1
SCHEDULE 14A INFORMATION(1)
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X](2)
Filed by a Party other than the Registrant [ ]
Check the appropriate box:(3)
[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 Rule 14a-11(c) or Rule 14a-12
CONNECTIVE THERAPEUTICS, INC.
(Name of Registrant as Specified in Its Charter)
CONNECTIVE THERAPEUTICS, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[X] No fee required.(4)
[ ] 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 transactions applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:*
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
- -----------------
* Set forth the amount on which the filing fee is calculated and how it was
determined.
1 The form of cover page to a proxy statement is set forth at the beginning
of Schedule 14A of the Exchange Act. See also Rule 14a-6(m) of the Exchange
Act. Note that this form of proxy statement cover page relates to an annual
shareholders meeting. To adapt it for other purposes, it may be necessary to
make changes to certain parts of it.
2 Proxy statements filed in connection with an annual shareholders meeting
are always filed by the registrant.
3 See Rule 14a-6(a) and (b) with respect to when a preliminary proxy
statement is required and the filing requirements for preliminary and
definitive proxy statements.
4 See Rule 14a-6(i) which provides that filing fees apply only to preliminary
proxy materials involving acquisitions, mergers, spinoffs, consolidations or
proposed sales or other dispositions of substantially all the assets of the
registrant.
2
CONNECTIVE THERAPEUTICS, INC.
3400 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
Dear Fellow Stockholders:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
(the "Annual Meeting") of Connective Therapeutics, Inc. ("Connective" or the
"Company"), which will be held on Wednesday, May 14, 1997, at 9:00 a.m., local
time, at the Company's principal executive offices in Palo Alto, California.
At the Annual Meeting, you will be asked to consider and vote upon the
following proposals: (i) the election of nine directors of the Company, (ii)
amendments to the Company's 1994 Stock Plan to increase the number of shares of
Common Stock issuable thereunder by 500,000 shares and to allow issuance of
shares to non-employee directors, (iii) an amendment to the Company's Amended
and Restated Certificate of Incorporation to change the name of the Company to
Connetics Corporation and (iv) the ratification of Ernst & Young LLP as
independent auditors of the Company for the year ended December 31, 1997.
The enclosed Proxy Statement more fully describes the details of the
business to be conducted at the Annual Meeting.
After careful consideration, the Company's Board of Directors has
unanimously approved the proposals and recommends that you vote IN FAVOR OF each
such proposal.
After reading the Proxy Statement, please mark, date, sign and return (if
possible, by no later than May 7, 1997) the enclosed proxy card in the
accompanying reply envelope. If you decide to attend the Annual Meeting and wish
to vote in person, please notify the Secretary of the Company and your proxy
will not be voted. YOUR SHARES CANNOT BE VOTED UNLESS YOU SIGN, DATE AND RETURN
THE ENCLOSED PROXY, OR ATTEND THE ANNUAL MEETING IN PERSON.
A copy of the Company's 1996 Annual Report is also enclosed.
We look forward to seeing you at the Annual Meeting.
Sincerely yours,
Thomas G. Wiggans
President and Chief Executive Officer
Palo Alto, California
April 3, 1997
IMPORTANT
PLEASE MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED POSTAGE-PREPAID RETURN ENVELOPE SO THAT IF YOU ARE
UNABLE TO ATTEND THE ANNUAL MEETING, YOUR SHARES MAY BE VOTED.
3
CONNECTIVE THERAPEUTICS, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1997
------------------------
The Annual Meeting of Stockholders (the "Annual Meeting") of Connective
Therapeutics, Inc. ("Connective" or the "Company") will be held at the Company's
principal executive offices at 3400 West Bayshore Road, Palo Alto, California
94303, on Wednesday, May 14, 1997, at 9:00 a.m., for the following purposes:
1. To elect nine (9) directors to hold office until the next Annual Meeting
of Stockholders and until their respective successors are duly elected
and qualified.
2. To approve amendments to the Company's 1994 Stock Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
500,000 shares to an aggregate of 2,000,000 shares, and to allow the
issuance of option shares to non-employee directors.
3. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to change the name of the company from
Connective Therapeutics, Inc. to Connetics Corporation.
4. To ratify the appointment of Ernst & Young LLP as independent auditors
of the Company for the year ending December 31, 1997.
5. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The record date for determining those stockholders entitled to notice of,
and to vote at, the Annual Meeting and any adjournment thereof is April 2, 1997.
A complete list of the stockholders entitled to vote at the Annual Meeting will
be available for inspection at the offices of the Company for at least ten days
prior to the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting.
However, to assure your representation at the meeting, please carefully read the
accompanying Proxy Statement which describes the matters to be voted upon at the
Annual Meeting and sign, date and return the enclosed proxy card in the reply
envelope provided. Should you receive more than one proxy because your shares
are registered in different names and addresses, each proxy should be returned
to assure that all your shares will be voted. If you attend the Annual Meeting
and vote by ballot, your proxy vote will be revoked automatically and only your
vote at the Annual Meeting will be counted. The prompt return of your proxy card
will assist us in preparing for the Annual Meeting.
By Order of the Board of Directors,
Joshua L. Green,
Secretary
Palo Alto, California
April 3, 1997
4
CONNECTIVE THERAPEUTICS, INC.
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Connective Therapeutics, Inc., a
Delaware corporation, with principal executive offices at 3400 West Bayshore
Road, Palo Alto, California 94303 ("Connective" or the "Company"), to be voted
upon at the Annual Meeting of Stockholders on Wednesday, May 14, 1997 (the
"Annual Meeting") and at any adjournment or adjournments thereof.
These proxy materials were first mailed to stockholders on or about April
9, 1997.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Stockholders. Each proposal is described in more detail in this Proxy Statement.
REVOCABILITY OF PROXIES
Any stockholder giving a proxy pursuant to this solicitation may revoke it
at any time prior to exercise of
such proxy by providing written notice of such revocation to the Secretary of
the Company at its offices at 3400 West Bayshore Road, Palo Alto, California
94303, or by providing a duly executed proxy bearing a later date, or by
attending the meeting and voting in person.
VOTING AND SOLICITATION
Stockholders of record at the close of business on April 2, 1997 are
entitled to notice of and to vote at the Annual Meeting. As of the close of
business on such date, the Company had shares of Common Stock outstanding
and entitled to vote and approximately stockholders of record, including
several holders who are nominees for an undetermined number of beneficial
owners. Each holder of Common Stock is entitled to one vote for each share held
as of the record date. The Company also has outstanding 200 shares of 7%
Convertible Preferred Stock, Series A, which shares are not entitled to be voted
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, whereas broker non-votes will not be
counted for purposes of determining whether a proposal has been approved or not.
The cost of soliciting these proxies, consisting of the printing, handling
and mailing of the proxy card and related material, and the actual expense
incurred by brokerage houses, custodians, nominees and fiduciaries in forwarding
proxy material to the beneficial owners of stock, will be paid by the Company.
In order to assure a majority vote will be present in person or by proxy at the
Annual Meeting, it may be necessary for certain officers, directors, regular
employees and other representatives of the Company to solicit proxies by
telephone, facsimile, telegraph or in person. These persons will receive no
extra compensation for their services. The Company also reserves the right to
have an outside solicitor conduct the solicitation of proxies and to pay such
solicitor for its services.
The Annual Report of the Company for the year ended December 31, 1996 has
been mailed to all stockholders entitled to notice of and to vote at the Annual
Meeting. The Annual Report is not incorporated into this Proxy Statement and is
not considered proxy soliciting material.
5
------------------------------------------------------------
PROPOSAL NO. 1
ELECTION OF DIRECTORS
------------------------------------------------------------
At the Annual Meeting, nine (9) directors will be elected by the
stockholders to serve until the next Annual Meeting and until their successors
are elected and qualified, or until their death, resignation or removal. The
Board of Directors will vote all proxies received by them IN FAVOR OF the nine
(9) nominees listed below unless otherwise instructed in writing on such proxy.
In the event any nominee is unable to or declines to serve as a director at the
time of the Annual Meeting, the proxies will be voted for an additional nominee
who will be designated by the current Board of Directors to fill the vacancy. As
of the date of this Proxy Statement, the Board of Directors is not aware of any
nominee who is unable or will decline to serve as director.
INFORMATION WITH RESPECT TO NOMINEES
Set forth below is information regarding the nominees, including
information furnished by them as to their principal occupation at present and
for the last five years, certain other directorships held by them, the year in
which each became a director of the Company and their ages as of December 31,
1996:
NOMINEE AGE POSITION(S) WITH THE COMPANY
------------------------------------- --- ------------------------------------------------
G. Kirk Raab(1)...................... 61 Chairman of the Board
Thomas G. Wiggans.................... 45 President, Chief Executive Officer and Director
Alexander E. Barkas, Ph.D.(1)........ 49 Director
Eugene A. Bauer, M.D................. 54 Director
Brian H. Dovey(2).................... 55 Director
John C. Kane......................... 57 Director
Thomas D. Kiley, Esq................. 53 Director
Kenneth B. Plumlee................... 36 Director
Joseph J. Ruvane, Jr.(1)(2).......... 71 Director
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
G. Kirk Raab has served as the Chairman of the Board of Directors of the
Company since October 1995. From 1985 to July 1995, Mr. Raab served as an
executive officer of Genentech, Inc. ("Genentech"), a biotechnology company, and
as President and Chief Executive Officer since 1990. Prior to joining Genentech
in 1985, Mr. Raab was President, Chief Operating Officer, and a Director of
Abbott Laboratories, and before that held executive positions with Beecham
Group, A.H. Robins and Pfizer, Inc. He is also Chairman of Shaman
Pharmaceuticals, Inc. and a director of Applied Imaging Inc., as well as three
private biotechnology companies. He is a trustee of KQED, San Francisco Public
Broadcasting stations and Colgate University.
Thomas G. Wiggans has served as President, Chief Executive Officer and as a
director of the Company since July 1994. From February 1992 to April 1994, Mr.
Wiggans served as President and Chief Operating Officer of CytoTherapeutics, a
biotechnology company. From 1980 to February 1992, Mr. Wiggans served at various
positions at Ares-Serono Group, a pharmaceutical company, including President of
its U.S. pharmaceutical operations and Managing Director of its U.K.
pharmaceutical operations. From 1976 to 1980 he held various sales and marketing
positions with Eli Lilly & Co., a pharmaceutical company. He is currently a
director of the Biotechnology Industry Organization, an industry trade group,
and a member of the governing body of its emerging company section. He was also
President of the Board of Directors of the Association of Biotechnology
Companies, also an industry trade group.
2
6
Alexander E. Barkas has served as a director of the Company since November
1993. He served as Acting CEO of the Company from November 1993 to August 1994
and as Chairman of the Board of Directors of the Company from August 1994 to
October 1995. He has been a partner with Kleiner Perkins Caufield & Byers
(KPCB), a venture capital investment firm, since 1991, prior to which he was a
retained consultant to KPCB for two years. Dr. Barkas also serves as Chairman of
the Board of Directors of Geron Corporation and as a director of several
privately-held medical technology companies.
Eugene A. Bauer has served as a director since January 1996 and also served
as a director from the Company's inception in February 1993 to September 1995.
Dr. Bauer has been Dean of the Stanford University School of Medicine since
1995, Professor, Department of Dermatology, Stanford University School of
Medicine since 1988, and Chief of the Dermatology Service at Stanford University
Hospital from 1988 to 1995. Previously he was a professor at Washington
University School of Medicine from 1982 to 1988. He has served as chairman of
two National Institutes of Health study sections of the National Institute of
Arthritis and Musculoskeletal and Skin Diseases and has served on a board of
scientific counselors for the National Cancer Institute.
Brian H. Dovey has served as a director of the Company since February 1995.
Mr. Dovey has been a general partner of Domain Associates, a venture capital
investment firm, since 1988. From 1986 to 1988, Mr. Dovey was President of Rorer
Group, Inc., a pharmaceutical company. Mr. Dovey also serves on the board of
directors of Creative BioMolecules, Inc., Geron Corporation, NABI, Inc., and
Vivus, Inc., all publicly held companies and as a director of several privately
held companies.
John C. Kane was nominated for election as a new director by the board in
March 1997. Mr. Kane joined Cardinal Health, Inc., a healthcare services
provider, as President and Chief Operating Officer in March 1993. Prior to
joining Cardinal, Mr. Kane served in various operational and management
positions at Abbott Laboratories for 19 years, most recently as President of
Ross Laboratories Division. Mr. Kane serves on several medical advisory councils
and educational foundations.
Thomas D. Kiley has served as a director of the Company since November
1993. He has been self-employed since 1988 as an attorney, consultant and
investor. From 1980 to 1988, he was an officer of Genentech, serving variously
as Vice President and General Counsel, Vice President for Legal Affairs and Vice
President for Corporate Development. From 1969 to 1980, he was with the Los
Angeles law firm of Lyon & Lyon and was a partner in such firm from 1975 to
1980. Mr. Kiley is also a director of Cardiogenesis, Inc., Geron Corporation,
Pharmacyclics, Inc. and certain private biotechnology and other companies.
Kenneth B. Plumlee, was appointed as a director by the board in January
1997. Mr. Plumlee founded Access Health Inc., a healthcare information company,
in 1988 and served as President, Chief Executive Officer and Director from 1988
to 1996 and is currently the Chairman of the Board. From 1986 to 1988, Mr.
Plumlee was responsible for the development of Ask-A-Nurse at Adventist Health
System, which was later acquired by Access Health.
Joseph J. Ruvane, Jr. has served as a director since November 1995. From
1981 to 1988, Mr. Ruvane served as President, Chief Executive Officer, and
Chairman of Glaxo, Inc., a pharmaceutical company. He has also served as the
executive director of Glaxo Holdings PLC. Mr. Ruvane currently serves on the
board of Intercardia, a public company and serves on the board of Pozen Inc., a
private company. He serves on the Thelonious Monk Institute of Jazz National
Advisory Board and on the University of Virginia Art and Sciences Alumni
Council.
The Company currently has authorized nine directors. Each director is
elected for a period of one year at the Company's annual meeting of stockholders
and serves until the next annual meeting or until his successor is duly elected
and qualified. The executive officers serve at the discretion of the Board of
Directors. There are no family relationships among any of the directors or
executive officers of the Company.
3
7
BOARD OF DIRECTORS COMMITTEES, COMPENSATION OF DIRECTORS AND OTHER INFORMATION
All directors hold office until the next annual meeting of stockholders of
the Company and until their successors have been elected and qualified. The
officers of the Company are appointed annually and serve at the discretion of
the Board of Directors.
The Board of Directors held a total of seven (7) meetings during the year
ended December 31, 1996. The Company has an Audit Committee and a Compensation
Committee of the Board of Directors. Each incumbent director attended at least
75% of the aggregate number of meetings of the Board of Directors and of the
Committees on which such directors served and that were held during the period
that such individual was a member of the Board of Directors, except that Mr.
Dovey attended five of the seven meetings held. There are no family
relationships among executive officers or directors of the Company.
The Company's Compensation Committee was formed in June 1994 to review and
approve the compensation and benefits for the Company's executive officers,
administer the Company's stock purchase and stock option plans and make
recommendations to the Board of Directors regarding such matters. The committee
is currently composed of Mr. Dovey and Mr. Ruvane. In addition, although no
longer a member, Mr. Raab served on the Compensation Committee through October
1996. The Compensation Committee held seven (7) meetings during the year ended
December 31, 1996.
The Board of Directors also has an Audit Committee (consisting of Mr.
Barkas, Mr. Raab and Mr. Ruvane), which reviews the results and scope of the
audit and other services provided by the Company's independent accountants. The
Audit Committee held no meetings in 1996, but held two (2) meetings in early
1997 to review the financial matters of the Company for the year ended December
31, 1996.
Non-employee directors currently receive $1,000 per quarter and $1,000 per
meeting for services provided in that capacity and are reimbursed for
out-of-pocket expenses incurred in connection with attendance at meetings of the
Board of Directors.
In October 1995, the Company entered into a Consulting Agreement with G.
Kirk Raab under which Mr. Raab serves as a director, consultant and the Chairman
of the Company's Board of Directors. Pursuant to such agreement, the Company
pays Mr. Raab a base annual consulting fee of $150,000. Mr. Raab was also
granted an option to purchase 67,450 shares of the Company's Common Stock at an
exercise price of $0.45 per share. Such shares vest at the rate of 8,431 shares
on April 1, 1996 and 1,405 shares each month thereafter. In January 1996, Mr.
Raab was granted an additional option to purchase 50,000 shares of the Company's
Common Stock at an exercise of $11.00 per share. Such shares vest at the rate of
6,250 shares on July 29, 1996 and 1,041 shares each month thereafter. In January
1997, Mr. Raab was granted an additional option to purchase 30,000 shares of the
Company's Common Stock at an exercise price of $7.125 per share. Such shares
will vest at the rate of 7,500 on January 27, 1998 and 1,875 shares each quarter
thereafter, provided Mr. Raab continues his service as a director or consultant
to the Company. Mr. Raab is reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors.
Non-employee directors of the Company are automatically granted options to
purchase shares of the Company's Common Stock pursuant to the terms of the
Company's 1995 Directors' Stock Option Plan. The Directors' Plan provides that
each person who first becomes a non-employee director of the Company after the
date of the Company's initial public offering, shall be granted a non-statutory
stock option to purchase 30,000 shares of Common Stock (the "First Option") on
the date on which the optionee first becomes a non-employee director of the
Company after February 1996. Thereafter, on the date of each annual meeting of
the Company's stockholders, each non-employee director (including directors who
were not granted a First Option prior to the date of such annual meeting) shall
be granted an option to purchase 7,500 shares of Common Stock (a "Subsequent
Option") if, on such date, he or she has served on the Company's Board of
Directors for at least six months. The Directors' Plan provides that the First
Option shall become exercisable in installments as to 25% of the total number of
shares subject to the First Option on each of the first, second, third and
fourth anniversaries of the date of grant of the First Option; each Subsequent
Option shall become exercisable in full on the first anniversary of the date of
grant of that Subsequent Option. The exercise price of
4
8
all stock options granted under the Directors' Plan shall be equal to the fair
market value of a share of the Company's Common Stock on the date of grant of
the option.
REQUIRED VOTE
The nine nominees receiving the highest number of affirmative votes of the
Company's Common Stock present at the Annual Meeting in person or by proxy and
entitled to vote shall be elected as directors.
------------------------------------------------------------
PROPOSAL NO. 2
APPROVAL OF AMENDMENTS TO 1994 STOCK PLAN
------------------------------------------------------------
At the Annual Meeting, the Company's stockholders are being asked to
approve amendments to the Company's 1994 Stock Plan (the "1994 Plan") to (i)
increase the number of shares of Common Stock reserved for issuance thereunder
by 500,000 shares to an aggregate of 2,000,000 shares and (ii) allow the
issuance of option shares to non-employee directors.
GENERAL
The 1994 Plan was adopted by the Board of Directors in August 1994. The
Board of Directors initially reserved 337,253 shares of Common Stock for
issuance under the 1994 Plan. The 1994 Plan was approved by the Company's
stockholders in August 1994. An additional 1,011,759 shares were approved for
issuance under the 1994 Plan in September 1995 and an additional 150,988 shares
in January 1996. In January 1997, the Board of Directors amended the 1994 Plan
to increase the number of shares reserved for issuance thereunder by 500,000
shares to an aggregate of 2,000,000, for which stockholder approval is
requested.
The Board of Directors believes that, in order to attract qualified
employees to the Company and to provide incentive to its current employees and
consultants, it is necessary to increase the number of shares available for
granting options or rights to purchase Common Stock to such employees and
consultants pursuant to the 1994 Plan. In addition, the 1994 Plan does not
currently allow option grants to non-employee directors. It is the
recommendation of the Board of Directors of the Company to amend the 1994 Plan
to allow future grants to non-employee directors. Accordingly, stockholders are
being asked to approve the amendments to the 1994 Plan at the Annual Meeting.
Options granted under the 1994 Plan may be either "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or nonstatutory stock options at the discretion of the
Board of Directors and as reflected in the terms of the written option
agreement. The Board of Directors, at its discretion, may also grant rights to
purchase Common Stock directly, rather than pursuant to stock options, subject
to certain restrictions discussed below.
The 1994 Plan is not a qualified deferred compensation plan under Section
401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
As of February 28, 1997 options for 1,315,365 shares were outstanding under
the 1994 Plan, 174,156 shares had been issued pursuant to the exercise of
options granted under such plan and 10,479 shares remained available for future
grants. No stock purchase rights have been granted under the 1994 Plan. Shares
not purchased under an option prior to its expiration will be available for
future option grants under the 1994 Plan. As of February 28, 1997, the aggregate
fair market value of shares subject to outstanding options under the 1994 Plan
was $9,865,237.50, based upon the closing price of the Common Stock as reported
on The Nasdaq Stock Market on such date. The actual benefits, if any, to the
holders of stock options issued under the 1994 Plan are not determinable prior
to exercise as the value, if any, of such stock options to their holders is
represented by the difference between the market price of a share of the
Company's Common Stock on the date of exercise and the exercise price of a
holder's stock option, as set forth below. No options to purchase shares of
Common Stock were granted during the fiscal year ended December 31, 1996 under
the Company's 1994 Plan to the Company's executive officers.
5
9
PURPOSE
The purposes of the 1994 Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employees and consultants of the Company and to promote the success
of the Company's business.
ADMINISTRATION
The 1994 Plan may be administered by the Board of Directors or by a
committee (or committees) of the Board of Directors. The 1994 Plan is currently
being administered by the Compensation Committee of the Board of Directors.
Members of the Compensation Committee receive no additional compensation for
their services in connection with the administration of the 1994 Plan. All
questions of interpretation of the 1994 Plan are determined by the Compensation
Committee and its decisions are final and binding upon all participants.
ELIGIBILITY
The 1994 Plan provides that either incentive stock options or nonstatutory
stock options may be granted to employees (including officers and directors who
are also employees) of the Company or any of its subsidiaries. In addition, the
1994 Plan currently provides that nonstatutory stock options may be granted to
consultants (excluding directors who are not compensated for their services or
are paid only a director's fee by the Company) of the Company or any of its
subsidiaries. A proposed amendment to the 1994 Plan, which stockholders are
requested to approve, would make non-employee directors also eligible for grants
of non-statutory stock options.
The Board of Directors or its committee selects the optionees and
determines the number of shares to be subject to each option. In making such
determination, certain factors are taken into account, including the duties and
responsibilities of the optionee, the value of the optionee's services, the
optionee's present and potential contribution to the success of the Company, and
other relevant factors.
The 1994 Plan provides that the maximum number of shares of Common Stock
which may be granted under options to any one employee during any fiscal year
shall be 150,000, subject to adjustment as provided in the 1994 Plan. There is
also a limit on the aggregate market value of shares subject to all incentive
stock options that may be granted to an optionee during any calendar year.
TERMS OF OPTIONS
Each option is evidenced by a stock option agreement between the Company
and the optionee. Each option is subject to the following additional terms and
conditions:
(a) Exercise of the Option. The Board of Directors or its committee
determines when options may be exercised. An option is exercised by giving
written notice of exercise to the Company specifying the number of full
shares of Common Stock to be purchased and by tendering payment of the
purchase price. The purchase price of the shares purchased upon exercise of
an option shall be paid in consideration of such form as is determined by
the Board of Directors or its committee and specified in the option
agreement, and such form of consideration may vary for each option.
(b) Exercise Price. The exercise price under the 1994 Plan is
determined by the Board of Directors or its committee and may not be less
than 100 percent of the fair market value of the Common Stock on the date
the option is granted for incentive stock options, or 85 percent for most
nonstatutory stock options. The fair market value per share is equal to the
closing price on The Nasdaq Stock Market on the date of grant. In the case
of an option granted to an optionee who owns more than ten percent of the
total combined voting power of all classes of stock of the Company or any
of its subsidiaries (a "10% Stockholder"), the exercise price must not be
less than 110 percent of the fair market value on the date of grant. In the
case of an option granted to an optionee who is the Company's Chief
Executive Officer or among the four other highest compensated officers, the
exercise price must not be less than 100 percent of the fair market value
on the date of grant.
6
10
(c) Termination of Service. If the optionee's employment or consulting
relationship terminates for any reason other than disability or death,
options under the 1994 Plan may be exercised not later than the period of
time determined by the Board or its committee after such termination and
may be exercised only to the extent the option was exercisable on the date
of termination. In no event may an option be exercised by any person after
the expiration of its term.
(d) Disability. If an optionee is unable to continue his or her
employment or consulting relationship with the Company as a result of his
total and permanent disability, options may be exercised within six months
(or such other period of time not exceeding twelve months as is determined
by the Board of Directors or its committee at the time of grant) of
termination and may be exercised only to the extent the option was
exercisable on the date of termination, but in no event may the option be
exercised after the expiration of its term. In the event that the
disability is total and permanent, options may be exercised within twelve
months of termination (but in no event later that the expiration date).
(e) Death. Under the 1994 Plan, if an optionee should die during the
term of the option, options may be exercised within twelve months after the
date of death to the extent the options were exercisable on the date of
death. In no event, however, may the option be exercised after expiration
of its term.
(f) Termination of Options. The 1994 Plan provides that options
granted under the 1994 Plan have the term provided in the option agreement.
In general, these agreements currently provide for a term of ten years.
Incentive stock options granted to an optionee who, immediately before the
grant of such option, is a 10% Stockholder, may not in any case have a term
of more than five years. No option may be exercised by any person after its
expiration.
(g) Option Not Transferable. An option is nontransferable by the
optionee other than by will or the laws of descent and distribution, and is
exercisable only by the optionee during his or her lifetime or, in the
event of the optionee's death, by a person who acquires the right to
exercise the option by bequest or inheritance or by reason of the death.
(h) Acceleration of Options. In the event of a merger or consolidation
in which the Company is not the surviving entity, the Board of Directors is
obligated to either accomplish a substitution or assumption of options or
give thirty days' notice of the discretionary acceleration of the
optionee's right to exercise his or her outstanding options as to all of
the optioned stock at any time within thirty days of such notice.
RESTRICTED STOCK PURCHASE RIGHTS
The 1994 Plan permits the granting of rights to purchase Common Stock of
the Company either alone, in addition to, or in tandem with other awards made by
the Company. Upon the granting of a stock purchase right under the 1994 Plan,
the offeree is advised in writing of the terms, conditions and restrictions
related to the offer, including the number of shares of Common Stock that such
person is entitled to purchase, the price to be paid and the time in which such
person must accept such offer. The purchase price for stock purchased pursuant
to such rights shall not be less than 85 percent of the fair market value of
such shares on the date of grant (or 100 percent of the fair market value if the
person is a Named Executive Officer, or 10% Stockholder). Stock purchase rights
granted to persons subject to Section 16 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), will be subject to any restrictions necessary
to comply with Rule 16b-3.
Unless the Administrator of the 1994 Plan determines otherwise, the
underlying stock purchase agreement for stock purchased pursuant to a stock
purchase right granted under the 1994 Plan will grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased shall be the original
purchase price paid by the purchaser.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of
7
11
consideration by the Company, appropriate adjustment shall be made in the
exercise price of each outstanding option, the number of shares subject to each
option, the annual limitation on grants to employees, as well as the number of
shares available for issuance under the 1994 Plan. In the event of the proposed
dissolution or liquidation of the Company, each option will terminate unless
otherwise provided by the Board of Directors or its committee.
PLAN BENEFITS
The following table sets forth information with respect to the stock
options granted to the Named Executive Officers, all current executive officers
as a group, all directors, and all employees and consultants (including all
current officers who are not executive officers) as a group under the 1994 Plan
as of February 28, 1997.
NUMBER OF SHARES SUBJECT
TO OPTIONS GRANTED UNDER WEIGHTED AVERAGE
NAME THE 1994 STOCK PLAN EXERCISE PRICE PER SHARE
------------------------------------------ ------------------------- ------------------------
Thomas G. Wiggans......................... 246,142 $ 3.1587
Cynthia M. Butitta........................ 87,319 $ 2.8974
Richard J. Hammel......................... 82,953 $ 2.0553
W. Scott Harkonen......................... 109,312 $ 1.9725
David A. Lowin............................ 70,835 $ 2.1423
Ernst Rinderknecht........................ 69,208 $ 1.6996
Edward P. Amento (1)...................... 28,104 $ 0.4448
Alexander E. Barkas....................... 16,862 $ 0.4448
Robert E. Curry........................... 16,862 $ 0.4448
Brian H. Dovey............................ 16,862 $ 0.4448
Thomas D. Kiley........................... 30,000 $ 1.5073
G. Kirk Raab.............................. 117,450 $ 4.9382
Joseph J. Ruvane, Jr...................... 30,000 $ 3.1073
Petri T. Vainio........................... 16,862 $ 0.4448
All current executive officers as a group
(6 persons)............................. 665,769 $ 2.5324
All current non-employee directors as a
group (10 persons)...................... 273,002 $ 2.7873
All employees (including all current
officers who are not executive officers)
as a group (40 persons)................. 428,027 $ 5.0788
- ---------------
(1) Resigned as an executive officer of the Company in October 1996. See
"Employment Agreements."
AMENDMENT AND TERMINATION
The Board of Directors may amend the 1994 Plan at any time or from time to
time or may terminate it without approval of the stockholders; provided,
however, that stockholder approval is required for any amendment to the 1994
Plan that increases the number of shares that may be issued under the 1994 Plan,
changes the class of persons eligible to receive options, modifies the
limitation on grants to employees described in the 1994 Plan, results in other
changes which would require stockholder approval to qualify options granted
under the 1994 Plan as performance-based compensation under Section 162(m) of
the Code, or, would require stockholder approval in order to preserve
qualification of the 1994 Plan under SEC Rule 16b-3. However, no action by the
Board of Directors or stockholders may alter or impair any option previously
granted under the 1994 Plan. The 1994 Plan shall terminate in August 2004,
provided that any options then outstanding under the 1994 Plan shall remain
outstanding until they expire by their terms.
8
12
UNITED STATES FEDERAL INCOME TAX INFORMATION
The following is a brief summary of the U.S. federal income tax
consequences of transactions under the 1994 Plan based on federal income tax
laws in effect on the date of this Proxy Statement. This summary is not intended
to be exhaustive and does not address all matters which may be relevant to a
particular optionee based on his or her specific circumstances. The summary
addresses only current U.S. federal income tax law and expressly does not
discuss the income tax laws of any state, municipality, non-U.S. taxing
jurisdiction or gift, estate or other tax laws other than federal income tax
law. The Company advises all optionees to consult their own tax advisors
concerning tax implications of option grants and exercises, the disposition of
stock acquired upon such exercises, and purchases and dispositions of stock
under stock purchase rights, under the 1994 Plan.
Options granted under the 1994 Plan may be either incentive stock options,
which are intended to qualify for the special tax treatment provided by Section
422 of the Code, or nonstatutory stock options, which will not so qualify. If an
option granted under the 1994 Plan is an incentive stock option, the optionee
will recognize no income upon grant of the incentive stock option and will incur
no tax liability due to the exercise except to the extent that such exercise
causes the optionee to incur alternative minimum tax. (See discussion below).
The Company will not be allowed a deduction for federal income tax purposes as a
result of the exercise of an incentive stock option regardless of the
applicability of the alternative minimum tax. Upon the sale or exchange of the
shares more than two years after grant of the option and one year after exercise
of the option by the optionee, any gain will be treated as a long-term capital
gain. If both of these holding periods are not satisfied, the optionee will
recognize ordinary income equal to the difference between the exercise price and
the lower of the fair market value of the Common Stock at the date of the option
exercise or the sale price of the Common Stock. The Company will be entitled to
a deduction in the same amount as the ordinary income recognized by the
optionee. Any gain or loss recognized on a disposition of the shares prior to
completion of both of the above holding periods in excess of the amount treated
as ordinary income will be characterized as long-term capital gain if the sale
occurs more than one year after exercise of the option or as short-term capital
gain if the sale is made earlier. For individual taxpayers, the current U.S.
federal income tax rate on long-term capital gains is capped at 28%, whereas the
maximum rate on other income is 39.6%. Capital losses for individual taxpayers
are allowed in full against capital gains plus $3,000 of other income.
All other options that do not qualify as incentive stock options are
referred to as nonstatutory stock options. An optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory stock option.
However, upon its exercise, the optionee will recognize ordinary income for tax
purposes measured by the excess of the fair market value of the shares over the
exercise price. The income recognized by an optionee who is also an employee of
the Company will be subject to income and employment tax withholding by the
Company by payment in cash by the optionee or out of the optionee's current
earnings. Upon the sale of such shares by the optionee, any difference between
the sale price and the fair market value of the shares as of the date of
exercise of the option will be treated as capital gain or loss, and will qualify
for long-term capital gain or loss treatment if the shares have been held for
more than one year.
ALTERNATIVE MINIMUM TAX
The exercise of an incentive stock option may subject the optionee to the
alternative minimum tax under Section 55 of the Code. The alternative minimum
tax is calculated by applying a tax rate of 26% to alternative minimum taxable
income of joint filers up to $175,000 ($87,500 for married taxpayers filing
separately) and 28% to alternative minimum taxable income above that amount.
Alternative minimum taxable income is equal to (i) taxable income adjusted for
certain items, plus (ii) items of tax preference less (iii) an exemption amount
of $45,000 for joint returns, $33,750 for unmarried individual returns and
$22,500 in the case of married taxpayers filing separately (which exemption
amounts are phased out for upper income taxpayers). Alternative minimum tax will
be due if the tax determined under the foregoing formula exceeds the regular tax
of the taxpayer for the year.
In computing alternative minimum taxable income, shares purchased upon
exercise of an incentive stock option are treated as if they had been acquired
by the optionee pursuant to the exercise of a nonstatutory stock
9
13
option. As a result, the optionee recognizes alternative minimum taxable income
equal to the excess of the fair market value of the Common Stock on the date of
exercise over the option exercise price. Because the alternative minimum tax
calculation may be complex, optionees should consult their own tax advisors
prior to exercising incentive stock options.
If an optionee pays alternative minimum tax as a result of the ISO
exercise, the amount of such tax may be carried forward as a credit against any
subsequent year's regular tax in excess of the alternative minimum tax for such
year.
REQUIRED VOTE
The approval of the amendments to the 1994 Stock Plan to increase the
number of shares reserved for issuance thereunder by 500,000 shares and to allow
the issuance of options to non-employee directors requires the affirmative vote
of the holders of a majority of the shares of the Company's Common Stock present
at the Annual Meeting in person or by proxy and entitled to vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the approval of the amendment
to the 1994 Plan and the reservation of shares for issuance thereunder. The
effect of an abstention is the same as that of a vote against the approval of
the adoption of the amendment to the 1994 Plan.
------------------------------------------------------------
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT NAME CHANGE
------------------------------------------------------------
The Company is asking its stockholders to approve a proposal to amend the
Company's Amended and Restated Certificate of Incorporation (the "Restated
Certificate") in order to change the name of the Company from Connective
Therapeutics, Inc. to Connetics Corporation. The Board of Directors has
unanimously approved such an amendment to the Restated Certificate. If the
corporate name change is approved by the stockholders, it is anticipated that
the Company's Common Stock will continue to be traded under the symbol "CNCT."
The Company desires to change the name of the Company from Connective
Therapeutics, Inc. to Connetics Corporation as it begins to establish a
commercial presence. The decision was made to change to a shorter name because
the Company believes it is easier to remember and denotes an organization that
is energetic and dynamic with significant forward momentum.
Upon consummation of the proposed change of name it will not be necessary
to surrender stock certificates. Instead, when certificates are presented for
transfer, new stock certificates bearing the name Connetics Corporation will be
issued.
If any action, suit, proceeding or claim is instituted, made or threatened,
relating to the name change, which makes effectuation of the name change
inadvisable in the opinion of the Company's Board of the Directors or there
exists any other circumstance which would make consummation of the name change
inadvisable in the opinion of the Board of Directors, the proposal to amend the
Restated Certificate may be terminated by the Board of Directors either before
or after approval of the name change by the stockholders.
10
14
REQUIRED VOTE
Approval of adoption of the Certificate of Amendment in order to change the
name of the Company requires the affirmative vote of the holders of a majority
of the shares of the Company's Common Stock present at the Annual Meeting in
person or by proxy and entitled to vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the stockholders vote FOR this
proposal to adopt the Certificate of Amendment whereby the Company's name will
be changed to Connetics Corporation.
------------------------------------------------------------
PROPOSAL NO. 4
RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS
------------------------------------------------------------
The firm of Ernst & Young LLP served as independent auditors for the
Company for the year ended December 31, 1996. The Board of Directors has
selected that firm to continue in this capacity for the current fiscal year. The
Company is asking the stockholders to ratify the selection by the Board of
Directors of Ernst & Young LLP, as independent auditors, to audit the accounts
and records of the Company for the year ending December 31, 1997, and to perform
other appropriate services. A representative of Ernst & Young LLP is expected to
be present at the Annual Meeting to respond to stockholders' questions, and if
he or she so desires, will be given an opportunity to make a brief statement.
The Board of Directors recommends a vote IN FAVOR OF the ratification of
the selection of Ernst & Young LLP. In the event that a majority of the shares
voted at the Annual Meeting do not vote for the ratification, the Board of
Directors will reconsider such selection. Under all circumstances, the Board of
Directors retains the corporate authority to change the auditors at a later
date.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors has general
responsibility for establishing the compensation of the Company's executive
officers and administers the Company's 1994 Stock Plan under which grants may be
made to such individuals.
General Compensation Policy.
Under the supervision of the Compensation Committee, the Company's
compensation policy is designed to attract and retain qualified key executives
critical to the Company's growth and long-term success. The Compensation
Committee seeks to have a portion of each executive's compensation contingent
upon the Company's performance as well as upon the individual's personal
performance. Accordingly, each executive officer's compensation package is
comprised of three elements: (i) base salary that reflects individual
performance and expertise, (ii) variable bonus awards payable in cash and tied
to the achievement of certain performance goals that the Compensation Committee
establishes from time to time for the Company or the individual and (iii)
long-term stock-based incentive awards that are designed to strengthen the
mutuality of interests between the executive officers and the Company's
stockholders.
Base Salary
The level of base salary is established primarily on the basis of the
individual's qualifications and relevant experience, the strategic goals for
which he or she has responsibility, the compensation levels at companies that
compete with the Company for business and executive talent (particularly in the
biopharmaceutical
11
15
industry), and the incentives necessary to attract and retain qualified
management. Base salary is adjusted each year to take into account the
individual's performance and to maintain a competitive salary structure.
Cash-Based Incentive Compensation
Cash bonuses are awarded to executive officers on the basis of their
success in achieving designated individual goals and the Company's success in
achieving specific company-wide goals, such as product development milestones,
the progress of clinical trials, successful product acquisitions or financings,
and stock price appreciation.
Long-Term Incentive Compensation
The 1994 Stock Plan provides executives and other key employees with
incentives to maximize long-term stockholder values. Stock option grants under
this plan by the Compensation Committee give the recipient a significant equity
stake in the Company and thereby closely align his or her interests with those
of the Company's stockholders. Factors considered in making such grants include
the individual's position in the Company, his or her performance and
responsibilities, and internal comparability considerations. No stock option
grants were made in fiscal 1996 to the executive officers named in the Summary
Compensation Table below.
Each option grant allows the executive to acquire shares of Common Stock at
a fixed price per share (the fair market value on the date of grant) over a
specified period of time (up to 10 years). The options typically vest in
periodic installments over a four-year period, contingent upon the executive
officer's continued employment with the Company. Accordingly, the option will
provide a return to the executive officer only if he or she remains in the
Company's service, and then only if the market price of the Common Stock
appreciates over the option term.
CEO Compensation
In setting the compensation payable during fiscal 1996 to the Company's
Chief Executive Officer, Thomas G. Wiggans, the Committee used the same factors
as described above for the executive officers. The Compensation Committee
reviewed Mr. Wiggans' compensation relative to comparables in the
biopharmaceutical industry and his performance over the last twelve (12) months
in achieving the Company's goals. Mr. Wiggans' annual base salary was set in
March 1996 at $280,000 with no change in base salary for 1997. In evaluating Mr.
Wiggans' attainment of corporate goals and achievement of key milestones, the
Compensation Committee awarded him a cash bonus of $80,000 in February 1996,
upon the successful completion of company milestones including the Company's
initial public offering, and a cash bonus of $40,000 in January 1997 for the
achievement of the Company's corporate goals for 1996 (in particular, additional
financings and the initiation of pivotal clinical trials for several of the
Company's products).
Compensation Committee:
Brian H. Dovey
Joseph J. Ruvane, Jr.
Petri T. Vainio
12
16
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Brian H. Dovey, Joseph J.
Ruvane, Jr. and Petri T. Vainio. In addition, although no longer a member, Mr.
Raab served on the Compensation Committee through October 1996. None of these
individuals was at any time during the year ended December 31, 1996 or at any
other time an officer or employee of the Company, except that Mr. Raab is the
Chairman of the Board of Directors.
No executive officer of the Company 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 the Company's Board of Directors or Compensation
Committee.
STOCK PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total stockholder
returns for the Company, the NASDAQ Composite Index, and the Nasdaq
Pharmaceutical Index for the period commencing January 31, 1996, the date of the
initial public offering of the Company's Common Stock, to the last day of the
Company's fiscal year ended December 31, 1996.
NASDAQ
MEASUREMENT PERIOD NASDAQ COMPOSITE PHARMACEUTICAL
(FISCAL YEAR COVERED) CONNECTIVE INDEX INDEX
2/1/96 100 100 100
2/29/96 91 103 97
3/29/96 71 103 95
4/30/96 78 112 100
5/31/96 98 117 103
6/28/96 89 112 78
7/31/96 62 102 82
8/30/96 54 107 88
9/30/96 76 116 94
10/31/96 71 114 90
11/29/96 66 121 89
12/31/96 73 121 91
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, which might incorporate future filings made by
the Company under those statutes, the preceding Compensation Committee Report on
Executive Compensation and Performance Graph are not to be incorporated by
reference into any of those previous filings; nor is such report or graph to be
incorporated by reference into any future filings which the Company may make
under those statutes.
13
17
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the Company
during the fiscal years ended December 31, 1996 and December 31, 1995 to the
Company's Chief Executive Officer and the Company's five other most highly
compensated executive officers during fiscal 1996 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
FISCAL YEAR -----------------------------------------
ENDED OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY($) BONUS($) COMPENSATION($)(1) COMPENSATION($)
- ------------------------------- ------------ --------- -------- ------------------ ---------------
Thomas G. Wiggans.............. 1996 $ 270,833 $120,000 $3,163 $ 76,809(2)
President and Chief Executive 1995 $ 225,000 $ 20,000 $1,240 $ 25,959(3)
Officer
Edward P. Amento, M.D.(4)...... 1996 $ 187,500 $ 95,000 $1,926 $ 144,472(5)
Formerly, Executive Vice 1995 $ 226,155 $ 20,000 $ 0 $ 3,340(6)
President of Scientific
and Medical Affairs
W. Scott Harkonen.............. 1996 $ 210,000 $ 26,000 $1,288 $ 0
Senior Vice President, 1995 $ 70,000 $ 40,782 $ 0 $ 20,262(7)
Product Development and
Operations
Cynthia M. Butitta............. 1996 $ 175,000 $ 20,000 $ 612 $ 0
Vice President, Finance and 1995 $ 14,133 $ 0 $ 0 $ 25,000(8)
Administration and Chief
Financial Officer
David A. Lowin, Esq............ 1996 $ 172,500 $ 30,000 $ 598 $ 0
Vice President, Intellectual 1995 $ 148,542 $ 25,000 $ 0 $ 0
Property and Chief Patent
Counsel
Richard J. Hammel.............. 1996 $ 165,000 $ 17,500 $1,613 $ 0
Vice President, Commercial 1995 $ 55,000 $ 10,000 $ 0 $ 0
Development
- ---------------
(1) Represents term life insurance premiums paid by the Company for the benefit
of the Named Executive Officer.
(2) Represents debt forgiveness on a loan. See "Employment Agreements."
(3) Represents $253 for taxes paid in conjunction with a bonus and $25,706 for
relocation expenses.
(4) Resigned from the Company in October 1996, but has been retained as a
consultant. See "Employment Agreements."
(5) Represents $99,922 for taxes paid by the Company on Dr. Amento's behalf in
conjunction with a bonus, $7,050 paid to Dr. Amento allowing him to repay
accrued interest on an outstanding loan and $37,500 in consulting fees.
(6) Represents reimbursement for disability insurance paid by the executive.
(7) Represents relocation and moving expenses.
(8) Represents bonus upon hire.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted to the Named Executive Officers during
the fiscal year ended December 31, 1996. In addition, no stock appreciation
rights were granted to these individuals during the year.
14
18
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information for the Named Executive Officers
with respect to exercises of options to purchase common stock in the fiscal year
ended December 31, 1996.
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
SHARES ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- -------------- ----------- ------------- ----------- -------------
Thomas G. Wiggans...... 0 $ 0 42,624 103,518 $ 332,689 $ 807,979
Edward P. Amento(2).... 6,000 $ 39,331 1,729 20,375 $ 13,495 $ 159,031
W. Scott Harkonen...... 0 $ 0 25,762 58,550 $ 201,078 $ 456,994
Cynthia M. Butitta..... 0 $ 0 20,398 54,921 $ 122,920 $ 330,959
David A. Lowin, Esq.... 0 $ 0 9,180 22,296 $ 71,652 $ 174,025
Richard J. Hammel...... 0 $ 0 19,203 43,750 $ 149,883 $ 341,478
- ---------------
(1) Based on the closing price of the Company's Common Stock on December 31,
1996 as reported on the NASDAQ National Market ($8.25 per share), minus the
per share exercise price, multiplied by the number of shares underlying the
option.
(2) Resigned as an executive officer of the Company in October 1996 but has been
retained as a consultant through July 1997 and remained a member of the
Board.
EMPLOYMENT AGREEMENTS
In June 1994, the Company entered into an employment agreement with Thomas
G. Wiggans, the President and Chief Executive Officer of the Company (the
"Wiggans Employment Agreement"). Pursuant to such agreement, Mr. Wiggans
receives an annual base salary of $225,000, subject to annual review. In
addition, Mr. Wiggans acquired 146,142 shares of Common Stock pursuant to a
restricted stock purchase agreement. The shares are released from the Company's
repurchase option at 1/10th after 6 months of employment and 1/60th each month
thereafter. The Wiggans Employment Agreement also entitles Mr. Wiggans to
receive continuation of salary and benefits and continuation of vesting with
respect to all of the Company's Common Stock held by Mr. Wiggans for nine months
following the termination of his employment from the Company other than for
cause, and to the payment of premiums on a life insurance policy in the amount
of $1,000,000. The Wiggans Employment Agreement also provided for reimbursement
by the Company of up to $110,000 for combined actual relocation and housing
expenses. Additionally, the Company and Mr. Wiggans have entered into two
interest-bearing loan agreements for up to $108,000 and for $225,000,
respectively, both of which are secured by the 146,142 shares of Common Stock
held by Mr. Wiggans. Amounts drawn on the $108,000 loan are due on the third
anniversary of the date of each draw. The principal balance owed to the Company
under the $108,000 loan was $72,000, which was also the largest aggregate amount
that was outstanding, payable under two $36,000 promissory notes with interest
at 5.63% and 5.73% per annum, respectively. These two loans were forgiven in
1996 for a total of $76,809, which includes principal plus interest. The
remaining $36,000 related to the original loan of $108,000 was loaned in July
1996 and payable under a promissory note with interest at 6.15% per annum. The
current balance owed, as of February 28, 1997, to the Company under this loan is
$37,321.26. The Board of Directors will consider forgiveness of this loan and
accrued interest as it becomes due. The $225,000 loan accrued interest at the
rate of 7.05% per annum and became due originally upon release of the
underwriters' lock up with respect to the Company's initial public offering.
This loan was amended and restated in July 1996. The new principal amount of the
loan is $256,401.10 at an interest rate of 6.74% per annum. Under the restated
terms, $50,000 principal amount plus interest accrued to date shall be due and
payable on each of July 31, 1997, July 31, 1998, July 31, 1999, July 31, 2000
and July 31, 2001. The current balance owed, as of February 28, 1997, to the
Company under this loan is $266,481.84, which is also the largest amount that
has been outstanding. The balance of the principal amount outstanding plus all
accrued interest shall be due and payable on July 31, 2001.
15
19
In November 1993, the Company entered into an employment agreement with
Edward Amento, M.D., who was Executive Vice President, Research and Preclinical
Development of the Company until October 1996 and who remains a director of the
Company up to the Annual Meeting. Pursuant to such agreement, Dr. Amento
received an annual base salary of $175,000, subject to annual review.
Effectively May 1, 1994, Dr. Amento's base salary was increased to $225,000. Dr.
Amento was also eligible for a performance bonus of up to $5,000 per quarter and
a bonus of $85,000, net of taxes, upon the Company's successful completion of an
initial public offering. In addition, pursuant to the employment agreement, the
Company loaned Dr. Amento $105,000, of which $20,000 was repaid in 1995. The
outstanding principal and accrued interest of $92,051 was repaid in May 1996.
Pursuant to a Stock Restriction Agreement and a Common Stock Purchase Agreement,
shares of Common Stock held by Dr. Amento are subject to repurchase by the
Company at the original purchase price in the event of cessation of service to
the Company. The shares are released from the Company's repurchase option at
1/48th of the original purchase of 134,900 shares per month. In addition, Dr.
Amento acquired 57,557 shares pursuant to a Restricted Stock Purchase Agreement
which specifies the vesting of such shares based upon completion of certain
milestones or a fixed number of years. The milestones related to this Restricted
Stock Purchase were forgiven by the Board in July 1996 as the Board determined
the intent of such milestones had been accomplished even though all milestones
had not been met. In the event of a change of control of the Company, all of the
shares held by Dr. Amento are immediately released from the Company's right of
repurchase.
In October 1996, the Company and Dr. Amento, entered into a Laboratory
Services Agreement, which agreement will be assigned by Dr. Amento to a
not-for-profit laboratory to be established by Dr. Amento. Under the terms of
the agreement, Dr. Amento will conduct research, including research on behalf of
the Company. Pursuant to this agreement, the Company has agreed to provide
$250,000 to assist in establishing the laboratory and an additional grant of
$100,000 per year starting upon the opening of the laboratory and the execution
of a Sponsored Research Agreement to be agreed upon between the parties to cover
two years of directed research at the laboratory relating to relaxin diagnosis
and therapeutics and TCR peptides for diagnosis and therapeutic autoimmune
disease applications. The Company will also provide clinical space and
researchers, along with costs to support three full time employees at the
laboratory. The Company will have all intellectual property rights arising from
directed research projects fully funded by the Company and will have a right of
first negotiation for certain other intellectual property developed by the
laboratory.
In conjunction with the Laboratory Services Agreement, the Company also
entered into an agreement with Dr. Amento. Pursuant to this agreement, Dr.
Amento resigned his employment relationship with the Company effective October
31, 1996, and became a consultant to the Company. For the first nine months' of
consulting work, Dr. Amento will receive a fee of $18,750 per month; after such
initial nine month period (and for consulting services exceeding one day per
week during the initial nine months), Dr. Amento will be compensated at a rate
of $2,000 per day. The Company will also pay Dr. Amento $25,000 for each
successfully completed transaction in which his consultation was requested, by
the Company and given by Dr. Amento. Dr. Amento will be provided $24,000 over
six months for office expenses. Also under the Agreement, Dr. Amento will resign
his position as a director on or before June 30, 1997.
CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS
On December 7, 1995, the Company entered into a Master Bridge Loan
Agreement with certain stockholders of the Company (the "Bridge Investors"),
pursuant to which such Bridge Investors severally and unconditionally agreed to
lend up to a maximum aggregate total of $5 million to the Company. No loans were
made under this Agreement, and the Company's ability to call for any loans
expired upon the closing of the Company's initial public offering in February
1997. In consideration for this commitment, in February 1996, the Company
delivered to each such Bridge Investor a warrant to purchase a number of shares
of Common Stock equal to (a) the original face principal amount of such Bridge
Investor's commitment times (b) 5%, divided by (c) $11.00, the price per share
of the initial public offering. The exercise price of the warrants is $11.00 per
share. The following five percent stockholders of the Company are Bridge
Investors: Kleiner Perkins Caufield & Byers VI, L.P., Sierra Ventures IV, L.P.,
Sprout Capital VII, L.P., and Domain Partners III, L.P. See "Principal
Stockholders."
16
20
In August 1994, the Company sold to Thomas G. Wiggans, President and Chief
Executive Officer of the Company, 146,142 shares of restricted Common Stock for
$0.45 per share pursuant to the 1994 Purchase Plan. These shares are subject to
repurchase by the Company, at the original $0.45 per share purchase price, upon
Mr. Wiggans' cessation of service prior to vesting in those shares. In
connection with the share purchase, the Company loaned $65,000 to Mr. Wiggans
pursuant to a promissory note secured by the 146,142 shares of Common Stock
purchased by Mr. Wiggans. See "Management -- Employment Agreements."
In November 1993, the Company entered into an employment agreement with
Edward Amento, M.D., Executive Vice President, Research and Preclinical
Development of the Company. In October 1996, Dr. Amento resigned from the
Company and entered into a Laboratory Services Agreement and a consultant
agreement with the Company. See "Management -- Employment Agreements."
In October 1995, the Company entered into a consulting agreement with G.
Kirk Raab, the Chairman of the Company's Board of Directors. See
"Management -- Board of Directors Committees; Compensation of Directors and
Other Information."
In March 1996, the Board authorized the Company to enter into individual
agreements with each of the Company's directors and executive officers to
provide in the event of a merger or acquisition of the Company and another
entity, all stock options held by such person will automatically vest in full
(i) unless the Company is the surviving entity after such transaction and the
Company's stockholders immediately prior to such transaction own a majority of
the outstanding securities of the surviving entity or (ii) if, as the result of
such transaction, the officer or director's position with the Company is
terminated or his or her responsibilities are adversely changed or reduced
without his or her written consent within twelve months of such transaction.
In December 1996, the Company acquired the exclusive U.S. and Canadian
rights to Ridaura(R) (auranofin), a disease modifying antirheumatic drug, from
SmithKline Beecham Corporation and related entities ("SmithKline"). As
consideration to SmithKline, the Company provided a $3 million upfront cash
payment, an $11.0 million promissory note, 637,733 shares of the Company's
common stock, and an obligation to pay up to $6.0 million in sales-based royalty
payments, for an aggregate purchase price of up to $29.0 million. The promissory
note is payable in two installments in January 1998 and January 1999 (of $6.0
million and $5.0 million, respectively) and is secured by the intellectual
property acquired from SmithKline. The total value of the shares issued to
SmithKline is required to be $9.0 million on December 31, 1997; to achieve such
value, the Company may be obligated to issue additional shares to SmithKline on
such date, or may repurchase a portion of the originally-issued shares to reduce
the market value of the remaining shares to $9.0 million. Under a related
Transitional Services Agreement, customer orders and distribution for the
product will continue to be managed by SmithKline through 1997. SmithKline will
receive no additional consideration for performing such services. The parties
also entered into a Supply Agreement, under which SmithKline will manufacture
and supply Rider (in final finished package form) to the Company for an initial
term of five years. As a result of the share issuance, SmithKline became the
beneficial owner of more than five percent of the Company's Common Stock. See
"Common Stock Ownership of Certain Beneficial Owners and Management."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors, and will continue to be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The members of the Board of Directors, the executive officers of the
Company and persons who hold more than ten percent (10%) of the Company's
outstanding Common Stock are subject to the reporting requirements of Section
16(a) of the Securities Exchange Act of 1934, which requires such individuals to
file reports with respect to their ownership of and transactions in the
Company's securities. Officers, directors and
17
21
greater than ten percent (10%) stockholders are required to furnish the Company
with copies of all such reports they file.
Based upon the copies of those reports furnished to the Company and written
representations that no other reports were required to be filed, the Company
believes that all reporting requirements under Section 16(a) for the year ended
December 31, 1996 were met in a timely manner by executive officers, Board
members and greater than ten percent (10%) stockholders, except (i) Alexander E.
Barkas, a director of the Company, was late to file a Form 4 reporting one
transaction, a 16,000 share acquisition, in August 1996, (ii) Edward P. Amento,
a director of the Company, was late to file a Form 4 reporting one transaction,
an exercise of a stock option in October 1996 and (iii) several general partners
of Domain Partners III, a principal stockholder, were late to file Form 3's in
connection with the Company's becoming a public company in February 1996.
18
22
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
February 28, 1997 by (i) all persons who are beneficial owners of five percent
or more of the Company's Common Stock, (ii) each director and nominee, (iii)
each executive officer of the Company, and (iv) all current directors and
executive officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, and the
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
NUMBER OF
NAME SHARES(1) PERCENTAGE
-------------------------------------------------------------- --------- ----------
Sierra Ventures IV, L.P.(2)................................... 830,564 9.1%
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
Sprout Capital VII, L.P.(3)................................... 822,624 9.1
650 Town Centre Drive, Suite 810
Costa Mesa, CA 92626
State of Wisconsin Investment Board(21)....................... 695,000 7.7
P.O. Box 7842
Madison, WI 53707
SmithKline Beecham Properties, Ltd.(21)....................... 637,733 7.0
1403 Foulk Road #102
Wilmington, DE 19803-2775
Domain Partners III, L.P.(4).................................. 621,181 6.8
One Palmer Square, Suite 515
Princeton, NJ 08542
Kleiner Perkins Caufield & Byers VI, L.P.(5).................. 523,121 5.8
2750 Sand Hill Road
Menlo Park, CA 94010
Edward P. Amento, M.D.(6)..................................... 204,753 2.3
Thomas G. Wiggans(7).......................................... 200,674 2.2
Eugene A. Bauer, M.D.......................................... 145,467 1.6
Petri T. Vainio(2)(8)......................................... 841,103 9.3
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
Robert E. Curry (3)(9)........................................ 833,163 9.2
650 Town Centre Drive #810
Costa Mesa, CA 92626
Brian H. Dovey(4)(10)......................................... 627,505 6.9
One Palmer Square, Suite 515
Princeton, NJ 08542
Alexander E. Barkas, Ph.D.(5)(11)............................. 567,645 6.2
2750 Sand Hill Road
Menlo Park, CA 94010
G. Kirk Raab(12).............................................. 46,539 *
Ernst H. Rinderknecht, Ph.D.(13).............................. 42,726 *
Thomas D. Kiley(14)........................................... 41,295 *
W. Scott Harkonen(15)......................................... 33,999 *
David A. Lowin, Esq.(16)...................................... 33,162 *
Joseph J. Ruvane, Jr.(17)..................................... 28,804 *
Cynthia M. Butitta(18)........................................ 26,675 *
19
23
NUMBER OF
NAME SHARES(1) PERCENTAGE
-------------------------------------------------------------- --------- ----------
Richard J. Hammel(19)......................................... 24,831 *
Kenneth B. Plumlee(20)........................................ 0
John C. Kane.................................................. 0
All directors and officers as a group (16 persons)
(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)
(18)(19)(20)............................................. 5,031,074 55.4%
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned
by a person includes shares of Common Stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of
February 28, 1997. Such exercisable options are shown in the footnotes to
this table for each such person. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person.
(2) Includes 793,941 shares held by Sierra Ventures IV, L.P., 31,790 shares
held by Sierra Ventures IV International, L.P., 4,647 shares issuable upon
exercise of warrants held by Sierra Ventures IV, L.P., exercisable within
60 days of February 28, 1997 and 186 shares issuable upon exercise of
warrants held by Sierra Ventures IV International, L.P., exercisable within
60 days of February 28, 1997. Petri T. Vainio, a director of the Company,
is a general partner of the general partner of Sierra Ventures IV, L.P. and
Sierra Ventures IV International, L.P., and as such, may be deemed to share
voting and investment power with respect to such shares. Dr. Vainio
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest in such shares.
(3) Includes 508,163 shares held by Sprout Capital VII, L.P., 267,119 shares
held by Sprout Capital VI, L.P., 42,299 shares held by DLJ Capital
Corporation, 3,134 shares issuable upon exercise of warrants held by Sprout
Capital VII, L.P., exercisable within 60 days of February 28, 1997, 1,648
shares issuable upon exercise of warrants held by Sprout Capital VI, L.P.,
exercisable within 60 days of February 28, 1997 and 261 shares issuable
upon exercise of warrants held by DLJ Capital Corporation exercisable
within 60 days of February 28, 1997. Robert E. Curry, Ph.D., is a general
partner of the general partner of Sprout Capital VII, L.P. and Sprout
Capital VI, L.P. and an employee of DLJ Capital Corporation, is a director
of the Company. Dr. Curry disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest in such shares.
(4) Includes 592,450 shares held by Domain Partners III, L.P., 20,734 shares
held by DP III Associates, L.P., 4,215 shares held by Domain Associates,
3,654 shares issuable upon exercise of warrants held by Domain Partners
III, L.P., exercisable within 60 days of February 28, 1997 and 128 shares
issuable upon exercise of warrants held by DP III Associates L.P.,
exercisable within 60 days of February 28, 1997. Brian H. Dovey, a general
partner of the general partner of Domain Partners III, L.P. and DP III
Associates, L.P., is a director of the Company. Mr. Dovey is also a general
partner of Domain Associates. Mr. Dovey disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest in such shares.
(5) Includes 517,203 shares owned by Kleiner Perkins Caufield & Byers VI, L.P.,
5,131 shares issuable upon exercise of warrants held by Kleiner Perkins
Caufield & Byers VI, L.P., exercisable within 60 days of February 28, 1997
and 787 shares issuable upon exercise of warrants held by KPCB VI Founders'
Fund, L.P., exercisable within 60 days of February 28, 1997. Alexander
Barkas, a director of the Company, is a limited partner of KPCB VI
Associates, the general partner of Kleiner Perkins Caufield & Byers VI,
L.P. and KPCB VI Founder's Fund, L.P., and, as such, Dr. Barkas may be
deemed to share voting and investment power with respect to such shares.
Dr. Barkas disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
20
24
(6) Includes shares held indirectly by Dr. Amento as trustee of the Amento
Family Trust. Excludes 15,808 shares issuable upon the exercise of
outstanding options, of which no shares are exercisable within 60 days of
February 28, 1997.
(7) Includes 54,803 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(8) Includes 10,539 shares issuable upon exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(9) Includes 10,539 shares issuable upon exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(10) Includes 6,324 shares issuable upon exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(11) Includes 10,539 shares issuable upon exercise of outstanding options
exercisable within 60 days of February 28, 1997. Also includes 17,985
shares of Common Stock owned by Linda Wijcik, spouse of Dr. Barkas.
(12) Includes 40,919 shares issuable upon exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(13) Includes 10,539 shares issuable upon exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(14) Includes 8,993 shares held in the Thomas D. and Nancy L.M. Kiley Revocable
Trust under Agreement dated August 7, 1981. Also includes 18,813 shares
issuable upon exercise of outstanding options exercisable within 60 days of
February 28, 1997.
(15) Includes 32,788 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(16) Includes 11,803 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(17) Represents 28,804 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(18) Represents 26,675 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(19) Includes 24,450 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1997.
(20) Excludes 30,000 shares issuable upon the exercise of outstanding options,
of which no shares are exercisable within 60 days of February 28, 1997.
(21) Such information has been obtained from a filing on Form 13-G by such
person.
COMPENSATION PLANS
The following information about the Company's compensation plans is
provided to stockholders in accordance with the requirements of such plans and
applicable law:
1995 EMPLOYEE STOCK PURCHASE PLAN
GENERAL
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1995 and approved by the
stockholders in January 1996. The Purchase Plan is designed to allow eligible
employees (including officers and employee directors) of the Company and
participating subsidiaries to purchase shares of Common Stock, at semi-annual
intervals, through their
21
25
periodic payroll deductions under the Purchase Plan. A reserve of 100,000 shares
of Common Stock has been established for this purpose.
The Purchase Plan is implemented through a series of successive offering
periods, each with a maximum duration of 24 months. Each offering period is
comprised of four purchase periods, each with a maximum duration of six months.
The current offering period began December 1, 1996 and will end on November 30,
1998. As of December 31, 1996, 11,874 shares had been purchased under the
Purchase Plan by the Company's employees, including its executive officers.
Directors who are not executive officers are not eligible to participate in the
Purchase Plan.
The Purchase Plan is intended to qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Code.
ADMINISTRATION
The Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All questions of interpretation or application of the
Purchase Plan are determined by the committee.
ELIGIBILITY AND PARTICIPATION
Employees (including officers and employee directors) who are employed for
at least 20 hours per week and more than five months per calendar year with the
Company (including subsidiaries of the Company approved by the Board) are
eligible to participate in an offering under the Purchase Plan, subject to
certain limitations imposed by Section 423(b) of the Internal Revenue Code and
limitations on stock ownership as set forth in the Purchase Plan. Eligible
employees become participants in the Purchase Plan by filing with the payroll
office of the Company a stock purchase agreement and a payroll deduction
authorization form prior to the date an eligible employee first commences
participation in the offering period in effect.
GRANT AND EXERCISE OF PURCHASE RIGHT
At the beginning of an offering period, each participant is granted a right
to purchase up to that number of shares determined by dividing such employee's
payroll deductions accumulated prior to a purchase period in the offering period
and retained in the participant's account as of the end of the purchase period
by eighty-five percent (85%) of the lower of (i) the fair market value of a
share of the Company's Common Stock at the date an eligible employee first
commences participation in the offering period in effect (on the start date of
the offering period) or (ii) the fair market value of a share of the Company's
Common Stock at the end of the purchase period; provided that the maximum number
of shares an Employee may purchase during each Offering Period may not exceed
$12,500 divided by the fair market value of a share of the Company's Common
Stock on the date such employee commences participation in the offering period;
and provided further that such purchases are subject to the limitations set
forth below. No employee may be granted a purchase right under the Purchase Plan
(i) if, immediately after the grant, such employee (or any other person whose
stock would be attributed to such employee pursuant to Section 424(d) of the
Code) would own stock and/or hold outstanding options to purchase stock
possessing five percent or more of the total combined voting power or value of
all classes of stock of the Company or of any subsidiary of the Company, or (ii)
if such purchase right, when aggregated with his or her rights to purchase stock
under any other purchase right granted under all employee stock purchase plans
(within the meaning of Section 423 of the Code) of the Company and its
subsidiaries, would otherwise permit such employee to purchase more than $25,000
worth of stock of the Company (determined at the time such rights are granted)
for each calendar year in which such rights are outstanding at any time.
The Company may make a pro rata reduction in the number of shares subject
to purchase rights if the total number of shares that would otherwise be subject
to purchase rights exceeds the number of remaining available shares in the
Purchase Plan. Unless an employee withdraws his or her participation in the
Purchase Plan by giving written notice to the Company of his or her election to
withdraw all accumulated payroll deductions prior to the end of a purchase
period, the employee's purchase right for the purchase of shares will be
exercised automatically at the end of the purchase period, and the maximum
number of full shares subject
22
26
to purchase right that are purchasable with the accumulated payroll deductions
in his or her account will be purchased at the applicable purchase price
determined as provided below.
PURCHASE PRICE
The purchase price per share at which shares are sold to participating
employees under the Purchase Plan is eighty-five percent of the lower of (i) the
fair market value of a share of the Company's Common Stock at the date an
eligible employee first commences participation in the offering period in effect
(generally the start date of the offering period) or (ii) the fair market value
of a share of the Company's Common Stock at the end of a purchase period. The
fair market value of the Common Stock on a given date shall be the closing
selling price if the Common Stock is listed on a stock exchange or on the Nasdaq
National Market.
PAYROLL DEDUCTIONS
The purchase price of the shares to be acquired under the Purchase Plan is
accumulated by payroll deductions over the offering period. The deductions may
not be less than one percent (1%) of a participant's aggregate compensation
during the offering period, nor more than maximum of fifteen percent (15%). A
participant may discontinue his participation in the Purchase Plan or, on one
occasion only during the offering period, may reduce his or her rate of payroll
deductions. Payroll deductions for a participant shall commence on the first
payroll following the date an eligible employee first commences participation in
the offering period in effect and shall (unless sooner terminated by the
participant) continue through the pay day ending with or immediately prior to
the last day of the offering period.
TERMINATION OF EMPLOYMENT
Termination of a participant's employment for any reason, including
retirement or death, or the failure of the participant to remain in the
continuous employ of the Company for at least 20 hours per week during the
applicable offering period, terminates his or her purchase right and his or her
participation in the Purchase Plan immediately. In such event, the payroll
deductions credited to the participant's account will be immediately refunded.
CAPITAL CHANGES
In the event any change is made in the Company's capitalization, such as a
stock split or stock dividend, that results in an increase or decrease in the
number of shares of Common Stock outstanding without receipt of consideration by
the Company, appropriate adjustment will be made to the number of shares of
Common Stock covered by each unexercised purchase right, the number of shares of
Common Stock that have been authorized for issuance under the Purchase Plan but
have not yet been placed under a purchase right, and the price per share of
Common Stock covered by each unexercised purchase right.
In the event of a proposed dissolution or liquidation of the Company, the
offering period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, each option under the
Purchase Plan will be assumed or an equivalent option will be substituted by
such successor corporation, unless the Company's Board determines to shorten the
offering period then in progress by setting a new purchase date.
AMENDMENT AND TERMINATION OF THE PLAN
The Board of Directors may at any time terminate or amend the Purchase
Plan. No such termination may affect options previously granted, nor may an
amendment make any change in any option theretofore granted which adversely
affects the rights of any participant. In addition, to the extent necessary to
comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code,
the Company must obtain stockholder approval in such a manner and to such a
degree as required under such laws.
The Purchase Plan will continue in effect until January 2015 unless sooner
terminated by the Board.
23
27
TAX INFORMATION
The Purchase Plan, and the right of participants to make purchases
thereunder, are intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no taxable income will be recognized by a
participant until the shares purchased under the Plan are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax and the amount of the taxable income will depend
upon the holding period. If the shares are sold or otherwise disposed of more
than two years from the first day of the offering period and one year after the
purchase date, the participant will recognize ordinary income measured as the
lesser of (a) the excess of the fair market value of the shares at the time of
such sale or disposition over the purchase price, or (b) an amount equal to 15%
of the fair market value of the shares as of the first day of the offering
period. Any additional gain or loss will be treated as long-term capital gain or
loss. If the shares are sold or otherwise disposed of before the expiration of
these holding periods, the participant will recognize ordinary income generally
measured as the excess, if any, of the fair market value of the shares on the
date the shares are purchased over the purchase price. Any additional gain or
loss on such sale or disposition will be long-term or short-term capital gain or
loss, depending on whether or not the shares are disposed of more than one year
after the purchase date. The Company is not entitled to a deduction for amounts
taxed as ordinary income or capital gain to a participant except to the extent
of ordinary income recognized by participants upon a sale or disposition of
shares prior to the expiration of the holding periods described above.
The foregoing is only a brief summary of the effect of federal income
taxation upon the participant and the Company with respect to the shares
purchased under the Purchase Plan. Reference should be made to the applicable
provisions of the Internal Revenue Code. In addition, the summary does not
discuss the tax consequences of a participant's death or the income tax laws of
any state or foreign country in which the participant may reside. Holders of
purchase rights should consult their own tax advisors with respect to the tax
consequences of participation in the Purchase Plan for their particular
situations.
1995 DIRECTORS' STOCK OPTION PLAN
The 1995 Directors' Stock Option Plan (the "Directors' Plan") was adopted
by the Board of Directors in December 1995 and by the Company's stockholders in
January 1996. A total of 150,000 shares of Common Stock has been reserved for
issuance under the Directors' Plan.
GENERAL
The Directors' Plan provides for the grant of nonstatutory stock options to
non-employee directors of the Company. The Directors' Plan is designed to work
automatically and not to require administration; however, to the extent
administration is necessary, it will be provided by the Board of Directors.
The purpose of the Directors' Plan is to provide an incentive for directors
to continue to serve the Company as directors and to assist the Company in
recruiting highly qualified individuals when vacancies occur on the Board of
Directors.
Grant and Exercise of Option
The Directors' Plan provides that each person who first becomes a
non-employee director of the Company after the effective date of the Directors'
Plan, will be granted a nonstatutory stock option to purchase 30,000 shares of
Common Stock (the "First Option") on the date on which the optionee first
becomes a non-employee director of the Company. Thereafter, on the date of each
Annual Meeting of the Company's shareholders at which non-employee directors are
elected to the Board, each person so elected (including directors who were not
eligible for a First Option) shall be granted an additional option to purchase
7,500 shares of Common Stock (a "Subsequent Option") if he or she shall have
served on the Company's Board of Directors for at least six months prior to the
date of such Annual Meeting. The Directors' Plan provides that the maximum
number of shares for which options may be granted under the Directors' Plan is
150,000 (the "Pool"). However, the Directors' Plan does not specify a maximum or
minimum number of
24
28
shares for which options may be granted to any one non-employee director so long
as the total number of shares so granted does not exceed the Pool. No option
granted under the Directors' Plan is transferable by the optionee other than by
will or the laws of descent or distribution or pursuant to a qualified domestic
relations order, and each option is exercisable, during the lifetime of the
optionee, only by such optionee or permitted transferee.
The Directors' Plan provides that the First Option granted thereunder shall
become exercisable in installments as to 25% of the total number of shares
subject to the First Option on each of the first, second, third and fourth
anniversaries of the date of grant of the First Option; and each Subsequent
Option shall become exercisable in full on the first anniversary of the date of
grant of that Subsequent Option. The options will remain exercisable for up to
ninety (90) days following the optionee's termination of service as a director
of the Company, unless such termination is a result of death, in which case the
options will remain exercisable for a six-month period, or disability, in which
case the options will remain exercisable for a six-month period (or such other
period not exceeding twelve months as is determined by the Board).
Exercise Price and Term
The exercise price of all stock options granted under the Directors' Plan
shall be equal to 100% of the fair market value of a share of the Company's
Common Stock on the date of grant of the option. Fair market value shall be
determined by the Company's Board; provided, however, that where there is a
public market for the Common Stock, the fair market value per share shall be the
mean of the bid and asked prices of the Common Stock in the over-the-counter
market on the date of grant, as reported in The Wall Street Journal or, in the
event the Common Stock is traded on the Nasdaq National Market or listed on a
stock exchange, the fair market value per share shall be the closing price on
such system or exchange on the date of grant of the Option, as reported in The
Wall Street Journal. Options granted under the Directors' Plan have a term of
ten years.
Merger or Sale of Assets
The Directors' Plan provides that, in the event of the dissolution or
liquidation of the Company, a merger of the Company with or into another
corporation in which the Company is not the surviving corporation, a sale of all
or substantially all of the Company's assets, or any other capital
reorganization in which more than 50% of the shares of the Company entitled to
vote are exchanged, the Company shall give to each non-employee director either
(i) a reasonable time within which to exercise the option in its entirety prior
to the effectiveness of any such transaction at the end of which time the option
shall terminate, or (ii) the right to exercise the option in its entirety (or
receive a substitute option with comparable terms) as to an equivalent number of
shares of stock of the corporation succeeding the Company or acquiring its
business by reason of any such transaction.
Amendment and Termination of the Directors' Option Plan
The Board of Directors may amend or terminate the Directors' Plan, provided
that, to the extent necessary and desirable to comply with Rule 16b-3 under the
Exchange Act (or any other applicable law or regulation) the Company shall
obtain approval of the stockholders to such amendments to the extent required by
such law or regulation. The provisions regarding the grant of options under the
Directors' Plan may be amended only once in any six month period, other than to
comport with changes in the Code, the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
If not terminated earlier, the Directors' Plan will have a term of ten (10)
years.
Tax
The federal income tax consequences of participation in the Directors' Plan
are the same as apply to optionees who receive nonstatutory stock options under
the Company's 1994 Stock Plan, as described above under Proposal No. 2.
25
29
1994 STOCK PLAN
Information regarding the Company's 1994 Stock Plan is provided above under
Proposal No. 2.
OTHER BUSINESS
The Board of Directors is not aware of any other matter which may be
presented for action at the Annual Meeting other than the matters set forth in
this Proxy Statement. Should any other matter requiring a vote of the
stockholders arise, it is intended that the persons named as proxy holders on
the enclosed proxy card will vote the shares represented thereby in accordance
with their best judgment in the interest of the Company. Discretionary authority
with respect to such other matters is granted by the execution of the enclosed
proxy.
STOCKHOLDER PROPOSALS
Under the present rules of the Commission, the deadline for stockholders to
submit proposals to be considered for inclusion in the Company's Proxy Statement
and form of proxy for the next year's Annual Meeting of Stockholders is expected
to be December 7, 1997. Such proposals may be included in next year's Proxy
Statement and form of proxy if they comply with certain rules and regulations
promulgated by the Commission.
INCORPORATION BY REFERENCE
According to the provisions of Schedule 14A under the Securities Exchange
Act of 1934, the following document or portion thereof is incorporated by
reference:
"Executive Officers of the Company" from Part I of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
ADDITIONAL INFORMATION AVAILABLE
THE COMPANY WILL PROVIDE WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF
THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING FINANCIAL STATEMENTS,
SCHEDULES AND A LIST OF EXHIBITS. REQUEST SHOULD BE SENT TO THE ATTENTION OF
CYNTHIA BUTITTA, VICE PRESIDENT, FINANCE AND ADMINISTRATION, AND CHIEF FINANCIAL
OFFICER AT CONNECTIVE THERAPEUTICS, INC., 3400 WEST BAYSHORE ROAD, PALO ALTO,
CALIFORNIA 94303, OR TELEPHONED TO 415-843-2800.
By Order of the Board of Directors,
Joshua L. Green,
Secretary
Dated: April 3, 1997
26
30
- -------------------------------------------------------------------------------
PROXY PROXY
CONNECTIVE THERAPEUTICS, INC.
ANNUAL MEETING OF STOCKHOLDERS, MAY 14, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
CONNECTIVE THERAPEUTICS, INC.
The undersigned revokes all previous proxies, acknowledges receipt of
Notice of the Annual Meeting of Stockholders to be held on May 14, 1997 and
the Proxy Statement and appoints Thomas G. Wiggans and Cynthia M. Butitta,
and each of them, as the Proxy of the undersigned, with full power of
substitution, to vote all shares of Common Stock of Connective Therapeutics,
Inc. (the "Company") which the undersigned is entitled to vote, either on his
or her own behalf or on behalf of any entity or entities, at the Annual
Meeting of Stockholders of the Company to be held at the Company's facilities
located 3400 West Bayshore Road, Palo Alto, California 94303, on Wednesday,
May 14, 1997 at 9:00 a.m. (the "Annual Meeting"), and at any adjournment or
postponement thereof, with the same force and effect as the undersigned might
or could do if personally present thereat. The shares represented by this
Proxy shall be voted in the following manner.
-------------------
SEE REVERSE
SIDE
-------------------
- -------------------------------------------------------------------------------
31
[X] Please mark your choices like this
1. To elect the following directors to FOR WITHHOLD AUTHORITY
serve until the next annual meeting TO VOTE
of stockholders and until their [ ] [ ]
successors are elected and qualified;
If you wish to withhold authority to vote for any individual members,
strike a line through that member's name in the field below:
Nominees: G. Kirk Raab
Thomas G. Wiggans
Eugene A. Bauer, M.D.
Alexander E. Barkas, Ph.D.
Brian H. Dovey
John C. Kane
Thomas D. Kiley, Esq.
Kenneth B. Plumlee
Joseph J. Ruvane, Jr.
2. To approve amendments to the 1994 FOR AGAINST ABSTAIN
Stock Plan to increase the number
of shares of Common Stock reserved [ ] [ ] [ ]
for issuance thereunder by
500,000 shares to an aggregate of 2,000,000 shares, and allow issuance
of option shares to non-employee directors;
3. To approve an amendment to the FOR AGAINST ABSTAIN
Company's Amended and Restated
Certificate of Incorporation to [ ] [ ] [ ]
change the name of the Company from
Connective Therapeutics, Inc. to
Connectics Corporation;
4. To ratify the Board of Director's FOR AGAINST ABSTAIN
selection of Ernst & Young LLP to
serve as the Company's independent [ ] [ ] [ ]
auditors for the fiscal year ending
December 31, 1997; and
5. To transact such other business as FOR AGAINST ABSTAIN
may properly come before the Annual
Meeting or any adjournment or [ ] [ ] [ ]
postponement thereof.
The Board of Directors recommends a vote FOR each of the directors listed above
and a vote FOR the other proposals. This Proxy, when properly executed, will be
voted as specified above. THIS PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS LISTED ABOVE AND FOR THE OTHER PROPOSALS IF NO SPECIFICATION IS MADE.
- ---------------------------------- ------------------------- Date:-----------
Please print the name(s) appearing Please sign your name:
on each share certificate(s) over (Authorized Signature(s))
which you have voting authority.
32
CONNECTIVE THERAPEUTICS, INC.
1994 STOCK PLAN
(AS AMENDED THROUGH MARCH 1997)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees and Consultants of the Company and
its Subsidiaries and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options (as defined under Section
422 of the Code) or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant of an option and reflected in the terms of
the written option agreement. Stock purchase rights may also be granted under
the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees appointed
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan below, if one is
appointed.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Connective Therapeutics, Inc., a Delaware
corporation.
(g) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and
is compensated for such services, and any director of the Company, whether
compensated for such services or not.
(h) "Continuous Status as an Employee or Consultant" means the absence
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interrupted in the case of sick leave, military leave, or any other leave
of absence approved by the Administrator, provided that such leave is for a
period of not more than ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time, or
in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or its successor. For purposes of this Plan, a
change in status from an Employee to a Consultant or from a Consultant to
an Employee will not constitute a termination of employment.
(i) "Director" means a member of the Board.
(j) "Employee" means any person, including Named Executives, Officers
and Directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment by the Company of a director's fee to a Director shall
not be sufficient to constitute "employment" of such Director by the
Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing
sales price for such stock as quoted on such system on the date of
determination (or the closing bid, if no sales were reported on that
day) as reported in The Wall Street Journal or such other source as the
Administrator deems reliable;
33
(ii) If the Common Stock is quoted on the Nasdaq System (but not on
the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high bid and low asked prices for
the Common Stock or;
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(n) "Named Executive" means any individual who, on the last day of the
Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer). Such officer status
shall be determined pursuant to the executive compensation disclosure rules
under the Exchange Act.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable
written option agreement.
(p) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
(r) "Optioned Stock" means the Common Stock subject to an Option or a
Stock Purchase Right.
(s) "Optionee" means an Employee or Consultant who receives an Option
or Stock Purchase Right.
(t) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(u) "Plan" means this 1994 Stock Plan.
(v) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(w) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
as the same may be amended from time to time, as any successor provision.
(x) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 below.
(y) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 below.
(z) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 2,000,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.
Notwithstanding any other provision of the Plan, Shares issued under the
Plan and later repurchased by the Company shall not become available for future
grant or sale under the Plan.
2
34
4. Administration of the Plan.
(a) Composition of the Administrator.
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3
and by the legal requirements relating to the administration of
incentive stock option plans, if any, of the applicable securities laws
and the Code (collectively the "Applicable Laws"), grants and sales
under the Plan may (but need not) be made by different administrative
bodies with respect to Directors, Officers who are not directors and
Employees who are neither Directors nor Officers.
(ii) Administration With Respect to Directors and Officers. With
respect to grants of Options or Stock Purchase Rights to Employees or
Consultants who are also Officers or Directors of the Company, grants or
sales under the Plan shall be made by (A) the Board if the Board may
make grants or sales under the Plan in compliance with Rule 16b-3 and
Section 162(m) of the Code as it applies so as to qualify grants of
Options or Stock Purchase Rights to Named Executives as
performance-based compensation, or (B) a Committee designated by the
Board to make grants or sales under the Plan, which committee shall be
constituted in such a manner as to permit grants or sales under the Plan
to comply with Rule 16b-3, to qualify grants of Options or Stock
Purchase Rights to Named Executives as performance-based compensation
under Section 162(m) of the Code and otherwise so as to satisfy the
Applicable Laws.
(iii) Administration With Respect to Other Persons. With respect to
grants of Options or Stock Purchase Rights to Employees or Consultants
who are neither Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a committee designated by the
Board, which committee shall be constituted in such a manner as to
satisfy the Applicable Laws.
(iv) General. If a Committee has been appointed pursuant to
subsection (ii) or (iii) of this Section 4(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefor, fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
the Applicable Laws and, in the case of a Committee appointed under
subsection (ii) of this Section 4(a), to the extent permitted by Rule
16b-3, and to the extent required under Section 162(m) of the Code to
qualify grants of Options or Stock Purchase Rights to Named Executives
as performance-based compensation.
(b) Powers of the Administrator. Subject to the provisions of the Plan
and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange upon which the
Common Stock is listed, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder;
3
35
(vii) to determine whether and under what circumstances an Option
may be settled in cash under subsection 10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted; and
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights.
(c) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all Optionees
and any other holders of any Options or Stock Purchase Rights.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if he is otherwise eligible, be granted additional Options
or Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this section, Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his or her right or the Company's right to
terminate his or her employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 21 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 17 of the
Plan.
7. Term of Option. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided in
this Plan, the maximum number of Shares which may be subject to Options or Stock
Purchase Rights granted to any one Employee under this Plan for any fiscal year
of the Company shall be 150,000.
4
36
9. Option Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of such
Option, is a Named Executive of the Company, the per Share exercise price shall
be no less than one hundred percent (100%) of the Fair market Value on the date
of grant; or
(B) granted to any person other than a Named Executive, the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant.
(iii) Notwithstanding anything to the contrary in subsections
9(a)(i) or 9(a)(ii) above, in the case of an Option granted on or after
the effective date of registration of any class of equity security of
the Company pursuant to Section 12 of the Exchange Act and prior to six
months after the termination of such registration, the per Share
exercise price shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option either have been owned by the Optionee for
more than six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, (5) authorization from the Company to retain from the
total number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised, (6) delivery
of a properly executed exercise notice together with such other documentation as
the Administrator and the broker, if applicable, shall require to effect an
exercise of the Option and delivery to the Company of the sale or loan proceeds
required to pay the exercise price, (7) any combination of the foregoing methods
of payment, (8) or such other consideration and method of payment for the
issuance of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Board shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and
5
37
full payment for the Shares with respect to which the Option is
exercised has been received by the Company. Full payment may, as authorized by
the Administrator, consist of any consideration and method of payment allowable
under Section 9(b) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate as
promptly as practicable upon exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the event
of termination of an Optionee's Continuous Status as an Employee or
Consultant, such Optionee may, but only within thirty (30) days (or such
other period of time, not exceeding three (3) months in the case of an
Incentive Stock Option or six (6) months in the case of a Nonstatutory
Stock Option, as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the
time of grant of the Option) after the date of such termination (but in no
event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), exercise his or her Option to the extent
that he or she was entitled to exercise it at the date of such termination.
To the extent that the Optionee was not entitled to exercise the Option at
the date of such termination, or if the optionee does not exercise such
Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) Disability of Optionee.
(i) Notwithstanding the provisions of Section 9(b) above, in the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (within the
meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve
(12) months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous Status
as an Employee or Consultant as a result of a disability which does not fall
within the meaning of total and permanent disability (as set forth in Section
22(e)(3) of the Code), Optionee may, but only within six (6) months from the
date of such termination (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise the Option
to the extent otherwise entitled to exercise it at the date of such termination.
However, to the extent that such Optionee fails to exercise an Option which is
an Incentive Stock Option within three (3) months of the date of such
termination, the Option will not qualify for ISO treatment under the Code. To
the extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within six months (6) from the date of termination, the Option shall
terminate.
(d) Death of Optionee. In the event of the death of an Optionee during
the term of the Option who is at the time of death an Employee or Consultant of
the Company, the Option may be exercised, at any time within twelve (12) months
following the date of death (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
6
38
(e) Rule 16b-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
(f) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Non-Transferability of Options. Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
12. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer or, in the case of a
shareholder owning ten percent (10%) or more of the Company's outstanding stock
or a person who is a Named Executive, 100% of the Fair Market Value of the
Shares as of the date of the offer), and the time within which such person must
accept such offer, which shall in no event exceed thirty (30) days from the date
upon which the Administrator made the determination to grant the Stock Purchase
Right. The offer shall be accepted by execution of a Restricted Stock purchase
agreement in the form determined by the Administrator. Shares purchased pursuant
to the grant of a Stock Purchase Right shall be referred to herein as
"Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines otherwise,
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the Board or
Committee may determine.
(c) Other Provisions. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
13. Withholding Taxes. As a condition to the exercise of Options or the
purchase of Restricted Stock pursuant to awards granted hereunder, the Optionee
or purchaser shall make such arrangements as the Administrator may require for
the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with the exercise, receipt or vesting
of such award. The Company shall not be required to issue any Shares under the
Plan until such obligations are satisfied.
14. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be
7
39
withheld under applicable tax laws, the Optionee may satisfy the withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
upon exercise of the Option, or the Shares to be issued in connection with the
Stock Purchase Right, if any, that number of Shares having a Fair Market Value
equal to the amount required to be withheld. The Fair Market Value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "Tax Date").
Any surrender by an Officer or Director of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(c) all elections shall be subject to the consent or disapproval of the
Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
15. Adjustments Upon Changes in Capitalization; Corporate Transaction.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Corporate Transactions. In the event of a dissolution or
liquidation of the Company, the Option will terminate immediately prior to the
consummation of such action, unless otherwise provided by the Administrator. The
Administrator may, in the exercise of its sole discretion in such instances,
declare that any Option shall terminate as of a date fixed by the Administrator
and give each Optionee the right to exercise his or her Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. In the event of a proposed sale of all or substantially all of the
assets of the Company, the merger of the Company with or into another
corporation or any other capital reorganization in which more than fifty percent
(50%) of the shares of the Company entitled to vote are exchanged, the Option
shall be assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Administrator determines, in the exercise of its sole discretion and in lieu of
such assumption or substitution, that the Optionee shall have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable. If the Administrator makes
an Option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option shall be exercisable for a period of
8
40
thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
16. Time of Granting Options and Stock Purchase Rights. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
17. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided, however, that the following revisions or amendments shall require
approval of the shareholders of the Company in the manner described in Section
20 of the Plan:
(i) any increase in the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 15 above;
(ii) any change in the designation of the class of persons eligible
to be granted Options;
(iii) any change in the limitation on grants to employees as
described in Section 8 of the Plan or other changes which would require
shareholder approval to qualify options granted hereunder as performance-based
compensation under Section 162(m) of the Code; or
(iv) any revision or amendment requiring shareholder approval in
order to preserve the qualification of the Plan under Rule 16b-3.
(b) Shareholder Approval. If any amendment requiring shareholder
approval under Section 13(a) above is made subsequent to the first registration
of any class of equity security by the Company under Section 12 of the Exchange
Act, then such shareholder approval shall be solicited as described in Section
20 below.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
18. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option or Stock Purchase Right unless the exercise of such
Option and the issuance and delivery of such Shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option or Stock Purchase Right, the
Company may require the person exercising such Option or Stock Purchase Right to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
19. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve
9
41
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
20. Agreements. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Board shall approve from time to time.
21. Shareholder Approval.
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. Such shareholder approval shall be obtained in the degree
and manner required under applicable state and federal law and the rules of any
stock exchange upon which the Common Stock is listed.
(b) In the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approval of
the shareholders of the Company obtained after such registration shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder.
(c) If any required approval by the shareholders of the Plan itself or
of any amendment thereto is solicited at any time otherwise than in the manner
described in Section 20(b) hereof, then the Company shall, at or prior to the
first annual meeting of shareholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for the Plan
substantially the same information that would be required (if proxies to be
voted with respect to approval or disapproval of the Plan or amendment were then
being solicited) by the rules and regulations in effect under Section 14(a) of
the Exchange Act at the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and Exchange
Commission four copies of the written information referred to in subsection (i)
hereof not later than the date on which such information is first sent or given
to shareholders.
22. Information to Optionees and Purchasers. The Company shall provide
financial statements at least annually to each Optionee and to each individual
who acquired Shares Pursuant to the Plan, during the period such Optionee or
purchaser has one or more Options or Stock Purchase Rights outstanding, and in
the case of an individual who acquired Shares pursuant to the Plan, during the
period such individual owns such Shares. The Company shall not be required to
provide such information if the issuance of Options or Stock Purchase Rights
under the Plan is limited to key employees whose duties in connection with the
Company assure their access to equivalent information.
10