SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
[Amendment No._____ ]
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/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-6(e)(2)
240.14a-12
DURA PHARMACEUTICALS, INC
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(Name of Registrant as Specified In Its Charter)
Mitchell R. Woodbury, Sr. Vice President General Counsel & Secretary
Dura Pharmaceuticals, Inc. 5880 Pacific Center Blvd. San Diego, CA 92121
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):_______________
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or the Form or Schedule and the date of its filing.
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(4) Date Filed:__________________________________________________________
[Logo]
PRELIMINARY
COPY
DURA PHARMACEUTICALS, INC.
5880 PACIFIC CENTER BLVD.
SAN DIEGO, CALIFORNIA 92121
April 16, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Dura Pharmaceuticals, Inc., which will be held at the La Jolla Marriott, 4240 La
Jolla Village Drive, La Jolla, California, on Wednesday, May 28, 1997 at 10:00
a.m.
Details of the business to be conducted at the Annual Meeting are given in
the attached Notice of Annual Meeting of Shareholders and Proxy Statement.
In order for us to have an efficient meeting, please sign, date and return
the enclosed proxy promptly in the accompanying reply envelope. If you are able
to attend the Annual Meeting and wish to change your proxy vote, you may do so
simply by voting in person at the Annual Meeting.
We look forward to seeing you at the Annual Meeting.
Sincerely,
CAM L. GARNER
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to
complete, sign and date the enclosed proxy as promptly as possible and return it
in the enclosed envelope. No postage need be affixed if mailed in the United
States.
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DURA PHARMACEUTICALS, INC.
5880 PACIFIC CENTER BLVD.
SAN DIEGO, CALIFORNIA 92121
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 28, 1997
The Annual Meeting (the "Annual Meeting") of Shareholders of Dura
Pharmaceuticals, Inc. (the "Company") will be held at the La Jolla Marriott,
4240 La Jolla Village Drive, La Jolla, California, on Wednesday, May 28, 1997 at
10:00 a.m., for the following purposes:
1. To elect four (4) directors to serve two-year terms to expire at the
1999 Annual Meeting of Shareholders.
2. To approve the Company's reincorporation in Delaware, through the
merger of Dura Pharmaceuticals, Inc., a California corporation, with
and into a wholly-owned Delaware subsidiary of Dura Pharmaceuticals,
Inc.
3. To approve amendments to the Company's 1992 Stock Option Plan to
increase the authorized number of shares of Common Stock available for
issuance under such Plan and certain other amendments.
4. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent public accountants for the fiscal year ending December 31,
1997.
5. To transact any other business which may properly come before the
meeting or any adjournment(s) thereof.
Shareholders of record at the close of business on March 31, 1997 will be
entitled to vote at the Annual Meeting. A list of shareholders entitled to vote
at the Annual Meeting will be available for inspection at the offices of the
Company. Whether or not you plan to attend the meeting in person, please sign,
date and return the enclosed proxy in the reply envelope provided. If you
attend the Annual Meeting and vote by ballot, your proxy will be revoked
automatically and only your vote at the Annual Meeting will be counted. The
prompt return of your proxy will assist us in preparing for the Annual Meeting.
By Order of the Board of Directors
Dated: April 16, 1997 MITCHELL R. WOODBURY
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
DURA PHARMACEUTICALS, INC.
PRELIMINARY
PROXY STATEMENT
COPY
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 28, 1997
These proxy materials and the enclosed proxy card are being mailed in
connection with the solicitation of proxies by the Board of Directors of Dura
Pharmaceuticals, Inc., a California corporation (the "Company"), for the Annual
Meeting of Shareholders to be held at 10:00 a.m. on May 28, 1997 and at any
adjournment or postponement of the Annual Meeting. These proxy materials were
first mailed to shareholders of record beginning on approximately April 16,
1997.
The mailing address of the principal executive office of the Company is
5880 Pacific Center Boulevard, San Diego, California 92121.
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
Shareholders. Each proposal is described in more detail in this Proxy
Statement.
VOTING RIGHTS AND SOLICITATION
Any shareholder executing a proxy has the power to revoke it at any time
before it is voted by delivering written notice of such revocation to the
Secretary of the Company before the Annual Meeting or by properly executing and
delivering a proxy bearing a later date. Proxies may also be revoked by any
shareholder present at the Annual Meeting who elects to vote his or her shares
in person. The cost of soliciting proxies will be paid by the Company and may
include reimbursement paid to brokerage firms and others for their expense in
forwarding solicitation material. Solicitation will be made primarily through
the use of the mail, but regular employees of the Company may, without
additional remuneration, solicit proxies personally by telephone or telegram.
The record date for determining those shareholders who are entitled to
notice of, and to vote at, the Annual Meeting has been fixed as March 31, 1997
(the "Record Date"). At the close of business on the Record Date, the Company
had ______________ outstanding shares of Common Stock (the "Common Stock").
Each share of Common Stock is entitled to one vote on matters brought before the
Annual Meeting. In voting for directors, each shareholder has the right to
cumulate his or her votes and give one nominee a number of votes equal to the
number of directors to be elected multiplied by the number of shares held, or to
distribute his or her votes on the same principle among the nominees to be
elected in such manner as the shareholder may see fit. California corporate law
allows a shareholder to cumulate his or her votes with respect to the election
of directors if the director nominee has been placed in nomination prior to
voting and if any shareholder present at the meeting has given notice AT THE
MEETING of their intention to cumulate votes. Such notice allows all votes cast
in the election to be counted cumulatively. If no such notice is given, no
cumulative voting will be used in the election of directors. While the notice
of intention to cumulate votes may be presented orally at the Annual Meeting, it
is prudent for any shareholder intending to cumulate his or her votes to present
a written notice of such intention to the Chairman of the meeting prior to the
beginning of voting, but after all candidates have been placed in nomination.
The persons named in the enclosed proxy card may or may not elect to give such
notice and vote the shares they represent in such a manner. In addition, non-
management proxyholders present at the Annual Meeting may also provide the
requisite notice of intention to cumulate votes. Shareholders who wish to
cumulate their votes must be present at the Annual Meeting or must give proxies
to non-management proxyholders along with a written statement that such non-
management proxyholders have the authority to give notice of their intention to
cumulate votes. Discretionary authority to cumulate votes is being solicited by
the Board of Directors and it is intended that the proxies received by the
management proxyholders pursuant to the solicitation will be voted in the manner
best designed to cause the election of the maximum number of the Board of
Directors' nominees. California statute and case law does not give specific
instructions regarding the treatment of abstentions and broker nonvotes for
companies such as the Company; however, the Company believes that California law
provides that if shares are represented and voted on any issue at a shareholder
meeting, their failure to vote "for" other issue (through either abstention or a
broker nonvote) has the same effect as a negative vote on that other issue.
At the Record Date, directors and executive officers of the Company may be
deemed to be beneficial owners of an aggregate of __________________ shares of
the Company's Common Stock (not including shares of the Common Stock issuable
upon exercise of outstanding stock options and warrants) constituting less than
1% of the shares of Common Stock outstanding and entitled to vote at the Annual
Meeting. Such directors and executive officers have indicated to the Company
that each such person intends to vote or direct the vote of all shares of Common
Stock held or owned by such persons, or over which such person has voting
control, in favor of all of the Proposals. The approval of the Proposals is not
assured. See "Common Stock Ownership of Management."
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors of the Company is currently composed of nine
members. The Company's Sixth Restated Articles of Incorporation, as amended,
divides the Board into two classes of directors serving staggered two-year
terms, with one class of directors to be elected at each annual meeting of
shareholders. All of the nominees are now serving as directors of the
Company. Unless individual shareholders specify otherwise, each returned
proxy will be voted for the election of Messrs. Conrad, Ramseier, Smith and
Spath, who have each agreed to stand for election to hold office for a term
of two years, expiring at the Annual Meeting of Shareholders in 1999, or
until a successor is elected and has qualified, or for as many nominees of
the Board of Directors as possible, such votes to be distributed among such
nominees in the manner as the persons named in the enclosed proxy see fit.
If, however, any of those named are unable to serve, or for good cause
decline to serve at the time of the Annual Meeting, the persons named in the
enclosed proxy will exercise discretionary authority to vote for substitutes.
The Board of Directors is not aware of any circumstances that would render any
nominee unavailable for election. Discretionary authority to cumulate votes is
being solicited by the Board of Directors, and it is intended that the proxies
received by the management proxyholders pursuant to the solicitation will be
voted in a manner designed to cause the election of the maximum number of the
Board of Directors' nominees.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR THE NOMINEES LISTED HEREIN.
NOMINEES FOR ELECTION TO TERMS WHICH EXPIRE AT THE 1999 ANNUAL MEETING OF
SHAREHOLDERS
Herbert J. Conrad, 64, served as President of the Pharmaceuticals Division
and Senior Vice President of Hoffmann-La Roche Inc. ("Roche") from 1982 until
his retirement in 1993. Mr. Conrad joined Roche in 1960 and held various
positions over the years, including Senior Vice President of the Pharmaceuticals
Division, Chairman of the Board of Medi-Physics, Inc. and Vice President, Public
Affairs and Planning Division. Mr. Conrad was first elected director of the
Company in 1994 and currently serves as a member of the Company's Compensation
Committee. Mr. Conrad is a director of Gensia, Inc. ("Gensia"), a
biopharmaceutical company, Biotechnology General Corp., a biotechnology company,
and Bradley Pharmaceuticals, a pharmaceutical company.
Gordon V. Ramseier, 52, has been Executive Director of a private consulting
company, The Sage Group, since 1995. The Sage Group provides consulting
services to companies in the health care field. Mr. Ramseier has operated a
private consulting company since 1994, and also performed such consulting work
from 1990 to 1992. Mr. Ramseier served as President and Chief Executive Officer
of Onco Therapeutics, Inc. from 1992 until 1994. From 1986 to 1990,
Mr. Ramseier served as President and Chief Executive Officer of the Company.
Mr. Ramseier was first elected director of the Company in 1986 and currently
serves as a member of the Company's Audit Committee.
Charles G. Smith, Ph.D., 69, has operated a private consulting company
since 1986 and is currently a consultant for several health care companies.
Prior to his consulting work, Dr. Smith served with Revlon Health Care Group as
Vice President of Research and Development from 1975 to 1986 and is a founder of
Vanguard Medical Ltd., a British start-up company. Dr. Smith was first elected
director of the Company in 1988 and also serves as a member of the Company's
Scientific Advisory Board.
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Walter F. Spath, 52, joined the Company in 1988 and currently serves as
Senior Vice President, Sales and Marketing, and has served as a director since
1991. Prior to joining the Company, Mr. Spath was Corporate Vice President,
Commercial Development, at Searle Pharmaceuticals ("Searle") from 1986 to 1988,
where he also served in a variety of sales and marketing positions from 1975 to
1986. Prior to joining Searle, Mr. Spath was a marketing manager at Pfizer
Pharmaceuticals. Mr. Spath received an MBA in Marketing from University of
Maryland and a B.S. in Economics from Villanova.
DIRECTORS WHOSE TERMS EXPIRE AT THE 1998 ANNUAL MEETING OF SHAREHOLDERS
James C. Blair, Ph.D., 57, has served as a general partner of Domain
Associates, a venture capital management company, since 1985. Dr. Blair was
first elected director of the Company in 1986 and currently serves as a member
of both the Company's Compensation Committee and the Audit Committee. Dr. Blair
is currently a director of Amylin Pharmaceuticals, Inc. ("Amylin"), CoCensys
Inc., Gensia, and Houghten Pharmaceuticals, Inc. ("Houghten"), all
biopharmaceutical companies.
Joseph C. Cook, 55, has been President of Cambrian Associates, LLC since
1994 and has been a principal of Life Science Advisors, LLC ("Life Science
Advisors") since it was founded in 1994. Mr. Cook retired as Group Vice
President, Global Manufacturing, Engineering and Corporate Quality at Eli Lilly
and Company ("Lilly") in 1993. During his 28 years with Lilly, Mr. Cook was
Vice President of Sales and Marketing, Chief Financial Officer for Elanco
Products Company, and General Manager of a worldwide business unit of Lilly.
Mr. Cook joined the Company's Board of Directors in 1995 and currently serves as
a member of the Company's Audit Committee. He is currently a director of
Amylin, NABI, Inc., a biopharmaceutical company, and Personnel Management, Inc.,
a temporary services company.
Cam L. Garner, 49, joined the Company in 1989 as Executive Vice President
of the Company (formerly Immunetech Pharmaceuticals), President of the Company's
former subsidiary and a director. He has served as President and Chief
Executive Officer of the Company since 1990 and was named Chairman of the Board
in 1995. Prior to joining the Company, Mr. Garner served as President of Syntro
Corporation, a biotechnology company, from 1987 to 1989. Mr. Garner is
currently a director of Safeskin Corporation, a manufacturer of medical
supplies, and Houghten. Mr. Garner received an MBA from Baldwin-Wallace College
and a B.S. in Biology from Virginia Wesleyan College.
David F. Hale, 48, has served as President and Chief Executive Officer of
Gensia since 1987. Prior to joining Gensia, Mr. Hale was President and Chief
Executive Officer of Hybritech Incorporated ("Hybritech"), a biotechnology
company which was acquired by Lilly in 1986. Mr. Hale was first elected
director of the Company in 1986 and currently serves as a member of the
Company's Compensation Committee. Mr. Hale is currently a director and Chairman
of the Board of Gensia.
David S. Kabakoff, 49, joined the Company in 1996 as a director and
Executive Vice President, and as President and Chief Executive Officer of Spiros
Development Corporation ("Spiros Corp."). From 1989 to 1996, he was employed by
Corvas International, Inc., a biopharmaceutical company ("Corvas"), and served
in a number of capacities during that time period, including Chief Executive
Officer, President, Chief Operating Officer and Chairman of the Board. From
1983 to 1989, Dr. Kabakoff was employed by Hybritech, most recently as Senior
Vice President of Research and Development-Diagnostics. Dr. Kabakoff is a
director of Spiros Corp. Dr. Kabakoff received a Ph.D. in Organic Chemistry
from Yale University and a B.A. in Chemistry from Case Western Reserve
University.
BOARD MEETINGS AND COMMITTEES
The Company's Board of Directors met a total of eight times during the
fiscal year ended December 31, 1996. With the exception of Mr. Hale, each
director attended at least 75% of the aggregate of (i) the total meetings of the
Board of Directors (held during the period for which he has been a director) and
(ii) the total number of meetings held by all committees of the board on which
he served (during the periods that he served).
The Company has a standing Compensation Committee currently composed of
three non-employee directors: Dr. Blair, Mr. Conrad and Mr. Hale. The
Compensation Committee met three times in fiscal 1996. The Compensation
Committee reviews and acts on matters relating to compensation levels and
benefit plans for executive officers and key employees of the Company, including
salary and stock options. The Committee is also responsible for granting stock
awards, stock options, stock appreciation rights and other awards to be made
under the Company's existing incentive
3
compensation plan. The Company also has a standing Audit Committee currently
composed of the following three directors: Dr. Blair, Mr. Cook and Mr.
Ramseier. During fiscal 1996, the Audit Committee met once. The Audit
Committee assists in selecting the independent auditors, designating services
they are to perform and maintaining effective communication with those auditors.
The Company does not have a standing Nominating Committee or any other committee
performing similar functions, as such matters are considered at meetings of the
full Board of Directors.
PROPOSAL 2
REINCORPORATION OF THE COMPANY IN DELAWARE
AND RELATED CHANGES TO THE RIGHTS OF SHAREHOLDERS
GENERAL
The Board of Directors has unanimously approved a proposal to change the
Company's state of incorporation from California to Delaware. The Board of
Directors believes the change in domicile to be in the best interests of the
Company and its shareholders for several reasons. Principally, the Board of
Directors believes that reincorporation will enhance the Company's ability to
attract and retain qualified members of the Company's Board of Directors as well
as encourage directors to continue to make independent decisions in good faith
on behalf of the Company. The Company believes that the more favorable
corporate environment afforded by Delaware will enable it to compete more
effectively with other public companies, most of which are incorporated in
Delaware, to attract new directors and to retain its current directors. To
date, the Company has not experienced difficulty in retaining directors.
Reincorporation in Delaware will allow the Company the increased flexibility and
predictability afforded by Delaware law. Concurrent with the reincorporation,
the Company proposes to adopt or maintain certain measures designed to make
hostile takeovers of the Company more difficult. The Board believes that
adoption of these measures will enable the Board to consider fully any proposed
takeover attempt and to negotiate terms that maximize the benefit to the Company
and its shareholders.
In recent years, a number of major public companies have obtained the
approval of their shareholders to reincorporate in Delaware. For the reasons
explained below, the Company believes it is beneficial and important that the
Company likewise avail itself of Delaware law.
For many years Delaware has followed a policy of encouraging incorporation
in that state. In furtherance of that policy, Delaware has adopted
comprehensive corporate laws which are revised regularly to meet changing
business circumstances. The Delaware legislature is particularly sensitive to
issues regarding corporate law and is especially responsive to developments in
modern corporate law. The Delaware courts have developed considerable expertise
in dealing with corporate issues as well as a substantial body of case law
construing Delaware's corporate law. As a result of these factors, it is
anticipated that Delaware law will provide greater predictability in the
Company's legal affairs than is presently available under California law.
In 1986, Delaware amended its corporate law to allow corporations to limit
the personal monetary liability of its directors for their conduct as directors
under certain circumstances. The directors have elected to adopt such a
provision in the Delaware certificate and bylaws. It should be noted that
Delaware law does not permit a Delaware corporation to limit or eliminate the
liability of its directors for intentional misconduct, bad faith conduct or any
transaction from which the director derives an improper personal benefit or for
violations of federal laws such as the federal securities laws. The Board of
Directors believes that Delaware incorporation will enhance the Company's
ability to recruit and retain directors in the future, however, the shareholders
should be aware that such a provision inures to the benefit of the directors,
and the interest of the Board of Directors in recommending the reincorporation
may therefore be in conflict with the interests of the shareholders. See
"--Indemnification and Limitation of Liability" for a more complete discussion
of these issues.
In 1987, California amended its corporate law in a manner similar to
Delaware to permit a California corporation to limit the personal monetary
liability of its directors for their conduct as directors under certain
circumstances. Nonetheless, the Board of Directors believes that the protection
from liability for directors is somewhat greater under the Delaware law than
under the California law and therefore that the Company's objectives in adopting
this type of provision can be better achieved by reincorporation in Delaware.
4
The interests of the Board of Directors of the Company, management and
affiliated shareholders in voting on the reincorporation proposal may not be the
same as those of unaffiliated shareholders. Delaware law does not afford
minority shareholders some of the rights and protections available under
California law. Reincorporation of the Company in Delaware may make it more
difficult for minority shareholders to elect directors and influence Company
policies. A discussion of the principal differences between California and
Delaware law as they affect shareholders begins on page 6 of this Proxy
Statement.
In addition, portions of the reincorporation proposal may have the effect
of deterring hostile takeover attempts. A hostile takeover attempt may have a
positive or a negative effect on the Company and its shareholders, depending on
the circumstances surrounding a particular takeover attempt. Takeover attempts
that have not been negotiated or approved by the board of directors of a
corporation can seriously disrupt the business and management of a corporation
and generally present to the shareholders the risk of terms which may be less
than favorable to all of the shareholders than would be available in a board-
approved transaction. Board approved transactions may be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the
corporation and all of its shareholders with due consideration to matters such
as the recognition or postponement of gain or loss for tax purposes, the
management and business of the acquiring corporation and maximum strategic
deployment of corporate assets.
The Board of Directors recognizes that hostile takeover attempts do not
always have the unfavorable consequences or effects described above and may
frequently be beneficial to the shareholders, providing all of the shareholders
with considerable value for their shares. However, the Board of Directors
believes that the potential disadvantages of unapproved takeover attempts are
sufficiently great that prudent steps to reduce the likelihood of such takeover
attempts are in the best interests of the Company and its shareholders.
Accordingly, the reincorporation plan includes certain proposals that may have
the effect of discouraging or deterring hostile takeover attempts.
Notwithstanding the belief of the Board of Directors as to the benefits to
shareholders of the changes, shareholders should recognize that one of the
effects of such changes may be to discourage a future attempt to acquire control
of the Company which is not presented to and approved by the Board of Directors,
but which a substantial number and perhaps even a majority of the Company's
shareholders might believe to be in their best interests or in which
shareholders might receive a substantial premium for their shares over the
current market prices. As a result, shareholders who might desire to
participate in such a transaction may not have an opportunity to do so.
The proposed reincorporation would be accomplished by merging the Company
into a newly-formed Delaware corporation which, just before the merger, will be
a wholly-owned subsidiary of the Company (the "Delaware Company"), pursuant to
an Agreement and Plan of Merger (the "Merger Agreement"), a copy of which is
attached as Exhibit A to this Proxy Statement. Upon the effective date of the
merger, the Delaware Company's name will be Dura Pharmaceuticals, Inc. The
reincorporation will not result in any change in the Company's business, assets
or liabilities, will not cause its corporate headquarters to be moved and will
not result in any relocation of management or other employees.
On the effective date of the proposed reincorporation, each outstanding
share of Common Stock of the Company will automatically convert into one
share of Common Stock of the Delaware Company, and shareholders of the
Company will automatically become shareholders of the Delaware Company. On
the effective date of the reincorporation, the number of outstanding shares
of Common Stock of the Delaware Company will be equal to the number of shares
of Common Stock of the Company outstanding immediately prior to the effective
date of the reincorporation. In addition, each outstanding option, warrant
or right to acquire shares of Common Stock of the Company will be converted
into an option or right to acquire an equal number of shares of Common Stock
of the Delaware Company, under the same terms and conditions as the original
options or rights. All of the Company's employee benefit plans, including
the 401(k) Profit Sharing Plan, the Deferred Compensation Plan and the 1992
Stock Option Plan, will be adopted and continued by the Delaware Company
following the reincorporation. Shareholders should recognize that approval of
the proposed reincorporation will constitute approval of the adoption and
assumption of those plans by the Delaware Company.
No action need be taken by shareholders to exchange their stock
certificates now; this will be accomplished at the time of the next transfer by
the shareholder. Certificates for shares in the Company will automatically
represent an equal number of shares in the Delaware Company upon completion of
the merger.
5
The affirmative vote of the holders of a majority of the outstanding shares
of the Common Stock present in person or represented by proxy and voting at the
Annual Meeting is required for approval of the reincorporation. For purposes of
the vote, abstentions and broker non-votes will not be counted for any purpose
in determining whether this matter has been approved. If approved by the
shareholders, it is anticipated that the reincorporation would be completed as
soon thereafter as practicable. The reincorporation may be abandoned or the
Merger Agreement may be amended (with certain exceptions), either before or
after shareholder approval has been obtained, if in the opinion of the Board of
Directors, circumstances arise that make such action advisable; provided, that
any amendment that would effect a material change from the charter provisions
discussed in this Proxy Statement would require further approval by the holders
of a majority of the outstanding shares of the Common Stock.
SIGNIFICANT CHANGES CAUSED BY REINCORPORATION
In general, the Company's corporate affairs are governed at present by
the corporate law of California, the Company's state of incorporation, and by
the Company's Sixth Restated Articles of Incorporation, as amended (the
"California Articles") and the Company's Amended and Restated Bylaws (the
"California Bylaws"), which have been adopted pursuant to California law.
The California Articles and California Bylaws are available for inspection
during business hours at the principal executive offices of the Company. In
addition, copies may be obtained by writing to the Company at Dura
Pharmaceuticals, Inc., 5880 Pacific Center Boulevard, San Diego, California
92121-4204, Attention: Corporate Secretary.
If the reincorporation proposal is adopted, the Company will merge into,
and its business will be continued by, the Delaware Company. Following the
merger, issues of corporate governance and control would be controlled by
Delaware, rather than California law (however, see "--Application of California
Law After Reincorporation"). The California Articles and California Bylaws,
will, in effect, be replaced by the Certificate of Incorporation of the Delaware
Company (the "Delaware Certificate") and the bylaws of the Delaware Company (the
"Delaware Bylaws"), copies of which are attached as Exhibits B and C to this
Proxy Statement. Accordingly, the differences among these documents and between
Delaware and California law are relevant to your decision whether to approve the
reincorporation proposal.
A number of differences between California and Delaware law and among the
various charter documents are summarized in the chart below. Shareholders are
requested to read the following chart in conjunction with the discussion
following the chart and the Merger Agreement, the Delaware Certificate and the
Delaware Bylaws attached to this Proxy Statement. For each item summarized in
the chart, there is a reference to a page of this Proxy Statement on which a
more detailed discussion appears.
ISSUE DELAWARE CALIFORNIA
----- -------- ----------
Limitation of Delaware law permits the California law contains
Liability of limitation of liability of additional exceptions to
Directors and directors and officers to the the liability limitations
Officers Company except in connection of directors and officers.
(see page 8). with (i) breaches of the duty
of loyalty; (ii) acts or
omissions not in good faith or
involving intentional
misconduct or knowing
violations of law; (iii) the
payment of unlawful dividends
or unlawful stock repurchases
or redemptions; or (iv)
transactions in which a
director received an improper
personal benefit.
Indemnification Delaware law permits somewhat California Law permits
of Directors and broader indemnification and indemnification under
Officers could result in certain circumstances,
(see page 9). indemnification of directors subject to certain
and officers in circumstances limitations.
where California law would not
permit indemnification.
6
ISSUE DELAWARE CALIFORNIA
----- -------- ----------
Cumulative Voting Cumulative voting not Cumulative voting is
for Directors available under Delaware law mandatory upon notice given
(see page 11). because not provided in the by a shareholder at a
Delaware Certificate. shareholders' meeting at
which directors are to be
elected. California law
permits Nasdaq National
Market System ("Nasdaq")
corporations with over 800
equity security holders to
eliminate cumulative
voting.
Number of Determined solely by Determined by the Board of
Directors (see resolution of the Board of Directors within a range
page 11). Directors. set in the California
Bylaws. Changes in the
authorized range must be
approved by the
shareholders.
Removal of Removal with or without cause Removal with or without
Directors by by affirmative vote of a cause by affirmative vote
Shareholders majority of the outstanding of a majority of the
(see page 11). shares. outstanding shares,
provided that shares voting
against removal could not
elect such director under
cumulative voting.
Filling Board Delaware law provides for the California law permits (a)
Vacancies Delaware Court of Chancery to any holder of 5% or more of
(see page 12). order an election to fill the corporation's voting
vacancies or newly created stock ("Voting Stock") or
directorships upon the (b) the superior court of
application of the holders of the appropriate county to
10% of the outstanding shares call a special meeting of
having a right to vote for shareholders to elect the
such directors if, at the time entire board if, after
of filling such vacancies or filling any vacancy, the
directorships, the directors directors then in office
then in office constitute less who have been elected by
than a majority of the entire the shareholders constitute
board as constituted less than a majority of the
immediately prior to any directors then in office.
increase.
Who May Call The Board of Directors, the The Board of Directors, the
Special Chairman of the Board or the Chairman of the Board, the
Shareholder Chief Executive Officer. President, or holders of
Meeting (see page 10% of the shares entitled
12). to vote at the special
meeting.
Action by Written Action by written consent not Action by written consent
Consent of permitted by Delaware not permitted by California
Shareholders in Certificate. All shareholder Articles. All shareholder
Lieu of a action must take place by a action must take place by a
Shareholder Vote shareholder vote at a meeting shareholder vote at a
at Shareholder of shareholders. meeting of shareholders.
Meeting
(see page 13).
Tender Offer Restricts hostile two-step No comparable statute. The
Statute (see page takeovers. California Articles include
13). a Fair Price provision
similar in effect to the
Delaware statute.
7
ISSUE DELAWARE CALIFORNIA
----- -------- ----------
Amendment of Amendments to provisions Amendments to provisions
Certificate relating to the establishment relating to the
(see page 15). of the number of directors, establishment of the number
advance notice of shareholder of directors, advance
proposals and nominations, notice of shareholder
shareholder action without a proposals and nominations,
meeting and cumulative voting shareholder action without
require approval by a simple a meeting, cumulative
majority of the Voting Stock voting and the Fair Price
of the Delaware Company. provision require approval
by a simple majority of the
Voting Stock of the
Company.
Loans to Officers Board of Directors may Loans must be approved or
and Directors authorize if expected to ratified by a majority of
(see page 15). benefit the Company. the outstanding shares.
Class Vote for Generally not required unless A reorganization
Reorganizations a reorganization adversely transaction must generally
(see page 15). affects a specific class of be approved by a majority
shares. vote of each class of
shares outstanding.
Right of Permitted for any purpose Permitted for any purpose
Shareholders to reasonably related to such reasonably related to such
Inspect shareholder's interest as a shareholder's interest as a
Shareholder List shareholder. shareholder. Also, an
(see page 16). absolute right to 5%
shareholders and certain 1%
shareholders.
Appraisal Rights Generally available if Available in certain
(see page 16). shareholders receive cash in circumstances if the
exchange for the shares and in holders of 5% of the class
certain other circumstances. assert such rights.
Dividends Paid from surplus (including Generally limited to the
(see page 16). paid-in and earned surplus or greater of (i) retained
net profits). earnings or (ii) an amount
which would leave the
Company with assets of 125%
of liabilities and current
assets of 100% of current
liabilities.
Other Responsive legislature and
(see page 4). larger body of corporate case
law in Delaware provides more
predictable corporate legal
environment in Delaware.
INDEMNIFICATION AND LIMITATION OF LIABILITY
LIMITATIONS ON DIRECTOR LIABILITY.
Both California and Delaware permit a corporation to limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of certain duties as a director. The California and Delaware
laws adopt a self-governance approach by enabling a corporation to take
advantage of these provisions only if an amendment to the charter limiting such
liability is approved by a majority of the outstanding shares or such language
is included in the original charter.
The California Articles eliminate the liability of directors to the
corporation to the fullest extent permissible under California law. California
law does not permit the elimination of monetary liability where such liability
is based on: (a) intentional misconduct or knowing and culpable violation of
law; (b) acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, or that involve the absence of
good faith on the part of the director;
8
(c) receipt of an improper personal benefit; (d) acts or omissions that show
reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing a
director's duties should be aware of a risk of serious injury to the corporation
or its shareholders; (e) acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
corporation and its shareholders: (f) interested transactions between the
corporation and a director in which a director has a material financial
interest: and (g) liability for improper distributions, loans or guarantees.
The Delaware Certificate also eliminates the liability of directors to the
fullest extent permissible under Delaware law, as such law exists currently or
as it may be amended in the future. Under Delaware law, such provision may not
eliminate or limit director monetary liability for (a) breaches of the
director's duty of loyalty to the corporation or its shareholders; (b) acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law; (c) the payment of unlawful dividends or unlawful stock
repurchases or redemptions; or (d) transactions in which the director received
an improper personal benefit. Such limitation of liability provision also may
not limit director's liability for violation of, or otherwise relieve the
Delaware Company or its directors from the necessity of complying with, federal
or state securities laws or affect the availability of non-monetary remedies
such as injunctive relief or rescission.
Shareholders should recognize that the proposed reincorporation and
associated measures are designed to shield a director from suits by the Delaware
Company or its shareholders for monetary damages for negligence or gross
negligence by the director in failing to satisfy the director's duty of care.
As a result, an action for monetary damages against a director predicated on a
breach of the duty of care would be available only if the Delaware Company or
its shareholders were able to establish that the director was disloyal in his or
her conduct, failed to act in good faith, engaged in intentional misconduct,
knowingly violated the law, derived an improper personal benefit or approved an
illegal dividend or stock repurchase. Consequently, the effect of such measures
may be to limit or eliminate an effective remedy which might otherwise be
available to a shareholder who is dissatisfied with the Board of Directors'
decisions. Although an aggrieved shareholder could sue to enjoin or rescind an
action taken or proposed by the Board of Directors, such remedies may not be
timely or adequate to prevent or redress injury in all cases.
The Company believes that directors are motivated to exercise due care in
managing the Company's affairs primarily by concern for the best interests of
the Company and its shareholders rather than by the fear of potential monetary
damage awards. As a result, the Company believes that the reincorporation
proposal should sustain the Board of Directors' continued high standard of
corporate governance without any decrease in accountability by directors to the
Company and its shareholders.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The California Bylaws and Delaware Bylaws relating to indemnification
similarly require that the Company and the Delaware Company, respectively,
indemnify its directors and its executive officers and officers to the fullest
extent permitted by the respective state law, provided, that the Company may
modify the extent of such indemnification by individual contracts with its
directors and executive officers, and, provided, further, that the Company will
not be required to indemnify any director or executive officer in connection
with a proceeding initiated by such person, with certain exceptions. Such
Bylaws permit the Company and the Delaware Company to provide indemnification to
their other officers, employees and agents as set forth in the respective state
law. Such indemnification is intended to provide the full flexibility available
under such laws. The Delaware Bylaws contain provisions similar to the
California Bylaws with respect to advances in that the Delaware Company is
required to advance expenses related to any proceeding contingent on such
persons' commitment to repay any advances unless it is determined ultimately
that such persons are entitled to be indemnified.
California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. There are
nonetheless certain differences between the laws of the two states.
California law permits indemnification of expenses incurred in derivative
or third-party actions, except that with respect to derivative actions (a) no
indemnification may be made without court approval when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines such person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that such court shall determine and (b) no indemnification
may be made under California law, without court approval in respect of amounts
paid or expenses incurred in settling or otherwise disposing of a threatened or
pending action or amounts incurred in
9
defending a pending action which is settled or otherwise disposed of without
court approval. Delaware allows indemnification of such expenses without court
approval.
Indemnification is permitted by both California and Delaware law providing
the requisite standard of conduct is met, as determined by a majority vote of a
disinterested quorum of the directors, independent legal counsel (if a quorum of
independent directors is not obtainable), a majority vote of a quorum of the
shareholders (excluding shares owned by the indemnified party) or the court
handling the action.
California law requires indemnification when the individual has
successfully defended the action on the merits (as opposed to Delaware law which
requires indemnification relating to a successful defense on the merits or
otherwise).
Delaware law generally permits indemnification of expenses incurred in the
defense or settlement of a derivative or third-party action, provided there is a
determination by a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the shareholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to California law) not opposed to the best interests of
the corporation. Without court approval, however, no indemnification may be
made in respect of any derivative action in which such person is adjudged liable
for negligence or misconduct in the performance of his or her duty to the
corporation. Delaware law requires indemnification of expenses when the
individual being indemnified has successfully defended the action on the merits
or otherwise.
California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements, bylaws
or other corporate action beyond that specifically authorized by statute. The
California Articles include such a provision.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise. Under
Delaware law, rights to indemnification and expenses are non-exclusive, in that
they need not be limited to those expressly provided by statute. California law
is similar in that it permits non-exclusive indemnification if authorized in the
Company's charter. The California Articles contain such an enabling provision.
Under Delaware law and the Delaware Bylaws, the Delaware Company is permitted to
indemnify its directors, officers, employees and other agents, within the limits
established by law and public policy, pursuant to an express contract, bylaw
provision, shareholder vote or otherwise, any or all of which could provide
indemnification rights broader than those currently available under the
California Bylaws or the California indemnification statutes. If the
reincorporation is approved, the Company intends to enter into indemnification
agreements with its officers and directors.
The indemnification and limitation of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of the Company made prior to the proposed reincorporation. Nevertheless, the
Board of Directors has recognized in considering this reincorporation proposal
that the individual directors have a personal interest in obtaining the
application of Delaware law to such indemnity and limitation of liability issues
affecting them and the Company in the event they arise from a potential future
case, and that the application of Delaware law, to the extent that any director
or officer is actually indemnified in circumstances where indemnification would
not be available under California law, would result in expense to the Company
which the Company would not incur if the Company were not reincorporated. The
Board of Directors believes, however, that the overall effect of reincorporation
is to provide a corporate legal environment that enhances the Company's ability
to attract and retain high quality outside directors and thus benefits the
interests of the Company and its shareholders.
There is no pending or, to the Company's knowledge, threatened litigation
to which any of its directors is a party in which the rights of the Company or
its shareholders would be affected if the Company currently were subject to the
provisions of Delaware law rather than California law.
California and Delaware corporate law, the California Bylaws and the
Delaware Bylaws, as well as any indemnity agreements, may permit indemnification
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Board of Directors has been advised that, in the opinion
of the Securities and Exchange Commission (the "SEC"), indemnification for
liabilities arising under the Securities Act is contrary to public policy and is
therefore unenforceable, absent a decision to the contrary by a court of
appropriate jurisdiction.
10
CUMULATIVE VOTING FOR DIRECTORS
Cumulative voting permits the holder of each share of stock entitled to
vote in the election of directors to cast that number of votes which equal the
number of directors to be elected. The holder may allocate all votes
represented by a share to a single candidate or may allocate those votes among
as many candidates as he or she chooses. Thus, a shareholder with a significant
minority percentage of the outstanding shares may be able to elect one or more
directors if voting is cumulative. In contrast, under non-cumulative voting,
the holder or holders of a majority of the shares entitled to vote in an
election of directors will be able to elect all the directors of the Company.
Under California law, cumulative voting in the election of directors is
mandatory upon notice given by a shareholder at a shareholders' meeting at which
directors are to be elected. In order to cumulate votes a shareholder must give
notice at the meeting, prior to the voting, of the shareholder's intention to
vote cumulatively. If any one shareholder gives such a notice, all shareholders
may cumulate their votes. However, California law permits a company, by
amending its articles of incorporation or bylaws, to eliminate cumulative voting
when the Company's shares are listed on a national stock exchange or traded on
the Nasdaq and are held by at least 800 equity security holders.
Cumulative voting is not available under Delaware law unless so provided in
the corporation's certificate of incorporation. The Delaware Certificate does
not provide for cumulative voting.
The elimination of cumulative voting could deter investors from acquiring a
minority block in the Company with a view toward obtaining a board seat and
influencing Company policy. It is also conceivable that the absence of
cumulative voting might deter efforts to seek control of the Company on a basis
which some shareholders might deem favorable.
OTHER MATTERS RELATING TO DIRECTORS
NUMBER OF DIRECTORS.
California law allows the number of persons constituting the board of
directors of a corporation to be fixed by the bylaws or the articles of
incorporation, or permits the bylaws to provide that the number of directors may
vary within a specified range, the exact number to be determined by the board of
directors. California law further provides that, in the case of a variable
board, the maximum number of directors may not exceed two times the minimum
number minus one. The California Bylaws provide for a Board of Directors that
may vary between five and nine members, inclusive, and the Board of Directors
has fixed the exact number of directors at nine. California law also requires
that any change in the range of a variable Board of Directors specified in the
articles and bylaws must be approved by a majority in interest of the
outstanding shares entitled to vote (or such greater proportion of the
outstanding shares as may be required by the articles of incorporation),
provided that a change reducing the minimum number of directors to less than
three cannot be adopted if votes cast against its adoption are equal to more
than 16 2/3% of the outstanding shares entitled to vote. The California Bylaws
require that any amendment reducing the minimum number of directors cannot be
adopted if votes cast against are equal to more than 16 2/3% of the outstanding
shares entitled to vote.
Delaware law permits a board of directors to change the authorized number
of directors by amendment to the bylaws unless the number of directors is fixed
in the certificate of incorporation or the manner of fixing the number of
directors is set forth in the certificate of incorporation, in which case the
number of directors may be changed only by amendment of the certificate of
incorporation or consistent with the manner specified in the certificate of
incorporation, as the case may be. The Delaware Certificate provides that the
exact number of directors shall be fixed from time to time exclusively by the
Board of Directors by resolution.
REMOVAL OF DIRECTORS.
Under California law, a director may be removed with or without cause by
the affirmative vote of a majority of the outstanding shares, provided that the
shares voted against removal would not be sufficient to elect the director by
cumulative voting. Under Delaware law, unless the board is classified or
cumulative voting is permitted, a director can be removed from office during his
term by shareholders with or without cause by the holders of a majority of the
shares then entitled to vote at an election of directors. The Delaware
Certificate provides that the Company's directors may be removed from office at
any time with or without cause by the affirmative vote of the holders of a
majority of the voting power of the then-outstanding
11
shares of Voting Stock of the Company. The term "cause" with respect to the
removal of directors is not defined in the Delaware General Corporation Law and
its meaning has not been precisely delineated by the Delaware courts.
FILLING BOARD VACANCIES.
Under California law, if, after the filling of any vacancy by the directors
of a corporation, the directors then in office who have been elected by the
corporation's shareholders constitute less than a majority of the directors then
in office, then: (i) any holder of more than 5% of the corporation's Voting
Stock may call a special meeting of shareholders, or (ii) the superior court of
the appropriate county may order a special meeting of the shareholders to elect
the entire board of directors of the corporation. Delaware law provides that
if, at the time of filling any vacancy or newly created directorship, the
directors then in office constitute less than a majority of the entire board of
directors as constituted immediately prior to any increase, the Delaware Court
of Chancery may, upon application of any shareholder or shareholders holding at
least 10% of the total number of shares at the time outstanding having the right
to vote for such directors, summarily order an election to be held to fill any
such vacancies or newly created directorships or to replace the directors chosen
by the directors then in office.
The proposed Delaware Certificate and Delaware Bylaws provide that
vacancies shall, unless the Board of Directors determines by resolution that any
such vacancies be filled by the shareholders or as otherwise provided by law, be
filled only by the affirmative vote of a majority of directors then in office,
even if such directors comprise less than a quorum of the Board of Directors.
CAPITALIZATION
Currently, the Company's capital stock consists of 100,000,000 authorized
shares of Common Stock, no par value, of which _________________ shares are
issued and outstanding as of March 31, 1997, and 5,000,000 authorized shares of
Preferred Stock, no par value, none of which are issued and outstanding as of
March 31, 1997.
Upon the effectiveness of the reincorporation, the Delaware Company will
have the same number of outstanding shares of Common Stock that the Company had
outstanding immediately prior to the reincorporation.
The capitalization of the Delaware Company is identical to the
capitalization of the Company with the addition of a per share par value, with
authorized capital stock of 100,000,000 shares of Common Stock, $.001 par value,
and 5,000,000 shares of Preferred Stock, $.001 par value, consistent with
maintaining adequate capitalization for the current needs of the Company. The
Delaware Company's authorized but unissued shares of Preferred Stock will be
available for future issuance.
Under the Delaware Certificate, as under the California Articles, the Board
of Directors has the authority to determine or alter the rights, preferences,
privileges and restrictions to be granted to or imposed upon any wholly unissued
series of Preferred Stock and to fix the number of shares constituting any such
series and to determine the designation thereof.
The Board of Directors may authorize the issuance of Preferred Stock for
the purpose of adopting shareholder rights plans or in connection with various
corporate transactions, including corporate partnering arrangements. If the
reincorporation is approved, it is not the present intention of the Board of
Directors to seek shareholder approval prior to any issuance of Preferred Stock,
except as required by law or regulation. See "--Anti-Takeover Measures."
SHAREHOLDER POWER TO CALL SPECIAL SHAREHOLDERS' MEETING
Under California law, a special meeting of shareholders may be called by
the Board of Directors, the Chairman of the Board of Directors, the President or
the holders of shares entitled to cast not less than 10% of the votes at such
meeting and such persons as are authorized by the articles of incorporation or
bylaws. Under Delaware law, a special meeting of shareholders may be called by
the Board of Directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. The Delaware Certificate and
Delaware Bylaws provide that such a meeting may be called by the Board of
Directors, the Chairman of the Board of Directors or the Chief Executive
Officer. Pursuant to the Delaware Certificate and Delaware Bylaws, if the
meeting is called by a person or persons other than the Board of Directors,
(i.e., by the Chairman of the Board of Directors or the Chief Executive Officer)
the Board of Directors shall determine the time and the place of such meeting
which shall be from 35 to 120 days after the receipt of the request for the
meeting.
12
ACTION BY WRITTEN CONSENT OF SHAREHOLDERS
Under California and Delaware law, shareholders may execute an action by
written consent in lieu of a shareholder meeting. Both California and Delaware
law permits a corporation to eliminate such actions by written consent in its
charter. The Delaware Certificate, like the California Articles, continues to
prohibit actions by written consent of shareholders.
Prohibition of such shareholder written consents may lengthen the amount of
time required to take shareholder actions because certain actions by written
consent are not subject to the minimum notice requirement of a shareholders'
meeting. The prohibition of shareholder written consents may deter hostile
takeover attempts because of the lengthened shareholder approval process.
Without the ability to act by written consent, a holder or group of holders
controlling a majority in interest of the Delaware Company's capital stock will
not be able to amend the Delaware Bylaws or remove directors pursuant to a
written consent. Any such holder or group of holders would have to wait until a
shareholders' meeting was held to take any such action. The Board of Directors
believes this provision, like the other provisions to be included in the
Delaware Certificate and Delaware Bylaws, will enhance the Board of Directors'
opportunity to fully consider and effectively negotiate in the context of a
takeover attempt.
ADVANCE NOTICE REQUIREMENT FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
There is no specific statutory requirement under either California or
Delaware law with regard to advance notice of director nominations and
shareholder proposals. Absent a bylaw restriction, director nominations and
shareholder proposals may be made without advance notice at the annual meeting.
However, federal securities laws generally provide that shareholder proposals
that the proponent wishes to include in the Company's proxy materials must be
received not less than 120 days in advance of the date stated in the proxy
statement released in connection with the previous year's annual meeting.
The Delaware Bylaws provide that, in order for director nominations or
shareholder proposals to be properly brought before the annual meeting, the
shareholder must have delivered timely notice to the Secretary of the
corporation. To be timely under the Delaware Bylaws, notice must be delivered
not less than 120 days prior to the date stated in the Company's proxy statement
released to stockholders in connection with the previous year's annual meeting.
If no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than 30 days from the date contemplated at the
time of the previous year's proxy statement, the Delaware Bylaws will provide
that notice must be given not more than 90 days nor less than 60 days prior to
the annual meeting. Proper notice under the federal securities laws for a
proposal to be included in the Company's proxy materials will constitute proper
notice under the Delaware Bylaws. These notice requirements help ensure that
shareholders are aware of all proposals to be voted on at the annual meeting and
have the opportunity to consider each proposal in advance of the annual meeting.
ANTI-TAKEOVER MEASURES
Delaware law has been widely viewed to permit a corporation greater
flexibility in governing its internal affairs and its relationships with
shareholders and other parties than do the laws of many other states, including
California. In particular, Delaware law permits a corporation to adopt a number
of measures designed to reduce a corporation's vulnerability to hostile takeover
attempts. Such measures are either not currently permitted or are more narrowly
drawn under California law. Among these measures are the establishment of a
classified board of directors and the elimination of the right of shareholders
to call special shareholders' meetings, each of which is described above. In
addition, certain types of "poison pill" defenses (such as shareholder rights
plans) have been upheld by Delaware courts, while California courts have yet to
decide on the validity of such defenses, thus rendering their effectiveness in
California less certain.
As discussed above, numerous differences between California and Delaware
law, effective without additional action by the Delaware Company, could have a
bearing on unapproved takeover attempts. One such difference is the existence
of a Delaware statute regulating tender offers, which statute is intended to
limit coercive takeovers of companies incorporated in that state. California
has no comparable statute, but the California Articles include a Fair Price
provision similar to the Delaware statute, which prevents potential acquirors
who purchase a controlling interest in the Company for a certain price from
acquiring the remainder of the shares at a lesser price. Delaware law provides
that a corporation may not engage in any business combination with any
interested shareholder for a period of three years following the date that such
shareholder became an interested shareholder, unless (i) prior to the date the
shareholder became an interested shareholder the Board of Directors approved the
business combination or the transaction which resulted in the shareholder
becoming an interested
13
shareholder, or (ii) upon consummation of the transaction which resulted in the
shareholder becoming an interested shareholder, the interested shareholder owned
at least 85% of the Voting Stock, or (iii) the business combination is approved
by the Board of Directors and authorized by 66 2/3% of the outstanding Voting
Stock which is not owned by the interested shareholder. An interested
shareholder means any person that is the owner of 15% or more of the outstanding
Voting Stock, however, the statute provides for certain exceptions to parties
who otherwise would be designated interested shareholders, including an
exception for parties that held 15% or more of the outstanding Voting Stock as
of December 23, 1987. Any corporation may decide to opt out of the statute in
its original certificate of incorporation or, at any time, by action of its
shareholders. The Company has no present intention of opting out of the
statute.
There can be no assurance that the Board of Directors would not adopt any
further anti-takeover measures available under Delaware law (some of which may
not require shareholder approval). Moreover, the availability of such measures
under Delaware law, whether or not implemented, may have the effect of
discouraging a future takeover attempt which a majority of the Delaware
Company's shareholders may deem to be in their best interests or in which
shareholders may receive a premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such
transactions may not have the opportunity to do so. Shareholders should
recognize that, if adopted, the effect of such measures, along with the
possibility of discouraging takeover attempts, may be to limit in certain
respects the rights of shareholders of the Delaware Company compared with the
rights of shareholders of the Company.
The Board of Directors recognizes that hostile takeover attempts do not
always have the unfavorable consequences or effects described above and may
frequently be beneficial to the shareholders, providing all of the shareholders
with considerable value for their shares. However, the Board of Directors
believes that the potential disadvantages of unapproved takeover attempts (such
as disruption of the Company's business and the possibility of terms which may
be less than favorable to all of the shareholders than would be available in a
board-approved transaction) are sufficiently great such that prudent steps to
reduce the likelihood of such takeover attempts and to enable the Board of
Directors to fully consider the proposed takeover attempt and actively negotiate
its terms are in the best interests of the Company and its shareholders.
In addition to the various anti-takeover measures that would be available
to the Delaware Company after the reincorporation due to the application of
Delaware law, the Delaware Company would retain the rights currently available
to the Company under California law to issue shares of its authorized but
unissued capital stock. Following the effectiveness of the proposed
reincorporation, shares of authorized and unissued Common Stock and Preferred
Stock of the Delaware Company could (within the limits imposed by applicable
law) be issued in one or more transactions, or Preferred Stock could be issued
with terms, provisions and rights which would make more difficult and,
therefore, less likely, a takeover of the Delaware Company. Any such issuance
of additional stock could have the effect of diluting the earnings per share and
book value per share of existing shares of Common Stock and Preferred Stock, and
such additional shares could be used to dilute the stock ownership of persons
seeking to obtain control of the Delaware Company.
It should be noted that the voting rights to be accorded to any unissued
series of Preferred Stock of the Delaware Company ("Delaware Preferred Stock")
remain to be fixed by the Delaware Company Board of Directors. Accordingly, if
the Delaware Company Board of Directors so authorizes, the holders of Delaware
Preferred Stock may be entitled to vote separately as a class in connection with
approval of certain extraordinary corporate transactions in circumstances where
Delaware law does not ordinarily require such a class vote, or might be given a
disproportionately large number of votes. Such Delaware Preferred Stock could
also be convertible into a large number of shares of Common Stock of the
Delaware Company under certain circumstances or have other terms which might
make acquisition of a controlling interest in the Delaware Company more
difficult or more costly, including the right to elect additional directors to
the Delaware Board of Directors. Potentially, the Delaware Preferred Stock
could be used to create voting impediments or to frustrate persons seeking to
effect a merger or otherwise to gain control of the Delaware Company. Also, the
Delaware Preferred Stock could be privately placed with purchasers who might
side with the management of the Delaware Company in opposing a hostile tender
offer or other attempt to obtain control.
If the reincorporation is approved it is not the present intention of the
Board of Directors to seek shareholder approval prior to any issuance of the
Preferred Stock or Common Stock of the Delaware Company, except as required by
law or regulation. Frequently, opportunities arise that require prompt action,
and it is the belief of the Board of Directors that the delay necessary for
shareholder approval of a specific issuance would be a detriment to the Delaware
Company and its shareholders. The Board of Directors does not intend to issue
any Preferred Stock except on terms which the Board of Directors deems to be in
the best interests of the Delaware Company and its then existing shareholders.
14
AMENDMENT OF CERTIFICATE
Both the California Articles and the Delaware Certificate provide that the
provisions relating to the (i) establishment of the number of directors, (ii)
advance notice of shareholder proposals and nominations, (iii) shareholder
action without a meeting and (iv) cumulative voting can only be amended by the
affirmative vote of the holders of a majority of the Voting Stock of the Company
and the Delaware Company, respectively.
AMENDMENT OF BYLAWS
Both the California Bylaws and the Delaware Bylaws provide that the
provisions relating to the (i) establishment of the number of directors, (ii)
advance notice of shareholder proposals and nominations, (iii) shareholder
action without a meeting, (iv) cumulative voting, (v) filling vacancies on the
Board of Directors, (vi) excessive compensation and (vii) loans to officers can
only be amended by the affirmative vote of the holders of a majority of the
Voting Stock of the Company and the Delaware Company, respectively.
LOANS TO OFFICERS, DIRECTORS AND EMPLOYEES
California law provides that any loan or guaranty (other than loans to
permit the purchase of shares under certain stock purchase plans) for the
benefit of any officer or director, or any employee benefit plan authorizing
such loan or guaranty (except certain employee stock purchase plans), must be
approved by the shareholders of a California corporation.
Under Delaware law, a corporation may make loans to, or guarantee the
obligations of, officers or other employees when, in the judgment of the board
of directors, the loan or guaranty may reasonably be expected to benefit the
corporation. Both California law and Delaware law permit such loans or
guaranties to be unsecured and without interest.
CLASS VOTE FOR CERTAIN REORGANIZATIONS
With certain exceptions, California law requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding. Delaware law generally
does not require class voting for such transactions, except in certain
situations involving an amendment to the certificate of incorporation which
adversely affects a specific class of shares.
California law also requires that holders of a California corporation's
common stock receive nonredeemable common stock in a merger of the corporation
with the holder (or an affiliate of the holder) of more than 50% but less than
90% of its common stock, unless all of the holders of its common stock consent
to the merger or the merger has been approved by the California Commissioner of
Corporations at a "fairness" hearing. This provision of California law may have
the effect of making a cash "freezeout" merger by a majority shareholder more
difficult to accomplish. A cash freezeout merger is a transaction whereby a
minority shareholder is forced to relinquish his share ownership in a
corporation in exchange for cash, subject in certain instances to dissenters
rights. Delaware law has no comparable provision.
15
INSPECTION OF SHAREHOLDER LISTS
California law provides for an absolute right of inspection of the
shareholder list for shareholders holding 5% or more of a corporation's Voting
Stock or shareholders holding 1% or more of such shares who have filed a
Schedule 14B with the SEC. Delaware law provides no such absolute right of
shareholder inspection. However, both California and Delaware law permit any
shareholder of record to inspect the shareholder list for any purpose reasonably
related to that person's interest as a shareholder.
APPRAISAL RIGHTS
Under both California law and Delaware law, a shareholder of a corporation
participating in certain mergers and reorganizations may be entitled to receive
cash in the amount of the "fair value" (Delaware) or "fair market value"
(California) of its shares, as determined by a court, in lieu of the
consideration it would otherwise receive in the transaction. The limitations on
such dissenters' appraisal rights are somewhat different in California and
Delaware.
Shareholders of a California corporation, the shares of which are listed on
a national securities exchange or on the OTC margin stock list, generally do not
have appraisal rights unless the holders of at least 5% of the class of
outstanding shares assert the appraisal right. In any reorganization in which
one corporation or the shareholders of one corporation own more than 5/6 of the
voting power of the surviving or acquiring corporation, shareholders are denied
dissenters' rights under California law. For this reason, appraisal rights will
not be available to shareholders in connection with the reincorporation
proposal.
Under Delaware law appraisal rights are not available to shareholders with
respect to a merger or consolidation by a corporation, the shares of which are
either listed on a national securities exchange or designated as a national
market system security or an interdealer quotation system security by the
National Association of Securities Dealers, Inc., or are held of record by more
than 2,000 holders if the shareholders receive shares of the surviving
corporation or shares of any other corporation which are similarly listed or
dispersed, and the shareholders do not receive any other property in exchange
for their shares except cash for fractional shares. Appraisal rights are also
unavailable under Delaware law to shareholders of a corporation surviving a
merger if no vote of those shareholders is required to approve the merger
because, among other things, the number of shares to be issued in the merger
does not exceed 20% of the shares of the surviving corporation outstanding
immediately before the merger and certain other conditions are met.
VOTING AND APPRAISAL RIGHTS IN CERTAIN TRANSACTIONS
Delaware law does not provide shareholders with voting or appraisal rights
when a corporation acquires another business through the issuance of its stock,
whether in exchange for assets or stock or in a merger with a subsidiary.
California law treats these kinds of acquisitions in the same manner as a merger
of the corporation directly with the business to be acquired and provides
appraisal rights in the circumstances described in the preceding section.
DIVIDENDS
Under California law, any dividends or other distributions to shareholders,
such as redemptions, are limited to the greater of (i) retained earnings or (ii)
an amount which would leave the corporation with assets (excluding certain
intangible assets) equal to at least 125% of its liabilities (excluding certain
deferred items) and current assets equal to at least 100% (or, in certain
circumstances, 125%) of its current liabilities. Delaware law allows the
payment of dividends and redemption of stock out of surplus (including paid-in
and earned surplus) or out of net profits for the current and immediately
preceding fiscal years. The Company has never paid cash dividends and has no
present plans to do so.
APPLICATION OF CALIFORNIA LAW AFTER REINCORPORATION
California law provides that if (i) the average of certain property,
payroll and sales factors results in a finding that more than 50% of the
Delaware Company's business is conducted in California, and in a particular
fiscal year more than 50% of the Delaware Company's outstanding voting
securities are held of record by persons having addresses in California, and
(ii) the Company's shares are traded in the Nasdaq and are held by fewer than
800 equity security holders, as of its most recent annual meeting of
shareholders, then the Delaware Company would become subject to certain
provisions of California law regardless of its state of incorporation. The
Company does not currently meet all of the above requirements.
16
Because the Company's Common Stock is traded in the Nasdaq and the
Company's shares are held by at least 800 equity security holders, as of its
most recent annual meeting of shareholders, California law will not initially
apply to the Delaware Company if the reincorporation is approved. The Company
would not be subject to California law as long as it continued to meet both of
these requirements.
If the Delaware Company were to become subject to the provisions of
California law referred to above, and such provisions were enforced by
California courts in a particular case, many of the Delaware laws described in
this Proxy Statement would not apply to the Delaware Company. Instead, the
Delaware Company could be governed by certain California laws, including those
regarding liability of directors for breaches of the duty of care,
indemnification of directors, dissenters' rights of appraisal, removal of
directors as well as certain other provisions discussed above, to the exclusion
of Delaware law. The effects of applying both Delaware and California laws to a
Delaware corporation whose principal operations are based in California have not
yet been determined.
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
The reincorporation provided for in the Merger Agreement is intended to be
a tax free reorganization under the Internal Revenue Code of 1986, as amended.
Assuming the reincorporation qualifies as a reorganization, no gain or loss will
be recognized to the holders of capital stock of the Company as a result of
consummation of the reincorporation, and no gain or loss will be recognized by
the Company or the Delaware Company. Each former holder of capital stock of the
Company will have the same basis in the capital stock of the Delaware Company
received by such holder pursuant to the reincorporation as such holder has in
the capital stock of the Company held by such holder at the time of consummation
of the reincorporation. Each shareholder's holding period with respect to the
Delaware Company's capital stock will include the period during which such
holder held the corresponding Company capital stock, provided the latter was
held by such holder as a capital asset at the time of consummation of the
reincorporation. The Company has not obtained a ruling from the Internal
Revenue Service or an opinion of legal or tax counsel with respect to the
consequences of the reincorporation.
The foregoing is only a summary of certain federal income tax consequences.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE PROPOSED REINCORPORATION, INCLUDING THE
APPLICABILITY OF THE LAWS OF ANY STATE OR OTHER JURISDICTION.
BOARD RECOMMENDATION
The foregoing discussion is an attempt to summarize the more important
differences in the corporation laws of Delaware and California and does not
purport to be an exhaustive discussion of all of the differences. Such
differences can be determined in full by reference to the California
Corporations Code and to the Delaware General Corporation Law. In addition,
both California and Delaware law provide that some of the statutory provisions
as they affect various rights of holders of shares may be modified by provisions
in the charter or bylaws of the corporation.
A vote FOR the reincorporation proposal will constitute approval of the
merger, the Delaware Certificate, the Delaware Bylaws, assumption of the
indemnification agreements, the adoption and assumption by the Delaware
Company of each of the Company's stock option and employee benefit plans and
all other aspects of this Proposal 2.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR THE REINCORPORATION OF THE COMPANY IN DELAWARE
AND RELATED CHANGES TO THE RIGHTS OF SHAREHOLDERS.
17
PROPOSAL 3
APPROVAL OF AMENDMENTS TO THE COMPANY'S
1992 STOCK OPTION PLAN
GENERAL
The shareholders are being asked to vote on amendments to the Company's
1992 Stock Option Plan (the "Plan"), which amendments were approved by the Board
of Directors on February 19, 1997, subject to shareholder approval. The effect
of the amendments will be to increase the number of shares available for
issuance under the Plan by an additional 1,600,000 to a total of 7,607,360
shares and to make certain changes to the Plan to take advantage of recent
changes in Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The affirmative vote of a majority of the shares of Common
Stock represented and voting at the Annual Meeting is required for approval of
the amendments to the Plan. The Plan, as amended, will become effective
immediately upon approval by the shareholders at the Annual Meeting.
Prior to the amendments, 6,007,360 shares (restated for the July 1, 1996
two-for-one stock split) were available for issuance under the Plan. The
amendment to increase the shares available for issuance was adopted by the
Board principally as a result of the public offerings of an aggregate of
10,225,000 shares of Common Stock which were completed during fiscal 1996,
with the intention of retaining approximately the same proportion of shares
subject to the Plan in relation to the number of shares outstanding.
SUMMARY OF STOCK OPTION PLAN
The following is a summary of all material terms and provisions of the
Plan, assuming the amendments discussed above are adopted. The summary,
however, does not purport to be a complete description of all the provisions of
the Plan. Copies of the actual Plan documents may be obtained by any
shareholder upon written request to the Secretary of the Company at the
corporate offices in San Diego, California.
PLAN ADMINISTRATION. The Plan is administered by a committee or committees
( the "Committee") appointed by the Board from among its members (the "Plan
Administrator"). Administration of the Plan with respect to persons subject to
Section 16 of the Exchange Act will comply with the applicable requirements of
Rule 16b-3. The Plan Administrator is generally authorized to construe and
interpret the Plan, to establish appropriate rules and regulations, to select
key employees, consultants and independent contractors of the Company and its
subsidiaries for participation, and to specify the terms of the options granted
under the Plan. Members of a Committee may be removed by the Board. The
Company will pay all costs of administration of the Plan. The cash proceeds
received by the Company from the issuance of shares pursuant to the Plan will be
used for general corporate purposes.
SHARE RESERVE. The aggregate number of shares available for issuance under
the Plan may not exceed 7,607,360 shares of Common Stock, subject to adjustment
from time to time in the event of certain changes to the Company's capital
structure.
Should any option under the Plan expire or terminate prior to exercise or
surrender in full (including any option incorporated into the Plan from the
Company's prior stock option plans), the shares subject to the portion of the
option not so exercised or surrendered will be available for subsequent option
grants. Shares subject to any option surrendered or cancelled in accordance
with the option surrender or cash-out provisions of the Plan will NOT be
available for subsequent grants.
Common Stock issuable upon exercise of an option under the Plan may be
subject to repurchase rights as determined by the Committee.
ELIGIBILITY. The persons eligible to receive discretionary stock options
include all employees of the Company or its subsidiaries, non-employee members
of the Board or the board of directors of any subsidiary, and consultants and
other independent advisors who provide services to the Company or its
subsidiary. Only non-employee members of the Board will be eligible to receive
automatic option grants.
PER-EMPLOYEE LIMITATION. No more than 1,500,000 shares may be granted to
any one optionee over the lifetime of the Plan and no more than 400,000 shares
may be granted to any one optionee in any fiscal year.
18
REPURCHASE RIGHTS. The Committee may include as an option term that the
Company (or its assigns) will have the right, exercisable on the optionee's
separation from service, to repurchase Common Stock acquired by the optionee
upon the exercise of an option. The Committee may also provide for the
automatic termination of such a repurchase right.
GRANTS. Under the general terms of the Plan, the Committee may grant
either an incentive stock option ("ISO"), which satisfies the requirements of
Section 422 of the Internal Revenue Code ("Code"), or a non-qualified option
("NQO"), which is not intended to satisfy the requirements of Section 422 of the
Code. The Committee may also determine the number of shares of Common Stock
issuable under an option as well as the exercise date, the exercise price, and
the exercise period of an option. The duration of an option may not exceed 10
years, and the exercise price for options may not be less than the fair market
value (as defined in the Plan) of the Common Stock on the date of grant of the
option, provided that the Plan Administrator may fix the exercise price at less
than 100% of the fair market value to the extent that the optionee has made a
payment to the Company at the time of the grant of the option (including by
means of a salary reduction agreement) equal to the amount by which the fair
market value exceeds the exercise price.
Upon exercise, the price of an option is generally payable in full in cash.
In the Committee's discretion, the purchase price may be paid in: (i) shares of
the Company's Common Stock ("Previously Owned Shares") held for such period of
time as may be required in order to avoid a charge to the Company's earnings;
(ii) by means of a same-day sale program, pursuant to which a designated
brokerage firm immediately sells shares purchased under the option and pays over
to the Company, out of the sales proceeds available on the settlement date,
funds to cover the option price plus all applicable withholding taxes; or (iii)
by means of a promissory note. The Committee may also permit an optionee to
elect to have any withholding tax obligation paid through withholding of shares
or by delivery of Previously Owned Shares. In order to assist an optionee
(other than the recipient of an Automatic Grant) in the acquisition of Common
Stock pursuant to an option, the Committee may also authorize the Company to
extend secured or unsecured credit, in an amount sufficient to cover the
exercise price and any employment tax liability incurred upon exercise of the
option, to an optionee who is also an employee.
During the lifetime of an optionee, an ISO is exercisable only by the
optionee and is not assignable or transferable other than by will or by the
laws of descent and distribution following the optionee's death. However, a NQO
may be assigned in whole or in part during the optionee's lifetime. The terms
applicable to the assigned portion are the same as those in effect for the
option immediately prior to such assignment.
The Committee has the authority to reprice outstanding options, with the
consent of the affected optionee, through the cancellation of options and the
grant of replacement options with an exercise price equal to the fair market
value of the option shares on the regrant date.
AUTOMATIC GRANTS. Each person who is newly elected or appointed as a non-
employee director after the effective date of the Plan will receive, on the date
of such election or appointment, a NQO for 30,000 shares of Common Stock. On
the date of each of the Company's Annual Meetings, each person who (i) (A) is a
continuing non-employee director or (B) is re-elected at the Annual Meeting and
(ii) has served as a non-employee director for the immediately preceding 180
days, will receive a NQO for 8,000 shares of Common Stock (collectively, the
"Automatic Grant").
The exercise price of each Automatic Grant will be equal to the fair market
value of the Common Stock on the date of grant. The exercise price of an
Automatic Grant will be payable in cash or in Common Stock held for such period
of time as may be required to avoid a charge to the Company's earnings or by
means of a same day sale program, pursuant to which a designated brokerage firm
immediately sells shares purchased under the Automatic Grant and pays over to
the Company, out of the sales proceeds available on the settlement date, funds
to cover the option price plus all applicable employment taxes. The term of the
Automatic Grant will be 10 years. The Automatic Grant will become fully
exercisable one year after the grant date (or immediately upon a Corporate
Transaction as described below). Finally, the Automatic Grant will be granted
in tandem with a limited stock appreciation right as described below. Options
granted under the Automatic Option Grant Program will expire if not exercised
within six months after the optionee ceases to serve as a director or within
12 months after the optionee ceases to serve as a director due to the optionee's
death.
ACCELERATION OF OPTIONS. In the event of any of the following transactions
to which the Company is a party (a "Corporate Transaction"):
19
(i) a merger or consolidation in which the Company is not the
surviving entity (except for a transaction the principal purpose of which is to
change the state of the Company's incorporation),
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in complete liquidation or dissolution of the
Company,
(iii) a reverse merger in which the Company is the surviving entity
but in which the holders of securities possessing more than 50% of the combined
voting power of the Company's outstanding securities (as determined immediately
prior to such merger) transfer their ownership of those securities to a person
or persons not otherwise part of the transferor group, or
(iv) a tender or exchange offer made directly to the Company's
shareholders in which any person or related group of persons (other than the
Company or any affiliate) acquires beneficial ownership of securities possessing
more than 50% of the combined voting power of the Company's outstanding
securities,
each outstanding option will automatically become exercisable for all of the
option shares and may be exercised for any or all of such shares. The Company's
outstanding repurchase rights under the Plan will also terminate, and the shares
subject to such terminated rights will become fully vested, upon the Corporate
Transaction. Upon the consummation of the Corporate Transaction, all
outstanding options under the Plan will terminate and cease to be exercisable,
except to the extent assumed by the successor corporation.
The acceleration of options in the event of a Corporate Transaction may be
seen as an anti-takeover provision and may have the effect of discouraging a
merger proposal, a takeover attempt or other efforts to gain control of the
Company.
STOCK APPRECIATION RIGHTS. The Plan includes a stock appreciation rights
program, pursuant to which one or more optionees may, subject to Committee
approval, surrender their outstanding options in return for a payment from the
Company in an amount equal to the excess of (i) the fair market value (on the
option surrender date) of the shares of Common Stock subject to the surrendered
option over (ii) the aggregate option price payable for such shares. The
payment may, at the discretion of the Committee, be made either in cash or in
shares of Common Stock.
One or more officers of the Company subject to the short-swing profit
restrictions of the federal securities laws may, in the Committee's discretion,
be granted limited stock appreciation rights in tandem with their outstanding
options. In addition, all Automatic Grants will be made in tandem with the
grant of a limited stock appreciation right. Any option with such a limited
stock appreciation right in effect for at least six months will automatically be
cancelled upon the occurrence of a Hostile Takeover, and the optionee will in
return be entitled to a cash distribution from the Company in an amount equal to
the excess of (i) the Takeover Price of the shares of Common Stock at the time
subject to the cancelled option (whether or not the option is otherwise at the
time exercisable for such shares) over (ii) the aggregate exercise price payable
for such shares.
For purposes of these option cancellation provisions, the following
definitions are in effect under the Plan:
A Hostile Takeover shall be deemed to occur upon the acquisition
by any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) of ownership of more than 50%
of the Company's outstanding Common Stock (excluding the Common Stock
holdings of officers and directors of the Company who participate in
this Plan) pursuant to a tender or exchange offer which the Board does
not recommend the Company's shareholders accept.
The Takeover Price per share shall be deemed to be equal to the
GREATER of (a) the Fair Market Value per share on the date of
cancellation, or (b) the highest reported price per share paid in
effecting the Hostile Takeover. However, if the cancelled option is
an ISO, the Takeover Price shall not exceed the clause (a) price per
share.
AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend, suspend or
discontinue the Plan at any time. Shareholder approval of amendments of the
Plan will be required when the amendments are made conditional on such approval
by the Board or when such approval is required by law or regulation. Generally,
the provisions of the Plan
20
concerning Automatic Grants may only be amended once every six months. The Plan
will terminate October 8, 2003, unless sooner terminated by the Board.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general description of certain federal income tax
consequences of the Plan. This description does not purport to be complete.
The Company will be entitled to a business expense deduction equal to the
ordinary income recognized by an optionee on exercise of a NQO. The ordinary
income recognized will be equal to the excess of the fair market value of the
purchased shares on the date of recognition over the exercise price. Generally,
the date of recognition will be the date the option is exercised or, if later,
the first date shares acquired on exercise are not subject to a substantial risk
of forfeiture.
The Company will also be entitled to a business expense deduction equal to
the ordinary income recognized by an optionee due to a "disqualifying
disposition" of stock acquired pursuant to an ISO. A disqualifying disposition
occurs if an optionee disposes of the acquired shares within two years of the
date of the option grant, or within one year of the date the shares are acquired
by the optionee. In the case of a disqualifying disposition, the optionee will
generally recognize ordinary income in the year of disposition, in an amount
equal to the amount of ordinary income the optionee would have recognized from
the exercise of the option had the option been a NQO at the time of exercise.
To the extent that the aggregate fair market value (determined as of the
respective date or dates of grant) of shares with respect to which options that
would otherwise be ISOs are exercisable for the first time by any individual
during any calendar year exceeds the sum of $100,000, such options will be
treated as NQOs.
If the exercisability of an option is accelerated as a result of a change
in control of the Company, all or a portion of the value of the option at that
time may be a "parachute payment" for purposes of the Code's "excess parachute"
provisions. Those provisions generally provide that if "parachute" payments
exceed three times an employee's average compensation for the five tax years
preceding the change in control, the Company loses its deduction and the
recipient is subject to a 20% excise tax for the amount of the "parachute
payments" in excess of such average compensation.
An optionee who surrenders an outstanding option for a cash or stock
distribution from the Company will recognize ordinary income in the year of
surrender equal to the amount of the appreciation distribution. The Company
will be entitled to a corresponding business expense deduction for the
appreciation distribution. The deduction will be allowed in the taxable year of
the Company in which the ordinary income is recognized by the optionee.
On the date an ISO is exercised or, if later, the date shares acquired upon
exercise are not subject to a substantial risk of forfeiture, the optionee will
generally recognize alternative minimum taxable income in an amount equal to the
excess of the fair market value of the purchased shares over the exercise price.
An optionee's recognition of alternative minimum taxable income will have no
effect on the Company.
ACCOUNTING TREATMENT
Pursuant to the accounting policy selected by the Company, neither the
grant of options to employees nor the exercise of any options will result in any
charge to the Company's earnings. The grant of options to non-employees will
result in a charge to earnings equal to the fair market value of the options at
the date of grant. The number of outstanding options under the Plan will be a
factor in determining earnings per share.
Should one or more optionees be granted the unqualified right to surrender
their options under the Plan for a cash or stock distribution, compensation
expense will arise as a charge to the Company's earnings. Accordingly, at the
end of each fiscal quarter, the amount (if any) by which the fair market value
of the shares of Common Stock subject to each such surrenderable option has
increased from prior quarter-end will be accrued as compensation expense, to the
extent such amount is in excess of the aggregate exercise price payable for such
shares. In the event the fair market value of such shares declines from quarter
to quarter, appropriate adjustments to current compensation expense will be
made.
21
OUTSTANDING OPTION GRANTS UNDER THE PLAN
The following table shows, as to the Company's Chairman, President and
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company (collectively, the "Named Executive Officers")
and as to the various indicated groups, information with respect to stock
options granted during the fiscal year ended December 31, 1996 and during all
other Plan years which are outstanding as of December 31, 1996, as well as
options which the Company has determined to grant under the Plan during the 1997
fiscal year to the extent currently known or determinable: (i) the number of
shares of Common Stock subject to options granted and (ii) the weighted average
exercise price per share for such options.
OPTIONS GRANTED UNDER THE PLAN
Fiscal 1997 Fiscal 1996 All Other Plan Years
-------------------------------- ---------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
-------------- ---------------- ------------- ------------- ---------------- --------------
Cam L. Garner -- -- 170,000 $35.48 835,000 $3.10
Director, Chairman, President,
Chief Executive Officer
Walter F. Spath -- -- 40,000 $37.63 355,000 $2.81
Director and Senior Vice
President, Sales and Marketing,
and nominee for Director
James W. Newman -- -- 60,000 $31.54 235,000 $4.12
Senior Vice President, Finance
and Administration and Chief
Financial Officer
Charles W. Prettyman -- -- 55,000 $30.99 210,000 $3.78
Senior Vice President,
Development and Regulatory
Affairs
David S. Kabakoff -- -- 250,000 $30.27 -- --
Director and
Executive Vice President
All current directors who are 48,000(1) (2) 48,000 $29.63 452,000(3) $5.47
not executive officers
(6 persons)
All current executive officers -- -- 655,000 $32.87 1,885,000 $3.97
as a group (7 persons)
All employees who are 31,150(4) $42.03 533,100 $31.30 1,811,932 $4.77
not executive officers
- ------------------------------
(1) Each person who is a continuing non-employee director or nominee who is re-
elected at the Annual Meeting and has served as a non-employee director for
the immediately preceding 180 days will receive a NQO for 8,000 shares of
Common Stock, pursuant to the "Automatic Grant" provision of the Plan.
(2) Weighted average exercise price will be determined on the date of grant and
will be equal to the fair market value of the Common Stock on such date.
(3) Includes an option to purchase 100,000 shares of Common Stock granted to
Life Science Advisors, of which Mr. Cook is a principal, pursuant to a
consulting arrangement between Life Science Advisors and the Company. See
"Executive Compensation and Other Information--Director Compensation."
(4) As of January 31, 1997.
22
NEW PLAN BENEFITS
Effective as of the 1997 Annual Meeting, the effect of the amendments will
be to increase the number of shares authorized for issuance under the Plan by
1,600,000 shares to a total of 7,607,360 shares. None of the 1,600,000-share
increase has been granted prior to the date of the Annual Meeting.
VOTE REQUIRED FOR APPROVAL OF THE AMENDMENT OF THE PLAN
The affirmative vote of a majority of the shares of Common Stock
represented and voting at the Annual Meeting is necessary to approve an
amendment of the Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR THE APPROVAL OF THE AMENDMENTS TO THE PLAN.
PROPOSAL 4
APPROVAL OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Company is asking the shareholders to ratify the selection of Deloitte
& Touche LLP as the Company's independent public accountants for the year ending
December 31, 1997. In the event that the shareholders fail to ratify the
appointment, the Board of Directors will reconsider its selection. Even if the
selection is ratified, the Board of Directors, in its discretion, may direct the
appointment of a different independent accounting firm at any time during the
year if the Board of Directors feels that such a change would be in the
Company's and the shareholders' best interest.
A representative of Deloitte & Touche LLP is expected to be present at the
meeting to respond to questions and will have the opportunity to make a
statement if they desire to do so.
The affirmative vote of the holders of a majority of shares represented and
voting at the Annual Meeting will be required to ratify the selection of
Deloitte & Touche LLP.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR THE RATIFICATION AND APPROVAL OF
THE SELECTION OF DELOITTE & TOUCHE LLP
AS THE COMPANY'S INDEPENDENT ACCOUNTANTS.
23
PRINCIPAL SHAREHOLDERS
The following are the only persons known by the Company to beneficially own
more than five percent of the outstanding shares of its Common Stock as of
January 31, 1997.
Shares Beneficially Owned
---------------------------
Name and Address
of Beneficial Owner Number (1) Percent (2)
------------------------------ ------------ ------------
Pilgrim Baxter & 4,214,400 9.75%
Associates, Ltd. (3)
1255 Drummers Lane, Suite 300
Wayne, Pennsylvania 19087
Nicholas-Applegate Capital 3,647,959 8.44%
Management (4)
600 West Broadway, 29th Floor
San Diego, California 92101
Putnam Investments, Inc. (5) 3,090,529 7.15%
One Post Office Square
Boston, Massachusetts 02109
Husic Capital Management (6) 2,325,674 5.38%
555 California Street,
Suite 2900
San Francisco, CA 94104
- --------------------
(1) Except as indicated in the footnotes to this table, the entities named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
(3) Pursuant to Amendment No. 2 to Schedule 13G dated February 14, 1997 filed
by Pilgrim Baxter & Associates, Ltd., an investment adviser under the
Investment Advisers Act of 1940, as amended (an "Investment Adviser"), and
certain of its affiliates. Such entities reported shared voting power and
sole dispositive power as to these shares.
(4) Pursuant to a Schedule 13G dated February 3, 1997 filed by Nicholas-
Applegate Capital Management, an Investment Adviser, who reported sole
voting power over 3,158,369 shares, shared voting power over 3,650 shares,
and sole dispositive power over all 3,647,959 shares.
(5) Pursuant to a Schedule 13G dated January 27, 1997 filed by Putnam
Investments, Inc., a parent holding company and a wholly-owned subsidiary
of Marsh & McLennan Companies, Inc., and certain of its affiliates, which
are Investment Advisers. Such entities reported shared voting and
dispositive power as to these shares.
(6) Pursuant to Amendment No. 1 to Schedule 13G dated February 6, 1997 filed
by Husic Capital Management, an Investment Adviser, and certain of its
affiliates, which are parent holding companies. Such entities reported
shared voting and dispositive power as to these shares.
24
COMMON STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of shares of Common
Stock of the Company as of January 31, 1997, by each director and nominee, Named
Executive Officer, and by directors and executive officers as a group.
Shares Beneficially Owned
---------------------------------------
Name Number (1)(2) Percent (3)
- ---------------------- ---------------------------------------
James C. Blair (4) 21,000 *
Herbert J. Conrad 8,000 *
Joseph C. Cook (5) 102,201 *
Cam L. Garner 207,660 *
David F. Hale 10,000 *
David S. Kabakoff 2,000 *
James W. Newman 116,254 *
Charles W. Prettyman 20,239 *
Gordon V. Ramseier 42,000 *
Charles G. Smith 54,000 *
Walter F. Spath 126,079 *
Directors and executive 788,136 1.80%
officers as a group
(13 persons)
- -----------------------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(2) Share ownership in each case includes shares issuable upon exercise of
outstanding options, now exercisable or exercisable within 60 days of
January 31, 1997, to purchase shares of Common Stock for the following
persons or group: Mr. Conrad 8,000; Mr. Cook 30,000; Mr. Garner 82,660;
Mr. Hale 10,000; Mr. Newman 96,227; Mr. Prettyman 20,239; Mr. Ramseier
42,000; Mr. Smith 54,000; Mr. Spath 126,079; and directors and executive
officers as a group 618,109.
(3) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
(4) Includes 8,000 shares held by Domain Associates, of which Dr. Blair is one
of several general partners. He disclaims ownership of any securities
which exceed his pecuniary interest and/or that are not actually
distributed to him.
(5) Includes options, now exercisable or exercisable within 60 days, to
purchase 70,201 shares of Common Stock held by Life Science Advisors. As a
principal of Life Science Advisors, Mr. Cook may be deemed to be the
indirect beneficial owner of shares held by Life Science Advisors.
25
EXECUTIVE OFFICERS
The Company's executive officers as of January 31, 1997 are:
Name Age Position Held With the Company
---- --- -----------------------------
Julia Brown 49 Senior Vice President, Business
Development
Cam L. Garner 49 Chairman, President, Chief Executive
Officer and director
David S. Kabakoff 49 Executive Vice President and director
James W. Newman 52 Senior Vice President, Finance and
Administration, Chief Financial Officer
and Assistant Secretary
Charles W. Prettyman 51 Senior Vice President, Development and
Regulatory Affairs
Walter F. Spath 52 Senior Vice President, Sales and
Marketing, and director
Mitchell R. Woodbury 55 Senior Vice President, General Counsel
and Secretary
Messrs. Garner, Kabakoff and Spath are directors of the Company. See
"Election of Directors" for a discussion of each individual's business
experience.
Julia Brown joined the Company in March 1995 as Vice President, Business
Planning, became Vice President, Business Development in October 1995 and was
named Senior Vice President in January 1997. Prior
to joining the Company, Ms. Brown spent over 25 years with Lilly and certain
subsidiaries dealing with pharmaceuticals, medical devices and diagnostics.
From October 1992 to December 1994, she was general manager of IVAC
Corporation's Vital Signs Division. From September 1986 to October 1992, Ms.
Brown held several marketing positions with Hybritech, including Division Vice
President of Marketing. Ms. Brown holds a B.S. in Microbiology from Louisiana
Tech University.
James W. Newman joined the Company in September 1991 as Vice President,
Finance and Administration and was named a Senior Vice President in February
1996. Prior to joining the Company, Mr. Newman served as President of George
Wimpey of Texas and previously as Vice President and Chief Financial Officer of
George Wimpey, Inc., a land development and home-building company, from October
1987 to September 1991. Mr. Newman holds an MBA in Finance from Golden Gate
University and a B.S. in Accounting from University of Illinois. Mr. Newman has
been a Certified Public Accountant in California since 1972.
Charles W. Prettyman joined the Company in December 1991 as Vice President,
Development and Regulatory Affairs and was named a Senior Vice President in
February 1996. Prior to joining the Company, Mr. Prettyman served as Vice
President, Regulatory Affairs and Compliance at The Purdue Frederick Company, a
privately-held pharmaceutical company, from August 1988 to November 1991. From
January 1987 until August 1988, Mr. Prettyman served as Executive Director, Drug
Regulatory Affairs, Central Nervous System Development at Ciba-Geigy
Pharmaceuticals. From January 1977 until December 1987, Mr. Prettyman held
various positions with the United States Food and Drug Administration, including
Director, Program Management, Office of the Commissioner. Mr. Prettyman
received a M.S. in Biological Science from George Washington University and a
B.S. degree in Biology from Randolph Macon College.
Mitchell R. Woodbury joined the Company in June 1994 as Vice President,
General Counsel and Secretary and was named Senior Vice President in January
1997. Prior to joining the Company, Mr. Woodbury served as Vice President,
General Counsel and Secretary at Advanced Tissue Sciences, Inc., a biomedical
company. From October 1991 until June 1992, Mr. Woodbury served as Senior Vice
President, General Counsel of Intermark, Inc., a publicly held operating/holding
company. He was elected Vice President and Corporate Counsel of Intermark in
1980 and had served as Corporate Secretary since 1981. Mr. Woodbury received
his J.D. from the University of San Diego School of Law and a B.A. in Business
Administration from San Diego State University.
26
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Named Executive Officers for services rendered in all
capacities to the Company for the fiscal years ended December 31, 1996, 1995 and
1994.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------------ ----------------------
Number of
Other Annual Securities All Other
Name and Compensation Underlying Compensation
Principal Position Year Salary (1) Bonus (1)(2) (3) Options/SARs (4)
------------------ ---- ---------- ------------ ----------- ------------ ------------
Cam L. Garner 1996 $347,654 $610,000 $ -- 170,000 $ 21,093
Chairman, President and Chief 1995 $337,391 $175,000 $ -- 25,000 $ 3,750
Executive Officer 1994 $260,000 $110,000 $ -- 100,000 $ 2,400
Walter F. Spath 1996 $201,538 $190,000 $ -- 40,000 $ 7,006
Senior Vice President, 1995 $204,250 $ 40,000 $ -- 15,000 $ 3,750
Sales and Marketing 1994 $165,000 $ 25,000 $ -- 15,000 $ 2,400
James W. Newman 1996 $190,039 $190,000 $ -- 60,000 $11,378
Senior Vice President, 1995 $175,870 $ 40,000 $ -- 15,000 $ 3,750
Finance and Administration 1994 $145,003 $ 25,000 $ -- 15,000 $ 2,400
Charles W. Prettyman 1996 $179,577 $190,000 $ -- 55,000 $-0-
Senior Vice President, 1995 $167,700 $ 45,000 $ -- 7,500 -0-
Development and Regulatory 1994 $148,540 $ 15,000 $ -- 12,500 -0-
Affairs
David S. Kabakoff (5) 1996 $171,635 $105,000 $ -- 250,000 $ 3,466
Executive Vice President
- ----------------------
(1) Includes amounts deferred under the Company's 401(k) Profit Sharing Plan
(the "401(k) Plan") pursuant to Section 401(k) of the Internal Revenue Code
of 1986, as amended, and the Company's Deferred Compensation Plan (the
"Deferred Comp Plan").
(2) Includes the following bonuses based on the Company's performance during
the 1996 fiscal year, to be paid to the Named Executive Officers on
December 31, 1997, provided they continue in the Company's employ until
that time: Mr. Garner $110,000; Mr. Spath $40,000; Mr. Newman $40,000; Mr.
Prettyman $40,000; and Mr. Kabakoff $40,000.
(3) Perquisites and other personal benefits paid to the Named Executive
Officers are less than the minimum reporting threshold of $50,000 or 10% of
the total annual salary plus bonus for the Named Executive Officer, and
such amounts paid, if any, are represented in the table by "--".
(4) Includes (a) contributions made by the Company pursuant to the 401(k) Plan
which were earned by the participants for the 1996 fiscal year and which
were used to buy shares of the Company's Common Stock; and (b) above-market
interest earned by the participants on their Deferred Comp Plan account.
(5) Dr. Kabakoff joined the Company in May 1996.
27
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Plan to the Named Executive Officers. No stock appreciation
rights ("SARs") were granted under the Plan in fiscal year ended December 31,
1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
- -----------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Price Appreciation for
Underlying Options/SARs Exercise or Option Term
Options/ Granted to Base Price ---------------------------------
SARs Employees in ($/Share) Expiration
Name Granted(1) Fiscal Year (2) Date 5%(3) 10%(3)
- ----------------------- --------------- --------------- --------------- --------------- ---------------------------------
Cam L. Garner 20,000 1.67% $19.38 02/21/06 $ 247,699 $ 623,960
150,000 12.58% $37.63 12/06/06 $ 3,549,324 $ 8,994,684
Walter F. Spath 40,000 3.35% $37.63 12/06/06 $ 946,486 $ 2,398,582
James W. Newman 20,000 1.67% $19.38 02/21/06 $ 247,669 $ 623,960
40,000 3.35% $37.63 12/06/06 $ 946,486 $ 2,398,582
Charles W. Prettyman 20,000 1.66% $19.38 02/21/06 $ 246,168 $ 621,571
35,000 2.93% $37.63 12/06/06 $ 828,176 $ 2,098,760
David S. Kabakoff 230,000 19.28% $29.63 05/29/06 $4,285,854 $ 10,001,196
20,000 1.67% $37.63 12/06/06 $ 473,243 $ 1,199,291
- ----------------------
(1) Each option becomes exercisable ratably over a four-year period following
the grant date. See "Proposal 3, Approval of Amendments to the Company's
1992 Stock Option Plan," for a summary of the material terms and
provisions of the Plan.
(2) The exercise price per share of options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
respective options were granted as determined by the Board of Directors.
See "Proposal 3, Approval of Amendments to the Company's 1992 Stock
Option Plan."
(3) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
Common Stock does in fact appreciate over the option term, no value will
be realized from the option grants made to the executive officers.
28
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the Named
Executive Officers, concerning the exercise of options during the fiscal year
ended December 31, 1996 and unexercised options held as of the end of the fiscal
year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money
Shares Options/SARs at Options/SARs at
Acquired December 31, 1996 December 31, 1996 (1)
Upon Value ---------------------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------- --------- ----------- ------------- ----------- -------------
Cam L. Garner 377,600 $8,734,715 51,936 315,464 $1,895,428 $7,832,888
Walter F. Spath 40,000 $ 975,200 117,600 87,400 $5,081,953 $2,148,796
James W. Newman 50,000 $1,377,631 86,501 103,099 $3,768,143 $2,586,327
Charles W. Prettyman 85,230 $1,535,853 12,402 81,368 $ 431,793 $1,959,458
David S. Kabakoff 0 0 34,212 215,788 $ 600,081 $3,645,018
- ----------------------
(1) Value is defined as market price of the Company's Common Stock at fiscal
year end less exercise price. The market price of the Company's Common
Stock at December 31, 1996 was $47.75.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1996, Dr. Blair and Messrs. Conrad and Hale served as the members
of the Company's Compensation Committee.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
In May 1990, the Company entered into an employment agreement with Mr.
Garner pursuant to which he was employed as President and Chief Executive
Officer. The current employment term ends May 31, 1997, and will automatically
renew for successive one year periods, unless either Mr. Garner or the Company
elect otherwise. The agreement allows for termination of employment upon
Mr. Garner's death or disability and for cause or without cause upon 60 days
written notice. During the employment term, Mr. Garner will receive an annual
base salary (currently $395,000) subject to increase by the Company's Board of
Directors annually, with a minimum increase of at least 5%.
In the event of termination of employment by the Company without cause, the
Company is obligated to pay Mr. Garner six months base salary. Mr. Garner is
entitled to nine months base salary if there has been a change of control of the
Company and he is terminated without cause, or following: (i) a change in
position with the Company that materially reduces Mr. Garner's level of
responsibility; (ii) a 10% or more reduction of Mr. Garner's compensation; or
(iii) a change in Mr. Garner's place of employment to more than 20 miles from
the Company's current facility in San Diego, California, unless Mr. Garner
otherwise agrees in writing.
29
In May 1996, Dr. Kabakoff entered into an employment agreement with the
Company upon the same basic terms and conditions as described above for Mr.
Garner, with an initial term expiring April 30, 1997. Dr. Kabakoff's current
annual base salary is $265,000 and is subject to annual review and increase at
the sole discretion of the Board of Directors.
"Proposal 3, Approval of Amendments to the Company's 1992 Stock Option
Plan", contains a summary of the material terms and provisions of the Plan,
pursuant to which, under certain circumstances, the exercisability of certain
options granted to Named Executive Officers is accelerated in the event of
certain corporate transactions, changes of control and changes in the
composition of the Board of Directors. In addition, as described in the Plan
summary, in the event of certain changes of control, certain options granted to
Named Executive Officers are, to the extent exercisable and outstanding for at
least six months, automatically cancelled in return for a payment to the
optionee equal to the difference between the market price of the optioned shares
(or the highest tender price, if applicable), less the exercise price.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), THAT MIGHT
INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART,
THE FOLLOWING REPORT AND THE PERFORMANCE GRAPH ON PAGE 32 SHALL NOT BE
INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
- GENERAL COMPENSATION POLICY. The fundamental policy of the Company is
to offer the executive officers competitive compensation opportunities
based upon their contribution to the financial success of the Company and
their personal performance. It is our objective to have a substantial
portion of each officer's compensation contingent upon the Company's
performance, as well as upon his or her own level of performance.
Accordingly, each executive officer's compensation package is comprised of
three elements: (i) base salary which reflects individual performance and
is designed primarily to be competitive with salary levels in the industry,
(ii) annual variable performance awards payable in cash and tied to the
achievement of financial and individual performance goals established by
management and approved by the Board of Directors, and (iii) long-term
stock-based incentive awards which strengthen the mutuality of interests
between the executive officers and the Company's shareholders. As an
officer's level of responsibility increases, it is our intent to have a
greater portion of his or her total compensation be dependent upon Company
performance and stock price appreciation rather than base salary.
- FACTORS. Several of the more important factors which we considered in
establishing the components of each executive officer's compensation
package for the 1996 fiscal year are summarized below. Additional factors
were also taken into account, and we may in our discretion apply entirely
different factors, particularly different measures of financial
performance, in setting executive compensation for future fiscal years, but
all compensation decisions will be designed to further the general
compensation policy indicated above.
- BASE SALARY. The base salary for each officer is set on the basis of
personal performance and the salary levels in effect for comparable
positions at similarly situated biopharmaceutical and biomedical companies
headquartered in the same geographical region as the Company. This group
of companies is believed to be more relevant for establishing compensation,
and is therefore not the same as the "peer group" of companies referred to
in the Performance Graph on page 32 of this Proxy Statement which displays
comparative total shareholder returns. As a general rule, we focus on the
mid-range of compensation for comparable positions at such similarly
situated companies in establishing base salary amounts for the Company's
executive officers.
- ANNUAL INCENTIVE COMPENSATION. Annual bonuses are earned by each
executive officer on the basis of the Company's and each officer's
achievement of corporate and individual performance targets, respectively,
which we establish at the beginning of the fiscal year. We do not assign a
defined weight to each component of the incentive compensation opportunity.
For fiscal year 1996, the corporate performance targets were primarily
focused on growth in earnings per share, with the belief that an increase
in the Company's earnings per share is a prime factor in positively
affecting the market price of the Company's stock. Accordingly, this
element of executive compensation is earned on the basis of the Company's
success in achieving the earnings per share growth targets. With the
exception of Mr. Garner, the bonus for the Company's executive officers who
participated was equal to an average of 89% of base salary, excluding the
forfeitable bonus discussed below. There is no fixed percentage of base
salary utilized in calculating or setting annual incentive compensation
targets.
30
Because of the extraordinary performance achieved by the Company
during the 1996 fiscal year, the Board of Directors determined it
appropriate to grant additional contingent bonuses to certain officers of
the Company, upon the condition that the individual officer remain in the
Company's employ through the end of the 1997 fiscal year. If the officer
meets this condition, the additional bonus will be paid on December 31,
1997; however, it will be forfeited in full as to any officer who does not
remain in the Company's employ through such date.
- LONG-TERM INCENTIVE COMPENSATION. On December 6, 1996, the grants of
stock options to certain of the Company's executive officers were approved
under the Plan. The grants are designed to consistently align the
interests of each executive officer with those of the shareholders and to
provide each individual with a significant incentive to manage the Company
from the perspective of an owner with an equity stake in the business.
The number of shares subject to each option grant was based on the
officer's level of responsibilities, relative position in, and length of
service with, the Company. Each grant allows the officer to acquire shares
of the Company's Common Stock at a fixed price per share (the market price
on the grant date) over a specified period of time (up to 10 years).
Accordingly, the option will provide a return to the executive officer only
if the market price of the shares appreciates over the option term.
CEO COMPENSATION. In setting the compensation payable to the
Company's Chief Executive Officer, Mr. Garner, the Compensation Committee
has sought to be competitive with other similarly situated companies in the
industry as referred to above, while at the same time tying a significant
percentage of such compensation to Company performance.
Mr. Garner's 1996 base salary was established based on our evaluation
of his personal performance and the objective of the Compensation Committee
to have his base salary keep pace with salaries being paid to similarly
situated chief executive officers. Over the last two fiscal years of Mr.
Garner's tenure as Chief Executive Officer, the Company has experienced an
annual compounded growth rate in revenue of 112%. While this factor has
been taken into account in the determination of Mr. Garner's base salary
for 1996, it may not be applied to the same extent in future years in
setting base salary.
The remaining components of Mr. Garner's 1996 fiscal year compensation
were entirely dependent upon the Company's financial performance and
provided no dollar guarantees. The cash bonus paid to him for the 1996
fiscal year was based on the Company's attainment of the earnings growth
targets which we established as his individual bonus plan for the year. For
Mr. Garner, a bonus, excluding the above-mentioned forfeitable bonus, equal
to 144% of base salary was earned as a result of the Company's achievement
of the established objectives. The option grants made to him during the
1996 fiscal year were based on his performance during the year and were
intended to place a significant portion of his total compensation for the
year at risk, since the options will have no value unless there is
appreciation in the value of the Company's Common Stock over the option
term. The amount of the stock option grants, 170,000 shares, was
determined in light of the Company's record performance in 1996, including
growth of 139% in revenues, profit for each of the quarters during the
year, culminating in growth in earnings per share which represented a 118%
increase over the prior year (excluding the one-time charges related to the
exercise of the Dura Delivery Systems, Inc. purchase option and the cash
contribution to Spiros Development Corporation). As a result of the
increase in the Company's earnings, as well as other factors, the Company's
market price per share in 1996 increased 184%. As indicated, it is our
objective to have an increasing percentage of Mr. Garner's total
compensation each year tied to the attainment of performance targets and
stock price appreciation on his option shares. In establishing bonus
amounts, if any, paid to Mr. Garner in future years, we may consider a
variety of Company performance factors which will include, but not be
limited to, financial performance.
We conclude our report with the acknowledgment that no member of the
Compensation Committee is a former or current officer or employee of the
Company or any of its subsidiaries.
COMPENSATION COMMITTEE
JAMES C. BLAIR
HERBERT J. CONRAD
DAVID F. HALE
31
PERFORMANCE GRAPH
The following graph compares total shareholder returns since the Company
became a reporting company under the Exchange Act to the Standard & Poor's 500
Index (the "S&P 500") and a peer group comprised of the Pharmaceutical Companies
in the S&P 500. The graph is constructed on the assumption that $100 was
invested on February 7, 1992 in each (a) the Company's Common Stock, (b) the S&P
500, and (c) the Pharmaceutical Companies in the S&P 500, and that all dividends
were reinvested, although dividends have not been declared on the Company's
Common Stock. The Pharmaceutical Companies in the S&P 500 consist of the
following pharmaceutical companies: Eli Lilly and Company, Merck & Co., Inc.,
Pfizer Inc., Schering-Plough Corp. and Upjohn Co. The shareholder return shown
on the graph below is not necessarily indicative of future performance, and the
Company will not make or endorse any predictions as to future shareholder
returns.
8.163265 0.243256 0.061184
Dura S & P 500 S & P Drug Companies
---------------- ---------------- --------------------
2/7/92 100 100 100
3/31/92 67.34694 98.19991 93.34993
6/30/92 51.02041 99.2824 87.16976
9/30/92 57.14286 101.6322 84.47584
12/31/92 59.18367 105.989 84.12954
3/31/93 40.81633 109.8713 69.91532
6/30/93 44.89796 109.594 72.56641
9/30/93 46.93878 111.6374 65.87046
12/31/93 59.18367 113.4666 74.43925
3/31/94 71.42857 108.4361 61.66958
6/30/94 85.71429 108.0712 68.15506
9/30/94 91.22449 112.552 76.83582
12/31/94 118.3673 111.7201 83.60825
3/31/95 121.4286 121.8006 93.54511
6/30/95 153.551 132.5136 102.8567
9/30/95 242.8571 142.1611 119.1059
12/31/95 283.6735 149.8285 137.3056
3/31/96 405.1429 157.0216 143.2594
6/30/96 457.1429 163.1346 148.2789
9/30/96 569.3878 167.1921 152.4883
12/31/96 779.5918 180.1893 175.2671
DIRECTOR COMPENSATION
The Company does not presently pay fees to its directors, other than
reimbursement for their out-of-pocket expenses incurred in attending meetings of
the Board of Directors and its committees. In addition, each non-employee
director is entitled to receive options under the Plan in connection with his
service on the Board of Directors. See "Proposal 3, Approval of Amendments to
the Company's 1992 Stock Option Plan--Automatic Grants."
The Company entered into a one-year Consulting Agreement with Mr. Conrad in
April 1995, pursuant to which Mr. Conrad provided certain consulting services to
the Company related to marketing and licensing strategies, and for which Mr.
Conrad received compensation of $1,000 per month, plus reimbursement of out-of-
pocket expenses. Such agreement has been extended for subsequent one-year terms
and currently expires March 31, 1998.
The Company engaged Life Science Advisors, of which Mr. Cook is a
principal, in May 1995 to provide certain strategic consulting services on a
limited basis, for which it received compensation during the 1996 fiscal year of
$23,847, plus reimbursement of out-of-pocket expenses.
CERTAIN TRANSACTIONS
See "Executive Compensation and Other Information--Employment Contracts and
Change in Control Arrangements" for a discussion of the employment agreements
between the Company and Messrs. Garner and Kabakoff and the options held by
certain officers of the Company.
32
Officers and directors of the Company are indemnified pursuant to certain
provisions of the California General Corporation Law and the Company's Articles
of Incorporation and Bylaws to the fullest extent permitted under California
law. In the event Proposal 2, Reincorporation of the Company in Delaware and
Related Changes to the Rights of Shareholders, is adopted by the shareholders,
the officers and directors of the Company will be similarly indemnified by the
Delaware Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities Exchange Commission ("SEC") and the Nasdaq
National Market. Officers, directors and greater than 10% beneficial owners are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company
or written representations from certain reporting persons that no Forms 5 were
required, the Company believes that, during the 1996 fiscal year, its officers,
directors and greater than 10% beneficial owners complied with all applicable
Section 16(a) filing requirements, with the exception of Mr. Hale, who filed one
Form 4 late solely with respect to the acquisition of a warrant to purchase
shares of the Company's Common Stock.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND LIST OF
EXHIBITS. REQUESTS SHOULD BE SENT TO THE ATTENTION OF INVESTOR RELATIONS, DURA
PHARMACEUTICALS, INC., 5880 PACIFIC CENTER BOULEVARD, SAN DIEGO, CALIFORNIA
92121-4204.
SHAREHOLDER PROPOSALS
Under the present rules of the SEC, the deadline for shareholders to submit
proposals to be considered for inclusion in the Company's Proxy Statement for
next year's Annual Meeting of Shareholders is expected to be 120 days prior to
May 28, 1998. Such proposals may be included in next year's Proxy Statement if
they comply with certain rules and regulations promulgated by the SEC. The date
by which shareholders must submit proposals is January 29, 1998.
OTHER MATTERS
The Board of Directors is not aware of any matter to 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 shareholders arise,
the persons named as proxies on the enclosed proxy card will vote the shares
represented thereby in accordance with their best judgment in the interests of
the Company. Discretionary authority with respect to such other matters is
granted by the execution of the enclosed proxy card.
By Order of the Board of Directors
Dated: April 16, 1997 MITCHELL R. WOODBURY
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
33
DURA PHARMACEUTICALS, INC.
1992 STOCK OPTION PLAN
EFFECTIVE DECEMBER 9, 1992; AS AMENDED JUNE 2, 1994; AS
AMENDED MAY 25, 1995; AS AMENDED MAY 29, 1996
AS AMENDED JULY 1, 1996; AS AMENDED FEBRUARY 19, 1997
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
A. IMPLEMENTATION. This 1992 Stock Option Plan ("PLAN") is implemented
as of December 9, 1992 ("EFFECTIVE DATE"), to enable Dura Pharmaceuticals, Inc.
("COMPANY") to grant options to the following eligible individuals ("ELIGIBLE
INDIVIDUALS") in order to attract them and to retain their services: (a) key
employees (including officers and directors) of the Company or its subsidiaries
or any parent corporation who are primarily responsible for the management,
growth and financial success of the Company or its subsidiaries, (b) non-
employee members of the Board of Directors ("BOARD") of the Company or any of
its subsidiaries, and (c) consultants and independent contractors who perform
valuable services for the Company or its subsidiaries.
B. SUCCESSOR PLAN. This Plan is a successor to the Company Stock Option
Plan that was adopted by the Board in 1983 ("1983 PLAN"). No further option
grants (including, but not limited to automatic option grants) will be made
under the 1983 Plan on and after the Effective Date of this Plan. All options
outstanding under the 1983 Plan on the Effective Date are hereby incorporated
into this Plan and will be treated as outstanding options under this Plan. Each
outstanding option so incorporated will continue to be governed solely by the
express terms and conditions of the instruments evidencing such grant. No
provision of this Plan will be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of the Company's Common Stock under the terms of the
incorporated options.
II. ADMINISTRATION OF THE PLAN
A. COMMITTEE. The Plan will be administered by the Board of Directors or
by a committee or committees appointed by the Board, and consisting of two or
more members of the Board. The Board may delegate the responsibility for
administration of the Plan with respect to designated classes of optionees to
different committees, subject to such limitations as the Board deems
appropriate. With respect to any matter, the term "COMMITTEE," when used in
this Plan, will refer to the committee that has been delegated authority with
respect to such matter. Members of a committee will serve for such term as the
Board may determine, and will be subject to removal by the Board at any time.
B. SECTION 16(b) COMMITTEE. Notwithstanding any other provision of this
Agreement, each grant of an option or other transaction between the Company and
any Section 16 Insider shall be valid and enforceable only if approved by the
Board of Directors or by a committee composed exclusively of two or more Non-
Employee Directors. For this purpose, a "Section 16 Insider" shall mean an
officer or director of the Corporation subject to the short-swing profit
liabilities of Section 16 of the 1934 Act, and a Non-Employee Director shall
have the meaning set forth in Rule 16b-3(b)(3).
C. AUTHORITY. Any Committee will have full authority to administer the
Plan within the scope of its delegated responsibilities, including authority to
interpret and construe any relevant provision of the Plan, to adopt such rules
and regulations as it may deem necessary, and to determine the terms of grants
made under the Plan (which need not be identical). Decisions of a Committee
made within the discretion delegated to it by the Board will be final and
binding on all persons.
III. STOCK SUBJECT TO THE PLAN
A. NUMBER OF SHARES. Shares of the Company's Common Stock available for
issuance under the Plan shall be drawn from either the Company's authorized but
unissued shares of Common Stock or from reacquired shares of Common Stock,
including shares repurchased by the Company on the open market. The maximum
number of shares of Common Stock that may be issued over the term of the Plan
shall not exceed 7,607,360 shares, subject to adjustment from time to time in
accordance with the provisions of this Section. This authorized share reserve
is comprised of (i) the number of shares remaining available for issuance under
the 1983 Plan as of the Effective Date, including the shares subject to the
outstanding options incorporated into this Plan and any other shares that would
have been available for future option grant under the 1983 Plan, plus (ii) an
additional 416,040 shares of Common Stock, plus (iii) an additional increase of
750,000 shares of Common Stock, plus (iv) an additional increase of 1,000,000
shares of Common Stock, plus (v) an additional increase of 1,500,000 shares of
Common Stock, plus (vi) an additional increase of 1,600,000 shares of Common
Stock. Accordingly, to the extent one or more outstanding options under the
1983 Plan that have been incorporated into this Plan are subsequently exercised,
the number of shares issued with respect to each such option will reduce, on a
share-for-share basis, the number of shares available for issuance under this
Plan.
B. EXPIRED OPTIONS. Should an outstanding option under this Plan
(including any outstanding option under the 1983 Plan incorporated into this
Plan) expire or terminate for any reason prior to exercise in full (including
any option cancelled in accordance with the cancellation-regrant provisions of
this Plan), the shares subject to the portion of the option not so exercised
will be available for subsequent option grant under this Plan. Shares subject
to any option or portion thereof cancelled in accordance with the stock
appreciation (or limited stock appreciation) rights provisions of this Plan will
NOT be available for subsequent option grant under the Plan.
C. ADJUSTMENTS. If any change is made to the Common Stock issuable under
the Plan (including Common Stock issuable under an Automatic Option Grant) by
reason of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without receipt of consideration, then appropriate adjustments
will be made to (i) the number and/or class of shares issuable under the Plan,
(ii) the number and/or class of shares and price per share in effect under each
outstanding option under the Plan, and (iii) the number and/or class of shares
and price per share in effect under each outstanding option incorporated into
this Plan from the 1983 Plan. The purpose of these adjustments will be to
preclude the enlargement or dilution of rights and benefits under the options.
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ARTICLE TWO
STANDARD OPTION PROVISIONS
I. TERMS AND CONDITIONS OF OPTIONS
A. COMMITTEE DISCRETION.
(1) Except as provided under the Automatic Option Grant provisions of
this Plan, the Committee will have full authority to determine which Eligible
Individuals are to receive option grants under the Plan, the number of shares to
be governed by each such grant, whether the option is to be an incentive stock
option ("INCENTIVE OPTION") that satisfies the requirements of Section 422 of
the Internal Revenue Code or a non-qualified option not intended to satisfy such
requirements ("NON-QUALIFIED OPTION"), the time or times at which each such
option is to become exercisable, and the maximum term for which the option is to
remain outstanding.
(2) Notwithstanding any other provision of this Plan, no individual
shall be granted options to acquire more than 400,000 shares in any fiscal year
or 1,500,000 shares over the lifetime of the Plan.
B. TERM. No option granted under the Plan will be exercisable after the
expiration of 10 years from the date the option was granted.
C. PRICE. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than 100% percent of the Fair Market Value
per share of Common Stock on the option grant date, provided that the Plan
Administrator may fix the exercise price at less than 100% if the optionee, at
the time of the option grant, shall have made a payment to the Company
(including payment made by means of an agreed salary reduction) equal to the
excess of the Fair Market Value of the Common Stock on the option grant date
over such exercise price.
D. EXERCISE AND PAYMENT. After any option granted under the Plan becomes
exercisable, it may be exercised by notice to the Company at any time prior to
the termination of such option. The option price will be payable in full in
cash or check made payable to the Company; provided, however, that the Committee
may, either at the time the option is granted or at the time it is exercised and
subject to such limitations as it may determine, authorize payment of all or a
portion of the option price in one or more of the following alternative forms:
(1) a promissory note authorized pursuant to Section IV of this
Article; or
(2) full payment in shares of Common Stock valued as of the exercise
date and held for the requisite period to avoid a charge to the Company's
earnings; or
(3) full payment through a sale and remittance procedure under which
the option holder delivers a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the Company the
amount of sale proceeds to pay the option prices.
For purposes of Subparagraphs (1) and (3) immediately above, the Exercise Date
shall be the date on which written notice of the exercise of the option is
delivered to the Company. In all other cases, the Exercise Date will be the
date on which written notice and actual payment is received by the Company.
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The sale and remittance procedure authorized for the exercise of
outstanding options under this Plan shall be available for all options granted
under this Plan on or after the Effective Date and for all non-qualified options
outstanding under the 1983 Plan and incorporated into this Plan. The Plan
Administrator may also allow such procedure to be utilized in connection with
one or more disqualifying dispositions of Incentive Option shares effected after
the Effective Date, whether such Incentive Options were granted under this Plan
or the 1983 Stock Option Plan.
E. SHAREHOLDER RIGHTS. An option holder will have no shareholder rights
with respect to any shares covered by an option (including an Automatic Option
Grant) prior to the Exercise Date of the option, as defined in the immediately
preceding Paragraph and in the Automatic Option Grant provisions of Section II
of Article Three of this Plan.
F. SEPARATION FROM SERVICE. The Committee will determine whether options
will continue to be exercisable, and the terms of such exercise, on and after
the date that an optionee ceases to be employed by, or to provide services to,
the Company or its subsidiaries PROVIDED, however, that in no event will an
option be exercisable after the specified expiration date of the option term.
The date of termination of an optionee's employment or services will be
determined by the Committee, which determination will be final.
G. INCENTIVE OPTIONS. Options granted under the Plan that are intended
to be Incentive Options will be subject to the following additional terms:
(1) DOLLAR LIMITATION. The aggregate fair market value (determined
as of the respective date or dates of grant) of the Common Stock for which one
or more options granted to any Employee after December 31, 1986 under this Plan
(or any other option plan of the Company or its parent or subsidiary
corporations) may for the first time become exercisable as incentive stock
options under the Federal tax laws during any one calendar year shall not exceed
the sum of $100,000. To the extent the Employee holds two or more such options
which become exercisable for the first time in the same calendar year, the
foregoing limitation on the exercisability of such options as incentive stock
options under the Federal tax laws shall be applied on the basis of the order in
which such options are granted.
(2) 10% SHAREHOLDER. If any employee to whom an Incentive Option is
to be granted pursuant to the provisions of the Plan is, on the date of grant,
the owner of stock (determined with application of the ownership attribution
rules of Section 424(d) of the Internal Revenue Code) possessing more than 10%
of the total combined voting power of all classes of stock of his or her
employer corporation or of its parent or subsidiary corporation ("10%
SHAREHOLDER"), then the following special provisions will apply to the option
granted to such individual:
(i) The option price per share of the stock subject to such
Incentive Option will not be less than 110% of the Fair Market Value of the
option shares on the date of grant; and
(ii) The option will not have a term in excess of 5 years from
the date of grant.
(3) PARENT AND SUBSIDIARY. For purposes of this Section, "PARENT
CORPORATION" and "SUBSIDIARY CORPORATION" will have the meaning attributed to
those terms, as they are used in Section 422(b) of the Internal Revenue Code.
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(4) EMPLOYEES. Incentive Options may only be granted to employees of
the Company or its subsidiaries.
H. FAIR MARKET VALUE. For all purposes under this Plan (including, but
not limited to Automatic Option Grants) the fair market value per share of
Common Stock on any relevant date under the Plan ("FAIR MARKET VALUE") will be
determined as follows:
(1) If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange but is traded in the over-the-counter
market, the fair market value will be the mean between the highest bid and
lowest asked prices (or, if such information is available, the closing selling
price) per share of Common Stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system. If there are no
reported bid and asked prices (or closing selling price) for the Common Stock on
the date in question, then the mean between the highest bid price and lowest
asked price (or the closing selling price) on the last preceding date for which
such quotations exist will be determinative of fair market value.
(2) If the Common Stock is at the time listed or admitted to trading
on any national stock exchange, then the fair market value will be the closing
selling price per share of Common Stock on the date in question on the stock
exchange determined by the Committee to be the primary market for the Common
Stock, as such price is officially quoted in the composite tape of transactions
on such exchange. If there is no reported sale of Common Stock on such exchange
on the date in question, then the fair market value will be the closing selling
price on the exchange on the last preceding date for which such quotation
exists.
(3) If the Common Stock is at the time neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value will be determined by the Committee after taking into
account such factors as the Committee shall deem appropriate.
I. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Qualified
Option may be assigned in whole or in part during the Optionee's lifetime. The
assigned portion may only be exercised by the person or persons who acquire a
proprietary interest in the option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.
II. STOCK APPRECIATION RIGHTS
If, and only if the Committee, in its discretion, elects to implement an
option surrender program under the Plan, one or more option holders may, upon
such terms as the Committee may establish at the time of the option grant or at
any time thereafter, be granted the right to surrender all or part of an
unexercised option in exchange for a distribution equal in amount to the
difference between (i) the Fair Market Value (at date of surrender) of the
shares for which the surrendered option or portion thereof is at the time
exercisable and (ii) the aggregate option price payable for such shares. The
distribution to which an option holder becomes entitled under this
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Section may be made in shares of Common Stock, valued at Fair Market Value at
the date of surrender, in cash, or partly in shares and partly in cash, as the
Committee, in its sole discretion, deems appropriate. The option surrender
provisions of this Section will not apply to options granted pursuant to the
Automatic Option Grant provisions of this Plan.
III. CORPORATE TRANSACTION/CHANGE OF CONTROL/HOSTILE TAKEOVER
A. CORPORATE TRANSACTION. In the event of any of the following
transactions ("CORPORATE TRANSACTION"):
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state of the Company's incorporation,
(2) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in liquidation or dissolution of the Company,
(3) any reverse merger in which the Company is the surviving entity
but in which fifty percent (50%) or more of the Company's outstanding voting
stock is transferred to holders different from those who held such securities
immediately prior to such merger, or
(4) an acquisition by any person or related group of persons (other
than the Company or a person that directly or indirectly controls, is controlled
by or is under common control with, the Company) of ownership of more than fifty
percent (50%) of the Company's outstanding Common Stock, pursuant to a tender or
exchange offer,
the exercisability of each option at the time outstanding under this Article Two
shall automatically accelerate so that each such option shall, immediately prior
to the specified effective date for the Corporate Transaction, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares. Upon the consummation of the Corporate Transaction, all outstanding
options under this Article Two shall terminate and cease to be outstanding.
B. HOSTILE TAKEOVER. One or more officers of the Company subject to the
short-swing profit restrictions of the Federal securities laws may, in the
Committee's sole discretion, be granted, in tandem with their outstanding
options, limited stock appreciation rights as described below. In addition all
Automatic Option Grants under this Plan will be made in tandem with limited
stock appreciation rights as described below.
(1) Upon the occurrence of a Hostile Takeover, each outstanding
option with such a limited stock appreciation right in effect for at least six
(6) months will automatically be cancelled in return for a cash distribution
from the Company in an amount equal to the excess of (i) the Takeover Price
(defined below) of the shares of Common Stock at the time subject to the
cancelled option (whether or not the option is otherwise at the time exercisable
for such shares) over (ii) the aggregate exercise price payable for such shares.
The cash distribution payable upon such cancellation shall be made within five
(5) days following the consummation of the Hostile Takeover. Neither the
approval of the Committee nor the consent of the Board shall be required in
connection with such option cancellation and cash distribution.
(2) For purposes of the limited stock appreciation rights described
above, the following definitions shall be in effect:
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(i) A Hostile Takeover shall be deemed to occur upon the
acquisition by any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) of ownership of more than 50% of the Company's
outstanding Common Stock (excluding the Common Stock holdings of officers and
directors of the Company who participate in this Plan) pursuant to a tender or
exchange offer which the Board does not recommend the Company's shareholders
accept.
(ii) The Takeover Price per share shall be deemed to be equal to
the GREATER of (a) the Fair Market Value per share on the date of cancellation,
or (b) the highest reported price per share paid in effecting the Hostile
Takeover. However, if the cancelled option is an Incentive Option, the Takeover
Price shall not exceed the clause (a) price per share.
C. COMPANY RIGHTS. The grant of options (including Automatic Option
Grants) under this Plan shall in no way affect the right of the Company to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
IV. LOANS OR GUARANTEE OF LOANS
The Committee may assist any optionee (including any officer) in the
exercise of one or more outstanding options under this Article by (a)
authorizing the extension of a loan to such optionee from the Company, (b)
permitting the optionee to pay the option price for the purchased Common Stock
in installments over a period of years or (c) authorizing a guarantee by the
Company of a third-party loan to the optionee. The terms of any loan,
installment method of payment or guarantee (including the interest rate and
terms of repayment) will be established by the Committee in its sole discretion.
Loans, installment payments and guarantees may be granted without security or
collateral (other than to optionees who are consultants or independent
contractors, in which event the loan must be adequately secured by collateral
other than the purchased shares), but the maximum credit available to the
optionee shall not exceed the SUM of (i) the aggregate option price (less par
value) of the purchased shares plus (ii) any federal and state income and
employment tax liability incurred by the optionee in connection with the
exercise of the option. Automatic Option Grants will not be subject to these
loan and loan guarantee provisions.
V. CANCELLATION AND REGRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and from time
to time, with the consent of the affected optionees, the cancellation of any or
all outstanding options under this Article (including outstanding options under
the 1983 Plan incorporated into this Plan) and to grant in substitution new
options under the Plan covering the same or different numbers of shares of
Common Stock but having an option price per share not less than 100% of the fair
market value of the Common Stock on the new grant date. Automatic Option Grants
will not be subject to these cancellation and regrant provisions.
VI. REPURCHASE RIGHTS
The Committee may in its discretion determine that it shall be a term and
condition of one or more options exercised under the Plan that the Company (or
its assigns) shall have the right, exercisable upon the optionee's separation
from service with the Company and its subsidiaries, to repurchase any or all of
the shares of Common Stock previously acquired by the optionee upon the exercise
of such option. Any such repurchase right shall be exercisable upon such terms
and conditions (including the establishment of the appropriate vesting schedule
and
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other provisions for the expiration of such right in one or more installments)
as the Committee may specify in the instrument evidencing such right. The
Committee shall also have full power and authority to provide for the automatic
termination of these repurchase rights, in whole or in part, and thereby
accelerate the vesting of any or all of the purchased shares.
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. GRANTS
A. AUTOMATIC OPTION GRANTS. Non-employee members of the Board will
automatically be granted Non-Qualified Options to purchase the number of shares
of Common Stock set forth below (subject to adjustment under Section III(C) of
Article One of this Plan) on the dates and pursuant to the terms set forth below
("AUTOMATIC OPTION GRANTS").
B. CONTINUING DIRECTORS. On the date of each Annual Shareholders Meeting
of the Company held after the Effective Date of this Plan, each continuing non-
employee member of the Board will receive an Automatic Option Grant to purchase
8,000 shares of Common Stock; provided, however, that an individual who has not
served as a non-employee member of the Board for the immediately preceding 180
days will not receive such a grant.
C. NEW DIRECTORS. Each individual person who is newly elected or
appointed as a non-employee member of the Board on or after the Effective Date
of this Plan will receive, on the effective date of such election or
appointment, an Automatic Option Grant to purchase 30,000 shares of Common
Stock.
II. TERMS
The terms applicable to each Automatic Option Grant will be as follows:
A. PRICE. The option price per share will be equal to 100% of the Fair
Market Value of a share of Common Stock on the date of grant.
B. OPTION TERM. Each Automatic Option Grant will have a maximum term of
10 years measured from the automatic grant date.
C. EXERCISABILITY. Each Automatic Option Grant will become exercisable
for all Automatic Option Grant shares one (1) year after the automatic grant
date, provided the optionee continues to serve as a Board member throughout that
one (1)-year period.
D. PAYMENT. Upon exercise of the option, the option price for the
purchased shares will become payable immediately in one or more of the following
alternative forms: cash, shares of Common Stock held for the requisite period
to avoid a charge to the Company's reported earnings and valued at Fair Market
Value on the Exercise Date (as defined below), or pursuant to a sale and
remittance procedure under which the option holder delivers a properly executed
exercise notice together with irrevocable instructions to a broker to promptly
deliver to the Company the amount of sale proceeds to pay the option price. For
these purposes, the Exercise Date shall be the date on which written notice of
the exercise of the option is delivered to the Company. Except to the extent
the sale and remittance procedure specified above is utilized for the exercise
of the option, payment of the exercise price for the purchased shares must
accompany the notice.
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E. EFFECT OF TERMINATION OF BOARD MEMBERSHIP.
(1) Should the optionee cease to be a Board member for any reason
(other than death) while holding one or more Automatic Option Grants, then the
optionee will have 6 months following the date of such cessation of Board
membership in which to exercise each such option for any or all of the shares of
Common Stock for which the option is exercisable at the time Board membership
ceases; provided however, that in no event may such an option be exercised after
the expiration of its 10-year term.
(2) Should the optionee die while holding one or more Automatic
Option Grants, then each such option may subsequently be exercised, for any or
all of the shares of Common Stock for which the option is exercisable at the
time of the optionee's death, by the personal representative of the optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the optionee's Will or in accordance with the laws of descent and distribution.
Any such exercise must, however, occur before the earlier of (i) the expiration
of the option's 10-year term, or (ii) 12 months after the date of the
optionee's death.
F. ACCELERATION. Automatic Option Grants will be subject to acceleration
and termination in the event of a Corporate Transaction as described in Article
Two, Section III.A. of this Plan.
G. HOSTILE TAKEOVER. Automatic Option Grants will be granted in tandem
with limited stock appreciation rights, as described in the Hostile Takeover
provisions contained in Article Two, Section III.B. of this Plan.
ARTICLE FOUR
MISCELLANEOUS
I. AMENDMENT OF THE PLAN
A. GENERAL RULES. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects whatsoever.
However, no such amendment or modification shall, without the consent of the
option holders, adversely affect rights and obligations with respect to options
at the time outstanding under the Plan. In addition, certain amendments may be
made conditional on first having obtained stockholder approval if required by
the Board or pursuant to any applicable laws or regulations.
B. AUTOMATIC OPTION GRANTS. Amendment of the Automatic Option Grant
provisions of this Plan is subject to the requirements outlined above. In
addition, the Automatic Option Grant provisions of this Plan may not be amended
more than once every 6 months, other than to comport with changes in the
Internal Revenue Code or rules thereunder.
C. AMENDMENT OF OPTIONS. The Committee shall have full power and
authority to modify or waive any or all of the terms, conditions or restrictions
applicable to any outstanding option, to the extent not inconsistent with the
Plan; provided, however, that no such modification or waiver shall (1) without
the consent of the option holder, adversely affect the holder's rights
thereunder or (2) affect any outstanding option granted pursuant to the
Automatic Option Grant provisions of this Plan except to the extent necessary to
conform to any amendment to this Plan.
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II. TAX WITHHOLDING
A. OBLIGATION. The Company's obligation to deliver shares or cash upon
the exercise of stock options or stock appreciation rights granted under the
Plan is subject to the satisfaction of all applicable Federal, State and local
income and employment tax withholding requirements.
B. STOCK WITHHOLDING. The Plan Administrator may, in its discretion and
upon such terms and conditions as it may deem appropriate (including the
applicable safe-harbor provisions of SEC Rule 16b-3) provide any or all holders
of outstanding option grants under the Plan with the election to have the
Company withhold, from the shares of Common Stock otherwise issuable upon the
exercise of such options, one or more of such shares with an aggregate fair
market value equal to the designated percentage (any multiple of 5% specified by
the optionee) of the Federal and State income taxes ("Taxes") incurred in
connection with the acquisition of such shares. In lieu of such direct
withholding, one or more optionees may also be granted the right to deliver
shares of Common Stock to the Company in satisfaction of such Taxes. The
withheld or delivered shares shall be valued at the Fair Market Value on the
applicable determination date for such Taxes or such other date required by the
applicable safe-harbor provisions of SEC Rule 16b-3.
III. EFFECTIVE DATE AND TERM OF PLAN
A. IMPLEMENTATION. This Plan, as successor to the Company's 1983 Stock
Option Plan, shall become effective as of the Effective Date, and no further
option grants shall be made under the 1983 Plan on or after the Effective Date
of this Plan. If shareholder approval of the 1,600,000-share increase is not
obtained by February 19, 1998, then each option granted under this Plan subject
to this share increase shall terminate without ever becoming exercisable for the
option shares and all shares issued hereunder shall be repurchased by the
Corporation at the purchase price paid, together with interest (at the
applicable Short Term Federal Rate). Subject to the foregoing limitations,
options may be granted under this Plan at any time from and after the Effective
Date of the Plan and before the date fixed herein for termination of the Plan.
B. TERMINATION. Unless sooner terminated due to a Corporate Transaction
or a Change in Control, the Plan will terminate upon the EARLIER of (i) October
8, 2003, or (ii) the date on which all shares available for issuance under the
Plan have been issued or cancelled pursuant to exercise, surrender or cash-out
of options. If the date of termination is determined under clause (i) above,
then options outstanding on such date shall thereafter continue to have force
and effect in accordance with the provisions of the instruments evidencing those
options.
C. ADDITIONAL SHARES. Options to purchase shares of Common Stock may be
granted under the Plan which are in excess of the number of shares then
available for issuance under the Plan, provided any excess shares actually
issued are held in escrow until shareholder approval is obtained for a
sufficient increase in the number of shares available for issuance under the
Plan. If such shareholder approval is not obtained within twelve (12) months
after the date the first such excess option grants are made, then (I) any
unexercised excess options shall terminate and cease to be exercisable and (II)
the Corporation shall promptly refund the purchase price paid for any excess
shares actually issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow.
III. USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares pursuant
to options granted under the Plan shall be used for general corporate purposes.
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IV. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option under the Plan,
and the issuance of stock upon the exercise or surrender of any such option
shall be subject to the procurement by the Company of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
options granted under it and the stock issued pursuant to it.
V. NO EMPLOYMENT/SERVICE RIGHTS
Neither the establishment of this Plan, nor any action taken under the
terms of this Plan, nor any provision of this Plan shall be construed so as to
grant any individual the right to remain in the employ or service of the Company
(or any parent or subsidiary corporation) for any period of specific duration,
and the Company (or any parent or subsidiary corporation retaining the services
of such individual) may terminate such individual's employment or service at any
time and for any reason, with or without cause.
-11-
PRELIMINARY
COPY
PROXY
DURA PHARMACEUTICALS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints James W. Newman and Mitchell R. Woodbury,
jointly and severally, as proxies, with power to act without the other and with
power of substitution, and hereby authorizes them to represent and vote all of
the shares of Common Stock of Dura Pharmaceuticals, Inc. standing in the name of
the undersigned, as designated on the other side, with all powers which the
undersigned would possess if present at the Annual Meeting of Shareholders to be
held May 28, 1997, or any postponements or adjournments thereof, and to vote in
his discretion on such other business as may properly come before the Meeting
and any adjournments thereof.
(Continued, and to be marked, dated and signed, on the other side)
* FOLD AND DETACH HERE *
[Logo]
Please mark
your votes as /X/
indicated in
this example
The Board of Directors recommends a vote FOR Items 1, 2, 3, and 4.
WITHHELD
FOR FOR ALL
ITEM 1-ELECTION OF DIRECTORS / / / /
Nominees:
Herbert J. Conrad
Gordon V. Ramseier
Charles G. Smith
Walter F. Spath
WITHHELD FOR: (write that nominee's name in the space provided below).
_______________________________________________________________________________
FOR AGAINST ABSTAIN
ITEM 2 - APPROVAL OF REINCORPORATION IN DELAWARE / / / / / /
ITEM 3 - APPROVAL OF AMENDMENTS TO 1992 STOCK
OPTION PLAN / / / / / /
ITEM 4 - RATIFICATION AND APPROVAL OF
DELOITTE & TOUCHE LLP
AS INDEPENDENT ACCOUNTANTS / / / / / /
Unless otherwise specified by the undersigned, this proxy will be voted FOR
proposals 1, 2, 3 and 4 and will be voted by the proxy-holder at his discretion
as to any other matters properly transacted at the Meeting or any adjournments
thereof. To vote in accordance with the Board of Director's recommendations,
just sign below, no boxes need to be checked.
Signature ___________________________________________________________________
Signature ___________________________________________________________________
Date ________________________________________________________________________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
* FOLD AND DETACH HERE *