SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement
[_]Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
DePuy, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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[X]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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previously. Identify the previous filing by registration statement number,
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[LOGO OF DEPUY]
DEPUY, INC.
P.O. Box 988
700 Orthopaedic
Drive
Warsaw, Indiana
46581-0988
U.S.A.
Dear Stockholder:
On behalf of the Board of Directors and employees of DePuy, Inc., I am happy
to invite you to attend the Annual Meeting of Stockholders of DePuy, Inc.,
which will be held on Thursday, May 1, 1997, at 10:00 a.m. local time at the
Hilton Hotel, 1020 South Calhoun Street, Fort Wayne, Indiana. The enclosed
Notice of Meeting and Proxy Statement contains detailed information about the
business to be conducted at the Meeting.
Whether or not you plan to attend the meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. As explained in the
Proxy Statement, your proxy may be withdrawn at any time before it is actually
voted at the meeting. If you plan to attend the meeting in person, please mark
the box on your proxy card where indicated. We look forward to welcoming in
person all of our stockholders who are able to attend the meeting.
Sincerely,
/s/ James A. Lent
James A. Lent
Chairman and Chief Executive Officer
DEPUY, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of DePuy,
Inc. (the "Company"), a Delaware corporation, will be held at the Hilton
Hotel, 1020 South Calhoun Street, Fort Wayne, Indiana, on Thursday, May 1,
1997, at 10:00 a.m., for the following purposes:
1. To elect two directors to serve for a term of three years and until
their respective successors shall be elected and shall qualify;
2. To approve the Company's 1996 Equity Incentive Plan;
3. To approve the Company's Employee Stock Option/Purchase Plan;
4. To approve the Company's Senior Executive Incentive Compensation Plan
and the performance goals set forth therein under which incentive
compensation is to be paid to executive officers of the Company pursuant to
the Plan;
5. To confirm the appointment of Price Waterhouse LLP as auditors of the
Company for the year ending December 31, 1997; and
6. To transact such other business as may properly be brought before the
meeting.
Only stockholders of record at the close of business on March 17, 1997 are
entitled to notice of and to vote at the meeting or any adjournments thereof.
By order of the Board of Directors,
Steven L. Artusi
Secretary
DEPUY, INC.
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 1, 1997
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of DePuy, Inc. (the "Company" or "DePuy"), a
Delaware corporation, for use at the Annual Meeting of Stockholders of the
Company (the "Meeting") to be held at the Hilton Hotel, 1020 South Calhoun
Street, Fort Wayne, Indiana, on Thursday, May 1, 1997, at 10:00 a.m., and at
any adjournments thereof. The approximate date on which this Proxy Statement
and the enclosed form of proxy will be first sent to stockholders is March 26,
1997.
SOLICITATION AND VOTING OF PROXIES; REVOCATION
All shares represented by properly-executed proxies will, unless such
proxies have been previously revoked, be voted at the Meeting in accordance
with the direction on the proxies. If no direction is indicated, the shares
will be voted as recommended by the Board of Directors. Stockholders who
execute proxies retain the right to revoke them, at any time before they are
actually voted, by notice in writing to the Secretary of the Company, by
revocation in person at the Meeting or by presenting a later-dated proxy.
Abstentions and broker "non-votes" are counted as present in determining the
number of shares present at the Meeting for quorum purposes. However, except
with respect to the election of directors, which requires a plurality of the
votes actually cast, abstentions and broker non-votes, which are counted as
having been voted but are not counted as having been voted in favor, have the
same effect as "no" votes. A broker "non-vote" occurs when a nominee does not
have discretionary voting power with respect to that item and has not received
instructions from the beneficial owner.
The Board of Directors does not intend to present and knows of no others who
intend to present at the Meeting any matter or business other than that set
forth in the accompanying Notice of Annual Meeting of Stockholders. If other
matters are properly brought before the Meeting, it is the intention of the
persons named in the accompanying form of proxy to vote any proxies on such
matters in accordance with their judgment.
The Company will bear the cost of preparing, assembling and mailing the
enclosed form of proxy, this Proxy Statement and other material which may be
sent to stockholders in connection with this solicitation. Officers and
regular employees may solicit proxies by mail, telephone, telegraph and
personal interview, for which no additional compensation will be paid.
RECORD DATE; REQUIRED VOTE
The close of business on March 17, 1997 has been fixed as the Record Date
for the determination of stockholders entitled to notice of and to vote at the
Meeting and any adjournments thereof. As of the Record Date there were
98,580,000 shares of Common Stock of the Company outstanding. Holders of
shares of Common Stock are entitled to one vote for each share registered in
their respective names. Cumulative voting is not permitted.
ON THE RECORD DATE, CORANGE LIMITED ("CORANGE") AND ITS DIRECT AND INDIRECT
WHOLLY-OWNED SUBSIDIARIES, CORANGE INTERNATIONAL LIMITED, CORANGE
INTERNATIONAL HOLDINGS B.V. AND PHARMINVEST S.A. (COLLECTIVELY, THE "CORANGE
STOCKHOLDERS") BENEFICIALLY OWNED 83,000,000 SHARES OF COMMON STOCK,
REPRESENTING APPROXIMATELY 84.2% OF THE OUTSTANDING SHARES. THE CORANGE
STOCKHOLDERS HAVE NOTIFIED THE COMPANY THAT THEY INTEND TO VOTE FOR PROPOSALS
1, 2, 3, 4 AND 5.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 17, 1997 with
respect to the number of shares of Common Stock beneficially owned by each
person who is known to the Company to own beneficially more than 5% of the
Common Stock, the number of shares of Common Stock beneficially owned by each
director of the Company and certain executive officers of the Company, and the
number of shares of Common Stock beneficially owned by all directors and
executive officers of the Company as a group. Except as otherwise indicated,
each such stockholder has sole voting and investment power with respect to the
shares beneficially owned by such stockholder.
AMOUNT AND NATURE OF PERCENT OF COMMON
NAME AND ADDRESS BENEFICIAL OWNERSHIP STOCK OUTSTANDING
---------------- -------------------- -----------------
Corange Limited........................ 3,168,745 3.22%
22 Church Street
HM 11
P.O. Box HM 2026
Hamilton, HM HX
Bermuda
Corange International Limited.......... 528,247 0.54
P.O. Box HM 2026
Hamilton, HM MX
Bermuda
Corange International Holdings B.V..... 13,272,193 13.46
Tripolis Building 100
Burgerweeshuispad 141
NL-1076 EW
Amsterdam, The Netherlands
Pharminvest S.A........................ 66,030,815 66.98
145, rue de Treves
Luxembourg, G.D.
James A. Lent.......................... 33,751.95(1) *
Michael J. Dormer...................... 8,676.86(2) *
R. Michael McCaffrey................... 8,696.44(3) *
William E. Tidmore, Jr. ............... 10,378.06(4) *
Robert E. Morel........................ 2,423.52(5) *
Richard C. Bolesky..................... 1,000 *
Richard A. Gilleland................... 2,000 *
Gerald C. Hanes........................ 1,000 *
M.L. Lowenkron......................... 3,000 *
Robert Volz, M.D....................... 5,000 *
Anthony Williams....................... 2,829 *
Directors and executive officers as a
group (15 persons).................... 101,338.87(6) *
- --------
* less than one percent
(1) Includes 33,201.95 phantom stock units which were acquired through the
conversion by Mr. Lent in October 1996 of amounts vested in a long-term
incentive plan. Phantom stock units automatically convert, without
further action on the part of the holder thereof, into shares of Common
Stock on the third anniversary of the grant date and are entitled to
participate in any dividend paid on the Common Stock prior to such
conversion. Also includes 550 shares registered in the name of Mr. Lent's
wife, as to which shares Mr. Lent disclaims beneficial ownership.
(2) Consists of 8,676.86 phantom stock units.
(3) Includes 8,296.44 phantom stock units.
(4) Includes 10,328.06 phantom stock units. Also includes 50 shares held by
Mr. Tidmore's minor children, as to which shares Mr. Tidmore disclaims
beneficial ownership.
(5) Includes 2,023.52 phantom stock units.
(6) Includes an aggregate of 74,659.87 phantom stock units held by executive
officers and 650 shares held by spouses or minor children of executive
officers or other persons residing in an executive officer's home as to
which beneficial ownership is disclaimed.
2
The Corange Stockholders (Corange Limited and three of its direct and
indirect wholly-owned subsidiaries: Corange International Limited, Corange
International Holdings B.V. and Pharminvest S.A.) own 83,000,000 shares of the
Common Stock of the Company, or approximately 84.20% of the Common Stock
outstanding. THE CORANGE STOCKHOLDERS HAVE NOTIFIED THE COMPANY THAT THEY
INTEND TO VOTE FOR PROPOSALS 1, 2, 3, 4 AND 5. Corange is managed by a five-
man Board of Directors consisting of the following persons: Curt Engelhorn,
James A. Lent, Gerhard Moller, Anthony Williams and Michael Drew. Mr. Lent and
Mr. Williams are also members of the Board of Directors of the Company. The
shares of Corange are beneficially owned by four family branches who are
descended from the founders of the Boehringer Mannheim companies in Germany.
The family of Curt Engelhorn beneficially owns approximately 37.3% of the
shares of Corange, the family of Christof Engelhorn beneficially owns
approximately 22.3% of the shares, the family of Peter Engelhorn beneficially
owns approximately 22.3% of the shares and Christa Gelpke beneficially owns
approximately 18.0% of the shares. Messrs. Curt Engelhorn and Christof
Engelhorn and Madame Traudl Engelhorn (the widow of Peter Engelhorn) may be
deemed to control the shareholdings of their respective family branches. There
are no agreements among the four branches as to the voting of their shares in
Corange, and since none of such family branches owns a majority of shares of
Corange, no branch (except insofar as any branch may act in concert with one
or more other branches from time to time) is in a position to cause the
election of particular directors or to cause the shareholders to approve any
matter with respect to which shareholder approval may be required or sought.
3
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides for the classification
of the Board of Directors into three classes (Class I, Class II and Class
III). At the Meeting two Class I directors are to be elected to serve for
three-year terms expiring at the 2000 Annual Meeting. The directors in Class
II and Class III will continue to serve their terms of office, which will
expire at the Annual Meeting to be held in 1998 and in 1999, respectively.
UNLESS OTHERWISE INDICATED, THE ACCOMPANYING FORM OF PROXY WILL BE VOTED FOR
EACH NOMINEE LISTED BELOW. THE ELECTION OF DIRECTORS REQUIRES THE AFFIRMATIVE
VOTE OF A PLURALITY OF THE SHARES OF COMMON STOCK PRESENT IN PERSON OR BY
PROXY AT THE MEETING. THE CORANGE STOCKHOLDERS, WHO HOLD MORE THAN A MAJORITY
OF THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK, HAVE ADVISED THE
COMPANY THAT THEY INTEND TO VOTE IN FAVOR OF THE NOMINEES. At this time, the
Board of Directors knows of no reason why any nominee might be unable to
serve.
The following table sets forth information with respect to each nominee for
election as a Class I director of the Company. Each nominee is currently a
director of the Company.
CLASS I DIRECTORS
DIRECTOR
NAME OF NOMINEE AGE SINCE
- --------------- --- --------
Richard A. Gilleland............................................... 52 1996
M.L. Lowenkron..................................................... 65 1996
The following table sets forth information with respect to each continuing
Class II and Class III director of the Company.
CLASS II DIRECTORS
DIRECTOR
NAME OF DIRECTOR AGE SINCE
- ---------------- --- --------
Richard C. Bolesky................................................. 65 1996
Gerald C. Hanes.................................................... 59 1996
Robert Volz, M.D................................................... 64 1996
CLASS III DIRECTORS
DIRECTOR
NAME OF DIRECTOR AGE SINCE
- ---------------- --- --------
James A. Lent...................................................... 54 1996
Anthony Williams................................................... 51 1996
James A. Lent has been Chairman and Chief Executive Officer of DePuy since
1991, having served as President from 1985 to 1991. Prior to joining DePuy,
Mr. Lent worked for Johnson & Johnson from 1967 to 1985, serving as President
of J&J Orthopaedics from 1982 to 1985. Mr. Lent is a member of the Board of
Directors of Corange and also serves on the Board of Directors of
Spectranetics Inc., a cardiovascular device company.
Richard C. Bolesky served as Vice President, Research and Development of
DePuy from 1982 until 1990. From 1990 until his retirement in 1994, he was
Senior Vice President, Technology. Between 1994 and 1996, Mr. Bolesky served
as a consultant to DePuy.
4
Richard A. Gilleland served from 1995 until 1996 as President and Chief
Executive Officer of AMSCO International, Inc., a healthcare supplies
manufacturer. He served from 1990 until 1995 as Chairman, President and Chief
Executive Officer of Kendall International, Inc., a medical supplies
manufacturer. Mr. Gilleland is a Director of Tyco International, Ltd.
Gerald C. Hanes has been President of Personal Investment Consultants, Inc.
since 1988.
M.L. Lowenkron was President and Chief Executive Officer of G. Heileman
Brewing Company, Inc. from 1995 until June 1996 and a Director from 1994. Mr.
Lowenkron was Chief Executive Officer of A&W Brands, Inc. from 1980 until 1993
and Chairman from 1991 to 1995. He also serves as a Director of Triarc
Companies, Inc., a holding company of various food distributors.
Robert Volz, M.D. is a physician and orthopedic surgeon and is a Professor
Emeritus at the University of Arizona, Health Services Center. Dr. Volz is
President of Robert G. Volz & Co., which provides services to the Company for
which the Company paid $1,419,409 in royalty fees in 1996.
Anthony Williams is a partner at the law firm of Coudert Brothers, which
firm provides legal services to the Company. Mr. Williams is also the Vice
Chairman and a Director of Corange.
The Board of Directors met three times during 1996.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee,
each of which was formed in September 1996.
Audit Committee. The Audit Committee meets with the Company's independent
public accountants to discuss the scope and results of their examination of
the books and records of the Company. It also meets with the independent
public accountants to discuss the adequacy of the Company's accounting and
control systems. The Committee reviews the audit schedule and considers any
issues raised by any member of the Committee, the independent public
accountants, the internal audit staff, the legal staff or management. Each
year it recommends to the full Board of Directors the name of an accounting
firm to audit the financial statements of the Company. The Audit Committee
consists of Messrs. Lowenkron (Chairman), Gilleland and Volz. The Audit
Committee did not meet during 1996.
Compensation Committee. The Compensation Committee establishes overall
employee compensation policies and recommends to the Board major compensation
programs. The Compensation Committee reviews the performance of corporate
officers and reviews and approves compensation of directors and corporate
officers, including bonus compensation and stock options and other stock
awards, except that the Stock Option and Bonus Subcommittee of the
Compensation Committee (the "Compensation Subcommittee") administers the
DePuy, Inc. Employee Stock Option/Purchase Plan (the "Stock Option/Purchase
Plan") and the DePuy, Inc. 1996 Equity Incentive Plan (the "Equity Incentive
Plan"), and will administer the DePuy, Inc. Senior Executive Incentive
Compensation Plan (the "Incentive Plan"), as each of such plans is described
below, and will review and approve certain other compensation to corporate
officers to the extent necessary for such compensation to be deductible by the
Company pursuant to the Internal Revenue Code of 1986, as amended (the
"Code"). The Compensation Committee consists of Messrs. Gilleland (Chairman),
Hanes and Williams and the Compensation Subcommittee consists of Messrs.
Gilleland and Hanes. The Compensation Committee and the Compensation
Subcommittee both met two times during 1996.
DIRECTORS' COMPENSATION
Directors receive no annual retainer for services provided in that capacity
but, except for any director who is also an employee of the Company, receive a
meeting fee of $3,000 plus expenses for each meeting (including telephone
meetings) of the Board attended and a meeting fee of $1,000 plus expenses for
each meeting (including telephone meetings) attended as a member of a Board
committee at a time other than immediately before or after a regular Board
meeting. In addition, the Equity Incentive Plan (described below) provides for
formula-based grants of options to purchase 20,000 shares of Common Stock to
each non-employee director.
5
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid to the
Company's chief executive officer and four other most highly compensated
executive officers (the "Named Officers") by the Company or its subsidiaries
during the fiscal years 1995 and 1996.
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------------------------------- ------------------------------------------
PAYOUTS
(PAYMENT
OTHER OF VESTED SECURITIES ALL
ANNUAL PRIOR UNDERLYING OTHER
COMPEN- AWARDS)(1) AWARDS(1) OPTIONS COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) ($) # SATION ($)
- --------------------------- ---- ---------- --------- ---------- ---------- --------- ---------- ----------
James A. Lent............ 1996 580,000 320,000 -- 271,966 260,348 150,000 8,360(7)
Chairman of the Board 1995 529,038 300,000(2) -- 192,758 229,770 -- 8,648(7)
and Chief Executive
Officer
Michael J. Dormer(3)(4).. 1996 287,794 150,000 -- 101,887 135,083 75,000 --
President and Chief 1995 231,161 119,861 -- 41,442 116,155 -- --
Operating Officer
R. Michael McCaffrey..... 1996 275,158 100,000 -- 185,524 113,247 40,000 8,761(7)
President, DePuy 1995 264,575 102,000 -- 137,414 144,552 -- 8,745(7)
Development, Inc.
William E. Tidmore, 1996 216,000 80,000 -- 144,242 75,498 40,000 12,634(7)
Jr. ....................
President, DePuy Motech, 1995 211,045 85,000 -- 44,364 94,712 -- 12,594(7)
Inc.
Robert E. Morel(5)....... 1996 237,966 70,000 111,422(6) 102,909 82,814 40,000 112,538(7)
President, DePuy ACE 1995 173,442 70,000 -- 75,112 80,936 -- 12,890(7)
Medical Company
- --------
(1) Awards made under LTIP I and LTIP II, as described below.
(2) Mr. Lent's 1995 compensation includes $75,000 of additional compensation
paid for serving as chief spokesperson for the Corange Group.
(3) All of Mr. Dormer's compensation in 1995 and a portion of such
compensation in 1996 was paid to him in the United Kingdom. All of such
compensation paid to Mr. Dormer in the United Kingdom has been converted
into U.S. dollars based on an exchange rate of $1.7123 per British Pound,
the Noon Buying Rate in New York for cable transfers payable in foreign
currencies as of December 31, 1996, as certified for customs purposes by
the Federal Reserve Bank of New York (the "Federal Reserve Rate"). In
1996, the Noon Buying Rate ranged from a high of $1.7123 to a low of
$1.4948 per British pound.
(4) Mr. Dormer's compensation for 1995 and part of 1996 reflects his prior
position as President of DePuy International Ltd. ("DePuy International").
Mr. Dormer was appointed President and Chief Operating Officer of the
Company, effective August 5, 1996, at a salary of $350,000.
(5) Mr. Morel's compensation for 1995 and part of 1996 reflects his prior
position as Senior Vice President, Operations of the Company. Mr. Morel
was appointed President of DePuy ACE Medical Company, effective May 1996,
at a salary of $250,000.
(6) Includes reimbursement for taxes of $100,059 in connection with relocation
costs.
(7) Includes for 1996 contributions by the Company to the DePuy, Inc.
Retirement Income Plan and to the DePuy, Inc. Cash Accumulation Plan in
the amounts of $7,507, $8,761, $12,634 and $12,932 for Messrs. Lent,
McCaffrey, Tidmore and Morel, respectively. Also included for 1996 is $853
for Mr. Lent, representing the term insurance cost of premiums paid on
behalf of Mr. Lent to purchase life insurance, and $99,606 for Mr. Morel,
representing relocation costs.
6
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS(1) OPTION TERM(2)
---------------------------------------------------------------------------- ---------------------------
(C)
(B) % OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
(A) OPTIONS IN FISCAL (D) (E) 5% 10%
NAME GRANTED YEAR EXERCISE PRICE EXPIRATION DATE $ $
- ---- ---------- ---------- -------------- --------------- ------------- -------------
James A. Lent........... 150,000 12% $17.50 10/30/06 1,651,500 4,123,500
Michael J. Dormer....... 75,000 6 17.50 10/30/06 825,750 2,091,750
R. Michael McCaffrey.... 40,000 3.2 17.50 10/30/06 440,400 1,115,600
William E. Tidmore,
Jr..................... 40,000 3.2 17.50 10/30/06 440,400 1,115,600
Robert E. Morel......... 40,000 3.2 17.50 10/30/06 440,400 1,115,600
All Stockholders(3)..... 1,085,355,800 2,749,396,200
- --------
(1) The options described above are non-qualified options that were granted on
October 30, 1996 and become exercisable in equal cumulative installments
on each of October 30, 1997, October 30, 1998 and October 30, 1999. The
exercise price of the options may be paid in cash or in shares of Common
Stock. In the event of a change in control (as described below), all
options will become fully vested and exercisable.
(2) The dollar amounts are the result of calculations at the 5% and 10% growth
rates set by the Securities and Exchange Commission (the "Commission").
The rates are not intended to forecast or reflect actual future price
appreciation. A zero rate of growth would result in zero gain to the
optionees.
(3) These dollar amounts are included for comparative purposes to show the
gain that would be achieved by the holders of the outstanding Common Stock
on December 31, 1996 at the assumed stock price appreciation rate at the
end of the 10-year term of the options granted in 1996.
AGGREGATE OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTIONS VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1996 FISCAL YEAR-END $
ACQUIRED ON VALUE ------------------------- -------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
NAME # $ # # EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
James A. Lent........... 0 0 0 150,000 0 412,500
Michael J. Dormer....... 0 0 0 75,000 0 206,250
R. Michael McCaffrey.... 0 0 0 40,000 0 110,000
William E. Tidmore,
Jr..................... 0 0 0 40,000 0 110,000
Robert E. Morel......... 0 0 0 40,000 0 110,000
EMPLOYEE PLANS
Management Incentive Plan. In 1995 and 1996 the Company maintained an annual
incentive program for certain officers and key employees (the "Bonus Plan").
Under the Bonus Plan, cash awards are made to individuals at the discretion of
the Company's management based on the performance of the Company with respect
to predetermined objectives set forth in the Company's Management by Objective
program and the
7
contribution of the individual towards reaching such objectives. The amount of
awards made under the Bonus Plan to Messrs. Lent, Dormer, McCaffrey, Tidmore
and Morel in 1995 was $300,000 ($75,000 of which was additional compensation
for serving as chief spokesperson for the Corange group), $107,019, $102,000,
$85,000 and $70,000 respectively and in 1996 was $320,000, $119,861, $100,000,
$80,000 and $70,000 respectively. Effective as of January 1, 1997, the Bonus
Plan for certain officers, including the Named Officers, is being replaced by
the Company's Senior Executive Incentive Compensation Plan, as described on
page 29.
Long-Term Incentive Plan. Prior to the initial public offering of the
Company's Common Stock, the Company participated in a long-term incentive plan
("LTIP I"), sponsored by Corange for eligible senior executives of Corange and
its worldwide affiliates, including the Company, based on the global
performance of Corange. To be eligible an executive must have been determined
by a committee of Corange officers to have a direct impact on the long-term
performance of Corange and be approved by the Board of Directors of Corange.
Fourteen of the Company's executives most recently participated, including the
Named Officers. Under LTIP I, an executive was awarded performance units, the
number of which were based on the committee's overall assessment of the
performance of Corange and the individual executive's performance and
potential impact on the performance of Corange. Each outstanding performance
unit had an initial value determined in U.S. dollars as of the date of grant
and, once granted, could only have increased in value. Awards may have been
increased annually, based on the corporate results of Corange, except that any
annual increase could not have been less than the corresponding annual
increase in the U.S. long-term Treasury bill interest rate. Any annual
increase in the value of a new performance unit award automatically increased
the value of any outstanding performance units. In the case of an employee who
elected to defer payment of an award beyond the fifth anniversary of the grant
date, the value of the performance units subject to such award could not have
been increased after the fifth anniversary of the grant date, except to
reflect any annual increase in the U.S. long-term Treasury bill interest rate.
LTIP I awards are subject to a four-year graded vesting schedule, such that an
employee who has received an award of performance units vested cumulatively as
to 40% of the performance units awarded on the first anniversary of the grant
date and 20% of the performance units on each of the second, third and fourth
anniversaries of the grant date. LTIP I awards were paid to the executive as
soon as practicable after they vested, except that employees could have
elected to defer payment of a portion or all of their LTIP I awards until the
end of any calendar year between the date of vesting and the fifteenth
anniversary of the grant date. The value of units awarded during 1995 under
LTIP I to Messrs. Lent, Dormer, McCaffrey, Tidmore and Morel, based on a unit
value of $12.42 as of December 31, 1995, was $229,770, $69,550, $69,552,
$44,712 and $9,936 respectively. The value of units awarded during 1996 under
LTIP I to Messrs. Lent, Dormer, McCaffrey, Tidmore and Morel, based on a unit
value of $13.42 as of October 30, 1996, (the date on which such awards were
cancelled, as described below) was $260,348, $75,152, $38,247, $25,498 and
$22,814 respectively. No additional awards were made under LTIP I subsequent
to April 30, 1996. As of October 30, 1996, LTIP I was amended to provide that
any awards granted to participants under LTIP I prior to or as of April 30,
1996 would vest immediately and in full as of the date on which the
participant executed an agreement with the Company pursuant to which the
participant would receive phantom stock units under the De Puy, Inc. Equity
Incentive Plan (the "Equity Incentive Plan"), and, on such date, the
participant's vested awards under LTIP I would be cancelled. All fourteen of
the Company's executives who participated in LTIP I received phantom stock
units and all awards granted to such executives under LTIP I were cancelled.
The number of phantom stock units received were determined by dividing the
participant's LTIP I account as of the date of the initial public offering of
the Common Stock of the Company by the then offering price per share (minus
underwriting discounts and commissions) equivalent to $16.58 as of such time.
The number of phantom stock units thus resulting from the conversion from
Messrs. Lent, Dormer, McCaffrey, Tidmore and Morel were 33,201.95, 8,676.86,
8,296.44, 10,328.06 and 2,023.56, respectively.
Additional Long-Term Incentive Plan. Prior to April 30, 1996, awards also
were made under the additional long-term incentive plan ("LTIP II"), which was
an annual incentive plan which provided annual cash awards to employee
participants, based on the Company's worldwide performance for the prior year
as well as a participant's individual performance. Awards vest cumulatively
over a three-year period such that 25% of an award and earnings thereon vests
on the January 1 following the January 1 on which the award is made, an
8
additional 25% vests on the following January 1 and the award vests fully on
the third January 1 following the award date. Awards which vest on January 1st
of any year are paid to the participant, to the degree vested, at such time.
The LTIP II currently covers 45 executives of the Company. Mr. Lent is not a
participant. Awards made to participants are invested by the Company in mutual
funds; however, a return of no less than the return on a 30-year Treasury Bill
is guaranteed on such invested awards. The plan provides for a target payout
to a participant of 20% of his or her base salary and a maximum payout of 30%
of his or her base salary. The value of awards made during 1995 and 1996 under
LTIP II to Messrs. Dormer, McCaffrey, Tidmore and Morel was $46,605, $75,000,
$50,000, and $71,000 and $59,931, $75,000, $50,000 and $60,000 respectively.
DePuy, Inc. Retirement Income Plan. The DePuy, Inc. Retirement Income Plan
(the "RIP") is a tax-qualified target benefit plan sponsored by the Company
for the benefit of the employees of the Company and certain of its
subsidiaries. The RIP covers substantially all of the non-union employees of
the Company and certain of its subsidiaries. Under the RIP, the Company is
required to make a prescribed annual contribution to the plan, up to
statutorily prescribed limits, payable ratably on a monthly basis, in an
amount determined necessary to meet the projected targeted benefit under the
RIP when all of such contributions and earnings thereon (at an assumed rate of
return specified in the plan) are accumulated to the participant's attainment
of age 65, the normal retirement date under the plan. The targeted benefit
with respect to any participant is equal to the product of 30% of the
participant's average compensation (determined with respect to the three
calendar years out of the most recent four calendar years in which the
participant received the largest amount of compensation) and the amount of the
participant's credited service (determined in months, up to a maximum of 360)
divided by 360. A separate account is established with respect to each
participant under the plan. Amounts contributed under the RIP are invested by
the plan's trustee, currently the NBD Bank, N.A., and the benefit which is
payable under the RIP is the amount which can be provided from the assets
accumulated in the participant's account under the plan. Thus, there is no
guaranty under the RIP that the amount available at retirement will be
sufficient to provide the targeted benefit. Retirement before age 65 can be
elected under certain conditions. Benefits under the plan are generally
payable in the form of a 50% joint and survivor annuity with the participant's
spouse as the joint annuitant, although a participant may elect, with the
consent of his or her spouse in the case of a married participant, to receive
a single lump sum payment or certain other forms of annuity payments. The
Company made contributions to the RIP in 1995 and 1996 in the amount of
$897,558 and $966,533, respectively. A participant generally vests 100% in the
Company contributions made to the RIP upon completing five years of service.
Prior to October 1, 1996, the RIP was sponsored by Corange U.S. Holdings, Inc.
("CUSHI"), and as of such date the companies (other than the Company and its
participating subsidiaries) which participated in the RIP established separate
successor RIPs, and, in accordance therewith, assets allocated on behalf of
employees of such other companies under the RIP were transferred from the RIP
to the successor plans established by such other companies.
DePuy, Inc. Cash Accumulation Plan. The DePuy, Inc. Cash Accumulation Plan
(the "401(k) Plan") is a tax-qualified employee savings and retirement plan
maintained by the Company for the benefit of the employees of the Company and
certain of its subsidiaries. The 401(k) Plan covers substantially all of the
Company's and participating subsidiaries' non-union employees. Employees
eligible to participate may elect to contribute, on a before-tax basis,
between 2% and 11% of their compensation, up to statutorily prescribed limits,
to the 401(k) Plan as a savings contribution. The Company matches 100% of the
pre-tax contributions made by a participant, up to 4% of the participant's
compensation. The Company's contribution to the 401(k) Plan for the 1995 year
was $1,250,360 and for 1996 was $1,510,853. A participant's interest in his or
her pre-tax contributions, after-tax contributions and rollover contributions
are 100% vested when contributed to the plan. A participant's interest in the
Company's matching contributions generally vests 100% upon the participant's
completion of three years of service with the Company or with certain
affiliates of the Company. Prior to October 1, 1996, the 401(k) Plan was
sponsored by CUSHI, and as of such date the companies (other than the Company
and its participating subsidiaries) which participated in the 401(k) Plan
established successor 401(k) plans, and, in accordance therewith, assets
allocated on behalf of employees of such other companies under the 401(k) Plan
were transferred from the 401(k) Plan to the successor plans established by
such other companies.
9
DePuy, Inc. Retirement Excess Plan. The DePuy, Inc. Retirement Excess Plan
(the "Excess Plan") is maintained by the Company for the benefit of the
eligible employees of the Company and certain of its subsidiaries. The Excess
Plan is intended to offset the limitations under the Code that are placed on
benefits under the RIP by providing eligible employees benefits in excess of
those available to such employees under the RIP. Employees are eligible to
participate in the Excess Plan in the year following the year in which the
amounts allocable to their accounts under the RIP are limited by the limit
imposed under the Code. Under the unfunded Excess Plan, a recordkeeping
account is established on behalf of each participant which is credited,
annually, with the difference between the amount of the employer contribution
that would have been credited to the participant under the RIP had the Code
limit not applied and the amount of the employer contribution that actually
was credited to the participant under the RIP because of such limit, provided
that no more than $10,000 may be credited to a participant's account for any
single calendar year. A participant's benefit under the Excess Plan becomes
100% vested and nonforfeitable after five years of service with the Company
and becomes payable, in a single lump sum payment, at the time that the
participant becomes eligible to receive benefits under the RIP. In the event
of a participant's death, the benefit credited to his or her account is
payable as a death benefit to the participant's beneficiary. Prior to October
1, 1996, the Excess Plan was sponsored by CUSHI, and as of such date the
companies (other than the Company and its participating subsidiaries)
established successor excess benefit plans and transferred the liabilities
associated with the employees of such companies to the successor plans
established by such other companies. Currently, the Excess Plan covers Mr.
Morel and other employees of the Company.
Supplemental Retirement Plan (Plan No. 1). The Company has adopted the
DePuy, Inc. Supplemental Retirement Plan (Plan No. 1) (the "SERP I") which is
sponsored by the Company for the senior executives of the Company and certain
of its subsidiaries. Plan participants are selected by the Board of the
Company from the senior executives of the Company and its subsidiaries. Upon
reaching the normal retirement date under the plan (defined as the last day of
the Company's pay period immediately following a participant's 65th birthday)
while employed by the Company or any of its affiliates, a participant is
eligible for supplemental retirement benefits under the plan in an annual
amount, payable for the participant's lifetime, equal to 60% of the
participant's "final average income", reduced by the sum of the participant's
retirement income from sources other than the Company, the benefit payable to
the participant under any defined benefit payable to the participant under the
RIP, any benefit payable to the participant under any defined benefit
retirement arrangement maintained by Corange or by any non-U.S. based
affiliate of Corange and by one-half of the participant's primary social
security benefits. For purposes of the plan, the participant's "final average
income" is determined as the annual average of the 36-month period ending on
the date of the participant's termination of employment and includes, with
respect to a fiscal year, base salary, one-half of the annual cash bonus paid
to the participant by the Company, participant deferrals pursuant to a 401(k)
plan maintained by the Company, salary or bonus amounts deferred under any
Company nonqualified deferred compensation arrangement and amounts excluded
from wages pursuant to a cafeteria plan maintained by the Company. The plan
also provides for reduced supplemental early retirement, disability and death
benefits. A participant forfeits benefits under the plan if the participant's
employment is terminated for cause or, if terminated upon death or disability,
before completing 5 years of service or reaching age 60 or, if terminated
other than upon retirement, death or disability, before completing 10 years of
service with the Company. In addition, a participant's continuing right to
receive benefits is conditioned on the participant's compliance with certain
noncompetition, nonsolicitation and confidentiality plan requirements.
Currently, the SERP I covers Mr. Lent.
Supplemental Retirement Plan (Plan No. 2). The DePuy, Inc. Supplemental
Retirement Plan (Plan No. 2) (the "SERP II") is sponsored by the Company for
the executives of the Company and certain of its subsidiaries. The SERP II
covers certain executives not covered by the SERP I who are selected by the
Chief Executive Officer of the Company. The SERP II provides the same level of
benefits provided in the SERP I and generally contains the same provisions as
described above with respect to the SERP I. However, for purposes of
determining the participant's "final average income", any annual cash bonus
paid to the participant with respect to a fiscal year or any bonus amount
which is deferred under any nonqualified deferred compensation arrangement is
not taken into account. Currently, the SERP II covers Messrs. Tidmore,
McCaffrey and other senior executives of the Company and its participating
affiliates.
10
Amounts necessary to fund the benefits under the SERP I and the SERP II are
determined by the Company's actuarial consultants and such amounts are then
paid into a grantor trust to provide the benefits under the plans. While the
purpose of the trust is to provide plan participants with greater security
that their benefits will be paid, the assets held under the trust become
available to be paid to the Company's creditors in the event of the Company's
insolvency. The Company is liable for any payments under the plans to the
extent that payments are not made from the trust. Prior to October 1, 1996,
SERP I and SERP II were sponsored by CUSHI, and as of such date separate
successor SERP I and SERP IIs were established by the companies (other than
the Company and its participating subsidiaries) which participated in SERP I
and SERP II, and, in accordance therewith, assets allocated on behalf of
employees of such other companies under the SERP I and under the SERP II were
transferred from the SERP I and the SERP II, as applicable, to the successor
plans established by such other companies.
Estimated Retirement Benefits Under the RIP, the Excess Plan, the SERP I and
the SERP II. If Messrs. Lent, McCaffrey, Tidmore and Morel continue in the
positions identified above and retire at their respective normal retirement
dates set forth under the RIP and the SERP I or the SERP II, as the case may
be, the estimated annual pension amounts payable under the RIP and the SERP I
or the SERP II, as the case may be, would be, respectively, with respect to
Mr. Lent, $36,000 and $400,512, with respect to Mr. McCaffrey $34,500 and
$123,107 and with respect to Mr. Tidmore, $33,000 and $89,112. With respect to
Mr. Morel, such amounts would be $25,500 and 0 (Mr. Morel does not participate
in the SERP I or the SERP II) and an additional estimated annual pension
amount of $1,410, stated as a single life annuity amount attributable to his
participation in the Excess Plan. As described above, the actual benefit under
the RIP is the amount actually accumulated in the participant's account as of
the payment date. The amount stated herein is the targeted single life annuity
benefit amount. The amount stated for the SERP I or the SERP II, as
applicable, is expressed as a joint and 50% survivor annuity amount.
DePuy International Ltd. Pension and Life Assurance Scheme. DePuy
International has adopted the DePuy International Ltd. Pension and Life
Assurance Scheme (the "UK Pension Plan") for the benefit of the permanent
salaried staff employees and employees at the director level of DePuy
International who are at least age 18, are not age 60 at the time that
participation commences and who elect to participate in the plan. Currently,
Mr. Dormer is the only Named Officer in the UK Pension Plan. Participants in
the plan are required to contribute 5% of their basic salaries plus specified
allowances to the UK Pension Plan, except that employees who are at the
director level contribute at a 6% rate. Under the UK Pension Plan, a
participating employee who retires at age 65 (age 60 for employees at the
director level), the normal retirement date specified in the plan, will
receive a pension calculated as follows: 1/60th (other amounts may be
applicable with respect to participants who joined the plan before 1978)
multiplied by the employee's final pensionable salary (as defined below)
multiplied by the employee's pensionable service (as defined below). The
pension with respect to a plan participant who is at the director level
accrues at the rate of 1/30th of final pensionable salary for each year of
pensionable service, to a maximum benefit equal to two-thirds of such salary.
For purposes of the plan, an employee's pensionable salary is his or her basic
annual salary and the final pensionable salary is the average of the three
highest consecutive years of pensionable salaries during the ten-year period
preceding normal retirement or earlier date of termination of participation in
the plan. Pensionable service, for purposes of the UK Pension Plan, generally
is an employee's consecutive years and months of participation in the plan.
Participants who retire may elect to receive a portion of their benefits in
the form of a tax-free lump sum payment, in which event benefits remaining to
be paid under the plan will be reduced.
Pensions payable under the plan are increased annually to reflect cost of
living increases. Pension benefits are guaranteed for five years and provide
for surviving spouse benefits payable on a joint and 50% survivor annuity
basis. If a participant dies while working for the company, a lump sum life
assurance benefit and refund of the accumulated value of contributions made by
the participant will be paid pursuant to the direction of the plan's trustees
and a lifetime pension under the plan will be payable to the participant's
spouse. Participants who have attained age 50 may elect to receive a reduced
early retirement pension. The reduction may be waived by the plan's trustees
if the retirement is due to the serious ill health of the participant.
Participants can elect to make additional voluntary contributions under the
plan in order to provide additional pension benefits.
11
Participants who leave the employ of the company after they have completed two
or more years of plan membership are eligible to receive a deferred vested
pension or to have the value of their accrued benefits transferred to another
plan. Participants who terminate their employment prior to completing two
years of plan membership will receive a refund of their accumulated
contributions. Participants in the plan also receive long-term disability
insurance benefits. Approximately 525 employees currently are participating in
the UK Pension Plan. The aggregate contributions of participating employers
during 1995 and 1996 to the UK Pension Plan were $942,585 and $1,034,132,
respectively (based on a conversion at the Federal Reserve Rate).
DePuy International Executive Retirement Benefits Scheme. DePuy
International has adopted the DePuy International Executive Retirement
Benefits Scheme (the "UK Serp"). Currently, Mr. Dormer is the only participant
in the UK Serp. Under the UK Serp, DePuy International contributes an amount
which is actuarially determined each year as necessary to provide the
projected targeted annual benefit under the plan. The targeted benefit is two-
thirds of the participant's final pensionable salary (as such term is defined
above) when the benefits under the UK Serp are added to the benefits under the
UK Pension Plan. A separate account is established with respect to each
participant in the plan. Amounts under the UK Serp are invested and the
benefit which is payable under the plan is the amount which can be provided
from the assets accumulated in the participant's account under the plan. Thus,
there is no guaranty under the UK Serp that the amount available at retirement
will be sufficient to provide the targeted benefit. In the event of Mr.
Dormer's death, a lump sum death benefit is also payable under the plan. The
actuary with respect to the UK Serp has determined that the contribution with
respect to Mr. Dormer should be approximately 38.8% of his pensionable salary.
The targeted benefit under the UK Serp with respect to Mr. Dormer is $228,306
(inclusive of the benefit of $93,834 expected to be payable to him under the
UK Pension Plan), and the amount contributed with respect to Mr. Dormer to the
plan in 1995 and 1996 was $44,049 and $73,133, respectively (based on a
conversion at the Federal Reserve Rate).
In addition, the Company has adopted, subject to shareholder approval, the
Equity Incentive Plan, the Stock Option/Purchase Plan and the Incentive Plan,
all of which are described in detail below.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into employment agreements with the Named Officers.
The agreements require the Company to provide the executive with 24 months'
advance notice (36 months, in the case of Mr. Lent, and 3 months, in the case
of Mr. Dormer) if the Company terminates his employment for any reason other
than for cause, as defined in the agreement, or constructively terminates the
executive's employment as also defined in the agreement. With respect to Mr.
Dormer, a previous agreement with the Company provides that the Company must
provide him with 24 months' advance notice, at a rate of compensation lower
than that in effect during the term of his current employment agreement, if
the Company terminates his employment for any reason other than for cause,
which provision remains effective. An executive may terminate his employment
with the Company upon 6 months' advance notice. During the applicable notice
period, following notice given by either the Company or the executive, during
which the Company may discontinue its use of the executive's services, the
executive will receive continuation of his salary, a prorated bonus with
respect to such period, continuation of his car allowance and continuation of
participation in the 401(k) Plan (except for Mr. Dormer who does not
participate in such plan), the RIP (except for Mr. Dormer who does not
participate in the RIP), the SERP I or the SERP II, as applicable (except for
Messrs. Dormer and Morel who do not participate in the SERP I or the SERP II),
any successor stock plans, and the Company's medical plans (under certain
conditions, certain Named Officers may be entitled to medical coverage for
life). In addition, the employment agreements with respect to Messrs. Lent,
McCaffrey and Tidmore provide for acceleration of eligibility to receive
benefits under the applicable SERP at age 55 if the executive's notice period
is in effect and, if the Company's notice period is in effect, the Company
will make such funding as necessary to provide the executive with enhanced
benefits under the applicable SERP equal to the amount that the executive
would have received under the RIP and the applicable SERP had he been employed
by the Company for three years past the last day of the Company's notice
period.
Pursuant to Mr. Dormer's agreement, the Company will continue contributions
on his behalf to the UK Pension Plan and the UK Serp, at the rate effective on
the date notice is given, through the applicable notice
12
period. In addition, the Company will contribute to the UK Serp on Mr.
Dormer's behalf a sum equal to two years' contributions.
In addition, each of the Equity Incentive Plan, the Stock Option/Purchase
Plan and the Incentive Plan includes certain provisions that become effective
in the event of a change of control of the Company, all of which provisions
are described in detail below.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and officers file reports of ownership and changes of
ownership of the Company's Common Stock with the Commission and the New York
Stock Exchange. Based solely on a review of filings made with the Commission
and furnished to the Company and of written representations made to the
Company, the Company believes that all directors, officers and beneficial
owners of over 10% of the Company's Common Stock filed on a timely basis all
such reports required of them with respect to stock ownership and changes in
ownership during 1996, except that Mr. Morel, Mr. McCaffrey and Mr. James M.
Taylor did not file Form 4s with respect to their respective purchases of
Common Stock in the Company's initial public offering, Mr. Tidmore did not
file a Form 4 with respect to his purchase of shares in the initial public
offering and his immediate gifting of such shares and Mr. G. Taylor Seward did
not report on Form 4 his indirect beneficial ownership of shares purchased by
members of his household in the initial public offering. All such transactions
were subsequently reported by such officers on Form 5.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Lent serves as a director of Corange, whose Vice Chairman, Anthony
Williams, is a member of DePuy's Compensation Committee. Otherwise, during
1996, no executive officer of the Company (i) served as a member of the
compensation committee (or other board committee performing similar functions
or, in the absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served on the Company's
Compensation Committee; (ii) served as a director of another entity, one of
whose executive officers served on the Company's Compensation Committee; or
(iii) served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a director of the Company.
The members of the Company's Compensation Committee were identified under
the heading "--Board Committees" above. No member of the Compensation
Committee (i) served, during 1996, as an officer or employee of the Company or
of any of its subsidiaries, (ii) was formerly an officer of the Company or any
of its subsidiaries, or (iii) had any relationship with the Company requiring
disclosure by the Company herein pursuant to Item 404 of Regulation S-K under
the Securities Exchange Act of 1934.
13
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors of the Company has appointed a Compensation Committee
and a Compensation Subcommittee. The Compensation Committee has overall
responsibility for establishing employee compensation policies and reviewing
and approving compensation agreements, bonuses and incentive programs for all
senior management of the Company.
The Compensation Subcommittee has responsibility for qualifying compensation
programs as "performance-based compensation" for purposes of Section 162(m) of
the Code. Under Code Section 162(m) the Company is precluded from taking a
Federal income tax deduction for compensation over $1 million paid or
otherwise taxable to the executives named in the Summary Compensation Table
who are employed by the Company at the end of the applicable year ("Covered
Executives") unless such compensation is "performance-based compensation." In
order to qualify as performance-based compensation under Code Section 162(m),
among other things, at least two directors who meet the requirements to be
designated as "outside directors" for purposes of Code Section 162(m) must
approve and take certain other actions with respect to compensation payable to
the Covered Executives. The Compensation Subcommittee was established to take
such actions as are necessary to preserve as much as possible of the
deductions for income taxes available to the Company with respect to the
compensation payable to the Company's senior management, without adversely
affecting the compensation objectives of the Company. The current members of
the Compensation Committee are Messrs. Gilleland, Hanes and Williams and the
current members of the Compensation Subcommittee are Messrs. Gilleland and
Hanes. The Compensation Committee and the Compensation Subcommittee are
collectively referred to below as the "Compensation Committees."
The primary goal of the Compensation Committees is to develop and structure
compensation arrangements which motivate and retain the Company's senior
management, in recognition of the significant role that the Company's senior
management has and will continue to play in the growth and success of the
Company, in order for the Company to continue to meet its business goals and
purposes.
The responsibilities of the Compensation Committees include reviewing,
approving and revising, as appropriate, the salary and annual incentive
compensation of the Company's chief executive officer and the chief executive
officer's recommendations regarding salaries and incentive compensation of the
Company's (and its affiliates') other senior management; establishing the
performance goals that will be used to determine the annual incentive
compensation that will be awarded to senior management, determining whether
such goals have been met and providing such certifications as the Compensation
Committees shall deem necessary or as shall be required by the terms of any
incentive compensation plan; determining the annual stock option grants or
other awards to employees, consultants and sales representatives under the
Equity Incentive Plan or such other compensatory plans or programs as the
Company may establish; establishing, implementing, interpreting and providing
ongoing administration of the various compensatory plans and programs in which
senior management participate, including the Equity Incentive Plan, the Stock
Option/Purchase Plan, any supplemental retirement plan, incentive compensation
or bonus plan, or any other existing or new benefit plan, agreement or program
affecting, or relating to, the compensation of the Company's senior
management.
The Compensation Committees were first established, and members thereof were
appointed by the Board of Directors, in September 1996 in conjunction with the
initial public offering of the Company's Common Stock. Since the Company's
1996 salary structure and compensation plans and programs which determined the
pay and benefits of the Company's senior management for 1996, including the
pay and benefits of the Company's chief executive officer, were in effect
prior to the time that the Compensation Committees were established, the
Compensation Committees were neither involved in, nor had any effect on, the
establishment of the Company's compensation policies, including the
establishment or measurement of the quantitative and qualitative performance
criteria which were to be considered in connection with the measurement
thereof prior to the Committees' establishment. Accordingly, the Compensation
Committees did not have any responsibility with respect to, or in any way
effect, the compensation paid to the Company's chief executive officer and to
other senior management during or with respect to 1996, except as indicated
below.
14
Effective as of the date of the initial public offering, the Compensation
Subcommittee approved the grant of options to Mr. Lent with respect to 150,000
shares of Common Stock at an exercise price equal to the initial public
offering price of $17.50 per share. The options granted to Mr. Lent will vest
in equal annual cumulative installments over three years from their date of
grant. Option grants also were approved as of the date of the initial public
offering, at the initial public offering price and subject to the same three
year vesting provisions, to Mr. Dormer with respect to 75,000 shares and to
Messrs. McCaffrey, Tidmore and Morel with respect to 40,000 shares each.
During 1996, a total of 1,129,250 options were approved and granted by the
Compensation Subcommittee under the Equity Incentive Plan to employees, sales
representatives and consultants. In addition, 85,069 phantom stock units were
granted to senior executives, including 33,201.95 such units to Mr. Lent,
under the Equity Incentive Plan, in replacement of awards cancelled under the
Company's former long-term incentive plan in which such senior management
participated.
Submitted by the Compensation Committee and the Stock Option and Bonus
Subcommittee of the Compensation Committee.
Gerald C. Hanes
Richard A. Gilleland
Anthony Williams
15
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's Common Stock with a broad performance indicator, the S&P Composite
500 Stock Index, and an industry index, the S&P health Care Medical Products &
Supplies Index, for the period from October 31, 1996 (when the Company's
Common Stock began trading on the New York Stock Exchange) to December 31,
1996. The graph assumes that the value of the investment in the Common Stock
and each Index was $100 on October 31, 1996 and that any dividends were
reinvested.
[PERFORMANCE GRAPH APPEARS HERE]
10/31/96 11/31/96 12/31/96
-------- -------- --------
DePuy, Inc...................................... 100.00 100.71 115.71
S&P Health Care Medical Products and Supplies
Index.......................................... 100.00 102.81 103.37
S&P 500 Index .................................. 100.00 107.56 105.43
16
PROPOSAL NO. 2
APPROVAL OF THE DEPUY, INC. 1996 EQUITY INCENTIVE PLAN
The Board of Directors of the Company adopted the Equity Incentive Plan in
1996, prior to the initial public offering of the Company's Common Stock, such
adoption subject to stockholder approval. The Plan authorizes the Company to
grant awards under the Plan with respect to an aggregate of 9,485,069 Awards
to (1) any employees, sales representatives and consultants of the Company and
its affiliates and (2) the non-employee directors of the Company.
THE BOARD OF DIRECTORS UNANIMOUSLY ADOPTED AND RECOMMENDS THAT THE
STOCKHOLDERS APPROVE THE PLAN.
UNLESS OTHERWISE INDICATED, THE ACCOMPANYING FORM OF PROXY WILL BE VOTED FOR
THE PROPOSAL TO EFFECT THE APPROVAL OF THE PLAN DISCUSSED ABOVE. THE
AFFIRMATIVE VOTE OF HOLDERS OF A MAJORITY OF THE SHARES OF THE COMMON STOCK
PRESENT IN PERSON OR BY PROXY AT THE MEETING IS REQUIRED FOR APPROVAL OF THE
FOREGOING PLAN. THE CORANGE STOCKHOLDERS, WHO HOLD MORE THAN A MAJORITY OF THE
OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK, HAVE ADVISED THE COMPANY
THAT THEY INTEND TO VOTE IN FAVOR OF THE PROPOSAL.
NATURE AND PURPOSE OF THE PLAN
The purpose of the Plan is to benefit the non-employee directors of the
Company, as well as those employees, sales representatives and consultants of
the Company and its affiliates who are in a position to make a material
contribution to the successful operation of the Company's business. By
enabling such persons to acquire stock of the Company, and thereby participate
in the long-term growth and financial success of the Company, it is intended
that the Plan will motivate such persons, by means of performance-related
incentives, to achieve the Company's business goals.
DURATION AND MODIFICATION
The Plan will terminate not later than October 30, 2006. The Board of
Directors may at any time terminate the Plan or make such modifications to the
Plan as it may deem advisable. However, the Board of Directors may not,
without approval by the stockholders of the Company, increase the number of
shares of Common Stock as to which options may be granted or make certain
revisions in connection with non-discretionary awards under the Plan to non-
employee directors of the Company.
ADMINISTRATION
The Plan is administered by a committee appointed by the Board of Directors,
comprised of not less than two Board members. The Plan is presently
administered by the Compensation Subcommittee. The Compensation Subcommittee
approves the eligible participants who will receive Awards, determines the
form and terms of the Awards and has the power to fix and accelerate vesting
periods, but will not have discretion to determine any of the foregoing with
respect to the grant of options to non-employee directors, which is non-
discretionary under the Plan.
ELIGIBILITY AND EXTENT OF PARTICIPATION
The Plan authorizes the grant of a broad array of stock-based Awards,
including options, stock appreciation rights, restricted stock awards,
restricted stock units, phantom stock units and performance awards, which may
be granted to any employee (including officers and employee-directors) and any
sales representative of, or consultant to, the Company and any of its
affiliates. Non-employee directors of the Company may be granted only
nonstatutory stock options. As of January 1, 1997, the Company estimates that
approximately 700 individuals are eligible to receive Awards under the Plan.
Except with respect to the non-employee directors, the Compensation
Subcommittee selects the participants who will receive Awards and determines
the type of Award and, if applicable, the number of shares to be subject to
each Award. In making such determination, a number of factors, including the
individual's position and responsibilities and other relevant factors are
taken into account. The Compensation Subcommittee has no
17
discretion to select non-employee directors to participate in the Plan. Each
non-employee director who is a director on the effective date of the Plan or
who becomes a director after such date is automatically granted, as of the
later of the effective date of the Plan or the date on which such person
becomes a director of the Company, a nonstatutory stock option with respect to
20,000 shares of Common Stock, with an exercise price equal to the fair market
value of the Common Stock on the grant date and which vests in three equal
cumulative installments on each of the first, second and third anniversaries
of the grant date. No Awards will be made under the Plan after October 30,
2006.
LIMITS ON SHARE AWARDS
The maximum number of shares with respect to which awards may be granted
under the Equity Incentive Plan to any participant in any calendar year is
1,000,000. Certain other restrictions may be applicable to awards other than
non-statutory stock options.
AUTHORIZED AWARDS
Stock options. Stock options may be granted as nonqualified options
("NQSO's") or incentive stock options qualified under Section 422 of the Code
("ISO's"). ISO's may be granted only to participants in the Plan who are
employees of the Company and its affiliates. Options are granted with terms
not exceeding 10 years from the date of grant and generally become exercisable
pursuant to a vesting schedule set at the time of grant, although the
Compensation Subcommittee retains the discretion to accelerate exercisability.
The exercise price for any ISO may not be less than 100% of the fair market
value per share of the Common Stock on the date of grant (110% of such value
in the case of an ISO granted to a person who possesses more than 10% of the
total combined voting power of all classes of the Company's and its
subsidiaries' stock. The form of payment for shares issued upon the exercise
of an option may, in the discretion of the Compensation Subcommittee, consist
of cash, check, promissory note, surrender of shares of Common Stock already
owned, delivery of irrevocable instructions to a broker dealer pursuant to
procedures approved by the Compensation Subcommittee to sell the shares to be
received on the exercise of the option and to remit the proceeds to the
Company, a combination thereof, or such other legal consideration as
determined by the Compensation Subcommittee. Optionees shall be required to
pay in cash, or to withhold amounts from payments to be made to the Optionee,
amounts necessary to satisfy the Company's income tax withholding obligations.
Options shall be nontransferable, other than by will or the laws of descent,
or among spouses incidental to a divorce proceeding.
Restoration options. The Compensation Subcommittee has discretion to grant,
or provide for the automatic grant of, restoration options to a participant if
the participant uses shares of Common Stock to pay the exercise price of an
option granted under the Plan or if the Company withholds shares granted under
the Plan in order to satisfy a participant's withholding tax liability
resulting from the exercise of the option. A restoration option will entitle
the participant to purchase a number of shares of Common Stock equal to the
number of such shares delivered or withheld upon exercise of the original
option and will have an exercise price per share of not less than 100% of the
fair market value of a share of Common Stock on the date of its grant.
Stock appreciation rights. Stock appreciation rights ("SAR's") entitle a
participant in the Plan to a future payment based on the appreciation in the
fair market value of the Common Stock between the date that the SAR is granted
and the date that the SAR is exercised. Upon exercise of an SAR, a participant
will be entitled to a payment equal to the amount reached by multiplying (a)
the difference between the fair market value of a share of Common Stock on the
date that the SAR is granted and the fair market value of a share on the date
that the SAR is exercised by (b) the number of shares covered by the SAR.
SAR's may be granted in tandem with another Award, in addition to another
Award or freestanding and unrelated to another Award. SAR's are not
exercisable earlier than six months after grant and have a grant price as
determined by the Compensation Subcommittee on the date of grant. SAR's may be
settled in cash, shares of Common Stock or a combination of cash and Common
Stock, as determined by the Compensation Subcommittee, and are generally
nontransferable, other than by will or the laws of descent or, among spouses
incidental to a divorce proceeding.
18
Restricted stock or restricted stock units. Under a restricted stock Award,
ownership of shares of Common Stock is transferred to a participant subject to
certain forfeiture restrictions. Restricted stock is not immediately
transferable by the participant during the period in which it is subject to a
substantial risk of forfeiture. During the restricted period, the participant
is entitled to receive dividends with respect to the shares of the restricted
stock and exercise voting rights with respect to such shares. In contrast, a
restricted stock unit is an Award measured by the fair market value of a share
of Common Stock. A restricted stock unit does not transfer ownership of shares
of Common Stock to a participant. A participant does not have any voting
rights with respect to restricted stock units although a participant may be
awarded dividend equivalents. Upon the expiration of the vesting requirement
applicable to a restricted stock unit, the participant is entitled to receive
a payment equal to the then current value of the number of shares covered by
the restricted stock unit.
Generally, shares of restricted stock and restricted stock units may not be
sold, assigned, transferred, pledged or otherwise encumbered. When the
restrictions with respect to a restricted stock award expire, the Company will
deliver the registered share certificates to the participant. Upon the
expiration of the restrictions with respect to restricted stock units, the
Company will settle a restricted stock unit in cash, shares of Common Stock or
other property. Each restricted stock unit has a value equal to the fair
market value of a share of Common Stock. Subject to the terms of the Plan and
any applicable Award agreement, the Compensation Subcommittee has the right to
determine the terms and conditions of any Award of restricted stock or
restricted stock units. Dividends and other distributions paid on or in
respect of any shares of restricted stock or restricted stock units may be
paid directly to the participant, or may be reinvested in additional shares of
restricted stock or restricted stock units, as determined by the Compensation
Subcommittee.
Phantom Stock Units. The grant of phantom stock units under the Plan
entitles a participant to receive shares of Common Stock on a specified
surrender date equal to the number of phantom stock units granted. Upon
surrender of the vested phantom stock units, the participant will receive an
actual share of Common Stock in exchange for each phantom stock unit, except
that any fractional shares shall be paid in cash. The date on which the
phantom stock units are surrendered may be accelerated upon the occurrence of
certain events, as determined by the Compensation Subcommittee in its sole
discretion and provided in the applicable award agreement.
Payments may be made to participants who have been awarded phantom stock
units in an amount equal to dividends and other distributions paid on or in
respect of an equivalent number of actual shares. Such payments may be paid
directly to the participant or may be reinvested in additional phantom stock
units, as determined by the Compensation Subcommittee and as set forth in the
applicable Award agreement. Generally, phantom stock units are nontransferable
by the participant, other than by will or the laws of descent or distribution
or transfers between spouses incident to a divorce proceeding.
Performance Awards and Other Stock-Based Awards. The Compensation
Subcommittee has the discretion to make performance Awards to eligible
participants, based on performance goals, which Awards may be made in cash or
in shares of Common Stock and are payable in accordance with the
determinations of the Compensation Subcommittee. The Compensation Subcommittee
may also grant other stock-based Awards to eligible participants. Other stock-
based Awards are Awards which the Compensation Subcommittee deems to be
consistent with the purposes of the Plan, are not otherwise described under
the Plan and are denominated or payable in, valued in whole or in part by
reference to, or otherwise based on or related to, shares of Common Stock.
Subject to the terms of the Plan and any applicable award agreement, the
Compensation Subcommittee has the right to determine the terms and conditions
of any performance or other stock-based Award. In general, a performance Award
or other stock-based Award is nontransferable by the participant, other than
by will or the laws of descent or distribution or transfers between spouses
incident to a divorce proceeding.
Termination of Services. (a) NQSO's and SAR's. If the optionee should cease
providing services to the Company for any reason other than death, total and
permanent disability or, in the case of an employee or sales representative,
retirement, any NQSO's or SAR's granted to him or her generally may be
exercised before the earlier of the first anniversary of the date on which
services terminate or the option expiration date, as to all or part of the
shares as to which the optionee was entitled to exercise options at the time
of termination. If an
19
optionee should die or become permanently and totally disabled while providing
services to the Company or, in the case of an employee or sales
representative, retire, any NQSO's or SAR's granted to him or her generally
may be exercised after such death, disability or retirement by the optionee or
his or her successor, as the case may be, at any time before the Award
expiration date, but only to the extent that the optionee was entitled to
exercise the options at the date on which he or she ceased providing services
due to such death, disability or retirement. The Compensation Subcommittee
also has the discretion to permit longer or shorter exercise periods than
those described above (provided that no option may be exercised later than the
date on which it would have expired had the participant's services for the
Company or its affiliates not terminated) or to accelerate the time at which
an option becomes exercisable if it believes that such action is in the best
interests of the Company, provided that no such discretion is applicable with
respect to options held by non-employee directors.
With respect to a participant who is a non-employee director, if the
participant ceases to serve as a director as a result of his or her death or
at such time as he or she is at least age 65 or has been a director of the
Company or an affiliate for at least five years, the director or the
director's successor, as the case may be, may exercise the director's option,
to the extent exercisable as of the date on which the director ceases to serve
as a director, until the earlier of the third anniversary of the date on which
the director ceases to serve as a director or the option expiration date. If a
non-employee director ceases to serve as a director for any reason other than
those described in the preceding sentence, the director may exercise his or
her option, to the extent exercisable as of the date on which he or she ceases
to serve as a director, until the earlier of the first anniversary of the date
on which he or she ceases to serve as a director or the option expiration
date.
(b) ISO's: Except as otherwise determined by the Compensation Subcommittee
at the time of grant, if the optionee's employment with the Company is
terminated for any reason except the participant's death, any options which
are ISO's (and any related SAR's) granted to him or her may be exercised as
ISO's at any time during the 90 days after such termination, as to all or part
of the shares as to which the optionee was entitled to exercise the options at
the time of termination, except that in no event may any option be exercised
after its expiration date. Failure to exercise an ISO within the 90-day period
described above will cause the ISO automatically to become a NQSO which may be
exercised during the time period described in paragraph (a) above and will be
taxed upon exercise as a NQSO. In the event of the optionee's death, the
option will be exercisable in accordance with paragraph (a) above and will
continue to be an ISO to the extent permitted.
(c) Restricted Stock: In general, if a participant who has been granted a
restricted stock award or restricted stock units ceases providing services to
the Company for any reason during the term of the restricted period, all
shares of stock or units still subject to the restriction as of such date will
be, respectively, forfeited by the participant and reacquired by the Company
at the price, if any, paid by the participant for such stock or cancelled.
(d) Phantom Stock Units: If a participant who has been granted phantom stock
units ceases providing services to the Company for any reason, the date of
surrender for any outstanding phantom stock units of the participant will
accelerate and all vested phantom stock units held by the participant will
automatically and immediately be surrendered and cancelled by the delivery of
shares of Common Stock to the participant as of such date and of cash with
respect to any fractional phantom stock units. Any unvested phantom stock
units will expire at such time.
ADJUSTMENT UPON OCCURRENCE OF CERTAIN EVENTS
In the event that an unusual or nonrecurring event occurs, including a
change in capitalization, such as a stock split or stock dividend, which
affects the stock-based awards made under the Plan, appropriate adjustment may
be made to the awards by the Compensation Subcommittee in its sole discretion.
For example, adjustment may be made in the exercise price of and the number of
shares covered by outstanding options, and in the number of shares available
for issuance under the Plan. Further, in the event of a change in control of
the Company, as defined in the Plan, all outstanding awards generally will
vest and become immediately exercisable or payable, provided that if the net
after-tax amount, as defined in the Plan, to be realized by participants would
be higher if no such vesting occurred, then, and to such extent, the
outstanding awards will not vest.
20
CANCELLATION OF AWARD
The Compensation Subcommittee may cancel any award held by a participant
under the Plan by providing the participant with cash compensation or another
award under the Plan equivalent to the fair market value of the cancelled
award.
TAX INFORMATION
The Federal tax consequences of options and other stock-based Awards that
may be granted under the Plan are complex and subject to change. The following
discussion is only a brief summary of the general Federal income tax rules
currently in effect which are applicable to stock options.
ISO's. If an option granted under the Plan is treated as an "incentive stock
option" as defined in Section 422 of the Code, then the optionee will not
recognize any income for regular income tax purposes, and the Company will not
be allowed a deduction for Federal income tax purposes, upon either the grant
or the exercise of the option. Upon a sale of the shares acquired in
connection with an ISO, the tax treatment to the optionee and the Company will
depend primarily upon whether the optionee has met certain holding period
requirements at the time of sale. As discussed below, the exercise of an ISO
may subject the optionee to alternative minimum tax liability in the year of
exercise.
If an optionee exercises an ISO and does not dispose of the shares received
within two years of the date of the grant of such option and within one year
after the exercise of the option, whichever period ends later, any gain
realized upon a subsequent disposition will be treated as long-term capital
gain, and any loss will be long-term capital loss. In either such case, the
Company will not be entitled to a Federal income tax deduction.
If the optionee disposes of the shares either within two years after the
date the option is granted or within one year after the exercise of the
option, such disposition will be treated as a "disqualifying disposition" and
an amount equal to the lesser of (i) the fair market value of the shares on
the date of exercise less the purchase price or (ii) the amount realized on
the disposition less the purchase price will be taxed as ordinary income in
the year in which the disqualifying disposition occurs. Any such ordinary
income will increase the optionee's tax basis for purposes of determining gain
or loss on the sale or exchange of such shares. The excess, if any, of the
amount realized over the fair market value of the shares at the time of the
exercise of the option will be treated as short-term or long-term capital
gain, as the case may be, and any loss realized upon the disposition will be
treated as a capital loss. An optionee will generally be considered to have
disposed of shares if he or she sells, exchanges, makes a gift of or transfers
legal title to such shares (except by pledge, in certain non-taxable
exchanges, a transfer in insolvency proceedings, incident to a divorce, or
upon death). If the amount realized is less than the purchase price, generally
the optionee will not recognize income in connection with a disqualifying
disposition.
The exercise of an ISO may subject an optionee to alternative minimum tax
liability in the year of exercise because the excess of the fair market value
of the shares at the time an ISO is exercised over the option price is an
adjustment in determining an optionee's alternative minimum taxable income for
such year. Consequently, an optionee may be obligated to pay alternative
minimum tax in the year he or she exercises an incentive stock option. An
optionee's alternative minimum tax liability is affected by the availability
of a special credit, a basis adjustment and other complex rules.
In general, there will be no Federal income tax consequences to the Company
upon the grant, exercise or termination of an incentive stock option. However,
in the event an optionee sells or disposes of stock received upon the exercise
of an ISO in a disqualifying disposition described above, the Company will be
entitled to a deduction for Federal income tax purposes in an amount equal to
the ordinary income, if any, recognized by the optionee as the result of the
disqualifying disposition of the shares.
21
NQSO's. NQSO's granted under the Plan do not qualify as "incentive stock
options" as defined in Section 422 of the Code and, accordingly, do not
qualify for any special tax benefits to the optionee. An optionee will not
recognize any income at the time he or she is granted a NQSO. However, upon
its exercise, the optionee will generally recognize ordinary income for
Federal income tax purposes measured by the excess of the then fair market
value of the shares over the option price. The income realized by the optionee
will be subject to income tax withholding by the Company at the time of
exercise.
Upon a sale of any shares acquired pursuant to the exercise of a NQSO, the
difference between the sale price and the optionee's tax basis in the shares
will be treated as a long-term or short-term capital gain or loss, as the case
may be. The optionee's tax basis for determination of such gain or loss upon
any subsequent disposition of shares acquired upon the exercise of a NQSO will
ordinarily be the amount paid for such shares plus any ordinary income
recognized as a result of the exercise of such option.
In general, there will be no Federal income tax consequences to the Company
upon the grant or termination of a NQSO or the sale or disposition of the
shares acquired upon exercise of a NQSO. However, upon the exercise of a NQSO,
the Company generally will be entitled to a deduction to the extent, and in
the year, that ordinary income from the exercise of the option is recognized
by the optionee.
Phantom Stock Units. For Federal income tax purposes, a participant who is
granted phantom stock units under the Plan generally does not recognize income
until the surrender date, at which time the participant receives actual shares
of Common Stock. At the surrender date, the participant will recognize
ordinary income equal to the fair market value of the shares of stock and any
cash received. Any dividends received by the participant with respect to his
or her phantom stock units, if the dividends are paid in cash or Common Stock,
will be included in the participant's taxable income in the year in which the
dividends are received and, if paid in additional phantom stock units, will be
taxed to the participant upon the participant's surrender of his or her
phantom stock units. The Company is entitled to a tax deduction in the taxable
year in which the phantom stock unit is surrendered by the participant and the
participant's phantom stock units are converted into actual shares of Common
Stock in an amount equal to the ordinary income recognized by the participant
with respect to such phantom stock units.
SAR's. For Federal income tax purposes, a participant receiving a stock
appreciation right award generally does not recognize income with respect to
such award until the SAR is exercised. At that time, the participant will
recognize ordinary income in an amount equal to the amount determined by
multiplying (a) the difference between the fair market value of a share of
Common Stock on the date that the SAR is granted and the fair market value of
a share on the date that the SAR is exercised by (b) the number of shares
covered by the SAR. The Company will be entitled to a deduction at the time of
the participant's exercise of the SAR in an amount equal to the ordinary
income recognized by the participant.
Restricted Stock and Restricted Stock Units. For Federal income tax
purposes, a participant receiving a restricted stock Award does not recognize
income with respect to shares of restricted stock granted under the Equity
Plan until the restrictions on such shares expire. At that time, the
participant will recognize ordinary income equal to the value of the
restricted stock, less any consideration paid by the participant for such
stock. Any dividends received by the participant with respect to his or her
shares of restricted stock, if the dividends are paid in cash or Common Stock,
will be taxable to the participant as ordinary income in the year in which the
dividends are received and, if paid in additional shares of restricted stock,
will be taxed to the participant at the time that the restrictions on the
stock expire. The Company is entitled to a tax deduction in the taxable year
in which the participant recognizes income as a result of the expiration of
the restrictions on the restricted stock in an amount equal to the amount of
income recognized by the participant.
With respect to restricted stock units, a participant does not recognize
income until the restrictions on the units expire and the participant receives
a payment with respect to the units. At such time, the participant will
recognize ordinary income in an amount equal to the amount of the payment, and
the Company will be entitled to a deduction in an amount equal to the amount
of ordinary income recognized by the participant.
22
CERTAIN INFORMATION WITH RESPECT TO OPTIONS GRANTED
The following table sets forth, with respect to the Named Officers, all
executive officers as a group, allnon-employee directors as a group, and all
employees as a group (excluding executive officers), the number of shares of
Common Stock subject to options granted during the year ended December 31,
1996 and certain related information:
NAME OF INDIVIDUAL NUMBER OF AVERAGE PER PHANTOM(1)
OR SHARES SUBJECT SHARE EXERCISE SHARE
IDENTITY OF GROUP CAPACITIES IN WHICH SERVED TO OPTION PRICE UNITS
------------------ -------------------------- -------------- -------------- ----------
James A. Lent........... Chairman of the Board and 150,000 $17.50 33,201.95
Chief Executive Officer
Michael J. Dormer....... President and Chief 75,000 17.50 8,676.86
Operating Officer
R. Michael McCaffrey.... President, DePuy 40,000 17.50 8,296.44
Development, Inc.
William E. Tidmore, President, 40,000 17.50 10,328.06
Jr..................... DePuy Motech, Inc.
Robert E. Morel......... President, DePuy ACE 40,000 17.50 2,023.52
Medical Company
All executive officers
as a group
(10 persons)........... 505,000 17.50 74,659.87
All non-employee
directors as a group (6
persons ).............. 120,000 17.50 --
All employees (except
executive officers) as
a group (188 persons).. 250,250 17.50 10,409.00
- --------
(1) Represents amounts converted from LTIP I, as described above.
PROPOSAL NO. 3
APPROVAL OF THE DEPUY, INC. EMPLOYEE STOCKOPTION/PURCHASE PLAN
The Board of Directors of the Company adopted the Stock Option/Purchase Plan
in 1996, prior to the initial public offering of the Company's Common Stock,
such adoption subject to stockholder approval. The Stock Option/Purchase Plan
authorizes the issuance of a maximum of 600,000 shares generally under the
Stock Option/Purchase Plan and 150,000 shares with respect to the 1997
Offering (as defined below). As part of its Stock Option/Purchase Plan, the
Board of Directors of the Company in January 1997 adopted, again subject to
stockholder approval, the Savings-Related Share Option Scheme which is
applicable to employees in the United Kingdom.
THE BOARD OF DIRECTORS UNANIMOUSLY ADOPTED AND RECOMMENDS THAT THE
STOCKHOLDERS APPROVE THE STOCK OPTION/PURCHASE PLAN, INCLUDING EXHIBIT A
THERETO, WHICH IS THE SAVINGS-RELATED SHARE OPTION SCHEME APPLICABLE TO
EMPLOYEES IN THE UNITED KINGDOM.
UNLESS OTHERWISE INDICATED, THE ACCOMPANYING FORM OF PROXY WILL BE VOTED FOR
THE PROPOSAL TO APPROVE THE STOCK OPTION/PURCHASE PLAN DISCUSSED ABOVE,
INCLUDING EXHIBIT A THERETO. THE AFFIRMATIVE VOTE OF HOLDERS OF A MAJORITY OF
THE SHARES OF COMMON STOCK PRESENT IN PERSON OR BY PROXY AT THE MEETING IS
REQUIRED FOR APPROVAL OF THE STOCK OPTION/PURCHASE PLAN. THE CORANGE
STOCKHOLDERS, WHO HOLD MORE THAN A MAJORITY OF THE OUTSTANDING SHARES OF THE
COMPANY'S COMMON STOCK, HAVE ADVISED THE COMPANY THAT THEY INTEND TO VOTE IN
FAVOR OF THE PROPOSAL.
NATURE AND PURPOSE OF THE PLAN
The purpose of the Stock Option/Purchase Plan is to enable employees of the
Company and its affiliates to acquire or increase ownership interests in the
Company so that they may participate in the long-term growth and financial
success of the Company. It is intended that the ability to participate in such
long-term growth will
23
motivate such persons to perform at increasing levels of effectiveness and to
use their best efforts to achieve the Company's business goals. The Stock
Option/Purchase Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code and will provide employees with the
opportunity to purchase shares of Common Stock through the automatic exercise,
pursuant to the terms of the plan, of deemed grants of nonstatutory stock
options. In addition, special provisions are incorporated in the plan with
respect to employees in the United Kingdom, in order to provide employees in
the United Kingdom with benefits from the plan which are more beneficial under
applicable tax laws in the United Kingdom. The provisions applicable to the
United Kingdom employees under the plan are further described under "--
Savings-Related Share Option Scheme" below.
DURATION AND MODIFICATION
The Stock Option/Purchase Plan will terminate on December 31, 2000. The
Board of Directors may amend or terminate the Stock Option/Purchase Plan at
any time; provided that the Board of Directors may not, without stockholder
approval, increase the number of shares which may be issued under the Stock
Option/Purchase Plan or under the 1997 Offering (except in connection with a
change in capitalization, as described below), amend the employee eligibility
requirements or allow members of the Compensation Subcommittee to participate.
ADMINISTRATION
The Stock Option/Purchase Plan is administered by a committee appointed by
the Board of Directors, comprised of not less than two Board members. The
Stock Option/Purchase Plan is presently administered by the Compensation
Subcommittee. The interpretation and construction of any provision of the
Stock Option/Purchase Plan is within the sole discretion of the Compensation
Subcommittee, whose determination is final and binding. In addition, the
Compensation Subcommittee has the ability to amend the Stock Option/Purchase
Plan for the sole purpose of incorporating into the plan special provisions
with respect to the participation of employees in jurisdictions outside of the
United States.
ELIGIBILITY
The Stock Option/Purchase Plan provides that any employee of the Company,
and of such of its subsidiary corporations as may be designated from time to
time by the committee which is administering the plan, who is classified as
full-time or part-time and is regularly scheduled to work more than 20 hours
per week is eligible to participate in the Stock Option/Purchase Plan,
provided that the employee has completed 90 days of employment. Employees who
own 5% or more of the total combined voting power or value of all classes of
stock of the Company are not eligible to participate. Employees who meet the
eligibility requirements after an Offering period has commenced may be
permitted, in certain instances, to participate in that Offering, although, in
general, employees only will be permitted to participate in Offerings which
commence after the date on which they meet the eligibility requirements
described above. A subsidiary corporation is generally defined in the Stock
Option/Purchase Plan as any corporation in an unbroken chain of corporations
beginning with the Company, if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in the chain. The final Offering under the plan will terminate on
December 31, 2000.
METHOD AND PRICE OF PURCHASE
Under the Stock Option/Purchase Plan, four annual offerings (each, an
"Offering") will be made by the Company, commencing on the effective date of
the Stock Option/Purchase Plan (January 1, 1997), or as soon as practicable
thereafter (or on any other such date as the Compensation Subcommittee may
determine) and on each anniversary of the effective date for three years
afterward. Each Offering will terminate on the December 31 following the
Offering commencement date. Prior to any Offering commencement date, the
Compensation Subcommittee may decide to divide each annual Offering into two
six-month Offerings commencing, respectively, on January 1, 1997 or as soon as
practicable thereafter (or on such other date as the Compensation Subcommittee
may determine) and on the date which is six months later and on each
anniversary of such dates
24
thereafter and terminating, respectively, on the following June 30 and
December 31. The Compensation Subcommittee will determine the maximum number
of shares of Common Stock to be issued under the Stock Option/Purchase Plan
during each annual Offering, except that, with respect to the 1997 Offering,
the maximum number of shares to be issued will be 150,000. If a six-month
Offering is made, the maximum number of shares to be issued shall be one-half
of the number of shares determined by the Compensation Subcommittee for the
annual period in which such six-month Offering falls, plus any unissued
shares, whether or not offered, from the immediately preceding six-month
Offering, if any.
Each eligible employee may participate in the Stock Option/Purchase Plan
with respect to any Offering by filing an election form authorizing a
specified percentage rate of regular payroll deductions. The election form
must be completed and filed on or before the date specified by the
Compensation Subcommittee, which date will be prior to the applicable Offering
commencement date. Eligible employees may elect payroll deductions in any
amount from 1% to 10% of an employee's base pay in effect at the commencement
date of the Offering. Generally, payroll deductions with respect to a
participating employee will commence on the applicable Offering commencement
date, when the employee's authorization for payroll deductions becomes
effective, and will end on the applicable Offering termination date (unless
sooner terminated by the participating employee, as described below). If an
employee is paid on an hourly basis, base pay shall mean the employee's hourly
rate of pay multiplied by the employee's regularly scheduled hours of work
during the Offering. Payroll deductions will automatically be adjusted to
reflect increases or decreases in an employee's base pay during the course of
an Offering.
All regular payroll deductions will be recorded and held in a non-interest
bearing account established by the Company on behalf of each participating
employee. The Company or the Compensation Subcommittee will appoint a
custodian of the Stock Option/Purchase Plan to maintain custody of all amounts
withheld as employee contributions (and to maintain custody of shares of
Common Stock held under the plan).
On the commencement date of each Offering, a participating employee will be
deemed to have been granted an option by the Company to purchase a maximum
number of shares of Common Stock equal to an amount determined by multiplying
(i) the percentage of the employee's base pay which the employee has elected
to have withheld pursuant to a payroll deduction election (described above) by
(ii) the employee's base pay during the period of the Offering and then
dividing this amount by (iii) 85% of the market value (described below) of a
share of Common Stock on the Offering commencement date. The option which is
deemed to be granted to an employee by the Company at the commencement of an
Offering is not transferable (other than by will or the laws of descent) and
can be exercised, during a participating employee's lifetime, only by the
employee.
For purposes of the Stock Option/Purchase Plan, an employee's base pay
during the period of an Offering will be determined by multiplying his or her
normal weekly rate of pay (as in effect on the last day prior to the day on
which the Offering commences) by 52 or his or her hourly rate by 2,080, in the
case of a one-year Offering, or by 26 or 1,040, respectively, in the case of a
6-month Offering. In the case of a part-time hourly employee, the employee's
base pay during the period of the Offering will be determined by multiplying
his or her hourly rate by the number of regularly scheduled hours of work for
the employee during the Offering.
A participating employee, at any time prior to the Offering termination date
and for any reason, may withdraw, by written notice to the Company, from
participation in the Stock Option/Purchase Plan, in which case the entire
balance accumulated in the employee's account under the Stock Option/Purchase
Plan will be paid to him or her as soon as practicable thereafter. Partial
withdrawals will not be permitted. A participating employee's withdrawal from
any Offering will not have any effect on his or her eligibility to participate
in any later Offering. Although a participating employee may discontinue his
or her participation in an Offering, the employee may not make any other
change, including any change to the amount of his or her payroll deductions,
with respect to that Offering. A participating employee who is on leave of
absence, and is considered an employee for purposes of the plan, has the right
to elect to withdraw the balance of his or her account, to discontinue
contributions but continue to participate in the plan, or to remain a
participant during the leave of
25
absence by authorizing deductions to be made from payments by the Company to
the employee during the leave of absence and, to the extent that such
deductions are insufficient to meet the employee's authorized deductions,
undertaking to make cash payments to the Stock Option/Purchase Plan at the end
of each payroll period, as necessary.
The accumulated amounts deducted from the employee's compensation during the
course of an Offering will be used to purchase, automatically on the Offering
termination date, the maximum number of whole and fractional shares of Common
Stock which such amounts can purchase at the purchase price of the shares
subject to the Offering. Each participating employee having elected payroll
deductions under the Stock Option/Purchase Plan and having such funds in his
or her account on the Offering termination date will be deemed to have been
granted on the Offering commencement date, and to have exercised on the
Offering termination date, the Option to purchase from the Company the number
of whole and fractional shares of Common Stock which the employee's account
balance will purchase as of the Offering termination date. All shares so
purchased will be held in the employee's account by the custodian, and any
excess cash representing authorized and unused payroll deductions in the
participating employee's account will be returned to the employee.
The purchase price (which is deemed to be the market value for purposes of
the Stock Option/Purchase Plan) for each whole or fractional share of Common
Stock will be the lower of (a) 85% of the closing price of a share of Common
Stock on the Offering commencement date (or the nearest prior business day on
which trading occurred on the exchange where the Company stock is listed or
(b) 85% of the closing price of a share of Common Stock on the Offering
termination date (or the nearest prior business day on which trading occurred
on the exchange where the Company stock is listed). For purposes of
determining the purchase price of the shares covered by any Offering, if the
shares of Common Stock are not admitted to trading on any such dates, then the
purchase price will be determined by reference to the fair market value of the
shares, as determined by the Compensation Subcommittee for such purpose.
Under the Stock Option/Purchase Plan, all cash dividends paid on shares of
Common Stock in a participating employee's account will be credited to the
employee's account and automatically reinvested in additional shares of Common
Stock at prevailing market prices. These shares will be credited to the
participating employee's account along with any stock dividends issued as
shares with respect to the Common Stock held in the account.
LIMITATION ON PURCHASES
No employee may purchase, in any calendar year, shares of Common Stock which
have an aggregate fair market value exceeding $25,000 as of the applicable
Offering termination date(s).
WITHDRAWAL OF SHARES
A participating employee, at any time, may instruct the Company to cause the
transfer to him or her of whole shares of Common Stock credited to the
employee's account under the Stock Option/Purchase Plan and to pay to him or
her in cash any amounts representing fractional shares or to cause the sale of
any such whole and fractional shares and remit to the employee the proceeds of
the sale, net of any brokerage commissions or expenses associated with the
sale of such shares.
TERMINATION OF EMPLOYMENT
If a participating employee's employment terminates during the course of an
Offering, such person will no longer be able to participate in the Stock
Option/Purchase Plan or any current or future Offering (unless such person
again meets the eligibility requirements at a later date after being
reemployed). In the event of the termination of a participating employee's
employment for any reason, including retirement (but excluding death or
continuation of a leave of absence for a period longer than 90 days), the
payroll deductions credited to the employee's account will be returned to the
employee and any whole shares of Common Stock held in his or her
26
account will be transferred to him or her (except that any fractional shares
will be returned in cash); provided that the participant may elect to have any
shares held in his or her account sold and the proceeds of such sale, net of
any associated brokerage commissions or expenses, remitted to him or her. In
the case of the participant's death subsequent to the termination of his or
her employment, any amounts to be paid or transferred, as the case may be,
shall be paid or transferred to the beneficiary designated by the employee
pursuant to the terms of the Stock Option/Purchase Plan (as described below).
Upon the termination of a participating employee's employment because of his
or her death, the beneficiary designated by the employee pursuant to the terms
of the Stock Option/Purchase Plan has the right to make an election, before
the earlier of the next subsequent Offering termination date or the expiration
of a period of 60 days commencing with the employee's date of death, (a) with
respect to cash in the employee's account, either to withdraw all payroll
deductions credited to the account since the most recent prior Offering
termination date or to exercise the employee's option for the purchase of
shares on the Offering termination date next following the employee's date of
death for the purchase of the number of full shares of Common Stock which the
accumulated payroll deductions in the employee's account as of his or her
death will purchase at the applicable purchase price (any excess in the
account is returnable to the beneficiary, without interest) or (b) with
respect to shares of Common Stock held in the employee's account, either to
have transferred to the beneficiary all of the whole shares credited to the
account and any cash amounts representing fractional shares or to have the
shares credited to the account sold and the proceeds, net of any associated
brokerage commissions or expenses, remitted to the beneficiary. If the Company
does not properly receive a beneficiary's written election notice, the
beneficiary will be considered to have elected, in accordance with the terms
of the plan, to exercise the participating employee's option and to have
transferred to the beneficiary all whole shares of Common Stock credited to
the employee's account and any cash representing fractional shares.
Interest amounts will be payable with respect to cash distributions, but
only with respect to an employee's payroll deductions that were never used to
acquire whole or fractional shares of Common Stock.
LEAVE OF ABSENCE
For purposes of participation in the Stock Option/Purchase Plan, a person on
leave of absence will be considered to have continued as an employee for the
first 90 days of the leave of absence. A participating employee on leave of
absence will continue to participate in the Stock Option/Purchase Plan,
subject to the employee's election, so long as he or she is on continuous
leave of absence. An employee's employment shall be deemed to have terminated
at the close of business on the 90th day of the leave unless the employee
returns to regular employment prior to that time. Termination by the Company
of any employee's leave of absence, other than as a result of the employee's
return to regular employment, will terminate the employee's participation in
the Stock Option/Purchase Plan and his or her right to exercise any
outstanding option.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event that certain changes in the capitalization of the Company occur
as a result of certain events, such as a reorganization, merger,
recapitalization, reclassification, stock split, stock dividend or similar
transaction, appropriate adjustments may be made by the Compensation
Subcommittee in the number and/or kind of shares which are subject to purchase
under outstanding options and any Offering and in the option exercise price
applicable to the outstanding options and with respect to any shares held in
accounts of participating employees. For example, adjustment may be made in
the exercise price of and the number of shares covered by outstanding options,
and in the number of shares available for issuance under the Stock
Option/Purchase Plan. Special provisions also will apply where a merger,
consolidation, reorganization or other transaction occurs and the Company will
not remain in existence after the transaction occurs.
TAX INFORMATION
The Federal tax consequences of options that may be granted under the Stock
Option/Purchase Plan are complex and subject to change. The following
discussion is only a brief summary of the general U.S. Federal income tax
rules currently in effect which are applicable to stock options.
27
Under the Stock Option/Purchase Plan, an employee who elects to participate
by filing a payroll deduction authorization form with the Company, will be
granted options to purchase shares of Common Stock under the applicable annual
Offering. Unless the employee elects to discontinue participation, the options
which are granted to him or her as of the applicable Offering commencement
date will be automatically exercised, resulting in the employee's acquisition
of the underlying shares of Common Stock on the Offering termination date.
Because the Stock Option/Purchase Plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Code, income will
not be realized by the employee when the shares of Common Stock are
transferred to him or her upon the automatic exercise of the options.
Section 423 imposes a statutory holding period on shares of Common Stock
acquired under the Stock Option/Purchase Plan. The statutory holding period is
the later of two years from the date an option is granted under the Stock
Option/Purchase Plan or one year from the date on which shares are transferred
to the employee pursuant to the exercise of the option. The disposition by an
employee of shares acquired pursuant to the Stock Option/Purchase Plan will,
in most cases, result in the employee's recognition of ordinary income and a
capital gain or loss in the year of the disposition. An employee will
generally be considered to have disposed of shares if he or she sells,
exchanges, makes a gift of or transfers legal title to such shares (except by
pledge, in certain non-taxable exchanges, a transfer in insolvency
proceedings, incidental to a divorce, or upon death).
The amount of ordinary income recognized upon a disposition of shares of
Common Stock depends on whether the shares were disposed of before or after
the expiration of the statutory holding period. If an employee disposes of his
or her shares after the expiration of the statutory holding period or upon the
employee's death while holding such shares, the employee must include in his
or her ordinary income an amount equal to the lesser of (i) the difference
between the fair market value of the optioned stock on the date that the
option was granted and the option exercise price or (ii) the difference
between the optioned stock's fair market value at the time of disposition or
death and the option exercise price paid. The Company will not be entitled to
a corresponding tax deduction with respect to a disposition of shares after
the expiration of the holding period.
Upon an employee's disposition of the shares of Common Stock acquired under
the Stock Option/Purchase Plan prior to the expiration of the statutory
holding period, the employee must include in ordinary income for the year in
which the disposition occurs an amount equal to the difference between the
optioned stock's fair market value on the date of exercise and the option
exercise price. In this event, the Company will be entitled to a corresponding
deduction from income equal to the amount the employee is required to include
in his or her ordinary income as a result of the disposition.
The amount of the capital gain or loss to be recognized upon the disposition
of shares of Common Stock acquired under the Stock Option/Purchase Plan is
equal to the difference between the amount received by the employee for the
shares and the employee's basis in the shares. An employee's initial basis in
shares acquired under the Stock Option/Purchase Plan is the option exercise
price. However, for purposes of calculating the employee's capital gain or
loss on a subsequent disposition of such shares, the employee's basis in the
shares will be adjusted by the amount of any ordinary income recognized by the
employee due to such disposition. Any gain or loss resulting from the
disposition will be recognized as a short or long term capital gain or loss,
depending on the length of time the shares were held by the employee.
Dividends paid on shares held under the Stock Option/Purchase Plan will be
taxable for income tax purposes, whether paid in cash or automatically
invested in additional shares of Common Stock. In addition, to the extent
applicable, the Company will make such provision as it deems appropriate for
the withholding or payment of income tax withholding, Social Security taxes,
and other employment taxes.
SAVINGS-RELATED SHARE OPTION SCHEME
The following is a summary of the principal terms of the DePuy Inc. Savings-
Related Share Option Scheme as applicable to employees of DePuy International.
Full-time "directors" and all employees of the Company
and of any designated subsidiary are eligible to participate in the Scheme,
provided they have been employed by
28
the Company and its affiliates for a minimum continuous period set by the
Company, but not to exceed five years. No minimum period will be set with
respect to the initial grant of options. Options may be offered at any time,
but must be offered to all eligible "directors" and employees. Options will be
granted at a price which represents not less than 85% of the closing price of
a share (as published in the Wall Street Journal) two trading days prior to
the date on which employees are offered the opportunity to apply for options
under the Scheme. Options must be granted to applicants within the 30 day
period following the invitation date.
An individual who applies for an option under the Scheme must enter into a
savings contract approved by Inland Revenue, the relevant tax authority in the
United Kingdom. Under the saving contract, qualifying employees agree to make
monthly savings contributions of fixed amounts of not less than (Pounds)5 and
not more than (Pounds)250 for a period of three, five or seven years. Shares
may only be acquired under the Scheme with the proceeds of this contract. At
the end of the savings term, a tax-free bonus will be added to the
participant's savings. The bonus may be an amount up to an additional 18
months of payments (depending on the duration of the savings contract). When
applying for an option, an individual must specify the amount (in pounds
sterling) he or she is willing to pay under the savings contract. The amount
of the repayment on the maturity of the savings contract will be converted
into U.S. dollars at the exchange rate on the maturity date. The amount of
U.S. dollars resulting from the conversion of the participant's savings will
determine the maximum number of shares that may be acquired on the exercise of
the option.
An option granted under the Scheme may normally only be exercised once the
optionholder has completed his or her savings contract. However, options may
be exercised early in certain specified events, including death and
termination of employment due to injury disability, redundancy or retirement.
In the case of death, options may generally be exercised within the following
twelve months and in other cases, options may generally be exercised within
the six month period after termination of employment.
The maximum number of shares for which options to subscribe may be granted
under the Scheme on any day will be determined by the Compensation
Subcommittee from time to time.
The principal terms of the Scheme may be amended to the advantage of current
or potential optionholders only with the approval of the Company's
stockholders. Stockholder approval, however, is not required for minor changes
to benefit the administration of the Scheme or for amendments made to obtain
or maintain favorable tax treatment for Scheme participants.
Optionholders generally pay no taxes on their gain at the time of the
exercise of an option. There may, however, be a capital gains tax payable if
the individual exemption amount is exceeded and in certain instances income
taxes may be payable if an option is exercised within three years of the date
of grant for reasons other than an exercise upon death or termination of
employment due to redundancy, injury, disability or retirement.
NEW PLAN BENEFITS
It cannot be determined at this time what benefits or amounts, if any, will
be received by or allocated to any person or group of persons under the Stock
Option/Purchase Plan if the plan is adopted or what benefits or amounts would
have been received by or allocated to any person or group of persons for the
last fiscal year if the Stock Option/Purchase Plan had been in effect.
29
PROPOSAL NO. 4
APPROVAL OF THE SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
The Board of Directors of the Company adopted, effective as of January 1,
1997 and subject to stockholder approval, the Incentive Plan. The purpose of
the Incentive Plan is to provide annual incentive compensation to designated
senior executives of the Company, based on the achievement of established
performance goals, as well as to encourage senior executives to remain in the
employ of the Company and to attract and motivate new senior executives. Under
Section 162(m) of the Code, it also is necessary to obtain stockholder
approval to ensure that certain types of compensation, including performance-
based compensation payable under the Incentive Plan, will qualify as
performance-based compensation for purposes of Code Section 162(m) so that
such compensation will be fully tax deductible to the Company.
THE BOARD OF DIRECTORS UNANIMOUSLY ADOPTED AND RECOMMENDS THAT THE
STOCKHOLDERS APPROVE THE INCENTIVE PLAN AND THE PERFORMANCE GOALS SET FORTH
THEREIN UNDER WHICH THE INCENTIVE COMPENSATION IS TO BE PAID TO EXECUTIVE
OFFICERS OF THE COMPANY PURSUANT TO THE PLAN.
UNLESS OTHERWISE INDICATED, THE ACCOMPANYING FORM OF PROXY WILL BE VOTED FOR
THE PROPOSAL TO EFFECT THE ADOPTION OF THE INCENTIVE PLAN DESCRIBED HEREIN.
THE AFFIRMATIVE VOTE OF HOLDERS OF A MAJORITY OF THE SHARES OF THE COMMON
STOCK PRESENT IN PERSON OR BY PROXY AT THE MEETING IS REQUIRED FOR APPROVAL OF
THE INCENTIVE PLAN. THE CORANGE STOCKHOLDERS, WHO HOLD MORE THAN A MAJORITY OF
THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK, HAVE ADVISED THE COMPANY
THAT THEY INTEND TO VOTE IN FAVOR OF THE PROPOSAL.
PURPOSE OF THE PLAN
The purpose of the Plan is to provide annual amounts of incentive
compensation in cash to certain senior management of the Company who are in a
position to make a material contribution to the successful operation of the
Company's business, as shall be determined each year by the Compensation
Subcommittee. By enabling such persons to receive incentive compensation as
described herein, such persons will be able to participate in the financial
success of the Company, and it is intended that the Incentive Plan will
motivate such persons, by means of performance-related incentives, to achieve
the Company's business goals. The Incentive Plan also has been established to
make certain that amounts payable under the plan are deductible to the Company
for Federal income tax purposes in accordance with Section 162(m) of the Code,
which denies certain tax deductions for annual compensation paid to the
Company's Chief Executive Officer and the next four highest paid executives
which is in excess of $1 million in any year. Certain types of compensation,
including "qualified performance-based compensation" are excluded from this
deduction limitation. The Incentive Plan has been adopted to meet the
requirements of Section 162(m) of the Code so that amounts payable under the
plan will be fully tax deductible to the Company. By approving the Incentive
Plan, the stockholders also will be approving the material terms of the
performance measures, eligibility requirements and annual bonus limits
contained in the plan.
DURATION AND MODIFICATION
The Incentive Plan does not have a predetermined period over which it will
remain in existence. The Board of Directors of the Company may at any time
suspend or terminate the Incentive Plan or make such modifications to the
Incentive Plan with respect to future performance periods, as it may deem
advisable. No amendments which are expected to materially increase amounts
which may be payable under the Incentive Plan to those senior executives who
are subject to Section 162(m) of the Code may be made unless such measures as
the Compensation Subcommittee shall determine for the increased benefits to be
deductible under Section 162(m) shall have been taken.
ADMINISTRATION
The Plan is administered by the Compensation Subcommittee, which consists of
not less than two members of the Board of Directors who are "outside
directors" within the meaning of Section 162(m) of the Code.
ELIGIBILITY
The Compensation Subcommittee shall in its sole discretion determine the
"senior executives" eligible to participate in the Incentive Plan each year.
The "senior executives" of the Company shall mean (i) the
30
Company's chief executive officer and the executives of the Company or its
affiliates (as determined by the Compensation Subcommittee) who report
directly to the chief executive officer and (ii) the presidents of the
divisions of the Company or its affiliates who report directly to the
Company's chief operating officer. There are currently 9 senior executives who
have been designated to participate in the Incentive Plan.
PLAN FEATURES
Performance Goals. The Incentive Plan provides for the payment of annual
cash bonuses to senior executives designated as described above, which
payments are conditioned upon the attainment of pre-established performance
goals measured over a "performance period" which corresponds to each calendar
year (commencing with calendar year 1997). The performance goals must be
established in writing by the Compensation Subcommittee within the first 90
days of each year and are determined by reference to the earnings per share of
the Company's Common Stock at the end of each performance period.
Target Incentives. During the first 90 days of each year the Compensation
Subcommittee will establish minimum threshold, target and maximum amounts of
earnings per share, the attainment of which will determine the percentage of a
participating senior executive's base pay earned during the performance period
that will be awarded as a cash bonus to the employee if the preestablished
level of earnings per share is attained as of the end of the relevant
performance period. In the case of the Company's chief executive officer and
chief operating officer, the cash bonus payable under the Incentive Plan with
respect to any performance period will be: (i) 30% of base pay if the minimum
threshold earnings per share is attained, (ii) 60% of base pay if the target
level of earnings per share is attained and (iii) 90% of base pay if the
maximum earnings per share level is attained. In the case of all other senior
executives participating in the Incentive Plan, the cash bonus payable under
the Incentive Plan with respect to any performance period will be: (i) 25% of
base pay if the minimum threshold earnings per share is attained, (ii) 50% of
base pay if the target earnings per share level is attained and (iii) 75% of
base pay if the maximum earnings per share level is attained. No payments
under the Incentive Plan are made with respect to any year in which less than
the minimum threshold level of earnings per share is attained.
The maximum annual cash bonus that could be payable under the Incentive Plan
to any covered individual with respect to any performance period is the lesser
of (i) 90% of the base pay earned during the performance period in the case of
the Company's chief executive officer and chief operating officer and 75% of
base pay earned during the performance period in the case of each other senior
executive of the Company or (ii) $700,000.
Certain Adjustments. In determining earnings per share for any performance
year, certain adjustments may be made to the earnings per share that are
reported to the Company's stockholders. In this regard, for example, the
earnings per share reported to stockholders is based on the average number of
shares outstanding during the last quarter of the performance year. For
purposes of the Incentive Plan, however, it was determined as more accurate to
adjust such earnings so that they will be based on the actual number of shares
outstanding at the end of the performance year. Certain other adjustments may
be made to disregard losses from discontinued operations and extraordinary
losses, as well as to reflect changes in accounting principles, the effects of
acquisitions and divestitures not previously accounted for when the
performance criteria were established and other unusual, nonrecurring items of
loss that are separately identified and quantified in the Company's audited
financial statements. Pro rata adjustments also will be made to reflect
changes in the Company's capital structure. The Compensation Subcommittee also
shall have the discretion to reduce or eliminate any amounts otherwise payable
under the Incentive Plan. No adjustment described above will be made, however,
if the adjustment would cause any amounts awarded under the Incentive Plan to
fail to be treated as qualified performance-based compensation under Section
162(m) of the Code.
Payment of Incentive Compensation. The determination of whether any amounts
are payable under the Incentive Plan is made by the Compensation Subcommittee,
which shall certify in writing, and before any amounts under the Incentive
Plan are paid, the amounts that are payable with respect to each participating
senior executive during each performance period. All payments from the
Incentive Plan shall be made in cash.
31
CHANGE IN CONTROL
In the case of a change in control (as defined in the Incentive Plan), a
participant will receive, as soon as practicable following the earlier of the
participant's termination of employment or the end of the calendar year in
which the change in control occurs, not less than the incentive award that the
participant would have received had the target earnings per share level with
respect to such year been attained.
NEW PLAN BENEFITS
It cannot be determined at this time what benefits or amounts, if any, will
be received by or allocated to any person or group of persons under the
Incentive Plan if the Incentive Plan is adopted or what benefits or amounts
would have been received by or allocated to any person or group of persons for
the last fiscal year if the Incentive Plan had been in effect.
PROPOSAL NO. 5
SELECTION OF AUDITORS
Price Waterhouse LLP served as independent public accountants of the Company
for the fiscal year 1996 and has been selected by the Board of Directors to
serve as the Company's independent public accountants for the fiscal year
1997. A representative of Price Waterhouse LLP is expected to be present at
the Meeting, who will have an opportunity to make a statement if such
representative desires to do so, and will be available to respond to
appropriate questions by stockholders. Although stockholder ratification of
the Board's selection of the Company's independent certified public
accountants is not legally required, management and the Board feel the
stockholders should have this right. In the event a majority of votes cast are
not voted in favor of Price Waterhouse LLP, the Board of Directors will
consider selecting another accounting firm.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS APPROVE THE APPOINTMENT
OF THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
UNLESS OTHERWISE INDICATED, THE ACCOMPANYING FORM OF PROXY WILL BE VOTED FOR
THE PROPOSAL TO APPROVE THE APPOINTMENT OF THE INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS. APPROVAL OF THE PROPOSAL REQUIRES AN AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE SHARES OF THE COMPANY'S COMMON STOCK PRESENT AT
THE MEETING, IN PERSON OR BY PROXY, AND ENTITLED TO VOTE. THE CORANGE
STOCKHOLDERS, WHO HOLD MORE THAN A MAJORITY OF THE OUTSTANDING SHARES OF THE
COMPANY'S COMMON STOCK, HAVE ADVISED THE COMPANY THAT THEY INTEND TO VOTE IN
FAVOR OF THE PROPOSAL.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the initial public offering of the Company's Common Stock in
October 1996, the DePuy business was operated as the orthopaedic division of
Corange, and those entities within the Corange group which were engaged (or
partly engaged) in the DePuy business were held by a number of different
entities in the Corange group. As a result of a pre-offering reorganization,
(i) the non-U.S. entities (or, in certain cases, the assets thereof) which
were involved in the DePuy business were transferred to CUSHI, the top holding
company in the Corange U.S. consolidated group, (ii) Boehringer Mannheim
Corporation ("BMC"), the U.S. operating subsidiary of the Boehringer Mannheim
companies (which are under common control with the DePuy companies), was
transferred outside CUSHI U.S. consolidated group, and (iii) CUSHI was
reincorporated in Delaware through a reincorporation merger of CUSHI, the
Company's predecessor, into the Company, a newly formed Delaware holding
company.
As part of the pre-offering reorganization, in connection with the transfer
of the shares of BMC out of the CUSHI consolidated group, Pharminvest S.A., a
wholly-owned indirect subsidiary of Corange, cancelled outstanding
indebtedness of CUSHI to Pharminvest S.A. in the amount of $496.9 million and
made a cash payment to CUSHI in the amount of $43.1 million, a portion of such
aggregate amount constituting payment to CUSHI for the BMC stock at its
appraised fair market value, with the remaining portion being a capital
contribution to CUSHI and (to a nominal extent) additional debt extended to
CUSHI.
Various subsidiaries of the Company have issued promissory notes in favor of
non-DePuy entities in the Corange group. Those notes call for the payment of
various rates of interest. Such notes involve an aggregate indebtedness of
$70.5 million. Of such amount, a total of $24.8 million in principal amount
was paid in 1996. A total of $30.3 million will become due in 1997 and $15.4
million in the year 1999.
32
The Company and BMC jointly insure the first level of their Product
Liability and Completed Operations Insurance coverage with Bellago Insurance
Limited of Hamilton, Bermuda ("Bellago"), a wholly-owned subsidiary of
Corange. Pursuant to a policy effective November 15, 1994, Bellago extends to
the Company defense and indemnity protection for claims arising from
occurrences for which the Company is, or might be alleged to be, liable to
third parties during the period June 1, 1986 through May 31, 1994 and defense
and indemnity protection for all claims brought against the Company and/or BMC
during the period June 1, 1994 through May 31, 1995. The policy was renewed in
both 1995 and 1996. The policy provides for insurance of $2.0 million per
occurrence, $5.0 million per group of related claims and $10.0 million in the
aggregate annually. The limit of coverage during each policy period
corresponds with, and is equal to, that amount of potential liability which is
not covered by insurance coverage from other insurance companies. Claims of
DePuy and BMC in excess of the stated limits of the Bellago policy are
currently insured through policies with such other insurance companies.
The Company has a tax allocation and indemnity agreement with Corange and
BMC which, among other things, requires Corange and BMC to indemnify the
Company with respect to tax liabilities of the Corange group for periods prior
to the consummation of the Company's initial public offering (except for tax
liabilities of the Company and other DePuy group entities), and requires
Corange to indemnify the Company with respect to tax liabilities arising as a
result of the pre-offering reorganization of the DePuy group. Under the
agreement, the Company is generally responsible for taxes imposed on the
Company and other DePuy group entities in cases where separate tax returns
have been, or will be, filed and for the Company's allocable share of tax
liabilities in cases where consolidated, combined or unitary tax returns have
been, or will be, filed with the Corange group (except for tax liabilities
arising as a result of the DePuy group pre-offering reorganization, which are
subject to indemnification by Corange, as discussed above). The agreement
provides Corange and BMC certain rights with respect to the filing of tax
returns and, generally, the right to control tax contests which involve, in
whole or in part, taxes for which Corange and BMC are obligated to indemnify
the Company.
Corange is party to a Note Purchase Deed dated December 22, 1993, as amended
(the "Debt Facility"). The Debt Facility, which is unsecured, requires Corange
to retain direct or indirect ownership of at least 65% of the Company's voting
stock. The Debt Facility contains covenants which limit aggregate borrowings
by all entities within the Corange group, absent a consent from the lenders
under the facility. All borrowings by Corange and its direct and indirect
subsidiaries, including the Boehringer Mannheim companies and the DePuy
companies, would be aggregated for purposes of determining whether such
aggregate limit on borrowings has been exceeded. The notes issued under the
Debt Facility have varying maturity dates, ranging from the year 2003 to the
year 2008. Corange may repay such notes at any time, subject to certain
conditions. The covenants contained in the Debt Facility will continue to
apply as long as any notes remain outstanding under the Debt Facility.
The Company funds, pursuant to an oral arrangement, ongoing research being
conducted by BMC in Indianapolis, Indiana. This arrangement involves research
performed by BMC relating to orthobiologic materials that might be used in
regeneration of human bone and cartilage, cell therapies and tissue
engineering. DePuy will have exclusive rights to all intellectual property
developed from the research. The arrangement began in 1992 and continues to
the present. From the beginning of this project through the end of 1996, the
Company spent approximately $2.4 million in the aggregate.
To manage foreign exchange risks associated with operations outside the
U.S., the Company's subsidiaries have, and will for the immediate future enter
into, foreign currency exchange contracts with Corange to reduce exposure to
exchange rate movements.
DePuy, Mexico, S.A. de C.V., the Company's subsidiary in Mexico, in 1996
entered into a two-year Shared Services Agreement with Farmaceuticas Lakeside
SA de CV ("Lakeside"), the Mexican subsidiary affiliated with the Boehringer
Mannheim business of the Corange group, which, among other things, requires
Lakeside to provide office and warehouse space, clerical assistance and
general administrative services, including accounting and bookkeeping
services, in exchange for a fee equal to 110% of the direct and indirect costs
of furnishing the services.
33
The Company and the Corange Stockholders have entered into a Registration
Rights Agreement, pursuant to which the Corange Stockholders have the right
(which right is assignable in connection with any non-public sale of shares)
to require the Company to file one or more registration statements with the
Commission registering, for resale to the public, the shares of Common Stock
held by the Corange Stockholders.
MISCELLANEOUS
Any proposal of an eligible stockholder intended to be presented at the next
Annual Meeting of Stockholders of the Company must be received by the
Secretary of the Company by December 1, 1997 to be eligible for inclusion in
the Company's proxy statement and form of proxy relating to such meeting.
The Annual Report to Stockholders for the fiscal year ended December 31,
1996 is being mailed to stockholders simultaneously with this Proxy Statement.
By order of the Board of Directors,
Steven L. Artusi
Secretary
Warsaw, Indiana
March 24, 1997
34
ANNEX A
DEPUY, INC.
1996 EQUITY INCENTIVE PLAN
SECTION 1. PURPOSE. The purpose of the DePuy, Inc. 1996 Equity Incentive
Plan is to promote the interests of DePuy, Inc. and its stockholders by (i)
attracting and retaining exceptional executive personnel, other key employees,
consultants and sales representatives of the Company and its Affiliates; (ii)
attracting and retaining non-employee advisors to serve on the Board of
Directors of the Company; and (iii) enabling such persons to participate in
the long-term growth and financial success of the Company.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have
the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly, is
controlled by or under common control with the Company and (ii) any entity
in which the Company has a significant equity interest, in either case as
determined by the Committee.
"Award" shall mean any Option, Stock Appreciation Right, Restricted Stock
Award, Performance Award, Phantom Stock Unit or other stock-based award as
herein provided.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may be required to be
executed or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall be deemed to have occurred if: (i) any "person"
as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other
than the Company, an Affiliate, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or an Affiliate,
or any Company owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of Stock
of the Company), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the
Company's then outstanding securities; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the
Plan), individuals who at the beginning of such period constitute the Board
of Directors, and any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a
transaction described in clause (i), (iii), or (iv) of this paragraph whose
election by the Board of Directors or nomination for election by the
Company stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning
of the two-year period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a
majority of the Board of Directors; (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation
which is not an Affiliate, other than a merger that would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; provided, however, that a merger or consolidation effected
to implement a recapitalization of the Company or an Affiliate (or similar
transaction) in which no person acquires more than 30% of the combined
voting power of the Company's then outstanding securities shall not
constitute a Change in Control of the Company; or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets. If any of the events enumerated
in clauses (i) through (iv) occur, the Board shall determine the effective
date of the Change in Control resulting therefrom, for purposes of the
Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" shall mean a committee of the Board designated by the Board
to administer the Plan and composed of not less than the minimum number of
persons from time to time required by Rule 16b-3
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and Section 162(m) of the Code, each of whom, to the extent necessary to
comply with Rule 16b-3 and Section 162(m) of the Code only, is a
"disinterested person" and an "outside director" within the meaning of Rule
16b-3 and Section 162(m) of the Code, respectively. Until otherwise
determined by the Board, the Compensation Committee designated by the Board
shall be the Committee under the Plan.
"Company" shall mean DePuy, Inc., a Delaware corporation, and its
successors and assigns.
"Consultant" shall mean a person who has agreed to perform consulting
services on behalf of the Company or an Affiliate.
"Director" shall mean a member of the Board.
"Employee" shall mean an employee of the Company or of any Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officer" shall mean, at any time, an individual who is an
executive officer of the Company within the meaning of Exchange Act Rule
3b-7 as promulgated and interpreted by the SEC under the Exchange Act, or
any successor rule or regulation thereto as in effect from time to time, or
who is an officer of the Company within the meaning of Exchange Act Rule
16a-l(f) as promulgated and interpreted by the SEC under the Exchange Act,
or any successor rule or regulation thereto as in effect from time to time.
"Fair Market Value" shall mean, except as otherwise set forth herein, the
fair market value of the property or other item being valued, as determined
by the Committee in its sole discretion.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to
meet the requirements of Section 422 of the Code or any successor provision
thereto.
"Net After-Tax Amount" shall mean the net amount of compensation,
assuming for this purpose only that all vested Awards and other forms of
compensation subject to vesting upon such Change of Control are exercised
upon such Change in Control, to be received (or deemed to have been
received) by such Participant in connection with such Change of Control
under any award agreement and under any other plan, arrangement or contract
of the Company to which such Participant is a party, after giving effect to
all income and excise taxes applicable to such payments.
"Non-Employee Director" shall mean a member of the Board who is not a
full-time employee of the Company.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from
the Company that is granted under Section 6 of the Plan and that is not
intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option and shall include a Restoration Option.
"Other Stock-Based Award" shall mean any right granted under Section 11
of the Plan.
"Participant" shall mean any Employee, Sales Representative, or
Consultant selected by the Committee to receive an Award under the Plan or
any Non-Employee Director who receives an Award pursuant to Section 12 of
the Plan.
"Performance Award" shall mean any right granted under Section 10 of the
Plan.
"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization,
government or political subdivision thereof or other entity.
"Phantom Stock Unit" shall mean a hypothetical Share which is cancelled
by the delivery of an actual Share or, in the discretion of the Company, by
the payment of cash (or a combination of cash and Shares) in an amount
equal to the Fair Market Value of a Share on the date of surrender.
"Plan" shall mean this DePuy, Inc. 1996 Equity Incentive Plan as the same
shall be amended, revised or terminated from time to time.
"QDRO" shall mean a domestic relations order meeting such requirements as
the Committee shall determine, in its sole discretion.
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"Restoration Option" shall mean an Option granted pursuant to Section
6(f) of the Plan.
"Restricted Stock" shall mean any Share granted under Section 8 of the
Plan.
"Restricted Stock Unit" shall mean any unit granted under Section 8 of
the Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the
SEC under the Exchange Act, or any successor rule or regulation thereto as
in effect from time to time.
"Sales Representative" shall mean any individual who acts as an
independent sales representative and/or distributor for the Company and/or
Affiliate.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the staff thereof.
"Shares" shall mean shares of the common stock of the Company, or such
other securities of the Company as may be designated by the Committee from
time to time.
"Stock Appreciation Right" shall mean any right granted under Section 7
of the Plan.
"Substitute Awards" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company
acquired by the Company or with which the Company combines.
SECTION 3. ADMINISTRATION.
(a) Authority of Committee. The Plan shall be administered by the Committee.
Subject to the terms of the Plan and applicable law, and in addition to other
express powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and discretionary authority to: (i) designate
Participants; (ii) determine the type or types of Awards to be granted to
eligible persons and the rights of Participants to such Awards; (iii)
determine the number of Shares to be covered by, or with respect to which
payments, rights, or other matters are to be calculated in connection with,
Awards; (iv) determine the terms and conditions of any Award; (v) determine
whether, to what extent, and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards or other property,
or canceled, forfeited, or suspended and the method or methods by which Awards
may be settled, exercised, canceled, forfeited or suspended; (vi) determine
whether, to what extent and under what circumstances cash, Shares, other
securities, other Awards, other property and other amounts payable with
respect to an Award shall be deferred either automatically or at the election
of the holder thereof or of the Committee; (vii) interpret and administer the
Plan and any instrument or agreement relating to, or Award made under, the
Plan; (viii) establish, amend, suspend, or waive such rules and regulations
and appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (ix) make any other determination and take any
other action that the Committee deems necessary or desirable for the
administration of the Plan.
(b) Committee Discretion Binding. Unless otherwise expressly provided in the
Plan, all designations, determinations, interpretations and other decisions
under or with respect to the Plan or any award shall be within the sole
discretion of the Committee, may be made at any time and shall be final,
conclusive and binding upon all Persons, including the Company, any Affiliate,
any Participant, any holder or beneficiary of any Award, any stockholder and
any Employee.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) Shares Available. Subject to adjustment as provided in Section 4(b), the
number of Shares with respect to which Awards may be granted under the Plan
shall be equal to 9,485,069. The maximum number of Shares with respect to
which Options and Stock Appreciation Rights may be granted under the Plan to
any individual in any calendar year shall be equal to 1,000,000 Shares. If,
after the effective date of the Plan, any Shares covered by an Award granted
under the Plan or by an award granted under any prior stock award plan of the
Company, or to which such an Award or award relates, are forfeited, or if such
an Award or award is settled for cash or otherwise terminates or is canceled
for any reason without the delivery of Shares, then the Shares covered by such
Award or award, or to which such Award or award relates, or the number of
Shares otherwise
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counted against the aggregate number of Shares with respect to which Awards
may be granted, to the extent of any such settlement, forfeiture, termination
or cancellation, shall again become Shares with respect to which Awards may be
granted. In the event that any Option or other Award granted hereunder or any
award granted under any prior stock award plan of the Company is exercised
through the delivery of Shares, or in the event that withholding tax
liabilities arising from such Award or award are satisfied by the withholding
of Shares by the Company, the number of Shares available for Awards under the
Plan shall be increased by the number of Shares so surrendered or withheld.
(b) Adjustments. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares
such that an adjustment is determined by the Committee to be appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall, in
such manner as it may deem equitable, adjust any or all of (i) the number of
Shares or other securities of the Company (or number and kind of other
securities or property) with respect to which Awards may be granted, (ii) the
number of Shares or other securities of the Company (or number and kind of
other securities or property) subject to outstanding Awards, and (iii) the
grant or exercise price with respect to any Award, or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding Award;
provided, in each case, that, with respect to Awards of Incentive Stock
Options, no such adjustment shall be authorized to the extent that such
authority would cause the Plan to violate Section 422(b)(1) of the Code, as
from time to time amended.
(c) Substitute Awards. Any Shares underlying Substitute Awards shall not be
counted against the Shares available for Awards under the Plan.
(d) Source of Shares Deliverable Under Awards. Any Shares delivered pursuant
to an Award may consist, in whole or in part, of authorized and unissued
Shares or of treasury Shares.
SECTION 5. ELIGIBILITY. The following persons shall be eligible to participate
in the Plan:
(a) any employee, including any officer or employee-director of the
Company or an Affiliate who is not a member of the Committee;
(b) any Sales Representative of the Company or an Affiliate;
(c) any Consultant of the Company or an Affiliate; and
(d) any Non-Employee Director.
SECTION 6. STOCK OPTIONS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the Employees, Sales
Representatives and Consultants to whom Options shall be granted, the number
of Shares to be covered by each Option, the option price therefor and the
conditions and limitations applicable to the exercise of the Option. The
Committee shall have the discretion and authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both types of
options. In the case of Incentive Stock Options, the terms and conditions of
such grants shall be subject to and comply with such rules as may be
prescribed by Section 422 of the Code, as from time to time amended, and any
regulations implementing such statute.
(b) Exercise Price. Subject to the requirement set forth in Section 6(e) the
Committee in its sole discretion shall establish the exercise price at the
time each option is granted.
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(c) Term. Subject to the provisions of the Plan, the term of any Option
granted hereunder shall be 10 years from the date of grant.
(d) Exercise. Each Option shall be exercisable at such times and subject to
such terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award Agreement or thereafter. The Committee may
impose such conditions with respect to the exercise of options, including
without limitation, any relating to the application of federal or state
securities laws, as it may deem necessary or advisable.
(e) Payment. No Shares shall be delivered pursuant to any exercise of an
Option until payment in full of the option price therefor is received by the
Company. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging Shares owned by the
optionee (which are not the subject of any pledge or other security interest),
or by the delivery of irrevocable instructions to a broker dealer pursuant to
procedures approved by the Committee to sell Shares to be received upon
exercise of an Option and to remit the proceeds to the Company, or by a
combination of the foregoing, provided that the combined value of all cash and
cash equivalents and the Fair Market Value of any such Shares so tendered to
the Company as of the date of such tender is at least equal to such option
price.
(f) Restoration Options. In the event that any Participant delivers Shares
in payment of the exercise price of any Option granted hereunder in accordance
with Section 6(d) or of any option granted under a prior stock award plan of
the Company, or in the event that the withholding tax liability arising upon
exercise of any such Option or option by a Participant is satisfied through
the withholding by the Company of Shares otherwise deliverable upon exercise
of the Option or option, the Committee shall have the authority to grant or
provide for the automatic grant of a Restoration Option to such Participant.
The grant of a Restoration Option shall be subject to the satisfaction of such
conditions or criteria as the Committee in its sole discretion shall establish
from time to time. A Restoration Option shall entitle the holder thereof to
purchase a number of shares equal to the number of such Shares so delivered or
withheld upon exercise of the original Option or option. A Restoration Option
shall have a per share exercise price of not less than 100% of the per Share
Fair Market Value of the date of grant of such Restoration Option and such
other terms and conditions as the Committee in its sole discretion shall
determine.
SECTION 7. STOCK APPRECIATION RIGHTS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the eligible persons
to whom Stock Appreciation Rights shall be granted, the number of Shares to be
covered by each Stock Appreciation Right Award, the grant price thereof and
the conditions and limitations applicable to the exercise thereof. Stock
Appreciation Rights may be granted in tandem with another Award, in addition
to another Award or freestanding and unrelated to another Award. Stock
Appreciation Rights granted in tandem with or in addition to an Award may be
granted either at the same time as the Award or at a later time. Stock
Appreciation Rights shall not be exercisable earlier than six months after
grant and shall have a grant price as determined by the Committee on the date
of grant.
(b) Exercise and Payment. A Stock Appreciation Right shall entitle the
Participant to receive an amount equal to the excess of the Fair Market Value
of a Share on the date of exercise of the Stock Appreciation Right over the
grant price thereof, provided that the Committee may for administrative
convenience determine that, with respect to any Stock Appreciation Right that
is not related to an Incentive Stock Option and that can only be exercised for
cash during limited periods of time in order to satisfy the conditions of Rule
16b-3, the exercise of such Stock Appreciation Right for cash during such
limited period shall be deemed to occur for all purposes hereunder on the day
during such limited period on which the Fair Market Value of the Shares is the
highest. Any such determination by the Committee may be changed by the
Committee from time to time and may govern the exercise of Stock Appreciation
Rights granted prior to such determination as well as Stock Appreciation
Rights thereafter granted. The Committee shall determine whether a Stock
Appreciation Right shall be settled in cash, Shares or a combination of cash
and Shares.
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(c) Other Terms and Conditions. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine, at or after the
grant of a Stock Appreciation Right, the term, methods of exercise, methods
and form of settlement, and any other terms and conditions of any Stock
Appreciation Right. Any such determination by the Committee may be changed by
the Committee from time to time and may govern the exercise of Stock
Appreciation Rights granted or exercised prior to such determination as well
as Stock Appreciation Rights granted or exercised thereafter. The Committee
may impose such conditions or restrictions on the exercise of any Stock
Appreciation Right as it shall deem appropriate.
SECTION 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the eligible persons
to whom Shares of Restricted Stock and Restricted Stock Units shall be
granted, the number of Shares of Restricted Stock and/or the number of
Restricted Stock Units to be granted to each Participant, the duration of the
period during which, and the conditions under which, the Restricted Stock and
Restricted Stock Units may be forfeited to the Company, and the other terms
and conditions of such Awards. The maximum number of shares of Restricted
Stock available under the Plan will be 350,000.
(b) Transfer Restrictions. Shares of Restricted Stock and Restricted Stock
Units may not be sold, assigned, transferred, pledged or otherwise encumbered,
except, in the case of Restricted Stock, as provided in the Plan or the
applicable Award Agreements. Certificates issued in respect of Shares of
Restricted Stock shall be registered in the name of the Participant and
deposited by such Participant, together with a stock power endorsed in blank,
with the Company. Upon the lapse of the restrictions applicable to such Shares
of Restricted Stock, the Company shall deliver such certificates to the
Participant or the Participant's legal representative.
(c) Payment. Each Restricted Stock Unit shall have a value equal to the Fair
Market Value of a Share. Restricted Stock Units shall be paid in cash, Shares,
other securities or other property, as determined in the sole discretion of
the Committee, upon the lapse of the restrictions applicable thereto, or
otherwise in accordance with the Applicable Award Agreement.
(d) Dividends and Distributions. Dividends and other distributions paid on
or in respect of any Shares of Restricted Stock may be paid directly to the
Participant, or may be reinvested in additional Shares of Restricted Stock or
in additional Restricted Stock Units, as determined by the Committee in its
sole discretion.
SECTION 9. PHANTOM STOCK UNITS.
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete discretion and authority to determine the eligible persons
to whom Phantom Stock Units shall be granted, the number of Phantom Stock
Units to be granted to each Participant, the duration of the period during
which, and the conditions under which, the Phantom Stock Units may be
forfeited to the Company and the other terms and conditions of such Awards.
(b) Surrender. Each Award Agreement with respect to a Phantom Stock Unit
shall specify the date on which the Phantom Stock Unit shall be surrendered,
and thereby cancelled by delivery of a Share with respect thereto, subject to
such terms and conditions as the Committee may specify, in its sole
discretion, in the applicable Award Agreement or thereafter. The date on which
the Phantom Stock Units shall be surrendered may be accelerated upon the
occurrence of certain events, as determined by the Committee in its sole
discretion and as set forth in the applicable Award Agreement.
(c) Dividends and Distributions. Payments may be made to Participants who
have been awarded Phantom Stock Units in an amount equal to dividends and
other distributions paid on or in respect of an equivalent number of Shares.
Such payments may be paid directly to the Participant or may be reinvested in
additional Phantom Stock Units, as determined by the Committee in its sole
discretion.
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SECTION 10. PERFORMANCE AWARDS.
(a) Grant. The Committee shall have sole and complete authority to determine
each eligible person who shall receive a "Performance Award," which shall
consist of a right that is (i) denominated in cash or Shares, (ii) valued, as
determined by the Committee, in accordance with the achievement of such
performance goals during such performance periods as the Committee shall
establish, and (iii) payable at such time and in such form as the Committee
shall determine.
(b) Terms and Conditions. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine the performance
goals to be achieved during any performance period, the length of any
performance period, the amount of any Performance Award and the amount and
kind of any payment or transfer to be made pursuant to any Performance Award.
(c) Payment of Performance Awards. Performance Awards may be paid in a lump
sum or in installments following the close of the performance period or, in
accordance with procedures established by the Committee, on a deferred basis.
SECTION 11. OTHER STOCK-BASED AWARDS. The Committee shall have the
discretion and authority to grant to eligible persons an "Other Stock-Based
Award," which shall consist of any right that is (i) not an Award described in
Sections 6 through 10 above and (ii) an Award of Shares or an Award
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to, Shares (including, without limitation,
securities or rights convertible into Shares), as deemed by the Committee to
be consistent with the purposes of the Plan. Subject to the terms of the Plan
and any applicable Award Agreement, the Committee shall determine the terms
and conditions of any such Other Stock-Based Award.
SECTION 12. NON-EMPLOYEE DIRECTOR.
(a) Automatic Grant. Notwithstanding the authority set forth in Section 3(a)
or any other provision of the Plan, the Committee shall have no power to
determine eligibility for grants of Non-Qualified Options or the number of
Shares for which Non-Qualified Options may be granted or the timing or
exercise price of Non-Qualified Options with respect to any Non-Employee
Director. Grants of Non-Qualified Options to Non-Employee Directors shall be
automatic as set forth in this Section 12.
(b) Options. All Non-Employee Directors who are Directors on the effective
date of the Plan or who become Directors after such date shall be granted
automatically, immediately following the effective date of the Plan or, if
such person becomes a Director after such date, as of the date such person
becomes a Director, a Non-Qualified Stock Option with respect to 20,000
Shares, at an exercise price per Share of the Fair Market Value at the date of
grant. Notwithstanding any other provision of the Plan, for purposes of this
Section, Fair Market Value means the average of the high and low sale price
per Share as finally reported in the exchange of listing, or if the Shares are
not sold on such date, the average of the high and low sale price per Share as
finally reported in the exchange of listing for the most recent prior date on
which Shares were sold. A Non-Qualified Stock Option granted to a Non-Employee
Director shall vest in three equal cumulative installments on each of the
first, second and third anniversaries following the date of grant.
(c) Ineligible Non-Employee Directors. Notwithstanding any other provision
of the Plan, a Non-Employee Director who is the beneficial owner of more than
10% of the total combined voting power of all classes of stock of the Company
as of the date that an automatic grant would otherwise occur under Section
12(b) shall not be eligible for such automatic grant.
SECTION 13. Termination or Suspension of Services to the Company. The
following provisions shall apply in the event that the Participant ceases to
provide services to the Company, either as an Employee, a Sales
Representative, a Consultant or a Non-Employee Director, unless, with respect
to any Participant other than a Non-Employee Director, the Committee shall
have provided otherwise, either at the time of the grant of the Award or
thereafter.
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(a) Non-Qualified Stock Options and Stock Appreciation Rights.
(i) Upon Termination of Services as Employee, Sales Representative or
Consultant.
(A) If the Participant ceases to provide services to the Company or its
Affiliates either as an Employee, Sales Representative or Consultant for
any reason other than death, permanent and total disability or, in the case
of an Employee or Sales Representative, retirement, the Participant's right
to exercise any Non-Qualified Stock Option or Stock Appreciation Right
shall terminate, and such Option or Stock Appreciation Right shall expire,
on the earlier of (1) the first anniversary of the date on which such
relationship terminates or (2) the date such Option or Stock Appreciation
Right would have expired had it not been for the termination of such
relationship. The Participant shall have the right to exercise such Option
or Stock Appreciation Right prior to such expiration to the extent it was
exercisable, but not exercised, as of the date on which such relationship
terminates.
(B) If the Participant ceases to provide services to the Company or its
Affiliates either as an Employee, Sales Representative or Consultant by
reason of death, permanent and total disability or, in the case of an
Employee or Sales Representative, retirement, the Participant or his or her
successor (if such termination results by death) shall have the right to
exercise all Non-Qualified Stock Option or Stock Appreciation Rights, to
the extent exercisable as of the date on which the Participant's
relationship with the Company and its Affiliates terminates, but in no
event shall such option be exercisable later than the date the Option would
have expired had it not been for the termination of such relationship. The
meaning of the terms "total and permanent disability" and "retirement"
shall be determined by the Committee.
(C) Notwithstanding the foregoing, the Committee may, in its discretion,
provide (1) that an Option granted to a Participant may terminate at a date
earlier than set forth above, (2) that an Option granted to a Participant
may terminate at a date later than set forth above, provided such date
shall not be beyond the date the Option would have expired had it not been
for the termination of the Participant's relationship with the Company and
its Affiliates, and (3) that an Option or Stock Appreciation Right may
become immediately exercisable when it finds that such acceleration would
be in the best interest of the Company.
(ii) Upon termination of Service as a Non-Employee Director.
(A) If a Participant who is a Non-Employee Director ceases to serve on
the Board for any reason other than death or under conditions other than as
described in (C) below, the Participant shall have the right to exercise
any unexercised Option for a period of one year from the date on which the
Participant ceases to serve on the Board, to the extent that such Option is
exercisable as of such date, except that in no event should an Option be
exercisable after the expiration of its term.
(B) If a Participant who is a Non-Employee Director ceases to serve on
the Board because of his or her death, the Participant's successor shall
have the right to exercise any unexercised Option until the third
anniversary of the date on which the Participant ceased to serve as a
Director, to the extent exercisable as of such date, except that in no
event shall an Option be exercisable after the expiration of its term.
(C) If a Participant who is a Non-Employee Director ceases to serve on
the Board and the Participant is at least 65 years of age or the
Participant has been a Director or a member of the Board of Directors of
any Affiliate for at least 5 years, the Participant shall have the right to
exercise any unexercised Option until the third anniversary of the date on
which the Participant ceased to serve as a Director, to the extent
exercisable as of such date, except that in no event shall an Option be
exercisable after the expiration of its term.
(b) Incentive Stock Options. Except as otherwise determined by the Committee
at the time of grant, if the Participant's employment with the Company
terminates for any reason, the Participant shall have the right to exercise
any Incentive Stock Option and any related Stock Appreciation Right during the
90 days after such termination of employment to the extent it was exercisable
at the date of such termination, but in no event later than the date the
option would have expired had it not been for the termination of such
employment. If the Participant does not exercise such Option or related Stock
Appreciation Right to the full extent permitted by the preceding sentence, the
remaining exercisable portion of such Option automatically will be deemed a
Non-Qualified Stock Option (except to the extent otherwise provided by Section
421 or Section 422 of the Code), and
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such Option and any related Stock Appreciation Right will be exercisable
during the period set forth in Section 13(a) of the Plan, provided that in the
event that employment terminates because of death or the Participant dies in
such 90-day period, the option will continue to be an Incentive Stock Option
to the extent provided by Section 421 or Section 422 of the Code, or any
successor provisions, and any regulations promulgated thereunder.
(c) Restricted Stock. Except as otherwise determined by the Committee at the
time of grant, upon termination of employment for any reason during the
restriction period, all shares of Restricted Stock still subject to
restriction shall be forfeited by the Participant and reacquired by the
Company at the price (if any) paid by the Participant for such Restricted
Stock, provided that in the event of a Participant's retirement, permanent and
total disability or death, or in cases of special circumstances, the Committee
may, in its sole discretion, when it finds that a waiver would be in the best
interests of the Company, waive in whole or in part any or all remaining
restrictions with respect to such participant's shares of Restricted Stock.
(d) Phantom Stock Units. Except as otherwise determined by the Committee at
the time of grant, upon termination of employment for any reason, the date of
surrender of Phantom Stock Units shall be accelerated and the Phantom Stock
Units shall be automatically and immediately surrendered and cancelled by
delivery of Shares as of the date of such termination.
SECTION 14. CHANGE IN CONTROL. Notwithstanding any other provision of the Plan
to the contrary, upon a Change in Control all outstanding Awards shall vest,
become immediately exercisable or payable or have all restrictions lifted as
may apply to the type of Award and no outstanding Stock Appreciation Right may
be terminated, amended or suspended upon or after a Change in Control;
provided, however, that unless otherwise determined by the Committee at the
time of award or thereafter, if it is determined that the Net After-Tax Amount
to be realized by any Participant, taking into account the accelerated vesting
provided for by this Section as well as all other payments to be received by
such Participant in connection with such Change in Control, would be higher if
Awards did not vest in accordance with this Section, then and to such extent
the Awards shall not vest. The determination of whether any such Award should
not vest shall be made by a nationally recognized accounting firm selected by
the Company, which shall be instructed to consider that (i) Awards and other
forms of compensation subject to vesting upon a Change of Control shall be
vested in the order in which they were granted and within each grant in the
order in which they would otherwise have vested and (ii) unless and to the
extent any other plan, arrangement or contract of the Company pursuant to
which any such payment is to be received provides to the contrary, such other
payment shall be deemed to have occurred after any acceleration of Awards or
other forms of compensation subject to vesting upon a Change of Control.
SECTION 15. AMENDMENT AND TERMINATION.
(a) Amendments to the Plan. Except as set forth in subsection (e) below, the
Board may amend, alter, suspend, discontinue or terminate the Plan or any
portion thereof at any time. Notwithstanding anything to the contrary herein,
the Committee may amend the Plan in such manner as may be necessary so as to
have the Plan conform with local rules and regulations in any jurisdiction
outside the United States or to obtain tax benefits for the Company or
Participants in any such jurisdiction.
(b) Amendments to Awards. Except as set forth in subsection (e) below, the
Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Award theretofore
granted, prospectively or retroactively; provided that any such waiver,
amendment, alteration, suspension, discontinuance, cancellation or termination
that would adversely affect the right of any Participant or any holder or
beneficiary of any Award theretofore granted shall not to that extent be
effective without the consent of the affected Participant, holder or
beneficiary.
(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in
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Section 4(b) hereof) affecting the Company, any Affiliate, or the financial
statements of the Company or any Affiliate, or of changes in applicable laws,
regulations or accounting principles, whenever the Committee determines that
such adjustments are appropriate in order to prevent dilution or enlargement
of the benefits or potential benefits intended to be made available under the
Plan.
(d) Cancellation. Any provision of the Plan or any Award Agreement to the
contrary notwithstanding, the Committee may cause any Award granted hereunder
to be canceled in consideration of a cash payment or alternative Award made to
the holder of such canceled Award equal in value to the Fair Market Value of
such canceled Award.
(e) Non-Employee Directors Provisions. The provisions of Section 12 shall
not be amended more often than once every six months, unless such amendment
would be consistent with the provisions of Rule 16b-3 promulgated under the
Exchange Act (or any successor provision thereto).
SECTION 16. GENERAL PROVISIONS.
(a) Dividend Equivalents. In the sole and complete discretion of the
Committee, an Award, whether made as an Other Stock-Based Award under Section
11 or as an Award granted pursuant to Sections 6 through 10 hereof, may
provide the Participant with dividends or dividend equivalents, payable in
cash, Shares, other securities or other property on a current or deferred
basis.
(b) Nontransferability. No Award shall be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by a Participant, except
by will or the laws of descent and distribution or pursuant to a QDRO;
provided, however, that an Award may be transferable, to the extent set forth
in the applicable Award Agreement, (i) if such Award Agreement provisions do
not disqualify such Award for exemption under Rule 16b-3 or (ii) if such Award
is not intended to qualify for exemption under such rule.
(c) No Rights to Awards. No Employee, Participant or other Person shall have
any claim to be granted any Award, and there is no obligation for uniformity
of treatment of Employees, Participants or holders or beneficiaries of Awards.
The terms and conditions of Awards need not be the same with respect to each
recipient.
(d) Share Certificates. All certificates for Shares or other securities of
the Company or any Affiliate delivered under the Plan pursuant to any Award or
the exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations and other requirements of the Securities and Exchange Commission,
any stock exchange upon which such Shares or other securities are then listed
and any applicable Federal, state or foreign laws, and the Committee may cause
a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions. The Company shall not be required to issue or
deliver Shares to a Participant unless and until the Company is advised by its
counsel that such issuance or delivery does not violate applicable securities
laws, rules or regulations or any rules or regulations of any securities
exchange or system on which Shares are traded or quoted.
(e) Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or
any Affiliate, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to
grant Awards to, or to cancel, modify or waive rights with respect to, or to
alter, discontinue, suspend or terminate Awards held by, Employees who are not
officers or directors of the Company for purposes of Section 16 of the
Exchange Act, or any successor section thereto, or who are otherwise not
subject to such Section.
(f) Withholding. A participant may be required to pay to the Company or any
Affiliate and the Company or any Affiliate shall have the right and is hereby
authorized to withhold from any Award, from any payment due or transfer made
under any Award or under the Plan or from any compensation or other amount
owing to a Participant the amount (in cash, Shares, other securities, other
Awards or other property) of any applicable
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withholding taxes in respect of an Award, its exercise or any payment or
transfer under any Award or under the Plan and to take such other action as
may be necessary in the opinion of the Company to satisfy all obligations for
the payment of such taxes.
(g) Award Agreements. Each Award hereunder shall be evidenced by an Award
Agreement that shall be delivered to the Participant and shall specify the
terms and conditions of the Award and any rules applicable thereto.
(h) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other compensation arrangements, which may, but need not, provide for
the grant of options, restricted stock, Shares and other types of Awards
provided for hereunder (subject to stockholder approval if such approval is
required), and such arrangements may be either generally applicable or
applicable only in specific cases.
(i) No Right to Employment. The grant of an Award shall not be construed as
giving a Participant who is an Employee the right to be retained in the employ
of the Company or any Affiliate or to retain a relationship with the Company
as a Sales Representative, Consultant or Non-Employee Director. Further, the
Company or an Affiliate may at any time dismiss a Participant who is an
Employee from employment, free from any liability or any claim under the Plan,
unless otherwise expressly provided in the Plan or in any Award Agreement.
(j) No Rights as Stockholder. Subject to the provisions of the applicable
Award, no Participant or holder or beneficiary of any Award shall have any
rights as a stockholder with respect to any Shares to be distributed under the
Plan until he or she has become the holder of such Shares. Notwithstanding the
foregoing, in connection with each grant of Restricted Stock hereunder, the
applicable Award shall specify if and to what extent the Participant shall not
be entitled to the rights of a stockholder in respect of such Restricted
Stock.
(k) Governing Law. The validity, construction and effect of the Plan and any
rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware.
(l) Severability. If any provision of the Plan or any Award is or becomes or
is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to
any Person or Award, or would disqualify the Plan or any Award under any law
deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform to the applicable laws, or if it cannot be construed
or deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Award, such provision shall be stricken
as to such jurisdiction, Person or Award and the remainder of the Plan and any
such Award shall remain in full force and effect.
(m) Other Laws. The Committee may refuse to issue or transfer any shares or
other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary
in connection with the exercise of such Award shall be promptly refunded to
the relevant Participant, holder or beneficiary. Without limiting the
generality of the foregoing, no Award granted hereunder shall be construed as
an offer to sell securities of the Company, and no such offer shall be
outstanding, unless and until the Committee in its sole discretion has
determined that any such offer, if made, would be in compliance with all
applicable requirements of the U.S. federal securities laws and any other laws
to which such offer, if made, would be subject. All grants made under the plan
shall, to the extent possible, meet the requirements of Section 162(m) of the
Code.
(n) No Trust or Fund Created. Neither the Plan nor any Award shall create or
be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any
other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company.
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(o) No Fractional Shares. No Fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities or other property shall be paid or transferred in lieu
of any Fractional Shares or whether such Fractional Shares or any rights
thereto shall be canceled, terminated or otherwise eliminated.
(p) Headings. Headings are given to the Sections and subsections of the Plan
solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.
SECTION 17. TERM OF THE PLAN.
(a) Effective Date. The Plan shall be effective as of October 31, 1996, and
subject to approval by the stockholders of the Company either before October
31, 1996, or within one year thereafter.
(b) Expiration Date. No Incentive Stock Option shall be granted under the
Plan after 10 years from October 31, 1996. Unless otherwise expressly provided
in the Plan or in an applicable Award Agreement, any Award granted hereunder
may, and the authority of the Board or the Committee to amend, alter, adjust,
suspend, discontinue or terminate any such Award or to waive any conditions or
right under any such Award shall, continue after the authority for grant of
new Awards hereunder has been exhausted.
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ANNEX B
DEPUY, INC.
EMPLOYEE STOCK OPTION/PURCHASE PLAN
ARTICLE I--PURPOSE
1.1 Purpose
The DePuy, Inc. Employee Stock Option/Purchase Plan is intended to provide a
method whereby employees of DePuy, Inc., a Delaware corporation, and its
subsidiary corporations (hereinafter referred to, unless the context otherwise
requires, as the "Company") will have an opportunity to acquire a proprietary
interest in the Company through the purchase of shares of the common stock of
the Company (the "Shares"). It is the intention of the Company to have the
Plan qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the
Plan shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
ARTICLE II--DEFINITIONS
2.1 Base Pay
"Base Pay" shall mean regular straight-time earnings and commissions,
excluding payments for overtime, shift premium, bonuses paid in the form of
commissions or otherwise, other special payments, and other marketing
incentive payments.
2.2 Committee
"Committee" shall mean the individuals described in Article XI.
2.3 Employee
"Employee" means any person who is classified by the Company as full-time or
part-time, is regularly scheduled to work more than 20 hours per week and is
not covered by a collective bargaining agreement to which the Company is a
party, unless such agreement, by specific reference to the Plan, provides for
coverage under the Plan.
2.4 Subsidiary Corporation
"Subsidiary Corporation" shall mean any present or future corporation which
(i) would be a "subsidiary corporation" of DePuy, Inc. as that term is defined
in Section 424 of the Code and (ii) is designated as a participating company
in the Plan by the Committee.
ARTICLE III--ELIGIBILITY AND PARTICIPATION
3.1 Initial Eligibility
Any employee who shall have completed ninety (90) days' employment and shall
be employed by the Company on the date his or her participation in the Plan is
to become effective shall be eligible to participate in an Offering (as such
term is defined below) under the Plan which commences on or after such ninety
day period has concluded.
3.2 Leave of Absence
For purposes of participation in the Plan, a person on leave of absence
shall be deemed to be an employee for the first 90 days of such leave of
absence and such employee's employment shall be deemed to have terminated at
the close of business on the 90th day of such leave of absence unless such
employee shall have returned to regular full-time or part-time employment (as
the case may be) prior to the close of business on such
B-1
90th day. Termination by the Company of any employee's leave of absence, other
than termination of such leave of absence on return to full-time or part-time
employment, shall terminate an employee's employment for all purposes of the
Plan and shall terminate such employee's participation in the Plan and right
to exercise any option.
3.3 Restrictions on Participation
Notwithstanding any provisions of the Plan to the contrary, no employee
shall be granted an option to acquire Shares under the Plan:
(a) if, immediately after the grant, such employee would own Shares,
and/or hold outstanding options to purchase Shares, possessing 5% or more
of the total combined voting power or value of all classes of stock of the
Company (for purposes of this paragraph, the rules of Section 424(d) of the
Code shall apply in determining stock ownership of any employee); or
(b) which permits his or her rights to purchase Shares under all employee
stock purchase plans of the Company and any subsidiary intended to qualify
under Section 423 of the Code to accrue at a rate which exceeds $25,000 in
fair market value of the stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding.
3.4 Commencement of Participation
An eligible employee may become a participant by completing an authorization
for a payroll deduction on the form provided by the Company and filing it with
the office of the Treasurer of the Company (or to such other person as the
Committee shall designate) on or before the date set therefor by the
Committee, which date shall be prior to the Offering Commencement Date (as
such term is defined below) for the Offering. Payroll deductions for a
participant shall commence on the applicable Offering Commencement Date when
the participant's authorization for a payroll deduction becomes effective and
shall end on the Offering Termination Date of the Offering to which such
authorization is applicable unless sooner terminated by the participant as
provided in Article VIII.
ARTICLE IV--OFFERINGS
4.1 Annual Offerings
The Plan will be implemented by four annual offerings of the Company (each,
an "Offering") beginning on the effective date of the Plan, January 1, 1997,
or as soon as practicable thereafter (or on such other date thereafter as the
Committee shall determine) and on each anniversary of the effective date
thereafter for three years, each Offering terminating on the following
December 31; provided, however, that each annual Offering may, in the
discretion of the Committee exercised prior to the commencement thereof, be
divided into two six-month Offerings commencing, respectively, on January 1,
1997 or as soon as practicable thereafter (or on such other date thereafter as
the Committee shall determine) and on the date which is six months subsequent
to such date and each anniversary thereafter and terminating, respectively, on
the following June 30 and December 31. The maximum aggregate number of shares
to be issued under the Plan shall be 600,000. The Committee shall determine,
in its discretion, the maximum number of shares to be issued under the Plan
during each annual Offering, except that with respect to the 1997 annual
Offering, the maximum number of shares to be issued under the Plan shall be
150,000.
If a six-month Offering is made, the maximum number of shares to be issued
shall be 1/2 of the number of shares determined by the Committee for the
annual period in which the six-month Offering falls, plus unissued shares,
whether offered or not, from the immediately preceding six-month Offering. As
used in the Plan, "Offering Commencement Date" means the effective date,
January 1, 1997 or as soon as practicable thereafter (or such other date
thereafter as the Committee shall determine), any anniversary of the effective
date or the date which is six months subsequent to the effective date or
anniversary of the effective date, as the case may be, on which the particular
Offering begins and "Offering Termination Date" means the June 30 or December
31, as the case may be, on which the particular Offering terminates.
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ARTICLE V--PAYROLL DEDUCTIONS
5.1 Amount of Deduction
At the time a participant files his or her authorization for payroll
deductions, the participant shall elect to have deductions made from his or
her pay on each payday during the time he or she is a participant in an
Offering at the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his or her base
pay in effect at the Offering Commencement Date of such Offering. In the case
of a part-time hourly employee, such employee's base pay during an Offering
shall be determined by multiplying such employee's regular hourly rate of pay
in effect on the Offering Commencement Date by the number of regularly
scheduled hours of work for such employee during such Offering. In the event
that the participant's base pay is increased or decreased during an Offering,
the payroll deduction percentage which the participant authorized pursuant to
the preceding sentence shall apply with respect to such increased or decreased
base pay amount, and payroll deductions shall be adjusted accordingly.
In the event that a person becomes an employee under Section 2.3 of the Plan
during an Offering, such person shall then be entitled to participate in the
Plan and in any future or current Offering, to the extent possible, as
determined by the Committee, by authorizing payroll deductions and electing a
payroll deduction percentage at such time. In the event that a participant
ceases to be an employee under Section 2.3 of the Plan during an Offering,
such person shall no longer be eligible to participate in the Plan and in any
future or current Offering.
5.2 Participant's Account
All payroll deductions made for a participant shall be credited to the
account established with respect to such participant under the Plan (the
"Account"). A participant may not make any separate cash payment into such
Account except when on leave of absence and, then, only as provided in
Section 5.4.
5.3 Changes in Payroll Deductions
A participant may discontinue his or her participation in the Plan as
provided in Article VIII, but no other change can be made during an Offering
and, specifically, a participant may not alter the amount of his or her
payroll deductions for that Offering.
5.4 Leave of Absence
A participant who is on a leave of absence shall have the right to elect,
subject to Section 8.5: (a) to withdraw the balance in his or her Account
pursuant to Section 7.2, (b) to discontinue contributions to the Plan but
remain a participant in the Plan, or (c) to remain a participant in the Plan
during such leave of absence, authorizing deductions to be made from payments
by the Company to the participant during such leave of absence and undertaking
to make cash payments to the Plan at the end of each payroll period to the
extent that amounts payable by the Company to such participant are
insufficient to meet such participant's authorized Plan deductions.
ARTICLE VI--GRANTING OF OPTION
6.1 Number of Option Shares
On the Commencement Date of each Offering, a participating employee shall be
deemed to have been granted an option to purchase a maximum number of Shares
equal to an amount determined as follows: an amount equal to (i) that
percentage of the employee's base pay which he has elected to have withheld
(but not in any case in excess of 10%) multiplied by (ii) the employee's base
pay during the period of the Offering (iii) divided by 85% of the market value
of a Share on the applicable Offering Commencement Date. The market value of a
Share shall be determined as provided in paragraphs (a) and (b) of Section 6.2
below. An employee's base pay during the period of an Offering shall be
determined by multiplying, in the case of a one-year Offering, the employee's
normal weekly rate of pay (as in effect on the last day prior to the
Commencement Date of the
B-3
particular Offering) by 52 or the hourly rate by 2,080 or, in the case of a
six-month Offering, by 26 or 1,040, as the case may be, provided that, in the
case of a part-time hourly employee, the employee's base pay during the period
of an Offering shall be determined by multiplying such employee's hourly rate
by the number of regularly scheduled hours of work for such employee during
such Offering.
6.2 Option Price
The option price of each Share purchased with payroll deductions made during
such annual Offering with respect to a participant therein shall be the lower
of:
(a) 85% of the closing price of a Share on the Offering Commencement Date
or the nearest prior business day on which trading occurred on the exchange
where the Company Stock is to be listed; or
(b) 85% of the closing price of a Share on the Offering Termination Date
or the nearest prior business day on which trading occurred on the exchange
where the Share is to be listed. If Shares are not admitted to trading on
any of the aforesaid dates for which closing prices of the stock are to be
determined, then reference shall be made to the fair market value of Shares
on that date, as determined on such basis as shall be established or
specified for the purpose by the Committee.
ARTICLE VII--EXERCISE OF OPTION
7.1 Automatic Exercise
Unless a participant gives contrary written notice to the Company as
hereinafter provided, the participant's option for the purpose of acquiring
Shares with payroll deductions made during any Offering will be deemed to have
been exercised automatically on the Offering Termination Date applicable to
such Offering, for the purchase of the number of full and fractional Shares
which the accumulated payroll deductions in the participant's Account at that
time will purchase at the applicable option price (but not in excess of the
number of shares for which options have been granted to the employee pursuant
to Section 6.1), and any excess in the participant's account at that time will
be returned to the participant.
7.2 Withdrawal of Account
By written notice to the Treasurer of the Company (or other person as the
Committee shall designate), at any time prior to the Offering Termination Date
applicable to any Offering, a participant may elect to withdraw all the
accumulated payroll deductions in his or her Account at such time.
7.3 Transfer of Stock
As of each Offering Termination Date, the custodian appointed pursuant to
Section 11.2 (the "Custodian") shall transfer to each participant's Account
the Shares acquired pursuant to Section 7.1 as of such Offering Termination
Date with respect to each participant.
7.4 Transferability of Option
During a participant's lifetime, options held by such participant shall be
exercisable only by that participant.
7.5 Crediting of Dividends
As soon as administrative practicable after any cash dividends have been
paid with respect to Shares held in a participant's Account, such dividends
shall be credited (net of taxes) by the Custodian to the participant's
Account, as of the appropriate record date and applied to purchase as many
whole and fractional Shares as possible at fair market value for such Account.
Such Shares, as well as any stock dividends issued as Shares with respect to
Shares held in a participant's Account, shall be credited to the participant's
Account accordingly.
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ARTICLE VIII--WITHDRAWAL
8.1 In General
As provided in Section 7.2, a participant may withdraw the payroll
deductions credited to his or her Account under the Plan at any time prior to
the applicable Offering Termination Date by giving written notice to the
Treasurer of the Company (or to such other person as the Committee shall
designate). All of the payroll deductions credited to a participant's Account
will be paid to the participant promptly after receipt of his or her notice of
withdrawal, and no further payroll deductions will be made with respect to
such participant during such Offering. The Company may, at its option, treat
any attempt to borrow by an employee on the security of his or her accumulated
payroll deductions as an election under Section 7.2 to withdraw such
deductions.
A participant also may at any time instruct the Company (i) to cause the
transfer of whole Shares credited to the participant's Account to him or her
and to pay in cash to the participant any amounts representing fractional
Shares, or (ii) to cause the sale of whole and any fractional Shares credited
to his or her Account and the remittance to the participant of the proceeds of
such sale, net of any brokerage commissions or expenses associated with the
sale of such Shares.
8.2 Effect on Subsequent Participation
A participant's withdrawal from any Offering will not have any effect upon
his or her eligibility to participate in any succeeding Offering or in any
similar plan which may hereafter be adopted by the Company.
8.3 Termination of Employment
Upon termination of a participant's employment for any reason, including
retirement (but excluding death while the participant is in the employ of the
Company or continuation of a leave of absence for a period beyond 90 days),
the payroll deductions credited to his or her Account will be returned to the
participant and any whole Shares held in the Account will be transferred to
the participant (any fractional shares will be returned in cash); provided,
however, the participant may elect to have any Shares held in the
participant's Account sold, in which event the proceeds of such sale, net of
any brokerage commissions or expenses associated with the sale of such Shares,
shall be remitted to the participant. In the case of the participant's death
subsequent to the termination of the participant's employment, amounts paid or
Shares transferred, as the case may be, shall be paid or transferred to the
person or persons entitled thereto under Section 12.1.
8.4 Termination of Employment Due to Death
Upon termination of a participant's employment because of the participant's
death, the participant's beneficiary (as defined in Section 12.1) shall have
the right to elect, by written notice given to the Treasurer of the Company
(or to such other person as the Committee shall designate) prior to the
earlier of the next subsequent Offering Termination Date or the expiration of
a period of sixty (60) days commencing with the date of the death of the
participant:
(a) With respect to cash held in the participant's Account, either
(i) to withdraw all of the payroll deductions credited to the
participant's Account under the Plan since the most recent prior Offering
Termination Date, or
(ii) to exercise the participant's option for the purchase of Shares on
the Offering Termination Date next following the date of the participant's
death for the purchase of the number of full Shares of stock which the
accumulated payroll deductions in the participant's Account at the date of
the participant's death will purchase at the applicable option price, and
any excess in such Account will be returned to said beneficiary, without
interest.
(b) With respect to Shares held in the participant's Account, either
(i) to have transferred to him or her all of the whole Shares credited to
the participant's Account and any cash amounts representing fractional
Shares, or
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(ii) to have the whole Shares credited to the participant's Account sold
and to have remitted to him or her the proceeds of such sale, net of any
brokerage commissions or expenses associated with the sale of such Shares.
In the event that no such written notice of election shall be duly received
by the office of the Treasurer of the Company (or such other person as the
Committee shall designate), the beneficiary shall automatically be deemed to
have elected, pursuant to paragraph (a)(ii), to exercise the participant's
option and then, pursuant to paragraph (b)(i), to have transferred to him or
her all of the Shares credited to the participant's Account and any cash
amounts representing fractional Shares.
8.5 Leave of Absence
A participant on leave of absence shall, subject to the election made by
such participant pursuant to Section 5.4, continue to be a participant in the
Plan so long as such participant is on continuous leave of absence. A
participant who has been on leave of absence for more than 90 days and is not
deemed an employee for the purposes of the Plan shall not be entitled to
participate in any Offering commencing after the 90th day of such leave of
absence. Notwithstanding any other provisions of the Plan, unless a
participant on leave of absence returns to regular full-time or part-time
employment with the Company at the earlier of: (a) the termination of such
leave of absence or (b) three months from the 90th day of the commencement of
such leave of absence, such participant's participation in the Plan shall
terminate on whichever of such dates first occurs.
ARTICLE IX--INTEREST
9.1 Payment of Interest
No interest will be paid or allowed on any money paid into the Plan or
credited to the Account of any participant; provided, however, that interest
shall be paid on any cash amounts distributed to a participant or the
participant's beneficiary in cash pursuant to the provisions of Sections 7.1,
7.2, 8.1, 8.3, 8.4 and 10.1 but only to the extent that such amounts do not
represent the proceeds of the sale of any whole or fractional Shares held in
the participant's Account. Such distributions shall bear simple interest
during the period from the date of withholding to the date of return at the
regular passbook savings Account rates per annum in effect at a bank to be
designated by the Committee. Where the amount returned represents an excess
amount in the participant's Account after such Account has been applied to the
purchase of stock, the participant's Account shall be deemed to have been
applied first toward purchase of Shares under the Plan, so that interest shall
be paid on the last withholdings during the period which results in the excess
amount.
ARTICLE X--STOCK
10.1 Maximum Shares
The maximum number of Shares which shall be issued under the Plan, subject
to Section 4.1 and to adjustment upon changes in capitalization of the Company
as provided in Section 12.3, shall be determined by the Committee. If the
total number of shares for which options are exercised on any Offering
Termination Date in accordance with Article VI exceeds the maximum number of
shares for the applicable Offering, the Company shall make a pro rata
allocation of the shares available for delivery and distribution in as nearly
a uniform manner as shall be practicable and as it shall determine to be
equitable, and the balance of payroll deductions credited to the Account of
each participant under the Plan shall be returned to him or her as promptly as
possible.
10.2 Participant's Interest in Option Stock
A participant will have no interest in Shares covered by an option until
such option has been exercised.
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10.3 Registration of Stock
Shares held in a participant's Account shall be registered in the name of
the Custodian. Shares to be delivered to a participant or, if applicable, a
beneficiary of a deceased participant under the Plan will be registered in the
name of the participant (or, if applicable, beneficiary).
10.4 Restrictions on Exercise
The Board of Directors of the Company (the "Board") may, in its discretion,
require as conditions to the exercise of any option that the Shares reserved
for issuance upon the exercise of the option shall have been duly listed, upon
official notice of issuance, upon a stock exchange, and that a Registration
Statement under the Securities Act of 1933, as amended, with respect to said
Shares shall be effective.
ARTICLE XI--ADMINISTRATION
11.1 Appointment of Committee
The Board shall designate a committee (the "Committee") to administer the
Plan. Unless otherwise determined by the Board, the Compensation Committee
designated by the Board shall be the Committee. No member of the Committee
shall be eligible to purchase stock under the Plan.
11.2 Authority of Committee
Subject to the express provisions of the Plan, the Committee shall have
plenary authority in its discretion to interpret and construe any and all
provisions of the Plan, to adopt rules and regulations for administering the
Plan, and to make all other determinations deemed necessary or advisable for
administering the Plan, including, without limitation, all questions
concerning eligibility to participate in and options to be received under, the
Plan; provided that all Employees who are granted options under the Plan shall
be treated equally with respect to their rights and privileges with respect to
such options. The Committee's determination on the foregoing matters shall be
conclusive. The Committee (or the Company) shall appoint as the Custodian of
the Plan an entity to maintain custody of all amounts withheld as participant
contributions, to maintain custody of all Shares (including fractional shares)
held under the Plan, to register Shares held in participants' Accounts under
the Plan in its name, and to perform such ministerial, recordkeeping and other
duties with respect to the Plan as shall be determined by the Committee or the
Company.
11.3 Rules Governing the Administration of the Committee
The Board may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee may select one of
its members as its Chairman and shall hold its meetings at such times and
places as it shall deem advisable and may hold telephonic meetings. A majority
of its members shall constitute a quorum. All determinations of the Committee
shall be made by a majority of its members. The Committee may correct any
defect or omission or reconcile any inconsistency in the Plan, in the manner
and to the extent it shall deem desirable. Any decision or determination
reduced to writing and signed by a majority of the members of the Committee
shall be as fully effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee may appoint a secretary and shall
make such rules and regulations for the conduct of its business as it shall
deem advisable.
ARTICLE XII--MISCELLANEOUS
12.1 Designation of Beneficiary
A participant may file a written designation of a beneficiary who is to
receive any Shares and/or cash held in the participant's Account under the
Plan. Such designation of beneficiary may be changed by the participant
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at any time by written notice to the Treasurer of the Company (or other person
as the Committee shall designate). Upon the death of a participant and upon
receipt of the Company of proof of identity and existence at the participant's
death of a beneficiary validly designated by him or her under the Plan, the
Company shall deliver, subject to the provisions of Section 8.4, such Shares
and/or cash held in the participant's Account under the Plan to such
beneficiary. In the event of the death of a participant and in the absence of
a beneficiary validly designated under the Plan who is living at the time of
such participant's death, the Company shall deliver, subject to the provisions
of Section 8.4, Shares and/or cash held in the participant's Account under the
Plan to the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver, subject to the
provisions of Section 8.4, such Shares and/or cash to the spouse or to any one
or more dependents of the participant as the Company may designate. No
beneficiary shall, prior to the death of the participant by whom the
beneficiary has been designated, acquire any interest in the Shares or cash
credited to the participant's Account.
12.2 Transferability
Neither payroll deductions credited to a participant's Account nor any
rights with regard to the exercise of an option or to receive Shares under the
Plan may be assigned, transferred, pledged or otherwise disposed of in any way
by the participant other than by will or the laws of descent and distribution.
Any such attempted assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with Section 7.2.
12.3 Adjustment Upon Changes in Capitalization
(a) If, while any options are outstanding or Shares are held in
participants' Accounts, the outstanding Shares have increased, decreased,
changed into or been exchanged for a different number or kind of shares or
securities of the Company through reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split or similar transaction,
appropriate and proportionate adjustments may be made by the Committee in the
number and/or kind of Shares which are subject to purchase under outstanding
options and on the option exercise price or prices applicable to such
outstanding options and with respect to any Shares held in participants'
Accounts. In addition, in any such event, the number and/or kind of shares
which may be offered in the Offerings described in Article IV hereof shall
also be proportionately adjusted. No adjustments shall be made for stock
dividends. For the purposes of this Paragraph (a), any distribution of Shares
to shareholders in an amount aggregating 20% or more of the outstanding Shares
shall be deemed a stock split and any distributions of shares aggregating less
than 20% of the outstanding Shares shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving
corporation, or upon a sale of substantially all of the property or stock of
the Company to another corporation, each participant who has an option then
outstanding under the Plan or has Shares held in his or her Account will
thereafter be entitled to receive at the next Offering Termination Date upon
the exercise of such option with respect to each Share as to which such option
shall be exercised or with respect to each Share held in the participant's
Account, as the case may be, as nearly as reasonably may be determined, the
cash, securities and/or property which a holder of one Share was entitled to
receive upon and at the time of such transaction. The Board shall take such
steps in connection with such transactions as it shall deem necessary to
assure that the provisions of this Section 12.3 shall thereafter be
applicable, as nearly as reasonably may be determined, in relation to the said
cash, securities and/or property as to which each participant who has an
option or Share held in his or her Account might thereafter be entitled to
receive.
12.4 Participant Voting and Other Rights
A participant shall have all rights of a shareholder with respect to any
Shares held in the participant's Account, including the right to vote such
shares, and the Company shall provide each participant with respect to whom
Shares are held in the participant's Account with a copy of the Company's
annual report and with such
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other informational material, including material concerning the voting of such
Shares, and reports of the Company as are generally provided to shareholders
of the Company. A participant shall provide written timely notice to the
Custodian as to the manner in which he or she desires to vote the Shares held
in his or her Account, and the Custodian shall vote such Shares accordingly.
12.5 Reports
Statements with respect to each participant's or beneficiary's Account shall
be provided periodically as determined by the Company, but in no event shall
such statements be provided less frequently than within a reasonable time
after each Offer Termination Date.
12.6 Indemnification
The Company, by its adoption of the Plan, indemnifies and holds its
employees and the members of the Committee, jointly and severally, harmless
from the effects and consequences of their acts, omissions, and conduct with
respect to the Plan in their official capacities, except to the extent that
such effects and consequences result from their own wilful misconduct, breach
of good faith or gross negligence in the performance of their duties
hereunder. The foregoing right of indemnification shall not be exclusive of
other rights to which each such employee or Committee member may be entitled
by any contract as a matter of law.
12.7 Amendment and Termination
The Board shall have complete power and authority to terminate or amend the
Plan; provided, however, that the Board shall not, without the approval of the
stockholders of the Corporation (i) increase the maximum number of shares
which may be issued under any Offering (except pursuant to Section 12.3); (ii)
amend the requirements as to the class of employees eligible to purchase
Shares under the Plan or permit the members of the Committee to purchase
Shares under the Plan. Notwithstanding the foregoing, attached as Appendix A
to the Plan is the "Savings Related Share Option Scheme," which sets forth
certain provisions applicable to the participation of employees of DePuy
International Ltd., the Company's United Kingdom employees, and, to the extent
applicable, shall supersede the provisions set forth herein. In addition, the
Committee may amend the Plan to add other provisions respecting the
participation of employees in jurisdictions outside the United States as it
shall determine from time to time. No termination, modification or amendment
of the Plan may, without the consent of a participant then having an option
under the Plan to purchase Shares, adversely affect the rights of such
participant with respect to such option.
12.8 Effective Date
The Plan shall become effective as of January 1, 1997, or as soon as
practicable thereafter, subject to approval by the holders of the majority of
the Shares present and represented at a special or annual meeting of the
shareholders held on the date which is twelve months subsequent to the date on
which the Plan is adopted by the Board. If the Plan is not so approved, the
Plan shall not become effective.
12.9 No Employment Rights
The Plan does not, directly or indirectly, create any right for the benefit
of any employees to purchase any Shares under the Plan, or create in any
employee or class of employees any right with respect to continuation of
employment by the Company, and it shall not be deemed to interfere in any way
with the Company's right to terminate, or otherwise modify, an employee's
employment at any time.
12.10 Effect of Plan
The provisions of the Plan shall, in accordance with its terms, be binding
upon, and inure to the benefit of, all successors of each employee
participating in the Plan, including, without limitation, such employee's
estate and the executors, administrators or trustees thereof, heirs and
legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
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12.11 Governing Law
The law of the State of Delaware will govern all matters relating to this
Plan except to the extent it is superseded by the laws of the United States.
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EXHIBIT A
THE DEPUY SAVINGS-RELATED SHARE OPTION SCHEME
1. DEFINITIONS AND INTERPRETATION
1.1 In this Scheme, unless the context otherwise requires, the following
terms have the following meanings:--
"THE BOARD" the board of directors of the Company or a duly
appointed committee of such board of directors;
"BONUS DATE" in the case of a 3 year or 5 year Savings
Contract the earliest date on which a bonus is
payable under the Savings Contract made in
connection with an Option (or, in the case of a
5 year Savings Contract, if the repayment is
taken as including the Maximum Bonus the
earliest date on which the Maximum Bonus is
payable);
"THE COMPANY" DePuy, Inc a company incorporated under the
laws of the State of Delaware;
"CONTROL" has the meaning given to it in Section 840 of
the Taxes Act;
"GRANT DATE" the date on which an Option is granted;
"INDEPENDENT ADVISER" the Company's legal adviser or such other
independent adviser as the Board may select;
"INVITATION" an invitation to apply for an Option issued
under Rule 3.1;
"INVITATION DATE" the date on which an Invitation is issued;
"MAXIMUM BONUS" the additional bonus payable on a 5 year
Savings Contract which is held for 7 years;
"OPTION" a right to acquire Shares granted under the
Scheme;
"PARTICIPANT" a person who holds an Option;
"PARTICIPATING COMPANY" the Company and any Subsidiary to which the
Board has resolved from time to time that the
Scheme extends;
"RELEVANT DATE" the date on which the Scheme is approved by the
Company in general meeting;
"SAVINGS BODY" any body with which a Savings Contract can be
made;
"SAVINGS CONTRACT" an agreement to pay monthly contributions under
the terms of a certified contractual savings
scheme, within the meaning of Section 326 of
the Taxes Act, which has been approved by the
Inland Revenue for the purposes of Schedule 9;
"SCHEDULE 9" Schedule 9 to the Taxes Act;
"THE SCHEME"
the DePuy Savings-Related Share Option Scheme
as set out in these Rules but subject to any
alterations or additions made under Rule 8;
"SHARE"
a share of Common Stock in the Company which
satisfies the requirements of paragraphs 10 to
14 of Schedule 9;
"SPECIFIED AGE"
65 years;
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"STANDARD BONUS" a bonus which is not a Maximum Bonus payable on
a Savings Contract;
"SUBSIDIARY" a body corporate which is a subsidiary of the
Company within the meaning of Section 736 of
the Companies Act 1985 and is under the Control
of the Company;
"TAXES ACT" the Income and Corporation Taxes Act 1988.
1.2 Expressions not otherwise defined in the Scheme have the same meaning as
they have in Schedule 9.
1.3 Any reference in the Scheme to any enactment includes a reference to
that enactment as from time to time modified, extended or re-extended.
1.4 Expressions used in the Scheme denoting the masculine gender include the
feminine, unless the context otherwise requires.
2. ELIGIBILITY
2.1 Subject to Rule 2.3, an individual is eligible to be granted an Option
on any day if:--
2.1.1 he is an employee or director of a Participating Company; and
2.1.2 he was an employee or full-time director of a Participating Company
on the relevant Invitation Date (or at such other time during a period not
exceeding 5 years ending on the relevant Grant Date as the Board may from
time to time decide); and
2.1.3 he had been an employee or full-time director of a Participating
Company at all times during the qualifying period not exceeding 5 years
ending at that time as the Board may from time to time decide; and
2.1.4 he was chargeable to tax in respect of his employment or office
under Case I of Schedule E on the relevant Invitation Date.
2.2 For the purposes of Rule 2.1 an individual is a full-time director of a
company if he is obliged to devote to the performance of the duties of his
office or employment with the company (or with the company and any other
Participating Company) the whole or substantially the whole of his working
time and in any event not less than 25 hours a week (excluding meal breaks).
2.3 An individual is not eligible to be granted an Option at any time:-
2.3.1 when he is excluded from participating in the Scheme by virtue of
paragraph 8 of Schedule 9; or
2.3.2 if the amount of the monthly contribution under the Savings
Contract proposed to be made in connection with the Option, determined in
accordance with Rule 3, would be less than (Pounds)5 (or such other minimum
amount as may for the time being be prescribed by paragraph 24(2)(b) of
Schedule 9).
3. GRANT OF OPTIONS
3.1 The Board may at any time or times after the Inland Revenue have
approved the Scheme under Schedule 9 issue on similar terms to every person
who is at that time eligible to be granted an Option (as defined in Rule 2) an
invitation to apply for an Option to acquire Shares on the terms of the
Scheme, specifying the date by which it must be accepted (being not less than
14 days after the Invitation Date).
3.2 No Option may be granted on any day unless:--
3.2.1 that day falls no later than 30 days (or, where Rule 3.8 applies,
42 days) after the day on which the exercise price was calculated under
Rule 3.4; and
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3.2.2 every individual who is eligible to be granted an Option on that
day has been sent an Invitation; and
3.2.3 save to the extent permitted by Rule 3.8, every individual who is
eligible to be granted an Option on that day and who has applied for an
Option and has proposed to make a Savings Contract with a Savings Body
approved by the Board for this purpose, is in fact granted an Option on
that day.
3.3 The consideration for the grant to any individual of an Option will be
his proposing to make a Savings Contract and in all other respects agreeing to
be bound by the provisions of the Scheme.
3.4 The price at which Shares may be acquired by the exercise of an Option
will be specified in US dollars and will be determined by the Board before it
is granted, provided that:
3.4.1 if at the relevant time the Shares are quoted on the New York Stock
Exchange, the price will not be less than 85 per cent. of the closing price
of a Share (as published in the Wall Street Journal) on the last dealing
day but two before the relevant Invitation Date (or such other dealing day
as may be agreed with the Inland Revenue) being not earlier than 30 days
before the Grant Date;
3.4.2 if Rule 3.4.1 does not apply, the price will not be less than 85
per cent. of the market value (within the meaning of Sections 272 to 274
(inclusive) of the Taxation of Chargeable Gains Act 1992) of a Share, as
agreed for the purposes of the Scheme with the Shares Valuation Division of
the Inland Revenue, on the last working day but two before the relevant
Invitation Date (or such other day as may be agreed with the Inland Revenue
being not earlier than 30 days before the Grant Date);
3.4.3 the price will not be less than the par value of a Share.
3.5 When applying for an Option, an individual must specify the amount (in
pounds sterling) he is willing to pay under the Savings Contract. The amount
of the repayment on the Bonus Date will be converted into US dollars at the
exchange rate applying on the date the Option is exercised. The amount of US
dollars arising from conversion of the repayment will determine the maximum
number of Shares that may be acquired on exercise of the Option.
3.6 Subject to Rules 3.8.1, 3.8.2 and 3.8.3, the Board may specify in an
Invitation whether, on that occasion;
3.6.1 the repayment under the Savings Contract will be taken as including
a bonus (or in the case of 5 year Savings Contracts the Maximum Bonus);
3.6.2 Savings Contracts may be for a term of 3 years or 5 years or 7
years.
3.7 For the purposes of Rule 3.5 the amount of the monthly contribution will
be the amount which the individual specifies in his application for the Option
that he is willing to pay under the Savings Contract or, if lower, the maximum
permitted amount, that is to say the lowest of:--
3.7.1 (Pounds)250 (or such other maximum amount as may for the time being
be permitted under Schedule 9) less any monthly contributions the
individual is already making under a certified contractual savings scheme
linked to any scheme approved under Schedule 9;
3.7.2 the maximum amount for the time being permitted under the terms of
the Savings Contract; and
3.7.3 such maximum amount (if any) as may have been determined by the
Board for this purpose and specified in every Invitation issued on that
occasion.
3.8 If the grant of Options on any day would cause any of the limits
mentioned in Rule 7 to be exceeded, then, in relation to Options granted on
that day, the following provisions will be successively applied (in the order
in which they are set out) so far as is necessary to ensure that those limits
are not exceeded:--
3.8.1 for the purposes of Rule 3.5, if the repayment would otherwise be
taken as including the Maximum Bonus, it will be deemed to include only the
Standard Bonus;
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3.8.2 for those purposes with regards to 3 year and 5 year Saving
Contracts if the repayment would otherwise be taken as including a Standard
Bonus it will be deemed to include no bonus;
3.8.3 for those purposes each application for a 5 year Savings Contract
shall be deemed to be an application for a 3 year Savings Contract;
3.8.4 for those purposes the amount of the monthly contribution
determined under Rule 3.6 shall be reduced pro rata to the extent
necessary, but will not be reduced to less than the minimum permitted
amount mentioned in Rule 2.3.2;
3.8.5 if the total number of Shares comprised in all applications
received in response to Invitations on any occasion is such that, after
application of Rules 3.7.1, 3.7.2 and 3.7.3, the grant of Options in
respect of that number of Shares would still result in any of the limits
referred to in Rule 7 being exceeded, the Board will adopt such method of
random selection of applications, based on a monthly Savings Contribution
of (Pounds)5 and the inclusion of no bonus, for acceptance as appears to
the Board in its sole discretion to be fair and reasonable.
3.9 Subject to Rule 4.3, an Option may not be transferred by a Participant
and will lapse forthwith if it is so transferred or if he is adjudicated
bankrupt.
4. EXERCISE OF OPTIONS
4.1 The exercise of any Option will be effected in such form and manner as
the Board may from time to time prescribe, provided that the monies paid for
Shares on exercise will not exceed the amount of the repayment made and any
interest or bonus paid under the Savings Contract made in connection with the
Option, and for this purpose the amount of the repayment will be taken not to
include the amount of any monthly contribution the due date of payment of
which falls more than one month after the date on which repayment is made.
4.2 Subject to Rules 4.3, 4.4, 4.5 and 5, an Option may not be exercised
before the Bonus Date or more than 6 months after the Bonus Date.
4.3 Subject to Rule 4.6, where a Participant dies at a time when he is a
director or employee of a Participating Company:
4.3.1 if he dies before the Bonus Date, the Option may (and must, if at
all) be exercised by his personal representatives within 12 months after
the date of his death;
4.3.2 if he dies within 6 months after the Bonus Date, the Option may
(and must, if at all) be exercised within 12 months after the Bonus Date.
4.4 Subject to Rule 4.6, where a Participant ceases to be a director or
employee of a Participating Company (otherwise than by reason of his death):
4.4.1 if he so ceases by reason of injury, disability, redundancy (within
the meaning of the Employment Protection (Consolidation) Act 1978), or
retirement on reaching the Specified Age or any other age at which he is
bound to retire in accordance with the terms of his contract of employment,
the Option may (and must, if at all) be exercised within 6 months of his so
ceasing;
4.4.2 if he so ceases by reason only that the office or employment is in
a company of which the Company ceases to have Control, or relates to a
business or part of a business which is transferred to a person who is
neither an associated company of the Company (within the meaning given to
that expression by Section 416 of the Taxes Act) nor a company of which the
Company has Control, the Option may (and must, if at all) be exercised
within 6 months of his so ceasing;
4.4.3 if he so ceases for any other reason before the Bonus Date but more
than 3 years after the Grant Date, the Option may (and must, if at all) be
exercised within 6 months of his so ceasing;
BA-4
4.4.4 if he so ceases for any other reason on or before the third
anniversary of the Grant Date, the Option may not be exercised at all.
4.5 Subject to Rule 4.6, where any Participant continues to be a director or
employee of a Participating Company after the Specified Age, he may exercise
any Option within 6 months of that date.
4.6 Where, before an Option has become capable of being exercised, the
Participant gives notice that he intends to stop paying monthly contributions
under the Savings Contract made in connection with the Option, or is deemed
under its terms to have given such notice, or makes an application for
repayment of the monthly contributions paid under it, the Option may not be
exercised at all.
4.7 A Participant will not be treated for the purposes of Rule 4.4 as
ceasing to be a director or employee of a Participating Company until such
time as he is no longer a director or employee of any of the Participating
Companies. A Participant (being a woman) who ceases to be a director or
employee of a Participating Company by reason of pregnancy or confinement and
who exercises her right to return to work under Section 45 of the Employment
Protection (Consolidation) Act 1978 before exercising an Option will be
treated for those purposes as not having ceased to be such a director or
employee.
4.8 Subject to Rule 4.4, a Participant may only exercise an Option at a time
when he is a director or employee of a Participating Company.
4.9 A Participant may not exercise an Option at any time when he is not
eligible to participate in the Scheme by virtue of paragraph 8 of Schedule 9.
The personal representatives of a Participant may not exercise an Option after
the death of the Participant if the Participant at the date of his death was
not eligible to participate in the Scheme by virtue of paragraph 8 of Schedule
9.
4.10 An Option may not be exercised more than once.
4.11 Within 30 days after an Option has been validly exercised by any
person, the Board on behalf of the Company will allot to him or procure the
transfer to him of the number of Shares in respect of which the Option has
been exercised.
4.12 All Shares allotted under the Scheme will rank pari passu in all
respects with the shares of the same class for the time being in issue save as
regards any rights attaching to such shares by reference to a record date
prior to the date of issue.
4.13 Company will apply to the New York Stock Exchange for any Shares issued
under the Scheme to be listed.
5. VARIATION OF CAPITAL
5.1 Subject to Rules 5.3 and 5.4, in the event of any increase or variation
of the share capital of the Company (whenever effected) by way of
capitalisation or rights issue (including a variation in share capital having
an effect similar to a rights issue), or sub-division, consolidation or
reduction, or otherwise, the Board may make such adjustments as it considers
appropriate under Rule 5.2.
5.2 An adjustment made under this Rule will be to one or more of the
following:--
5.2.1 the number of Shares in respect of which any Option may be
exercised;
5.2.2 the price at which Shares may be acquired by the exercise of any
Option (provided that the price cannot be reduced below the nominal value
of the Shares);
5.2.3 where any Option has been exercised but no Shares have been
allotted or transferred pursuant to such exercise, the number of Shares
which may be so allotted or transferred and the price at which they may be
acquired.
5.3 Except in the case of a capitalisation issue, no adjustment under Rule
5.2 may be made without the prior confirmation in writing by the Independent
Adviser that it is in his opinion fair and reasonable.
BA-5
5.4 If the Scheme is then approved by the Inland Revenue under Schedule 9,
no adjustment may be made under Rule 5.2 without the prior consent of the
Inland Revenue.
6. LIMITS
6.1 The aggregate of the monthly contributions being made at any time by a
Participant under the Scheme and any other scheme or schemes approved under
Schedule 9 to the Act may not exceed:--
6.1.1 (Pounds)250 per month or such other maximum amount as may for the
time being be permitted under Schedule 9; or
6.1.2 such lower maximum figure as the Board may decide in respect of any
Invitation Date provided that no monthly contribution in respect of any
Option granted prior to that Invitation Date will be reduced due to the
imposition of such lower maximum figure.
6.2 The Board may from time to time specify the maximum number of Shares in
respect of which Options may be granted on any day.
7. ALTERATIONS
7.1 Subject to Rule 7.2, the Board may at any time alter or add to all or
any of the provisions of the Scheme, or the terms of any Option, in any
respect. No amendment shall have effect until approved by the Board of Inland
Revenue.
7.2 The prior approval by ordinary resolution of the members of the Company
in general meeting must be obtained for any alteration or addition to the
Scheme to the advantage of Participants or potential Participants except for
any alteration or addition which:-
7.2.1 is a minor alteration or an addition and is made to benefit the
administration of the Scheme; or
7.2.2 is to obtain or maintain favourable tax, exchange control or
regulatory treatment for Participants or for the Company or any
Participating Company.
7.3 As soon as reasonably practicable after making any alteration or
addition under Rule 7.1 the Board will notify in writing any Participant
affected by it and, if the Scheme is then approved by the Inland Revenue under
Schedule 9, the Inland Revenue.
8. MISCELLANEOUS
8.1 The rights and obligations of any individual under the terms of his
office or employment with any Participating Company will not be affected by
his participation in the Scheme or any right which he may have to participate
in it. A Participant whose office or employment is terminated for any reason
whatsoever will not be entitled to claim any compensation for or in respect of
any consequent diminution or extinction of his rights or benefits (actual or
prospective) under any Option then held by him or otherwise in connection with
the Scheme.
8.2 Subject to Rule 8, the Board may from time to time make and vary such
rules and regulations not inconsistent with the Scheme and establish such
procedures for the administration and implementation of the Scheme as it
thinks fit, and in the event of any dispute or disagreement as to the
interpretation of the Scheme, or of any such rule, regulation or procedure, or
as to any question or right arising from or related to the Scheme, the
decision of the Board will be final and binding on all persons.
8.3 The Company and any Participating Company may provide money to the
trustees of any trust or any other person to enable them or him to acquire
Shares to be held for the purposes of the Scheme, or enter into any guarantee
or indemnity for these purposes, to the extent permitted by section 153 of the
Companies Act 1985.
8.4 In any matter in which he is required to act under the Scheme the
Independent Adviser will act as an expert and not as an arbitrator.
BA-6
8.5 The Company will at all times keep available sufficient authorised but
unissued Shares for the purposes of the Scheme.
8.6 The Company will endeavour to obtain and maintain the approval of the
Scheme by the Inland Revenue under Schedule 9 and will notify the Inland
Revenue of any event or circumstance which may affect that approval.
8.7 Any notice or other communication under or in connection with the Scheme
may be given by personal delivery or by sending the same by post or by fax, in
the case of a company to its registered office, and in the case of an
individual to his last known address, or, where he is a director or employee
of a Participating Company, either to his last known address or to the address
of the place of business at which he performs the whole or substantially the
whole of the duties of his office or employment, and where a notice or other
communication is given by first class post, it will be deemed to have been
received 48 hours after it was put into the post properly addressed and
stamped, and where a notice or other communication is sent by fax it will be
deemed to have been received ten minutes after it has been duly despatched.
9. TERMINATION
The Board may at any time resolve to cease making further offers of
participation under the Scheme but in such event the subsisting rights of
Participants will not be affected.
BA-7
ANNEX C
DEPUY, INC.
SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
1. Purpose. The purposes of the DePuy, Inc. Senior Executive Incentive
Compensation Plan (the "Plan") are to provide annual incentive compensation to
designated senior executives of DePuy, Inc. (the "Company") based on the
achievement of established performance goals, to encourage such senior
executives to remain in the employ of the Company, to assist the Company in
attracting and motivating new senior executives and to qualify the incentive
payments awarded under the Plan (the "Awards") as qualified "performance-based
compensation" so that all payments under the Plan shall be deductible in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
2. Eligibility. The Stock Option and Bonus Subcommittee of the Compensation
Committee of the Board of Directors of the Company (the "Committee") shall
each year determine the "Senior Executives" of the Company eligible to
participate in the Plan (the "Participants"). For purposes hereof, Senior
Executives shall mean the Chief Executive Officer of the Company and each
executive of the Company or an Affiliate of the Company who reports directly
to the Chief Executive Officer of the Company and the presidents of the
divisions of the Company or of Affiliates who report directly to the Chief
Operating Officer of the Company. As used herein, "Affiliate" shall mean (i)
any entity that, directly or indirectly, is controlled by or under common
control with the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee.
3. Performance Periods. Each performance period for purposes of the Plan
shall have a duration of one calendar year, commencing January 1 and ending
the next December 31. The first Performance Period under the Plan shall
commence on January 1, 1997.
4. Administration. The Committee shall have the full power and authority to
administer and interpret the Plan and to establish rules for its
administration. Such power and authority shall include proration or adjustment
of awards in the case of retirement, termination, changes in base salary,
dismissal, death and other conditions as appropriate; provided, however, that
the discretion granted above with respect to an Award earned by a Participant
who is a "covered employee" within the meaning of Section 162(m) of the Code
(a "Covered Employee") may only be used by the Committee to reduce or
eliminate such Award and further provided, if the terms of a Participant's
employment with the Company or Affiliate are covered by a written employment
agreement, the payment of Awards hereunder in the event of a Participant's
termination of employment for any reason shall be subject to the terms of such
agreement.
5. Performance Goals. On or before the 90th day of each Performance Period,
the Committee shall establish in writing one or more performance criteria for
the Performance Period. The performance criteria shall in all instances be
determined on the basis of earnings per share at the end of the relevant
Performance Period.
6. Target Incentives and Payout Schedule. On or before the 90th day of each
Performance Period, the Committee shall establish in writing minimum
threshold, target and maximum Awards for each Participant and a payout
schedule specifying the percentage of the Participant's base pay that the
Participant is eligible to earn on various levels of attainment of the
performance criteria established pursuant to Section 5. Such percentages, (i)
in the case of the Chief Executive Officer and the Chief Operating Officer,
shall range from an Award of 30% of base pay if the minimum threshold
performance goal is attained, 60% of base pay if the target performance goal
is attained and 90% of base pay if the maximum performance goal is attained,
and (ii) in the case of all other Participants, shall range from an Award of
25% of base pay if the minimum threshold performance goal is attained, 50% of
base pay if the target performance goal is attained and 75% of base pay if the
maximum performance goal is attained. No Award with respect to any Performance
Period shall be earned if less than the minimum threshold performance goal for
the period is attained. Base pay for purposes hereof shall be determined as
the Participant's base salary actually earned by the Participant during the
relevant Performance Period.
C-1
7. Incentive Payout Calculation. As soon as practicable after release of the
Company's financial results for the Performance Period, the Committee will
certify the Company's attainment of the financial performance criteria
established for such Performance Period pursuant to Section 5 and will
calculate the possible payout of incentive awards for each Participant under
the payout schedule established pursuant to Section 6. To the extent net
income is used as a component of determining earnings per share, it shall mean
net income as reported to stockholders, but before losses resulting from
discontinued operations, extraordinary losses (in accordance with generally
accepted accounting principles, as currently in effect), the cumulative effect
of changes in accounting principles, the effects of acquisitions and
divestitures of assets (including stock) not previously accounted for in the
establishment of the performance criteria, and other unusual, nonrecurring
items of loss that are separately identified and quantified in the Company's
audited financial statements. Pro rata adjustments to reflect changes in the
number of outstanding shares of Company stock or otherwise in the Company's
capital structure during the relevant Performance Period shall also be made.
No adjustment pursuant to this Section 7 shall be made, however, if such
adjustment would cause Awards granted to Covered Employees to fail to be
qualified "performance-based compensation" under Section 162(m) of the Code.
8. Reduction of Calculated Payouts. The Committee shall have the power and
authority to reduce or eliminate for any reason the payout calculated pursuant
to Section 7 that would otherwise be payable to a Participant based on the
established target Award and payout schedule.
9. Payouts. After calculation of incentive payouts pursuant to Section 7 and
any reduction or elimination thereof pursuant to Section 8, the Committee
shall certify the amount of the payout to each Participant under the Plan for
the Performance Period. In no event shall the payout under the Plan to any
Participant for any Performance Period exceed the lesser of (i) the
Participant's base pay for the relevant Performance Period multiplied by the
maximum percentage of the base pay as set forth in Section 6 or (ii) $700,000.
Payment of the Award determined in accordance with the Plan for each
Performance Period shall be made to a Participant in cash.
10. Change in Control. If a Change in Control (as defined below) occurs,
then each Participant who is actively employed by the Company on the date of
the Change in Control shall receive, as soon as practicable following the
earlier of the Participant's termination of employment or the end of the
calendar year in which such Change in Control occurs, not less than 100% of
the target award established for the Participant pursuant to Section 6 for the
Performance Period in which the Change in Control occurs, subject to upward
adjustment based on the criteria established by the Committee prior to the
Change in Control. For purposes hereof, a Change in Control shall be deemed to
have occurred if: (i) any "person" as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 as amended (the "Exchange Act")
(other than the Company, an Affiliate, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or an Affiliate, or
any Company owned, directly or indirectly, by the stockholders of the Company
in substantially the same proportions as their ownership of common stock of
the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities; (ii) during any period of two consecutive years (not
including any period prior to the adoption of the Plan), individuals who at
the beginning of such period constitute the board of directors of the Company,
and any new director (other than a director designated by a person who has
entered into an agreement with the Company to effect a transaction described
in clause (i), (iii), or (iv) of this paragraph whose election by the board of
directors of the Company or nomination for election by the Company
stockholders was approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the beginning of the two-
year period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority of the board
of directors of the Company; (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation which is not
an Affiliate, other than a merger that would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) more than 50% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately
C-2
after such merger or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the Company or an
Affiliate (or similar transaction) in which no person acquires more than 30%
of the combined voting power of the Company's then outstanding securities
shall not constitute a Change in Control of the Company, or (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets. If any of the events enumerated in
clauses (i) through (iv) occur, the Committee shall determine the effective
date of the Change in Control resulting therefrom, for purposes of the Plan.
11. Miscellaneous Provisions.
(a) The Board of Directors of the Company shall have the right to suspend or
terminate the Plan at any time and may amend or modify the Plan with respect
to future Performance Periods prior to the beginning of any Performance
Period, provided that no such amendment or modification which is expected to
materially increase benefits payable to Covered Employees who are Participants
under the Plan shall be made unless such measures as the Committee deems
necessary for the increased benefit to be deductible pursuant to Section
162(m) of the Code have been taken.
(b) Nothing contained in the Plan or any agreement related hereto shall
affect or be construed as affecting the terms of the employment or employment
agreement, if any, of any Participant except as specifically provided herein
or therein. Nothing contained in the Plan or any agreement related hereto
shall impose or be construed as imposing any obligation on (i) the Company to
continue the employment of any Participant or (ii) any Participant to remain
in the employ of the Company.
(c) No person shall have any claim to be granted an Award under the Plan and
there is no obligation of uniformity of treatment of eligible employees under
the Plan. Awards under the Plan may not be assigned or alienated.
(d) The Company or Affiliate, as applicable, shall have the right to deduct
from any Award to be paid under the Plan, any federal, state or local taxes
required by law to be withheld with respect to such payment.
(e) If any provision of the Plan would cause the Awards granted to a Covered
Employee not to be qualified "performance-based compensation" under Section
162(m), that provision, insofar as it pertains to such Covered Employee shall
be severed from, and shall be deemed not to be a part of, the Plan, but the
other provisions hereof shall remain in full force and effect.
12. Adoption. The Plan shall become effective as of January 1, 1997, subject
to approval by the stockholders of the Company.
C-3
PROXY
DEPUY, INC.
WARSAW, INDIANA
PROXY/VOTING INSTRUCTION CARD
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING ON MAY 1, 1997.
The undersigned hereby appoints James A. Lent, Steven L. Artusi and Thomas
J. Oberhausen, or any of them, each with full power of substitution, as
proxies for the undersigned, to attend the Annual Meeting of Stockholders
of DePuy, Inc. to be held on May 1, 1997 at 10:00 a.m., and at any
adjournment thereof, and to vote as specified in this Proxy all the shares
of stock of the Company which the undersigned would be entitled to vote if
personally present.
Your vote with respect to the election of Directors and the other
proposals may be indicated on the reverse.
Election of Directors, Nominees:
Richard A. Gilleland
and M.L. Lowenkron.
YOUR VOTE IS IMPORTANT. PLEASE SIGN AND DATE ON THE REVERSE AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
[X] PLEASE MARK YOUR 0340
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS AND FOR PROPOSALS 2, 3, 4 AND 5.
- ----------------------------------
THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR THE
ELECTION OF DIRECTORS.
- ----------------------------------
FOR WITHHELD
1. Election of [ ] [ ]
Directors
(see reverse)
For, except vote withheld from the
following nominee(s):
- -----------------------------------
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR PROPOSALS 2, 3, 4, AND 5.
- ------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of the [ ] [ ] [ ]
DePuy, Inc. 1996
Equity Incentive
Plan
3. Approval of the [ ] [ ] [ ]
DePuy, Inc.
Employee Stock
Option/Purchase
Plan
4. Approval of the [ ] [ ] [ ]
DePuy, Inc. Senior
Executive Incentive
Compensation Plan
and the compensation
goals thereunder
5. Appointment of Price [ ] [ ] [ ]
Waterhouse LLP as
auditors of the
Company for fiscal
year 1997
- -----------------------------------------------------
6. In their discretion, the Proxies are authorized
to vote upon such other business as may properly
come before the meeting.
SIGNATURE(S) _________________________________________________ DATE ________
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. JOINT OWNERS SHOULD EACH
SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE,
GUARDIAN, OFFICER, GENERAL PARTNER, ETC., PLEASE GIVE FULL TITLE AS SUCH.
CHECK HERE IF YOU PLAN
TO ATTEND THE MEETING
[ ]