3 million for that initial period.
The agreement required that we indemnify Regent Pacific and Mr. Sbona
for certain liabilities arising out of the performance of services under the
agreement. On April 13, 1998, we agreed to amend our agreement with Regent
Pacific to provide that Mr. Sbona and other Regent Pacific personnel would serve
as part of our management team. The amendment also served to extend the term of
the agreement until August 31, 1999, and to extend the noncancelable period of
the agreement until February 28, 1999.
In connection with Mr. Sbona's service as our President and Chief
Executive Officer, the Compensation Committee of our Board also granted Mr.
Sbona an option to purchase 700,000 shares of our Common Stock, at an exercise
price of $2.563 per share. In October 1998, our Board granted Mr. Sbona another
option to purchase additional 520,000 shares of our common stock, at an exercise
price of $3.813 per share. In May 1999, our Board granted Mr. Sbona another
option to purchase additional 420,000 shares of our Common Stock, at an exercise
price of $16.250 per share. In October 1999 and January 2000, our Board granted
Mr. Sbona options to purchase 606,000 and 394,000 of our Common Stock, at an
exercise price of $30.75 and $31.75 per share, respectively. The shares subject
to such options will vest entirely upon certain change of control transactions
or upon a termination of Mr. Sbona without cause. The options will also remain
exercisable for one year following the termination of Mr. Sbona's services.
On March 12, 1999, we extended our agreement with Regent Pacific
Management Corporation until August 31, 2000. Under this amended agreement,
Regent Pacific continues to provide us certain services at a fee of $50,000 per
week. The new agreement provides us with an option to further extend the term of
this agreement through February 2001. Additionally, the parties agree that Mr.
Sbona became our employee effective February 16, 1998. Furthermore, on March 12,
1999, Mr. Sbona was appointed as our Chairman of the Board of Directors. Mr.
Sbona has been our Chief Executive Officer since July 1997 and has been a Board
member since May 1998.
On February 10, 2000, we extended our agreement with Regent Pacific
Management Corporation through August 31, 2001. This is the third amendment to
the retainer agreement between us and Regent Pacific Management Corporation
since the original agreement dated July 31, 1997. Under this amended agreement,
Regent Pacific continues to provide us the services of Gary J. Sbona as Chairman
and Chief Executive Officer of Verity, and continues to provide us additional
Regent Pacific management services. The agreement provides us with an option to
further extend the term of this agreement through February 2002.
On September 23, 1999, we entered into a letter agreement with Anthony
J. Bettencourt to serve as our President at a monthly salary of $25,000 with a
commission plan providing for the minimum payment of $200,000 in commissions
with respect to the year ending August 31, 2000, plus a $100,000 incentive bonus
payable on or before September 30, 2000. If Mr. Bettencourt's employment is
terminated with cause prior to September 30, 2000, he will not be entitled to
receive the $100,000 incentive bonus. The agreement is at-will, and further
provides that if Mr. Bettencourt is terminated without cause he will continue to
receive monthly payments of $41,667 for the term of the agreement and will be
entitled to receive the $100,000 incentive bonus. The term of the agreement is
one year.
20.
<PAGE> 23
OTHER MATTERS
Our Board of Directors knows of no other matters that will be presented
for consideration at the Annual Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
/S/ GORDON C. ATKINSON
Gordon C. Atkinson
Secretary
August 18, 2000
A COPY OF OUR ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM
10-K FOR THE FISCAL YEAR ENDED MAY 31, 2000 IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN REQUEST TO: CORPORATE SECRETARY, VERITY, INC., 894 ROSS DRIVE,
SUNNYVALE, CALIFORNIA 94089.
21.
<PAGE> 24
VERITY, INC.
1995 STOCK OPTION PLAN
(AS AMENDED THROUGH SEPTEMBER 21, 1999)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Verity, Inc. 1988 Stock Option Plan was
initially established effective as of August 31, 1988 (the "INITIAL PLAN"). The
Initial Plan is hereby amended and restated in its entirety as the Verity, Inc.
1995 Stock Option Plan (the "PLAN") effective immediately prior to the effective
date of the initial registration by the Company of its Stock under Section 12 of
the Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of the Participating Company Group and its stockholders by providing an
incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Incentive
Stock Options shall be granted, if at all, within ten (10) years from July 19,
1996. Notwithstanding the foregoing, if the maximum number of shares of Stock
issuable pursuant to the Plan as provided in Section 4.1 has been increased at
any time, all Incentive Stock Options shall be granted, if at all, no later than
the last day preceding the tenth (10th) anniversary of the earlier of (a) the
date on which the latest such increase in the maximum number of shares of Stock
issuable under the Plan was approved by the stockholders of the Company or (b)
the date such amendment was adopted by the Board.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
<PAGE> 25
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Verity, Inc., a Delaware corporation,
or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(f) "DIRECTOR" means a member of the Board or of the board
of directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value
of a share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(j) "INCENTIVE STOCK OPTION" means an Option intended to
be (as set forth in the Option Agreement) and which qualifies as an incentive
stock option within the meaning of Section 422(b) of the Code.
(k) "INSIDER" means an officer or a Director of the
Company or any other person whose transactions in Stock are subject to Section
16 of the Exchange Act.
(l) "NONSTATUTORY STOCK OPTION" means an Option not
intended to be (as set forth in the Option Agreement) or which does not qualify
as an Incentive Stock Option.
(m) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(n) "OPTION AGREEMENT" means a written agreement between
the Company and an Optionee setting forth the terms, conditions and restrictions
of the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
<PAGE> 26
(o) "OPTION RESERVE INCREASE" means the increase of four
hundred thousand (400,000) shares of Stock issuable under the Plan which was
approved by the Board on July 19, 1996.
(p) "OPTIONEE" means a person who has been granted one or
more Options.
(q) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.
(t) "RULE 16B-3" means Rule 16b-3 under the Exchange Act,
as amended from time to time, or any successor rule or regulation.
(u) "SECTION 162(m)" means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(v) "STOCK" means the common stock, $0.001 par value, of
the Company, as adjusted from time to time in accordance with Section 4.2.
(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(x) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at
the time an Option is granted to the Optionee, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
a Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
<PAGE> 27
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board, including any duly appointed Committee of the Board. All questions
of interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 POWERS OF THE BOARD. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or
times at which, Options shall be granted and the number of shares of Stock to be
subject to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock
or other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new
Option in substitution for, any Option or to waive any restrictions or
conditions applicable to any Option or any shares acquired upon the exercise
thereof; provided, however, that without the approval of the Company's
stockholders, the Board may not amend an Option granted from the Option Reserve
Increase to decrease the exercise price thereof, or grant a new Option in
substitution therefor;
<PAGE> 28
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of employment or service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make all
other determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
3.3 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating
Company is a "publicly held corporation" within the meaning of Section 162(m),
the Board may establish a Committee of "outside directors" within the meaning of
Section 162(m) to approve the grant of any Option which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income tax
purposes pursuant to Section 162(m).
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be twelve million one hundred twenty-one
thousand six hundred seventy-two (12,121,672) and shall consist of authorized
but unissued or reacquired shares of Stock or any combination thereof. If an
outstanding Option for any reason expires or is terminated or canceled or shares
of Stock acquired, subject to repurchase, upon the exercise of an Option are
repurchased by the Company, the shares of Stock allocable to the unexercised
portion of such Option, or such repurchased shares of Stock, shall again be
available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan, the Option Reserve Increase and to any outstanding Options,
in the Section 162(m) Grant Limit set forth in Section 5.5, and in the exercise
price per share of any outstanding Options. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Options to provide that such Options are exercisable for New Shares. In the
event of any such amendment, the number of shares subject to, and the exercise
price per share
<PAGE> 29
of, the outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded up or down to the nearest whole number, as determined by the
Board, and in no event may the exercise price of any Option be decreased to an
amount less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 4.2 shall be final,
binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option.
5.2 DIRECTORS SERVING ON COMMITTEE. At any time that any class of
equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, no member of a Committee established to administer the Plan in
compliance with the "disinterested administration" requirements of Rule 16b-3,
while a member, shall be eligible to be granted an Option.
5.3 OPTION GRANT RESTRICTIONS. Any person who is not an Employee
on the effective date of the grant of an Option to such person may be granted
only a Nonstatutory Stock Option. An Incentive Stock Option granted to a
prospective Employee upon the condition that such person become an Employee
shall be deemed granted effective on the date such person commences service with
a Participating Company, with an exercise price determined as of such date in
accordance with Section 6.1.
5.4 FAIR MARKET VALUE LIMITATION. To the extent that the
aggregate Fair Market Value of stock with respect to which options designated as
Incentive Stock Options are exercisable by an Optionee for the first time during
any calendar year (under all stock option plans of the Participating Company
Group, including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the
portion of such options which exceeds such amount shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5.4, options designated
as Incentive Stock Options shall be taken into account in the order in which
they were granted, and the Fair Market Value of stock shall be determined as of
the time the option with respect to such stock is granted. If the Code is
amended to provide for a different limitation from that set forth in this
Section 5.4, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code. If an Option is treated as an Incentive
Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 5.4, the Optionee may designate which
portion of such Option the Optionee is exercising and may request that separate
certificates representing each such portion be issued upon the exercise of the
Option. In the absence of such designation,
<PAGE> 30
the Optionee shall be deemed to have exercised the Incentive Stock Option
portion of the Option first.
5.5 SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided
in Section 4.2, at any such time as a Participating Company is a "publicly held
corporation" within the meaning of Section 162(m), no Employee shall be granted
one or more Options within any fiscal year of the Company which in the aggregate
are for the purchase of more than five hundred thousand (500,000) shares (the
"SECTION 162(m) GRANT LIMIT").
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Option shall be not less than the Fair Market
Value of a share of Stock on the effective date of grant of the Option, and (b)
no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an
exercise price per share less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying under the
provisions of Section 424(a) of the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Incentive Stock Option shall be exercisable after the expiration of
ten (10) years after the effective date of grant of such Option, (b) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, (c) no Option granted to a prospective Employee or
prospective Consultant may become exercisable prior to the date on which such
person commences service with a Participating Company, and (d) no Option granted
from the Option Reserve Increase shall be exercisable after the expiration of
eight (8) years after the effective date of grant of such Option.
<PAGE> 31
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an
Option may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions of
any law, regulation or agreement restricting the redemption of the Company's
stock. Unless otherwise provided by the Board, an Option may not be exercised by
tender to the Company of shares of Stock unless such shares either have been
owned by the Optionee for more than six (6) months or were not acquired,
directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and
all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall
be permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
<PAGE> 32
6.4 TAX WITHHOLDING. The Company shall have the right, but not
the obligation, to deduct from the shares of Stock issuable upon the exercise of
an Option, or to accept from the Optionee the tender of, a number of whole
shares of Stock having a Fair Market Value, as determined by the Company, equal
to all or any part of the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to such Option or the shares acquired upon the exercise thereof. Alternatively
or in addition, in its sole discretion, the Company shall have the right to
require the Optionee, through payroll withholding, cash payment or otherwise,
including by means of a Cashless Exercise, to make adequate provision for any
such tax withholding obligations of the Participating Company Group arising in
connection with the Option or the shares acquired upon the exercise thereof. The
Company shall have no obligation to deliver shares of Stock or to release shares
of Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be
subject to a right of first refusal, one or more repurchase options, or other
conditions and restrictions as determined by the Board in its sole discretion at
the time the Option is granted. The Company shall have the right to assign at
any time any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company. Upon
request by the Company, each Optionee shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder and
shall promptly present to the Company any and all certificates representing
shares of Stock acquired hereunder for the placement on such certificates of
appropriate legends evidencing any such transfer restrictions.
7. STANDARD FORMS OF OPTION AGREEMENT.
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as an "Incentive
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Immediately Exercisable Incentive Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as a "Nonstatutory
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Immediately Exercisable Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, (a) any Incentive Stock
Option granted hereunder (except for Incentive Stock Options granted from the
Option Reserve Increase) shall have a term of ten (10) years from the effective
date of grant of the Option, and (b) any Incentive Stock Option granted from the
Option Reserve Increase shall have a term of eight (8) years from the effective
date of grant of the Option.
<PAGE> 33
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority
from time to time to vary the terms of any of the standard forms of Option
Agreement described in this Section 7 either in connection with the grant or
amendment of an individual Option or in connection with the authorization of a
new standard form or forms; provided, however, that the terms and conditions of
any such new, revised or amended standard form or forms of Option Agreement
shall be in accordance with the terms of the Plan. Such authority shall include,
but not by way of limitation, the authority to grant Options which are not
immediately exercisable.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a
single or series of related transactions by the stockholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(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.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
<PAGE> 34
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
outstanding Options shall not terminate unless the Board otherwise provides in
its sole discretion.
9. PROVISION OF INFORMATION. Each Optionee shall be given access to
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. INDEMNIFICATION. In addition to such other rights of indemnification
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
<PAGE> 35
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
the Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no expansion in the class of persons
eligible to receive Nonstatutory Stock Options. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option or any
unexercised portion thereof, without the consent of the Optionee, unless such
termination or amendment is required to enable an Option designated as an
Incentive Stock Option to qualify as an Incentive Stock Option or is necessary
to comply with any applicable law or government regulation.
13. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS. Any other
provision of the Plan to the contrary notwithstanding, the terms of the Initial
Plan shall remain in effect and apply to all Options granted pursuant to the
Initial Plan.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing is the Verity, Inc. 1995 Stock Option Plan, as amended
through June 15, 2000.
---------------------------------
Secretary
---------------------------------
<PAGE> 36
<TABLE>
<CAPTION>
PLAN HISTORY
------------
<S> <C>
08/31/88 1988 Stock Option Plan adopted by the Board of Directors of
Verity, Inc., a California corporation, with a share reserve of
300,000
04/25/89 Date of Unanimous Written Consent of the Board of Directors
increasing share reserve by 395,506 to 695,506
04/25/89 1988 Stock Option Plan approved by Written Consent of
Shareholders with a share reserve of 695,506
02/27/90 Date Board of Directors increased the share reserve by 680,000
to 1,375,506
03/02/90 Date of Written Consent of Shareholders increasing share reserve
by 680,000 to 1,375,506
05/31/90 Date Board of Directors increased share reserve by 55,000 to
1,430,506
08/07/90 Date of Written Consent of Shareholders increasing share reserve
by 55,000 to 1,430,506
06/20/91 Date Board of Directors increased share reserve by 1,000,000 to
2,430,506
07/15/91 Date of Written Consent of Shareholders increasing share reserve
by 1,000,000 to 2,430,506
05/21/92 Date Board of Directors increased share reserve by 1,500,000 to
3,930,506
08/20/92 Date Board of Directors approved amended 1988 Stock Option Plan
re: changes requested by Department of Corporations
08/25/92 Date of Written Consent of Shareholders increasing share reserve
by 1,500,000 to 3,930,506
12/15/93 Date Board of Directors increased share reserve by 2,615,000 to
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
<S> <C>
6,545,506
02/28/94 Date of Written Consent of Shareholders increasing share reserve
by 2,615,000 to 6,545,506
06/10/95 Date Board of Directors increased share reserve by 708,674 to
7,254,180
06/26/95 Date Board of Directors amended and restated 1988
Stock Option Plan, effective immediately prior to
the effective date of the Company's initial
registration under Section 12 of the Exchange Act,
as the 1995 Stock Option Plan and increased share
reserve by 2,300,000 from 7,254,180 to 9,554,180
09/19/95 Date shareholders approved the 1995 Stock Option Plan with the
share reserve increase to 9,554,180
09/22/95 Effective date of Delaware reincorporation of
Verity, Inc., a California corporation, pursuant to
which each 5 shares outstanding of Verity
California became 1 share of Verity Delaware,
resulting in an adjusted share reserve of
1,910,836.
02/06/96 Date Board of Directors approved an increase in the
share reserve by 1,000,000 to 2,910,836 and
approved a limit on the number of shares that can
be granted to any one optionee during any fiscal
year of 500,000 shares pursuant to Section 162(m)
of the Internal Revenue Code by Unanimous Written
Consent.
03/28/96 Date of Stockholders Meeting approving an increase
in the share reserve by 1,250,000 to 2,910,836 and
a limit on the number of shares that can be granted
to any one optionee during any fiscal year of
500,000 shares pursuant to Section 162(m) of the
Internal Revenue Code.
07/19/96 Date Board of Directors approved an increase in the
share reserve by 400,000 to 3,310,836, amendments
providing for restrictions on grants from the share
reserve increase, and an amendment which requires
the per share option exercise price to be no less
than the fair market value of a share of stock on
the date of grant.
09/16/96 Date of Annual Stockholders Meeting approving an increase in the
share reserve by 400,000 to 3,310,836.
8/25/98 Date Committee approved an increase in the share reserve by
750,000 to 4,060,836.
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C>
09/24/98 Date of Annual Stockholders Meeting approving an increase in the
share reserve by 750,000 to 4,060,836.
10/20/98 Date Board of Directors approved removal of "disinterested
administration" requirement.
07/15/99 Date Board approved an increase in the share reserve by
1,000,000 to 5,060,836.
09/21/99 Date of Annual Stockholders Meeting approving an increase in the
share reserve by 1,000,000 to 5,060,836.
12/03/99 Date of 2:1 stock split increasing reserve to 10,121,672.
06/15/00 Date Board approved an increase in the share reserve by
2,000,000 to 12,121,672.
</TABLE>
<PAGE> 39
PROXY
VERITY, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 26, 2000
The undersigned hereby appoints Gary J. Sbona and James E. Ticehurst, and each
of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Verity, Inc. which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders of
Verity, Inc. to be held at the Sunnyvale Sheraton, 1100 N. Mathilda Avenue,
Sunnyvale, California on Tuesday, September 26, 2000 at 11:00 a.m. local time,
and at any and all postponements, continuations and adjournments thereof, with
all powers that the undersigned would possess if personally present, upon and in
respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4, AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
SEE REVERSE SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
<PAGE> 40
[x] Please mark votes as in this example.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW AND FOR
PROPOSALS 2, 3 AND 4.
1: To elect two Directors to hold office until the 2003 Annual Meeting of
Stockholders.
NOMINEES: (01) Stephen A. MacDonald, (02) Anthony J. Bettencourt.
[ ] FOR all nominees listed above. [ ] WITHHOLD AUTHORITY
to vote for all nominees
listed above.
[ ]
---------------------------------------------------------------
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, PLEASE WRITE THAT NOMINEE'S NAME IN THE SPACE
PROVIDED ABOVE)
2: To approve the amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of Common Stock from
100,000,000 shares to 200,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3: To approve the Company's 1995 Stock Option Plan, as amended, to increase
the aggregate number of shares of Common Stock authorized for issuance
under such plan from 10,121,672 shares 12,121,672 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4: To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Company for its fiscal year ending May 31, 2001.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
<PAGE> 41
Please vote, date and promptly return this proxy in the enclosed return envelope
which is postage prepaid if mailed in the United States.
Please sign exactly as your name appears hereon. If the stock is registered in
the names of two or more persons, each should sign. Executors, administrators,
trustees, guardians and attorneys-in-fact should add their titles. If signer is
a corporation, please give full corporate name and have a duly authorized
officer sign, stating title. If signer is a partnership, please sign in
partnership name by authorized person.
SIGNATURE DATE
----------------------------------- ---------------
SIGNATURE DATE
------------------------------------ ----------------
