<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
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
CARDIOTHORACIC SYSTEMS, INC.
- --------------------------------------------------------------------------------
(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)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(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.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
TO BE HELD ON MAY 19, 1998
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
CARDIOTHORACIC SYSTEMS, INC., a Delaware corporation (the "Company") will be
held on Tuesday, May 19, 1998, at 9:00 a.m., local time, at the Company's
principal executive offices, 10600 N. Tantau Ave., Cupertino, California 95014
for the following purposes (as more fully described in the Proxy Statement
accompanying this Notice):
1. To elect two Class I directors of the Company to serve for terms of
three years expiring upon the 2001 Annual Meeting of Stockholders or
until their successors are elected.
2. To approve an amendment of the Company's Incentive Stock Plan to
increase the number of shares of Common Stock available for issuance
thereunder by 600,000 shares and to approve the material terms of the
Incentive Stock Plan, including, but not limited to, share limitations
for purposes of Section 162(m) of the Internal Revenue Code of 1986, as
amended.
3. To consider a stockholder proposal by the State of Wisconsin Investment
Board to amend the Company's Bylaws to prohibit the repricing of stock
options without stockholder approval.
4. To ratify the appointment of Coopers & Lybrand L.L.P. as the independent
auditors of the Company for the fiscal year ending January 1, 1999.
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on March 23, 1998 are entitled to notice of and to vote at the Annual
Meeting. All stockholders are cordially invited to attend the meeting. However,
to ensure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. If you attend the meeting, you may vote in
person, even if you return a proxy.
FOR THE BOARD OF DIRECTORS
Richard M. Ferrari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Cupertino, California
April 9, 1998
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING,
YOU MAY VOTE IN PERSON, EVEN IF YOU RETURN A PROXY.
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
---------------------
PROXY STATEMENT FOR
1998 ANNUAL MEETING OF STOCKHOLDERS
------------------------
MAY 19, 1998
INFORMATION CONCERNING VOTING AND PROXY SOLICITATION
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
CardioThoracic Systems, Inc. ("CardioThoracic Systems" or the "Company") for use
at the Annual Meeting of Stockholders to be held on Tuesday, May 19, 1998 at
9:00 a.m., local time, or at any adjournment thereof. The Annual Meeting will be
held at the Company's principal executive offices, 10600 N. Tantau Ave.,
Cupertino, California 95014. The telephone number at the meeting location is
(408) 342-1700.
These proxy solicitation materials and the Annual Report to stockholders for
the fiscal year ended January 2, 1998 (the "Last Fiscal Year"), including
financial statements, were first mailed on or about April 9, 1998, to all
stockholders entitled to vote at the Annual Meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on March 23, 1998 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. At
the Record Date, 13,783,686 shares of the Company's Common Stock, $.001 par
value (the "Common Stock"), were issued and outstanding and held of record by
approximately 310 stockholders.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person. Attending the Annual
Meeting in and of itself may not constitute a revocation of a proxy.
VOTING AND SOLICITATION
Each stockholder is entitled to one vote for each share held as of the
Record Date. Stockholders will not be entitled to cumulate their votes in the
election of directors.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses incurred in forwarding solicitation material
to such beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation, in
person or by telephone or facsimile. The Company may retain a proxy solicitation
firm to aid in soliciting proxies from its stockholders. The fees of such firm
are estimated not to exceed $5,000, plus reimbursement of expenses.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections (the "Inspector") with the assistance of the
Company's Transfer Agent. The Inspector will also determine whether or not a
quorum is present. Except in certain specific circumstances, the affirmative
vote of a majority of shares present in person or represented by proxy at a duly
held meeting at which a quorum is present is required under Delaware law for
approval of proposals presented to stockholders. In general,
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Delaware law also provides that a quorum consists of a majority of shares which
are entitled to vote and which are present or represented by proxy at the
meeting.
The Inspector will treat shares that are voted "WITHHELD" or "ABSTAIN" as
being present and entitled to vote for purposes of determining the presence of a
quorum but will not be treated as votes in favor of or opposed to approving any
matter submitted to the stockholders for a vote. Any proxy which is returned
using the form of proxy enclosed and which is not marked as to a particular item
will be voted for the election of the two Class I directors, for approval of the
amendment of the Incentive Stock Plan, against the stockholder proposal to amend
the Bylaws, for the confirmation of the appointment of the designated
independent auditors and, as the proxy holders deem advisable, on other matters
that may come before the meeting, as the case may be, with respect to the items
not marked.
If a broker indicates on the enclosed proxy or its substitute that it does
not have discretionary authority as to certain shares to vote on a particular
matter ("Broker Non-Votes"), those shares will not be considered as present with
respect to that matter. The Company believes that the tabulation procedures to
be followed by the Inspector are consistent with the general statutory
requirements in Delaware concerning voting of shares and determination of a
quorum.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS TO BE PRESENTED AT 1999 ANNUAL
MEETING
Proposals that are intended to be presented by stockholders of the Company
at the 1999 Annual Meeting of Stockholders must be received by the Company no
later than December 10, 1998 in order to be considered for inclusion in the
proxy statement and form of proxy relating to that meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file an initial report of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the Securities and Exchange Commission (the
"SEC") and the National Association of Securities Dealers, Inc. Executive
officers, directors and greater than ten percent stockholders are also required
by SEC rules to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that, with respect to fiscal year 1997, all filing requirements applicable to
its officers, directors and ten percent stockholders were complied with, except
that Geoffrey D. Dillon, Jeffrey G. Gold, Richard A. Lotti and Michael D.
Minailo each did not timely file their initial statements of beneficial
ownership of securities on Form 3. In addition, Jack W. Lasersohn did not timely
file a statement of changes in beneficial ownership on Form 4 for two
transactions (such form was filed approximately one month late).
SHARE OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Common Stock of the Company as of
March 23, 1998, by: (i) each person who is known to the Company to beneficially
own more than five percent of the outstanding shares of its Common Stock, (ii)
each director and nominee for election, (iii) each officer named in the Summary
Compensation Table below, and (iv) all directors, nominees for election and
executive officers as a group. Unless otherwise indicated, officers and
directors can be reached at the Company's principal executive
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offices. A total of 13,783,686 shares of the Company's Common Stock were issued
and outstanding as of March 23, 1998.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(1) PERCENT OF TOTAL(2)
- -------------------------------------------------------------- ----------- --------------------
<S> <C> <C>
New Enterprise Associates VI, Limited Partnership ............ 873,500 6.3%
2490 Sand Hill Road
Menlo Park, CA 94025
Morgenthaler Venture Partners IV ............................. 840,000 6.1
2730 Sand Hill Road
Suite 280
Menlo Park, CA 94025
Robert C. Bellas, Jr.(3)...................................... 843,000 6.1
Richard M. Ferrari............................................ 945,041 6.9
Thomas J. Fogarty, M.D.(4).................................... 148,677 1.1
Jack W. Lasersohn(5).......................................... 498,000 3.6
Thomas C. McConnell(6)........................................ 876,500 6.4
Charles S. Taylor............................................. 948,152 6.9
Philip M. Young(7)............................................ 10,857 *
Michael J. Billig(8).......................................... 84,232 *
Jeffrey G. Gold(9)............................................ 51,066 *
Steve M. Van Dick(10)......................................... 111,951 *
All directors, nominees and executive officers as a group (13
persons)(11)................................................ 4,571,176 32.6
</TABLE>
- ------------------------
* Less than 1%.
(1) Except as otherwise indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
(2) Applicable percentage ownership is based on 13,783,686 shares of Common
Stock outstanding as of March 23, 1998, together with applicable options for
such stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission, based on factors including
voting and investment power with respect to shares. Shares of Common Stock
subject to options currently exercisable, or exercisable within 60 days
after March 23, 1998, are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed outstanding
for computing the percentage ownership of any other person.
(3) Consists of 840,000 shares held by Morgenthaler Venture Partners IV and
3,000 shares issuable upon exercise of options exercisable within 60 days
after March 23, 1998. Mr. Bellas, a director of the Company, is a general
partner of Morgenthaler Venture Partners IV. Mr. Bellas shares voting or
investment control over the shares held by Morgenthaler Venture Partners IV.
(4) Consists of 45,919 shares held by Three Arch Partners, L.P., 10,331 shares
held by Three Arch Associates, L.P., 89,427 shares held by the Thomas
Fogarty Separate Property Trust (some of which remain subject to repurchase
by the Company), and 3,000 shares issuable upon exercise of options
exercisable within 60 days after March 23, 1998. Thomas J. Fogarty, M.D. is
a director of the Company and a general partner of Three Arch Partners, L.P.
and Three Arch Associates, L.P. Dr. Fogarty disclaims beneficial ownership
of the shares held by such entities except to the extent of his
proportionate partnership interest therein.
3
<PAGE>
(5) Consists of 475,000 shares held by Vertical Fund Associates L.P., 20,000
shares held by Vertical Life Sciences L.P. and 3,000 shares issuable upon
exercise of options exercisable within 60 days after March 23, 1998. Jack W.
Lasersohn is a director of the Company, a managing director of the Vertical
Group G.P., the general partner of Vertical Fund Associates L.P., and the
general partner of Vertical Life Sciences L.P. Mr. Lasersohn disclaims
beneficial ownership of the shares held by Vertical Fund Associates L.P. and
Vertical Life Sciences L.P. except to the extent of his proportionate
partnership interest therein.
(6) Consists of 873,500 shares held by New Enterprise Associates VI, Limited
Partnership, and 3,000 shares issuable upon exercise of options exercisable
within 60 days after March 23, 1998. Thomas C. McConnell is a director of
the Company and a general partner of New Enterprise Associates VI, Limited
Partnership. Mr. McConnell disclaims beneficial ownership of the shares held
by New Enterprise Associates VI, Limited Partnership except to the extent of
his proportionate partnership interest therein.
(7) Includes 3,000 shares issuable upon exercise of options exercisable within
60 days after March 23, 1998.
(8) Includes 40,833 shares issuable upon exercise of options exercisable within
60 days after March 23, 1998.
(9) Includes 45,206 shares issuable upon exercise of options exercisable within
60 days after March 23, 1998.
(10) Includes 100,000 shares issuable upon exercise of options exercisable
within 60 days after March 23, 1998.
(11) Includes 253,539 shares issuable upon exercise of options exercisable
within 60 days after March 23, 1998.
4
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
DIRECTORS AND NOMINEES FOR DIRECTOR
Pursuant to the Company's Certificate of Incorporation and Bylaws, the
Company's Board of Directors currently consists of seven persons, divided into
three classes serving staggered terms of three years. Currently there are two
directors in Class I, two directors in Class II and three directors in Class
III. Two Class I directors are to be elected at the Annual Meeting. The Class II
and Class III directors will be elected at the Company's 1999 and 2000 Annual
Meetings of Stockholders, respectively. Each of the two Class I directors
elected at the Annual Meeting will hold office until the 2001 Annual Meeting of
Stockholders or until his successor has been duly elected and qualified.
In the event that any of such persons becomes unavailable or declines to
serve as a director at the time of the Annual Meeting, the proxy holders will
vote the proxies in their discretion for any nominee who is designated by the
current Board of Directors to fill the vacancy. It is not expected that any of
the nominees will be unavailable to serve.
The names of the two Class I nominees for election to the Board of Directors
at the Annual Meeting, their ages as of the Record Date and certain information
about them are set forth below. The names of the current Class II and Class III
directors with unexpired terms, their ages as of the Record Date and certain
information about them are also set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
- ----------------------------------- --- ------------------------------------------------------------ ---------
<S> <C> <C> <C>
NOMINEES FOR CLASS I DIRECTORS
Thomas J. Fogarty, M.D............. 64 Director 1996
Charles S. Taylor.................. 43 Vice President, Chief Technical Officer, Director 1995
CONTINUING CLASS II DIRECTORS
Robert C. Bellas, Jr.(1)........... 56 Director 1995
Thomas C. McConnell(1)(2).......... 43 Director 1995
CONTINUING CLASS III DIRECTORS
Richard M. Ferrari................. 44 Chief Executive Officer, President, Director 1995
Jack W. Lasersohn(2)............... 45 Director 1995
Philip M. Young(1)................. 58 Director 1995
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
There are no family relationships among directors or executive officers of
the Company.
THOMAS J. FOGARTY, M.D. has served as a director of the Company since
February 1996. Dr. Fogarty is an internationally recognized cardiovascular
surgeon, inventor and venture capitalist. He is a General Partner of Three Arch
Partners, a venture capital firm investing primarily in medical device
companies, and has held the position of Professor of Surgery at Stanford
University Medical Center since July 1993. Dr. Fogarty also serves as a director
of Raytel Medical Corporation, Cardiac Pathways Corporation, and General
Surgical Innovations, Inc. Dr. Fogarty holds an M.D. from the University of
Cincinnati College of Medicine.
CHARLES S. TAYLOR, the founder of the Company, was with Informed Creation,
the predecessor company to CardioThoracic Systems, since its inception in
November 1993, and has served as Vice President, Chief Technical Officer and a
director of the Company since its incorporation in June 1995. From June 1992
until
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November 1993, Mr. Taylor was a member of the research and development group at
Stanford Surgical Technologies, Inc. (now Heartport, Inc., a publicly traded
company), that develops instruments for advanced cardiac surgical procedures.
From January 1992 to May 1992, Mr. Taylor managed the establishment of a new
development group for Eli Lilly's Medical Instrument Systems division (now
Guidant Corp., a publicly traded company), the Technology Development Center,
which develops surgical devices for vascular intervention procedures. From May
1986 to December 1991, he was an Engineer and Manager for Advanced
Cardiovascular Systems, Inc. where he directed teams of engineers developing new
manufacturing technologies and custom research and development equipment.
ROBERT C. BELLAS, JR. has served as a director of the Company since
September 1995. Since January 1984, Mr. Bellas has been a General Partner of
Morgenthaler Ventures, a venture capital firm, where he is responsible for the
firm's investments in health care services, medical devices and biomedical
ventures. Mr. Bellas also serves on the Board of Directors of Vical, Inc. and
Medaphis Corporation. Mr. Bellas holds an M.B.A. from Stanford University
Graduate School of Business.
THOMAS C. MCCONNELL has served as a director of the Company since September
1995. He has been a General Partner of New Enterprise Associates ("NEA"), a
venture capital investment entity, since 1989 and has been associated with NEA
since 1985. Mr. McConnell also serves as a director of Conceptus, Inc., Applied
Imaging Corp. and Innovasive Devices Inc. He holds an M.B.A. from Stanford
University Graduate School of Business.
RICHARD M. FERRARI joined the Company as Chief Executive Officer and a
director in June 1995 and was elected President in August 1995. From January
1991 until joining the Company, he was President and Chief Executive Officer of
Cardiovascular Imaging Systems, Inc. ("CVIS"), a manufacturer of intravascular
ultrasound systems, which is currently a subsidiary of Boston Scientific
Corporation. From March 1990 until joining CVIS, he served as President and
Acting Chief Executive Officer of Medstone International, Inc., a manufacturer
of lithotripsy equipment for treatment of gall and kidney stones. From 1981 to
February 1990, he was employed with ADAC Laboratories, a supplier of diagnostic
imaging equipment, serving most recently as Executive Vice President and General
Manager responsible for the Nuclear Medicine, Digital Cardiology, Information
Management and Radiation Therapy business units. Mr. Ferrari holds an M.B.A.
from the University of South Florida.
JACK W. LASERSOHN has served as a director of the Company since September
1995. He has been a Managing Director of The Vertical Group, Inc., a venture
capital firm investing primarily in medical technology companies, since its
formation in 1989. From 1981 to 1989, Mr. Lasersohn was the director of the
venture capital division of F. Eberstadt & Co., Inc. Mr. Lasersohn also serves
as a director of VitelCom Inc., UroQuest Medical Corporation and Mossimo, Inc.
He holds an M.A. from Tufts University and a J.D. from Yale University.
PHILIP M. YOUNG has served as a director of the Company since September
1995. He has been a general partner of U.S. Venture Partners, a venture capital
firm, since April 1990. Mr. Young serves as a director of 3Dfx Interactive,
Inc., The Immune Response Corporation, FemRx, Inc., Vical, Inc. and Zoran
Corporation. He holds an M.B.A. from Harvard University.
JOSEPH A. CIFFOLILLO resigned as a director of the Company effective
February 2, 1998. Mr. Ciffolillo had been a Class I director.
CHARLES S. TAYLOR is standing for re-election as a Class I director. Mr.
Taylor had previously been a Class II director.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held five meetings during the fiscal
year ended January 2, 1998. No director attended fewer than 75% of the meetings
of the Board of Directors during the fiscal year ended January 2, 1998, with the
exception of director Fogarty, who attended two meetings. The Board of Directors
has an Audit Committee and a Compensation Committee. It does not have a
nominating
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committee or a committee performing the functions of a nominating committee.
From time to time, the Board has created various ad hoc committees for special
purposes. No such committee is currently functioning.
The Audit Committee consists of directors Lasersohn and McConnell. The Audit
Committee is responsible for reviewing the results and scope of the audit and
other services provided by the Company's independent auditors. The Audit
Committee held two meeting during the last fiscal year.
The Compensation Committee consists of directors Bellas, McConnell, and
Young. The Compensation Committee reviews and makes recommendations to the Board
concerning salaries and incentive compensation for officers of the Company and
administers the Company's equity incentive plans. The Compensation Committee
held two meetings during the last fiscal year.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for services they
provide as directors, aside from reimbursement of out-of-pocket expenses
incurred in connection with attendance at board meetings. From time to time,
certain directors who are not employees of the Company have received grants of
options to purchase shares of the Company's Common Stock. Under the Company's
Director Option Plan, directors who are not employees or consultants of the
Company receive options to purchase up to 12,000 shares of Common Stock upon
joining the Board of Directors. Thereafter, each non-employee director who has
served on the Board of Directors for at least six months shall receive an option
to acquire 3,000 shares of Common Stock on the date of each of the Company's
annual meetings of stockholders, provided such Outside Director is re-elected or
continuing to serve as a director.
In February 1996, the Company entered into a four-year consulting agreement
with director Thomas J. Fogarty, M.D. for the development of devices,
instruments, and techniques for minimally invasive coronary artery bypass graft
surgery. The Company granted to Three Arch Associates, L.P. and Three Arch
Partners, L.P., partnerships of which Dr. Fogarty is a general partner, options
for the purchase of 90,000 shares of common stock. In February 1996, the
partnerships exercised the options, which are subject to a right of repurchase
in the event of termination of the consulting agreement and Dr. Fogarty's
services as a board member. The repurchase right lapses at the rate of 1/48 of
the shares per month beginning in March 1996. The consulting agreement also
provides for certain royalty payments to Dr. Fogarty based on certain product
sales by the Company. No such royalty payments were made in 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company. The Compensation Committee also administers the
Company's various incentive compensation plans. During the year ended January 2,
1998, directors Bellas, McConnell, and Young served as the Compensation
Committee of the Company's Board of Directors. Mr. Ferrari, who is President and
Chief Executive Officer of the Company, participates in all discussions and
decisions regarding salaries and incentive compensation for all employees and
consultants to the Company, except that Mr. Ferrari is excluded from discussions
regarding his own salary and incentive compensation. No member of the
Compensation Committee has a relationship that would constitute an interlocking
relationship with executive officers or directors of another entity.
VOTE REQUIRED
The two nominees receiving the highest number of affirmative votes of the
shares entitled to vote on this matter shall be elected as the Class I
directors.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
NOMINEES SET FORTH HEREIN.
7
<PAGE>
PROPOSAL NO. 2
INCREASE IN NUMBER OF SHARES AUTHORIZED
UNDER THE COMPANY'S INCENTIVE STOCK PLAN
The Company's Board of Directors and stockholders have previously adopted
and approved the Incentive Stock Plan (the "Stock Plan"). A total of 2,200,000
shares of Common Stock have been reserved for issuance under the Stock Plan, and
only 67,079 shares were available for future grant as of the Record Date. In
January 1998, the Board of Directors authorized an amendment to the Stock Plan,
subject to stockholder approval, to increase the shares reserved for issuance
thereunder by 600,000, bringing the total number of shares issuable under the
Stock Plan to 2,800,000.
At the Annual Meeting, the stockholders are being requested to consider and
approve the proposed amendment of the Stock Plan to increase the number of
shares of Common Stock reserved for issuance thereunder, and to approve the
material terms of the Stock Plan, including, but not limited to, share
limitations for purposes of Section 162(m) of the Internal Revenue Code of 1986,
as amended. A vote for the amendment of the Stock Plan will constitute approval
of the proposed increase in the number of shares authorized for issuance under
the Stock Plan and of the material terms of the Stock Plan.
The Board of Directors believes that the amendment is necessary to enable
the Company to, among other things, continue its policy of employee stock
ownership as a means to motivate high levels of performance and to recognize key
employee accomplishments. A summary of the Stock Plan is set forth below.
SUMMARY OF THE STOCK PLAN
GENERAL. The Stock Plan was originally adopted by the Board of Directors in
August 1995 and approved by the stockholders in August 1995. The Stock Plan
authorizes the Board of Directors (the "Board"), or one or more committees which
the Board may appoint from among its members (the "Committee"), to grant options
and rights to purchase Common Stock. Options granted under the Stock Plan may be
either "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options, as
determined by the Board or the Committee.
PURPOSE. The general purpose of the Stock Plan is to attract and retain the
best available personnel for positions of substantial responsibility, to provide
additional incentive to employees, directors and consultants and to promote the
success of the Company's business.
ADMINISTRATION. The Stock Plan may be administered by the Board or the
Committee. Subject to the other provisions of the Stock Plan, the administrator
has the authority: (i) to determine the fair market
value of the Company's Common Stock; (ii) to select the service providers
(employees, directors or consultants) to whom options and stock purchase rights
may be granted under the Stock Plan; (iii) to determine the number of shares of
Common Stock to be covered by each option and stock purchase right granted under
the Stock Plan; (iv) to approve forms of agreement for use under the Stock Plan;
(v) to determine the terms and conditions, not inconsistent with the terms of
the Stock Plan, of any option or stock purchase right granted under the Stock
Plan, including the exercise price, the time or times when options or stock
purchase rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any option or stock purchase right or the
shares of Common Stock relating thereto, based in each case on such factors as
the administrator of the Stock Plan, in its sole discretion, shall determine;
(vi) to reduce the exercise price of any option or stock purchase right to the
then current fair market value if the fair market value of the Common Stock
covered by such option or stock purchase right shall have declined since the
date the option or stock purchase right was granted; (vii) to institute an
option exchange program; (viii) to construe and interpret the terms of the Stock
Plan and awards granted pursuant to the Stock Plan; (ix) to
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<PAGE>
prescribe, amend and rescind rules and regulations relating to the Stock Plan,
including rules and regulations relating to sub-plans established for the
purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to
modify or amend any option or stock purchase right (subject to certain
provisions of the Stock Plan), including the discretionary authority to extend
the post-termination exercisability period of options longer than is otherwise
provided for in the Stock Plan; (xi) to allow optionees to satisfy withholding
tax obligations by electing to have the Company withhold from the shares to be
issued upon exercise of an option or stock purchase right that number of shares
having a fair market value equal to the amount required to be withheld; (xii) to
authorize any person to execute on behalf of the Company any instrument required
to effect the grant of an option or stock purchase right previously granted by
the administrator; and (xiii) to make all other determinations deemed necessary
or advisable for administering the Stock Plan.
In August 1996, the Compensation Committee authorized the Chief Executive
Officer of the Company to make initial option grants of up to 15,000 shares to
new employees. The Chief Executive Officer has authority to grant such options
to new employees who do not report directly to him; the Chief Financial
Officer's approval is required to grant such options to new employees who report
directly to the Chief Executive Officer. The Chief Executive Officer and Chief
Financial Officer report to the Compensation Committee with regard to such
matters.
ELIGIBILITY. The Stock Plan provides that options and rights may be granted
to the Company's employees, directors and consultants. Incentive stock options
may be granted only to employees. Any optionee who owns more than 10% of the
voting power of all classes of outstanding stock of the Company (a "10%
Stockholder") is not eligible for the grant of an incentive stock option unless
the exercise price of the option is at least 110% of the fair market value of
the Common Stock on the date of grant.
PERFORMANCE-BASED COMPENSATION LIMITATIONS. No employee, director or
consultant shall be granted, in any fiscal year of the Company, options to
purchase more than 500,000 shares of Common Stock. In connection with his or her
initial service to the Company, an employee, director or consultant may be
granted options to purchase up to an additional 500,000 shares, which do not
count against the 500,000 share limit. The foregoing limitations, which shall be
adjusted proportionately in connection with any change in the Company's
capitalization, 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.
TERMS AND CONDITIONS OF OPTIONS. Each option granted under the Stock Plan
is evidenced by a written stock option agreement between the optionee and the
Company and is subject to the following terms and conditions:
(a) EXERCISE PRICE. The Board or the Committee determines the exercise
price of options to purchase shares of Common Stock at the time the options are
granted. However, excluding options issued to 10% Stockholders, the exercise
price under an incentive stock option must not be less than 100% of the fair
market value of the Common Stock on the date the option is granted. As the
Company's Common Stock is listed on the Nasdaq National Market, the fair market
value shall be the closing sales price of the Common stock (or the closing bid
if no sales were reported) on the date the option is granted.
(b) FORM OF CONSIDERATION. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally may be
made by cash, check, promissory note, other shares of Common Stock of the
Company owned by the optionee, consideration received by the Company under a
formal cashless exercise program adopted by the Company, a reduction in the
amount of any Company liability to the Optionee, or by a combination of such
methods.
(c) EXERCISE OF THE OPTION. Each stock option agreement specifies the term
of the option and the date when the option is to become exercisable. However, in
no event shall an option granted under the
9
<PAGE>
Stock Plan be exercised more than 10 years after the date of grant. Moreover, in
the case of an incentive stock option granted to a 10% Stockholder, the term of
the option shall be for no more than five years from the date of grant.
(d) TERMINATION OF EMPLOYMENT. If an optionee ceases for any reason (other
than death or permanent disability) to be a service provider to the Company,
then all options held by such optionee under the Stock Plan expire upon the
earlier of (i) such period of time as is set forth in his or her option
agreement (but not to exceed three months after the termination of his or her
employment in the event of an incentive stock option) or (ii) the expiration
date of the option. The optionee may exercise all or part of his or her option
at any time before such expiration to the extent that such option was
exercisable at the time of termination of employment.
(e) PERMANENT DISABILITY. If an optionee ceases to be a service provider
to the Company as a result of permanent and total disability (as defined in the
Code), then all options held by such optionee under the Stock Plan shall expire
upon the earlier of (i) twelve months after the date of termination of the
optionee's employment or (ii) the expiration date of the option. The optionee
may exercise all or part of his or her option at any time before such expiration
to the extent that such option was exercisable at the time of termination of
employment.
(f) DEATH. If an optionee dies while a service provider to the Company,
his or her option shall expire upon the earlier of (i) twelve months after the
optionee's death or (ii) the expiration date of the option. The executors or
other legal representative or the optionee may exercise all or part of the
optionee's option at any time before such expiration to the extent that such
option was exercisable at the time of death.
(g) TERMINATION OF OPTIONS. Each stock option agreement will specify the
term of the option. Notwithstanding the foregoing, however, the term of any
incentive stock option shall not exceed 10 years from the date of grant. No
options may be exercised by any person after the expiration of its term.
(h) NONTRANSFERABILITY OF OPTIONS. Unless determined otherwise by the
Administrator, during an optionee's lifetime, his or her option(s) shall be
exercisable only by the optionee and shall not be transferable other than by
will or laws of descent and distribution.
(i) VALUE LIMITATION. If the aggregate fair market value of all shares of
Common Stock subject to an optionee's incentive stock option which are
exercisable for the first time during any calendar year exceeds $100,000, the
excess options shall be treated as nonstatutory options.
(j) OTHER PROVISIONS. The stock option agreement may contain such terms,
provisions and conditions not inconsistent with the Stock Plan as may be
determined by the Board or Committee.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION, CORPORATE TRANSACTIONS. In the
event that the stock of the Company is changed by reason of any stock split,
reverse stock split, stock dividend, recapitalization or other change in the
capital structure of the Company, appropriate proportional adjustments shall be
made in the number and class of shares of stock subject to the Stock Plan, the
number and class of shares of stock subject to any option or stock purchase
right outstanding under the Stock Plan, and the exercise price of any such
outstanding option or stock purchase right. Any such adjustment shall be made
upon approval of the Board and, if required, the stockholders of the Company,
whose determination shall be conclusive. Notwithstanding the above, in
connection with any merger, consolidation, acquisition of assets or like
occurrence involving the Company, each outstanding option and right shall be
assumed or an equivalent option or right substituted by a successor corporation
or a parent or subsidiary of the successor corporation. If the successor
corporation does not assume the options or substitute substantially equivalent
options, then the exercisability of all outstanding options and rights shall be
accelerated. In the event of the proposed dissolution or liquidation of the
Company, the exercisability of all outstanding options and rights may be
accelerated at the discretion of the Administrator. To the extent they have not
been previously exercised, options shall terminate upon consummation of the
action.
10
<PAGE>
AMENDMENT, SUSPENSIONS AND TERMINATION OF THE STOCK PLAN. The Board may
amend, alter, suspend or terminate the Stock Plan at any time; provided,
however, that the Company shall obtain stockholder approval of any amendment to
the extent necessary and desirable to comply with Section 422 of the Code or any
other applicable rule or statute. In any event, the Stock Plan will terminate
automatically in 2005.
FEDERAL TAX INFORMATION. Options granted under the Stock Plan may be either
incentive stock options, as defined in Section 422 of the Code, or nonstatutory
options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (i)
the fair market value of the shares at the date of the option exercise or (ii)
the sale price of the shares. A different rule for measuring ordinary income
upon such a premature disposition may apply if the optionee is also an officer,
director, or 10% stockholder of the Company. The Company will be entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as
long-term or short-term capital gain or loss, depending on the holding period.
All other options which do not quality as incentive stock options are
nonstatutory options. An optionee will not recognize any taxable income at the
time a nonstatutory option is granted. However, upon its exercise, the optionee
will recognize taxable income, generally measured as the excess of the then fair
market value of the shares purchased over the purchase price. Any taxable income
recognized in connection with an option exercise by an optionee who is also an
employee of the Company will be subject to tax withholding by the Company. Upon
resale of such shares by the optionee, any difference between the sales price
and the optionee's purchase price, to the extent not recognized as taxable
income as described above, will be treated as long-term or short-term capital
gain or loss, depending on the holding period.
Subject to Section 162(m) of the Code, the Company will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the optionee
with respect to shares acquired upon exercise of a nonstatutory option.
Stock purchase rights are taxed in substantially the same manner as
nonstatutory options.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Stock Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
VOTE REQUIRED
The approval of the amendment of the Stock Plan requires the affirmative
vote of a majority of the shares of the Company's Common Stock present and
voting at the Annual Meeting.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT OF THE INCENTIVE STOCK PLAN SET FORTH HEREIN.
11
<PAGE>
PROPOSAL NO. 3
STOCKHOLDER PROPOSAL REGARDING
OPTION EXCHANGE PROGRAMS
The Company receives many suggestions from stockholders. All are given
careful attention by the Company, and the Company's management has adopted a
number of the suggestions made.
Management of the Company disagrees strongly with the adoption of the
resolution proposed below and asks all stockholders to read through the
Company's entire response which follows the stockholder's proposal.
The author and proponent of the following resolution, the State of Wisconsin
Investment Board ("SWIB"), 121 East Wilson Street, Madison, Wisconsin 53702, has
requested that the Company include the following proposal in its Proxy Statement
for 1998 Annual Meeting of Stockholders. The proponent owns 332,500 shares of
the Company's Common Stock as of the Record Date. The SWIB proposal is quoted
verbatim below:
STOCKHOLDER RESOLUTION
"WHEREAS, the CardioThoracic Systems, Inc. (CTSI) Board has supported
the adoption of numerous stock option plans over the years, regardless of
company or stock performance; and
"WHEREAS, during the previous several years, the Company has granted
options of CTSI shares pursuant to such plans; and
"WHEREAS, the Company has the potential to engage in repricing options
to a lower exercise price whenever the board deems appropriate after poor
stock performance;
"NOW THEREFORE, BE IT RESOLVED:
"Pursuant to the authority of shareholders to change bylaws granted under
Article IX, Section 9.1 of the bylaws of CardioThoracic Systems, Inc. the
following bylaw shall be added to the Bylaws of CardioThoracic Systems,
Inc.: OPTION REPRICING: The Board of Directors shall not reprice any stock
options already issued and outstanding to a lower strike price at any time
during the term of such option, without the prior approval of shareholders."
PROPONENT'S STATEMENT IN SUPPORT OF RESOLUTION
"Shareholders generally support the use of reasonable incentive
compensation to provide a competitive employment environment. However,
excessive reliance on such plans is unfair to existing shareholders.
"Certain companies like CTSI have continued to expand the use of such
plans to the point where existing shareholders face serious potential
dilution from options representing approximately 23% of outstanding shares
based on disclosures in the Company's May 1997 proxy statement. We believe
the practice of repricing, especially when additive to high potential
dilution is an abuse of the incentive compensation process. While we
understand and agree with the need to provide meaningful incentives to
staff, we object strongly to repricing as the means of implementing such
incentives.
"The Company has the ability to reprice "underwater-options" for
existing option holders when CTSI stock has had a drop leaving many of the
previously awarded options at a strike price above current market. Such
action allows existing option holders to exchange "out-of-the-money" options
for new options with a reduced exercise price. By engaging in the practice
of repricing, the company cancels any negative impact to option holders,
essentially rewarding the only people with a direct hand in controlling
underperformance. We urge management to raise the stock price, not lower the
exercise
12
<PAGE>
price. The above resolution will help ensure a measure of fairness to the
use of incentive compensative compensation at CTSI."
MANAGEMENT'S RESPONSE
Nearly all Silicon Valley companies of substantial size use stock options to
attract and retain outstanding employees, and there is significant competition
to obtain skilled and experienced engineers, sales people and managers in
Silicon Valley. Accordingly, stock option-based incentives are an important part
of the benefits package for the employees of CardioThoracic Systems.
Furthermore, because a stock option only becomes exercisable if an employee
remains with the Company, stock options are an important means of motivating
employees to remain at the Company.
Under some market conditions, such as those experienced in 1997, the
exercise price that employees would have to pay in order to exercise their stock
options exceeds the price at which anyone could buy stock in the market. This
can be because of a decline in the Company's stock price due to factors beyond
the Company's control such as stock market pressures and trends or because of
Company performance. Such "underwater" stock options have little incentive value
to employees and may be a cause of low morale and may result in employee
attrition.
When, in the good faith judgment of the Board of Directors, this situation
appears to be more damaging to the Company and its stockholders than would be
the dilutive effect of an option exchange program, the Board of Directors needs
to have the ability to replace such "underwater" stock options promptly with
options having an exercise price equal to the then fair market value of the
stock, thus restoring the opportunity for employees to receive value in the near
term by building the Company and causing the market value of the stock to
increase.
The Company has authorized option exchange programs twice in its history. In
each case, before authorizing the exchange program, the Board of Directors
carefully considered market conditions, employee turnover, employee morale and
Company performance. In each case, the Board of Directors concluded that,
because of the risk to the Company of employee attrition in the highly
competitive Silicon Valley employment market, the adoption of an option exchange
program would be in the best interest of all stockholders. The Company's policy
of having the Board of Directors determine if and when an option exchange
program can be authorized is conventional in the industry, and SWIB is the only
entity that has written to the Company requesting a change to this policy.
The Company believes that requiring stockholders to approve the rare action
of the Board of Directors in authorizing an option exchange program, as SWIB has
proposed, would be unnecessary, time consuming and wasteful of the Company's
money. The Board of Directors is a group of experienced executives elected by
the stockholders specifically because of their experience and judgment. Each
director has a fiduciary obligation to the stockholders to approve only those
actions that are for the benefit of the Company and its stockholders. Moreover,
because members of the Company's Board of Directors hold a significant portion
of the Company's stock, the interests of the Board of Directors are closely
aligned with the interests of all of the Company's stockholders.
MANAGEMENT RECOMMENDATION AND VOTE REQUIRED
The approval of the stockholder proposal and the amendment of the Bylaws
requires the affirmative vote of a majority of the shares entitled to vote on
this matter.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE AGAINST THE ABOVE
PROPOSAL.
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<PAGE>
PROPOSAL NO. 4
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Coopers & Lybrand L.L.P., independent
auditors, to audit the financial statements of the Company for the fiscal year
ending January 1, 1999 and recommends that the stockholders vote FOR
confirmation of such selection. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection. Coopers &
Lybrand L.L.P. has audited the Company's financial statements since its
inception. Representatives of Coopers & Lybrand L.L.P. are expected to be
present at the Annual Meeting with the opportunity to make a statement if they
desire to do so, and are expected to be available to respond to appropriate
questions.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING JANUARY 1, 1999.
EXECUTIVE COMPENSATION
COMPENSATION TABLES
SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation paid by the Company to the Chief Executive Officer, the four other
most highly compensated executive officers of the Company, and one former
officer (the "Named Executive Officers") for services rendered during the fiscal
years ended December 31, 1995 and 1996, and January 2, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
------------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION
- ----------------------------------------- --------- ------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Ferrari....................... 1997 $ 229,166 $ 75,000 --(1) -- $ 60,751(2)
President and Chief 1996 189,583 70,000 --(1) -- 28,098(3)
Executive Officer 1995 47,065(4) -- --(1) -- 2,100(5)
Jeffrey G. Gold.......................... 1997 123,059(6) 147,033 -- 190,000 106,234(7)
Executive Vice President and 1996 -- -- -- -- --
Chief Operating Officer 1995 -- -- -- -- --
Steve M. Van Dick........................ 1997 157,309 47,453 -- -- 568(8)
Vice President of Finance 1996 99,167(9) 42,908 -- 200,000 976(10)
and Administration and Chief 1995 -- -- -- -- --
Financial Officer
Charles S. Taylor........................ 1997 132,500 65,000 --(11) -- 407(12)
Vice President and Chief 1996 130,000 -- --(11) -- 1,100(13)
Technical Officer 1995 48,750(14) -- --(11) -- --
Michael J. Billig........................ 1997 141,658 40,294 -- -- 923(15)
Vice President of Regulatory, 1996 115,104(16) 46,089 -- 140,000 1,100(17)
Quality, and Clinical Research 1995 -- -- -- -- --
Thomas A. Afzal.......................... 1997 142,327(18) 46,458 -- -- 173,197(19)
Former Vice President of 1996 97,500(20) 30,001 -- 100,000 917(21)
Sales and Marketing 1995 -- -- -- -- --
</TABLE>
- ------------------------
(1) As of January 2, 1998, Mr. Ferrari held 945,041 shares of the Company's
Common Stock having a value of $5,433,986, based upon the closing price of
$5.75 per share on January 2, 1998. Pursuant to
14
<PAGE>
the terms of a Common Stock Purchase Agreement dated August 1, 1995, the
shares are subject to repurchase by the Company at $0.00097 per share in
the event of a termination of Mr. Ferrari's employment with the Company.
The shares are subject to the following vesting schedule: (1) One
twenty-fourth (1/24) of 206,120 of the shares were released from the
repurchase option on each of May 31, June 30, July 31 and August 31, 1995;
on September 8, 1995, an additional 103,060 shares were released from the
repurchase option; pursuant to the terms of an Amendment Agreement dated
September 8, 1995, one forty-eighth (1/48) of the remaining 68,707 shares
were and will continue to be released at the end of each month thereafter,
contingent upon Mr. Ferrari's continued employment with the Company; (2)
One forty-eighth (1/48) of 738,921 of the shares were released from the
repurchase option on August 31, 1995; pursuant to the terms of an Amendment
Agreement dated September 8, 1995, 1/48 of the remaining 723,527 shares
were and will continue to be released at the end of each month thereafter,
contingent upon Mr. Ferrari's continued employment with the Company. As of
January 2, 1998, a total of 614,944 shares had been released from the
Company's repurchase options. None of the shares will be subject to the
repurchase options after September 30, 1999.
(2) Consists of $51,300 in imputed interest on a non-interest-bearing loan from
the Company to Mr. Ferrari, twelve payments of a $700 monthly car allowance
and payment by the Company of life insurance premiums for the benefit of
Mr. Ferrari in the amount of $1,051.
(3) Consists of $19,396 in imputed interest on a non-interest-bearing loan from
the Company to Mr. Ferrari, twelve payments of a $700 monthly car allowance
and payment of life insurance premiums for the benefit of Mr. Ferrari in
the amount of $302.
(4) Mr. Ferrari joined the Company as Chief Executive Officer in June 1995 and
was elected President in August 1995. He received an annualized salary of
$175,000 in 1995.
(5) Consists of three payments of a $700 monthly car allowance.
(6) Mr. Gold joined the Company as Executive Vice President in May 1997 at an
annualized salary of $160,000. In July 1997, Mr. Gold was also appointed
Chief Operating Officer.
(7) Consists of a housing allowance in the amount of $24,000, relocation
payments in the amount of $80,842 plus payment by the Company of life
insurance premiums for the benefit of Mr. Gold in the amount of $1,392.
(8) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Van Dick.
(9) Mr. Van Dick accepted employment with the Company as Vice President of
Finance and Administration and Chief Financial Officer in March 1996; his
employment began in April 1996 at an annualized salary of $140,000.
(10) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Van Dick.
(11) As of January 2, 1998, Mr. Taylor held 948,152 shares of Common Stock
having a value of $5,451,874 based upon the closing price of $5.75 per
share on January 2, 1998. Pursuant to the terms of a Common Stock Purchase
Agreement dated August 1, 1995, the shares are subject to repurchase by the
Company at $0.00097 per share in the event of a termination of Mr. Taylor's
employment with the Company. One forty-eighth (1/48) of the shares were
released from the repurchase option as of the last day of each month from
November 1993 through August 1995. Pursuant to the terms of an Amendment
Agreement dated September 8, 1995, 1/48 of the 513,582 shares still subject
to the Company's repurchase option as of September 8, 1995 were and will
continue to be released from the repurchase option at the end of each month
thereafter, contingent upon Mr. Taylor's continued employment with the
Company. As of January 2, 1998, a total of 734,160 shares had been released
from the Company's repurchase option. None of the shares will be subject to
the repurchase option after September 30, 1999.
(12) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Taylor.
(13) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Taylor.
(14) Mr. Taylor has served as Vice President and Chief Technical Officer since
June 1995 and received an annualized salary of $130,000 in 1995.
15
<PAGE>
(15) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Billig.
(16) Mr. Billig joined the Company as Vice President, Regulatory, Quality, and
Clinical Research in February 1996 at an annualized salary of $130,000.
(17) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Billig.
(18) Mr. Afzal's employment with the Company terminated in August 1997. Under a
separation agreement between the Company and Mr. Afzal, Mr. Afzal's salary
was continued through January 1998.
(19) Consists of $172,851 in forgiveness of indebtedness under a loan from the
Company to Mr. Afzal plus payment by the Company of life insurance premiums
for the benefit of Mr. Afzal in the amount of $346.
(20) Mr. Afzal served as Vice President of Sales from March 1996 and became Vice
President of Sales and Marketing in July 1996, at an annualized salary of
$136,000.
(21) Consists of payment by the Company of life insurance premiums for the
benefit of Mr. Afzal.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning stock options
granted during the fiscal year ended January 2, 1998 to the Named Executive
Officers. In accordance with the rules of the Securities and Exchange
Commission, the following table also sets forth the potential realizable value
over the term of the options (the period from the grant date to the expiration
date) based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts do not represent the Company's estimate of future stock
prices. Actual realizable values, if any, of stock options will depend on the
future performance of the Common Stock.
OPTION GRANTS IN FISCAL YEAR ENDED JANUARY 2, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OR OPTION TERM(3)
OPTIONS GRANTED IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL 1997(1) ($/SH)(2) DATE 5%($) 10%($)
- -------------------------------------------- ----------- ----------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Ferrari.......................... -- -- -- -- -- --
Jeffrey G. Gold............................. 50,000 3.1% $ 15.000 3/25/07 $ 471,671 $ 1,195,307
Jeffrey G. Gold............................. 42,500 2.6 21.125 3/25/07 564,629 1,430,882
Jeffrey G. Gold............................. 27,500 1.7 21.125 3/25/07 365,348 925,865
Jeffrey G. Gold............................. 35,000 2.1 14.875 5/27/07 327,418 829,742
Jeffrey G. Gold............................. 35,000 2.1 7.688 9/04/07 169,212 428,816
Steve M. Van Dick........................... -- -- -- -- -- --
Charles S. Taylor........................... -- -- -- -- -- --
Michael J. Billig........................... -- -- -- -- -- --
Thomas A. Afzal............................. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Based on an aggregate of 1,634,450 options granted by the Company in the
fiscal year ended January 2, 1998 to employees of and consultants to the
Company, including the Named Executive Officers.
(2) The exercise price per share of each option was equal to the last reported
sale price of the Common Stock on the date of grant. On January 6, 1998,
pursuant to an option exchange program approved by the Compensation
Committee of the Company's Board of Directors, each of the options listed in
the table was exchanged for an equivalent option with an exercise price of
$5.50 per share, which was the last reported sale price of the Common Stock
on January 6, 1998.
(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
16
<PAGE>
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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth, for each of the Named Executive Officers,
information with respect to each exercise of stock options during the fiscal
year ended January 2, 1998 and the value of unexercised stock options held by
such individuals at January 2, 1998.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED JANUARY 2, 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES JANUARY 2, 1998 JANUARY 2, 1998(2)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Ferrari....................... -- -- -- -- -- --
Jeffrey G. Gold.......................... -- -- -- 190,000 -- --
Steve Van Dick........................... 50,000 $ 681,250 75,000 75,000 $ 56,250 $ 56,250
Charles S. Taylor........................ -- -- -- -- -- --
Michael J. Billig........................ 40,833 644,141 26,250 72,917 148,313 411,981
Thomas A. Afzal.......................... 39,583 89,062 8,334 -- 6,251 --
</TABLE>
- ------------------------
(1) Based on the last reported sale price of the Common Stock on the date of
exercise.
(2) Based on a value of $5.75 per share, which was the last reported sale price
of the Common Stock on January 2, 1998.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL AGREEMENTS
Under the terms of a letter dated September 5, 1995, setting forth the terms
of Charles S. Taylor's employment with the Company, the Company has agreed to
provide Mr. Taylor with a base salary continuation, subject to certain
conditions, for three months following a termination of Mr. Taylor's employment
without cause or a mutual agreement for separation from the Company. The
agreement does not provide for any specified term of employment.
Under the terms of an Employment Agreement dated April 19, 1996 between the
Company and Steve M. Van Dick, in the event of a change in control of the
Company, all of Mr. Van Dick's then unvested stock options would become fully
vested and if Mr. Van Dick's employment were terminated voluntarily or
involuntarily, other than for cause, within twelve months following such change
in control of the Company, he would be entitled to receive twelve months
severance pay. The agreement does not provide for any specified term of
employment. The Company has provided Mr. Van Dick with a loan for the purchase
of a home having a principal amount of $200,000 with simple interest payable at
the rate of 6.31% per annum and a term of five years.
Under the terms of a letter dated February 25, 1997, setting forth the terms
of Jeffrey G. Gold's employment with the Company, in the event of a change in
control of the Company, certain of Mr. Gold's then unvested stock options would
become fully vested.
Under the terms of a separation agreement dated August 11, 1997, between the
Company and Thomas A. Afzal, the Company agreed to continue Mr. Afzal's salary,
stock option vesting and loan forgiveness through January 1998, after which time
the remaining balance of a loan from the Company to Mr. Afzal is to be repaid
with interest by Mr. Afzal in monthly installments through April 29, 2000.
17
<PAGE>
OPTION REPRICING
On January 6, 1998, pursuant to an option exchange program approved by the
Compensation Committee of the Company's Board of Directors, each of the options
listed in the table entitled "Option Grants in Fiscal Year Ended January 2,
1998" was exchanged for an equivalent option with an exercise price of $5.50 per
share, which was the last reported sale price of the Common Stock on January 6,
1998.
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
THE FOLLOWING IS PROVIDED TO STOCKHOLDERS BY THE MEMBERS OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS:
The Compensation Committee of the Board of Directors (the "Committee"),
consisting of three outside directors, is responsible for the administration of
the Company's compensation programs. These programs include base salary for
executive officers and both annual and long-term incentive compensation
programs. The Company's compensation programs are designed to provide a
competitive level of total compensation and include incentive and equity
ownership opportunities linked to the Company's performance and stockholder
return.
COMPENSATION PHILOSOPHY
The design and implementation of the Company's executive compensation
programs are based on a series of guiding principles derived from the Company's
values, business strategy and management requirements. These principles may be
summarized as follows:
- Align the financial interests of the management team with the Company and
its stockholders;
- Attract, motivate and retain high-caliber individuals necessary to
increase total return to stockholders;
- Provide a total compensation program where a significant portion of pay is
linked to individual achievement and short- and long-term Company
performance; and
- Emphasize reward for performance at the individual, team and Company
levels.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
The Committee has considered the potential impact of Section 162(m) of the
Internal Revenue Code adopted under the Federal Revenue Reconciliation Act of
1993. Section 162(m) may limit the company's ability to deduct for United States
federal income tax purposes compensation in excess of $1 million paid to the
Company's Chief Executive Officer and its four other highest paid executive
officers in any one fiscal year. No executive officer of the Company received
any such compensation in excess of this limit during the fiscal year ended
January 2, 1998. Grants under the Incentive Stock Plan will not be subject to
the deduction limitation if the stockholders approve the Incentive Stock Plan,
including the option grant limitations described below.
Section 162(m) of the Code places limits on the deductibility for United
States federal income tax purposes of compensation paid to certain executive
officers of the Company. In order to preserve the Company's ability to deduct
the compensation income associated with options and stock purchase rights
granted to such persons, the Option Plan provides that no employee may be
granted, in any fiscal year of the Company, options and stock purchase rights to
purchase more than 500,000 shares of Common Stock.
Since the targeted cash compensation of each of the named executive officers
is well below the $1 million threshold and the Committee believes that any
options granted under the Company's stock option plan will meet the requirement
of being performance based under the transition provisions
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<PAGE>
provided in the regulations under Section 162(m), the Committee believes that
Section 162(m) will not reduce the tax deduction available to the Company. The
Company's policy is to qualify to the extent reasonable its executive officers'
compensation for deductibility under applicable tax laws.
COMPENSATION PROGRAM
In 1996, the Company retained iQuantic, Inc., a compensation consulting
firm, to research and prepare a report regarding the Company's chief executive
officer's compensation package, other officers' compensation and the employee
bonus program. In August 1996, iQuantic submitted to the Compensation Committee
a report regarding the Company's cash and equity bonus structure and officer
compensation issues. In its December 1997 meeting, the Compensation Committee
considered the 1996 iQuantic report and additional executive compensation
information relating to the medical device industry, as well as the rate of
inflation, and made certain adjustments to the chief executive officer's
compensation package, the other officers' compensation, and the employee bonus
program.
The Company's executive compensation program has three major components, all
of which are intended to attract, retain and motivate executive officers
consistent with the principles set forth above. The Committee considers these
components of compensation individually as well as collectively in determining
total compensation for executive officers.
1. BASE SALARY. Each fiscal year the Committee establishes base salaries
for individual executive officers based upon (i) industry and peer group
surveys, (ii) responsibilities, scope and complexity of each position and (iii)
performance judgments as to each individual's past and expected future
contributions. The Committee reviews with the Chief Executive Officer and
approves, with appropriate modifications, an annual base salary plan for the
Company's executive officers other than the Chief Executive Officer. The
Committee reviews and fixes the base salary of the Chief Executive Officer based
on similar competitive compensation data and the Committee's assessment of his
past performance and its expectations as to his future contributions in leading
the Company.
2. ANNUAL CASH (SHORT-TERM) INCENTIVES. Annual cash incentives are
established to provide a direct linkage between individual pay and annual
corporate performance. Target annual bonus awards are established for executive
officer positions based upon industry and peer group surveys and range from 35%
to 40% of base salary, with 40% for the chief executive officer position. Each
officer who served in an executive capacity during the Last Fiscal Year,
including the Chief Executive Officer, received a cash bonus for such service
ranging in amount from 0% to approximately 49% of base salary. In establishing
bonus amounts, the Committee generally considers the performance of each officer
in his or her respective area of accountability, each officer's respective
contribution to the success of the Company, the Company's overall performance,
and competitive data for similar positions. In establishing bonus awards for the
Last Fiscal Year, the Committee also considered the Company's successful product
development programs and training programs during the year, as well as financial
performance for the Last Fiscal Year. The Compensation Committee establishes
corporate and individual objectives for each officer at the beginning of each of
the Company's fiscal quarters. The Compensation Committee makes a quarterly
determination of the bonus for each officer. The determination is based on set
proportions of the corporate and individual objectives, and each officer is
rated separately on the attainment of those objectives. Each officer may receive
a portion or the full amount of his targeted annual performance based bonus. The
bonus award to the Chief Executive Officer for the Last Fiscal Year was
approximately 33% of his base salary.
3. EQUITY BASED INCENTIVE COMPENSATION. Long-term incentives for the
Company's employees are provided under the Company's stock option plans. Each
fiscal year, the Committee considers the desirability of granting to executive
officers long-term incentives in the form of stock options. These option grants
are intended to motivate the executive officers to manage the business to
improve long-term Company performance and align the financial interests of the
management team with the Company and its
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<PAGE>
stockholders. The Committee established the grants of stock options to executive
officers (other than the Chief Executive Officer) in the Last Fiscal Year, based
upon a review of proposed individual awards, taking into account each officer's
scope of responsibility and specific assignments, strategic and operational
goals applicable to the officer, anticipated performance requirements and
contributions of the officer and competitive data for similar positions. During
the Last Fiscal Year, option awards were granted to the following officers in
the following amounts: (1) 190,000 shares of Common Stock to the Executive Vice
President and Chief Operating Officer, (2) 110,000 shares of Common Stock to the
Vice President, Business Development and (3) 90,000 shares of Common Stock to
the Vice President, Sales and Marketing.
Respectfully submitted,
Robert C. Bellas
Thomas C. McConnell
Philip M. Young
THE FOREGOING COMPENSATION COMMITTEE REPORT SHALL NOT BE DEEMED TO BE
"SOLICITING MATERIAL" OR TO BE "FILED" WITH THE SEC, NOR SHALL SUCH INFORMATION
BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE EXCHANGE ACT, EXCEPT TO THE
EXTENT THE COMPANY SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
20
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders of
the Company's Common Stock at December 31, 1997 since April 18, 1996 (the date
the Company first became subject to the reporting requirements of the Exchange
Act) to the cumulative total return over such period of (i) "Nasdaq Stock Market
(U.S.)" index, and (ii) the Hambrecht & Quist "Healthcare Excluding
Biotechnology" index. The graph assumes the investment of $100 in the Company's
Common Stock and each of such indices (from April 18, 1996) and reflects the
change in the market price of the Company's Common Stock relative to the noted
indices at December 31, 1997 (and not for any interim period). The performance
shown is not necessarily indicative of future price performance.
COMPARISON OF 20 MONTH CUMULATIVE TOTAL RETURN*
AMONG CARDIOTHORACIC SYSTEMS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST HEALTHCARE EXCLUDING BIOTECHNOLOGY INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HAMBRECHT & QUIST HEALTHCARE
CARDIOTHORACIC SYSTEMS, INC. NASDAQ STOCK MARKET (U.S.) EXCLUDING BIOTECHNOLOGY
<S> <C> <C> <C>
4/18/96 $100 $100 $100
12/96 82 114 108
12/97 24 140 129
</TABLE>
* $100 INVESTED ON 4/18/96 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
THE INFORMATION CONTAINED IN THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED
TO BE "SOLICITING MATERIAL" OR TO BE FILED WITH THE SEC, NOR SHALL SUCH
INFORMATION BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE
SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY
SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
21
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended January 2, 1998, certain of the Company's
executive officers were indebted to the Company pursuant to loans made by the
Company to such executive officers.
On December 3, 1996, the Company loaned to Steve M. Van Dick, an officer of
the Company, the principal amount of $200,000 for the purchase of a home, with
interest to accrue at a rate of 6.31% per annum, due and payable on the earlier
of December 31, 2000 or the termination of Mr. Van Dick's employment with the
Company. As of March 23, 1998, a total of $217,110 was outstanding on the loan
to Mr. Van Dick.
On August 16, 1996, the Company loaned to Richard M. Ferrari, the Chief
Executive Officer of the Company, the principal amount of $750,000 for the
purpose of estate planning, secured by 75,000 shares of the Company's Common
Stock. The note does not bear interest and is due and payable on the earlier of
August 16, 2000 or the termination of Mr. Ferrari's employment with the Company.
As of March 23, 1998, a total of $750,000 was outstanding on the loan to Mr.
Ferrari.
On April 29, 1996, the Company loaned to Thomas A. Afzal, who was then an
officer of the Company, the principal amount of $300,000 for the purchase of a
home, with interest to accrue at a rate of 5.88% per annum. On June 5, 1996, the
Company loaned an additional $55,000 to Mr. Afzal for the same purpose and at
the same interest rate. One-fourth of the $300,000 principal amount was due and
payable, with interest, on April 29, 1997, with the balance payable in monthly
installments, with interest, through April 29, 2000. The $55,000 loan was due
and payable, with interest, in two equal installments on January 5, 1997 and
January 5, 1998. Under the terms of the loans, the amount to be repaid on each
payment date would be forgiven, so long as Mr. Afzal was still associated with
the Company on such payment date. Mr. Afzal's employment with the Company
terminated in August 1997. Under a separation agreement between Mr. Afzal and
the Company, Mr. Afzal's salary, stock option vesting and loan forgiveness were
continued through January 1998. Accordingly, in 1997 and 1998, pursuant to the
loan forgiveness schedules, as extended by the separation agreement, a total of
$161,564 in principal and accrued interest on the $300,000 loan was forgiven,
and the entire $55,000 loan, together with $3,504 in accrued interest, was
forgiven. Under the separation agreement, the remaining balance of the $300,000
loan is to be repaid with interest by Mr. Afzal, in monthly installments of
$6,535 each from February 28, 1998, through April 29, 2000. As of March 23,
1998, a total of $165,000 was outstanding on the loan to Mr. Afzal.
All transactions, including any loans from the Company to its officers,
directors, principal stockholders or affiliates, have been or will be approved
by a majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
OTHER MATTERS
The Company knows of no other matters to be submitted at the Annual Meeting.
If any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the accompanying form of proxy to vote the
shares they represent as the Board of Directors may recommend.
THE COMPANY WILL MAIL WITHOUT CHARGE TO ANY STOCKHOLDER UPON WRITTEN REQUEST
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULES AND A LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO
INVESTOR RELATIONS, CARDIOTHORACIC SYSTEMS, INC., 10600 N. TANTAU AVE.,
CUPERTINO, CALIFORNIA 95014.
THE BOARD OF DIRECTORS
Dated: April 9, 1998
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APPENDIX
CARDIOTHORACIC SYSTEMS, INC.
INCENTIVE STOCK PLAN
(AMENDED AND RESTATED EFFECTIVE AUGUST 12, 1996)
(AND AS AMENDED JANUARY 28, 1997)
(AND AS AMENDED JANUARY 22, 1998)
1. PURPOSES OF THE PLAN. The purposes of this Stock 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.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Options or Stock Purchase Rights
are, or will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means CardioThoracic Systems, Inc., a Delaware
corporation.
<PAGE>
(h) "CONSULTANT" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed
by statute or contract. If reemployment upon expiration of a leave of
absence approved by the Company is not so guaranteed, on the 181st day of
such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as
a Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment"
by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the date of determination, as reported in THE WALL STREET JOURNAL or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the date of determination, as reported
in THE WALL STREET JOURNAL or such other source as the Administrator deems
reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
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(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "NOTICE OF GRANT" means a written or electronic notice
evidencing certain terms and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option Agreement.
(q) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(t) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(u) "OPTIONED STOCK" means the Common Stock subject to an Option or
Stock Purchase Right.
(v) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "PLAN" means this Incentive Stock Plan.
(y) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 below.
(z) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted
Stock Purchase Agreement is subject to the terms and conditions of the Plan
and the Notice of Grant.
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(aa) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "SECTION 16(b)" means Section 16(b) of the Exchange Act.
(cc) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(dd) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "STOCK PURCHASE RIGHT" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 2,800,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an
Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the
Plan has terminated); PROVIDED, however, that Shares that have actually been
issued under the Plan, whether upon exercise of an Option or Right, shall not
be returned to the Plan and shall not become available for future
distribution under the Plan, except that if Shares of Restricted Stock are
repurchased by the Company at their original purchase price, such Shares
shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different groups of
Service Providers.
(ii) SECTION 162(m). 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
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
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(iii) RULE 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(vii) OTHER ADMINISTRATION. Other than as provided above, the
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws. The Board or Committee may
authorize the Chief Executive Officer of the Company to grant Options to newly-
hired Employees OTHER THAN OFFICERS AND DIRECTORS to purchase up to 15,000
Shares (subject to adjustment as provided in Section 13) per Optionee (less the
number of Shares covered by any Options previously granted to such Optionee
during the preceding 12 months) and to fix the terms of such Options within the
limitations imposed by this Plan, the form of option agreement approved by the
Board or Committee, and by the authorizing resolutions.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may
be exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value
of the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
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(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority
to extend the post-termination exercisability period of Options longer than
is otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of
Shares having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by an Optionee to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on
all Optionees and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights
may be granted to Service Providers. Incentive Stock Options may be granted
only to Employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be
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taken into account in the order in which they were granted. The Fair Market
Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 500,000
Shares which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of
the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the
Option Agreement. In the case of an Incentive Stock Option, the term shall
be ten (10) years from the date of grant or such shorter term as may be
provided in the Option Agreement. Moreover, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant or such shorter term as may be provided in the Option
Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
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(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value
per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied
before the Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
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(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be tolled during any
unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by
the Administrator and permitted by the Option Agreement and the Plan. Shares
issued upon exercise of an Option shall be issued in the name of the Optionee
or, if requested by the Optionee, in the name of the Optionee and his or her
spouse. Until the Shares are issued (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such Shares promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's
death or Disability, the Optionee may exercise his or her Option within such
period of time as is specified in the Option Agreement to the extent that the
Option is vested on the date of termination (but in no event later than the
expiration of the term
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<PAGE>
of such Option as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date
of termination, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise
his or her Option within such period of time as is specified in the Option
Agreement to the extent the Option is vested on the date of termination (but
in no event later than the expiration of the term of such Option as set forth
in the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by
the unvested portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later than the expiration
of the term of such Option as set forth in the Notice of Grant), by the
Optionee's estate or by a person who acquires the right to exercise the
Option by bequest or inheritance, but only to the extent that the Option is
vested on the date of death. In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, at the time of death, the Optionee
is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall immediately revert to the Plan. The
Option may be exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the Option under
the Optionee's will or the laws of descent or distribution. If the Option is
not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, by means of a Notice of
Grant, of the terms,
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conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid,
and the time within which the offeree must accept such offer. The offer
shall be accepted by execution of a Restricted Stock Purchase Agreement in
the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase 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 a rate
determined by the Administrator.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 13 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right
may not be sold, pledged, assigned, hypothecated, transferred, or disposed of
in any manner other than by will or by the laws of descent or distribution
and may be exercised, during the lifetime of the Optionee, only by the
Optionee. If the Administrator makes an Option or Stock Purchase Right
transferable, such Option or Stock Purchase Right shall contain such
additional terms and conditions as the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Purchase Right, and the number of shares
of Common Stock which have been authorized for issuance under the Plan but as
to which no Options or Stock Purchase Rights have yet been granted or which
have been returned to the Plan upon cancellation or expiration of an Option
or Stock Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in
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the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until ten (10) days
prior to such transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option would not otherwise be exercisable.
In addition, the Administrator may provide that any Company repurchase option
applicable to any Shares purchased upon exercise of an Option or Stock
Purchase Right shall lapse as to all such Shares, provided the proposed
dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option
or Stock Purchase Right will terminate immediately prior to the consummation
of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding Option and Stock Purchase Right shall
be assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested
or exercisable. If an Option or Stock Purchase Right becomes fully vested
and exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be
fully vested and exercisable for a period of fifteen (15) days from the date
of such notice, and the Option or Stock Purchase Right shall terminate upon
the expiration of such period. For the purposes of this paragraph, the
Option or Stock Purchase Right shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase
or receive, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received
in the merger or sale of assets by holders of Common Stock for each Share
held on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the
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consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation
or its Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes
the determination granting such Option or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the
determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) STOCKHOLDER APPROVAL. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder with
respect to options granted under the Plan prior to the date of such
termination.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and warrant at
the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
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liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
19. STOCKHOLDER APPROVAL. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan
is adopted. Such stockholder approval shall be obtained in the manner and to
the degree required under Applicable Laws.
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CARDIOTHORACIC SYSTEMS, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 19, 1998
The undersigned shareholder of CARDIOTHORACIC SYSTEMS, INC., a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, each dated April 9, 1998 and hereby appoints
Richard M. Ferrari and Steve M. Van Dick and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 1998 Annual Meeting
of Stockholders of CARDIOTHORACIC SYSTEMS, INC. to be held on May 19, 1998 at
9:00 a.m. local time, at the Company's principal executive offices at 10600 N.
Tantau Ave., Cupertino, California and at any adjournment or adjournments
thereof, and to vote all shares of Common Stock which the undersigned would be
entitled to vote if then and there personally present, on the matters set forth
below:
<TABLE>
<S> <C> <C>
1. ELECTION OF CLASS I DIRECTORS:
/ / FOR all nominees listed below (except as indicated) / / WITHHOLD
IF YOU WISH TO WITHHOLD AUTHORITY FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THAT NOMINEE'S NAME
IN THE LIST BELOW:
Thomas J. Fogarty, M.D. Charles S. Taylor
2. AMENDMENT OF INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR GRANT THEREUNDER:
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST STOCKHOLDER PROPOSAL 3.
3. STOCKHOLDER PROPOSAL TO AMEND THE COMPANY'S BYLAWS TO PROHIBIT THE REPRICING OF STOCK OPTIONS WITHOUT
STOCKHOLDER APPROVAL:
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4. PROPOSAL TO RATIFY THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS THE INDEPENDENT AUDITORS OF THE
COMPANY FOR THE FISCAL PERIOD ENDING JANUARY 1, 1999:
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
and, in their discretion, upon such other matter or matters which may properly
come before the meeting or any adjournment or adjournments thereof.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF CLASS I DIRECTORS, FOR THE
AMENDMENT OF THE INCENTIVE STOCK PLAN, AGAINST THE STOCKHOLDER PROPOSAL TO AMEND
THE BYLAWS, FOR THE RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P.
AS INDEPENDENT AUDITORS, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
Dated: _____________________ , 1998
___________________________________
Signature
___________________________________
Signature
(This Proxy should be marked, dated
and signed by the shareholder(s)
exactly as his or her name appears
hereon, and returned promptly in
the enclosed envelope. Persons
signing in a fiduciary capacity
should so indicate. If shares are
held by joint tenants or as
community property, both should
sign.)
