<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
HEARTPORT, 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:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(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:
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(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>
[LOGO]
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 7, 1999
------------------------
To Our Stockholders:
You are cordially invited to attend the Annual Meeting of Stockholders of
HEARTPORT, INC. (the "Company") which will be held at the Company's
headquarters, 700 Bay Road, Redwood City, California at 2:00 p.m. on May 7,
1999, for the following purposes:
1. To elect three directors to serve for the ensuing three year term or
until their successors are elected and qualified;
2. To approve an amendment to the Company's Employee Stock Purchase Plan
(the "Purchase Plan") increasing the number of shares authorized for
purchase under the Purchase Plan as described in the accompanying proxy
statement;
3. To ratify the selection of Ernst & Young LLP as independent auditors for
the Company for the fiscal year ending December 31, 1999; and
4. To act upon such other business as may properly come before the meeting
or at any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on March 19, 1999, as
the record date for determining those stockholders who will be entitled to vote
at the meeting. The stock transfer books will not be closed between the record
date and the date of the meeting.
Representation of at least a majority of all outstanding shares of Common
Stock of Heartport, Inc. is required to constitute a quorum. Accordingly, it is
important that your shares be represented at the meeting. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. You may revoke your proxy at any
time prior to the time it is voted. If you attend the Annual Meeting and vote by
ballot, your proxy will be revoked automatically and only your vote at the
Annual Meeting will be counted.
Sincerely,
[SIGNATURE]
Frank M. Fischer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Redwood City, California
April 2, 1999
<PAGE>
STOCKHOLDERS SHOULD READ THE ENTIRE PROXY STATEMENT
CAREFULLY PRIOR TO RETURNING THEIR PROXIES
------------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS OF
HEARTPORT, INC.
TO BE HELD MAY 7, 1999
------------------------
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of HEARTPORT, INC. ("Heartport" or the "Company") of proxies
to be voted at the Annual Meeting of Stockholders which will be held at 2:00
p.m. on May 7, 1999, at the Company's headquarters, 700 Bay Road, Redwood City,
California, or at any adjournments or postponements thereof, for the purposes
set forth in the accompanying Notice of Annual Meeting of Stockholders. This
Proxy Statement and the proxy card were first mailed to stockholders on or about
April 2, 1999.
VOTING RIGHTS AND SOLICITATION
The close of business on March 19, 1999, was the record date for
stockholders entitled to notice of and to vote at the Annual Meeting. As of that
date, Heartport had 25,333,622 shares of common stock, $.001 par value per share
(the "Common Stock"), issued and outstanding, exclusive of treasury stock. All
of the shares of Common Stock outstanding on the record date are entitled to
vote at the Annual Meeting, and stockholders of record entitled to vote at the
meeting will have one (1) vote for each share so held on the matters to be voted
upon.
Shares of Common Stock represented by proxies in the accompanying form that
are properly executed and returned to Heartport will be voted at the Annual
Meeting of Stockholders in accordance with the stockholders' instructions
contained therein. In the absence of contrary instructions, shares represented
by such proxies will be voted FOR the election of each of the directors as
described herein under "Proposal 1--Election of Directors", FOR approval of the
amendment to the Employee Stock Purchase Plan as described herein under
"Proposal 2--Approval of Amendment to Employee Stock Purchase Plan" and FOR
ratification of the selection of accountants as described herein under "Proposal
3--Ratification of Selection of Independent Auditors." Management does not know
of any matters to be presented at this Annual Meeting other than those set forth
in this Proxy Statement and in the Notice accompanying this Proxy Statement. If
other matters should properly come before the meeting, the proxy holders will
vote on such matters in accordance with their best judgment. Any stockholder has
the right to revoke his or her proxy at any time before it is voted.
The entire cost of soliciting proxies will be borne by Heartport. Proxies
will be solicited principally through the use of the mails, but, if deemed
desirable, may be solicited personally or by telephone, telegraph or special
letter by officers and regular Heartport employees for no additional
compensation. Arrangements may be made with brokerage houses and other
custodians, nominees and fiduciaries to send proxies and proxy material to the
beneficial owners of Common Stock, and such persons may be reimbursed for their
expenses.
1
<PAGE>
VOTES REQUIRED
PROPOSAL 1. Directors are elected by a plurality of the affirmative votes
cast by those shares present in person, or represented by proxy, and entitled to
vote at the Annual Meeting. The three nominees for director receiving the
highest number of affirmative votes will be elected. Abstentions and broker
non-votes will not be counted toward a nominee's total. Stockholders may not
cumulate votes in the election of directors.
PROPOSAL 2. Approval of the amendment to the Company's Employee Stock
Purchase Plan requires the affirmative vote of a majority of those shares
present in person or represented by proxy, and entitled to vote at the Annual
Meeting. Abstentions will be treated as votes against the proposal. Broker
non-votes will be treated as not entitled to vote on this matter and thus will
have no effect on the outcome of the vote.
PROPOSAL 3. Ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December 31, 1999,
requires the affirmative vote of a majority of those shares present in person,
or represented by proxy, and cast either affirmatively or negatively at the
Annual Meeting. Abstentions and broker non-votes will not be counted as having
been voted on the proposal.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be considered at the 2000 Annual Meeting
of Stockholders must be received by Heartport no later than December 6, 1999 and
not prior to November 4, 1999 in order to be included. The proposal must be
mailed to the Company's principal executive offices, 700 Bay Road, Redwood City,
California 94063, Attention: Corporate Secretary. Such proposals may be included
in next year's proxy statement if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission ("SEC") and certain
provisions contained in the Company's Bylaws.
MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL 1
ELECTION OF DIRECTORS
The Company currently has authorized seven directors. In accordance with the
terms of the Company's Certificate of Incorporation, the Board of Directors is
divided into three classes: Class I, whose term will expire at the 2000 Annual
Meeting; Class II, whose term will expire at the 2001 Annual Meeting; and Class
III, whose term will expire at the 1999 Annual Meeting. At the 1999 Annual
Meeting, three directors will be elected to serve until the Annual Meeting to be
held in 2002 or until their respective successors are elected and qualified. The
Board of Directors has selected three nominees as the nominees for Class III.
The nominees for the Board of Directors are all currently directors of the
Company and are set forth below. The proxy holders intend to vote all proxies
received by them in the accompanying form for the nominees for director listed
below. In the event any nominee is unable or declines to serve as a director at
the time of the Annual Meeting, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. In
the event that additional persons are nominated for election as directors, the
proxy holders intend to vote all proxies received by them for the nominees
listed below. As of the date of this Proxy Statement, the Board of Directors is
not aware of any nominee who is unable or will decline to serve as a director.
2
<PAGE>
NOMINEES FOR TERM ENDING IN 2002
Set forth below is information regarding the nominees, including their ages,
the period during which they have served as directors, and information furnished
by them as to principal occupations and directorships held by them in
corporations whose shares are publicly registered.
<TABLE>
<CAPTION>
DIRECTOR
NAME SINCE AGE
- ------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Robert V. Gunderson, Jr....................................................... 1995 47
Wesley D. Sterman, M.D........................................................ 1991 38
Steven C. Wheelwright, Ph.D................................................... 1995 55
</TABLE>
ROBERT V. GUNDERSON, JR. has been a director of the Company since May, 1995.
Mr. Gunderson has been a partner of the law firm of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, since its formation in September, 1995.
From May, 1988, until September, 1995, Mr. Gunderson was a partner of the law
firm of Brobeck, Phleger & Harrison, LLP. Mr. Gunderson holds an M.A. from
Stanford University, an M.B.A. in finance from the Wharton School, University of
Pennsylvania, and a J.D. from the University of Chicago.
WESLEY D. STERMAN, M.D. founded the Company with Dr. John H. Stevens in May,
1991, and has served as director since that time. Dr. Sterman has been Chairman
of the Board of Directors of the Company since May, 1998. He served as the
Company's President and Chief Executive Officer from May, 1991 to May, 1998.
Prior to founding the Company, Dr. Sterman was founder, President and Chief
Executive Officer of EndoVascular Technologies, Inc., a medical device
manufacturer, from July, 1989 to September, 1991. Dr. Sterman has B.S. degrees
both in Biology and in Chemistry from Stanford University. Dr. Sterman received
an M.D. from the Stanford University School of Medicine and an M.B.A. from the
Graduate School of Business at Stanford University, where he was an Arjay Miller
Scholar.
STEVEN C. WHEELWRIGHT, PH.D. has been a director of the Company since
January, 1995. Dr. Wheelwright currently serves as a senior associate dean at
the Graduate School of Business, Harvard University, where he has been a
professor since July, 1988. Dr. Wheelwright also served as a professor at the
Graduate School of Business, Harvard University, from August, 1985 to August,
1986. From August, 1986 to August, 1988, Dr. Wheelwright served as a professor
at the Graduate School of Business at Stanford University. Dr. Wheelwright is
also a member of the Board of Directors of Quantum Corporation, a mass storage
device company, T.J. International Corporation, an engineered wood products
company, and Franklin Covey, an organizational tools company.
CONTINUING DIRECTORS
Set forth below is information regarding the continuing directors of the
Company, including their ages, the period in which they have served as
directors, and information furnished by them as to principal occupations and
directorships held by them in corporations whose shares are publicly registered.
<TABLE>
<CAPTION>
DIRECTOR
NAME SINCE AGE
- ------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Frank M. Fischer.............................................................. 1998* 57
Joseph S. Lacob............................................................... 1992 43
Petri T. Vainio, M.D., Ph.D................................................... 1992 38
John H. Stevens, M.D.......................................................... 1991 38
</TABLE>
- ------------------------
* Mr. Fischer was previously a director of the Company from October, 1992
until May, 1997.
3
<PAGE>
FRANK M. FISCHER has been President and Chief Executive Officer and a
director of the Company since May, 1998. Mr. Fischer was also a director of the
Company from October, 1992 until May, 1997. Mr. Fischer was a director and the
President and Chief Executive Officer of Ventritex, Inc., a manufacturer of
implantable cardiac defibrillators from 1987 until 1997. From May, 1977 until
joining Ventritex, Mr. Fischer held various positions with Cordis Corporation, a
manufacturer of medical products, serving most recently as President of the
Implantable Products Division. Mr. Fischer holds an M.S. in Management from
Rensselaer Polytechnic Institute.
JOSEPH S. LACOB has been a director of the Company since April, 1992. Mr.
Lacob is a general partner of Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), a venture capital firm he joined in 1987. Prior to joining Kleiner
Perkins, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Mr. Lacob serves as Chairman of the Board of Directors of CellPro,
Inc., and is a director of Cardima, Inc., Corixa Corporation, Microcide
Pharmaceuticals, Inc., Pharmacyclics, Inc. and five privately held companies.
Mr. Lacob holds a B.S. in Biochemistry from the University of California at
Irvine, a Masters in Public Health from the University of California at Los
Angeles, and an M.B.A. from the Graduate School of Business at Stanford
University.
PETRI T. VAINIO, M.D., PH.D. has been a director of the Company since April,
1992. Dr. Vainio is a general partner of Sierra Ventures, a venture capital firm
he joined in 1988. He currently serves on the Board of Directors of Symphonix
Devices, Inc., a medical device company, and six privately held companies. Dr.
Vainio holds M.D. and Ph.D. degrees from the University of Helsinki, Finland,
and an M.B.A. from the Graduate School of Business at Stanford University.
JOHN H. STEVENS, M.D. founded the Company with Dr. Sterman in May, 1991, and
has been a director of the Company since that time. Dr. Stevens was Chief
Technology Officer of Heartport from July, 1997 until December 31, 1998. He has
also been Consulting Assistant Professor of Cardiothoracic Surgery at Stanford
University School of Medicine since July, 1997. From August, 1996 until he
joined the Company, Dr. Stevens was Assistant Professor of Cardiothoracic
Surgery at Stanford and prior to that he served as Chief Resident of the
Department of Cardiothoracic Surgery at Stanford and as Senior Registrar in
Cardiothoracic Surgery at the Great Ormond Street Hospital for Sick Children in
London, England from July, 1995 to March, 1996. Dr. Stevens earned B.U.S. and
B.S. degrees in Communications and Psychology from the University of Utah and an
M.D. from Stanford University.
BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1998, the Board of Directors of
the Company held a total of eleven (11) meetings. During this period, each
director attended or participated in at least 75% of the aggregate of (i) the
total number of meetings of the Board and (ii) the total number of meetings held
by all committees of the Board on which he was a member.
The Board of Directors has an Audit Committee and a Compensation Committee.
There is no nominating committee or committee performing the functions of such
committee. The Audit Committee meets with the Company's financial management and
its independent accountants at various times during each year and reviews
internal control conditions, audit plans and results, and financial reporting
procedures. This Committee, consisting of Messrs. Gunderson and Lacob and Dr.
Wheelwright, held three (3) meetings during fiscal 1998. The Compensation
Committee reviews and approves the Company's compensation arrangements for
management. This Committee, consisting of Drs. Vainio and Wheelwright, held four
(4) meetings during fiscal 1998.
4
<PAGE>
DIRECTOR COMPENSATION
The Company's directors receive no cash compensation for any meetings that
they attend. However, each of the Company's directors, in exchange for his
services as a director, was granted stock options to purchase shares of Common
Stock. The Company's directors were granted the following options to purchase
shares of Common Stock in April, 1995, at an exercise price of $0.375 per share:
Dr. Wesley D. Sterman and Dr. John H. Stevens were granted options to purchase
640,000 shares and 192,000 shares, respectively; each of the options are
immediately exercisable and the shares vest monthly over a five year period
beginning from the fifth anniversary of the date of hire or the date the
individual became a director, as applicable. Each of the Company's outside
directors was granted options to purchase 80,000 shares on April 1, 1995 at an
exercise price of $0.375 per share. Each director except Joseph S. Lacob has
exercised in full his respective option grant. All of the foregoing options
granted to the directors are immediately exercisable and the director vests in
the shares monthly over a five year period. In addition, the Company's 1996
Stock Option Plan provides for automatic grants to non-employee directors. On
May 7, 1998, the date of the Company's 1998 Annual Meeting of Stockholders, each
of the Company's directors, except for Mr. Fischer, Dr. Sterman and Dr. Stevens,
was automatically granted a non-statutory stock option to purchase 6,400 shares
of Common Stock at an exercise price of $10.1875 per share, all of which become
exercisable upon completion of five continuous years of service. On May 7, 1999,
the date of the Company's 1999 Annual Meeting of Stockholders, each of the
Company's directors, except for Mr. Fischer, Dr. Sterman and Dr. Stevens, will
automatically be granted a non-statutory stock option to purchase 6,400 shares
of Common Stock at an exercise price per share equal to the fair market value on
that date.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the stockholders vote FOR the
election of each of the above nominees.
5
<PAGE>
PROPOSAL 2
AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the
Board on February 26, 1996 and approved by the stockholders on April 10, 1996.
The Board amended the Purchase Plan on February 5, 1999 to provide that, as of
January 1 of each year, the number of shares reserved for issuance under the
Purchase Plan will be increased automatically by the lesser of (i) 0.5% of the
total number of shares of Common Stock outstanding or (ii) 150,000 shares. The
stockholders are being asked to approve the amendment to the Purchase Plan. The
Company has been advised by its counsel that it should reserve a sufficient
number of shares under its Purchase Plan to last through the end of each
offering period beginning prior to the 2000 Annual Stockholders Meeting. In
accordance with recently issued accounting guidance, an insufficient number of
shares reserved at the beginning of an offering period may result in an
unintended and potentially adverse accounting treatment. Accordingly, the Board
is recommending this amendment to provide for an increase in the number of
shares available under the Purchase Plan.
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to meet the requirements of an "employee stock purchase
plan" as defined in Section 423 of the Internal Revenue Code (the "Code"). If
the amendment to the Purchase Plan is not approved by the stockholders, the
Purchase Plan will continue in effect in accordance with its current terms until
the current share reserve is exhausted.
SUMMARY OF PURCHASE PLAN
The following summary of certain Purchase Plan provisions is qualified, in
its entirety, by reference to the Purchase Plan. Copies of the Purchase Plan
document may be obtained by a stockholder upon written request to the Secretary
of the Company at the executive offices in Redwood City, California.
PURPOSE. The purpose of the Purchase Plan is to provide employees of the
Company and designated parent or subsidiary corporations (collectively,
"Participating Companies") an opportunity to participate in the ownership of the
Company by purchasing Common Stock through payroll deductions. The Company and
its subsidiaries, Heartport Research and Training Center, Inc. and UBTL, Inc.,
are the only Participating Companies in the Purchase Plan.
The Purchase Plan is intended to benefit the Company as well as its
stockholders and employees. The Purchase Plan gives employees an opportunity to
purchase shares of Common Stock at a favorable price. The Company believes that
the stockholders will correspondingly benefit from the increased interest on the
part of participating employees in the profitability of the Company. Finally,
the Company will benefit from the periodic investments of equity capital
provided by participants in the Purchase Plan.
ADMINISTRATION. The Purchase Plan is administered by the Compensation
Committee of the Board (the "Committee"). All costs and expenses incurred in
plan administration will be paid by the Company without charge to participants.
All cash proceeds received by the Company from payroll deductions under the
Purchase Plan shall be credited to a non-interest bearing book account.
SHARES AND TERMS. The stock issuable under the Purchase Plan is the
Company's authorized but unissued or reacquired Common Stock. Common Stock
subject to a terminated purchase right shall be available for purchase pursuant
to purchase rights subsequently granted. Prior to approval of this Proposal No.
2, the maximum number of shares of Common Stock reserved for issuance under the
Purchase Plan was 240,000 shares. As of January 1, 1999, 164,000 shares have
been issued under the Purchase Plan and 202,000 shares remain available for
future issuance, assuming approval of this Proposal No. 2.
ADJUSTMENTS. If any change in the Common Stock occurs (through
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares, or other change affecting the outstanding Common Stock as a class
without the Company's receipt of consideration), appropriate adjustments shall
be made by the Company to the class and maximum number of shares subject to the
Purchase Plan, to the
6
<PAGE>
class and maximum number of shares purchasable by each participant on any one
purchase date, and the class and number of shares and purchase price per share
subject to outstanding purchase rights in order to prevent the dilution or
enlargement of benefits thereunder.
ELIGIBILITY. Generally, any individual who is customarily employed by a
Participating Company more than 20 hours per week and for more than five months
per calendar year is eligible to participate in the Purchase Plan. Approximately
200 employees (including all officers) were eligible to participate in the
Purchase Plan as of March 19, 1999.
OFFERING PERIODS. The Purchase Plan is implemented by a series of offering
periods that generally have a duration of six months but may have a maximum
duration of twenty-four months. A new offering period will commence every six
months and may run concurrently with prior offering periods. The Committee in
its discretion may vary the beginning date and ending date of the offering
periods prior to their commencements. The current offering period under the
Purchase Plan began on November 2, 1998 and will end on April 30, 1999. The next
offering period will commence on May 7, 1999 and will end on October 29, 1999.
A participant will have a separate purchase right for each offering period
in which he or she participates. The purchase right will be granted on the first
day of the offering period and will be automatically exercised in successive
installments on the last day of each purchase period within the offering period.
PURCHASE PRICE. The purchase price per share under the Purchase Plan is 85%
of the lower of (i) the fair market value of a share of Common Stock on the
first day of the applicable offering period or (ii) the fair market value of a
share of Common Stock on the purchase date. Generally, the fair market value of
the Common Stock on a given date is the closing sale price of the Common Stock,
as reported on The Nasdaq Stock Market. The market value of the Common Stock as
reported on The Nasdaq Stock Market as of March 19, 1999 was $5.56 per share.
LIMITATIONS. The Purchase Plan imposes certain limitations upon a
participant's rights to acquire Common Stock, including the following:
1. No purchase right shall be granted to any person who immediately
thereafter would own, directly or indirectly, stock or hold outstanding
options or rights to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of
the Company or any of its parent or subsidiary corporations.
2. In no event shall a participant be permitted to purchase more than 1,000
shares on any one purchase date.
3. The right to purchase Common Stock under the Purchase Plan (or any other
employee stock purchase plan that the Company or any of its subsidiaries
may establish) in an offering intended to qualify under Section 423 of
the Code may not accrue at a rate that exceeds $25,000 in fair market
value of such Common Stock (determined at the time such purchase right
is granted) for any calendar year in which such purchase right is
outstanding.
The purchase right shall be exercisable only by the participant during the
participant's lifetime and shall not be assignable or transferable by the
participant.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS. Payment for shares by
participants shall be by accumulation of after-tax payroll deductions during the
purchase period. The deductions may not exceed 15% of a participant's cash
compensation paid during a purchase period. Cash compensation for this purpose
includes elective contributions that are not includable in income under Code
Sections 125 or 401(k) and all bonuses, overtime, commissions, and other amounts
to the extent paid in cash.
7
<PAGE>
The participant will receive a purchase right for each offering period in
which he or she participates to purchase up to the number of shares of Common
Stock determined by dividing such participant's payroll deductions accumulated
prior to the purchase date by the applicable purchase price (subject to the
"Limitations" section). No fractional shares shall be purchased. Any payroll
deductions accumulated in a participant's account that are not sufficient to
purchase a full share will be retained in the participant's account for the
subsequent purchase period. No interest shall accrue on the payroll deductions
of a participant in the Purchase Plan.
TERMINATION AND CHANGE TO PAYROLL DEDUCTIONS. A purchase right shall
terminate at the end of the offering period or earlier if (i) the participant
terminates employment, in which case any payroll deductions that the participant
may have made with respect to a terminated purchase right will be refunded, or
(ii) the participant elects to withdraw from the Purchase Plan. Any payroll
deductions that the participant may have made with respect to a terminated
purchase right under clause (ii) will be refunded unless the participant elects
to have the funds applied to the purchase of shares on the next purchase date.
Unless a participant has irrevocably elected otherwise, he or she may decrease
his or her deductions once during a purchase period.
AMENDMENT AND TERMINATION. The Purchase Plan shall continue in effect until
the earlier of (i) the last business day in October, 2006, (ii) the date on
which all shares available for issuance under the Purchase Plan shall have been
issued or (iii) a Corporate Transaction, unless the Purchase Plan is earlier
terminated by the Board in its discretion.
The Board may at any time alter, amend, suspend or discontinue the Purchase
Plan, provided that, without the approval of the stockholders, no such action
may (i) alter the purchase price formula so as to reduce the purchase price
payable for shares under the Purchase Plan, (ii) materially increase the number
of shares issuable under the Purchase Plan or the maximum number of shares
purchasable per participant, or (iii) materially increase the benefits accruing
to participants under the Purchase Plan or materially modify the eligibility
requirements.
In addition, the Company has specifically reserved the right, exercisable in
the sole discretion of the Board, to terminate the Purchase Plan immediately
following any six month purchase period. If such right is exercised by the
Board, then the Purchase Plan will terminate in its entirety and no further
purchase rights will be granted or exercised, and no further payroll deductions
shall thereafter be collected under the Purchase Plan.
CORPORATE TRANSACTION. In the event of (i) a merger or consolidation in
which securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities are transferred to a person
or persons different from the persons holding those securities immediately prior
to such transaction or (ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete liquidation or
dissolution of the Company (a "Corporate Transaction"), each purchase right
under the Purchase Plan will automatically be exercised immediately before
consummation of the Corporate Transaction as if such date were the last purchase
date of the offering period. The purchase price per share shall be equal to
eighty-five percent (85%) of the lower of the fair market value per share of
Common Stock on the start date of the offering period or the fair market value
per share of Common Stock immediately prior to the effective date of such
Corporate Transaction. Any payroll deductions not applied to such purchase shall
be promptly refunded to the participant.
The grant of purchase rights under the Purchase Plan will in no way affect
the right of the Company to adjust, reclassify, reorganize, or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
PRORATION OF PURCHASE RIGHTS. If the total number of shares of Common Stock
for which purchase rights are to be granted on any date exceeds the number of
shares then remaining available under the Purchase Plan, the Committee shall
make a pro rata allocation of the shares remaining.
8
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES. The following is a general description of
certain federal income tax consequences of the Purchase Plan. This description
does not purport to be complete.
The Purchase Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Under a plan which so qualifies, no taxable
income will be reportable by a participant, and no deductions will be allowable
to the Company, by reason of the grant or exercise of the purchase rights issued
thereunder. A participant will, however, recognize taxable income in the year in
which the purchased shares are sold or otherwise made the subject of
disposition.
A sale or other disposition of the purchased shares will be a disqualifying
disposition if made before the later of two years after the start of the
offering period in which such shares were acquired or one year after the shares
are purchased. If the participant makes a disqualifying disposition of the
purchased shares, then the Company will be entitled to an income tax deduction
for the taxable year in which such disposition occurs, equal to the amount by
which the fair market value of such shares on the date of purchase exceeded the
purchase price, and such amount will be taxable as ordinary income to the
participant who will be required to satisfy the employment and income tax
withholding requirements applicable to such income. In no other instance will
the Company be allowed a deduction with respect to the participant's disposition
of the purchased shares.
Any additional gain or loss recognized upon the disposition of the shares
will be a capital gain, which will be long-term if the shares have been held for
more than one year following the date of purchase under the Purchase Plan.
The foregoing is only a summary of the federal income taxation consequences
to the participant and the Company with respect to the shares purchased under
the Purchase Plan. In addition, the summary does not discuss the tax
consequences of a participant's death or under the income tax laws of any city,
state or foreign country in which the participant may reside.
NEW PURCHASE PLAN BENEFITS. Since purchase rights are subject to
discretion, including an employee's decision not to participate in the Purchase
Plan, awards under the Purchase Plan for the current fiscal year are not
determinable. In the purchase period that ended on October 30, 1998, Mr. Tansey
purchased 620 shares of Common Stock at a purchase price of $3.61, no other
Named Officers purchased shares, and all executive officers as a group (8
persons) purchased 2,620 shares. In addition, each of the Named Officers, other
than Dr. Sterman and Dr. Stevens, has the right to purchase a maximum of 1,000
shares of Common Stock at a price that will not exceed $3.40 per share on the
April 30, 1999, purchase date.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the approval of the amendment
to the Company's Employee Stock Purchase Plan.
9
<PAGE>
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The firm of Ernst & Young LLP served as independent auditors for the Company
for the fiscal year ended December 31, 1998. The Board of Directors desires the
firm to continue in this capacity for the current fiscal year. Accordingly, a
resolution will be presented to the meeting to ratify the selection of Ernst &
Young LLP by the Board of Directors as the Company's independent auditors to
audit the accounts and records of the Company for the fiscal year ending
December 31, 1999, and to perform other appropriate services. In the event that
stockholders fail to ratify the selection of Ernst & Young LLP, the Board of
Directors would reconsider such selection. Even if the selection is ratified,
the Board of Directors in its discretion may direct the appointment of a
different independent auditing firm at any time during the year if the Board of
Directors believes that such a change would be in the best interests of the
Company and its stockholders.
A representative of Ernst & Young LLP will be present at the Annual Meeting
to respond to appropriate questions and to make a statement if such
representative desires to do so.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the stockholders vote FOR the
ratification of the selection of Ernst & Young LLP to serve as the Company's
independent auditors for the fiscal year ending December 31, 1999.
10
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, certain information
with respect to shares beneficially owned by (i) each person who is known by the
Company to be the beneficial owner of more than five percent of the Company's
outstanding shares of Common Stock, (ii) each of the Company's directors and the
executive officers named in the Summary Compensation Table and (iii) all current
directors and executive officers as a group. Beneficial ownership has been
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended. Under this rule, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share the
power to vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire shares (for example, upon exercise of an option or warrant) within sixty
(60) days of the date as of which the information is provided; in computing the
percentage ownership of any person, the amount of shares is deemed to include
the amount of shares beneficially owned by such person (and only such person) by
reason of such acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily
reflect the person's actual voting power at any particular date.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED(1)
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers (2).................................................. 1,820,000 7.21%
2750 Sand Hill Road
Menlo Park, CA 94025
Sierra Ventures(3).................................................................... 1,609,999 6.38%
3000 Sand Hill Road
Building Four, Suite 210
Menlo Park, CA 94025
Robert V. Gunderson, Jr............................................................... 163,000 *
Joseph S. Lacob(2)(4)................................................................. 2,084,838 8.26%
Petri T. Vainio, M.D., Ph.D.(3)....................................................... 1,762,094 6.98%
Steven C. Wheelwright, Ph.D........................................................... 124,946 *
Frank M. Fischer(5)................................................................... 651,792 2.58%
Wesley D. Sterman, M.D................................................................ 3,205,492 12.70%
John H. Stevens, M.D.(6).............................................................. 2,262,663 8.97%
Casey M. Tansey....................................................................... 289,532 1.15%
Lawrence C. Siegel, M.D............................................................... 221,046 *
Bradford J. Shafer.................................................................... 0 *
All current directors and executive officers as a group (13 persons)(7)............... 11,267,214 44.65%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Percentage of ownership is based on 25,232,059 shares of Common Stock
outstanding on December 31, 1998. The number of shares of Common Stock
beneficially owned includes the shares issuable pursuant to stock options
that are exercisable within 60 days of December 31, 1998. Shares issuable
pursuant to stock options are deemed outstanding for computing the
percentage of the person holding such options but are not outstanding for
computing the percentage of any other person. Except as 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
11
<PAGE>
Common Stock. To the Company's knowledge, the entities named in the table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Includes 1,820,000 shares of Common Stock owned by Kleiner Perkins Caufield
& Byers VI, L.P. ("KPCB VI"). Mr. Lacob, a director of the Company, is a
general partner of Kleiner Perkins Caufield & Byers VI Associates, L.P.
("KPCB VI Associates"), which is a general partner of KPCB VI. Mr. Lacob
disclaims beneficial ownership of shares held by KPCB VI and KPCB VI
Associates, except for his pecuniary interest therein.
(3) Includes 1,548,095 shares of Common Stock owned by Sierra Ventures IV, L.P.
("Sierra IV") and 61,904 shares held by Sierra Ventures IV International,
L.P. Dr. Vainio, a director of the Company, is a general partner of SV
Associates IV, which is the general partner of Sierra IV. Dr. Vainio
disclaims beneficial ownership of shares held by Sierra IV or Sierra
Ventures IV International, L.P., except for his pecuniary interest therein.
(4) Includes options immediately exercisable for 80,000 shares of Common Stock.
(5) Includes options immediately exercisable, or exercisable within 60 days of
December 31, 1998, for 390,625 shares of Common Stock.
(6) Includes options immediately exercisable, or exercisable within 60 days of
December 31, 1998, for 58,113 shares of Common Stock.
(7) Includes options immediately exercisable, or exercisable within 60 days of
December 31, 1998, for 533,287 shares of Common Stock.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors and greater-than-ten-percent beneficial
owners are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file.
Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that there was compliance for the fiscal year ended December
31, 1998, with all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater-than-ten-percent beneficial owners, except that
Joseph S. Lacob, a director of the Company, filed late one report showing five
transactions.
12
<PAGE>
EXECUTIVE COMPENSATION AND RELATED INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned for services rendered
in all capacities to the Company and its subsidiaries for the three fiscal years
ended December 31, 1998 by each of the individuals who served as the Company's
Chief Executive Officer and each of the Company's four other highest-paid
individuals who were serving as executive officers at the end of 1998 (the
"Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS(2)
ANNUAL COMPENSATION -------------
---------------------- SECURITIES
SALARY UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR ($)(1) BONUS ($) OPTIONS(#) COMPENSATION
- --------------------------------------------- ----------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Frank M. Fischer............................. 1998(3) 218,077 0 1,000,000 0
President, Chief Executive 1997 0 0 0 0
Officer and Director 1996 0 0 0 0
Wesley D. Sterman, M.D....................... 1998(4) 207,265 0 0 0
Chairman of the Board 1997 240,096 40,000 0 0
of Directors (former President and 1996 216,033 32,405 0 0
Chief Executive Officer)
John H. Stevens, M.D......................... 1998 262,692 0 0 0
Chief Technology Officer and 1997 100,962 17,692 308,000 102,084
Director(5) 1996 0 0 0 329,142
Casey M. Tansey.............................. 1998 198,013 60,000 0 0
Senior Vice President of Sales 1997 181,609 55,492 0 0
and Marketing 1996 175,557 26,250 0 0
Lawrence C. Siegel, M.D...................... 1998 213,832 40,000 300,000(6) 0
Vice President of Clinical Affairs 1997 197,577 25,000 0 0
1996 33,333 2,333 300,000 0
Bradford J. Shafer........................... 1998 215,920 32,675 350,000(6) 0
General Counsel and Secretary 1997 199,199 25,195 0 0
1996 85,641 5,995 350,000 0
</TABLE>
- ------------------------
(1) Salary includes amounts deferred under the Company's 401(k) Plan.
(2) No restricted stock grants were made to the Named Officers during the fiscal
year.
(3) Mr. Fischer became President and Chief Executive Officer on May 7, 1998 and
the amount of compensation indicated reflects what he received from that
date.
(4) Dr. Sterman was President and Chief Executive Officer of the Company until
May 7, 1998 and the amount of salary indicated reflects what he received for
service in that capacity from January 1, 1998 until May 7, 1998. Dr.
Sterman's salary in 1998 includes $56,059 paid to him for unused vacation
time.
(5) "All other compensation" represents (i) for 1997, consulting fees paid prior
to Dr. Stevens becoming employed by the Company in July 1997 and (ii) for
1996, consulting fees and reimbursement of expenses relating to services
provided to the Company.
(6) These options were granted upon cancellation of an identical number of
options previously granted to the employee in 1996.
13
<PAGE>
STOCK OPTIONS
The following table contains information concerning the stock option grants
made to each of the Named Officers for the year ended December 31, 1998:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(3)
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
- --------------------------------- --------------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Frank M. Fischer................. 750,000 16.5% 5.25 6/22/08 2,476,273 6,275,361
250,000 5.5% 5.00 6/22/08 887,924 2,154,287
Wesley D. Sterman, M.D........... 0 -- -- -- -- --
John H. Stevens, M.D............. 0 -- -- -- -- --
Casey M. Tansey.................. 0 -- -- -- -- --
Lawrence C. Siegel, M.D.......... 300,000 6.6% 5.25 6/22/08 990,509 2,510,144
Bradford J. Shafer............... 350,000 7.7% 5.25 6/22/08 1,155,594 2,928,502
</TABLE>
- ------------------------
(1) The option will become fully exercisable and any unvested option shares will
vest immediately upon an acquisition of the Company by merger or asset sale
unless assumed or replaced by the acquiring entity. Options which are
assumed or replaced in the transaction and do not otherwise accelerate at
that time shall automatically accelerate (and unvested option shares which
do not otherwise vest at that time shall automatically vest) in the event
the optionee's service terminates by reason of an involuntary or
constructive termination within 12 months following the transaction as if
the optionee's service continued for an additional twelve months. Each
option has a maximum term of ten years, subject to earlier termination in
the event of the optionee's cessation of providing services to the Company.
(2) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the exercise date, or through a cashless exercise
procedure involving a same-day sale of the purchased shares.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the ten
year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.
14
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option holdings for
the year ended December 31, 1998, with respect to each of the Named Officers. No
options were exercised by the Named Officers during the 1998 fiscal year. No
stock appreciation rights were exercised during such year or were outstanding at
the end of that year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Frank M. Fischer.......................................... 359,375 640,625 287,109 400,391
Wesley D. Sterman, M.D.................................... 0 0 0 0
John H. Stevens, M.D...................................... 50,533 257,467 0 0
Casey M. Tansey........................................... 0 0 0 0
Lawrence C. Siegel, M.D................................... 0 300,000 0 187,500
Bradford J. Shafer........................................ 0 350,000 0 218,750
</TABLE>
- ------------------------
(1) Based on the fair market value of the Common Stock at year-end ($5.875 per
share) less the exercise price payable for such shares.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
SECURITIES OPTION TERM
UNDERLYING MARKET PRICE OF EXERCISE PRICE REMAINING AT
NUMBER OF STOCK AT TIME AT TIME OF NEW DATE OF
OPTIONS REPRICED OF REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE OR AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE ($) AMENDMENT
- --------------------------------- ---------- ---------------- ----------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence C. Siegel, M.D.......... June 23, 300,000 5.25 25.63 5.25 100 mos.
Vice President of Clinical 1998
Affairs
Bradford J. Shafer............... June 23, 350,000 5.25 21.75 5.25 97 mos.
General Counsel and Secretary 1998
Michi E. Garrison................ June 23, 30,000 5.25 10.38 5.25 117 mos.
Vice President of 1998 13,500 5.25 12.94 5.25 116 mos.
Research & Development 5,250 5.25 23.75 5.25 101 mos.
3,000 5.25 24.50 5.25 107 mos.
Luis J. Jimenez.................. June 23, 100,000 5.25 20.25 5.25 111 mos.
Vice President of Quality 1998 25,000 5.25 8.63 5.25 119 mos.
Assurance and Regulatory
Affairs
</TABLE>
15
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed in
February, 1996, and the members of the Compensation Committee are Dr.
Wheelwright and Dr. Vainio. None of these individuals was at any time during the
year ended December 31, 1998, or at any other time, an officer or employee of
the Company. No member of the Compensation Committee of the Company serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
CHANGE IN CONTROL ARRANGEMENTS
The Company has agreed to provide Frank M. Fischer, its President and Chief
Executive Officer, a severance payment equal to 24 months of salary plus 200% of
Mr. Fischer's target bonus should he be involuntarily terminated or have his
responsibilities materially diminished following a change of control of the
Company. The failure to retain Mr. Fischer as Chief Executive Officer of the
company surviving the change of control transaction will be considered an
involuntary termination under the agreement. Mr. Fischer will also be entitled
to continued vesting of his stock options for an additional twelve months should
he be involuntarily terminated within 12 months following certain change of
control transactions involving the Company.
The Company has agreed to provide Dr. Lawrence C. Siegel, its Vice President
of Clinical Affairs, with severance payments of twelve months of salary and
vesting of his stock options as if his service continued for an additional
twelve months should there be an involuntary termination of his employment
without cause.
Each of the executive officers of the Company is eligible to participate in
the Company's Change in Control Severance Plan. To the extent that any of the
executive officers has other severance arrangements with the Company, such
executive officers shall be paid the benefits provided under the Severance Plan
or their existing severance arrangements, whichever provides a greater benefit.
Under the Change in Control Severance Plan, in the event that an officer is
involuntarily terminated within twenty-four months following certain changes in
control, such officer shall receive severance benefits equal to twenty-four
months of salary plus a bonus equal to 200% of such officer's target bonus.
Under the terms of the 1996 Stock Option Plan, each outstanding option will
accelerate upon a Corporate Transaction unless the option is assumed in
connection with certain change of control situations (a "Corporate
Transaction"). Unvested shares purchased under options granted prior to the
initial public offering, including shares held by Dr. Sterman, Dr. Stevens and
Mr. Tansey, also provide that the vesting of the shares will accelerate upon a
Corporate Transaction unless the Company's repurchase right is assigned in
connection with the Corporate Transaction. In addition, upon an involuntary
termination of the optionee's service within twelve months following a Corporate
Transaction, the exercisability of the option and the vesting of shares will
accelerate with respect to that number of shares as if the optionee's service
continued for an additional twelve months following the involuntary termination,
unless otherwise provided in the individual's employment agreement.
The Compensation Committee has the authority under the 1996 Stock Option
Plan to provide for the acceleration of vesting of the shares of Common Stock
subject to the outstanding options held by any executive officer or other
employee under that Plan at any time, including in connection with Corporate
Transactions or a hostile take-over of the Company, which may or may not be
conditioned on his employment being terminated (whether involuntarily or through
a forced resignation).
OTHER ARRANGEMENTS
On May 7, 1998 the Company entered into an agreement with Wesley D. Sterman,
its President and Chief Executive Officer, pursuant to which Dr. Sterman
resigned as President and Chief Executive Officer
16
<PAGE>
and became Chairman of the Board of Directors. Under the agreement and while Dr.
Sterman's service as a director continues, the Company will provide Dr. Sterman
with the benefits of the Company's Change in Control Severance Plan as if he
were still President and Chief Executive Officer. In addition, if the Company
agrees to any severance, change in control or similar package with any other
executive officer that is more beneficial to such officer than that provided to
Dr. Sterman, he will be entitled to a comparable arrangement in lieu of that
provided under the Change in Control Severance Plan. Dr. Sterman will continue
to vest in his outstanding 640,000 shares of the Company's Common Stock acquired
through exercise of a stock option while his service to the Company continues.
On June 19, 1998 the Company entered into an agreement with Richard B.
Brewer, its Chief Operating Officer, pursuant to which Mr. Brewer ceased to be
an employee and became a consultant to the Company effective July 7, 1998. Under
the agreement, Mr. Brewer will serve as a consultant to the Company until July
7, 1999 and be paid a fee of $265,000. In addition, during the term of the
consulting agreement Mr. Brewer will continue to vest in his outstanding stock
options to purchase up to 560,000 shares of the Company's Common Stock. If there
occurs a Change in Control (as defined in the Company's Change of Control
Severance Plan) during his consultancy, (i) Mr. Brewer's options will
automatically accelerate in part and will vest as if his service continued for
an additional twelve months following the date of the Change in Control, and
(ii) upon execution of a general release by Mr. Brewer in favor of the Company,
all consulting fees will cease and he will receive a lump sum payment of
$620,000.
17
<PAGE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company's Board of Directors (the
"Committee") is responsible for establishing policies and programs for
compensating Heartport's executive officers. Each year, the Committee determines
the base salary payable to the Chief Executive Officer ("CEO") and all other
executive officers, and approves the incentive bonus program for the CEO and
other executive officers. In addition, the Committee administers the Company's
1996 Stock Option Plan and Employee Stock Purchase Plan. The Committee has the
exclusive authority to grant stock options to the Company's officers. For fiscal
1998, the Committee considered both qualitative and quantitative factors in
determining executive officer compensation levels, including
commercially-prepared surveys of comparable companies.
COMPENSATION POLICY AND PHILOSOPHY
The Committee's policy is to develop executive compensation packages that
attract, retain and motivate highly effective executives. Compensation programs
are designed to reward the achievement of both short-term and long-term
objectives of the Company and to align the executives' interests with those of
the Company's stockholders. It is the Committee's objective to have a
substantial portion of each officer's compensation contingent upon the Company's
performance, as well as upon his or her own level of performance. Accordingly,
each executive officer's compensation package consists of three major
components: (i) base salary, (ii) annual cash incentive compensation, and (iii)
long-term stock-based incentive awards.
BASE SALARY
The base salary for each executive officer is set by reviewing the pay
practices of companies that compete with the Company for executive talent, and
by evaluating each individual's performance and contribution. The Committee
believes that the Company's most direct competitors for executive talent are not
necessarily all of the companies that the Company would use in a comparison of
stockholder returns. Therefore, the compensation comparison group is not the
same as the industry group in the index used in the Stock Performance Graph,
below.
ANNUAL CASH INCENTIVE COMPENSATION
Each executive officer has an annual bonus target. The total bonus pool for
executive officers is determined based on the Company's achievement of goals.
For fiscal 1998, the corporate-level goals were comprised primarily of the
following equally-weighted components: (i) revenue; (ii) expense reductions;
(iii) usage of the Company's products; and (iv) completion and commercial
release of planned innovations and iterations to the product line. The Company
achieved substantially all of its performance targets in 1998. Actual bonuses
paid reflect both the achievement of corporate goals and the individual's
specific functional objectives, with greater weight being given to the
achievement of corporate goals. The weighting of corporate goals vs. individual
objectives was consistent among all executive officers. Actual bonuses for the
Named Officers are listed in the Summary Compensation Table.
LONG-TERM STOCK-BASED INCENTIVE AWARDS
Generally, a significant option grant is made in the year that an executive
officer commences employment. The size of each grant is set at a level that the
Committee deems appropriate to create a meaningful opportunity for stock
ownership based upon the individual's position and responsibilities with the
Company. Each grant allows the officer to acquire shares of Common Stock at a
fixed price per share (generally the market price on the grant date) over a
specified period of time. The vesting schedules are designed to encourage the
executives to remain with the Company and to focus on longer-term results.
CEO COMPENSATION
During fiscal 1998 the Company recruited Mr. Fischer to assume the role of
President and Chief Executive Officer. Mr. Fischer's annual base salary of
$350,000 was established by the Committee in May 1998 based upon his substantial
experience as chief executive of another public medical device company in the
cardiovascular field, and in recognition of the challenges he faced with regard
to leading
18
<PAGE>
the Company's business. The Committee also made significant option grants to Mr.
Fischer in connection with negotiation of his employment arrangement.
The annual base salary for Dr. Sterman, the Company's president and Chief
Executive Officer until May 1998, was determined by the Committee based on Dr.
Sterman's performance in 1997 and in consideration of base salaries paid to
chief executive officers of comparable companies.
TAX LIMITATION
Under the Federal tax laws, a publicly-held company such as the Company is
not allowed a Federal income tax deduction for compensation paid to certain
executive officers to the extent that compensation exceeds $1 million per
officer in any year. In order to qualify option grants under the Company's 1996
Stock Option Plan ("1996 Plan") for an exemption available to performance-based
compensation, the stockholders have approved certain provisions of the 1996
Plan, including a limit on the maximum number of shares of Common Stock for
which any one participant may be granted stock options each calendar year over
the term of the 1996 Plan. Accordingly, any compensation deemed paid to an
executive officer when he exercises an outstanding option under the 1996 Plan
with an exercise price equal to the fair market value of the option shares on
the grant date will qualify as performance-based compensation that will not be
subject to the $1 million limitation. Since it is not expected that the cash
compensation to be paid to the Company's executive officers for the 1998 fiscal
year will exceed the $1 million limit per officer, the Committee will defer any
decision on whether to limit the dollar amount of the cash compensation payable
to the Company's executive officers to the $1 million limit.
Compensation Committee
Petri T. Vainio, M.D., Ph.D.
Steven C. Wheelwright, Ph.D.
COMPENSATION COMMITTEE REPORT
ON CANCELLED/REPRICED OPTIONS
On June 23, 1998, the Compensation Committee of the Board of Directors
approved a plan pursuant to which certain officers and employees were allowed to
exchange options with exercise prices ranging from $7.50 to $41.00 per share for
new options having exercise prices equal to $5.25 per share, the then current
fair market value of the Common Stock. The vesting schedule of each option was
changed to four years from five years, but no portion of the option can be
exercised prior to June 23, 1999, a one-year period. Approximately 2.2 million
stock options were cancelled and repriced pursuant to this program.
The objectives of the Company's 1996 Stock Option Plan (the "Option Plan")
are to promote the interests of the Company by providing employees, non-employee
directors and consultants or independent contractors an incentive to acquire a
proprietary interest in the Company and to continue to render services to the
Company. The Compensation Committee believes that, at their original exercise
prices, the disparity between the exercise prices of these options and recent
market prices for the Common Stock did not provide meaningful incentives to the
officers and employees holding the options. The Committee concluded that such
option grants seriously undermined the specific objectives of the Option Plan
and should be canceled and replaced. A review of other companies in the high
technology medical device industry indicates that some of these companies have
confronted this problem and have made similar adjustments in option prices to
motivate their employees. In making this decision, the Committee also considered
the fairness of such a determination in relation to other stockholders. In the
opinion of the Committee, the stockholders' long-term interests are clearly best
served by the retention and motivation of the optionees.
Compensation Committee
Petri T. Vainio, M.D., Ph.D.
Steven C. Wheelwright, Ph.D.
19
<PAGE>
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return
on the Company's Common Stock between April 25, 1996 (the date the Company's
initial public offering commenced) and December 31, 1998 with the cumulative
total return of (i) the CRSP Total Return Index for The Nasdaq Stock Market
(U.S. Companies) (the "Nasdaq Stock Market-U.S. Index") and (ii) the Hambrecht
and Quist Healthcare Index (the "H&Q Healthcare Index"), over the same period.
This graph assumes the investment of $100.00 on April 25, 1996 in the Company's
Common Stock, the Nasdaq Stock Market-U.S. Index and the H&Q Healthcare Index,
and assumes the reinvestment of dividends, if any.
The comparisons shown in the graph below are based upon historical data. The
Company cautions that the stock price performance shown in the graph below is
not indicative of, nor intended to forecast, the potential future performance of
the Company's Common Stock. Information used in the graph was obtained from
Hambrecht & Quist LLC, a source believed to be reliable, but the Company is not
responsible for any errors or omissions in such information.
COMPARISON OF 32 MONTH CUMULATIVE TOTAL RETURN AMONG HEARTPORT, INC.,
THE NASDAQ STOCK MARKET--U.S. INDEX, AND THE H&Q HEALTHCARE INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DOLLARS HEARTPORT, INC. NASDAQ STOCK HAMBRECHT &
<S> <C> <C> <C>
MARKET (U.S.) QUIST HEALTHCARE
4/96 100 100 100
6/96 144 100 96
9/96 124 104 104
12/96 109 109 103
3/97 117 103 99
6/97 84 122 115
9/97 117 143 121
12/97 97 134 119
3/98 52 157 136
6/98 31 161 137
9/98 15 146 125
12/98 28 188 152
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this Proxy
Statement or future filings made by the Company under those statutes, the
Compensation Committee Report and Stock Performance Graph shall not be deemed
filed with the Securities and Exchange Commission and shall not be deemed
incorporated by reference into any of those prior filings or into any future
filings made by the Company under those statutes.
20
<PAGE>
CERTAIN TRANSACTIONS
INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
LOANS TO EMPLOYEES
In connection with the acquisition of shares of Common Stock from the
Company pursuant to the exercise of options previously granted to such
individuals, the Company on September 1, 1995, extended loans to certain of its
executive officers. Each of the loans is full recourse and is secured by the
shares of Common Stock purchased with the proceeds of the loans. In addition,
loans were extended on other dates for stock purchases and relocation expenses.
The following table sets forth information with respect to loans extended to the
officers by the Company in excess of $60,000.
<TABLE>
<CAPTION>
INDEBTEDNESS
AS OF
NO. OF SHARES PER SHARE PRINCIPAL 12/31/98* INTEREST RATE MATURITY
NAME PURCHASED (#) PRICE ($) ($) ($) (%) DATE
- ----------------------------------- ------------- ----------- --------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Wesley D. Sterman, M.D............. 20,000 0.062 1,250(1) 1,645 6.00 03/01/99
640,000 0.375 240,000 293,835 6.18 02/28/02
John H. Stevens, M.D............... 192,000 0.375 72,000 88,150 6.18 03/31/02
20,000 0.062 1,250(1) 1,645 6.00 03/01/99
Steven E. Johnson.................. 192,000 0.375 72,000 88,150 6.18 08/23/99
176,000 0.375 66,000 80,805 6.18 08/23/04
Lawrence C. Siegel, M.D............ 24,000 0.375 9,000 12,079 7.05 08/29/99
Casey M. Tansey.................... 208,000 0.781 162,500(2) 196,591 6.02 12/11/00
120,000 0.781 93,750(2) 113,418 6.45 12/11/05
</TABLE>
- ------------------------
* The amount of indebtedness disclosed in this column also represents the
largest aggregate indebtedness outstanding at any time during the fiscal
year.
(1) The Company loaned $1,250 to Dr. Sterman and $1,250 to Dr. Stevens on March
1, 1994 to purchase 20,000 shares of Common Stock each.
(2) The loans from the Company to Mr. Tansey were made on December 28, 1995.
21
<PAGE>
ANNUAL REPORT
A copy of the Annual Report of the Company for the fiscal year ended
December 31, 1998, has been mailed concurrently with this Proxy Statement to all
stockholders entitled to notice of and to vote at the Annual Meeting.
FORM 10-K
The Company filed an Annual Report on Form 10-K with the SEC. Stockholders
may obtain a copy of this report, as amended, without charge, by writing to the
Company's executive offices at 700 Bay Road, Redwood City, California 94063,
Attention: Investor Relations.
OTHER MATTERS
Management does not know of any matters to be presented at this Annual
Meeting other than those set forth herein and in the Notice accompanying this
Proxy Statement.
THE BOARD OF DIRECTORS
OF HEARTPORT, INC.
April 2, 1999
Redwood City, California
22
<PAGE>
PROXY
[HEARTPORT LOGO]
ANNUAL MEETING OF STOCKHOLDERS
MAY 7, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints FRANK M. FISCHER and BRADFORD J. SHAFER,
and each or either of them, as Proxies of the undersigned, with full power of
substitution, and hereby authorizes them to represent and to vote, as
designated in this proxy, all of the shares of Common Stock of HEARTPORT,
INC., held of record by the undersigned on March 19, 1999, at the Annual
Meeting of Stockholders of Heartport, Inc. to be held May 7, 1999, or at any
adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NUMBERS 1, 2 AND
3. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ON THE
REVERSE SIDE. THIS PROXY WILL BE VOTED "FOR" PROPOSAL NUMBERS 1, 2 AND 3 IF
NO SPECIFICATION IS MADE.
- ----------- -----------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
- ----------- -----------
<PAGE>
Heartport, Inc.
c/o Equiserve
P.O. Box 8040
Boston, MA 02266-8040
[HEARTPORT LOGO]
Dear Stockholder:
Heartport, Inc. cordially invites you to attend the 1999 Annual Meeting of
Stockholders. The meeting will take place at 2:00 p.m. on May 7, 1999 at the
Company's offices in Redwood City, California.
Even if you are able to attend the meeting, please review the enclosed
material and cast your votes below.
Your vote is important to us. Please mark the boxes on the proxy card to
indicate how your shares will be voted. Then sign the card, detach it, and
return your proxy in the enclosed postage paid envelope.
Thank you for your prompt consideration of these matters.
Heartport, Inc.
<TABLE>
<CAPTION>
<S> <C>
DETACH HERE
/X/ PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
FOR AGAINST ABSTAIN
2. Amendment to the / / / / / /
Employee Stock
Purchase Plan.
FOR AGAINST ABSTAIN
1. Election of Directors. 3. Ratification of Selection of / / / / / /
Nominees: Robert V. Gunderson, Jr., Independent Auditors.
Wesley D. Sterman, M.D., Steven C.
Wheelwright, Ph.D. 4. In their discretion, the proxies are authorized to vote
FOR WITHHELD upon such other matters as may properly come before the meeting.
/ / / /
/ /
-----------------------------------------
For all nominees, except as noted above.
MARK HERE IF YOU PLAN TO ATTEND THE MEETING. / /
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT. / /
PLEASE SIGN EXACTLY AS YOUR NAME(S) IS (ARE) SHOWN ON THE
SHARE CERTIFICATE TO WHICH THE PROXY APPLIES. WHEN SHARES
ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING
AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN,
PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN
IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF
A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
Signature: _____________________ Date: ________ Signature: _____________________ Date: ________
</TABLE>
