<PAGE>
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 Section 240.14a-11(c) or Section
240.14a-12
ARTHROCARE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined:
------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------
(5) Total fee paid:
------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
ARTHROCARE CORPORATION
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 5, 2000
----------------
TO THE STOCKHOLDERS:
Notice is hereby given that the 2000 Annual Meeting of Stockholders of
ArthroCare Corporation, a Delaware corporation (the "Company"), will be held
on Monday, June 5, 2000 at 10:00 a.m., local time, at the Company's principal
executive offices located at 595 North Pastoria Avenue, Sunnyvale, California
94086 for the following purposes:
(1) To elect directors of the Company.
(2) To approve an amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of Common Stock by 55,000,000
shares to a total of 75,000,000 shares of Common Stock authorized for
issuance.
(3) To approve an amendment to the Company's Certificate of Incorporation
to effect a two-for-one stock split of the Company's outstanding Common
Stock.
(4) To approve an amendment to the Company's 1993 Stock Plan to increase
the number of shares of Common Stock reserved for issuance thereunder by
400,000 shares (without giving effect to the approval of Proposal No. 3
above).
(5) To approve an amendment to the Company's 1995 Director Option Plan to
(i) increase the number of shares of Common Stock reserved for issuance
thereunder by 145,000 shares (without giving effect to the approval of
Proposal No. 3 above); (ii) increase the number of options for shares of
Common Stock automatically granted to non-employee directors upon election
and re-election to 25,000 and 7,500, respectively (without giving effect to
the approval of Proposal No. 3 above); and (iii) provide for accelerated
vesting of directors' options upon a change of control of the Company.
(6) To confirm the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the 2000 fiscal year.
(7) To transact such other business as may properly come before the
meeting or any adjournment thereof.
These matters are more fully described in the Proxy Statement accompanying
this Notice.
Only stockholders of record at the close of business on April 14, 2000 are
entitled to vote at the Annual Meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to sign
and return the enclosed Proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. Any stockholder attending the meeting may
vote in person even if the stockholder has returned a proxy.
By Order of The Board of Directors
Michael A. Baker
President and Chief Executive
Officer
Sunnyvale, California
May 10, 2000
IMPORTANT
TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-
PREPAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN IF
YOU RETURNED A PROXY.
<PAGE>
ARTHROCARE CORPORATION
----------------
PROXY STATEMENT
2000 ANNUAL MEETING OF STOCKHOLDERS
The enclosed Proxy is solicited on behalf of ArthroCare Corporation, a
Delaware corporation (the "Company"), for use at the Annual Meeting of
Stockholders (the "Annual Meeting") to be held Monday, June 5, 2000 at 10:00
a.m., local time, or at any adjournment thereof, for the purposes set forth
herein and in the accompanying Notice of Annual Meeting of Stockholders. The
Annual Meeting will be held at the Company's principal executive offices
located at 595 North Pastoria Avenue, Sunnyvale, California 94086. The
Company's telephone number at that location is (408) 736-0224.
This Proxy Statement is being mailed on or about May 10, 2000 to all
stockholders entitled to vote at the Annual Meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
Record Date and Voting Securities
Stockholders of record at the close of business on April 14, 2000 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting.
The Company has one series of common shares outstanding, designated Common
Stock. At the Record Date, 10,916,309 shares of the Company's Common Stock,
$0.001 par value (the "Common Stock"), were issued and outstanding and held of
record by 150 stockholders.
Voting; Quorum; Abstentions; and Broker Non-Votes
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 (Proposal No. 1). A plurality of the Votes Cast (see
definition below) at the Annual Meeting is required for the election of
directors (Proposal No. 1). The affirmative vote of a majority of the
outstanding Common Stock is required for approval to amend the Certificate of
Incorporation (Proposals No. 2 and 3). For all other proposals, the
affirmative vote of the majority of the Votes Cast at the Annual Meeting is
required for approval.
The required quorum for the transaction of business at the Annual Meeting
is a majority of the shares of Common Stock issued and outstanding on the
Record Date and entitled to vote at the Annual Meeting, present in person or
represented by proxy. Shares that are voted "FOR," "AGAINST" or "ABSTAIN" from
a matter are treated as being present at the Annual Meeting for purposes of
establishing a quorum and are also treated as votes eligible to be cast by the
Common Stock, present in person or represented by proxy, at the Annual Meeting
and "entitled to vote on the subject matter" (the "Votes Cast") with respect
to such matter. If a quorum is not present or represented, then either the
chairman of the Annual Meeting or the stockholders entitled to vote at the
Annual Meeting, present in person or represented by proxy, will have the power
to adjourn the Annual Meeting from time to time, without notice other than an
announcement at the Annual Meeting, until a quorum is present. At any
adjourned Annual Meeting at which a quorum is present, any business may be
transacted that might have been transacted at the Annual Meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned Annual Meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the adjourned Annual Meeting.
Although there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, the Company believes that
abstentions should be counted for purposes of determining both the presence or
absence of a quorum for the transaction of business and the total number of
Votes Cast with respect
1
<PAGE>
to a particular matter. Therefore, in the absence of controlling precedent to
the contrary, the Company intends to treat abstentions in this manner.
Broker non-votes, however, shall be treated differently. In a 1988 Delaware
case, Berlin v. Emerald Partners, the Delaware Supreme Court held that, while
broker non-votes may be counted for purposes of determining the presence or
absence of a quorum for the transaction of business, broker non-votes should
not be counted for purposes of determining the number of Votes Cast with
respect to the particular proposal on which the broker has expressly not
voted. Consequently, broker non-votes with respect to proposals set forth in
this Proxy Statement will not be considered Votes Cast and, accordingly, will
not affect the determination as to whether the requisite majority of Votes
Cast has been obtained with respect to a particular matter.
Therefore, for purposes of the election of directors (Proposal No. 1),
neither abstentions nor broker non-votes will have any effect on the outcome
of the vote. For all other proposals, abstentions will have the same effect as
votes against these proposals and broker non-votes will not have any effect on
the outcome of the vote.
PROXIES IN THE ACCOMPANYING FORM THAT ARE PROPERLY EXECUTED AND RETURNED
WILL BE VOTED AT THE ANNUAL MEETING IN ACCORDANCE WITH THE INSTRUCTIONS ON THE
PROXY. ANY PROPERLY EXECUTED PROXY ON WHICH THERE ARE NO INSTRUCTIONS
INDICATED ABOUT A SPECIFIED PROPOSAL WILL BE VOTED AS FOLLOWS: (I) FOR THE
ELECTION OF THE SIX PERSONS NAMED IN THIS PROXY STATEMENT AS THE BOARD OF
DIRECTORS' NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS; (II) FOR THE
AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION TO
INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK BY 55,000,000; (III)
FOR THE AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION TO EFFECT A TWO-FOR-ONE STOCK SPLIT OF THE COMPANY'S COMMON
STOCK; (IV) FOR AN AMENDMENT TO THE 1993 STOCK PLAN TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER BY 400,000 SHARES
(WITHOUT GIVING EFFECT TO THE APPROVAL OF PROPOSAL NO. 3); (V) FOR AN
AMENDMENT TO THE DIRECTOR OPTION PLAN TO (1) INCREASE THE NUMBER OF SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER BY 145,000 SHARES (WITHOUT
GIVING EFFECT TO THE APPROVAL OF PROPOSAL NO. 3); (2) INCREASE THE NUMBER OF
OPTIONS FOR SHARES OF COMMON STOCK AUTOMATICALLY GRANTED TO NON-EMPLOYEE
DIRECTORS UPON ELECTION AND RE-ELECTION TO 25,000 AND 7,500, RESPECTIVELY
(WITHOUT GIVING EFFECT TO THE APPROVAL OF PROPOSAL NO. 3); AND (3) PROVIDE FOR
ACCELERATED VESTING OF DIRECTORS' OPTIONS UPON A CHANGE OF CONTROL OF THE
COMPANY; AND (VI) FOR THE RATIFICATION OF THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS AS INDEPENDENT ACCOUNTANTS OF THE COMPANY. NO BUSINESS
OTHER THAN THAT SET FORTH IN THE ACCOMPANYING NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS IS EXPECTED TO COME BEFORE THE ANNUAL MEETING. SHOULD ANY OTHER
MATTER REQUIRING A VOTE OF STOCKHOLDERS PROPERLY ARISE, THE PERSONS NAMED IN
THE PROXY WILL VOTE THE SHARES THEY REPRESENT AS THE BOARD OF DIRECTORS MAY
RECOMMEND. THE PERSONS NAMED IN THE PROXY MAY ALSO, AT THEIR DISCRETION, VOTE
THE PROXY TO ADJOURN THE ANNUAL MEETING FROM TIME TO TIME.
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 Annual Meeting and voting in person.
Solicitation
The cost of soliciting proxies will be borne by the Company. The Company
has retained MacKenzie Partners, Inc. to solicit proxies on behalf of the
Company for a fee not to exceed $10,000. MacKenzie expects to use 35 persons
in its solicitation efforts. In addition, the Company may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation material to such beneficial owners.
Proxies may also be solicited by certain of the Company's directors, officers
and regular employees, without additional compensation, personally or by
telephone, facsimile or telegram.
2
<PAGE>
Deadline for Receipt of Stockholder Proposals
Stockholders who intend to present a proposal for inclusion in the
Company's proxy materials for the 2001 Annual Meeting of Stockholders must
submit the proposal to the Company no later than January 5, 2001.
Additionally, stockholders who intend to present a proposal at the 2001 Annual
Meeting of Stockholders without inclusion of such proposal in the Company's
proxy materials for the 2001 Annual Meeting must provide notice of such
proposal to the Company no later than January 5, 2001. The Company reserves
the right to reject, rule out of order, or take other appropriate action with
respect to any proposal that does not comply with these and other applicable
requirements.
3
<PAGE>
SHARE OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of April
1, 2000 by:
. each of the Company's directors,
. each executive officer named in the Summary Compensation Table appearing
herein,
. all directors and executive officers of the Company as a group, and
. each person known by the Company to beneficially own more than 5% of the
Company's Common Stock.
The address for all executive officers and directors is c/o ArthroCare
Corporation, 595 North Pastoria Avenue, Sunnyvale, CA 94086.
<TABLE>
<CAPTION>
Shares Approximate
Beneficially Percent
Name and Address Owned(1) Owned(2)
---------------- ------------ -----------
<S> <C> <C>
Brown Investment Advisory & Trust Co. .............. 938,952 8.6%
19 South Street
Baltimore, MD 21202-3232
Navellier & Associates.............................. 679,819 6.2%
One East Liberty, Third Floor
Reno, NV 89501
Kern Capital Management LLC......................... 648,100 6.0%
114 West 47th Street, #1926
New York, NY 10036
Hira V. Thapliyal, Ph.D.(3)......................... 425,524 3.9%
Michael A. Baker(4)................................. 229,986 2.1%
John S. Lewis(5).................................... 126,560 1.2%
Annette J. Campbell-White(6)........................ 103,823 1.0%
Robert T. Hagan(7).................................. 80,801 *
Christine Hanni(8).................................. 55,858 *
Robert R. Momsen(9)................................. 46,537 *
C. Raymond Larkin, Jr.(10).......................... 31,020 *
John R. Tighe(11)................................... 24,656 *
Bruce Prothro(12)................................... 12,178 *
All directors and executive officers as a group (10
persons)(13)....................................... 1,136,943 10.4%
</TABLE>
- --------
* Represents 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 shown as beneficially owned by them.
(2) Applicable percentage ownership is based on 10,912,982 shares of Common
Stock outstanding as of April 1, 2000 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 the options currently exercisable, or
exercisable within 60 days of April 1, 2000, 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.
4
<PAGE>
(3) Includes an aggregate of 200,000 shares held in trust for Dr. Thapliyal's
minor children, over which Dr. Thapliyal does not hold voting or
dispositive control, and 8,833 shares issuable to Dr. Thapliyal upon
exercise of stock options exercisable within 60 days of April 1, 2000.
(4) Consists of 23,306 shares held by Michael A. Baker, and 206,680 shares
issuable to Mr. Baker upon exercise of stock options exercisable within
60 days of April 1, 2000.
(5) Consists of 102,560 shares held by John S. Lewis, 10,000 shares held by
John S. Lewis IRA Charles Schwab & Co. Inc., 5,000 shares which are held
by the Lewis Family Partnership, and 9,000 shares issuable to Mr. Lewis
upon exercise of stock options exercisable within 60 days of April 1,
2000.
(6) Consists of 84,823 shares held by Annette J. Campbell-White, 10,000
shares held by Delaware Charter Guarantee & Trust Co. Cust. MedVenture
Partners fbo Annette J. Campbell-White Profit Sharing Plan and 9,000
shares issuable upon exercise of stock options exercisable within 60 days
of April 1, 2000.
(7) Consists of 66,031 shares held by Robert T. Hagan and Barbara Hagan as
joint tenants over which Mr. Hagan and Ms. Hagan hold voting and
dispositive control and 14,770 shares issuable to Mr. Hagan upon exercise
of stock options exercisable within 60 days of April 1, 2000.
(8) Consists of 5,362 shares held by Christine Hanni and 50,496 shares
issuable to Ms. Hanni upon exercise of stock options exercisable within
60 days of April 1, 2000.
(9) Consists of 37,537 shares held by Robert R. Momsen and 9,000 shares
issuable to Mr. Momsen upon exercise of stock options exercisable within
60 days of April 1, 2000.
(10) Consists of 31,020 shares issuable to Mr. Larkin upon exercise of stock
options exercisable within 60 days of April 1, 2000.
(11) Consists of 2,972 shares held by John R. Tighe and 21,684 shares issuable
to Mr. Tighe upon exercise of stock options exercisable within 60 days of
April 1, 2000.
(12) Consists of 12,178 shares issuable to Mr. Prothro upon exercise of stock
options within 60 days of April 1, 2000.
(13) See footnotes (3) through (12) above.
5
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PROPOSAL NO. 1:
ELECTION OF DIRECTORS
Nominees
A Board of six directors will be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the six nominees named below, all of whom are presently directors of the
Company. If any nominee is unable or declines to serve as a director at the
time of the Annual Meeting, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. It
is not expected that any nominee will be unable to or will decline to serve as
a director. If stockholders nominate additional persons for election as
directors, the proxy holder will vote all proxies received by him to assure
the election of as many of the Board of Directors' nominees as possible, with
the proxy holder making any required selection of specific nominees to be
voted for. The term of office of each person elected as a director will
continue until the next Annual Meeting of Stockholders or until that person's
successor has been elected.
The names of the nominees, and certain information about them, are set
forth below.
<TABLE>
<CAPTION>
Name of Nominee Age Principal Occupation
--------------- --- --------------------
<C> <C> <S>
Michael A. Baker............... 41 President and Chief Executive Officer
of the Company
Annette J. Campbell-White...... 53 Managing General Partner, MedVenture
Associates
C. Raymond Larkin, Jr. ........ 51 Principal 3x NELL, L.L.C.
John S. Lewis.................. 54 Principal, Lewis Capital
Robert R. Momsen............... 52 General Partner, InterWest Partners
Hira V. Thapliyal, Ph.D. ...... 51 Retired
</TABLE>
Except as set forth below, each of the nominees has been engaged in his
principal occupation set forth above during the past five years. There are no
family relationships among any directors or executive officers of the Company.
Michael A. Baker, has served as President, Chief Executive Officer and a
Director of the Company since July 1997. From 1989 to 1997, Mr. Baker held
several positions in planning, corporate development and senior management at
Medtronic, Inc. a multi-billion medical technology company specializing in
implantable and invasive therapies. His most recent position at Medtronic,
Inc., was Vice President, General Manager of Medtronic's Coronary Vascular
Division. From 1988 to 1989, Mr. Baker was a management consultant at The
Carroll Group. From 1986 to 1988, Mr. Baker was a Corporate Development
Officer at American National Bank & Trust Co. Prior to joining American
National Bank & Trust Co., Mr. Baker served in the United States Army from
1981 to 1986. Mr. Baker holds a bachelor degree from the United States
Military Academy at West Point and an M.B.A. from the University of Chicago.
Annette J. Campbell-White joined the Company in May 1993 as a Director.
Since 1986, Ms. Campbell-White has been the Managing General Partner of
MedVenture Associates, a venture capital firm which invests primarily in
medical device companies. From July 1992 to July 1994, Ms. Campbell-White was
a general partner of Paragon Venture Partners II, a venture capital
partnership. Ms. Campbell-White has a B.Sc. degree in Chemical Engineering and
an M.Sc. degree in Physical Chemistry each from the University of Cape Town,
South Africa. Ms. Campbell-White serves on the Board of Directors of several
privately held companies.
C. Raymond Larkin, Jr. became a Director of the Company in April 1996. From
1983 to March 1998, he held various executive positions with Nellcor
Incorporated, a medical products company, for which he served as President and
Chief Executive Officer from 1989 until August 1995 when he became President
and Chief Executive Officer of Nellcor Puritan Bennett Incorporated upon the
merger of Nellcor Incorporated with Puritan-
6
<PAGE>
Bennett Corporation. Since July 1998 Mr. Larkin has been a principal of 3x
NELL, L.L.C., a company which invests in and provides consulting services to
the medical device, biotechnology and pharmaceutical industries. Mr. Larkin is
also a director of Neuromedical Systems, Inc. and Hangar Orthopedics M.D. He
holds a B.S. degree from LaSalle University.
John S. Lewis joined the Company in May 1993 as a Director when Paragon
Venture Partners, a high technology and healthcare-oriented venture capital
partnership, became the Company's founding lead investor. In addition to his
continuing role as a co-founder and General Partner of Paragon Venture
Partners since 1983, Mr. Lewis is a private investor, serving since April 1999
as the sole principal of Lewis Capital. From September 1995 until April 1999,
Mr. Lewis was a co-founder and Managing Director of Pacific Venture Group, a
venture capital partnership focused on healthcare investing. He received a
B.S. degree in Mechanical Engineering from University of California at
Berkeley, and an M.B.A. degree from Harvard Business School.
Robert R. Momsen joined the Company in January 1994 as a Director. Since
1982, he has been General Partner of InterWest Partners, a venture capital
firm which invests primarily in life sciences companies. Prior to 1981, Mr.
Momsen served as General Manager and Chief Financial Officer for Life
Instruments Corporation, a medical imaging company which he co-founded. Mr.
Momsen is also a director of COR Therapeutics, Inc., Coulter Pharmaceuticals,
Inc., First Medical Inc., Innovasive Devices, Inc., Integ, Inc., Urologix,
Progenitor, Inc. and several private companies. Mr. Momsen holds an M.B.A.
degree from Stanford University.
Hira V. Thapliyal, Ph.D., a founder of the Company, served as Chief
Technical Officer from July 1997 through October 1998 and from May 1993 to
July 1997, served as President, Chief Executive Officer and has been a
Director of the Company since its inception. From 1989 to 1993, Dr. Thapliyal
was President and Chief Executive Officer of MicroBionics, Inc., a privately-
held company developing an in-vivo continuous blood gas monitor. In 1986, Dr.
Thapliyal co-founded Cardiovascular Imaging Systems, Inc. ("CVIS") and served
as its President until 1988. CVIS develops and markets catheters for
ultrasonic intraluminal imaging of human arteries. From 1984 to 1986, Dr.
Thapliyal was Vice President, Engineering of Devices for Vascular
Interventions, Inc., a leader in marketing arthrectomy systems for treatment
of atherosclerotic disease. Dr. Thapliyal holds an M.S. degree in Electrical
Engineering from the University of Idaho and a Ph.D. in Materials Science &
Engineering from Cornell University.
Vote Required
The six nominees receiving the highest number of affirmative votes of the
Votes Cast shall be elected as directors of the Company for the ensuing year.
Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE NOMINEES.
Board Meetings, Committees
The Board of Directors of the Company held seven meetings during the year
ended January 1, 2000 (the "Last Fiscal Year"). The Board of Directors has an
Audit Committee, a Compensation Committee and a Nominating Committee. From
time to time, the Board has created various ad hoc committees for special
purposes. No such committee is currently functioning.
During the Last Fiscal Year, the Audit Committee consisted of directors
Lewis and Momsen. The Audit Committee is responsible for reviewing the results
and scope of the audit and other services provided by the Company's
independent auditors. During the Last Fiscal Year, the Audit Committee held
four meetings during which they reviewed and discussed financial presentations
and related matters. The Audit Committee also met with the Company's
independent auditors to discuss the audit for the Last Fiscal Year.
7
<PAGE>
During the Last Fiscal Year, the Compensation Committee consisted of
directors Campbell-White and Momsen. The Compensation Committee reviews and
makes decisions concerning salaries and incentive compensation for officers
and employees of the Company. The responsibilities of the Compensation
Committee were executed primarily by the Board of Directors during the first
half of the Last Fiscal Year. The Compensation Committee held eight meetings
during the Last Fiscal Year during which they discussed and reviewed
compensation matters.
In January 1999, a Nominating Committee was formed consisting of directors
Larkin, Momsen and Thapliyal. The Nominating Committee proposes a slate of
directors for election by the stockholders at each annual meeting and
candidates to fill any vacancies on the Board of Directors.
No director serving in the Last Fiscal Year attended fewer than 75% of the
aggregate number of meetings of the Board of Directors and meetings of the
committees of the Board on which he or she serves.
Director Compensation
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses they incur in
connection with their attendance at meetings of the Board of Directors and
committees of the Board of Directors. On June 5, 2000, each non-employee
director (an "Outside Director") who is re-elected at the Annual Meeting will
be granted an option to purchase 7,500 shares of the Company's Common Stock
(assuming stockholder approval of Proposal No. 5) at an exercise price per
share equal to the closing price of one share of the Company's Common Stock on
the day before the date of grant.
Compensation Committee Interlocks and Insider Participation
For the Last Fiscal Year, directors Campbell-White and Momsen served as
members of the Compensation Committee of the Board of Directors. No member of
the Compensation Committee was or is an officer or employee of the Company or
any of its subsidiaries. In addition, during the Last Fiscal Year, no officer
of the Company had an "interlock" relationship, as that term is defined by the
SEC, to report.
Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and reports of changes in the ownership with the
Securities and Exchange Commission (the "SEC"). Such persons are required by
SEC regulations 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 submitted to it
during the year ended January 1, 2000, the Company believes that, during the
Last Fiscal Year, none of its directors and officers failed to timely file any
Forms 4 disclosing shares of the Company common stock acquired.
8
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company who are elected by and serve at the
discretion of the Board of Directors and their ages as of April 1, 2000 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Michael A. Baker................. 41 President and Chief Executive Officer
Robert T. Hagan.................. 54 Vice President, Manufacturing
Christine Hanni.................. 39 Vice President, Finance and Chief
Financial Officer
Bruce Prothro.................... 38 Vice President, Regulatory Affairs
and Quality Assurance
John R. Tighe.................... 39 Vice President, Worldwide Sales and
Marketing
</TABLE>
Michael A. Baker has served as our President, Chief Executive Officer and a
director since July 1997. From 1989 to 1997, Mr. Baker held several positions
in planning, corporate development and senior management at Medtronic, Inc. a
multi-billion dollar medical technology company specializing in implantable
and invasive therapies. His most recent position at Medtronic, Inc., was Vice-
President, General Manager of Medtronic's Coronary Vascular Division. From
1988 to 1989, Mr. Baker was a management consultant at The Carroll Group. From
1986 to 1988, Mr. Baker was a Corporate Development Officer at American
National Bank & Trust Co. Prior to joining American National Bank & Trust Co.,
Mr. Baker served in the United States Army from 1981 to 1986. Mr. Baker holds
a bachelor degree from the United States Military Academy at West Point and an
M.B.A. from the University of Chicago.
Robert T. Hagan joined our Company in August 1995 as Vice President,
Manufacturing. From October 1992 to July 1995, Mr. Hagan was retired. From
1984 to September 1992, Mr. Hagan held several manufacturing oversight
position with Haemonetics Corporation, a manufacturer of blood processing
equipment and sterile disposable devices. His most recent position at
Haemonetics Corporation was Director of Advanced Manufacturing Technologies.
Mr. Hagan also served as Vice President of Manufacturing for Haemonetics and
Medical and Scientific Designs, Incorporated, a start-up reagent company. Mr.
Hagan holds a B.S. degree in Industrial Engineering from Tennessee
Technological University.
Christine Hanni joined our Company in January 1998 as Vice President,
Finance and Chief Financial Officer. From 1992 until 1997, Ms. Hanni first
served as Corporate Controller and then as Director of International Finance
and Sales Administration of Target Therapeutics, Inc., a leading manufacturer
of disposable medical devices for the treatment of various brain diseases.
Prior to joining Target, she held several finance and accounting positions
with Tandem Computers, Inc. including Marketing Accounting Manager. From 1983
to 1987, Ms. Hanni was an auditor for Coopers & Lybrand in San Jose,
California and Portland, Oregon. Ms. Hanni holds a B.S. degree in Accounting
from Southern Oregon University.
Bruce Prothro joined our Company in October 1998 as Vice President,
Regulatory Affairs and Quality Assurance. From November 1992 to September
1998, Mr. Prothro held various positions with KeraVision, Inc. where most
recently he served as the Director of Regulatory Affairs and Compliance. Prior
to his tenure at KeraVision, Inc. Mr. Prothro was Manager, Quality Engineering
at Advanced Cardiovascular Systems, Inc. and Manufacturing Manager at Diamon
Images, Inc. Mr. Prothro holds a B.S. degree in Chemistry from the University
of California, Berkeley.
John R. Tighe joined our Company in May 1995 as the Director of Sales. He
was appointed Vice President of Worldwide Sales and Marketing in January 1999.
From January 1988 to April 1995, Mr. Tighe held various sales positions with
Acufex Microsurgical, Inc., a manufacturer of arthroscopic instruments. His
most recent position at Acufex Microsurgical, Inc. was National Sales Manager.
Mr. Tighe holds a B.S. degree in Civil Engineering from the University of
Maryland.
9
<PAGE>
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table
The following table sets forth the compensation received by the Company's
Chief Executive Officer and each of the other most highly compensated
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 for the three fiscal years ended January 3, 1998, January 2, 1999 and
January 1, 2000 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
------------------------ ------------------------------------------
Securities
Restricted Underlying All Other
Name and Principal Fiscal Salary Bonus Other Annual Stock Options Compensation
Position Year ($) ($)(1) Compensation Awards ($)(2) (# of shares) ($)(21)
------------------ ------ -------- -------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Baker........ 1999 $280,575 $146,025 61,046(3) $141,000 40,000(5) 53,975
President and Chief 1998 274,006 84,130 $ 19,600(3) -- 30,000(6) 70,000
Executive Officer 1997 115,347 70,000 135,042(4) -- 300,000(7) --
Robert T. Hagan......... 1999 $173,863 $ 32,174 -- $ 70,500 25,000(8) $26,826
Vice President, 1998 178,896 53,000 -- -- 20,000(9) --
Manufacturing 1997 155,002 50,000 -- -- 10,000(10) --
Christine Hanni......... 1999 $137,729 $ 38,506 -- $ 70,500 10,000(11) $13,494
Vice President, Finance 1998 128,194 18,562 -- -- 85,000(12) 28,000
and Chief Financial 1997 -- -- -- -- -- --
Officer
John R. Tighe........... 1999 $150,221 $ 55,000 $ 5,964(14) 70,500 49,000(15) --
Vice President, Sales 1998 185,713 -- -- -- 5,000(16) --
and Marketing(13) 1997 141,828 -- -- -- 1,000(17) --
Bruce Prothro........... 1999 $127,446 $ 45,000 $ -- $ 70,500 10,000(19) $ --
Vice President, 1998 28,870 10,000 -- -- 40,000(20) --
Regulatory Affairs and
Quality Assurance(18)..
</TABLE>
- --------
(1) Except as otherwise noted, all bonuses were earned by the named officer
in the fiscal year indicated and paid to the named officer in the
subsequent year.
(2) The Company entered into restricted stock bonus agreements to purchase
shares of the Company's Common Stock.
(3) Consists of reimbursement for the payment of taxes.
(4) Consists of one-time reimbursements of expenses paid by the Company to or
on behalf of Mr. Baker.
(5) Consists of one option for 40,000 shares of the Company's Common Stock
granted August 31, 1999 at an exercise price of $34.75. One forty-eighth
( 1/48) of the total number of shares subject to the option became
exercisable on September 30, 1999 and an additional one forty-eight (
1/48) of the total number of shares subject to the option became
exercisable at the end of each full month thereafter until all such
shares are exercisable based upon such individual's continued employment
by the Company.
(6) On January 15, 1998 and on August 11, 1998, the Company granted to Mr.
Baker an option to purchase 10,000 and 20,000 shares, respectively, of
the Company's Common Stock at an exercise price of $11.125 and $17.625,
respectively, per share, the closing price of one share of the Company's
Common Stock on the day before the date of grant. One forty-eighth (
1/48) of the total number of shares subject to these options became
exercisable on February 15, 1998 and on September 11, 1998, respectively,
and an additional one forty-eighth ( 1/48) of the total number of shares
subject to these options are exercisable at the end of each full month
thereafter until all such shares are exercisable, based upon Mr. Baker's
continued employment by the Company.
10
<PAGE>
(7) On June 25, 1997, the Company granted to Mr. Baker an option to purchase
300,000 shares of the Company's Common Stock at an exercise price of
$8.25 per share, the closing price of one share of the Company's Common
Stock on the day before the date of grant. One forty-eighth ( 1/48) of
the total number of shares subject to these options became exercisable on
August 1, 1997 and an additional one forty-eighth ( 1/48) of the total
number of shares subject to these options are exercisable at the end of
each full month thereafter until all such shares are exercisable, based
upon Mr. Baker's continued employment by the Company.
(8) On March 31, 1999 and August 31,1999, the Company granted to Mr. Hagan an
option to purchase 25,000 shares of the Company's Common Stock, 10,000
shares at an exercise price of $14.00 per share and 15,000 shares at an
exercise price of $34.75 per share, the closing price of one share of
stock on the day before the date of each grant. One forty-eighth ( 1/48)
of the total number of shares subject to these options became exercisable
on April 30, 1999 and on September 30, 1999, respectively and an
additional one forty-eight ( 1/48) of the total number of shares subject
to these options are exercisable at the end of each full month thereafter
until all such shares are exercisable, based upon such individual's
continued employment by the Company.
(9) On each of January 15, 1998 and on August 11, 1998, the Company granted
to Mr. Hagan an option to purchase 10,000 shares of the Company's Common
Stock at an exercise price of $11.125 per share and 10,000 shares at an
exercise price of $17.625 per share, respectively, the closing price of
one share of the Company's Common Stock on the day before the date of
each grant. One forty-eighth ( 1/48) of the total number of shares
subject to these options became exercisable on February 15, 1998 and on
September 11, 1998, respectively, and an additional one forty-eighth (
1/48) of the total number of shares subject to these options are
exercisable at the end of each full month thereafter until all such
shares are exercisable, based upon Mr. Hagan's continued employment by
the Company.
(10) On January 10, 1997, the Company granted to Mr. Hagan an option to
purchase 10,000 shares of the Company's Common Stock at an exercise price
of $7.375 per share, the closing price of one share of the Company's
Common Stock on the day before the date of grant. One forty-eighth (
1/48) of the total number of shares subject to these options became
exercisable on January 31, 1997 and an additional one forty-eighth (
1/48) of the total number of shares subject to these options are
exercisable at the end of each full month thereafter until all such
shares are exercisable, based upon such individual's continued employment
by the Company.
(11) On August 31, 1999, the Company granted to Ms. Hanni an option to
purchase 10,000 shares of the Company's Common Stock at an exercise price
of $34.75 per share, the closing price of one share of the Company's
Common Stock on the day before the date of grant. One forty-eighth (
1/48) of the total number of shares subject to these options became
exercisable on September 30, 1999 and an additional one forty-eighth (
1/48) of the total number of shares subject to the option are exercisable
at the end of each full month thereafter until all such shares are
exercisable, based upon such individual's continued employment by the
Company.
(12) On January 15, 1998, the Company granted to Ms. Hanni an option to
purchase 75,000 shares of the Company's Common Stock at an exercise price
of $11.125 per share, the closing price of one share of the Company's
Common Stock on the day before the date of grant. One-fourth ( 1/4) of
the shares subject to the option became exercisable on the one year
anniversary of the effective date of her employment and 1/48 of the
shares will continue to vest at the end of each full month thereafter
until all the shares are vested, based upon Ms. Hanni's continued
employment by the Company. On August 11, 1998 the Company granted to Ms.
Hanni an option to purchase 10,000 shares of the Company's Common Stock
at an exercise price of $17.625 per share, the closing price of one share
of the Company's Common Stock on the day before the date of grant. One
forty-eighth ( 1/48) of the total number of shares subject to these
options became exercisable on September 11, 1998, and an additional one
forty-eighth ( 1/48) of the total number of shares subject to these
options are exercisable at the end of each full month thereafter until
all such shares are exercisable, based upon Ms. Hanni's continued
employment by the Company.
(13) Mr. Tighe was promoted to Vice President Sales and Marketing in February
1999.
11
<PAGE>
(14) Consists of reimbursements of expense relating to relocation.
(15) Consists of one option for 30,000 shares, a second option for 15,000
shares, and a third option for 4,000 shares of the Company's Common
Stock. Twelve forty-eighths (12/48) of 30,000 shares, granted on March 1,
1999 at an exercise price of $14.00 per share, became exercisable on
April 1, 1999 and an additional one forty-eighth ( 1/48) of the total
number of shares subject to the option became exercisable at the end of
each full month thereafter. Of the shares subject to the option
exercisable for 15,000 shares, granted on August 31, 1999 at an exercise
price of $34.75 per share, one forty-eighth ( 1/48) of the total number
of shares subject to the option became exercisable on September 30, 1999
and an additional one forty-eighth ( 1/48) of the total number of shares
subject to the option become exercisable at the end of each full month
thereafter, based upon each individual's continued employment by the
Company. Of the shares subject to the option exercisable for 4,000
shares, granted on January 26, 1999 at an exercise price of $18.25 per
share, one-fourth ( 1/4) of the total number of shares subject to the
option became exercisable on February 3, 2000 and an additional twenty-
five (25%) of the total number of shares subject to the option become
exercisable each full year thereafter based upon each individual's
continued employment by the Company.
(16) On January 15, 1998, the Company granted to Mr. Tighe an option to
purchase 5,000 shares of the Company's Common Stock at an exercise price
of $11.13 per share, the closing price of one share of the Company's
Common Stock on the day before the date of grant. One forty-eighth (
1/48) of the total number of shares subject to these options became
exercisable on February 15, 1998 and an additional one forty-eighth (
1/48) of the total number of shares subject to these options are
exercisable at the end of each full month thereafter until all such
shares are exercisable, based upon such individual's continued employment
by the Company.
(17) On May 22, 1997, the Company granted to Mr. Tighe an option to purchase
1,000 shares of the Company's Common Stock at an exercise price of $7.375
per share, the closing price of one share of the Company's Common Stock
on the day before the date of grant. One-fourth ( 1/4) of the total
number of shares subject to these options became exercisable on May 19,
1998 and an additional one forty-eighth ( 1/48) of the total number of
shares subject to these options are exercisable at the end of each full
month thereafter until all such shares are exercisable, based upon such
individual's continued employment by the Company.
(18) Mr. Prothro joined the Company as Vice President, Regulatory Affairs and
Quality Assurance in October 1998.
(19) On August 31, 1999 the Company granted to Mr. Prothro an option to
purchase 10,000 shares at an exercise price of $34.75 per share, the
closing price of one share of the Company's Common Stock on the day
before the date of grant. One forty-eighth ( 1/48) of the total number of
shares subject to these options became exercisable on September 30, 1999,
and an additional one forty-eighth ( 1/48) of the total number of shares
subject to these options are exercisable at the end of each full month
thereafter until all such shares are exercisable, based upon such
individual's continued employment by the Company.
(20) On September 17, 1998, the Company granted to Mr. Prothro an option to
purchase 40,000 shares of the Company's Common Stock at an exercise price
of $15.25 per share, the closing price of one share of the Company's
Common Stock on the day before the date of grant. Twelve forty-eighth (
12/48) of the total number of shares subject to these options became
exercisable on October 5, 1999 and an additional one forty-eighth ( 1/48)
of the total number of shares subject to these options are exercisable at
the end of each full month thereafter until all such shares are
exercisable, based upon such individual's continued employment by the
Company.
(21) The Company entered into stock bonus agreements with certain officers of
the Company to purchase shares of the Company's Common Stock as a bonus
in lieu of a portion of their cash bonus payment.
12
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table provides information on option grants made in the Last
Fiscal Year to the Named Executive Officers. No SARs were granted.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------
% of Total Potential Realizable Value
Options at Assumed Annual Rates of
Number of Granted to Stock Price Appreciation
Underlying Employees Exercise for Option Term(3)
Options in Fiscal Price Per Expiration --------------------------
Name Granted Year(1) Shares(2) Date 0% 5% 10%
---- ---------- ---------- --------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Baker........ 40,000 7.5401 $34.75 8/31/2009 $42,520 $943,424 $2,325,587
Robert T. Hagan......... 10,000 1.8850 14.00 3/01/2009 2,500 92,117 229,608
15,000 2.8275 34.75 8/31/2009 15,945 353,784 872,095
Christine Hanni......... 10,000 1.8850 34.75 8/31/2009 10,630 235,856 581,397
John R. Tighe........... 4,000 .7540 18.25 1/26/2009 5,000 54,054 129,312
30,000 5.6550 14.00 3/01/2009 7,500 276,352 688,825
15,000 2.8275 34.75 8/31/2009 15,945 353,784 872,095
Bruce Prothro .......... 10,000 1.8850 34.75 8/31/2009 10,630 235,856 581,397
</TABLE>
- --------
(1) Based on an aggregate of 666,000 options granted by the Company during the
fiscal year ended January 1, 2000 to employees and non-employee directors
of and consultants to the Company, including options granted to the Named
Executive Officers.
(2) Options are granted at an exercise price equal to the closing market price
per share on the day before 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. These numbers are
calculated based on the requirements promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future
stock price growth.
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table provides information on option exercises in the Last
Fiscal Year by the Named Executive Officers and the number and value of such
officer's unexercised options at January 1, 2000. No SARs have been granted.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options at January 1, In-The-Money Options at
Acquired on 2000 (#) January 1, 2000 (2)
Exercise Value ------------------------- -------------------------
Name (#) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Baker........ 0 $ 0 193,389 167,711 $9,807,124 $7,536,024
Robert T. Hagan......... 9,998 218,573 8,958 36,044 383,656 1,373,341
Christine Hanni......... 0 0 40,103 54,897 1,911,190 2,412,919
John R. Tighe........... 11,500 402,475 24,664 44,836 1,268,615 1,763,287
Bruce Prothro .......... 0 0 12,499 37,501 540,749 1,492,400
</TABLE>
- --------
(1) Based upon fair market value of one share of the Company's Common Stock on
the date that the option was exercised, less the exercise price per share
multiplied by the number of shares received upon exercise of the option.
(2) Based upon fair market value of $59.813 per share as of January 3, 2000
minus the exercise price per share multiplied by the number of shares
underlying the option.
The Company has not established any long-term incentive plans or defined
benefit or actuarial plans covering any of the Named Executive Officers.
13
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The following report is provided to stockholders by the members of the
Compensation Committee of the Board of Directors.
In addition to executive compensation matters, the Compensation Committee
is responsible for making recommendations to the Board of Directors concerning
salaries and incentive compensation for employees of and consultants to the
Company. The Compensation Committee also has the authority and power to grant
stock options to the Company's employees and consultants.
The goal of the Company's compensation policies is to align executive
compensation with business objectives, corporate performance, market
compensation levels, and to attract and retain executives who contribute to
the long-term success and value of the Company. The Company endeavors to
achieve its compensation goals through the implementation of policies that are
based on the following principles:
. The Company pays competitively for experienced, highly-skilled
executives:
The Company operates in a competitive and rapidly changing industry.
Executive base compensation is targeted to the median salary paid to
comparable executives in companies of similar size, location, and with
comparable responsibilities. The individual executive's salary is
adjusted annually based on individual performance, corporate
performance, and the relative compensation of the individual compared to
the comparable medians.
. The Company rewards executives for superior performance:
The Committee believes that a substantial portion of each executive's
compensation should be in the form of bonuses. Executive bonuses are
based on a combination of individual performance and the attainment of
corporate goals. Individual performance goals are based on specific
objectives which must be met in order for the Company to achieve its
corporate goals. In order to attract and retain executives who are
qualified to excel in the medical device industry, the Company awards
higher bonuses based on performance in excess of the corporate goals.
. The Company strives to align long-term stockholder and executive
interests:
In order to align the long-term interests of executives with those of
stockholders, the Company grants all employees, and particularly
executives, options to purchase stock. Options are granted at the
closing price of one share of the Company's Common Stock on the day
before the date of grant and will provide value only when the price of
the Common Stock increases above the exercise price. Options are subject
to vesting provisions designed to encourage executives to remain as
employees of the Company. Additional options are granted from time to
time based on individual performance, prior level of grants and tenure
with the Company.
Compensation Of Michael Baker, President And Chief Executive Officer
During 1999, the compensation of Mr. Baker was determined by applying the
same criteria discussed at the beginning of this report used to determine
compensation and bonuses for all executive officers. Mr. Baker's compensation
for 1999 is set forth in the Summary Compensation Table appearing on page 14.
Summary
The Committee believes that the Company's compensation policy as practiced
to date by the Committee and the Board has been successful in attracting and
retaining qualified employees and in tying compensation directly to corporate
performance relative to corporate goals. The Company's compensation policy
will evolve
14
<PAGE>
over time as the Company attempts to achieve the many short-term goals it
faces while maintaining its focus on building long-term stockholder value
through technological leadership and development and expansion of the market
for the Company's products.
Respectfully submitted,
Annette J. Campbell-White
Robert R. Momsen
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.
15
<PAGE>
PERFORMANCE GRAPH
The following graph shows a comparison of total stockholder return for
holders of the Company's Common Stock from February 5, 1996, the date of the
Company's initial public offering, through January 1, 2000 compared with the
Nasdaq Stock Market, U.S. Index, the Hambrecht & Quist Healthcare Index
(excluding Biotechnology) and the Nasdaq Health Services Index. This graph is
presented pursuant to SEC rules. The Company believes that while total
stockholder return can be an important indicator of corporate performance, the
stock prices of medical device stocks like that of the Company are highly
volatile and are subject to a number of market-related factors other than
Company performance, such as competitive announcements, mergers and
acquisitions in the industry, the general state of the economy, and the
performance of other medical device and small-cap stocks.
COMPARISON OF 47 MONTH CUMULATIVE TOTAL RETURN*
AMONG ARTHROCARE CORPORATION
THE NASDAQ STOCK MARKET (U.S.) INDEX, THE NASDAQ HEALTH SERVICES INDEX
AND THE HAMBRECHT & QUIST HEALTHCARE-EXCLUDING BIOTECHNOLOGY INDEX
* $100 INVESTED ON FEBRUARY 5, 1996 IN STOCK OR ON JANUARY
31, 1996 IN INDEX - INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
<TABLE>
<CAPTION>
2/5/96 3/96 6/96 9/96 12/96 3/97 6/97 9/97 12/97 3/98 6/98 9/98 12/98 3/99 6/99 9/99 12/99
------ ---- ---- ---- ----- ---- ---- ---- ----- ---- ---- ---- ----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ArthroCare
Corporation........ 100 157 129 70 52 46 67 92 94 106 119 190 155 118 154 390 436
Nasdaq Stock Market
(U.S.)............. 100 104 113 117 122 116 137 160 150 175 180 163 211 236 259 265 382
Nasdaq Health
Services........... 100 100 109 108 96 89 100 109 98 107 97 74 84 74 92 68 68
Hambrecht & Quist
Healthcare
(excluding
Biotechnology)..... 100 100 94 103 104 99 118 124 124 141 143 126 150 143 147 127 131
</TABLE>
- --------
* $100 invested on February 5, 1996 in stock or on January 31, 1996 in index--
including reinvestment of dividends. Fiscal year ending December 31 (the
Company's last fiscal year ended January 1, 2000).
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 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.
16
<PAGE>
Employment and Change of Control Agreements
During 1998 the Company entered into Continuity Agreements with the Chief
Executive Officer and all other executive officers of the Company. The
Continuity Agreements provide certain compensation and benefits in the event
of a Change of Control of the Company. A Change of Control is defined as (i) a
change of beneficial ownership of at least 15% of the voting power of the
Company without the approval of the Board, (ii) a merger or sale of the
Company whereby the Company does not maintain at least 50% of the voting power
of the surviving Company, (iii) the approval by the shareholders of the
Company of a plan of complete liquidation of the Company or an agreement for
the sale or disposition of all or substantially all of the Company's assets,
or (iv) a change in the composition of the Board such that at least 50% of the
members are not incumbents or elected by incumbent directors. In the event of
a Change of Control, the Continuity Agreements provide for accelerated vesting
of 50% of the then-current unvested and outstanding stock options of each
executive officer. In the event of a hostile takeover, the vesting is
accelerated as to 100% of the outstanding unvested options of the executive
officer. Further, in the event of an involuntary termination of employment of
an executive officer within 24 months of a change of control, certain
severance benefits will be provided. These benefits include 24 months of
continued monthly compensation (36 months for the Chief Executive Officer),
continued medical benefits during the severance period and immediate vesting
of all outstanding and unvested stock options.
17
<PAGE>
CERTAIN TRANSACTIONS
On July 18, 1995, the Company and Mr. Hagan, the Company's Vice President,
Manufacturing, entered into an employment agreement which, in addition to his
annual salary of $130,000, provided for Mr. Hagan's purchase of 90,000 shares
of the Company's Common Stock at a purchase price of $0.80 per share, with
payment in the form of a promissory note due on August 1, 1999 or upon
termination of employment pursuant to a restricted stock purchase and security
agreement. Such note has been fully repaid.
On June 20, 1997, the Company and Mr. Baker, the Company's President and
Chief Executive Officer, entered into an employment offer letter, which, in
addition to an annual salary and bonus, benefits and vacation time, provided
for a loan by the Company in the principal amount of $500,000 in connection
with Mr. Baker's purchase of a home. The loan is secured by a deed of trust on
the property and is due within twelve months of termination of employment.
In February 1999, the Company and Mr. Tighe, the Company's Vice President
Sales and Marketing, entered into an employment offer letter, which, in
addition to an annual salary and bonus, benefits and vacation time, provided
for a loan by the Company in the principal amount of $350,000 in connection
with Mr. Tighe's purchase of a home. The loan is secured by a deed of trust on
the property and is due within twelve months of termination of employment.
18
<PAGE>
PROPOSAL NO. 2:
APPROVAL OF AMENDMENT AND RESTATEMENT OF
CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED NUMBER OF SHARES OF COMMON STOCK
The present capital structure of the Company authorizes 20,000,000 shares
of common stock and 5,000,000 shares of preferred stock. The Board of
Directors believes this capital structure is inadequate for the present and
future needs of the Company. Therefore, the Board of Directors has unanimously
approved the amendment and restatement of the Company's Restated Certificate
of Incorporation to increase the number of shares of Common Stock authorized
by Article 4 by 55,000,000 shares for a total 75,000,000 shares of Common
Stock authorized or issuance. The Board believes this capital structure more
appropriately reflects the present and future needs of the Company and
recommends such amendment and restatement to the Company's stockholders for
adoption. The undesignated preferred stock may be issued from time to time in
one or more series with such rights, preferences and privileges as may be
determined by the Board of Directors. On April 1, 2000, 10,912,982 shares of
Common Stock were outstanding and no shares of preferred stock were
outstanding. The total number of shares of Common Stock outstanding excludes:
. 566,295 shares issuable upon the exercise of stock options outstanding
as of April 1, 2000;
. 254,289 shares that are available for future grant under our 1993 Stock
Plan as of April 1, 2000; and
. 95,752 shares that are available for future issuance under our 1996
Employee Stock Purchase Plan as of April 1, 2000.
Purpose of Authorizing Additional Common Stock
Authorizing an additional 55,000,000 shares of Common Stock would give the
Board of Directors the express authority, without further action of the
stockholders, to issue such Common Stock from time to time as the Board of
Directors deems necessary. The Board of Directors believes it is necessary to
have the ability to issue such additional Common Stock for general corporate
purposes. Potential uses of additional authorized shares may include
acquisition transactions, equity or convertible debt financings, stock
dividends or distributions, issuance of options pursuant to the Company's 1993
Stock Plan and issuances of Common Stock pursuant to the Company's 1996
Employee Stock Purchase Plan without further action by the stockholders,
unless such action were specifically required by applicable law or rules of
any stock exchange on which the Company's securities may then be listed. The
Company is not committed to issue any shares of Common Stock which are the
subject of this Proposal.
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's stockholders depending upon
the exact nature and circumstances of any actual issuances of authorized but
unissued shares. The increase could have an anti-takeover effect, in that
55,000,000 additional shares could be issued (within the limits imposed by
applicable law) in one or more transactions that could make a change in
control or takeover of the Company more difficult. For example, additional
shares could be issued by the Company so as to dilute the stock ownership or
voting rights of persons seeking to obtain control of the Company. Similarly,
the issuance of additional shares to certain persons allied with the Company's
management could have the effect of making it more difficult to remove the
Company's current management by diluting the stock ownership or voting rights
of persons seeking to cause such removal. In addition, an issuance of
additional shares by the Company could have an effect on the potential
realizable value of a stockholder's investment. In the absence of a
proportionate increase in the Company's earnings and book value, an increase
in the aggregate number of outstanding shares would dilute the earnings per
share and book value per share of all outstanding shares of the Company's
Common Stock. If such factors were reflected in the price per share of Common
Stock, the potential realizable value of a stockholder's investment could be
adversely affected. The Common Stock carries no preemptive rights to purchase
additional shares. The adoption of the amendment will not of itself cause any
change in the capital accounts of the Company.
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The proposed amendment and restatement of the Company's Restated
Certificate of Incorporation was approved by the Board on March 24, 2000.
Vote Required
The affirmative vote of the majority of the outstanding voting shares of
the Company entitled to vote on this proposal will be required to approve the
amendment and restatement of the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock by 55,000,000 to a
total of 75,000,000 shares of Common Stock authorized for issuance.
Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK BY
55,000,000 TO A TOTAL OF 75,000,000 SHARES OF COMMON STOCK AUTHORIZED FOR
ISSUANCE.
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PROPOSAL NO. 3:
APPROVAL OF AMENDMENT AND RESTATEMENT OF
CERTIFICATE OF INCORPORATION TO EFFECT A
TWO-FOR-ONE STOCK SPLIT OF THE COMPANY'S COMMON STOCK
The Board of Directors has approved a two-for-one stock split and has
directed that the proposal to approve the amendment to the Certificate of
Incorporation to effect the stock split be submitted to the Company's
stockholders for consideration and action.
If this Proposal No. 3 is approved by the stockholders of the Company at
the Annual Meeting, the stock split would be effected by the Board of
Directors only upon a determination by the Board that the stock split is in
the best interests of the Company and its stockholders. The Board will make
its determination based on prevailing market conditions, on the likely effect
of the market price of the Common Stock and on other relevant factors.
If this Proposal No. 3 is approved by the stockholders and the Board has
determined that the stock split described in this Proposal No. 3 is in the
best interests of the Company as provided above, the amendment to the
Certificate of Incorporation would become effective on the soonest practicable
date following the Annual Meeting selected by the Board of Directors (the
"Effective Date"). If the amendment is not effected by such date, the Board
will take action to abandon the amendment pursuant to Section 242(c) of the
Delaware General Corporation Law.
Purposes and Effects of the Stock Split
The Board of Directors has proposed a two-for-one stock split because the
Board believes that the stock split would result in a decrease in the market
price of the Common Stock to a level at which the Common Stock would be more
readily tradeable and accessible to a broader base of investors. A lower per-
price share would enable investors to purchase "round lots" of the Company's
Common Stock for a lower total price than is the case currently. Stockholders
should be aware, however, that brokerage charges and any applicable transfer
taxes on sales and transfers of shares would be higher after the stock split
on the same relative interest in the Company because that interest would be
represented by a greater number of shares. Although the impact on the market
price of shares of Common Stock cannot be predicated with certainty, it is
likely that the stock split would initially result in the market price of each
share of Common Stock being approximately one-half of the price previously
prevailing and that the aggregate market price of all shares of Common Stock
held by a particular stockholder should remain approximately the same.
The Common Stock is listed for trading on The Nasdaq National Market. On
the Record Date, the reported closing price of the Common Stock on The Nasdaq
National Market was $81.75 per share.
Proportionate voting rights and other rights of stockholders would not be
altered by the stock split. In addition, the number of shares of Common Stock
subject to outstanding options granted pursuant to the Company's 1993 Stock
Plan, 1995 Director Option Plan and 1999 Nonstatutory Option Plan
(collectively, the "Plans"), and the number of shares of Common Stock reserved
for issuance under the Plans, would be doubled, and the exercise price of
outstanding options would be divided by two.
The proposed stock split would not change the stockholders' equity or
interest in the Company, and the book value of the number of shares
outstanding immediately after the applicable stock split would be equal to the
book value of the number of shares outstanding immediately prior to the split.
Since the $.001 par value of the Common Stock would not be changed following
the stock split, an adjustment would be made in the stockholders' equity
accounts of the Company to increase the Company's common stock account by an
amount equal to the par value of shares issued in the stock split and to make
a corresponding reduction in the capital in excess of par value of Common
Stock account on the Company's balance sheet. Total stockholders' equity would
thus remain unchanged.
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Following the Effective Date, on which the amendments to the Certificate of
Incorporation (i) increasing the authorized number of shares of Common Stock
and (ii) effecting the stock split would be effected, the number of shares of
Common Stock outstanding immediately prior to the stock split (10,916,309
shares as of the Record Date) would be split into 21,832,618 shares, and,
assuming the approval of Proposal No. 2, the number of authorized and unissued
shares of the Common Stock would be 78,167,382. In addition, an aggregate of
2,886,025 shares of Common Stock reserved for issuance as of the Record Date
pursuant to the Company's Plans would be split into 5,772,050 shares reserved
for issuance.
Stockholders of record as of the close of business on the Effective Date
would receive, as soon as practicable after the Effective Date, an additional
stock certificate representing one share of the Company's Common Stock for
each share held immediately prior to the stock split. Stockholders would
retain certificates issued prior to the Effective Date, and those certificate
would continue to represent the number of shares evidenced thereby.
CERTIFICATES SHOULD NOT BE RETURNED TO THE COMPANY OR ITS TRANSFER AGENT.
Tax Consequences
The Company has been advised by tax counsel that, under existing U.S.
federal income tax laws and regulations, the receipt of additional shares of
the Company's Common Stock in the stock split will not constitute taxable
income or gain or loss to stockholders; the cost or other tax basis of each
share of Common Stock held by a stockholder immediately prior to the stock
split will be divided equally between the corresponding number of shares held
immediately after the split; and the holding period for each of the post-split
shares will include the period for which the corresponding old share of the
Company's Common Stock was held.
The laws of jurisdictions other than the United States (including state and
foreign jurisdictions) may impose income taxed on the receipt by a stockholder
of additional shares of Common Stock resulting from the stock split. Assuming
transactions of an equivalent dollar amount, brokerage commissions on
purchases and sales of the Common Stock after the split and transfer taxes, if
any, may be somewhat higher than before the split, depending on the specific
number of shares involved. Stockholders are urged to consult their own tax
advisors.
Vote Required
The affirmative vote of the majority of the outstanding voting shares of
the Company entitled to vote on this proposal will be required to approve the
amendment and restatement of the Company's Restated Certificate of
Incorporation to effect a two-for-one split of the Company's Common Stock.
Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION TO EFFECT A TWO-FOR-ONE STOCK SPLIT OF THE COMPANY'S COMMON
STOCK.
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PROPOSAL NO. 4:
APPROVAL OF AMENDMENT TO THE 1993 STOCK PLAN
The Board of Directors of the Company approved an amendment to the
Company's 1993 Stock Plan (the "1993 Plan") in January 2000, subject to
stockholder approval, to increase the number of shares reserved for issuance
under the Plan by an aggregate of 400,000 shares to a new total of 2,686,025
shares, provided that if Proposal No. 3 and this Proposal No. 4 are approved,
the number of shares reserved for issuance under the 1993 Plan will be
increased by an aggregate of 800,000 shares to a new total of 5,372,050
shares. The proposed increase in the number of shares of Common Stock reserved
for issuance under the 1993 Plan is for the purposes of ensuring that the
Company will continue to have a sufficient reserve of Common Stock available
under the 1993 Plan to attract and retain the services of key individuals
essential to the Company's long-term growth and success.
Vote Required
The affirmative vote of the majority of the Votes Cast will be required to
approve the amendment to the 1993 Plan.
Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE AMENDMENT TO THE 1993 PLAN.
Summary of Plan
The principal features of the 1993 Plan are outlined below.
Purpose. The purposes of the Plan are 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.
Eligibility; Administration. The 1993 Plan provides that options may be
granted to employees and service providers. Incentive stock options may only
be granted to employees. The 1993 Plan may be administered by the Board of
Directors or Board Committees (the "Administrator"). To the extent that the
Administrator determines it to be desirable to qualify Options granted
hereunder as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code (the "Code"), the 1993 Plan shall be
administered by a committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3 of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3. Otherwise, the 1993 Plan shall be administered by
the Board or a committee, which committee shall be constituted to satisfy
applicable laws.
The Administrator of the 1993 Plan shall have full power to select, from
among the employees and consultants of the Company eligible for awards, the
individuals to whom awards will be granted, to make any combination of awards
to any participant and to determine the specific terms of each grant, subject
to the provisions of the Plan. The interpretation and construction of any
provision of the 1993 Plan by the Administrator shall be final and conclusive.
Exercise Price. The exercise price of options granted under the 1993 Plan
is the reported closing price of the Company's common stock on the last market
trading day prior to the date of determination as reported on the Nasdaq Stock
Market. In the event of the grant of a nonstatutory option below the fair
market value, the difference between fair market value on the date of grant
and the exercise price shall be treated as a compensation expense for
accounting purposes and will therefore affect the Company's earnings. In the
case of options granted
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to an employee who at the time of grant owns more than 10% of the voting power
of all classes of stock of the Company or any parent or subsidiary, the
exercise price must be at least 110% of the fair market value per share of the
Common Stock at the time of grant. The exercise price of incentive stock
options must be at least 100% of the fair market value per share at the time
of grant.
Performance-Based Compensation Limitations. No employee shall be granted in
any fiscal year of the Company options to acquire in the aggregate 500,000
shares of Common Stock. The foregoing limitation, which shall adjust
proportionately in connection with any change in the Company's capitalization,
is 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.
Exercisability. Options granted to new optionees under the Plan generally
become exercisable starting one year after the date of grant with 25% of the
shares covered thereby becoming exercisable at that time and with an
additional 1/48 of the total number of options becoming exercisable at the
beginning of each full month thereafter, with full vesting occurring on the
fourth anniversary of the date of grant; provided, however, that the
Administrator has discretion in determining the vesting schedule for each
option granted. The term of an option may not exceed ten years. No option may
be transferred by the optionee other than by will or the laws of descent or
distribution. Each option may be exercised, during the lifetime of the
optionee, only by such optionee.
Stock Purchase Rights. The Plan permits the Company to grant rights to
purchase Common Stock. After the Administrator determines that it will offer
stock purchase rights under the Plan, it shall advise the offeree in writing
or electronically of the terms, conditions and restrictions related to the
offer, including the number of shares that the offeree shall be entitled to
purchase, and the time within which the offeree must accept such offer. The
offer shall be accepted by execution of a stock purchase agreement or a stock
bonus agreement in the form determined by the Administrator.
Unless the Administrator determines otherwise, the stock purchase agreement
or a stock bonus agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason. The purchase price for shares
repurchased pursuant to the stock purchase agreement or a stock bonus
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at such rate as the Board or Committee may
determine.
Amendment and Termination of the Plan. The Board may amend the Plan at any
time or from time to time or may terminate the Plan without approval of the
stockholders; provided, however, that stockholder approval is required for any
amendment to the Plan for which stockholder approval would be required under
applicable law, as in effect at the time. However, no action by the Board of
Directors or stockholders may alter or impair any option previously granted
under the Plan. The Administrator may accelerate any option or waive any
condition or restriction pertaining to such option at any time. In any event,
the Plan shall terminate in August 2007. Any options outstanding under the
Plan at the time of its termination shall remain outstanding until they expire
by their terms.
Certain Federal Tax Information. An optionee who is granted an incentive
stock option will not recognize taxable income either at the time the option
is granted or at the time it is exercised, although exercise of the option may
subject the optionee to the alternative minimum tax. The Company will not be
allowed a deduction for federal income tax purposes as a result of the
exercise of an incentive stock option regardless of the applicability of the
alternative minimum tax. Upon the sale or exchange of the shares at least two
years after grant of the option and one year after exercise of the option, any
gain will be treated as long-term capital gain. If these holding periods are
not satisfied at the time of sale, the optionee will recognize ordinary income
equal to the difference between the exercise price and the lower of (i) the
fair market value of the stock at the date of the option exercise or (ii) the
sale price of the stock, and the Company will be entitled to a deduction in
the same
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amount. (Different rules may apply upon a premature disposition by an optionee
who is an officer, director or 10% stockholder of the Company.) Any additional
gain or loss recognized on such a premature disposition of the shares will be
characterized as capital gain or loss. If the Company grants an incentive
stock option and as a result of the grant the optionee has the right in any
calendar year to exercise for the first time one or more incentive stock
options for shares having an aggregate fair market value (under all plans of
the Company and determined for each share as of the date the option to
purchase the share was granted) in excess of $100,000, then the excess shares
must be treated as non-statutory options.
An optionee who is granted a non-statutory stock option will also not
recognize any taxable income upon the grant of the option. However, upon
exercise of a non-statutory stock option, the optionee will recognize ordinary
income for tax purposes measured by the excess of the then fair market value
of the shares over the exercise price. Any taxable income recognized by an
optionee who is an employee of the Company will be subject to tax withholding
by the Company. Upon resale of the shares by the optionee, any difference
between the sales price and the fair market value at the time of exercise, to
the extent not recognized as ordinary income as described above, will be
treated as capital gain or loss. The Company will be allowed a deduction for
federal income tax purposes equal to the amount of ordinary income recognized
by the optionee. The foregoing summary of the federal income tax consequences
of Plan transactions is based upon federal income tax laws in effect on the
date of this Proxy Statement. This summary does not purport to be complete,
and does not discuss foreign, state or local tax consequences.
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PROPOSAL NO. 5:
APPROVAL OF AMENDMENT TO THE
1995 DIRECTOR OPTION PLAN
The Board of Directors of the Company approved an amendment to the
Company's 1995 Director Option Plan (the "Director Plan") in January 2000,
subject to stockholder approval, to (1) increase the number of shares reserved
for issuance under the Director Plan by an aggregate of 145,000 shares to a
new total of 245,000 shares, provided that if Proposal No. 3 and this Proposal
No. 5 are approved, the number of shares reserved for issuance under the
Director Plan will be increased by an aggregate of 290,000 shares, to a new
total of 490,000 shares; (2) increase the number of options for shares of
Common Stock automatically granted to non-employee directors upon election and
re-election to 25,000 and 7,500, respectively (or 50,000 and 15,000,
respectively, if proposal No. 3 if approved); and (3) provide for accelerated
vesting of directors' options upon a change of control of the Company. The
proposed increase in the number of shares of Common Stock reserved for
issuance under the Director Plan is for the purposes of establishing a reserve
for purchases of Common Stock by directors pursuant to the terms of the
Director Plan.
The proposed amendment also increases the number of options for Common
Stock automatically granted to non-employee directors upon election and re-
election to 25,000 and 7,500 shares, respectively (without giving effect to
the approval of Proposal No. 3), from 12,000 and 3,000 shares, respectively
(without giving effect to the approval of Proposal No. 3) as provided under
the existing Director Plan. The proposed amendment also provides for
accelerated vesting of all outstanding options under the Director Plan in the
event of a change of control. Under the existing Director Plan the vesting of
such options would be accelerated in the event of a change of control only if
such options are not assumed by the successor entity. These changes to the
Director Plan are to ensure that the Company's stock option grants to
directors are competitive with practices in comparable companies in the
industry. The full text of the proposed amendment is attached to this Proxy
Statement as Appendix A. Stockholders are urged to read the proposed amendment
in its entirety.
Vote Required
The affirmative vote of the majority of the Votes Cast will be required to
approve the amendments to the Director Plan.
Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE AMENDMENT TO THE DIRECTOR PLAN.
Summary of Plan
The following is a summary of the principal features of the Director Plan
that will be in effect if the amendment is approved by the stockholders.
Purpose. Under the Director Plan, the Company grants nonstatutory options
to non-employee directors ("Outside Directors"). The purpose of the Director
Plan is to attract and retain the best available personnel for service as
outside directors of the Company, to provide additional incentive to the
Outside Directors of the Company to serve as directors, and to encourage their
continued service on the Board.
Administration. All grants of options to Outside Directors under the
Director Plan are automatic and non-discretionary and are made in accordance
with the following provisions:
1. Each Outside Director who becomes a director following the date of
approval of the Director Plan by the Board shall be automatically granted
an option to purchase 25,000 shares (the "First Option") without giving
effect to the approval of Proposal No. 3 on the date on which such person
first becomes a director, whether through election by the shareholder of
the Company or appointment by the Board to fill a vacancy; and
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2. Each Outside Director shall be automatically granted an option to
purchase 7,500 shares (the "Subsequent Option") (without giving effect to
the approval of Proposal No. 3) on the date of the Company's Annual Meeting
of Shareholders upon such Outside Director's reelection, if on such date,
he has served on the Board for at least six (6) months.
Eligibility. The Director Plan provides that options may be granted only to
Outside Directors and that all options granted under the Director Plan shall
be nonstatutory options. All options are automatically granted in accordance
with the Director Plan.
Terms of Options. Each option granted under the Director Plan is evidenced
by a written stock option agreement between the Company and the optionee and
is subject to the following additional terms and conditions:
1. Duration and Termination of Options. Options granted under the
Director Plan have a term of ten years from the date of grant. No option
may be exercise by any person after the expiration of its term.
2. Exercise of the Option. Options granted under the Director Plan
become exercisable in accordance with one of the following two schedules:
25% of the shares subject to the First Option become exercisable on
each anniversary of the date of grant, with full vesting occurring on
the fourth anniversary of the date of the grant.
12 1/2% of the shares subject to the Subsequent Option become
exercisable on the first day of each month following the date of grant,
with full vesting occurring eight months after the date of grant.
An option granted under the Director Plan is exercisable by giving
written notice of exercise to the Company, specifying the number of full
shares of Common Stock to be purchased and tendering full payment of the
purchase price to the Company. Payment for shares issued upon exercise of
an option shall consist of cash or check.
3. Exercise Price. The exercise price of options granted under the
Director Plan shall be 100% of the fair market value of the Common Stock on
the date the option is granted. The Common Stock is currently traded on the
NASDAQ National Market System. While the Company's stock is traded on the
NASDAQ National Market System, the fair market value is the reported
closing price. If the Common Stock is listed on a stock exchange, the fair
market value per share will be the closing price on such exchange.
4. Termination of Continuous Status as a Director. In the event an
optionee's continuous status as a director terminates (other than death),
the optionee may exercise his or her option, but only within
three (3) months from the date of such termination, and only to the extent
that such option rights were exercisable on the date of termination. For
terminations that result from total and permanent disability, as defined in
the Internal Revenue Code of 1986, as amended, the option may be exercised
within twelve (12) months. However, the time period cannot extend beyond
the expiration date of the option.
5. Death. If an optionee dies while continuously employed by the Company
or within 30 days after the termination of the optionee's employment by or
services to the Company, the optionee's options may be exercised by the
optionee's estate or a person who acquired the right to exercise the option
by bequest or inheritance. Such options may be exercised within twelve (12)
months after the date of death to the extent exercisable on the date of
death. However, the option cannot be exercised beyond the expiration date
of the option.
6. Nontransferability of Options. An option is not transferable by the
optionee, other than by will or the laws of descent and distribution.
During the optionee's lifetime, only the optionee may exercise the option.
7. Other Provisions. The option agreement may contain other provisions
not inconsistent with the Director Plan.
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Changes in Capitalization. In the event of changes in the Common Stock by
reason of stock dividends, split-ups or combinations of shares,
reclassifications, recapitalizations, consolidations or reorganizations, the
Board or its committee will adjust the exercise price and the number and class
of shares subject to each option or stock purchase right proportionately by
the increase or decrease in the issue shares of Common Stock as a result of
such change. Such adjustment shall be final and conclusive.
All outstanding options will terminate immediately before a dissolution or
liquidation of the Company.
In the event of either (i) any consolidation or merger of the Company with
or into any other corporation or other entity or person in which the
stockholders of the Company prior to such consolidation or merger own less
than fifty percent of the voting power of the Company (or any successor
entity) immediately after such consolidation or merger, or (ii) a sale of all
or substantially all of the assets of the Company (each a "Change of
Control"), the vesting of all options held by any director who is a director
at the time of the such Change of Control, shall be accelerated and made fully
exercisable at least ten days prior to the effective time of the Change of
Control. Any Options outstanding under the Plan will be terminated if not
exercised prior to the effective time for the Change of Control.
Amendment and Termination. The Board may at any time amend or terminate the
Director Plan without approval of the shareholders; provided, however, that
the Company will obtain shareholder approval of any amendment to the (the
"Exchange Act"), with Section 422 of the Code, or with any other applicable
law or regulation, including requirements of the NASD or any established stock
exchange. Any amendment or termination of the Director Plan is subject to the
rights of optionees under agreements entered into prior to such amendment or
termination.
Restrictions on Resale. The directors of the Company may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act
of 1933 (the "Securities Act"). Common Stock acquired under the Director Plan
by an affiliate may only be reoffered or resold pursuant to an effective
registration statement or pursuant to Rule 144 promulgated under the
Securities Act or another exemption from the registration requirements of the
Securities Act. Such reoffers or resales may not be made in reliance on the
Registration Statement filed in connection with the shares of Common Stock
issued as described in this Plan Summary.
Tax Information--Nonstatutory Options. Nonstatutory options will not
qualify for any special tax benefits to the optionee.
General Rules. An optionee will not recognize any taxable income at the
time he is granted a nonstatutory option. Upon exercise of the option, the
optionee will generally recognize compensation income for federal tax purposes
measured by the excess, if any, of the then fair market value of the shares
over the exercise price. However, if shares subject to a repurchase option of
the Company are purchased upon exercise of a nonstatutory option, no tax will
be imposed at the time of exercise with respect to such non-vested shares (and
the optionee's long-term capital gain holding period will not begin at such
time) unless the optionee files an election with the Internal Revenue Service
pursuant to Section 83(b) of the Code within 30 days after the date of
exercise. In the absence of such election, the optionee is taxed (and the
long-term capital gain holding period begins) at the time at which the shares
vest (i.e., the time at which the repurchase option lapses with respect to
such shares), and the optionee recognizes compensation income in the amount of
the difference between the value of the shares at that time and the option
exercise price. If a Section 83(b) election is timely filed, the non-vested
shares will be treated for federal income tax purposes as if they have been
vested at the time of exercise. Taxation may also be deferred (unless a
Section 83(b) election is filed) when shares are purchased by an optionee who
is subject to Section 16(b) of the Exchange Act.
Upon the surrender of shares of the Company's Common Stock in connection
with the exercise of a nonstatutory stock option, the optionee will recognize
compensation income as described above. A number of the acquired shares, equal
in number to the surrendered shares, will have a basis equal to the optionee's
basis in the surrendered shares. Any additional shares acquired in the
exchange will have a zero basis, increased by any compensation income
recognized with respect to the exercise of the nonstatutory option.
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Withholding. The compensation income recognized by the optionee who is also
an employee will be treated as wages and will be subject to tax withholding by
the Company out of the current compensation paid to the optionee. If such
current compensation is insufficient to pay the withholding tax, the optionee
will be required to make direct payment to the Company for the tax liability.
Gain or Loss on Sale. Upon a resale of such shares by the optionee, any
difference between the sales price and the fair market value of the shares on
the date of exercise of the nonstatutory option(or the fair market value of
the shares on the date they become vested, if a Section 83(b) election has not
been timely filed) will be treated as capital gain or loss. If after exercise
the shares held for more than one year before resale, any gain will be long-
term capital gain. Tax on a long-term capital gains is currently capped at
28%. Capital losses are allowed in full against capital gains plus $3,000 of
other income.
The Company will be entitled to a tax deduction in the amount and at the
time that the optionee recognizes ordinary income with respect to shares
acquired upon exercise of an nonstatutory option.
Federal Estate Taxes. Upon the death of an optionee who has not exercised
his or her nonstatutory option, the value of such option (determined under
applicable Treasury regulations) will be includable in the optionee's estate
for federal estate tax purposes. Upon the exercise of such option, the holder
will recognize compensation income as described above, and will be allowed a
deduction based upon any estate tax paid with respect to the value of such
option.
Additional Tax Considerations. The foregoing summary of the effect of
federal income taxation upon the optionee and the Company with respect to the
grant of options and purchase of shares under the Director Plan does not
purport to be complete, and reference should be made to the applicable
provisions of the Code. In additional, this summary does not discuss the
provisions of the income tax laws of any municipality, state or foreign
country in which the participant may reside, or the consequences of the
participant's death. It is advisable that an optionee consult his or her own
tax advisor concerning application of these tax laws.
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PROPOSAL NO. 6:
CONFIRMATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected PricewaterhouseCoopers LLP, independent
accountants, to audit the financial statements of the Company for the 2000
fiscal year ending December 30, 2000 and recommends that the stockholders
confirm such selection. This firm has audited the Company's financial
statements since the Company's inception. In the event of a negative vote, the
Board of Directors will reconsider its selection. 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.
Vote Required
The affirmative vote of the majority of the Votes Cast will be required to
ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for the 2000 fiscal year ending December 30, 2000.
Recommendation
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE
COMPANY'S INDEPENDENT AUDITORS FOR THE 2000 FISCAL YEAR ENDING DECEMBER 30,
2000.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, the persons named in the
accompanying form of proxy will vote the shares represented by proxy as the
Board may recommend or as the proxy holders, acting in their sole discretion,
may determine.
THE COMPANY WILL MAIL WITHOUT CHARGE TO ANY STOCKHOLDER UPON WRITTEN
REQUEST A COPY OF THE COMPANY'S ANNUAL REPORT AND REPORT ON FORM 10-K FOR THE
YEAR ENDED JANUARY 1, 2000, INCLUDING THE FINANCIAL STATEMENTS, SCHEDULES AND
A LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO STOCKHOLDER RELATIONS,
ARTHROCARE CORPORATION, 595 NORTH PASTORIA AVENUE, SUNNYVALE, CALIFORNIA
94086.
THE BOARD OF DIRECTORS
Dated: May 10, 2000
30
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Appendix A
AMENDMENT TO
1995 DIRECTOR OPTION PLAN
OF
ARTHROCARE CORPORATION
Pursuant to the authority reserved to the Board of Directors (the "Board")
of ArthroCare Corporation, a corporation organized under the laws of the State
of Delaware (the "Company"), under Section 11(a) of the Company's 1995
Director Option Plan (the "Plan"), the Board hereby amends the Plan as
follows:
1. Definitions. Section 2 of the Plan is amended to add the following
definition of "Change of Control" as subsection (r):
"(r) "Change of Control" means (i) any consolidation or merger of the
Company with or into any other corporation or other entity or person in which
the stockholders of the Company prior to such consolidation or merger own less
than fifty percent (50%) of the voting power of the Company (or any successor
entity) immediately after such consolidation or merger; or (ii) a sale of all
or substantially all of the assets of the Company."
2. Stock Subject to the Plan. The first sentence of Section 3 of the Plan
is amended to read in its entirety as follows:
"Subject to the provisions of Section 10 of the Plan, the maximum
aggregate number of Shares which may be optioned and sold under the Plan is
245,000 (without giving effect to the two-for-one stock split of the Company's
Common Stock approved by the Board on March 24, 2000) Shares (the "Pool") of
Common Stock."
3. Administration of and Grants of Options Under the Plan.
(a) Subsection 4(a)(ii) is amended to read in its entirety as follows:
"Each Outside Director who becomes a Director following the date of this
Amendment shall be automatically granted an Option to purchase 25,000 Shares
(without giving effect to the two-for-one stock split of the Company's Common
Stock approved by the Board on March 24, 2000) (the "First Option") on the
date on which such person first becomes a Director, whether through election
by the shareholders of the Company or appointment by the Board to fill a
vacancy."
(b) Subsection 4(b)(iii) is amended to read in its entirety as follows:
"Each Outside Director shall be automatically granted an Option to purchase
7,500 Shares (without giving effect to the two-for-one stock split of the
Company's Common Stock approved by the Board on March 24, 2000) (a "Subsequent
Option") on the date of the Company's Annual Meeting of Shareholders upon such
Outside Director's Re-election, if on such date, he shall have served on the
Board for at least six (6) months."
4. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset
Sale of Change of Control. Subsection 10(c) is amended to read in its entirety
as follows:
"(c) Change of Control. In the event of a Change of Control, then (i)
with respect to Options held by participants in the Plan whose status as a
Director has not terminated prior to such event, the vesting of such Options
shall be accelerated and made fully exercisable at least ten (10) days prior
to the effective time of the Change of Control (and the Options shall be
terminated if not exercised prior to the effective time of such Change of
Control), and (ii) any other Options outstanding under the Plan shall be
terminated if not exercised prior to the effective time of the Change of
Control."
5. This Amendment shall be submitted for approval at the annual meeting of
shareholders of the Company scheduled to be held on June 5, 2000, or any
postponement or adjournment thereof. Such shareholder approbal shall be
obtained in the degree and manner required under applicable state and federal
law.
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PROXY
ARTHROCARE CORPORATION
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS
JUNE 5, 2000
The undersigned, revoking all prior proxies, hereby appoints Michael A.
Baker and Christine Hanni, and either of them, as proxy or proxies, with full
power of substitution and revocation, to vote all shares of common stock of
ArthroCare Corporation (the "Company") of record in the name of the undersigned
at the close of business on April 14, 2000, at the Annual Meeting of
Stockholders (the "Annual Meeting") to be held on Monday, June 5, 2000, or at
any adjournment thereof, upon the following matters:
1. Election of the following directors: Michael A. Baker, Hira V.
Thapliyal, Ph.D., Annette J. Campbell-White, C. Raymond Larkin, Jr., John S.
Lewis, Robert R. Momsen
[ ] FOR ALL NOMINEES [ ] WITHHOLD FOR ALL NOMINEES
FOR ALL NOMINEES EXCEPT THE FOLLOWING:
(Mark no box and write the name(s) of the nominee(s) withheld in the space
provided below.)
2. Approval of an amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of Common Stock by 55,000,000 shares
for a total of 75,000,000 shares of Common Stock and Preferred Stock authorized
for issuance.
[ ] For [ ] Against [ ] Abstain
3. Approval of an amendment to the Company's Certificate of Incorporation
to effect a two-for-one stock split of the Company's Common Stock.
[ ] For [ ] Against [ ] Abstain
4. Approval of an amendment to the Company's 1993 Stock Option Plan to
increase the number of shares of Common Stock reserved for issuance thereunder
by 400,000 shares (without giving effect to the approval of Proposal No.3
above).
[ ] For [ ] Against [ ] Abstain
5. Approval of an amendment to the Company's 1995 Director Option Plan to
(i) increase the number of shares of Common Stock reserved for issuance
thereunder by 145,000 shares (without giving effect to the approval of Proposal
No.3 above); (ii) increase the number of options for shares of Common Stock
automatically granted to non-employee directors upon election and re-election to
25,000 and 7,500 shares (without giving effect to the approval of Proposal No. 3
above), respectively, and (iii) provide for accelerated vesting of directors'
options upon a change of control of the Company.
[ ] For [ ] Against [ ] Abstain
6. Ratification of appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the 2000 fiscal year.
[ ] For [ ] Against [ ] Abstain
7. In their discretion, the Proxies are authorized to vote upon such
matters as may properly come before the Annual Meeting, or any adjournment
thereof.
[ ] For [ ] Against [ ] Abstain
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(continued on reverse side)
Please mark, date, sign and mail this proxy promptly in the enclosed envelope.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE
VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS
1, 2, 3, 4, 5, 6 AND 7. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1,
2, 3, 4, 5, 6 AND 7.
Please sign your name exactly as it appears
below. In the case of shares owned in joint
tenancy or as tenants in common, all should
sign. Fiduciaries should indicate their
title and authority.
Dated: , 2000.
___________________________________________
___________________________________________
___________________________________________
___________________________________________
Signature(s)
