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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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[ ] 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 Rule 14a-11(c) or Rule 14a-12
CONNETICS CORPORATION
- --------------------------------------------------------------------------------
(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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(1) Title of each class of securities to which transaction applies:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
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[CONNECTICS]
Dear Fellow Stockholders:
Please join me at the 2001 Annual Meeting of Stockholders of Connetics
Corporation, which will be held on THURSDAY, MAY 17, 2001, at 9:00 a.m., local
time, at Connetics' offices at 3294 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA.
The meeting notice and the Proxy Statement that follow set forth
information about what business will be taken care of at the meeting and who has
been nominated for election to the Board of Directors.
It is important that your shares be represented at the meeting. Whether or
not you plan to attend the meeting in person, we hope that you will vote on the
matters to be considered and sign, date and return your proxy in the enclosed
envelope as promptly as possible (if possible, by no later than May 10, 2001).
If you decide to attend the Annual Meeting and wish to vote in person, please
notify the Secretary of Connetics and your proxy will not be voted. YOUR SHARES
CANNOT BE VOTED UNLESS YOU SIGN, DATE, AND RETURN THE ENCLOSED PROXY, OR ATTEND
THE ANNUAL MEETING IN PERSON.
Sincerely yours,
[THOMAS WIGGINS SIGNATURE]
Thomas G. Wiggans
President and Chief Executive Officer
Palo Alto, California
April 9, 2001
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT THAT ALL STOCKHOLDERS BE REPRESENTED AT THE ANNUAL MEETING.
THEREFORE, TO ASSURE YOUR REPRESENTATION WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING, PLEASE COMPLETE, DATE, SIGN, AND RETURN THE ENCLOSED PROXY PROMPTLY IN
THE ACCOMPANYING REPLY ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED
STATES. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE THE MEETING. IF YOU ATTEND
THE MEETING AND WISH TO CHANGE YOUR PROXY VOTE, YOU MAY DO SO AUTOMATICALLY BY
VOTING IN PERSON AT THE MEETING.
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CONNETICS CORPORATION
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NOTICE OF 2001 ANNUAL MEETING OF STOCKHOLDERS
DATE Thursday, May 17, 2001
TIME 9:00 a.m. Pacific Time
PLACE 3294 West Bayshore Road, Palo Alto, California 94303
ITEMS OF BUSINESS (1) To elect eight (8) directors to hold office until the
next Annual Meeting and until their successors have been
elected and qualified.
(2) To approve an amendment to the 1995 Director's Stock
Option Plan to increase the number of shares of common stock
reserved for issuance under the plan by 200,000 shares.
(3) To ratify the appointment of Ernst & Young LLP as our
independent auditors for the year ending December 31,
2001.
(4) To consider and act upon such other business as may
properly come before the meeting.
RECORD DATE Stockholders of record at the close of business on March 23,
2001 are entitled to vote at the meeting
ANNUAL REPORT Connetics' 2000 annual report, which is not a part of the
proxy soliciting material, is enclosed.
On behalf of the Board of Directors
/s/ KATRINA J. CHURCH
Katrina J. Church,
Secretary
Palo Alto, California
April 9, 2001
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TABLE OF CONTENTS
PAGE
----
GENERAL INFORMATION......................................... 1
What is the purpose of the annual meeting?................ 1
Can I change my vote after I return my proxy card?........ 1
Who is entitled to vote?.................................. 1
How do I vote?............................................ 1
How do proxies work?...................................... 1
What constitutes a quorum?................................ 1
What are the Board's recommendations?..................... 2
What vote is required to approve each proposal?........... 2
MATTERS TO BE ACTED UPON.................................... 2
PROPOSAL 1 -- ELECTION OF DIRECTORS....................... 2
PROPOSAL 2 -- APPROVAL OF AMENDMENT TO DIRECTORS' PLAN.... 4
PROPOSAL 3 -- RATIFICATION OF SELECTION OF INDEPENDENT
AUDITORS............................................... 6
OTHER BUSINESS............................................ 7
GOVERNANCE OF THE COMPANY................................... 7
Board Meetings and Committees............................. 7
Compensation Committee Interlocks and Insider
Participation.......................................... 8
Report of the Audit Committee............................. 8
STOCK OWNERSHIP............................................. 10
EXECUTIVE COMPENSATION AND RELATED INFORMATION.............. 13
Executive Compensation Summary Table...................... 13
Option Grants for 2000.................................... 14
Aggregated Option Exercises for 2000 and Option Values on
December 29, 2000...................................... 14
Certain Relationships and Related Transactions............ 15
Report of the Compensation Committee on Executive
Compensation........................................... 16
STOCK PERFORMANCE GRAPH..................................... 18
ADDITIONAL INFORMATION...................................... 18
Section 16(a) Beneficial Ownership Reporting Compliance... 18
Who pays for solicitation of proxies?..................... 18
Stockholder Proposals for the 2002 Annual Meeting......... 19
Documents Incorporated by Reference....................... 19
APPENDIX A -- CHARTER OF THE AUDIT COMMITTEE................ A-1
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CONNETICS CORPORATION
PROXY STATEMENT
We are providing this proxy statement and the enclosed proxy card to you on
behalf of the Board of Directors of Connetics Corporation. The Board of
Directors requests that you allow the proxies named in the proxy card to
represent your shares at the Annual Meeting, and at any meeting following the
adjournment or postponement of the Annual Meeting.
GENERAL INFORMATION
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
The accompanying Notice of Annual Meeting of Stockholders summarizes the
specific proposals to be considered and acted upon at the meeting. Each proposal
is described in more detail in this Proxy Statement.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
You may revoke your proxy before it is voted by submitting a new proxy with
a later date, by voting in person at the meeting, or by notifying our Corporate
Secretary in writing at 3294 West Bayshore Road, Palo Alto, California 94303.
WHO IS ENTITLED TO VOTE?
We are first mailing these proxy materials on or about April 9, 2001. You
are entitled to vote at the Annual Meeting if our stockholder records on March
23, 2001 (the record date) showed that you owned Connetics common stock as of
the close of business on such date. As of March 23, 2001, there were 29,761,379
shares of common stock outstanding and entitled to vote. Each share is entitled
to one vote for each matter properly brought before the meeting. The enclosed
proxy card shows the number of shares you are entitled to vote. As of the close
of business on the record date, Connetics had approximately 195 stockholders of
record.
HOW DO I VOTE?
You may vote in person at the meeting or by using the enclosed proxy card.
Our Board of Directors recommends that you vote by proxy even if you plan to
attend the meeting.
HOW DO PROXIES WORK?
The Board of Directors is asking for your proxy. Giving us your proxy means
that you authorize us to vote your shares at the meeting in the manner you
direct. You may vote for all, some, or none of our director nominees. You may
also vote for or against the other proposals or abstain from voting. If you sign
and return the enclosed proxy card but do not specify how to vote, we will vote
your shares in favor of our director nominees, in favor of the amendment to the
1995 Directors' Stock Option Plan, and in favor of the appointment of Ernst &
Young LLP as auditors.
WHAT CONSTITUTES A QUORUM?
To carry on the business of the meeting, there must be a quorum. This means
at least a majority of the outstanding shares eligible to vote must be
represented at the meeting, either by proxy or in person. All proxies
representing shares that are entitled to vote at the meeting will be counted
toward establishing a quorum, regardless of whether such proxies contain
abstentions or broker non-votes.
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WHAT ARE THE BOARD'S RECOMMENDATIONS?
The Board of Directors recommends that you vote FOR each of proposals 1, 2
and 3.
WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?
All valid proxies received prior to the meeting will be voted. If you
specify a choice with respect to any item by marking the appropriate box on the
proxy card, the shares will be voted as you specified. If you do not specify a
choice, the shares will be voted FOR each of proposals 1, 2 and 3 and, in the
proxy holders' discretion, as to other matters that may properly come before the
meeting. A "broker non-vote" occurs when a nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to that item and has not
received instructions from the beneficial owner. Broker non-votes are not
considered as present or voting with respect to a matter. The inspector of
election appointed for the meeting will separately tabulate affirmative and
negative votes, abstentions and broker non-votes. Abstentions will be counted
towards the tabulation of votes cast on proposals presented to the stockholders
and will have the same effect as negative votes.
Election of Directors. The eight nominees receiving the highest number of
votes will be elected to fill the seats on the Board. Votes withheld from any
director will be counted for purposes of determining whether a quorum is present
for the transaction of business at the meeting, but have no other legal effect
upon election of directors under Delaware law.
Amendment of Existing Plan. Approval of the amendment to the 1995
Directors' Stock Option Plan requires the affirmative vote of the holders of a
majority of shares present at the meeting, in person or by proxy, and entitled
to vote. If you abstain from voting, the abstention is counted as a vote against
the amendment to the Directors' Plan.
Ratification of Selection of Independent Auditors. Approval of the proposal
to ratify the selection of Ernst & Young LLP as our independent auditors
requires the affirmative vote of the holders of a majority of shares present at
the meeting, in person or by proxy, and entitled to vote. If you abstain from
voting, the abstention is counted as a vote against the proposal.
MATTERS TO BE ACTED UPON
PROPOSAL NO. 1
ELECTION OF DIRECTORS
At the meeting, the stockholders will elect eight directors to serve until
the next meeting and until their successors are elected and qualified, or until
they die, resign, or are removed from office. We will vote all proxies we
receive FOR the nominees listed below unless the proxy includes written
instructions otherwise. If any nominee is unable to or declines to serve as a
director at the time of the meeting, we will vote the proxies for an additional
nominee who the current Board of Directors will designate to fill the vacancy.
As of the date of this Proxy Statement, we are not aware of any nominee who is
unable or will decline to serve as director.
All of the eight nominees are currently directors of Connetics. If
additional persons are nominated for election as directors, we intend to vote
all proxies received in a manner that will ensure the election of as many of the
nominees listed below as possible, and, in such event, the proxy holder(s) will
determine the specific nominees to be voted for. In any event, the proxy holders
cannot vote for more than eight persons. The term of office of each person
elected as a director will continue until the next Annual Meeting or until his
successor has been elected and qualified.
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DIRECTORS STANDING FOR ELECTION
The names of the nominees, and certain information about them, are set
forth below:
ALEXANDER E. BARKAS, PH.D. DIRECTOR SINCE 1993
Dr. Barkas, 53, served as our Chairman of the Board of Directors from
January 1994 to October 1995. He served as our Chief Executive Officer from
January 1994 to August 1994. Dr. Barkas has been a Managing Partner of Prospect
Venture Partners, a venture capital investment firm, since June 1997. He was
previously a partner with Kleiner Perkins Caufield & Byers, a venture capital
investment firm, from September 1991 to June 1997. Dr. Barkas serves as Chairman
of the Board of Directors of Geron Corporation and as a director of several
private medical technology companies.
EUGENE A. BAUER, M.D. DIRECTOR FROM 1993 - 1995 AND SINCE 1996
Dr. Bauer, 58, is the Vice President for the Stanford University Medical
Center. He was Dean of the Stanford University School of Medicine from 1995
through 2000. He has been Professor, Department of Dermatology, Stanford
University School of Medicine since 1988, and was Chief of the Dermatology
Service at Stanford University Hospital from 1988 to 1995. From 1982 to 1988, he
was a professor at Washington University School of Medicine from 1982 to 1988.
He has served as chairman of two National Institutes of Health study sections of
the National Institute of Arthritis and Musculoskeletal and Skin Diseases and
has served on a board of scientific counselors for the National Cancer
Institute. Dr. Bauer is currently a director of Lucile Packard Children's
Hospital and of Stanford Hospital and Clinics. He also serves as a director of
three private companies.
JOHN C. KANE DIRECTOR SINCE 1997
Mr. Kane, 61, joined Cardinal Health, Inc., a healthcare services provider,
as President and Chief Operating Officer in March 1993. Prior to joining
Cardinal, Mr. Kane served in various operational and management positions at
Abbott Laboratories for 19 years, most recently as President of Ross
Laboratories Division. Mr. Kane is a director of Cardinal Health, Inc. and Greif
Bros. Corporation, both public companies. Mr. Kane also serves as a director for
a private company and serves on several medical advisory councils and
educational foundations.
THOMAS D. KILEY DIRECTOR SINCE 1993
Mr. Kiley, 57, has been self-employed since 1988 as an attorney, consultant
and investor. From 1980 to 1988, he was an officer of Genentech, serving
variously as Vice President and General Counsel, Vice President for Legal
Affairs and Vice President for Corporate Development. From 1969 to 1980, he was
with the law firm of Lyon & Lyon, where he was a partner from 1975 to 1980. Mr.
Kiley is also a director of Geron Corporation and certain private biotechnology
and other companies.
GLENN A. OCLASSEN DIRECTOR SINCE JAN. 2001
Mr. Oclassen, 58, joined our board in January 2001. Mr. Oclassen worked at
Allergan from 1971 to 1977 where he was Director of Marketing for OTC ophthalmic
products, and General Manager of the Dermatology Division. In 1977, Mr. Oclassen
founded the Neutrogena Dermatologics Division of Neutrogena Corp. and served as
President until 1982. In 1985, he founded Oclassen Pharmaceuticals, Inc., which
was acquired by Watson Pharmaceuticals in 1997. Mr. Oclassen is also a director
of Procyte Corporation and of a private company.
LEON E. PANETTA DIRECTOR SINCE 2000
Mr. Panetta, 62, has served as a director of Connetics since March 2000.
Mr. Panetta is the Director along with his wife Sylvia of the Panetta Institute
for Public Policy at California State University at Monterey Bay and is a member
of the international advisory board of Fleishman-Hillard. From 1994 to 1997, he
served
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as White House Chief of Staff. Before his appointment as White House chief of
staff, Mr. Panetta served as Director of the White House Office of Management
and Budget, having been confirmed by the Senate for that job on January 21,
1993. Prior to 1993, Mr. Panetta was a U.S. Representative for eight full terms.
Mr. Panetta has a B.A. from Santa Clara University, and a J.D. from Santa Clara
University Law School. Mr. Panetta is also a director of several private
companies and not-for-profit organizations.
G. KIRK RAAB DIRECTOR SINCE 1995
Mr. Raab, 65, has served as the Chairman of the Board of Directors since
October 1995. From 1985 to January 1990, Mr. Raab served as President, Chief
Operating Officer and a Director of Genentech, Inc., and from January 1990 to
July 1995, he served as Genentech's President, Chief Executive Officer and a
Director. Prior to joining Genentech, Inc. in 1985, Mr. Raab was President,
Chief Operating Officer, and a Director of Abbott Laboratories, and before that,
held executive positions with Beecham Group, A.H. Robins and Pfizer, Inc. He is
also Chairman of Oxford Glycosciences UK Ltd. and a director of Applied Imaging
Inc., as well as four private biotechnology companies.
THOMAS G. WIGGANS DIRECTOR SINCE 1994
Mr. Wiggans, 49, has served as President, Chief Executive Officer and as a
director of Connetics since July 1994. From February 1992 to April 1994, Mr.
Wiggans served as President and Chief Operating Officer of CytoTherapeutics, a
biotechnology company. From 1980 to February 1992, Mr. Wiggans served in various
positions at Ares-Serono Group, a pharmaceutical company, including President of
its U.S. pharmaceutical operations and Managing Director of its U.K.
pharmaceutical operations. From 1976 to 1980 he held various sales and marketing
positions with Eli Lilly & Co., a pharmaceutical company. He is currently a
director of the Biotechnology Industry Organization (BIO), and a member of its
Emerging Company Section. He is also Chairman of the Biotechnology Institute, a
non-profit educational organization. He is also a director of Paladin Labs, a
public Canadian pharmaceutical company. Mr. Wiggans received a B.S. in Pharmacy
from the University of Kansas and an M.B.A. from Southern Methodist University.
PROPOSAL NO. 2
APPROVAL OF AMENDMENT TO DIRECTOR'S PLAN
DESCRIPTION OF THE PLAN
At the meeting, we are asking our stockholders to approve an amendment to
our 1995 Directors' Stock Option Plan (the "Directors' Plan") to increase the
number of shares of our common stock reserved for issuance under the Directors'
Plan by 200,000 shares to an aggregate of 600,000 shares.
GENERAL
The Directors' Plan provides for the grant of non-qualified stock options
to our non-employee directors ("Outside Directors"). The purposes of the
Directors' Plan are to attract and retain the best available personnel for
service as directors of Connetics, to provide additional incentive to our
non-employee directors to serve as directors, and to encourage their continued
service on the Board.
The Directors' Plan was adopted by the Board of Directors in December 1995
and approved by our stockholders in January 1996. The Directors' Plan was
amended in February 1999. In February 2001, our Board of Directors approved an
amendment to the Directors' Plan to increase the number of shares of our common
stock reserved for issuance under the Directors' Plan by 200,000 shares to an
aggregate of 600,000 shares, for which stockholder approval is requested.
As of March 23, 2001, options for 240,000 shares were outstanding under the
Directors' Plan, no shares had been issued pursuant to the exercise of options
granted under the plan, and 137,500 shares remained available for future grants.
Shares not purchased under an option before it expires will be available for
future option grants under the Directors' Plan. As of March 23, 2001, the
aggregate fair market value of shares
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subject to outstanding options under the Directors' Plan was $1,893,540 based
upon the closing price of our common stock on that date as reported on The
Nasdaq Stock Market. In 2000, a total of 82,500 options with a weighted average
exercise price of $9.818 per share were granted under the Director's Plan to our
current non-employee directors. The actual benefits, if any, to the holders of
stock options issued under the Directors' Plan are not determinable prior to
exercise as the value, if any, of such stock options to their holders is
represented by the difference between the market price of a share of our common
stock on the date of exercise and the exercise price of a holder's stock option,
as set forth below.
The Directors' Plan is not a qualified deferred compensation plan under
Section 401(a) of the Internal Revenue Code, and is not subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
ADMINISTRATION
The Directors' Plan is designed to work automatically and not to require
administration. To the extent administration is necessary, however, it will be
provided by the Board of Directors.
ELIGIBILITY
Options may be granted only to Outside Directors. An Outside Director who
has been granted an option may, if he or she is otherwise eligible, be granted
additional options under Connetics' 2000 Stock Plan.
TERMS OF OPTIONS
The Directors' Plan provides that each person who first becomes an Outside
Director of Connetics after the effective date of the Directors' Plan, will be
granted a non-qualified stock option to purchase 30,000 shares of our common
stock (the "First Option") on the date on which the optionee first becomes an
Outside Director. Thereafter, on the date of each Annual Meeting of stockholders
at which non-employee directors are elected to the Board, each person so elected
(including directors who were not eligible for a First Option) shall be granted
an additional option to purchase 7,500 shares of common stock (a "Subsequent
Option") if he or she has served on our Board of Directors for at least six
months prior to the date of such Annual Meeting. Effective upon reelection in
May 2001, the amount of the Subsequent Option has been increased from 7,500
shares to 10,000 shares.
The Directors' Plan currently provides that the maximum number of shares
for which options may be granted under the Directors' Plan is 400,000 (the
"Pool"). However, the Directors' Plan does not specify a maximum or minimum
number of shares for which options may be granted to any one non-employee
director so long as the total number of shares so granted does not exceed the
Pool. Options granted under the Directors' Plan are not transferable by the
optionee other than by will or the laws of descent or distribution or pursuant
to a qualified domestic relations order. Each option is exercisable, during the
lifetime of the optionee, only by such optionee or permitted transferee.
Options granted under the Directors' Plan have a term of ten years. The
Directors' Plan provides that the First Option granted under the plan shall
become exercisable in installments as to 25% of the total number of shares
subject to the First Option on each of the first, second, third and fourth
anniversaries of the date of grant of the First Option; and each Subsequent
Option shall become exercisable in full on the first anniversary of the date of
grant of that Subsequent Option. The options will remain exercisable for up to
ninety (90) days following the optionee's termination of service as our
director, unless such termination is a result of death, in which case the
options will remain exercisable for a six-month period, or disability, in which
case the options will remain exercisable for a six-month period (or such other
period not exceeding twelve months as is determined by the Board).
The exercise price of each stock option granted under the Directors' Plan
must be equal to 100% of the fair market value of a share of our common stock on
the date of grant of the option. The fair market value per share is calculated
as the mean of the bid and asked prices of the common stock in the
over-the-counter market on the date of grant, as reported in The Wall Street
Journal or, if our common stock is traded on the
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Nasdaq Stock Market or listed on a stock exchange, the fair market value per
share is the closing price on such system or exchange on the date of grant of
the option, as reported in The Wall Street Journal.
MERGER OR SALE OF ASSETS
The Directors' Plan provides that, in the event of the dissolution or
liquidation of Connetics, a merger of Connetics with or into another corporation
in which we are not the surviving corporation, a sale of all or substantially
all of our assets, or any other capital reorganization in which more than 50% of
our shares entitled to vote are exchanged, we shall give to each non-employee
director either (i) a reasonable time within which to exercise the option in its
entirety (including as to shares which would not otherwise be exercisable) prior
to the effectiveness of any such transaction at the end of which time the option
shall terminate, or (ii) the right to exercise the option in its entirety (or
receive a substitute option with comparable terms) as to an equivalent number of
shares of stock of the corporation succeeding Connetics or acquiring its
business by reason of any such transaction.
AMENDMENT AND TERMINATION
The Board of Directors may amend or terminate the Directors' Plan, provided
that, to the extent necessary and desirable to comply with Rule 16b-3 under the
Exchange Act (or any other applicable law or regulation) we must obtain approval
of the stockholders to such amendments to the extent required by such law or
regulation. The provisions regarding the grant of options under the Directors'
Plan may be amended only once in any six month period, other than to comport
with changes in the Internal Revenue Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
If not terminated earlier, the Directors' Plan will terminate in December
2005.
REQUIRED VOTE
The approval of the amendment to the Directors' Plan to increase the number
of shares reserved for issuance under the Directors' Plan by 200,000 shares
requires the affirmative vote of the holders of a majority of the shares of our
common stock present at the meeting in person or by proxy and entitled to vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the approval of the amendment
to the Directors' Plan and the reservation of shares for issuance under the
plan. If you abstain from voting, the effect is the same as if you voted against
the approval of the adoption of the amendment to the plan.
PROPOSAL NO. 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Ernst & Young LLP served as our independent auditors for the year ended
December 31, 2000. The Board of Directors has selected that firm to continue in
this capacity for 2001. We are asking our stockholders to ratify the selection
by the Board of Directors of Ernst & Young LLP, as independent auditors, to
audit our accounts and records for the year ending December 31, 2001, and to
perform other appropriate services. A representative of Ernst & Young LLP is
expected to be present at the meeting to respond to stockholders' questions, and
if he or she so desires, will be given an opportunity to make a brief statement.
FEES BILLED BY ERNST & YOUNG LLP DURING 2000
Audit Fees: Audit fees billed to us by Ernst & Young LLP during 2000 for
review of our annual financial statements and the financial statements included
in our quarterly reports on Form 10-Q totaled $140,075.
Financial Information Systems Design and Implementation Fees: We did not
engage Ernst & Young LLP to provide services to us regarding financial
information systems design and implementation during 2000.
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Other Audit Related Fees: Fees billed to us by Ernst & Young LLP during
2000 for all other audit services, including SEC filings, comfort letters and
accounting questions, totaled $112,017.
All Other Fees: Fees billed to us by Ernst & Young LLP during 2000 for all
other non-audit services rendered to us, including tax related services, total
$20,898.
REQUIRED VOTE
Approval of the proposal to ratify the selection of Ernst & Young LLP as
our independent auditors requires the affirmative vote of the holders of a
majority of shares present at the meeting, in person or by proxy, and entitled
to vote. If you abstain from voting, the abstention is counted as a vote against
the proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS.
The Board of Directors recommends a vote FOR the ratification of the
selection of Ernst & Young LLP. If a majority of the shares voted at the meeting
do not vote for the ratification, the Board of Directors will reconsider its
selection. Under all circumstances, the Board of Directors retains the corporate
authority to change the auditors at a later date.
OTHER BUSINESS
We do not intend to present any business at the meeting that we have not
described in this proxy statement. The enclosed proxy form confers discretionary
authority upon the persons designated to vote the shares represented by the
proxy, to vote such shares in accordance with their best judgment with respect
to all matters that may come before the meeting in addition to the scheduled
items of business. Examples of such matters are any shareholder proposal omitted
from the Proxy Statement pursuant to the rules of the Securities and Exchange
Commission, and matters incident to the conduct of the meeting. As of March 23,
2001, we were not aware of any other matter that may properly be presented for
action at the meeting, but the enclosed proxy confers the same discretionary
authority with respect to any such other matter.
GOVERNANCE OF THE COMPANY
BOARD MEETINGS AND COMMITTEES
HOW OFTEN DID THE BOARD MEET DURING 2000?
Our Board of Directors held four (4) regular meetings during the year ended
December 31, 2000 and four (4) telephonic meetings. All current directors
attended at least 75% of the total meetings of the Board and the Board
Committees of which they were members during 2000, except that Dr. Bauer
attended five (5) of the eight (8) meetings during the year.
WHAT COMMITTEES HAS THE BOARD ESTABLISHED?
The Compensation Committee of the Board of Directors reviews and approves
the compensation and benefits for our executive officers, administers our stock
purchase and stock option plans and makes recommendations to the Board of
Directors regarding such matters. The committee is currently composed of Mr.
Kane and Dr. Barkas. The Compensation Committee held six (6) meetings in 2000.
The Audit Committee of the Board of Directors reviews the results and scope
of the audit and other services provided by our independent accountants. In
2000, the Audit Committee was composed of Dr. Barkas, Mr. Kiley, and Mr. Raab.
The Audit Committee held five (5) meetings in 2000. Effective January 1, 2001,
Mr. Raab is no longer a member of the audit committee. Mr. Kane will replace Mr.
Raab. Dr. Barkas and Messrs. Kiley and Kane are independent directors as defined
in Rule 4200(a)(14) of the National Association of Securities Dealers listing
standards.
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The Nominating Committee of the Board of Directors evaluates and recommends
candidates to serve on our Board. The Nominating Committee will also consider
nominees recommended by stockholders. Recommendations for our Annual Meeting of
Stockholders to be held in 2002 must be submitted in writing to our Corporate
Secretary at 3294 West Bayshore Road, Palo Alto, California 94303. Such
recommendations must include the name, address and principal business occupation
of the candidate for the last five years and must be received by the Corporate
Secretary on or before November 30, 2001. The Nominating Committee is composed
of Mr. Raab and Mr. Wiggans. The Nominating Committee held three (3) meetings in
2000.
HOW ARE DIRECTORS COMPENSATED?
Cash Compensation. We pay non-employee directors an annual retainer of
$15,000 when they are reelected to the Board, plus $2,000 per meeting attended.
We pay $250 additional fees for serving on each committee of the Board. We
reimburse directors for out-of-pocket expenses they incur in connection with
attending Board meetings. Each director may elect to receive the $15,000
retainer in the form of our common stock or an option to purchase our stock.
Stock Options. Non-employee directors automatically receive options to
purchase shares of our common stock pursuant to the terms of our 1995 Directors'
Stock Option Plan. The initial non-statutory stock option to purchase 30,000
shares of common stock (the "First Option") is granted on the date on which the
optionee first becomes a director. In each year that the director is reelected,
the director receives an option to purchase 7,500 shares of common stock (a
"Subsequent Option") if, on such date, he has served on our Board of Directors
for at least six months. Effective upon reelection to the Board in May 2001, the
amount of the Subsequent Option is increased from 7,500 shares to 10,000 shares.
The First Option is exercisable in four equal installments on each of the
first, second, third and fourth anniversaries of the date of grant. Each
Subsequent Option is exercisable in full on the first anniversary of the date of
grant of that Subsequent Option. The exercise price of all stock options granted
under the Directors' Plan is equal to the fair market value of a share of our
common stock on the date of grant.
Consulting Agreements. We have consulting agreements with Messrs. Raab,
Panetta, Bauer and Oclassen pursuant to which we pay each of them in addition to
the compensation they receive as directors of Connetics. See "Certain
Relationships and Related Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Kane and Dr. Barkas are members of the Compensation Committee. Neither
of these individuals was at any time during the year ended December 31, 2000 or
at any other time an officer or employee of Connetics, except that Dr. Barkas
was an officer of Connetics in 1994 and 1995, as described above.
None of our executive officers serves on the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our Board of Directors or Compensation Committee.
REPORT OF THE AUDIT COMMITTEE
The audit committee oversees our financial reporting process on behalf of
our Board of Directors, and operates under a written charter adopted by the
Board of Directors in June 2000. The charter sets out the audit related
functions the committee is to perform. You can find a copy of that charter
attached to this proxy statement as Appendix A.
The current committee members are Directors Barkas, Kiley and Kane. Mr.
Kane replaced Mr. Raab, who served on the committee during 2000. During 2000,
the audit committee met on five (5) occasions. The directors who currently serve
on the committee are all "independent" for purposes of Nasdaq listing standards.
That is, the Board of Directors has determined that none of us has a
relationship to Connetics that may interfere with our independence from
Connetics and its management.
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The functions of the audit committee are to review and advise the Board on:
- The adequacy of the company's internal controls and financial reporting
process and the reliability of the company's financial statements;
- The independence and performance of the company's internal auditors and
independent auditors; and
- The company's compliance with legal and regulatory requirements.
Management has the primary responsibility for the financial statements and
the overall reporting process, including the system of internal controls.
In this context, we have met and held discussions with management and the
independent auditors. Management has represented to us that Connetics'
consolidated financial statements were prepared in accordance with generally
accepted accounting principles. We have reviewed and discussed the audited
consolidated financial statements with management and the independent auditors,
including a discussion of the quality -- not just the acceptability -- of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures.
We have discussed with the independent auditors matters required to be
disclosed by Statement on Auditing Standards No. 61 (Communication with Audit
Committees). We also discussed with Ernst & Young LLP that firm's independence
from Connetics and its management, including the matters in the written
disclosures required by the Independence Standards Board Standard No. 1
(Independent Discussion With Audit Committee), and have considered the
compatibility of the auditors' independence with using Ernst & Young LLP for
non-audit services.
We also discussed with our independent auditors the overall scope and plans
for their audit. We met with the independent auditors, with and without
management present, to discuss the results of their examinations, the
evaluations of the company's internal controls, and the overall quality of our
financial reporting.
Based on these reviews and discussions, we recommended to the Board of
Directors that the audited consolidated financial statements be included in
Connetics' annual report on Form 10-K for the year ended December 31, 2000. We
have also recommended to the Board that, subject to stockholder approval, Ernst
& Young LLP be appointed as our independent auditors.
SUBMITTED BY THE 2000 AUDIT COMMITTEE:
ALEXANDER E. BARKAS
THOMAS D. KILEY
G. KIRK RAAB
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STOCK OWNERSHIP
Who are the largest owners of our stock, and how much stock do our directors
and officers own?
The following table sets forth certain information we know with respect to
the beneficial ownership of our common stock as of March 23, 2001 by (a) all
persons who are beneficial owners of five percent or more of our common stock,
(b) each director and nominee, (c) each of our Named Officers (as defined on
page 13), and (iv) all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules and
regulations of the SEC and generally includes voting or investment power with
respect to securities. Except as indicated otherwise in the footnotes below, and
subject to community property laws where applicable, we believe based on
information furnished by them that the persons named in the table below have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
NUMBER PERCENTAGE OF
OF SHARES
NAME SHARES OUTSTANDING
Wellington Management Company, LLP 4,130,100(1)(2) 13.9%
75 State Street
Boston, Massachusetts 02109
Wellington Trust Company, NA 1,854,900(2) 6.2%
75 State Street
Boston, Massachusetts 02109
Credit Suisse First Boston 2,763,628(3) 9.1%
11 Madison Avenue
New York, New York 10010
Nevis Capital Management, Inc. 2,432,855(4) 8.2%
1119 St. Paul Street
Baltimore, Maryland 21202
BVF, LP 1,883,000(5) 6.3%
227 W. Monroe Street, Suite 4800
Chicago, Illinois 60606
Thomas G. Wiggans 555,394(6) 1.9%
Alexander E. Barkas, Ph.D. 443,064(7) 1.5%
G. Kirk Raab 334,958(8) 1.1%
John L. Higgins 219,608(9) *
Thomas D. Kiley 170,870(10) *
Brian H. Dovey 134,557(11) *
Eugene A. Bauer, M.D. 121,550(12) *
C. Gregory Vontz 83,657(13) *
Katrina J. Church 83,612(14) *
John C. Kane 74,833(15) *
Robert G. Lederer 53,200(16) *
Glenn A. Oclassen 28,158(17) *
Leon E. Panetta 10,658(18) *
All directors and executive officers as a group (14 2,319,343(19) 7.5%
persons)
* Less than 1% based on 29,761,379 outstanding at March 23, 2001.
(1) As reported on a Schedule 13G/A filed with the SEC on or about February 13,
2001. Represents 4,130,100 shares as to which Wellington Management
Company, LLP has shared dispositive power, and 3,659,500 shares as to which
Wellington Management Company LLP has shared voting power, with the unnamed
beneficial owners, who are clients of Wellington Management Company, LLP.
Includes shares held by Wellington Trust Company, NA. See Footnote 2.
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(2) These shares are also reported under Footnote 1. As reported on a Schedule
13G filed with the SEC on or about February 13, 2001. Represents 1,854,900
shares as to which Wellington Trust Company, NA has shared voting and
dispositive power with the unnamed beneficial owners, who are clients of
Wellington Trust Company, NA.
(3) As reported on a Schedule 13G/A filed with the SEC on or about February 14,
2001, as to which Credit Suisse First Boston holds shared voting and
dispositive power. The affiliated companies covered by the Schedule 13G/A
and the shares they are reported to hold are:
- 1,146,200 shares held by Sprout Capital VII, L.P.,
- 521,618 shares held by Sprout Growth II, L.P.,
- 267,119 shares held by Sprout Capital VI, L.P.,
- 132,621 shares held by DLJ First ESC LLC,
- 68,823 shares held by DLJ Capital Corporation, and
- 7,412 shares held by Sprout CEO Fund L.P.
Also includes a total of 619,835 shares issuable upon the exercise of
warrants that are exercisable on or before May 15, 2001, (warrants expire
May 15, 2001) as follows:
- 298,201 shares issuable upon exercise of warrants held by Sprout Capital
VII, L.P.,
- 243,790 shares issuable upon exercise of warrants held by Sprout Growth
II, L.P.,
- 61,984 shares issuable upon exercise of warrants held by DLJ First ESC
LLC,
- 12,396 shares issuable upon exercise of warrants held by DLJ Capital
Corporation, and
- 3,464 shares issuable upon exercise of warrants held by Sprout CEO Fund,
L.P.
(4) As reported on a Schedule 13G filed with the SEC on or about March 21,
2001.
(5) As reported on a Schedule 13G filed with the SEC on or about February 14,
2001. Represents:
- 837,406 shares beneficially owned by BVF Investments, L.L.C.
("Investments"); and
- 607,700 shares beneficially owned by Biotechnology Value Fund, L.P.
("BVF")
- 353,944 shares beneficially owned by Biotechnology Value Fund II, L.P.
("BVF2"), and
- 83,950 shares beneficially owned by certain managed accounts (see below).
As to all of the 1,883,000 shares (the total number of shares beneficially
owned collectively by the BVF entities), BVF Partners L.P. ("Partners") and
BVF Inc. ("BVF Inc.") share voting and dispositive power. Individually,
BVF, BVF2 and Investments beneficially own 607,700, 353,944 and 837,950
respectively. Additionally, Partners and BVF Inc. shares voting and
dispositive power over the shares they beneficially own with certain
managed accounts, on whose behalf Partners purchased such shares. None of
these managed accounts individually owns more than 5% of the outstanding
common stock of Connetics.
(6) Mr. Wiggans' total includes 341,111 options to purchase shares of common
stock that will be exercisable on or before May 22, 2001. Also includes
10,490 shares held by Mr. Wiggans' spouse, and 14,986 shares held in trust
for Mr. Wiggans' children. Mr. Wiggans disclaims beneficial ownership of
the shares held in trust.
(7) Dr. Barkas' total includes 11,855 warrants and 30,000 options to purchase
shares of common stock that will be exercisable on or before May 22, 2001.
Also includes 25,985 shares of common stock owned by Lynda L. Wijcik,
spouse of Dr. Barkas.
(8) Mr. Raab's total includes 270,575 options to purchase shares of common
stock that will be exercisable on or before May 22, 2001.
(9) Mr. Higgins' total includes options to purchase 151,368 shares of common
stock that will be exercisable on or before May 22, 2001. Also includes 250
shares of common stock held by Mr. Higgins' wife.
(10) Mr. Kiley's total includes 62,447 shares held in the Thomas D. and Nancy
L.M. Kiley Revocable Trust under Agreement dated August 7, 1981, and 10,000
shares held in The Kiley Family Partnership of which Mr. Kiley is a
trustee. Also includes 7,500 options to purchase shares of common stock
that will be exercisable on or before May 22, 2001.
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(11) Mr. Dovey's total includes 62,325 shares issuable upon exercise of warrants
held by Domain Partners III, L.P. and DP III Associates, L.P. that are
exercisable on or before May 15, 2001, and as to which Mr. Dovey disclaims
beneficial ownership except to the extent of his pecuniary interest in such
shares. Also includes 12,000 shares held in the Brian H. Dovey and
Elizabeth Hartzell Dovey Family Foundation. Also includes options to
purchase 42,647 shares of common stock that will be exercisable on or
before May 22, 2001. Mr. Dovey will not stand for re-election as a director
at the meeting.
(12) Dr. Bauer's total includes 41,250 options to purchase shares of common
stock that will be exercisable on or before May 22, 2001.
(13) Mr. Vontz's total reflects 74,063 options exercisable on or before May 22,
2001.
(14) Ms. Church's total includes options to purchase 55,312 shares of common
stock that will be exercisable on or before May 22, 2001.
(15) Mr. Kane's total includes options to purchase 52,500 shares of common stock
that will be exercisable on or before May 22, 2001.
(16) Mr. Lederer's total includes options to purchase 49,125 shares of common
stock that will be exercisable on or before May 22, 2001.
(17) Mr. Oclassen's total includes options to purchase 25,000 shares of common
stock that will be exercisable on or before May 22, 2001.
(18) Mr. Panetta's total includes options to purchase 7,500 shares of common
stock that will be exercisable on or before May 22, 2001.
(19) See footnotes 6 through 18. The total includes options and warrants to
purchase an aggregate of 2,319,343 shares of common stock that will be
exercisable on or before May 22, 2001 by all of the executive officers and
non-employee directors as a group.
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EXECUTIVE COMPENSATION
AND RELATED INFORMATION
The following table sets forth certain compensation that we paid during
each of the three years ended December 31, 2000, to our Chief Executive Officer
and four other most highly compensated executive officers during fiscal 2000
(collectively, the "Named Officers"):
EXECUTIVE COMPENSATION SUMMARY TABLE
LONG-TERM COMPENSATION
ANNUAL ---------------------------
COMPENSATION RESTRICTED NO. OF SHARES
------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD(S)($) OPTIONS(#) COMPENSATION(1)
Thomas G. Wiggans 2000 $400,000 $150,000 -- 175,000 $ 6,549(2)
President and Chief Executive Officer 1999 $337,584 $120,000 $334,075 100,000 $ 2,446
1998 $315,000 $100,000 -- 150,000 $ 4,577
John L. Higgins 2000 $250,000 $ 75,000 -- 90,000 $ 2,145
Exec. Vice President, Finance and 1999 $210,244 $ 56,700 -- 30,000 $22,675(3)
Administration; Chief Financial Officer 1998 $190,000 $ 50,000 -- 60,000 $ 3,319(4)
C. Gregory Vontz(5) 2000 $235,417 $ 87,500 -- 121,390 $ 2,218
Exec. Vice President, Chief 1999 $ 14,567 -- -- 108,610(6) $35,018(7)
Operating Officer 1998 N/A N/A -- N/A N/A
Robert G. Lederer(8) 2000 $225,000 $ 69,700 -- 5,000 $67,603(9)
Sr. Vice President, Commercial 1999 $225,000 $ 33,750 -- 30,000 $75,846(10)
Operations 1998 $ 92,814 $ 25,000 -- 110,000 $38,025(11)
Katrina J. Church(12) 2000 $218,875 $ 61,276 -- 65,000 $ 2,127(13)
Senior Vice President, Legal Affairs 1999 $184,012 $ 37,000 -- 30,000 $ 2,155
General Counsel and Secretary 1998 $ 89,577 $ 27,000 -- N/A $ 467(14)
1. Except as otherwise indicated, "other compensation" represents premiums paid
by Connetics for group term life insurance. "Other compensation" also
includes a company match for 401(k) plans of $1,713 in 2000, $1,773 in 1999,
and $1,059 in 1998.
2. Also includes airfare of $1,666 paid by Connetics for Mr. Wiggans' spouse.
3. Also includes $884 paid as an incentive travel bonus and debt forgiveness on
a loan of $19,707.
4. Also includes $1,943 paid as an incentive travel bonus.
5. Mr. Vontz joined Connetics in December 1999. Prior to that time he was a
consultant to Connetics. On February 15, 2001, Mr. Vontz was promoted to
Chief Operating Officer.
6. Represents 5000 shares received in December 1999, with 100% vesting and
103,610 shares when he became an employee.
7. Amount represents $18.00 in group term life and $35,000 as consultant
compensation.
8. Mr. Lederer joined Connetics in July 1998.
9. Also includes $58,521 debt forgiveness on a loan, and $5,305 airfare paid
for Mr. Lederer's spouse.
10. Also includes $43,710 in relocation expenses and debt forgiveness on a loan
of $27,885 and $1,418 for the 401(k) match.
11. Also includes $2,089 in rental reimbursement and $35,000 in relocation
expenses. Mr. Lederer did not participate in Connetics' 401(k) plan during
1998.
12. Ms. Church joined Connetics in June 1998.
13. Includes $1,711 for the 401(k) match.
14. Includes $260 for the 401(k) match.
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OPTION INFORMATION
The following tables provide certain information with respect to stock
options granted to the Named Officers in 2000.
OPTION GRANTS FOR 2000
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
PERCENTAGE OF OF STOCK PRICE APPRECIATION
NUMBER OF TOTAL OPTIONS FOR OPTION TERM(2)
OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION ---------------------------
NAME GRANTED(1) EMPLOYEES PER SHARE DATE 5% 10%
Thomas G. Wiggans 150,000 14.6% $8.750 01/04/10 $825,424 $2,091,787
25,000 $4.563 10/12/10 $ 71,741 $1,841,806
John L. Higgins 65,000 7.5% $8.750 01/04/10 $357,684 $ 906,441
25,000 $4.563 10/12/10 $ 71,741 $ 181,806
C. Gregory Vontz 91,390 10.2% $8.750 01/04/10 $502,903 $1,274,456
30,000 $4.563 10/12/10 $ 86,089 $ 218,167
Robert G. Lederer 5,000 0.4% $4.564 10/12/10 $ 14,348 $ 36,361
Katrina J. Church 40,000 5.4% $8.750 01/04/10 $220,113 $ 557,810
25,000 $4.563 10/12/10 $ 71,741 $ 181,806
(1) These stock options generally become exercisable at a rate of one-fourth of
the shares of common stock subject to the option at the end of the first
twelve month period after the date of grant and monthly thereafter until the
fourth anniversary of grant, as long as the optionee remains an employee
with, consultant to, or director of Connetics.
(2) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, in accordance with SEC rules. The hypothetical value for the options
is calculated based on 5% and 10% assumed rates of annual compound stock
price appreciation during the option term, as mandated by the SEC. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the common stock, overall market conditions and the option
holders' continued employment through the vesting period. The amounts
reflected in this table may not necessarily be achieved.
AGGREGATED OPTION EXERCISES FOR 2000
AND
OPTION VALUES ON DECEMBER 29, 2000
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/29/00 AT 12/29/00(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Thomas G. Wiggans 20,000 $ 82,364.00 260,902 298,959 $231,303 $71,712
John L. Higgins 23,632 $255,521.00 109,285 157,083 $ 54,532 $38,383
C. Gregory Vontz -- -- 53,751 176,249 -- --
Robert G. Lederer 40,250 $428,090.62 34,542 70,208 $ 16,455 $31,533
Katrina J. Church -- -- 36,250 93,750 $ 23,880 $ 6,450
(1) Based on the closing price of our common stock on December 29, 2000 as
reported on the NASDAQ National Market ($4.563 per share), minus the per
share exercise price, multiplied by the number of shares underlying the
option.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT AND CONSULTING AGREEMENTS
We have a consulting agreement with G. Kirk Raab pursuant to which Mr. Raab
serves as a director, consultant and the Chairman of our Board of Directors.
Pursuant to that agreement, we pay Mr. Raab a base annual director's fee of
$180,000. Since 1995, in connection with the consulting agreement, Mr. Raab has
been granted options to purchase 449,950 shares of our common stock with
exercise prices ranging from $0.45 to $11.00 per share. These options are in
addition to options granted to Mr. Raab in connection with his service as a
director.
Mr. Wiggans serves as our President and Chief Executive Officer pursuant to
an employment agreement entered into in June 1994. Pursuant to that agreement,
Mr. Wiggans receives an annual base salary, which is reviewed annually, and is
eligible for an annual cash bonus based on consideration of his attainment of
corporate goals and achievement of key milestones. In addition, Mr. Wiggans
acquired 146,142 shares of common stock pursuant to a restricted stock purchase
agreement in June 1994. We loaned Mr. Wiggans the money to purchase the shares,
pursuant to a Secured Loan Agreement and Promissory Note dated August 1, 1994
and payable on August 1, 1999. All of those shares have been released from
Connetics' repurchase option. Mr. Wiggans surrendered existing shares as
satisfaction of the loan obligation related to the purchase of these shares. The
employment agreement provides for Mr. Wiggans to receive continuation of salary
and benefits and continuation of vesting with respect to all of the common stock
held by Mr. Wiggans for nine months following the termination of his employment
from Connetics other than for cause, and to the payment of premiums on a life
insurance policy in the amount of $1,000,000 for the benefit of Mr. Wiggans'
family.
We have a consulting agreement with Glenn Oclassen pursuant to which Mr.
Oclassen provides consulting services to us in addition to serving as a
director. Pursuant to that agreement, we pay Mr. Oclassen $44,000, and granted
him additional stock options to purchase up to 25,000 shares of our common stock
in addition to the options granted to him as a director.
Mr. Lederer serves as an officer of Connetics pursuant to an employment
agreement entered into on July 1, 1998. Pursuant to that agreement, Mr. Lederer
receives an annual base salary, which is reviewed annually, and is eligible for
an annual cash bonus based on consideration of attainment of corporate goals and
achievement of key milestones, including corporate sales goals. The employment
agreement provides for Mr. Lederer to receive continuation of salary and
benefits and continuation of vesting with respect to all of the common stock
held by him for six months following the termination of his employment from
Connetics other than for cause.
We have consulting agreements with Dr. Bauer and Mr. Panetta, each of which
involves annual compensation of less than $60,000.
LOANS TO CERTAIN EMPLOYEES AND CONSULTANTS
Between 1997 and 1999 we loaned money to Mr. Wiggans pursuant to two
interest-bearing loan agreements for up to $225,000. Both loans were secured by
shares of common stock held by Mr. Wiggans. As of December 31, 1999 the balance
on both loans was zero. In February 2000, the Board authorized a loan to Mr.
Wiggans in the amount of $250,000, at an interest rate equal to 6.2%. The loan
is to be forgiven at a rate of $50,000 per year plus accrued interest, on each
anniversary of the loan on which Mr. Wiggans is still employed by Connetics. At
December 31, 2000, the total balance outstanding was $263,036.99.
We have loaned money to John L. Higgins, our Executive Vice President,
Finance and Administration and Chief Financial Officer, pursuant to a Secured
Loan Agreement in the amount $18,000. On May 18, 1999, the Board of Directors
forgave the loan granted (for a total forgiveness of $19,707) and authorized
another loan to Mr. Higgins in the amount of $18,000, which is secured by shares
of common stock issuable upon the exercise of vested options held by Mr.
Higgins. The loan bears interest at 5.54% per year, compounded annually. At
December 31, 2000, the total balance outstanding was $19,245.17.
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We have loaned money to Robert G. Lederer, our Senior Vice President of
Commercial Operations, pursuant to a Secured Loan Agreement for an aggregate of
$72,000 over a two-year period. Any loans under the agreement are secured by
110,000 shares of common stock issuable upon the exercise of vested options held
by Mr. Lederer. To date, Mr. Lederer has delivered promissory notes as follows:
the first note, in the amount of $18,000, bore interest at 5.48% per annum,
compounded annually. On July 2, 1999, the Board of Directors forgave the note
with accrued interest and principal of $27,885. The second note, in the amount
of $18,000, was entered into in February 1999, and bore interest at 6.2% per
year. The third note, in the amount of $18,000, was entered into in August 1999,
and bore interest at 5.43% per year. On May 10, 2000 the Board of Directors
forgave the second and third notes with accrued interest and principal of
$58,521.00. At December 31, 2000, the total balance outstanding was $19,000.41.
INVESTMENTS BY CERTAIN STOCKHOLDERS
In June 2000, we sold an aggregate of 2,010,000 shares of our common stock
at a price of $10.00 per share to certain accredited investors in a private
placement. As part of this financing, Dr. Barkas purchased 100,000 shares of our
common stock for an aggregate price of $1,000,000. Those shares are held in the
name of Alexander E. Barkas and Lynda J. Wijick (tenants in common).
OTHER ARRANGEMENTS
We have agreements with each of our directors and executive officers which
provide that in the event of a merger or acquisition of Connetics and another
entity, all stock options held by such person will automatically vest in full
(1) unless Connetics is the surviving entity after such transaction and
Connetics' stockholders immediately prior to such transaction own a majority of
the outstanding securities of the surviving entity, or (2) if, as the result of
such transaction, the officer or director's position with Connetics is
terminated or his or her responsibilities are adversely changed or reduced
without his or her written consent.
We have entered into indemnification agreements with our officers and
directors containing provisions which may require the company, among other
things, to indemnify its officers and directors against certain liabilities that
may arise by reason of their status or service as officers or directors (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
We have a distribution agreement with CORD Logistics, Inc. for distribution
of our products to our direct customers. Pursuant to the agreement, we pay CORD
monthly fixed fees for system access, customer service and financial services,
in addition to other per order and fixed fees for distribution, customer
services and financial services. CORD is a subsidiary of Cardinal Health, Inc.,
of which Mr. Kane, one of our directors was the President, Chief Operating
Officer and a director until December 31, 2000.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The following Report of the Compensation Committee and the performance graphs
included elsewhere in this proxy statement do not constitute soliciting material
and should not be deemed filed or incorporated by reference into any of our
other filings under the Securities Act of 1933 or the Securities Exchange Act of
1934, except to the extent we specifically incorporate this Report or the
performance graphs by reference in such filings.
The Compensation Committee of the Board of Directors has general
responsibility for establishing the compensation payable to our executive
officers and has the sole and exclusive authority to administer our stock option
plans under which grants may be made to such individuals.
WHAT IS OUR PHILOSOPHY OF EXECUTIVE OFFICER COMPENSATION?
Under the supervision of the Compensation Committee, Connetics'
compensation policy is designed to attract and retain qualified key executives
critical to our growth and long-term success. It is the objective of the
Compensation Committee to make a portion of each executive's compensation
contingent upon Connetics'
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performance as well as upon the individual's personal performance. Accordingly,
each executive officer's compensation package is comprised of three elements:
(i) base salary which reflects individual performance and expertise, (ii)
variable bonus awards payable in cash and tied to the achievement of certain
performance goals which the Compensation Committee establishes from time to time
for Connetics or the individual and (iii) long-term stock-based incentive awards
which are designed to strengthen the mutuality of interests between the
executive officers and Connetics' stockholders.
The summary below describes in more detail the factors that the
Compensation Committee considers in establishing each of the three primary
components of the compensation package provided the executive officers.
Base Salary. The Committee established annual base salary levels for
executives based on competitive survey data, level of experience, position and
responsibility, the prior year's corporate performance, the incentives necessary
to attract and retain qualified management, and individual recommendations of
executive management. Base salary is adjusted each year to take into account the
individual's performance and to maintain a competitive salary structure. Company
performance does not play a significant role in the determination of base
salary.
Cash-Based Incentive Compensation. Cash bonuses are awarded to executive
officers on the basis of their success in achieving designated individual goals
and our success in achieving specific company-wide goals. Any cash bonuses
awarded to the Named Officers in 2001 based on 2000 performance are reflected in
the Summary Compensation Table.
Stock Options. We use stock option plans to provide executives and other
key employees with incentives to maximize long-term stockholder values. Awards
under our option plans take the form of stock options designed to give the
recipient an equity stake in Connetics and thereby closely align his or her
interests with those of our stockholders. The factors we consider in making such
awards include the individual's position in Connetics, his or her performance
and responsibilities, and internal comparability considerations. In addition,
the Compensation Committee has established certain general guidelines in making
option grants to the executive officers in an attempt to target a fixed number
of unvested option shares based upon each individual's position with Connetics
and his or her existing holdings of unvested options. However, the Compensation
Committee does not adhere strictly to these guidelines and will vary the size of
the option grant made to each executive officer as it believes the circumstances
warrant. Option grants during 2000 to the Named Officers are reflected in the
table under "Option Grants in 2000."
HOW IS OUR CHIEF EXECUTIVE OFFICER COMPENSATED?
In setting the compensation payable during 2000 to our Chief Executive
Officer, Thomas G. Wiggans, the Committee used the same factors as described
above for the executive officers. The Compensation Committee reviewed Mr.
Wiggans' compensation relative to industry comparables and his performance over
the last twelve (12) months in achieving our company goals. As a result of this
review, in January 2000, Mr. Wiggans received two stock option grants totaling
175,000 shares, as part of a number of grants made to certain of Connetics'
employees. Mr. Wiggans was also awarded a bonus in the amount of $150,000 for
2000. Mr. Wiggans' annual base salary was set at $400,000 for 2000.
HOW ARE WE ADDRESSING THE INTERNAL REVENUE CODE LIMITS ON DEDUCTIBILITY OF
COMPENSATION?
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public corporations for compensation over $1,000,000 paid for any
year to the corporation's Chief Executive Officer and four other most highly
compensated executive officers as of the end of any fiscal year. However, the
statute exempts qualifying performance-based compensation from the deduction
limit if certain requirements are met. Connetics does not have a policy
requiring the Committee to qualify all compensation for deductibility under this
provision. The Committee's current view is that any non-deductible amounts will
be immaterial to Connetics' financial or tax position, and that Connetics
derives substantial benefits from the flexibility provided by the current
system, in which the selection and quantification of performance targets are
modified from year to year to reflect changing conditions. However, the
Committee takes into account the net cost to
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Connetics in making all compensation decisions and will continue to evaluate the
impact of this provision on its compensation programs.
SUBMITTED BY THE 2000 COMPENSATION COMMITTEE:
JOHN C. KANE
ALEXANDER BARKAS
STOCK PERFORMANCE GRAPH
The following graph compares total stockholder return on our common stock
since February 1, 1996, with the performance of the NASDAQ Composite Index and
the Nasdaq Pharmaceutical Index for the same period. The graph assumes that $100
was invested on February 1, 1996, the date of our initial public offering, in
each of our common stock, the NASDAQ Composite Index and the Nasdaq
Pharmaceutical Index, and that all dividends were reinvested.
[LINE GRAPH]
- --------------------------------------------------------------------------------------------------
2/1/96 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
- --------------------------------------------------------------------------------------------------
Connetics Corporation LOGO $100 $ 73 $ 27 $ 52 $ 93 $ 41
NASDAQ Composite Index LOGO $100 $121 $149 $210 $390 $234
NASDAQ Pharmaceutical Index LOGO $100 $ 91 $ 94 $120 $226 $281
ADDITIONAL INFORMATION
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and persons who hold more than ten percent (10%)
of our outstanding common stock (collectively, "Reporting Persons") to file
reports with respect to their ownership of and transactions in our securities
with the SEC. Reporting Persons are required by SEC regulations to furnish us
with copies of all Section 16(a) forms that they file. Based solely on a review
of the copies of those reports furnished to us and written representations from
certain Reporting Persons that no other reports were required to be filed, we
believe that all filing requirements under Section 16(a) for the year ended
December 31, 2000 were complied with, except that Mr. Panetta inadvertently
filed his Form 3 (Initial Statement of Ownership) late, certain transactions
reportable by Mr. Raab on Form 4 (Statement of Changes in Beneficial Ownership)
inadvertently were filed late, and certain transactions reportable by Mr. Vontz
on Form 5 for fiscal year 1999 (Annual Statement of Changes in Beneficial
Ownership) inadvertently were filed late.
WHO PAYS FOR SOLICITATION OF PROXIES?
We will bear the entire cost of soliciting these proxies, including the
preparation, assembly, printing, handling and mailing of the proxy card and
related material. We also expect to reimburse brokerage firms and
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other persons representing beneficial owners of shares for their actual expense
in forwarding proxy material to the beneficial owners. The original solicitation
of proxies by mail may be supplemented by solicitation by telephone, facsimile,
telegraph or personal communication by our directors, officers, regular
employees or agents. These persons will receive no extra compensation for their
services. We may also use an outside solicitor to assist with the solicitation
of proxies. If we were to use an outside solicitor, we would pay that solicitor
for its services, the cost of which are not anticipated to be material.
STOCKHOLDER PROPOSALS FOR THE 2002 ANNUAL MEETING
Stockholders interested in presenting a proposal for consideration at our
2002 annual meeting of stockholders may do so by submitting proposals to be
considered for inclusion no later than December 10, 2001. Such proposals may be
included in next year's Proxy Statement and form of proxy if they comply with
certain SEC rules and regulations.
DOCUMENTS INCORPORATED BY REFERENCE
According to the provisions of Schedule 14A under the Securities Exchange
Act of 1934, this proxy statement incorporates by reference the section entitled
"Our Directors and Executive Officers" from Part III of Connetics' Annual Report
on Form 10-K for the year ended December 31, 2000.
**********
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APPENDIX A
CONNETICS CORPORATION
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
PURPOSE AND SCOPE OF RESPONSIBILITIES:
The purpose of the Audit Committee (the "Committee") of the Board of
Directors (the "Board") of CONNETICS CORPORATION, a Delaware corporation (the
"Company"), shall be to make such examinations as are necessary to monitor the
corporate financial reporting and the external audits of the Company, to provide
the Board with the results of its examinations and recommendations derived
therefrom, to outline to the Board improvements made, or to be made, in internal
accounting controls, to nominate independent auditors, and to provide such
additional information and materials as it may deem necessary to make the Board
aware of significant financial matters that require the Board's attention.
COMPOSITION:
The Committee shall be comprised of a minimum of three (3) members of the
Board, all of whom shall be independent directors, in accordance with any
applicable Nasdaq or SEC rules concerning independence. The members of the
Committee and its Chairperson will be appointed by and serve at the discretion
of the Board.
FUNCTIONS AND AUTHORITY:
The operation of the Committee shall be subject to the provisions of the
Bylaws of the Company, as in effect from time to time, and to Section 141 of the
Delaware General Corporation Law. The Committee shall have the full power and
authority to carry out the following responsibilities:
1. To recommend annually to the full Board the firm of certified public
accountants to be employed by the Company as its independent auditors for the
ensuing year.
2. To review the engagement of the independent auditors, including the
scope, extent and procedures of the audit and the compensation to be paid
therefore, and all other matters the Committee deems appropriate, including the
auditors' independence and accountability to the Board and the Committee.
3. To have familiarity, through the individual efforts of its members, with
the accounting and reporting principles and practices applied by the Company in
preparing its financial statements, including, without limitation, the policies
for recognition of revenues in financial statements.
4. To review the annual audited financial statements with management,
including a review of major issues regarding accounting principles and
practices, and evaluate the adequacy of internal controls that could
significantly affect the Company's financial statements; and to review the
financial statements in the Form 10-K with management and the independent
auditors before the 10-K is filed.
5. To assist and interact with the independent auditors in order that they
may carry out their duties in the most efficient and cost effective manner, and
to ensure that they understand that they are accountable to the Committee and
the Board.
6. To evaluate the cooperation received by the independent auditors during
their audit examination, including their access to all requested records, data
and information, and elicit the comments of management regarding the
responsiveness of the independent auditors to the Company's needs.
7. To review the Company's balance sheet, profit and loss statement and
statements of cash flows and stockholders' equity for each interim period, and
any changes in accounting policy that have occurred during the interim period.
8. To review the interim financial statements in the Form 10-Q with
management and the independent auditors before the 10-Q is filed.
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9. To review and approve all professional services provided to the Company
by its independent auditors and consider the possible effect of such services on
the independence of such auditors.
10. To consult with the independent auditors and discuss with Company
management the scope and quality of internal accounting and financial reporting
controls in effect.
11. To investigate, review and report to the Board the propriety and
ethical implications of any transactions, as reported or disclosed to the
Committee by management, the independent auditors, employees, officers, members
of the Board or otherwise, between (a) the Company and (b) any employee, officer
or member of the Board of the Company, or any affiliates of the foregoing.
12. To oversee the independence of the outside auditors through the receipt
of a formal written statement delineating all relationships between the auditors
and the Company and active dialogue with the auditors.
13. To review annually and, if necessary, propose amendments or revisions
to the Charter of the Audit Committee to the Board of Directors for approval.
14. To perform such other functions and have such power as may be necessary
or convenient in the efficient and lawful discharge of the foregoing.
MEETINGS:
The Committee will hold at least two (2) regular meetings per year and
additional meetings as the Chairperson or Committee deem appropriate. The
President and Chief Financial Officer may attend any meeting of the Committee,
except for portions of the meetings where his, her or their presence would be
inappropriate, as determined by the Committee Chairperson.
MINUTES AND REPORTS:
Written minutes of each meeting of the Committee shall be kept and
distributed to each member of the Committee, members of the Board who are not
members of the Committee and the Secretary of the Company. The Chairperson of
the Committee shall report to the Board from time to time, or whenever so
requested by the Board.
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[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
The Board of Directors recommends a vote FOR each of the directors listed below
and a vote FOR the other proposals. This PROXY, when properly executed, will be
voted as specified below. THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
DIRECTORS LISTED BELOW AND FOR THE OTHER PROPOSALS IF NO SPECIFICATION IS MADE.
1. To elect the following directors to serve until the next annual meeting of
stockholders and until their successors are elected and qualified:
Alexander E. ???, Ph.D., Eugene A. Bauer, M.D., John C. Kane, Thomas D. K??,
Glenn A. Octassen, Leon E. Panetta, G. Kirk Raab, Thomas G. Wiggans
FOR [ ] [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
For all nominees except:
[ ]
-------------------------
2. To approve amendments to the 1995 Directors' Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To ratify the Board of Directors' selection of Ernst & Young LLP to serve as
the Company's independent auditors for the fiscal year ending December 31,
2001.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To transact such other business as may properly come before the Annual
Meeting of any adjournment or postponement of the Annual Meeting.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
IF YOUR ADDRESS HAS CHANGED, PLEASE MARK HERE AND WRITE CORRECTED ADDRESS TO THE
LEFT. [ ]
Please sign the name(s) appearing on each share certificate(s) over which you
have voting authority.
Signature: Date: Signature: Date:
----------------- ------- ----------------- ---------
27
PROXY
CONNETICS CORPORATION
Annual Meeting of Stockholders, May 17, 2001
This Proxy is Solicited on Behalf of the Board of Directors of
Connetics Corporation
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of the Annual Meeting of Stockholders to be held on May 17, 2001 and the
Proxy Statement and appoints Thomas G. Wiggans and Katrina J. Church, and each
of them, as the Proxy of the undersigned, with full power of substitution, to
vote all shares of Common Stock of Connetics Corporation (the "Company") which
the undersigned is entitled to vote, either on his or her own behalf or on
behalf of any entity or entities, at the Annual Meeting of Stockholders of the
Company to be held at the Company's facilities located at 3284 West Bayshore
Road, Palo Alto, California 94303, on Thursday, May 17, 2001 at 9:00 a.m. (the
"Annual Meeting"), and at any adjournment or postponement of the Annual
Meeting, with the same force and effect as the undersigned might or could do if
personally present at the meeting. The shares represented by this Proxy shall
be voted in the manner set forth on the reverse side.
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE