SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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 Section240.14a-11(c) or
Section240.14a-12
CARDIOTHORACIC SYSTEMS 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)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
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and 0-11.
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CARDIOTHORACIC SYSTEMS, INC.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 4, 1999
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TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
CARDIOTHORACIC SYSTEMS, INC., a Delaware corporation (the "Company") will be
held on Tuesday, May 4, 1999, at 2:00 p.m., local time, at the Company's
principal executive offices, 10600 N. Tantau Ave., Cupertino, California 95014
for the following purposes (as more fully described in the Proxy Statement
accompanying this Notice):
1. To elect one Class II director of the Company to serve for a term of
three years expiring upon the 2002 Annual Meeting of Stockholders or
until his successor is elected.
2. To approve an amendment of the Company's Incentive Stock Plan to
increase the number of shares of Common Stock available for issuance
thereunder by 500,000 shares.
3. To ratify the appointment of PricewaterhouseCoopers LLP as the
independent auditors of the Company for the fiscal year ending December
31, 1999.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on March 25, 1999 are entitled to notice of and to vote at the Annual
Meeting. All stockholders are cordially invited to attend the meeting. However,
to ensure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. If you attend the meeting, you may vote in
person, even if you return a proxy.
FOR THE BOARD OF DIRECTORS
Richard M. Ferrari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Cupertino, California
April 1, 1999
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING,
YOU MAY VOTE IN PERSON, EVEN IF YOU RETURN A PROXY.
CARDIOTHORACIC SYSTEMS, INC.
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PROXY STATEMENT FOR
1999 ANNUAL MEETING OF STOCKHOLDERS
MAY 4, 1999
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INFORMATION CONCERNING VOTING AND PROXY SOLICITATION
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
CardioThoracic Systems, Inc. ("CardioThoracic Systems" or the "Company") for use
at the Annual Meeting of Stockholders to be held on Tuesday, May 4, 1999 at 2:00
p.m., local time, or at any adjournment thereof. The Annual Meeting will be held
at the Company's principal executive offices, 10600 N. Tantau Ave., Cupertino,
California 95014. The telephone number at the meeting location is (408)
342-1700.
These proxy solicitation materials and the Annual Report to Stockholders for
the fiscal year ended January 1, 1999 (the "Last Fiscal Year"), including
financial statements, were first mailed on or about April 1, 1999, to all
stockholders entitled to vote at the Annual Meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on March 25, 1999 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. At
the Record Date, 14,321,933 shares of the Company's Common Stock, $.001 par
value per share (the "Common Stock"), were issued and outstanding and held of
record by approximately 284 stockholders.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person. Attending the Annual
Meeting in and of itself may not constitute a revocation of a proxy.
VOTING AND SOLICITATION
Each stockholder is entitled to one vote for each share held as of the
Record Date. Stockholders will not be entitled to cumulate their votes in the
election of directors.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses incurred in forwarding solicitation material
to such beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation, in
person or by telephone or facsimile. The Company may retain a proxy solicitation
firm to aid in soliciting proxies from its stockholders. The fees of such firm
are estimated not to exceed $5,000, plus reimbursement of expenses.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections (the "Inspector") with the assistance of the
Company's Transfer Agent. The Inspector will also determine whether or not a
quorum is present. Except in certain specific circumstances, the affirmative
vote of a
majority of shares present in person or represented by proxy at a duly held
meeting at which a quorum is present is required under Delaware law for approval
of proposals presented to stockholders. In general, Delaware law also provides
that a quorum consists of a majority of shares which are entitled to vote and
which are present or represented by proxy at the meeting.
The Inspector will treat shares that are voted "WITHHELD" or "ABSTAIN" as
being present and entitled to vote for purposes of determining the presence of a
quorum but will not be treated as votes in favor of or opposed to approving any
matter submitted to the stockholders for a vote. Any proxy which is returned
using the form of proxy enclosed and which is not marked as to a particular item
will be voted for the election of the Class II director, for approval of the
amendment of the Incentive Stock Plan, for the confirmation of the appointment
of the designated independent auditors and, as the proxy holders deem advisable,
on other matters that may come before the meeting, as the case may be, with
respect to the items not marked.
If a broker indicates on the enclosed proxy or its substitute that it does
not have discretionary authority as to certain shares to vote on a particular
matter ("Broker Non-Votes"), those shares will not be considered as present with
respect to that matter. The Company believes that the tabulation procedures to
be followed by the Inspector are consistent with the general statutory
requirements in Delaware concerning voting of shares and determination of a
quorum.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS TO BE PRESENTED AT 2000 ANNUAL
MEETING
Proposals that are intended to be presented by stockholders of the Company
at the 2000 Annual Meeting of Stockholders must be received by the Company no
later than December 10, 1999 in order to be considered for inclusion in the
proxy statement and form of proxy relating to that meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file an initial report of ownership on Form 3 and changes
in ownership on Form 4 or Form 5 with the Securities and Exchange Commission
(the "SEC") and the National Association of Securities Dealers, Inc. Executive
officers, directors and greater than ten percent stockholders are also required
by SEC rules to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that, with respect to fiscal year 1998, all filing requirements applicable to
its officers, directors and ten percent stockholders were complied with.
SHARE OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Common Stock of the Company as of
March 15, 1999, by: (i) each person who is known to the Company to beneficially
own more than five percent of the outstanding shares of its Common Stock, (ii)
each director and nominee for election, (iii) each officer named in the Summary
Compensation Table below, and (iv) all directors, nominees for election and
executive officers as a group. Unless otherwise indicated, officers and
directors can be reached at the Company's principal executive
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offices. A total of 14,321,933 shares of the Company's Common Stock were issued
and outstanding as of March 15, 1999.
SHARES
BENEFICIALLY APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED PERCENT OF TOTAL(2)
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Entities Affiliated with New Enterprise Associates VI, Limited Partnership(3)... 963,500 6.7%
1119 St. Paul Street
Baltimore, MD 21202
Entities Affiliated with The Vertical Fund Associates, L.P.(4).................. 945,000 6.6
18 Bank Street
Summit, NJ 07901
Morgenthaler Venture Partners IV(5)............................................. 840,000 5.9
629 Euclid Avenue
Suite 700
Cleveland, OH 44114
Thomas C. McConnell(6).......................................................... 969,500 6.8
Richard M. Ferrari(7)........................................................... 966,541 6.7
Jack W. Lasersohn(8)............................................................ 966,000 6.7
Charles S. Taylor(9)............................................................ 954,818 6.7
Robert C. Bellas, Jr. (10)...................................................... 846,000 5.9
Steven M. Van Dick(11).......................................................... 188,061 1.3
Thomas J. Fogarty, M.D.(12)..................................................... 152,462 1.1
Michael J. Billig(13)........................................................... 139,236 *
Jeffrey G. Gold(14)............................................................. 118,566 *
Philip M. Young(15)............................................................. 13,857 *
All directors, nominees and executive officers as a group (12 persons) (16)..... 5,406,240 36.6
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* Less than 1%
(1) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Applicable percentage ownership is based on 14,321,933 shares of Common
Stock outstanding as of March 15, 1999, together with applicable options
for such stockholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, based on factors
including voting and investment power with respect to shares. Shares of
Common Stock subject to options currently exercisable, or exercisable
within 60 days after March 15, 1999, are deemed outstanding for computing
the percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Consists of 873,500 shares held of record by New Enterprise Associates VI,
Limited Partnership ("NEA VI") and 90,000 shares held of record by New
Enterprise Associates VII, Limited Partnership ("NEA VII"), a limited
partnership affiliated with NEA VI. By virtue of their relationship as
affiliated limited partnerships, whose general partners have overlapping
individual general partners, NEA VI and NEA VII may be deemed to share the
power to direct the disposition and vote of the total 963,500 shares.
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(4) Consists of 809,500 shares held of record by the Vertical Fund Associates,
L.P. ("VFA") with respect to which VFA has sole voting and dispositive
power, and 135,500 shares held of record by Vertical Life Sciences, L.P.
("VLS") with respect to which VLS has sole voting and dispositive power.
(5) All 840,000 shares are held of record by Morgenthaler Venture Partners IV
("MVP IV"); however, power to direct the disposition and vote of the shares
is shared by MVP IV, Morgenthaler Management Partners IV, its general
partner ("MMP IV"), and the general partners of MMP IV. Beneficial
ownership of the shares is disclaimed except in the case of MVP IV for the
840,000 shares which it holds of record.
(6) Consists of 873,500 shares held by NEA VI, 90,000 shares held of record by
NEA VII, and 6,000 shares issuable upon exercise of options exercisable
within 60 days after March 15, 1999. Thomas C. McConnell is a director of
the Company and a general partner of NEA Partners VI, Limited Partnership,
(the sole general partner of New Enterprise Associates VI, Limited
Partnership) and NEA Partners VII, Limited Partnership, (the sole general
partner of New Enterprise Associates VI, Limited Partnership). Mr.
McConnell disclaims beneficial ownership of the shares held by New
Enterprise Associates VI, Limited Partnership and New Enterprise Associates
VII, Limited Partnership except to the extent of his proportionate
partnership interests in the general partners thereof.
(7) Includes 25,000 shares issuable upon exercise of options exercisable within
60 days after March 15, 1999. An aggregate of 1,500 of the shares are held
in custodial accounts for Mr. Ferrari's children.
(8) Consists of 819,500 shares held by VFA, 140,500 shares held by VLS and
6,000 shares issuable upon exercise of options exercisable within 60 days
after March 15, 1999. Jack W. Lasersohn is a director of the Company, a
general partner of the Vertical Group, L.P. which is in turn the general
partner of VFA and of VLS. Mr. Lasersohn disclaims beneficial ownership of
the shares held by VFA and VLS except to the extent of his pecuniary
interests therein.
(9) Includes 6,666 shares issuable upon exercise of options exercisable within
60 days after March 15, 1999.
(10) Consists of 840,000 shares held by MVP IV and 6,000 shares issuable upon
exercise of options exercisable within 60 days after March 15, 1999. Mr
Bellas, a director of the Company, is a general partner of MMP IV, the
general partner of MVP IV. Mr. Bellas shares voting or investment control
over the shares held by MVP IV. Mr. Bellas disclaims beneficial ownership
of the shares held by MVP IV except to the extent of his proportionate
partnership interests in the general partner thereof.
(11) Includes 166,666 shares issuable upon exercise of options exercisable
within 60 days after March 15, 1999. An aggregate of 1,810 of the shares
are held in custodial accounts for Mr. Van Dick's children.
(12) Consists of 45,919 shares held by Three Arch Partners, L.P., (some of
which remain subject to repurchase by the Company), 10,330 shares held by
Three Arch Associates, L.P., (some of which remain subject to repurchase
by the Company), 89,427 shares held by the Thomas Fogarty Separate
Property Trust, 786 shares hold by Fogarty Engineering, and 6,000 shares
issuable upon exercise of options exercisable within 60 days after March
15, 1999. Thomas J. Fogarty, M.D. is a director of the Company and a
general partner of Three Arch Partners, L.P. and Three Arch Associates,
L.P. (14) Includes 6,000 shares issuable upon exercise of options
exercisable within 60 days after March 15, 1999.
(13) Includes 12,500 shares issuable upon exercise of options exercisable
within 60 days after March 15, 1999.
(14) Includes 96,768 shares issuable upon exercise of options exercisable
within 60 days after March 15, 1999.
4
(15) Includes 6,000 shares issuable upon exercise of options exercisable within
60 days after March 15, 1999.
(16) Includes 427,599 shares issuable upon exercise of options exercisable
within 60 days after March 15, 1999.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
DIRECTORS AND NOMINEES FOR DIRECTOR
Pursuant to the Company's Certificate of Incorporation and Bylaws, the
Company's Board of Directors currently consists of seven persons, divided into
three classes serving staggered terms of three years. Currently there are two
directors in Class I, two directors in Class II and three directors in Class
III. One Class II director is to be elected at the Annual Meeting, leaving one
vacancy on the Board of Directors among the Class II directors. Although a
vacancy will remain among the Class II directors following the 1999 Annual
Meeting of Stockholders, the form of proxy delivered with this Proxy Statement
cannot be voted for a greater number of persons than the number of nominees
named therein. The Company is currently conducting a search for a suitable
candidate for the vacant Class II position. The Class I and Class III directors
will be elected at the Company's 2001 and 2000 Annual Meetings of Stockholders,
respectively. The Class II director elected at the Annual Meeting will hold
office until the 2002 Annual Meeting of Stockholders or until his successor has
been duly elected and qualified.
In the event that any such person becomes unavailable or declines to serve
as a director at the time of the Annual Meeting, the proxy holders will vote the
proxies in their discretion for any nominee who is designated by the current
Board of Directors to fill the vacancy. It is not expected that the nominee will
be unavailable to serve.
The name of the Class II nominee for election to the Board of Directors at
the Annual Meeting, his age as of the Record Date and certain information about
him is set forth below. The names of the current Class I and Class III directors
with unexpired terms, their ages as of the Record Date and certain information
about them are also set forth below:
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
- ------------------------------------ ----- ------------------------------------------------------------ --------
NOMINEE FOR CLASS II DIRECTOR
Thomas C. McConnell(1)(2)........... 44 Director 1995
CONTINUING CLASS I DIRECTORS
Thomas J. Fogarty, M.D.............. 65 Director 1996
Charles S. Taylor................... 44 Vice President, Chief Technical Officer, Director 1995
CONTINUING CLASS III DIRECTORS
Richard M. Ferrari.................. 45 Chief Executive Officer, President, Director 1995
Jack W. Lasersohn(2)................ 46 Director 1995
Philip M. Young(1).................. 59 Director 1995
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(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
There are no family relationships among directors or executive officers of
the Company.
THOMAS C. MCCONNELL has served as a director of the Company since September
1995. He has been a General Partner of New Enterprise Associates ("NEA"), a
venture capital investment entity, since 1989 and has been associated with NEA
since 1985. Mr. McConnell also serves as a director of Conceptus, Inc.,
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Applied Imaging Corp. and Innovasive Devices Inc. He holds an M.B.A. from
Stanford University Graduate School of Business.
THOMAS J. FOGARTY, M.D. has served as a director of the Company since
February 1996. Dr. Fogarty is an internationally recognized cardiovascular
surgeon, inventor and venture capitalist. He is a General Partner of Three Arch
Partners, a venture capital firm investing primarily in medical device
companies, and has held the position of Professor of Surgery at Stanford
University Medical Center since July 1993. Dr. Fogarty also serves as a director
of Raytel Medical Corporation, Cardiac Pathways Corporation, and General
Surgical Innovations, Inc. Dr. Fogarty holds an M.D. from the University of
Cincinnati College of Medicine.
CHARLES S. TAYLOR, the founder of the Company, was with Informed Creation,
the predecessor company to CardioThoracic Systems, since its inception in
November 1993, and has served as Vice President, Chief Technical Officer and a
director of the Company since its incorporation in June 1995. From June 1992
until November 1993, Mr. Taylor was a member of the research and development
group at Stanford Surgical Technologies, Inc. (now Heartport, Inc., a publicly
traded company), that develops instruments for advanced cardiac surgical
procedures. From January 1992 to May 1992, Mr. Taylor managed the establishment
of a new development group for Eli Lilly's Medical Instrument Systems division
(now Guidant Corp., a publicly traded company), the Technology Development
Center, which develops surgical devices for vascular intervention procedures.
From May 1986 to December 1991, he was an Engineer and Manager for Advanced
Cardiovascular Systems, Inc. where he directed teams of engineers developing new
manufacturing technologies and custom research and development equipment.
RICHARD M. FERRARI joined the Company as Chief Executive Officer and a
director in June 1995 and was elected President in August 1995. From January
1991 until joining the Company, he was President and Chief Executive Officer of
Cardiovascular Imaging Systems, Inc. ("CVIS"), a manufacturer of intravascular
ultrasound systems, which is currently a subsidiary of Boston Scientific
Corporation. From March 1990 until joining CVIS, he served as President and
Acting Chief Executive Officer of Medstone International, Inc., a manufacturer
of lithotripsy equipment for treatment of gall and kidney stones. From 1981 to
February 1990, he was employed with ADAC Laboratories, a supplier of diagnostic
imaging equipment, serving most recently as Executive Vice President and General
Manager responsible for the Nuclear Medicine, Digital Cardiology, Information
Management and Radiation Therapy business units. Mr. Ferrari holds an M.B.A.
from the University of South Florida.
JACK W. LASERSOHN has served as a director of the Company since September
1995. He has been a General Partner of The Vertical Group, L.P., a venture
capital firm investing primarily in medical technology companies, since its
formation in 1989. From 1981 to 1989, Mr. Lasersohn was the director of the
venture capital division of F. Eberstadt & Co., Inc. Mr. Lasersohn also serves
as a director of VitalCom Inc., UroQuest Medical Corporation, Massimo, Inc. and
a number of privately held medical companies. He holds a B.S. and an M.A. from
Tufts University and a J.D. from Yale University.
PHILIP M. YOUNG has served as a director of the Company since September
1995. He has been a general partner of U.S. Venture Partners, a venture capital
firm, since April 1990. Mr. Young serves as a director of 3Dfx Interactive,
Inc., The Immune Response Corporation, Vical, Inc. and Zoran Corporation. He
holds an M.B.A. from Harvard University.
ROBERT C. BELLAS, JR. is not standing for re-election as a Class II
director.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held seven meetings during the fiscal
year ended January 1, 1999. No director attended fewer than 75% of the meetings
of the Board of Directors during the fiscal year ended January 1, 1999, with the
exception of director Fogarty, who attended four meetings and director
McConnell, who attended five meetings. The Board of Directors has an Audit
Committee and a
6
Compensation Committee. It does not have a nominating committee or a committee
performing the functions of a nominating committee. From time to time, the Board
has created various ad hoc committees for special purposes. No such committee is
currently functioning.
The Audit Committee consists of directors Lasersohn and McConnell. The Audit
Committee is responsible for reviewing the results and scope of the audit and
other services provided by the Company's independent auditors. The Audit
Committee held two meetings during the last fiscal year.
The Compensation Committee consists of directors McConnell and Young and
included former director Bellas prior to his resignation. The Compensation
Committee reviews and makes recommendations to the Board concerning salaries and
incentive compensation for officers of the Company and administers the Company's
equity incentive plans. The Compensation Committee held five meetings during the
last fiscal year.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for services they
provide as directors, aside from reimbursement of out-of-pocket expenses
incurred in connection with attendance at board meetings. From time to time,
certain directors who are not employees of the Company have received grants of
options to purchase shares of the Company's Common Stock. Under the Company's
Director Option Plan, each director who is not an employee or consultant of the
Company receives an option to purchase 12,000 shares of Common Stock upon
joining the Board of Directors. Thereafter, each non-employee director who has
served on the Board of Directors for at least six months receives an option to
purchase 3,000 shares of Common Stock on the date of each of the Company's
annual meetings of stockholders, provided such non-employee director is
re-elected or continues to serve as a director.
In February 1996, the Company entered into a four-year consulting agreement
with director Thomas J. Fogarty, M.D. for the development of devices,
instruments, and techniques for minimally invasive coronary artery bypass graft
surgery. The Company granted to Three Arch Associates, L.P. and Three Arch
Partners, L.P., partnerships of which Dr. Fogarty is a general partner, options
to purchase 90,000 shares of common stock. In February 1996, the partnerships
exercised the options and purchased the shares, which are subject to a right of
repurchase in the event of termination of the consulting agreement and Dr.
Fogarty's services as a board member. The repurchase right lapses at the rate of
1/48 of the shares per month beginning in March 1996. The consulting agreement
also provides for certain royalty payments to Dr. Fogarty based on certain
product sales by the Company. No such royalty payments were made in 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company. The Compensation Committee also administers the
Company's various incentive compensation plans. During the year ended January 1,
1999, directors Bellas, McConnell and Young served as the Compensation Committee
of the Company's Board of Directors. Mr. Ferrari, who is President and Chief
Executive Officer of the Company, participates in all discussions and decisions
regarding salaries and incentive compensation for all employees and consultants
to the Company, except that Mr. Ferrari is excluded from discussions regarding
his own salary and incentive compensation. No member of the Compensation
Committee has a relationship that would constitute an interlocking relationship
with executive officers or directors of another entity.
VOTE REQUIRED
The nominee receiving the highest number of affirmative votes of the shares
entitled to vote on this matter shall be elected as the Class II director.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
NOMINEE SET FORTH HEREIN.
7
PROPOSAL NO. 2
INCREASE IN NUMBER OF SHARES AUTHORIZED
UNDER THE COMPANY'S INCENTIVE STOCK PLAN
The Company's Board of Directors and stockholders have previously adopted
and approved the Incentive Stock Plan (the "Stock Plan"). A total of 2,800,000
shares of Common Stock have been reserved for issuance under the Stock Plan, and
only 389,202 shares were available for future grant as of the Record Date. In
January 1999, the Board of Directors authorized an amendment to the Stock Plan,
subject to stockholder approval, to increase the shares reserved for issuance
thereunder by 500,000, bringing the total number of shares issuable under the
Stock Plan to 3,300,000.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment of the Stock Plan to increase the number of
shares of Common Stock reserved for issuance thereunder. A vote for the
amendment of the Stock Plan will constitute approval of the proposed increase in
the number of shares authorized for issuance under the Stock Plan.
The Board of Directors believes that the amendment is necessary to enable
the Company to, among other things, continue its policy of employee stock
ownership as a means to motivate high levels of performance and to recognize key
employee accomplishments. A summary of the Stock Plan is set forth below.
SUMMARY OF THE STOCK PLAN
GENERAL. The Stock Plan was originally adopted by the Board of Directors in
August 1995 and approved by the stockholders in August 1995. The Stock Plan
authorizes the Board of Directors (the "Board"), or one or more committees which
the Board may appoint from among its members (the "Committee"), to grant options
and rights to purchase Common Stock. Options granted under the Stock Plan may be
either "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options, as
determined by the Board or the Committee.
PURPOSE. The general purpose of the Stock Plan is to attract and retain the
best available personnel for positions of substantial responsibility, to provide
additional incentive to employees, directors and consultants and to promote the
success of the Company's business.
ADMINISTRATION. The Stock Plan may be administered by the Board or the
Committee. Subject to the other provisions of the Stock Plan, the administrator
has the authority: (i) to determine the fair market value of the Company's
Common Stock; (ii) to select the service providers (employees, directors or
consultants) to whom options and stock purchase rights may be granted under the
Stock Plan; (iii) to determine the number of shares of Common Stock to be
covered by each option and stock purchase right granted under the Stock Plan;
(iv) to approve forms of agreement for use under the Stock Plan; (v) to
determine the terms and conditions, not inconsistent with the terms of the Stock
Plan, of any option or stock purchase right granted under the Stock Plan,
including the exercise price, the time or times when options or stock purchase
rights may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any restriction
or limitation regarding any option or stock purchase right or the shares of
Common Stock relating thereto, based in each case on such factors as the
administrator of the Stock Plan, in its sole discretion, shall determine; (vi)
to reduce the exercise price of any option or stock purchase right to the then
current fair market value if the fair market value of the Common Stock covered
by such option or stock purchase right shall have declined since the date the
option or stock purchase right was granted; (vii) to institute an option
exchange program; (viii) to construe and interpret the terms of the Stock Plan
and awards granted pursuant to the Stock Plan; (ix) to prescribe, amend and
rescind rules and regulations relating to the Stock Plan, including rules and
regulations relating to sub-plans established for the purpose of qualifying for
preferred tax treatment
8
under foreign tax laws; (x) to modify or amend any option or stock purchase
right (subject to certain provisions of the Stock Plan), including the
discretionary authority to extend the post-termination exercisability period of
options longer than is otherwise provided for in the Stock Plan; (xi) to allow
optionees to satisfy withholding tax obligations by electing to have the Company
withhold from the shares to be issued upon exercise of an option or stock
purchase right that number of shares having a fair market value equal to the
amount required to be withheld; (xii) to authorize any person to execute on
behalf of the Company any instrument required to effect the grant of an option
or stock purchase right previously granted by the administrator; and (xiii) to
make all other determinations deemed necessary or advisable for administering
the Stock Plan.
In August 1996, the Compensation Committee authorized the Chief Executive
Officer of the Company to make initial option grants of up to 15,000 shares to
new employees. The Chief Executive Officer has authority to grant such options
to new employees who do not report directly to him; the Chief Financial
Officer's approval is required to grant such options to new employees who report
directly to the Chief Executive Officer. The Chief Executive Officer and Chief
Financial Officer report to the Compensation Committee with regard to such
matters.
ELIGIBILITY. The Stock Plan provides that options and rights may be granted
to the Company's employees, directors and consultants. Incentive stock options
may be granted only to employees. Any optionee who owns more than 10% of the
voting power of all classes of outstanding stock of the Company (a "10%
Stockholder") is not eligible for the grant of an incentive stock option unless
the exercise price of the option is at least 110% of the fair market value of
the Common Stock on the date of grant.
PERFORMANCE-BASED COMPENSATION LIMITATIONS. No employee, director or
consultant shall be granted, in any fiscal year of the Company, options to
purchase more than 500,000 shares of Common Stock. In connection with his or her
initial service to the Company, an employee, director or consultant may be
granted options to purchase up to an additional 500,000 shares, which do not
count against the 500,000 share limit. The foregoing limitations, which shall be
adjusted proportionately in connection with any change in the Company's
capitalization, are intended to satisfy the requirements applicable to options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code. In the event that the Administrator determines that
such limitation is not required to qualify options as performance-based
compensation, the Administrator may modify or eliminate such limitation.
TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Stock Plan
is evidenced by a written stock option agreement between the optionee and the
Company and is subject to the following terms and conditions:
(a) EXERCISE PRICE. The Board or the Committee determines the exercise
price of options to purchase shares of Common Stock at the time the options are
granted. However, excluding options issued to 10% Stockholders, the exercise
price under an incentive stock option must not be less than 100% of the fair
market value of the Common Stock on the date the option is granted. As the
Company's Common Stock is listed on the Nasdaq National Market, the fair market
value shall be the closing sales price of the Common stock (or the closing bid
if no sales were reported) on the date the option is granted.
(b) FORM OF CONSIDERATION. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally may be
made by cash, check, promissory note, other shares of Common Stock of the
Company owned by the optionee, consideration received by the Company under a
formal cashless exercise program adopted by the Company, a reduction in the
amount of any Company liability to the Optionee, or by a combination of such
methods.
(c) EXERCISE OF THE OPTION. Each stock option agreement specifies the term
of the option and the date when the option is to become exercisable. However, in
no event shall an option granted under the Stock Plan be exercised more than 10
years after the date of grant. Moreover, in the case of an incentive stock
9
option granted to a 10% Stockholder, the term of the option shall be for no more
than five years from the date of grant.
(d) TERMINATION OF EMPLOYMENT. If an optionee ceases for any reason (other
than death or permanent disability) to be a service provider to the Company,
then all options held by such optionee under the Stock Plan expire upon the
earlier of (i) such period of time as is set forth in his or her option
agreement (but not to exceed three months after the termination of his or her
employment in the event of an incentive stock option) or (ii) the expiration
date of the option. The optionee may exercise all or part of his or her option
at any time before such expiration to the extent that such option was
exercisable at the time of termination of employment.
(e) PERMANENT DISABILITY. If an optionee ceases to be a service provider to
the Company as a result of permanent and total disability (as defined in the
Code), then all options held by such optionee under the Stock Plan shall expire
upon the earlier of (i) twelve months after the date of termination of the
optionee's employment or (ii) the expiration date of the option. The optionee
may exercise all or part of his or her option at any time before such expiration
to the extent that such option was exercisable at the time of termination of
employment.
(f) DEATH. If an optionee dies while a service provider to the Company, his
or her option shall expire upon the earlier of (i) twelve months after the
optionee's death or (ii) the expiration date of the option. The executors or
other legal representative or the optionee may exercise all or part of the
optionee's option at any time before such expiration to the extent that such
option was exercisable at the time of death.
(g) TERMINATION OF OPTIONS. Each stock option agreement will specify the
term of the option. Notwithstanding the foregoing, however, the term of any
incentive stock option shall not exceed 10 years from the date of grant. No
options may be exercised by any person after the expiration of its term.
(h) NONTRANSFERABILITY OF OPTIONS. Unless determined otherwise by the
Administrator, during an optionee's lifetime, his or her option(s) shall be
exercisable only by the optionee and shall not be transferable other than by
will or laws of descent and distribution.
(i) VALUE LIMITATION. If the aggregate fair market value of all shares of
Common Stock subject to an optionee's incentive stock option which are
exercisable for the first time during any calendar year exceeds $100,000, the
excess options shall be treated as nonstatutory options.
(j) OTHER PROVISIONS. The stock option agreement may contain such terms,
provisions and conditions not inconsistent with the Stock Plan as may be
determined by the Board or Committee.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION AND CORPORATE TRANSACTIONS. In
the event that the stock of the Company is changed by reason of any stock split,
reverse stock split, stock dividend, recapitalization or other change in the
capital structure of the Company, appropriate proportional adjustments shall be
made in the number and class of shares of stock subject to the Stock Plan, the
number and class of shares of stock subject to any option or stock purchase
right outstanding under the Stock Plan, and the exercise price of any such
outstanding option or stock purchase right. Any such adjustment shall be made
upon approval of the Board and, if required, the stockholders of the Company,
whose determination shall be conclusive. Notwithstanding the above, in
connection with any merger, consolidation, acquisition of assets or like
occurrence involving the Company, each outstanding option and right shall be
assumed or an equivalent option or right substituted by a successor corporation
or a parent or subsidiary of the successor corporation. If the successor
corporation does not assume the options or substitute substantially equivalent
options, then the exercisability of all outstanding options and rights shall be
accelerated. In the event of the proposed dissolution or liquidation of the
Company, the exercisability of all outstanding options and rights may be
accelerated at the discretion of the Administrator. To the extent they have not
been previously exercised, options shall terminate upon consummation of the
action.
10
AMENDMENT, SUSPENSIONS AND TERMINATION OF THE STOCK PLAN. The Board may
amend, alter, suspend or terminate the Stock Plan at any time; provided,
however, that the Company shall obtain stockholder approval of any amendment to
the extent necessary and desirable to comply with Section 422 of the Code or any
other applicable rule or statute. In any event, the Stock Plan will terminate
automatically in 2005.
FEDERAL TAX INFORMATION. Options granted under the Stock Plan may be either
incentive stock options, as defined in Section 422 of the Code, or nonstatutory
options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (i)
the fair market value of the shares at the date of the option exercise or (ii)
the sale price of the shares. A different rule for measuring ordinary income
upon such a premature disposition may apply if the optionee is also an officer,
director, or 10% stockholder of the Company. The Company will be entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as
long-term or short-term capital gain or loss, depending on the holding period.
All other options which do not quality as incentive stock options are
nonstatutory options. An optionee will not recognize any taxable income at the
time a nonstatutory option is granted. However, upon its exercise, the optionee
will recognize taxable income, generally measured as the excess of the then fair
market value of the shares purchased over the purchase price. Any taxable income
recognized in connection with an option exercise by an optionee who is also an
employee of the Company will be subject to tax withholding by the Company. Upon
resale of such shares by the optionee, any difference between the sales price
and the optionee's purchase price, to the extent not recognized as taxable
income as described above, will be treated as long-term or short-term capital
gain or loss, depending on the holding period.
Subject to Section 162(m) of the Code, the Company will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the optionee
with respect to shares acquired upon exercise of a nonstatutory option.
Stock purchase rights are taxed in substantially the same manner as
nonstatutory options.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Stock Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
VOTE REQUIRED
The approval of the amendment of the Stock Plan requires the affirmative
vote of a majority of the shares of the Company's Common Stock present and
voting at the Annual Meeting.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT OF THE INCENTIVE STOCK PLAN SET FORTH HEREIN.
11
PROPOSAL NO. 3
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected PricewaterhouseCoopers LLP, independent
auditors, to audit the financial statements of the Company for the fiscal year
ending December 31, 1999 and recommends that the stockholders vote FOR
confirmation of such selection. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection. Coopers &
Lybrand L.L.P., the predecessor entity to PricewaterhouseCoopers LLP, has
audited the Company's financial statements since its inception. Representatives
of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting
with the opportunity to make a statement if they desire to do so, and are
expected to be available to respond to appropriate questions.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
12
EXECUTIVE COMPENSATION
COMPENSATION TABLES
SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation paid by the Company to the Chief Executive Officer and the four
other most highly compensated executive officers of the Company (the "Named
Executive Officers") for services rendered during the fiscal years ended
December 31, 1996, January 2, 1998 and January 1, 1999:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
-----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
----------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION
- ------------------------------------------------------------ ---- ------------- ------- ---------- ---------- ------------
Richard M. Ferrari.......................................... 1998 $ 234,693 83,425 --(1) 175,000 $63,502(2)
President and Chief Executive Officer 1997 229,166 75,000 --(1) -- 60,751(3)
1996 189,583 70,000 --(1) -- 28,098(4)
Jeffrey G. Gold............................................. 1998 185,431 41,439 -- 225,000(5) 32,031(6)
Executive Vice President and Chief Operating Officer 1997 123,059(7) 147,033 -- 190,000 106,234(8)
1996 -- -- -- -- --
Steven M. Van Dick.......................................... 1998 174,539 41,113 -- 100,000 306(9)
Vice President, Finance and Administration and Chief 1997 157,309 47,453 -- -- 568(10)
Financial Officer 1996 99,167(11) 42,908 -- 200,000 976(12)
Charles S. Taylor........................................... 1998 144,539 30,958 --(13) 45,000 306(14)
Vice President and Chief Technical Officer 1997 132,500 65,000 --(13) -- 407(15)
1996 130,000 -- --(13) -- 1,100(16)
Michael J. Billig........................................... 1998 140,000 32,156 -- 45,000 522(17)
Vice President, Regulatory, Quality and Clinical Research 1997 141,658 40,294 -- -- 923(18)
1996 115,104(19) 46,089 -- 140,000 1,100(20)
- ------------------------
(1) As of January 1, 1999, Mr. Ferrari held 941,541 shares of the Company's
Common Stock having a value of $6,532,411, based upon the closing price of
$6.938 per share on December 31, 1998. Pursuant to the terms of a Common
Stock Purchase Agreement dated August 1, 1995, certain of the shares
(originally aggregating to 945,041 shares) are subject to repurchase by the
Company at $0.00097 per share in the event of a termination of Mr.
Ferrari's employment with the Company. The shares held by Mr. Ferrari are
subject to the following vesting schedule: (1) one twenty-fourth (1/24) of
206,120 of the original aggregate number of shares were released from the
repurchase option on each of May 31, June 30, July 31 and August 31, 1995;
on September 8, 1995, an additional 103,060 shares were released from the
repurchase option; pursuant to the terms of an Amendment Agreement dated
September 8, 1995, one forty-eighth (1/48) of the remaining 68,707 shares
were and will continue to be released at the end of each month thereafter,
contingent upon Mr. Ferrari's continued employment with the Company; (2)
one forty-eighth (1/48) of 738,921 of the original aggregate number of
shares were released from the repurchase option on August 31, 1995;
pursuant to the terms of an Amendment Agreement dated September 8, 1995,
1/48 of the remaining 723,527 shares were and will continue to be released
at the end of each month thereafter, contingent upon Mr. Ferrari's
continued employment with the Company. As of January 1, 1999, a total of
796,496 shares had been released from the Company's repurchase options.
None of the shares will be subject to the repurchase options after
September 8, 1999.
13
(2) Consists of $51,300 in imputed interest on a non-interest-bearing loan from
the Company to Mr. Ferrari, twelve payments of a $700 monthly car
allowance, payments reimbursing automobile expenses totaling $3,260 and
payment by the Company of life insurance premiums for the benefit of Mr.
Ferrari in the amount of $542.
(3) Consists of $51,300 in imputed interest on a non-interest-bearing loan from
the Company to Mr. Ferrari, twelve payments of a $700 monthly car allowance
and payment by the Company of life insurance premiums for the benefit of
Mr. Ferrari in the amount of $1,051.
(4) Consists of $19,396 in imputed interest on a non-interest-bearing loan from
the Company to Mr. Ferrari, twelve payments of a $700 monthly car allowance
and payment of life insurance premiums for the benefit of Mr. Ferrari in
the amount of $302.
(5) Consists of 190,000 options originally granted prior to fiscal year 1998
but which were repriced in connection with an option Exchange Program
described in the section of this Proxy Statement entitled "Stock Option
Repricing Report and Table."
(6) Consists of a housing allowance in the amount of $31,200 and payment by the
Company of life insurance premiums for the benefit of Mr. Gold in the
amount of $831.
(7) Mr. Gold joined the Company as Executive Vice President in May 1997 at an
annualized salary of $160,000. In July 1997, Mr. Gold was also appointed
Chief Operating Officer.
(8) Consists of a housing allowance in the amount of $24,000, relocation
payments in the amount of $80,842 plus payment by the Company of life
insurance premiums for the benefit of Mr. Gold in the amount of $1,392.
(9) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Van Dick.
(10) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Van Dick.
(11) Mr. Van Dick accepted employment with the Company as Vice President of
Finance and Administration and Chief Financial Officer in March 1996; his
employment began in April 1996 at an annualized salary of $140,000.
(12) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Van Dick.
(13) As of January 1, 1999, Mr. Taylor held 948,152 shares of Common Stock
having a value of $6,578,279 based upon the closing price of $6.938 per
share on December 31, 1998. Pursuant to the terms of a Common Stock
Purchase Agreement dated August 1, 1995, certain of the shares are subject
to repurchase by the Company at $0.00097 per share in the event of a
termination of Mr. Taylor's employment with the Company. One forty-eighth
(1/48) of the shares were released from the repurchase option as of the
last day of each month from November 1993 through August 1995. Pursuant to
the terms of an Amendment Agreement dated September 8, 1995, 1/48 of the
513,583 shares still subject to the Company's repurchase option as of
September 8, 1995 were and will continue to be released from the
repurchase option at the end of each month thereafter, contingent upon Mr.
Taylor's continued employment with the Company. As of January 1, 1999, a
total of 851,855 shares had been released from the Company's repurchase
option. None of the shares will be subject to the repurchase option after
September 8, 1999.
(14) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Taylor.
(15) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Taylor.
(16) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Taylor.
(17) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Billig.
(18) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Billig.
14
(19) Mr. Billig joined the Company as Vice President, Regulatory, Quality, and
Clinical Research in February 1996 at an annualized salary of $130,000.
(20) Consists of payments by the Company of life insurance premiums for the
benefit of Mr. Billig.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning stock options
granted during the fiscal year ended January 1, 1999 to the Named Executive
Officers. In accordance with the rules of the Securities and Exchange
Commission, the following table also sets forth the potential realizable value
over the term of the options (the period from the grant date to the expiration
date) based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts do not represent the Company's estimate of future stock
prices. Actual realizable values, if any, of stock options will depend on the
future performance of the Common Stock.
OPTION GRANTS IN FISCAL YEAR ENDED JANUARY 1, 1999
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
---------------------------------------------------------------- STOCK PRICE
NUMBER OF PERCENT OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS EXERCISE OR OPTION TERM(3)
UNDERLYING OPTIONS GRANTED IN BASE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL 1998(1) ($/SH)(2) DATE 5%($) 10%($)
- ------------------------------ ------------------- --------------- ------------- ----------- --------- ---------
Richard M. Ferrari............ 75,000 5.08% 5.50 1/06/08 259,419 657,419
Richard M. Ferrari............ 100,000 6.77 5.00 12/16/08 314,447 796,871
Jeffrey G. Gold............... 42,500(4) 2.88 5.50 1/06/08 147,004 372,537
Jeffrey G. Gold............... 50,000(4) 3.39 5.50 1/06/08 172,946 438,279
Jeffrey G. Gold............... 27,500(4) 1.86 5.50 1/06/08 95,120 241,054
Jeffrey G. Gold............... 35,000(4) 2.37 5.50 1/06/08 121,062 306,795
Jeffrey G. Gold............... 35,000(4) 2.37 5.50 1/06/08 121,062 306,795
Jeffrey G. Gold............... 35,000 2.37 5.00 12/16/08 110,057 278,905
Steven M. Van Dick............ 50,000 3.39 5.50 1/06/08 172,946 438,279
Steven M. Van Dick............ 50,000 3.39 5.00 12/16/08 157,224 398,436
Charles S. Taylor............. 20,000 1.35 5.50 1/06/08 69,178 175,312
Charles S. Taylor............. 25,000 1.69 5.00 12/16/08 78,612 199,218
Michael J. Billig............. 20,000 1.35 5.50 1/06/08 69,178 175,312
Michael J. Billig............. 25,000 1.69 5.00 12/16/08 78,612 199,218
- ------------------------
(1) Based on an aggregate of 1,476,525 options granted by the Company in the
fiscal year ended January 1, 1999 to employees of and consultants to the
Company, including the Named Executive Officers.
(2) The exercise price per share of each option was equal to the last reported
sale price of the Common Stock on the date of grant.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Company's Common Stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price.
(4) These options represent options originally granted prior to fiscal year 1998
but which were repriced in connection with an option Exchange Program
described in the section of this Proxy Statement entitled "Stock Option
Repricing Report and Table."
15
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth, for each of the Named Executive Officers,
information with respect to each exercise of stock options during the fiscal
year ended January 1, 1999 and the value of unexercised stock options held by
such individuals at January 1, 1999.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED JANUARY 1, 1999
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED VALUE JANUARY 1, 1999 JANUARY 1, 1999(2)
ON REALIZED ---------------------------- ----------------------------
NAME EXERCISE (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- -------- -------- ----------- -------------- ----------- --------------
Richard M. Ferrari........................... -- -- 18,750 156,250 $ 26,963 $274,688
Jeffrey G. Gold.............................. -- -- 80,936 144,064 $116,386 $224,664
Steven M. Van Dick........................... -- -- 147,500 102,500 $279,605 $179,895
Charles S. Taylor............................ -- -- 5,000 40,000 $ 7,190 $ 70,020
Michael J. Billig............................ 49,583 $251,160 16,667 77,917 $ 86,969 $329,296
- ------------------------
(1) Based on the last reported sale price of the Common Stock on the dates of
exercise.
(2) Based on a value of $6.938 per share, which was the last reported sale price
of the Common Stock on December 31, 1998.
STOCK OPTION REPRICING REPORT OF THE COMPENSATION COMMITTEE AND TABLE
In January 1998 and October 1997, the Compensation Committee of the Board of
Directors authorized the exchange of certain stock options at the then fair
market values of the Company's Common Stock (the "January 1998 Exchange Program"
and the "October 1997 Exchange Program," respectively, and referred to
collectively as the "Exchange Programs").
In January 1998, options to purchase 469,375 shares of Common Stock at
exercise prices ranging from $7.69 to $21.25 per share were exchanged for a like
number of options at an exercise price of $5.50 per share.
In October 1997, options to purchase 369,100 shares of Common Stock at
exercise prices ranging from $7.25 to $23.75 per share were exchanged for a like
number of options at an exercise price of $7.156 per share.
The following table sets forth certain information concerning the Exchange
Programs, including (i) the name and position of each executive officer who
participated in the Exchange Programs, (ii) the date of such exchange, (iii) the
number of securities underlying exchanged options, (iv) the per share market
price of the underlying security at the time of the exchange, (v) the original
exercise price or base price of the canceled option at the time of exchange,
(vi) the per share exercise price of the option received in exchange for the
existing option and (vii) the original option term remaining at the date of
exchange. No executive officers participated in the October 1997 Exchange
Program.
16
10-YEAR OPTION REPRICING
NUMBER OF
SECURITIES EXERCISE
UNDERLYING MARKET PRICE OF PRICE NEW
OPTIONS STOCK AT TIME AT TIME OF EXERCISE
DATE OF REPRICED OF REPRICING REPRICING PRICE
NAME AND POSITION (1) REPRICING (#) ($) ($) ($)
--------------------------- --------- ---------- ---------------- ---------- --------
Geoffrey D. Dillon................................ 1/6/98 90,000 5.50 7.687 5.50
Vice President, Sales and Marketing
Jeffrey G. Gold................................... 1/6/98 35,000 5.50 7.687 5.50
Executive Vice President and Chief Operating 35,000 5.50 14.875 5.50
Officer 50,000 5.50 15.000 5.50
42,500 5.50 21.750 5.50
27,500 5.50 21.750 5.50
LENGTH OF ORIGINAL
OPTION TERM REMAINING
NAME AND POSITION (1) AT DATE OF REPRICING
--------------------------- ---------------------
Geoffrey D. Dillon................................ 3 years 8 months
Vice President, Sales and Marketing
Jeffrey G. Gold................................... 3 years 8 months
Executive Vice President and Chief Operating 3 years 4 months
Officer 3 years 2 months
3 years 2 months
3 years 2 months
COMPENSATION COMMITTEE REPORT ON THE JANUARY 1998 EXCHANGE PROGRAM
After considering various alternatives to address employee retention and
long-term compensation, the Compensation Committee approved the January 1998
Exchange Program on January 6, 1998. Pursuant to the January 1998 Exchange
Program, certain officers and consultants who held stock options granted under
the Company's Incentive Stock Plan and who were not permitted to participate in
the October 1997 Exchange Program were offered the opportunity to exchange all
of their stock options for new stock options with an exercise price of $5.50,
the fair market value to the Common Stock as determined under the terms of the
Incentive Stock Plan. All new stock options issued pursuant to the Exchange
Program were issued under the Incentive Stock Plan. No partial exchanges were
permitted. In addition, the new stock options issued under the January 1998
Exchange Program were issued on a one-for-one basis with the stock options
exchanged. All optionees receiving new options in the January 1998 Exchange
Program were required to agree not to exercise their new options, except in the
case of death, disability or involuntary termination of employment, for a period
of six months following January 6, 1998. All stock options issued under the
January 1998 Exchange Program will expire on January 6, 2008. A total of 469,375
stock options were exchanged in the January 1998 Exchange Program.
Stock options are intended to provide incentives to the Company's officers,
employees and consultants. The Compensation Committee believes that such equity
incentives are a significant factor in the Company's ability to attract, retain
and motivate service providers who are critical to the Company's long-term
success. The disparity between the original exercise prices of the Company's
outstanding stock options and the market price for the Common Stock did not
provide, in the judgment of the Compensation Committee, a meaningful incentive
or retention device to those holding stock options and, therefore, the
Compensation Committee determined that offering the Exchange Program was in the
best interest of the Company and its stockholders.
Members of the Compensation Committee
Robert C. Bellas, Jr.
Thomas C. McConnell
Philip M. Young
17
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL AGREEMENTS
Under the terms of a letter dated September 5, 1995, setting forth the terms
of Charles S. Taylor's employment with the Company, the Company has agreed to
provide Mr. Taylor with a base salary continuation, subject to certain
conditions, for three months following a termination of Mr. Taylor's employment
without cause or pursuant to a mutual agreement for separation from the Company.
The agreement does not provide for any specified term of employment.
Under the terms of an Employment Agreement dated April 19, 1996 between the
Company and Steven M. Van Dick, in the event of a change in control of the
Company, all of Mr. Van Dick's then unvested stock options would become fully
vested. In addition, if Mr. Van Dick's employment were terminated voluntarily or
involuntarily, other than for cause, within twelve months following such change
in control of the Company, he would be entitled to receive twelve months
severance pay. The agreement does not provide for any specified term of
employment. The Company has provided Mr. Van Dick with a loan for the purchase
of a home having a principal amount of $200,000 with simple interest payable at
the rate of 6.31% per annum and a term of five years.
Under the terms of a letter dated February 25, 1997, setting forth the terms
of Jeffrey G. Gold's employment with the Company, in the event of a change in
control of the Company, certain of Mr. Gold's then unvested stock options would
become fully vested.
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
THE FOLLOWING IS PROVIDED TO STOCKHOLDERS BY THE MEMBERS OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS:
The Compensation Committee of the Board of Directors (the "Committee"),
consisting of three outside directors, is responsible for the administration of
the Company's compensation programs. These programs include base salary for
executive officers and both annual and long-term incentive compensation
programs. The Company's compensation programs are designed to provide a
competitive level of total compensation and include incentive and equity
ownership opportunities linked to the Company's performance and stockholder
return.
COMPENSATION PHILOSOPHY
The design and implementation of the Company's executive compensation
programs are based on a series of guiding principles derived from the Company's
values, business strategy and management requirements. These principles may be
summarized as follows:
- Align the financial interests of the management team with the Company and
its stockholders;
- Attract, motivate and retain high-caliber individuals necessary to
increase total return to stockholders;
- Provide a total compensation program where a significant portion of pay is
linked to individual achievement and short- and long-term Company
performance; and
- Emphasize reward for performance at the individual, team and Company
levels.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
The Committee has considered the potential impact of Section 162(m) of the
Internal Revenue Code adopted under the Federal Revenue Reconciliation Act of
1993. Section 162(m) may limit the Company's ability to deduct for United States
federal income tax purposes compensation in excess of $1 million paid to the
Company's Chief Executive Officer and its four other highest paid executive
officers in any one
18
fiscal year, unless compensation is performance based. No executive officer of
the Company received any such compensation in excess of this limit during the
fiscal year ended January 1, 1999.
Since the targeted cash compensation of each of the named executive officers
is well below the $1 million threshold and the Committee believes that any
options granted under the Company's stock option plan will meet the requirement
of being performance based under the transition provisions provided in the
regulations under Section 162(m), the Committee believes that Section 162(m)
will not reduce the tax deduction available to the Company. The Company's policy
is to qualify to the extent reasonable its executive officers' compensation for
deductibility under applicable tax laws.
COMPENSATION PROGRAM
The Company's executive compensation program has three major components, all
of which are intended to attract, retain and motivate executive officers
consistent with the principles set forth above. The Committee considers these
components of compensation individually as well as collectively in determining
total compensation for executive officers.
1. BASE SALARY. Each fiscal year the Committee establishes base salaries
for individual executive officers based upon (i) industry and peer group
surveys, (ii) responsibilities, scope and complexity of each position and (iii)
performance judgments as to each individual's past and expected future
contributions. The Committee reviews with the Chief Executive Officer and
approves, with appropriate modifications, an annual base salary plan for the
Company's executive officers other than the Chief Executive Officer. The
Committee reviews and fixes the base salary of the Chief Executive Officer based
on similar competitive compensation data and the Committee's assessment of his
past performance and its expectations as to his future contributions in leading
the Company.
2. ANNUAL CASH (SHORT-TERM) INCENTIVES. Annual cash incentives are
established to provide a direct linkage between individual pay and annual
corporate performance. Target annual bonus awards are established for executive
officer positions based upon industry and peer group surveys and range from 35%
to 50% of base salary, with 50% for the chief executive officer position. Each
officer who served in an executive capacity during the Last Fiscal Year,
including the Chief Executive Officer, received a cash bonus for such service
ranging in amount from 21% to approximately 36% of base salary. In establishing
bonus amounts, the Committee generally considers the performance of each officer
in his or her respective area of accountability, each officer's respective
contribution to the success of the Company, the Company's overall performance,
and competitive data for similar positions. In establishing bonus awards for the
Last Fiscal Year, the Committee also considered the Company's successful product
development programs and training programs during the year, as well as financial
performance for the Last Fiscal Year. The Compensation Committee establishes
corporate and individual objectives for each officer at the beginning of each of
the Company's fiscal quarters. The Compensation Committee makes a quarterly
determination of the bonus for each officer. The determination is based on set
proportions of the corporate and individual objectives, and each officer is
rated separately on the attainment of those objectives. Each officer may receive
a portion or the full amount of his targeted annual performance based bonus. The
bonus award to the Chief Executive Officer for the Last Fiscal Year was
approximately 36% of his base salary.
3. EQUITY BASED INCENTIVE COMPENSATION. Long-term incentives for the
Company's employees are provided under the Company's stock option plans. Each
fiscal year, the Committee considers the desirability of granting to executive
officers long-term incentives in the form of stock options. These option grants
are intended to motivate the executive officers to manage the business to
improve long-term Company performance and align the financial interests of the
management team with the Company and its stockholders. The Committee established
the grants of stock options to executive officers in the Last Fiscal Year, based
upon a review of proposed individual awards, taking into account each officer's
scope of responsibility and specific assignments, strategic and operational
goals applicable to the officer, anticipated
19
performance requirements and contributions of the officer and competitive data
for similar positions. During the Last Fiscal Year, option awards were granted
to the following officers in the following amounts: (1) 175,000 shares of Common
Stock to the President and Chief Executive Officer, (2) 225,000 shares of Common
Stock to the Executive Vice President and Chief Operating Officer, (3) 100,000
shares of Common Stock to the Vice President, Finance and Administration and
Chief Financial Officer, (4) 45,000 shares of Common Stock to the Vice President
and Chief Technical Officer, (5) 45,000 shares of Common Stock to the Vice
President, Regulatory, Quality and Clinical Research, (6) 180,000 shares of
Common Stock to the Vice President, Sales and Marketing, and (7) 135,000 shares
of Common Stock to the Vice President, Business Development.
Respectfully submitted,
Robert C. Bellas, Jr.
Thomas C. McConnell
Philip M. Young
THE FOREGOING COMPENSATION COMMITTEE REPORT SHALL NOT BE DEEMED TO BE
"SOLICITING MATERIAL" OR TO BE "FILED" WITH THE SEC, NOR SHALL SUCH INFORMATION
BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE EXCHANGE ACT, EXCEPT TO THE
EXTENT THE COMPANY SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
20
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders of
the Company's Common Stock at January 1, 1999 since April 18, 1996 (the date the
Company first became subject to the reporting requirements of the Exchange Act)
to the cumulative total return over such period of (i) the "Nasdaq Stock Market
(U.S.)" index, and (ii) the Hambrecht & Quist "Healthcare Excluding
Biotechnology" index. The graph assumes the investment of $100 in the Company's
Common Stock and each of such indices (from April 18, 1996) and reflects the
change in the market price of the Company's Common Stock relative to the noted
indices at quarterly intervals from April 18, 1996 to January 1, 1999 (and not
for any interim periods). The performance shown is not necessarily indicative of
future price performance.
COMPARISON OF 32 MONTH CUMULATIVE TOTAL RETURN*
AMONG CARDIOTHORACIC SYSTEMS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST HEALTHCARE EXCLUDING BIOTECHNOLOGY INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CARDIOTHORACIC SYSTEMS, INC. NASDAQ STOCK MARKET (U.S.)
4/18/96 100 100
6/96 59 105
9/96 91 108
12/96 82 114
3/97 94 108
6/97 62 127
9/97 33 149
12/97 24 139
3/98 29 163
6/98 23 168
9/98 17 152
12/98 31 196
HAMBRECHT & QUIST HEALTHCARE-EXCLUDING BIOTECHNOLOGY
4/18/96 100
6/96 98
9/96 107
12/96 108
3/97 103
6/97 123
9/97 129
12/97 129
3/98 146
6/98 149
9/98 132
12/98 156
THE INFORMATION CONTAINED IN THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED
TO BE "SOLICITING MATERIAL" OR TO BE FILED WITH THE SEC, NOR SHALL SUCH
INFORMATION BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE
SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY
SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended January 1, 1999, certain of the Company's
executive officers were indebted to the Company pursuant to loans made by the
Company to such executive officers.
On December 3, 1996, the Company loaned to Steven M. Van Dick, an officer of
the Company, the principal amount of $200,000 for the purchase of a home, with
interest to accrue at a rate of 6.31% per annum, due and payable on the earlier
of December 31, 2000 or the termination of Mr. Van Dick's employment with the
Company. As of March 15, 1999, a total of $230,800 was outstanding on the loan
to Mr. Van Dick.
On August 16, 1996, the Company loaned to Richard M. Ferrari, the Chief
Executive Officer of the Company, the principal amount of $750,000 for the
purpose of estate planning, secured by 75,000 shares of the Company's Common
Stock. The note does not bear interest and is due and payable on the earlier of
August 16, 2000 or the termination of Mr. Ferrari's employment with the Company.
As of March 15, 1999, a total of $750,000 was outstanding on the loan to Mr.
Ferrari.
All transactions, including any loans from the Company to its officers,
directors, principal stockholders or affiliates, have been or will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
OTHER MATTERS
The Company knows of no other matters to be submitted at the Annual Meeting.
If any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the accompanying form of proxy to vote the
shares they represent as the Board of Directors may recommend.
THE COMPANY WILL MAIL WITHOUT CHARGE TO ANY STOCKHOLDER UPON WRITTEN REQUEST
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULES AND A LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO
INVESTOR RELATIONS, CARDIOTHORACIC SYSTEMS, INC., 10600 N. TANTAU AVE.,
CUPERTINO, CALIFORNIA 95014.
THE BOARD OF DIRECTORS
Dated: April 1, 1999
22
PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS PROXY
CARDIOTHORACIC SYSTEMS, INC.
1999 ANNUAL MEETING OF STOCKHOLDERS--MAY 4, 1999
The undersigned stockholder of CARDIOTHORACIC SYSTEMS, INC., a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, each dated April 1, 1999, and 1998 Annual
Report to Stockholders and hereby appoints Richard M. Ferrari, Steven M. Van
Dick, or either of them, proxies and attorneys-in-fact, with full power to each
of substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the 1999 Annual Meeting of Stockholders of CARDIOTHORACIC
SYSTEMS, INC. to be held on May 4, 1999 at 2:00 p.m., local time, at the
principal executive offices of CARDIOTHORACIC SYSTEMS, INC. located at 10600 N.
Tantau Ave., Cupertino, California 95014, and at any adjournment or adjournments
thereof, and to vote all shares of Common Stock which the undersigned would be
entitled to vote if then and there personally present, on the matters set forth
below.
1. ELECTION OF CLASS II
DIRECTOR:
/ / FOR Thomas C. McConnell / /
WITHHOLD
2. AMENDMENT OF THE INCENTIVE STOCK PLAN TO INCREASE THE
NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER FROM
2,800,000 TO 3,300,000 SHARES:
/ / FOR / / AGAINST / / ABSTAIN
RATIFICATION OF THE APPOINTMENT OF
3. PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT AUDITORS
OF THE COMPANY FOR ITS FISCAL YEAR ENDING DECEMBER 31,
1999:
/ / FOR / / AGAINST / / ABSTAIN
and, in their discretion, upon such other matter or matters which may properly
come before the meeting or any adjournment or adjournments thereof.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF THE CLASS II DIRECTOR, FOR THE
AMENDMENT OF THE INCENTIVE STOCK PLAN, FOR THE RATIFICATION OF THE APPOINTMENT
OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT AUDITORS, AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
Dated: _____________________ , 1999
___________________________________
(Signature)
___________________________________
(Signature)
(This Proxy should be marked, dated
and signed by the stockholder(s)
exactly as his, her or its name
appears hereon, and returned
promptly in the enclosed envelope.
Persons signing in a fiduciary
capacity should so indicate. If
shares are held by joint tenants or
as community property, both should
sign.)