SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Material
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COLLAGENEX PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than 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:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
|_| Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
301 SOUTH STATE STREET
NEWTOWN, PA 18940
April 12, 1999
To Our Stockholders:
You are cordially invited to attend the 1999 Annual Meeting of
Stockholders of CollaGenex Pharmaceuticals, Inc. at 8:30 A.M., local time, on
Tuesday, May 11, 1999, at the Marriott Hotel, 1201 Market Street, Philadelphia,
Pennsylvania.
The Notice of Meeting and Proxy Statement on the following pages
describe the matters to be presented at the meeting.
It is important that your shares be represented at this meeting to
assure the presence of a quorum. Whether or not you plan to attend the meeting,
we hope that you will have your stock represented by signing, dating and
returning your proxy in the enclosed envelope, as soon as possible. Your stock
will be voted in accordance with the instructions you have given in your proxy.
Thank you for your continued support.
Sincerely,
Brian M. Gallagher, Ph.D.
President and
Chief Executive Officer
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
301 SOUTH STATE STREET
NEWTOWN, PA 18940
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 11, 1999
The Annual Meeting of Stockholders (the "Meeting") of COLLAGENEX
PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), will be held at
the Mariott Hotel, 1201 Market Street, Philadelphia, Pennsylvania, on Tuesday,
May 11, 1999, at 8:30 A.M., local time, for the following purposes:
(1) To elect eight directors to serve until the next Annual Meeting of
Stockholders and until their respective successors shall have been duly
elected and qualified;
(2) To amend the Company's 1996 Stock Option Plan (the "1996 Stock Option
Plan") to increase the maximum aggregate number of shares of Common Stock
available for issuance thereunder from 750,000 to 1,500,000 shares and to
reserve an additional 750,000 shares of Common Stock of the Company for
issuance in connection with awards granted under the 1996 Stock Option
Plan;
(3) To approve the consummation of a private placement pursuant to which the
Company shall issue shares of Series D Cumulative Convertible Preferred
Stock, $.01 par value, representing 21.2% of the issued and outstanding
equity securities of the Company;
(4) To ratify the appointment of KPMG LLP as independent auditors for the year
ending December 31, 1999; and
(5) To transact such other business as may properly come before the Meeting or
any adjournment or adjournments thereof.
Holders of Common Stock of record at the close of business on March 26,
1999 are entitled to notice of and to vote at the Meeting, or any adjournment or
adjournments thereof. A complete list of such stockholders will be open to the
examination of any stockholder at the Company's principal executive offices at
301 South State Street, Newtown, Pennsylvania 18940 and at the Mariott Hotel,
1201 Market Street, Philadelphia, Pennsylvania, for a period of 10 days prior to
the Meeting. The Meeting may be adjourned from time to time without notice other
than by announcement at the Meeting.
<PAGE>
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER OF
SHARES YOU MAY HOLD. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE. THE PROMPT RETURN OF PROXIES WILL ENSURE A QUORUM
AND SAVE THE COMPANY THE EXPENSE OF FURTHER SOLICITATION. EACH PROXY GRANTED MAY
BE REVOKED BY THE STOCKHOLDER APPOINTING SUCH PROXY AT ANY TIME BEFORE IT IS
VOTED. IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOUR SHARES ARE
REGISTERED IN DIFFERENT NAMES OR ADDRESSES, EACH SUCH PROXY CARD SHOULD BE
SIGNED AND RETURNED TO ASSURE THAT ALL OF YOUR SHARES WILL BE VOTED.
By Order of the Board of Directors
Nancy C. Broadbent
Secretary
Newtown, Pennsylvania
April 12, 1999
THE COMPANY'S 1998 ANNUAL REPORT ACCOMPANIES THE PROXY STATEMENT.
2
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
301 SOUTH STATE STREET
NEWTOWN, PA 18940
-------------------------------------------------
PROXY STATEMENT
-------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of CollaGenex Pharmaceuticals, Inc. (the "Company") of
proxies to be voted at the Annual Meeting of Stockholders of the Company to be
held on Tuesday, May 11, 1999 (the "Meeting") at the Marriott Hotel, 1201 Market
Street, Philadelphia, Pennsylvania at 8:30 A.M., local time, and at any
adjournment or adjournments thereof. Holders of record of Common Stock, $.01 par
value ("Common Stock"), as of the close of business on March 26, 1999, will be
entitled to notice of and to vote at the Meeting and any adjournment or
adjournments thereof. As of that date, there were 8,589,704 shares of Common
Stock issued and outstanding and entitled to vote. Each share of Common Stock is
entitled to one vote on any matter presented at the Meeting. The number of votes
entitled to be cast at the Meeting is 8,589,704.
If proxies in the accompanying form are properly executed and returned, the
Common Stock represented thereby will be voted in the manner specified therein.
If not otherwise specified, the Common Stock represented by the proxies will be
voted (i) FOR the election of the eight nominees named below as directors, (ii)
FOR a proposal to amend the Company's 1996 Stock Option Plan (the "1996 Stock
Option Plan") to increase the maximum number of shares of Common Stock available
for issuance under the 1996 Stock Option Plan from 750,000 to 1,500,000 shares
and to reserve an additional 750,000 shares of Common Stock of the Company for
issuance in connection with awards granted under the 1996 Stock Option Plan,
(iii) FOR a proposal to consummate a private placement pursuant to which the
Company shall issue shares of Series D Cumulative Convertible Preferred Stock,
$.01 par value ("Series D Preferred Stock"), representing 21.2% of the issued
and outstanding equity securities of the Company; (iv) FOR the ratification of
the appointment of KPMG LLP as independent auditors for the year ending December
31, 1999, and (v) in the discretion of the persons named in the enclosed form of
proxy, on any other proposals which may properly come before the Meeting or any
adjournment or adjournments thereof. Any Stockholder who has submitted a proxy
may revoke it at any time before it is voted, by written notice addressed to and
received by the Secretary of the Company, by submitting a duly executed proxy
bearing a later date or by electing to vote in person at the Meeting. The mere
presence at the Meeting of the person appointing a proxy does not, however,
revoke the appointment.
The presence, in person or by proxy, of holders of Common Stock having a
majority of the votes entitled to be cast at the Meeting shall constitute a
quorum. The affirmative vote by the holders of a plurality of the shares of
Common Stock represented at the Meeting is required for the election of
directors, provided a quorum is present in person or by proxy. All actions
proposed herein other than the election of directors may be taken upon the
affirmative vote of Stockholders possessing a majority of the voting power
represented at the Meeting, provided a quorum is present in person or by proxy.
Certain Stockholders of the Company, owning in the aggregate 4,764,580 shares of
Common Stock (approximately 55.2% of the currently outstanding shares of Common
Stock entitled to vote at the Meeting) have agreed to vote in favor of the
private placement set forth in proposal (iii) above.
Abstentions are included in the shares present at the Meeting for purposes
of determining whether a quorum is present, and are counted as a vote against
for purposes of determining whether a proposal is approved. Broker non-votes
(when shares are represented at the Meeting by a proxy specifically conferring
only limited authority to vote on certain matters and no authority to vote on
other matters) are included in the determination of the number of shares
represented at the Meeting for purposes of determining whether a quorum is
present but are not counted for purposes of determining whether a proposal has
been approved and thus have no effect on the outcome.
This Proxy Statement, together with the related proxy card, is being mailed
to the Stockholders of the Company on or about April 12, 1999. The Annual Report
to Stockholders of the Company for the year ended December 31, 1998, including
financial statements (the "Annual Report"), is being mailed together with this
Proxy
<PAGE>
Statement to all Stockholders of record as of March 26, 1999. In addition, the
Company has provided brokers, dealers, banks, voting trustees and their
nominees, at the Company's expense, with additional copies of the Annual Report
so that such record holders could supply such materials to beneficial owners as
of March 26, 1999.
ELECTION OF DIRECTORS
At the Meeting, eight directors are to be elected (which number shall
constitute the entire Board of Directors of the Company) to hold office until
the next Annual Meeting of Stockholders and until their successors shall have
been elected and qualified.
It is the intention of the persons named in the enclosed form of proxy to
vote the stock represented thereby, unless otherwise specified in the proxy, for
the election as directors of the persons whose names and biographies appear
below. All of the persons whose names and biographies appear below are at
present directors of the Company. In the event any of the nominees should become
unavailable or unable to serve as a director, it is intended that votes will be
cast for a substitute nominee designated by the Board of Directors. The Board of
Directors has no reason to believe that the nominees named will be unable to
serve if elected. Each of the nominees has consented to being named in this
Proxy Statement and to serve if elected.
The current Board of Directors and nominees for election to the Board are
as follows:
<TABLE>
<CAPTION>
Served as a Positions with
Name Age Director Since the Company
- ---- --- -------------- -----------
<S> <C> <C>
Helmer P.K. Agersborg, Ph.D.......... 70 1992 Chairman of the Board
Brian M. Gallagher, Ph.D............. 51 1994 President, Chief Executive Officer
and Director
Peter R. Barnett, D.M.D.............. 47 1997 Director
James E. Daverman.................... 49 1995 Director
Robert J. Easton..................... 54 1993 Director
Stephen W. Ritterbush, Ph.D.......... 52 1992 Director
Pieter J. Schiller................... 61 1995 Director
Terence E. Winters, Ph.D............. 56 1992 Director
</TABLE>
The principal occupations and business experience, for at least the past
five years, of each nominee are as follows:
Dr. Agersborg has been Chairman of the Company's Board of Directors since
March 1992 and served as its Chief Executive Officer and President until March
1994. Dr. Agersborg also serves as Chairman, President and Chief Scientific
Officer of Afferon Corporation and Vice-Chairman and Chief Scientific Officer of
Maret Corporation, having joined such companies in September 1992 and September
1994, respectively. Dr. Agersborg has also served as director of Lidak
Pharmaceutical since October 1992. Each of such companies engages in
pharmaceutical development. From May 1987 until his retirement in June 1990, Dr.
Agersborg was the President of Wyeth-Ayerst Research Division of American Home
Products Corporation. Prior to that, and beginning in 1975, he was a Vice
President, and then an Executive Vice President, of Wyeth-Ayerst Laboratories
Research Division.
Dr. Gallagher joined the Company in April 1994 as President and Chief
Executive Officer and was elected to the Board of Directors in November 1994.
From 1988 until joining the Company, Dr. Gallagher was
-2-
<PAGE>
employed by Bristol-Myers Squibb Company ("BMS") and its predecessor, Squibb
Corporation, in various executive positions including strategic planning,
worldwide product and business development and marketing. From 1991 until
joining the Company, Dr. Gallagher was Vice President and General Manager of
Squibb Diagnostics, the in vivo imaging pharmaceutical division. Prior to that,
Dr. Gallagher served for ten years with E.I. DuPont de Nemours & Co. in a
variety of pharmaceutical research, development, marketing and business
management positions.
Dr. Barnett has been a director of the Company since February 1997. He is
Senior Vice President and Chief Operating Officer of United Dental Care, Inc., a
managed dental benefits firm, where he has served in such capacity since January
1995. From August 1994 to January 1995, Dr. Barnett was Executive Director of
Prudential DMO, and from March 1993 to August 1994, he served as an independent
consultant in the managed care field. From January 1985 to March 1993, Dr.
Barnett was a Senior Vice President with Pearle Vision, Inc.
Mr. Daverman has been a director of the Company since November 1995. He is
a managing general partner of Marquette Venture Partners ("MVP"), a venture
capital investment company which he founded in 1987. Mr. Daverman is President
of Marquette Management Partners, LLC, the general partner of Marquette Venture
Partners, L.P. and a general partner of MG II, L.P., the general partner of
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P. He is a
member of the Board of Directors of the Technology Advisory Group of the
Technology Management Office of the University of Michigan. Mr. Daverman is a
member of the Board of Directors of Endocardial Solutions, Inc. and numerous
privately held companies.
Mr. Easton has been a director of the Company since November 1993. He is
Managing Director of The Wilkerson Group, Inc., a major health care consulting
firm, where he has served in such capacity since 1986. Mr. Easton is a former
President of the Biomedical Marketing Association.
Dr. Ritterbush has been a director of the Company since its founding in
January 1992. He is managing general partner of Fairfax Partners/The Venture
Fund of Washington, L.P., a venture capital fund, which he co-founded in 1989.
Dr. Ritterbush serves as a director and is on the compensation committee of the
Board of Directors of Apache Medical Systems, Inc.
Mr. Schiller has been a director of the Company since September 1995. He
joined Advanced Technology Ventures ("ATV"), a venture capital fund, in
September 1986 and is currently a general partner of various ATV funds. He is a
director of Anthra Pharmaceuticals, Inc., Endius, Inc., Afferon Corporation,
Avicenna Systems Corporation, HealthShare Technology, Inc. and Novoste
Corporation.
Dr. Winters has been a director of the Company since its founding in
January 1992. He is a general partner of Columbine Venture Funds, a venture
capital fund, of which he was a founder in 1983. He also serves as a director of
Afferon Corporation, Maret Corporation and Melanotan Corporation.
All directors hold office until the next annual meeting of stockholders and
until their successors shall have been duly elected and qualified. None of the
Company's directors are related to any other director or to any executive
officer of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE
NOMINEES FOR THE BOARD OF DIRECTORS.
COMMITTEES AND MEETINGS OF THE BOARD
The Board of Directors has a Compensation Committee (the "Compensation
Committee"), which approves salaries and incentive compensation for executive
officers of the Company and which administers the Company's stock option plans,
and an Audit Committee, which reviews the results and scope of the audit and
other services provided by the Company's independent accountants. The
Compensation Committee currently consists of Robert J. Easton, Stephen W.
Ritterbush, Ph.D. and Terence E. Winters, Ph.D. The Compensation Committee was
established in March 1996 and held two meetings in 1998. The Audit Committee
currently consists of James E. Daverman, Stephen W. Ritterbush, Ph.D. and Pieter
J. Schiller. The Audit Committee was established in March 1996 and held one
meeting in 1998. There were four meetings of the Board of Directors during 1998.
Each
-3-
<PAGE>
incumbent director attended at least 75% of the aggregate of all meetings of the
Board of Directors held during the period in which he served as a director and
the total number of meetings held by the committee on which he served during the
period, if applicable.
COMPENSATION OF DIRECTORS
Helmer P.K. Agersborg is paid $36,000 per year for his services as Chairman
of the Board. Peter R. Barnett receives $1,500 per meeting for each meeting of
the Board of Directors attended. The Wilkerson Group, Inc. receives $1,500 per
meeting for each meeting of the Board of Directors attended by Mr. Easton. No
other directors receive cash compensation for services on the Board of
Directors. The Company provides reimbursement to directors for reasonable and
necessary expenses incurred in connection with attendance at meetings of the
Board of Directors and other Company business.
From time-to-time, members of the Board of Directors have been granted
options to purchase shares of Common Stock of the Company. See "Security
Ownership of Certain Beneficial Owners and Management."
Pursuant to the Company's 1996 Non-Employee Director Stock Option Plan (the
"Non-Employee Plan"), each new non-employee director of the Company is
automatically granted an option to purchase 25,000 shares of Common Stock, at an
exercise price per share equal to the then current fair market value per share.
All such options become exercisable in five equal annual installments commencing
one year after the date of grant provided that the optionee then remains a
director at the time of vesting of the installments. The right to exercise
annual installments of options under the Non-Employee Plan will be reduced
proportionately based on the optionee's actual attendance at Directors' meetings
if the optionee fails to attend at least 75% of the Directors' meetings held in
any calendar year. On February 12, 1998 Dr. Gallagher was granted 75,000 options
under the 1996 Stock Option Plan at an exercise price of $6.25 per share and on
January 15, 1999 Dr. Gallagher was granted 75,000 options outside of any stock
option plan at an exercise price of $10.0625 per share. All of such options
become exercisable in five equal annual installments beginning on the
anniversary of their respective grant dates.
-4-
<PAGE>
EXECUTIVE OFFICERS
The following table identifies the current executive officers of the
Company:
<TABLE>
<CAPTION>
Capacities in In Current
Name Age Which Served Position Since
- ---- --- ------------ --------------
<S> <C> <C>
Brian M. Gallagher, Ph.D............... 51 President, Chief Executive April 1994
Officer and Director (Director since November
1994)
Robert A. Ashley(1).................... 41 Senior Vice President January 1999
Nancy C. Broadbent(2).................. 43 Chief Financial Officer, March 1996
Treasurer and Secretary
Douglas C. Gehrig(3)................... 54 Vice President, Sales June 1997
David P. Pfeiffer(4)................... 36 Vice President, Marketing June 1997
- -----------
</TABLE>
(1) Mr. Ashley joined the Company in September 1994 as Vice President,
Commercial Development. He was promoted to Senior Vice President in January
1999. From 1989 until joining the Company, he was employed by BMS and its
predecessor, Squibb Corporation, in various positions including product
development, commercial and business development and, most recently, as
Director, Business Development where he was responsible for the worldwide
product and market development of several new drugs. From 1979 to 1989, Mr.
Ashley held various positions at Amersham International (UK) Ltd.,
including research, development, manufacturing, sales and marketing
positions, as well as worldwide product development and product launch
positions.
(2) Ms. Broadbent joined the Company in March 1996 as Chief Financial Officer,
Treasurer and Secretary. From October 1994 until joining the Company, Ms.
Broadbent served as Senior Vice President, Chief Financial Officer and
director of Human Genome Sciences, Inc., a biotechnology company. From
January 1993 to October 1994, she served as Vice President and Chief
Financial Officer of Cangene, Inc., a biopharmaceutical company. From
January 1992 through December 1992, Ms. Broadbent served as an independent
financial consultant. From March 1990 to December 1991, she was employed by
Baring Brothers & Co., Inc., initially as Senior Vice President and then as
Executive Director, Corporate Finance. Prior to that, Ms. Broadbent served
for nine years in corporate finance positions with Salomon Brothers, Inc.
and PaineWebber Incorporated.
(3) Mr. Gehrig joined the Company in June 1997 as Vice President, Sales. From
September 1991 until joining the Company, he was employed by the
Musculoskeletal Transplant Foundation, most recently as Vice President,
Hospital Sales. From January 1990 until September 1991, Mr. Gehrig was
Director of Sales for the Consumer Product Division of Warner Lambert.
Prior to that, he served for 19 years in various sales, marketing and sales
management positions with Johnson & Johnson.
(4) Mr. Pfeiffer joined the Company in June 1997 as Vice President, Marketing.
From September 1995 until June 1997, Mr. Pfeiffer served as Director of
Marketing, Health Management Services, for SmithKline Beecham. From May
1994 to September 1995, Mr. Pfeiffer served as Director, Disease Management
Services of Stuart Disease Management Services, a division of Zeneca
Pharmaceuticals. From October 1991 to May 1994 he was employed in various
product management positions with Zeneca Pharmaceuticals Group. From July
1988 to October 1991, Mr. Pfeiffer held various marketing and product
management positions with the Lederle Laboratories Division of American
Cyanamid.
-5-
<PAGE>
None of the Company's executive officers is related to any other executive
officer or to any director of the Company. Executive officers of the Company are
elected annually by the Board of Directors and serve until their successors are
duly elected and qualified.
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 directors, officers and stockholders who
beneficially own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act to file initial reports of
ownership and reports of changes in ownership with respect to the Company's
equity securities with the Securities and Exchange Commission (the "SEC"). All
reporting persons are required by SEC regulation to furnish the Company with
copies of all reports that such reporting persons file with the SEC pursuant to
Section 16(a).
Based solely on the Company's review of the copies of such forms received
by the Company and upon written representations of the Company's reporting
persons received by the Company, each such reporting person has filed all of
their respective reports pursuant to Section 16(a) on a timely basis.
-6-
<PAGE>
EXECUTIVE COMPENSATION
Summary of Compensation in Fiscal 1998, 1997 and 1996
The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to
each person who served as the Company's Chief Executive Officer at any time
during 1998 and each other executive officer of the Company whose aggregate cash
compensation exceeded $100,000 at the end of 1998 (collectively, the "Named
Executives") during the years ended December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
Annual Compensation Awards
--------------------------------------------------------------
Securities
Salary Bonus Underlying All Other
Name and Principal Position Year Options Compensation
($) ($) (#) ($)
(a) (b) (c) (d) (g) (i)
- ------------------------------------ ----------- ------------------- ---------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D.(2).... 1998 262,500 53,074 75,000 --
President and 1997 250,000 42,536 50,000 --
Chief Executive Officer 1996 225,000 50,000 -- --
Robert A. Ashley................ 1998 175,000 36,701 25,000 --
Senior Vice President 1997 157,500 36,125 25,000 --
1996 139,961 30,000 -- --
Nancy C. Broadbent(3)........... 1998 182,000 36,789 25,000 --
Chief Financial Officer, 1997 173,250 36,380 25,000 --
Treasurer and Secretary 1996 137,500 30,000 60,000 --
Douglas C. Gehrig(4)............ 1998 153,500 36,413 20,000 --
Vice President, Sales 1997 78,977 800 60,000 --
David F. Pfeiffer(5)............ 1998 153,500 36,544 20,000 35,000(6)
Vice President, Marketing 1997 84,375 656 60,000 --
- -----------
</TABLE>
(1) The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total annual salary and bonus reported in the above table.
(2) In November 1994, Dr. Gallagher purchased 125,000 shares of the Company's
restricted Common Stock at $0.335 per share. Such shares are subject to the
Company's right of first refusal, pursuant to which the Company may buy
them back from Dr. Gallagher at $0.335 per share, if Dr. Gallagher is
terminated for cause, and at the then current market value per share, if he
is terminated for any other reason. At December 31, 1998, Dr. Gallagher
held 125,000 shares of restricted Common Stock with a year-end value of
$1,161,250 based on the value of the Common Stock as of such date ($9.625
per share), less the purchase price per share paid for such shares ($0.335
per share).
(3) Ms. Broadbent joined the Company in March 1996 as Chief Financial Officer,
Treasurer and Secretary.
(4) Mr. Gehrig joined the Company in June 1997 as Vice President, Sales.
(5) Mr. Pfeiffer joined the Company in June 1997 as Vice President, Marketing.
(6) Represents reimbursable relocation allowance.
-7-
<PAGE>
Option Grants in 1998
The following table sets forth information concerning individual grants of
stock options made pursuant to the 1996 Stock Option Plan during 1998 to each of
the Named Executives.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------- ---------------------------
Individual Grants
---------------------------
- -------------------------------- --------------- ------------- ------------- -------------- ---------------------------
Potential Realizable
Percent of Value at
Number of Total Assumed Annual Rates of
Securities Options Stock
Underlying Granted to Exercise or Price Appreciation for
Options Employees Base Price Option
Granted in Fiscal Expiration Term (3)
---------------------------
Name (#)(1) Year (2) ($/Sh) Date 5%($) 10%($)
(a) (b) (c) (d) (e) (f) (g)
- -------------------------------- --------------- ------------- ------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D..... 75,000 23.9% $6.25 2/12/08 294,794 747,067
Robert A. Ashley............. 25,000 8.0% $6.25 2/12/08 98,265 249,022
Nancy C. Broadbent........... 25,000 8.0% $6.25 2/12/08 98,265 249,022
Douglas C. Gehrig............ 20,000 6.4% $6.25 2/12/08 78,612 199,218
David F. Pfeiffer............ 20,000 6.4% $6.25 2/12/08 78,612 199,218
- -----------
</TABLE>
(1) Such options were granted pursuant to and in accordance with the Company's
1996 Stock Option Plan. For a complete description of such plan, see "1996
Stock Option Plan Proposal."
(2) Based on an aggregate of 313,500 options granted to employees in 1998,
including options granted to Named Executives.
(3) Based on a grant date fair market value of $6.25 per share.
-8-
<PAGE>
Aggregated Option Exercises in 1998
and Year End Option Values
The following table sets forth information concerning each exercise of
options during 1998 by each of the Named Executives and the year end value of
unexercised in-the-money options.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------------
Number of
Securities Underlying Value of
Unexercised Unexercised
Options at In-the-Money
Fiscal Options at
Year-End Fiscal
Shares (#) Year-End
Acquired on Value Exercisable/ ($) (1)
Exercise Realized Unexercisable Exercisable/
Name (#) ($) (d) Unexercisable
(a) (b) (c) (e)
- -------------------------------- ------------------ ------------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D........ -- -- 97,500/127,500 $786,688/$383,438
Robert A. Ashley................ 9,375 $82,406 42,500/54,375 $327,172/$175,859
Nancy C. Broadbent.............. -- -- 17,000/69,000 $94,625/$279,875
Douglas L. Gehrig............... -- -- 24,000/56,000 $0/$67,500
David P. Pfeiffer............... -- -- 24,000/56,000 $0/$67,500
- -----------
</TABLE>
(1) Based on a year end fair market value of the underlying securities equal to
$9.625 per share, less the exercise price payable for such shares.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has executed indemnification agreements with each of its
executive officers and directors pursuant to which the Company has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company. In general, the
Company's employees are covered by confidentiality agreements.
In addition, each of Dr. Gallagher, Ms. Broadbent and Messrs. Ashley,
Gehrig and Pfeiffer have agreed that during the term of his or her employment
and for a period of two years thereafter, such person will not directly or
indirectly provide services to or for any business engaged in research regarding
the development, manufacture, testing, marketing or sale of collagenase
inhibiting drugs for application in periodontal disease or any other application
which, during the period of such person's employment with the Company, is either
marketed or in advanced clinical development by the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of, and during 1998 consisted of,
Robert J. Easton, Stephen W. Ritterbush, Ph.D. and Terence E. Winters, Ph.D.
There are no, and during 1998 there were no, Compensation Committee Interlocks.
-9-
<PAGE>
As of April 1, 1999, each of Fairfax Partners/The Venture Fund of
Washington, L.P., with which Dr. Ritterbush is affiliated and Columbine Venture
Fund II, L.P., with which Dr. Winters is affiliated, held 446,517 and 969,328
shares, respectively, of the Company's Common Stock which were previously issued
upon conversion of certain shares of the Company's Series A, Series B or Series
C Redeemable Preferred Stock previously held by such entities. Such shares of
Common Stock are entitled to certain registration rights and certain rights to
participate in certain future offerings undertaken by the Company.
In September 1995, the Company and the then holders of the Company's Series
A, Series B and Series C Redeemable Preferred Stock entered into a Registration
Rights Agreement (the "Rights Agreement") pursuant to which the Company has
granted certain registration rights to such Stockholders. Pursuant to the Rights
Agreement, at any time beginning six months after June 20, 1996, the effective
date of the Company's initial public offering, the holders of at least a
majority of the Common Stock issued upon the conversion of the Series A, Series
B and Series C Redeemable Preferred Stock (the "Registrable Securities") have
the right, subject to certain restrictions set forth in the Rights Agreement, to
require that the Company register the Registrable Securities requested by such
holders at the Company's expense (on no more than two occasions) on either a
Form S-1, Form S-2 or Form S-3 Registration Statement under the Securities Act
of 1933, as amended (the "Securities Act"). The Company is not, however,
required to register any Registrable Securities unless such shares represent at
least 10% of the Company's outstanding shares of Common Stock, or, if less than
10%, if the anticipated aggregate offering price exceeds $1,000,000.
The holders of Registrable Securities also have the right to an unlimited
number of registrations on Form S-3 under the Securities Act. The Company is
not, however, required to effect such a registration unless the requesting
holders reasonably anticipate having an aggregate disposition price of at least
$500,000.
Also pursuant to the Rights Agreement, if, at any time during the
seven-year period commencing on the effective date of the Company's initial
public offering, the Company proposes to register any of its Common Stock under
the Securities Act for sale to the public, the holders of the Registrable
Securities have unlimited piggyback registration rights at the Company's
expense, subject to certain restrictions set forth in the Rights Agreement.
Also in September 1995, the Company granted to the then holders of Series
A, Series B and Series C Redeemable Preferred Stock certain rights to
participate in certain future offerings undertaken by the Company. Such rights
to participate require that, with certain exceptions including, but not limited
to, an underwritten public offering, any time the Company proposes to issue,
sell or exchange, or reserve therefor, any securities, the Company must first
offer to sell to each of the pre-conversion holders of Series A, Series B and
Series C Redeemable Preferred Stock their respective pro rata share of such
securities at a price and on terms identical to the price and terms of the
securities proposed to be issued, sold or exchanged in the applicable offering.
-10-
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total return on the Nasdaq Composite
Index and the Nasdaq Pharmaceutical Index (capitalization weighted) for the
period beginning on the date on which the Securities and Exchange Commission
declared effective the Company's Form 8-A Registration Statement pursuant to
Section 12 of the Exchange Act and ending on the last day of the Company's last
completed fiscal year.
COMPARISON OF CUMULATIVE TOTAL RETURN(1)(2)(3)
Among the Company, the Nasdaq Composite Index and the
Nasdaq Pharmaceutical Index
(Capitalization Weighted)
[Graph goes here]
<TABLE>
<CAPTION>
Company/ Base Period December June December June December
Index Name June 1996 1996 1997 1997 1998 1998
---------- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CGPI................ $100 $ 89.04 $ 131.51 $ 136.99 $ 94.52 $ 105.48
NASDAQ.............. 100 110.46 123.67 135.61 $ 162.98 $ 190.29
NASDAQ PHAR......... 100 98.41 101.11 101.87 $ 104.04 $ 130.72
</TABLE>
- -----------
(1) Graph assumes $100 invested on June 20, 1996 in the Company's Common Stock,
the Nasdaq Composite Index and the Nasdaq Pharmaceutical Index
(capitalization weighted).
(2) Total return assumes reinvestment of dividends.
(3) Year ended December 31.
-11-
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has furnished the following report:
The Compensation Committee is composed of three non-employee directors. The
Compensation Committee recommends, and the Board approves, all matters relating
to executive compensation, including setting and administering policies
governing executive salaries, bonuses (if any) and stock option awards (if any).
The Compensation Committee meets twice annually to set performance objectives
for the Chief Executive Officer ("CEO") and to determine the annual compensation
of the CEO and other senior executives of the Company. The CEO is not present
during the discussion of his compensation.
Executive Compensation Policy
- -----------------------------
The goal of the Company's executive compensation policy is to ensure that
an appropriate relationship exists between executive compensation and the
creation of stockholder value, while at the same time attracting and retaining
qualified senior management. Historically, the Company has operated as a
"virtual" pharmaceutical company with a small number of highly experienced
senior executives determining and executing the Company's strategy while
contracting out pharmaceutical development activities to clinical research and
other third party organizations. More recently, however, the Company has and
will continue to expand its sales and marketing infrastructure. In order to
continually attract highly experienced executives, the Company's compensation
packages for senior executives are highly competitive with those paid to
executives of other emerging pharmaceutical companies.
Compensation Mix
- ----------------
The Company's executive compensation packages generally include three
components: base salary, a discretionary annual cash bonus and stock options.
Base Salary
- -----------
The Compensation Committee seeks to establish base salaries for each
position and level of responsibility which are competitive with those of
executive officers at other emerging pharmaceutical companies.
Discretionary Cash Bonus
- ------------------------
The Compensation Committee believes that discretionary cash bonuses are
important to motivate and reward executive officers. However, cash bonuses are
not guaranteed. Annual cash bonuses are awarded to executives based on their
achievements against a stated list of objectives developed at the beginning of
each year by senior management and the Compensation Committee. Such objectives
are reviewed and approved by the Board of Directors.
Stock Options
- -------------
Stock option grants under the Company's stock option plans are designed to
align the long term interests of the Company's executives with those of its
stockholders by rewarding executives for increasing stockholder value. All
executive officers are awarded option grants upon joining the Company which are
competitive with those at comparable emerging pharmaceutical companies. In
addition, the Compensation Committee may award additional stock option grants
annually. When granting stock options, the Compensation Committee considers the
recommendation of the Company's Chief Executive Officer and the relative
performance and contributions of each officer compared to that of other officers
within the Company with similar levels of responsibility.
Compensation of the Chief Executive Officer
- -------------------------------------------
In establishing Dr. Gallagher's compensation package, the Compensation
Committee seeks to maintain a level of total current compensation that is
competitive with that paid to chief executive officers of other comparable
emerging pharmaceutical companies. In addition, in order to align Dr.
Gallagher's interests with the interests of
-12-
<PAGE>
the Company's stockholders, the Compensation Committee attempts to make a
substantial portion of the value of his total compensation dependent on the
appreciation of the Company's stock price.
Dr. Gallagher's performance is evaluated annually by the Compensation
Committee against a stated list of short, medium and long term objectives
developed by the Compensation Committee at the beginning of each year and
approved by the Board of Directors. Based on his achievements relating to these
objectives, the Compensation Committee recommended, and the board approved, a
bonus to Dr. Gallagher of $75,000 for 1998, which is paid in 1999, and an
increase in base salary from $262,500 to $268,000 effective January 1, 1999.
Section 162(m) of the Internal Revenue Code disallows the deductibility by
the Company of any compensation over $1 million paid to the Chief Executive
Officer or any of the other four most highly compensated executives, unless
certain criteria are satisfied. The Company's Chief Executive Officer and the
other named executives have not received annual compensation over $1 million,
and the Company has not determined what measures, if any, it should take to
comply with Section 162.
Compensation Committee Members:
Robert J. Easton
Stephen W. Ritterbush, Ph.D.
Terence E. Winters, Ph.D.
-13-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are, as of February 15, 1999, approximately 118 holders of record and
3,000 beneficial holders of the Company's Common Stock. The following table sets
forth certain information, as of February 15, 1999, with respect to holdings of
the Company's Common Stock by (i) each person known by the Company to be the
beneficial owner of more than 5% of the total number of shares of Common Stock
outstanding as of such date, (ii) each of the Company's directors (which
includes all nominees) and Named Executives, and (iii) all directors and
officers as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner(1) BeneficialOwnership(1) of Class(2)
- --------------------------------------- ---------------------- -----------
<S> <C> <C>
(i) Certain Beneficial Owners:
Zesiger Capital Group LLC
320 Park Avenue, 30th Floor
New York, New York 10022............................... 972,300 11.3%
Columbine Venture Fund II, L.P.
6155 N. Scottsdale Road, Suite 100
Scottsdale, Arizona 85250.............................. 969,328 11.3
Marquette Venture Partners II, L.P.
and MVP II Affiliates Fund, L.P.
520 Lake Cook Road, Suite 450
Deerfield, Illinois 60015.............................. 916,313(3) 10.7
Thomson Horstmann & Bryant, Inc.
Park 80 West Plaza Two
Saddle Brook, NJ 07663................................. 613,600 7.1
Delphi Ventures III, L.P. and
Delphi Investments III, L.P.
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, California 94025........................... 510,000(4) 5.9
Fairfax Partners/The Venture Fund
of Washington, L.P.
1568 Spring Hill Road, Suite 200
McLean, Virginia 22102................................. 446,517 5.2
(ii) Directors (which includes all nominees) and
Named Executives:
Brian M. Gallagher, Ph.D............................... 412,500(5) 4.6
Robert A. Ashley....................................... 150,725(6) 1.7
Nancy C. Broadbent..................................... 124,000(7) 1.4
Douglas C. Gehrig...................................... 70,500(8) *
David F. Pfeiffer...................................... 70,000(8) *
Helmer P.K. Agersborg, Ph.D............................ 126,209(9) 1.5
Peter R. Barnett, D.M.D................................ 12,000(10) *
James E. Daverman...................................... 926,313(11) 10.8
Robert J. Easton....................................... 41,689(12) *
Stephen W. Ritterbush, Ph.D............................ 456,517(13) 5.3
Pieter J. Schiller..................................... 400,299(14) 4.7
Terence E. Winters, Ph.D............................... 979,328(15) 11.4
(iii) All Directors and officers as a
group (12 persons)............................ 3,770,080(16) 40.4%
</TABLE>
-14-
<PAGE>
- -----------
* Less than 1%
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares.
(2) Applicable percentage of ownership for each holder is based on 8,589,704
shares of Common Stock outstanding on February 15, 1999, plus any Common
Stock equivalents and presently exercisable stock options or warrants held
by each such holder, and options or warrants held by each such holder which
will become exercisable within 60 days after February 15, 1999.
(3) Includes 890,860 shares and 25,453 shares owned by Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P., respectively.
(4) Includes 500,968 shares and 9,032 shares owned by Delphi Ventures III, L.P.
and Delphi Investments III, L.P., respectively.
(5) Of such shares, 125,000 are subject to certain rights of first refusal held
by the Company. See "EXECUTIVE COMPENSATION -- Summary of Compensation in
fiscal 1998, 1997 and 1996". Includes 287,500 shares of Common Stock
underlying options which are or may be exercisable as of February 15, 1999
or 60 days after such date.
(6) Includes 122,500 shares of Common Stock underlying options which are or may
be exercisable as of February 15, 1999 or 60 days after such date.
(7) Includes 99,000 shares of Common Stock underlying options which are or may
be exercisable as of February 15, 1999 or 60 days after such date. Also
includes 1,000 shares held as custodian to minor child.
(8) Includes 69,000 shares of Common Stock underlying options which are or may
be exercisable as of 2/15/99 or 60 days after such date.
(9) Includes 37,500 shares of Common Stock underlying options which are
exercisable as of February 15, 1999 or 60 days after such date.
(10) Includes 10,000 shares of Common Stock underlying options which are
exercisable as of February 15, 1999 or 60 days after such date.
(11) James E. Daverman is President of Marquette Management Partners, LLC, the
general partner of Marquette Venture Partners, L.P. and a general partner
of MG II, L.P., the general partner of Marquette Venture Partners II, L.P.
and MVP II Affiliates Fund, L.P. and, as such, has the power to vote or
direct the vote of and to dispose of or direct the disposition of the
shares owned by Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P. Mr. Daverman expressly disclaims beneficial ownership of such
shares, except as to his proportionate interest in Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P. Includes 10,000 shares
of Common Stock underlying options which are exercisable as of February 15,
1999 or 60 days after such date.
(12) Includes 10,000 shares of Common Stock underlying options which are
exercisable as of February 15, 1999 or 60 days after such date. Also
includes 6,400 shares held as trustee for Second Easton Family Charitable
Trust.
(13) Stephen W. Ritterbush, Ph.D. is a general partner of Fairfax Partners/The
Venture Fund of Washington, L.P. and, as such, has the power to vote or
direct the vote of and to dispose of or direct the disposition of the
shares owned by Fairfax Partners/The Venture Fund of Washington, L.P. Dr.
Ritterbush expressly disclaims beneficial ownership of such shares, except
as to his proportionate interest in Fairfax Partners/The Venture
-15-
<PAGE>
Fund of Washington, L.P. Includes 10,000 shares of Common Stock underlying
options which are exercisable as of February 15, 1999 or 60 days after such
date.
(14) Pieter J. Schiller is a general partner of Advanced Technology Ventures
III, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Advanced
Technology Ventures III, L.P. Mr. Schiller expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in
Advanced Technology Ventures III, L.P. Includes 10,000 shares of Common
Stock underlying options which are exercisable as of February 15, 1999 or
60 days after such date.
(15) Terence E. Winters, Ph.D. is a general partner of Columbine Venture Fund
II, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Columbine
Venture Fund II, L.P. Dr. Winters expressly disclaims beneficial ownership
of such shares, except as to his proportionate interest in Columbine
Venture Fund II, L.P. Includes 10,000 shares of Common Stock underlying
options which are exercisable as of February 15, 1999 or 60 days after such
date.
(16) See Notes 5 through 15.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of April 1, 1999, each of Advanced Technology Ventures III, L.P., with
which Mr. Schiller is affiliated, and Marquette Venture Partners II, L.P. and
MVP II Affiliates Fund, L.P., with which Mr. Daverman is affiliated, held
390,299, 890,860 and 25,453 shares, respectively, of the Company's Common Stock
which were previously issued upon conversion of the Company's Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock previously held by
each such entity. Such entities are, therefore, with respect to such shares of
Common Stock, entitled to the identical registration rights and rights to
participate in certain future offerings undertaken by the Company as are Fairfax
Partners/The Venture Fund of Washington, L.P., with which Dr. Ritterbush is
affiliated and Columbine Venture Fund II, L.P., with which Dr. Winters is
affiliated.
For information concerning such registration rights and rights to
participate in certain future offerings undertaken by the Company, and with
respect to Drs. Ritterbush and Winters, each a member of the Compensation
Committee. See "EXECUTIVE COMPENSATION -- Compensation Committee Interlocks and
Insider Participation."
In March 1999, each of Robert J. Easton and Marquette Venture Partners II,
L.P. and MVP II Affiliates Fund, L.P. executed a Stock Purchase Agreement and a
Stockholders and Registration Rights Agreement with respect to the purchase,
upon requisite stockholder approval, of shares of the Company's Series D
Preferred Stock. See "Series D Preferred Stock Issuance Proposal."
1996 STOCK OPTION PLAN PROPOSAL
The 1996 Stock Option Plan was adopted by the Board of Directors and
approved by the Stockholders of the Company on March 22, 1996 and March 29,
1996, respectively. Those eligible to receive stock option grants or stock
purchase rights under the 1996 Stock Option Plan include the Company's
employees, directors and consultants. The 1996 Stock Option Plan was adopted to
o attract and retain the best available personnel for positions of
substantial responsibility;
o provide additional incentives to employees, members of the Board and
consultants of the Company and its subsidiaries; and
o promote the success of the Company's business.
Currently there are 750,000 shares of Common Stock reserved for issuance upon
the exercise of options and/or stock purchase rights granted under the 1996
Stock Option Plan.
-16-
<PAGE>
The 1996 Stock Option Plan is administered by the Compensation Committee,
which is comprised solely of outside directors. The Compensation Committee
determines, among other things, the
o nature of the options to be granted;
o persons, or grantees, who are to receive options;
o number of shares to be subject to each option;
o exercise price of the options; and
o vesting schedule of the options.
The 1996 Stock Option Plan provides for the granting of options intended to
qualify as incentive stock options, or ISOs, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, to employees of the Company. The 1996
Stock Option Plan also provides for the granting of non-qualified stock options,
or NQSOs, to employees, non-employee directors and consultants who perform
services for the Company or its subsidiaries. The exercise price of all ISOs
granted under the 1996 Stock Option Plan may not be less than the fair market
value of the shares at the time the option is granted. In addition, no ISO may
be granted to an employee who owns more than 10% of the total combined voting
power of all classes of stock of the Company unless the exercise price as to
that employee is at least 110% of the fair market value of the stock at the time
of the grant. No employee may be granted ISOs which are exercisable for the
first time in any calendar year to the extent that the aggregate exercise value
of such option shares exceeds $100,000 as of the date of grant. Options may be
exercisable for a period of not more than ten years from the date of grant,
provided, however that the term of an ISO granted to an employee who owns more
that 10% of the total combined voting power of all classes of stock of the
Company may not exceed five years. The exercise price of NQSOs granted under the
1996 Stock Option Plan may not be less than 85% of the fair market value per
share of the Common Stock on the date of grant. No NQSO may be granted to a
person who owns more than 10% of the total combined voting power of all classes
of stock of the Company unless the exercise price to that person is at least
110% of the fair market value of the stock at the time of the grant. The
exercise price must be paid in full at the time an option is exercised, and at
the Compensation Committee's discretion, all or part of the exercise price may
be paid with previously owned shares or other approved methods of payment. An
option is exercisable as determined by the Compensation Committee. The 1996
Stock Option Plan will terminate on March 28, 2006.
Subject to the terms as specified in any option agreement, the following
time table applies with respect to exercising outstanding vested options if a
grantee's employment or consulting relationship is terminated:
Reason for termination
during term of employment
or consulting relationship Latest exercise date
-------------------------- --------------------
Disability One year following termination by grantee
Death One year following death by grantee's estate
Any other reason 90 days following termination by grantee
Options are not assignable or otherwise transferable except by will or the
laws of descent and distribution and shall be exercisable during the grantee's
lifetime only by the grantee.
The 1996 Stock Option Plan also permits the awarding of stock purchase
rights at not less than 50% of the fair market value of the shares as of the
date offered. The 1996 Stock Option Plan requires the execution of a restricted
stock purchase agreement in a form determined by the Compensation Committee.
Once a stock purchase right is exercised, the purchaser will have the rights of
a shareholder. The purchaser will be a shareholder when the purchase is entered
on the Company's records.
-17-
<PAGE>
The 1996 Stock Option Plan provides that in the event of a
o reorganization; o recapitalization;
o stock split; o stock dividend;
o combination of or reclassification o or any other change in the corporate
of shares; structure or shares of the Company,
the Board of Directors shall make adjustments with respect to the shares that
may be issued under the 1996 Stock Option Plan or that are covered by
outstanding options, or in the option price per share.
The Board shall notify the grantee at least fifteen days prior to a
dissolution or liquidation of the Company. The outstanding options, not
previously exercised, will terminate immediately prior to the consummation of
such proposed action. In the event of a merger or consolidation of the Company
or the sale of all or substantially all of the Company's assets (a "merger"),
the outstanding options will be assumed or an equivalent option will be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. If such successor corporation does not agree to assume
the outstanding options or to substitute equivalent options, the Board of
Directors will, in lieu of such assumption or substitution, provide for the
grantee to have the right to exercise all of his outstanding options. If the
Board of Directors makes an option fully exercisable in lieu of assumption or
substitution, in the event of a merger, the Board of Directors shall notify the
grantee that the option will be fully exercisable for a period of fifteen days
from the date of such notice, and the option will terminate upon the expiration
of such period. The option will be considered assumed if, following the merger,
the option confers the right to purchase, for each share of Common Stock subject
to the option immediately prior to the merger, the consideration (whether stock,
cash, or other securities or property) received in the merger 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). If such
consideration received in the merger was not solely common stock of the
successor corporation or its parent, the Board of Directors may, with the
consent of the successor corporation and the participant, provide for the
consideration to be received upon the exercise of an option for each share of
stock subject to the option 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.
The Board may at any time amend, alter, suspend or discontinue the 1996
Stock Option Plan, but no such action will be made which would impair the rights
of any grantee under any grant previously made, without such grantee's consent.
In addition, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act, or with Section 422 of the Code (or any other applicable
law or regulation, including the requirements of the National Association of
Securities Dealers or an established stock exchange), the Company shall obtain
shareholder approval of any 1996 Stock Option Plan amendment in such a manner
and to such a degree as required. Any such amendment or termination of the 1996
Stock Option Plan is not permitted to affect options already granted and such
options will remain in full force and effect as if the 1996 Stock Option Plan
had not been amended or terminated, unless mutually agreed otherwise between the
grantee and the Board of Directors, which agreement must be in writing and
signed by the grantee and the Company.
FEDERAL INCOME TAX ASPECTS
(a) Incentive Stock Options
Some options to be issued under the 1996 Stock Option Plan will be
designated as ISOs and are intended to qualify under Section 422 of the Code.
Under the provisions of that Section and the related regulations, an optionee
will not be required to recognize any income for Federal income tax purposes at
the time of grant of an ISO. Additionally, the Company will not be entitled to
any deduction. The exercise of an ISO also is not a taxable event, although the
difference between the option price and the fair market value on the date of
exercise is an item of tax preference for purposes of the alternative minimum
tax. The taxation of gain or loss upon the sale of stock acquired upon exercise
of an ISO depends in part on whether the stock is disposed of at least two years
after the date the
-18-
<PAGE>
option was granted and at least one year after the date the stock was
transferred to the optionee, referred to as the ISO Holding Period.
If the ISO Holding Period is not met, then, upon disposition of such
shares, referred to as a disqualifying disposition, the optionee will realize
compensation, taxable as ordinary income, in an amount equal to the excess of
the fair market value of the shares at the time of exercise over the option
price, limited, however, to the gain on sale. Any additional gain would be
taxable as capital gain (see discussion of capital gains under the section
relating to NQSOs, below). If the optionee disposes of the shares in a
disqualifying disposition at a price that is below the fair market value of the
shares at the time the ISO was exercised and such disposition is a sale or
exchange to an unrelated party, the amount includible as compensation income to
the optionee will be limited to the excess of the amount received on the sale or
exchange over the exercise price.
If the optionee recognizes ordinary income upon a disqualifying
disposition, the Company generally will be entitled to a tax deduction in the
same amount.
Effective as of January 1, 1998, the holding period for long-term capital
gain treatment is reduced to one year. Hence, if the ISO Holding Period is met,
any disposition on or after January 1, 1998 would be taxable as a long-term
capital gain or loss; any such gains are taxable at a maximum rate of 20%.
A maximum capital gains rate of 18% will apply to certain sales after
December 31, 2000 of shares acquired upon the exercise of an ISO if such shares
have been held for at least five years.
If the ISO is exercised by delivery of previously owned shares of Common
Stock in partial or full payment of the option price, no gain or loss will
ordinarily be recognized by the optionee on the transfer of such previously
owned shares. However, if the previously owned transferred shares were acquired
through the exercise of an ISO, the optionee may realize ordinary income with
respect to the shares used to exercise an ISO if such transferred shares have
not been held for the ISO Holding Period. If an ISO is exercised through the
payment of the exercise price by the delivery of Common Stock, to the extent
that the number of shares received exceeds the number of shares surrendered,
such excess shares will possibly be considered ISO stock with a zero basis.
(b) Non-Qualified Stock Options
Some options to be issued under the 1996 Stock Option Plan will be
designated as NQSOs. If (as in the case of NQSOs granted under the 1996 Stock
Option Plan at this time) the NQSO does not have a "readily ascertainable fair
market value" at the time of the grant, the NQSO is not included as compensation
income at the time of grant. Rather, the optionee realizes compensation income
only when the NQSO is exercised and the optionee has become substantially vested
in the shares transferred. The shares are considered to be substantially vested
when they are either transferable or not subject to a substantial risk of
forfeiture. The amount of income realized is equal to the excess of the fair
market value of the shares at the time the shares become substantially vested
over the sum of the exercise price plus the amount, if any, paid by the optionee
for the NQSO. If a NQSO is exercised through payment of the exercise price by
the delivery of Common Stock, to the extent that the number of shares received
by the optionee exceeds the number of shares surrendered, ordinary income will
be realized by the optionee at that time only in the amount of the fair market
value of such excess shares, and the tax basis of such excess shares will be
such fair market value. When the optionee disposes of the shares acquired
pursuant to a NQSO, the optionee will recognize capital gain or loss equal to
the difference between the amount received for the shares and the optionee's
basis on the shares.
Under the 1996 Stock Option Plan, the optionee's basis in the shares will
be the exercise price plus the compensation income realized at the time of
exercise. Under tax legislation which became effective as of January 1, 1998,
the capital gain or loss will be short-term (with gains generally subject to tax
as ordinary income) if the shares are disposed of within one year after the
option is exercised and long term (with gains generally subject to tax at a
maximum rate of 20%) if the shares are disposed of more than one year after the
option is exercised.
-19-
<PAGE>
A maximum capital gains rate of 18% will apply to certain sales, after
December 31, 2000, of shares acquired upon the exercise of an NQSO if such
shares have been held for at least five years.
The Company is generally entitled to a deductible compensation expense in
an amount equivalent to the amount included as compensation income to the
optionee. This deduction is allowed in the Company's taxable year in which the
income is included as compensation to the optionee.
Except as otherwise indicated, the preceding discussion is based upon
Federal tax laws and regulations in effect on the date of the preparation of
this Summary, which are subject to change, and upon an interpretation of the
relevant sections of the Code, their legislative histories and the income tax
regulations which interpret similar provisions of the Code. Furthermore, the
forgoing is only a general discussion of the Federal income tax aspects of the
1996 Stock Option Plan and does not purport to be a complete description of all
Federal income tax aspects of the 1996 Stock Option Plan. Optionees may also be
subject to state and local taxes in connection with the grant or exercise of
options granted under the 1996 Stock Option Plan and the sale or other
disposition of shares acquired upon exercise of the options. Each key employee
receiving a grant of options should consult with his or her personal tax advisor
regarding the Federal, state and local tax consequences of participating in the
1996 Stock Option Plan.
PREVIOUSLY GRANTED OPTIONS UNDER THE 1996 STOCK OPTION PLAN
As of March 31, 1999, the Company had granted options to purchase an
aggregate of 749,950(1) shares of Common Stock under the 1996 Stock Option Plan
at an average exercise price of $9.51 per share. As of March 31, 1999, 184,212
options to purchase shares were vested and no options to purchase shares had
been exercised under the 1996 Stock Option Plan. The following table sets forth
the options granted under the 1996 Stock Option Plan to (i) the Named
Executives; (ii) all current executive officers as a group; (iii) each nominee
for election as a Director; (iv) all current Directors who are not executive
officers as a group; (v) each associate of any of such Directors, executive
officers or nominees; (vi) each person who has received or is to receive 5% of
such options or rights; and (vii) all employees, including all current officers
who are not executive officers, as a group:
<TABLE>
<CAPTION>
Options Granted
through Weighted Average
Name March 31, 1999 Exercise Price Expiration Date
- --------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D..................... 125,000 $7.35 2/2007-2/2008
Robert A. Ashley............................. 50,000 $7.63 2/2007-2/2008
Nancy C. Broadbent........................... 50,000 $7.63 2/2007-2/2008
Douglas C. Gehrig............................ 80,000 $9.53 7/2007-2/2008
David F. Pfeiffer............................ 80,000 $9.53 7/2007-2/2008
All current executive officers as a group
(5 persons)............................... 385,000 $8.33 2/2007-2/2008
All current Directors who are not executive
officers as a group (7 persons)........... -- -- --
All employees, including all current
officers who are not executive officers,
as a group (137 persons)(4)............... 364,950 $10.75 11/2006-2/2009
</TABLE>
As of March 31, 1999, the market value of the Common Stock underlying the
1996 Stock Option Plan was $[ ] per share.
- -----------
(1) Of the 749,950 options granted as of March 31, 1999, 3,000 of such options
have been canceled and may be reissued by the Company.
-20-
<PAGE>
(2) Options are granted under the 1996 Stock Option Plan pursuant to various
vesting schedules. In general, such options vest over two (2) to five (5)
year periods.
(3) All 142 of the Company's employees are eligible to participate in 1996
Stock Option Plan.
(4) Includes two (2) consultants who were granted options to purchase an
aggregate of 40,000 shares of Common Stock at an exercise price of $12.19
per share with an expiration date of February 2009.
Each of the following individuals holds more than five-percent (5%) of the total
options issuable under the 1996 Stock Option Plan: Brian M. Gallagher, Ph.D.
(16.67%); Robert A. Ashley (6.67%); Nancy C. Broadbent (6.67%); Douglas C.
Gehrig (10.67%) and David F. Pfeiffer (10.67%).
PROPOSED AMENDMENT
Stockholders are being asked to consider and vote upon a proposed amendment
(the "Amendment") to the 1996 Stock Option Plan to increase the maximum number
of shares of Common Stock available for issuance under the 1996 Stock Option
Plan from 750,000 to 1,500,000 shares and to reserve an additional 750,000
shares of Common Stock of the Company for issuance in connection with awards
granted under the 1996 Stock Option Plan.
The Board of Directors believes that the Amendment provides an important
inducement to recruit and retain the best available personnel. The Board of
Directors believes that providing employees with an opportunity to invest in the
Company rewards them appropriately for their efforts on behalf of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT.
-21-
<PAGE>
SERIES D PREFERRED STOCK ISSUANCE PROPOSAL
Stockholders are being asked to consider and vote upon a proposal to issue,
pursuant to a private placement (the "Private Placement"), 200,000 shares (the
"Preferred Shares") of Series D Preferred Stock at a price per share of $100.
The Series D Preferred Stock is initially convertible into an aggregate of
1,818,182 shares of Common Stock, or approximately 21.2% of the currently issued
and outstanding shares of Common Stock. The Private Placement includes the
issuance of 177,000 shares of Series D Preferred Stock, initially convertible
into 1,609,091 shares of Common Stock (or approximately 18.7% of the currently
issued and outstanding shares of Common Stock), to a single investor, OCM
Principal Opportunities Fund, L.P. ("OCM"). Among the purchasers of the balance
of the shares are Robert J. Easton, a Director of the Company, and Marquette
Venture Partners II, L.P. ("Marquette") and MVP II Affiliates Fund, L.P.
("MVP"), together the beneficial owners of more than 5% of the outstanding
shares of Common Stock. James E. Daverman, a Director of the Company, is the
President of the General Partner of Marquette and MVP. Based on the number of
shares to be issued (on an as-converted to Common Stock basis), certain dividend
provisions of the Preferred Shares and other rights and preferences thereof, the
Company, pursuant to The Nasdaq Stock Market, Inc.'s Marketplace Rules 4310(c)
and (d), seeks to obtain stockholder approval of the Private Placement.
As indicated in the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 and the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, the Company is in need of additional financing to
fund the Company's actual and planned operations. At December 31, 1998, the
Company had $10,250,317 of cash and cash equivalents.
The Company has incurred losses each year since inception and had an
accumulated deficit of $37,928,591 at December 31, 1998. The Company expects to
continue to incur losses in the near future from expenditures on sales and
marketing, manufacturing, drug development and administrative activities. The
Company currently estimates that cash on hand at December 31, 1998 together with
the proceeds of the Debt Financing (as hereinafter defined) and cash generated
from operations will be sufficient to satisfy the Company's cash requirements at
least through December 31, 1999. The Board of Directors of the Company
considered various means of procuring financing and has determined that, at the
present time, the Private Placement is in the best interests of the Company and
its stockholders. The Company believes that it may be required to seek
additional financing in the future to fund its operations and to continue to
develop its products.
STOCK PURCHASE AGREEMENT
On March 19, 1999, the Company executed a Stock Purchase Agreement (the
"Purchase Agreement") with six (6) investors pursuant to which the Company has
agreed to issue the Preferred Shares for an aggregate purchase price of
$20,000,000. The Preferred Shares, which have the rights and preferences
described below, are initially convertible into an aggregate of 1,818,182 shares
of Common Stock, or approximately 21.2% of the currently issued and outstanding
shares of Common Stock. The consummation of the Private Placement is subject to,
among other things, approval of the transaction by the stockholders of the
Company. If approved by the stockholders of the Company, it is anticipated that
the closing of the Private Placement would occur as soon as practicable
thereafter. Simultaneously with the execution of the Purchase Agreement, the
purchasers and the Company executed a Stockholders and Registration Rights
Agreement (the "Stockholders Agreement"), the material provisions of which are
described below.
DEBT FINANCING
On March 19, 1999, the Company completed a private placement of a Senior
Secured Convertible Note (the "Note") to OCM (the "Debt Financing"), raising
$10,000,000 in gross proceeds. The Note will pay interest at 12% per annum and
is due and payable on March 18, 2000. The Note must be prepaid upon the closing
of the Private Placement. In the event the Private Placement is not consummated
by June 30, 1999, the holder of the Note shall have the option to convert the
principal due under the Note, at a conversion price of $6.50 per share, into
1,538,462 shares of Common Stock. The accrued interest due under the Note is
also convertible into shares of Common Stock at a conversion price of $6.50 per
share. The shares of Common Stock issued upon conversion of
-22-
<PAGE>
the Note would have registration rights similar to those granted to the holders
of the Preferred Shares. See "- the Series D Preferred Stock - Information,
Registration and Other Rights" below.
VOTING AGREEMENT
Certain stockholders of the Company, including Brian M. Gallagher, Ph.D.,
Nancy C. Broadbent, Robert A. Ashley, Henry P.K. Agersborg, Ph.D., Robert J.
Easton, Zesiger Capital Group LLC (on its own behalf and as trustee on behalf of
certain stockholders), Columbine Venture Fund II, L.P., Marquette Venture
Partners II, L.P., MVP II Affiliates Fund, L.P., Delphi Ventures III, L.P. and
Delphi Investments III, L.P. and Fairfax Partners/The Venture Fund of
Washington, L.P., owning in the aggregate 4,764,580 shares of Common Stock
(approximately 55.2% of the currently outstanding shares of Common Stock
entitled to vote at the Meeting) have agreed to vote in favor of the Private
Placement.
THE SERIES D PREFERRED STOCK
Appendix A attached hereto is the proposed form of Certificate of
-----------
Designation, Preferences and Rights of Series D Cumulative Convertible Preferred
Stock (the "Designation"). The following is a summary of the Designation and of
the rights and preferences of the Series D Preferred Stock.
Designation and Amount. Preferred Stock of the Company designated as the
"Series D Cumulative Convertible Preferred Stock" (herein referred to as the
"Series D Preferred Stock"), having a par value per share equal to $.01, with
the number of shares constituting such series is 200,000.
Dividends. During the first three years after the date of issuance, the
holders of the outstanding shares of Series D Preferred Stock will be entitled
to receive, out of funds legally available therefor, an 8.4% annual dividend,
equal in value to $8.40 per share, payable on each July 31 and January 31 in
registered shares of Common Stock (valued at 100% of the average trading price
on the Nasdaq National Market for the five trading days immediately prior to the
dividend declaration date). After such three-year period, the holders of the
outstanding shares of Series D Preferred Stock will be entitled to receive, out
of funds legally available therefor, an 8% annual cash dividend, equal in value
to $8.00 per share, payable on each July 31 and January 31.
Conversion by Holders. Each share of Series D Preferred Stock will be
convertible, at the option of its holder, at any time after issuance, into
shares of Common Stock determined by dividing $100 by the conversion price,
which initially shall be $11 per share, for each share of Series D Preferred
Stock converted.
Voting Rights. The Series D Preferred Stock shall be entitled to vote
together with the holders of the Common Stock on all matters to be voted on by
the Company, on an as-converted to Common Stock basis. The approval of the
holders of at least 66 2/3% of the Series D Preferred Stock is required for
certain actions by the Company, including creating or issuing stock ranking
senior to the Series D Preferred Stock or issuing securities during the first
year after the original issuance of the Series D Preferred Stock at a price less
than the conversion price then in effect. The approval of the holders of at
least a majority of the Series D Preferred Stock is required for certain actions
by the Company, including paying dividends (other than those on the Series D
Preferred Stock), incurring indebtedness in excess of $10,000,000 for working
capital purposes, disposing of assets of the Company (except in the ordinary
course of business), acquisitions in any calendar year period in excess of
$10,000,000 and making research and development expenditures in any 12-month
period in excess of $7,000,000 unless the Company has reported net income for
four consecutive quarters.
Conversion by the Company. Each share of Series D Preferred Stock will be
convertible, at the option of the Company, into shares of Common Stock, at the
applicable conversion rate, at any time after the Common Stock has traded at a
price per share of at least 200% above the conversion price then in effect for
40 consecutive trading days, provided that the shares of Common Stock to be
issued upon such conversion are registered under the Securities Act of 1933, as
amended.
-23-
<PAGE>
Adjustment of Conversion Price. The conversion price of the Series D
Preferred Stock shall be adjusted, on a weighted average basis, upon the
issuance of securities, options or warrants at a price per share less than the
then effective conversion price.
Redemption. Each outstanding share of Series D Preferred Stock is
redeemable, at the option of the Company as follows: at $100 per share plus all
accrued and unpaid dividends if less than 5% of the Series D Preferred Stock
originally issued are outstanding; at $120 per share plus all accrued and unpaid
dividends in the event of a change in control of the Company between the third
and fifth anniversaries of the date of issuance of the Series D Preferred Stock;
and at $100 per share plus accrued and unpaid dividends in the event of a change
in control of the Company after the fifth anniversary of the date of issuance of
the Series D Preferred Stock.
Board Representation. The holders of the Series D Preferred Stock will be
entitled to elect one director to the Board of Directors of the Company. The
maximum size of the Board of Directors is set at nine members.
Default Dividends. The dividend payable to the holders of the Series D
Preferred Stock shall be doubled upon an event of default, which is defined as,
among other things, default on the payment of dividends, material breaches of
the Purchase Agreement or the Stockholders Agreement, the filing of a bankruptcy
petition by or against the Company, acceleration of indebtedness in excess of
$1,000,000, a change in control of the Company, or the failure of the Common
Stock to actively trade on the American Stock Exchange, New York Stock Exchange
or the Nasdaq National Market. The Company is entitled to pay the default
dividends in shares of Common Stock in the event the Company cannot pay cash
dividends because of a deficiency in cash or a prohibition under Delaware law,
such that a cash payment would have a material adverse effect on the Company.
Additional Dividends. If dividends are not paid on the required dividend
payment dates (July 31 and January 31), accrued dividends shall accrue
additional dividends at double the applicable dividend rate (16.8% or 16.0%, as
the case may be).
Adjustment of Conversion Price. In the event the Company fails to declare
dividends after the Company has been notified of an event of default for failure
to pay dividends, the holders of a majority of the Series D Preferred Stock
shall have the option to elect to have the conversion price of the Series D
Preferred Stock reset to the then fair market value of the Common Stock (based
upon the five-day trailing average closing price of the Common Stock).
Liquidation, Dissolution or Winding Up. In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of outstanding shares of Series D Preferred Stock shall be entitled to
receive out of the assets of the Company available for distribution to its
stockholders, an amount equal to $100.00 per share of Series D Preferred Stock
plus all cumulative dividends, whether or not earned or declared.
Information, Registration and Other Rights. Pursuant to the Stockholders
Agreement, the Company has agreed to furnish OCM with certain financial and
business information, including monthly, quarterly and annual financial reports
and annual budgets and operating forecasts. The Company has granted OCM a right
of first refusal to purchase certain securities issued after twelve (12) months
from the date of issuance of the Series D Preferred Stock in the event the price
per share of such securities is less than the conversion price then in effect.
The Company has granted the holders of the Series D Preferred Stock certain
demand and piggyback registration rights with respect to the Common Stock
issuable upon conversion of the Series D Preferred Stock. The Company also has
agreed to file a shelf registration statement for the shares of Common Stock
issuable upon conversion of the Series D Preferred Stock and the shares of
Common Stock issuable as dividends on the Series D Preferred Stock.
-24-
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company: (i)
as of December 31, 1998; (ii) pro forma to give effect to the issuance of the
Note; and (iii) pro forma as adjusted to give effect to the sale by the Company
of 200,000 shares of the Series D Preferred Stock in the Private Placement at
the offering price of $100 per share and the application of the estimated net
proceeds therefrom (including repayment of the Note), after deducting estimated
offering expenses.
<TABLE>
<CAPTION>
As of December 31, 1998
-------------------------------------------------------
Pro Forma As
Actual Pro Forma Adjusted
------ --------- --------
(in thousands)
<S> <C> <C> <C>
Short-term debt.................................. $ -- $ 10,000 $ --
=========== ========= =======
Stockholders' Equity:
Preferred Stock, $0.01 par value, 5,000,000
shares authorized; none issued and outstanding
on an actual and pro forma basis and 200,000
shares issued and outstanding on a pro forma as
adjusted basis.............................. -- -- 2
----------- --------- ---------
Common Stock, $0.01 par value, 25,000,000
shares authorized; 8,587,204 shares issued and
outstanding on an actual, pro forma and pro
forma as adjusted basis, respectively....... 86 86 86
Additional paid-in capital................... 47,317 47,317 65,915
Deferred compensation........................ (194) (194) (194)
Accumulated Deficit ......................... (37,928) (37,928) (37,928)
------- ------- -------
Total shareholders' equity ................. $ 9,281 $ 9,281 $27,881
=========== ========== =======
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PRIVATE
PLACEMENT.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The information appearing under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997, and
the Consolidated Statements of Operations and the Consolidated Statements of
Stockholders' Equity (Deficit), each for the years ended December 31, 1998, 1997
and 1996 and the independent auditors' report on such consolidated financial
statements contained in the Annual Report accompanying this Proxy Statement are
incorporated herein by reference to such portions of such Annual Report.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company intends, subject to Stockholder
approval, to retain KPMG LLP as independent auditors of the Company for the year
ending December 31, 1999. KPMG LLP also served as independent auditors of the
Company for 1998. Neither the firm nor any of its members has any direct or
indirect financial interest in the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY FOR THE YEAR
ENDING DECEMBER 31, 1999.
One or more representatives of KPMG LLP is expected to attend the Meeting
and have an opportunity to make a statement and/or respond to appropriate
questions from stockholders.
-25-
<PAGE>
STOCKHOLDERS' PROPOSALS
Stockholders who wish to submit proposals for inclusion in the Company's
proxy statement and form of proxy relating to the 2000 Annual Meeting of
Stockholders must advise the Secretary of the Company of such proposals in
writing by December 14, 1999.
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for
action at the Meeting other than the matters referred to above and does not
intend to bring any other matters before the Meeting. However, if other matters
should come before the Meeting, it is intended that holders of the proxies will
vote thereon in their discretion.
GENERAL
The accompanying proxy is solicited by and on behalf of the Board of
Directors of the Company, whose notice of meeting is attached to this Proxy
Statement, and the entire cost of such solicitation will be borne by the
Company.
In addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telegram by directors, officers and other employees of
the Company who will not be specially compensated for these services. The
Company will also request that brokers, nominees, custodians and other
fiduciaries forward soliciting materials to the beneficial owners of shares held
of record by such brokers, nominees, custodians and other fiduciaries. The
Company will reimburse such persons for their reasonable expenses in connection
therewith.
Certain information contained in this Proxy Statement relating to the
occupations and security holdings of directors and officers of the Company is
based upon information received from the individual directors and officers.
COLLAGENEX PHARMACEUTICALS, INC. WILL FURNISH, WITHOUT CHARGE, A COPY OF
ITS REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, INCLUDING
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE THERETO BUT NOT INCLUDING
EXHIBITS, TO EACH OF ITS STOCKHOLDERS OF RECORD ON MARCH 26, 1999, AND TO EACH
BENEFICIAL STOCKHOLDER ON THAT DATE UPON WRITTEN REQUEST MADE TO MS. NANCY C.
BROADBENT, SECRETARY, COLLAGENEX PHARMACEUTICALS, INC., 301 SOUTH STATE STREET,
NEWTOWN, PENNSYLVANIA 18940. A REASONABLE FEE WILL BE CHARGED FOR COPIES OF
REQUESTED EXHIBITS.
PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST CONVENIENCE IN
THE ENCLOSED RETURN ENVELOPE. A PROMPT RETURN OF YOUR PROXY CARD WILL BE
APPRECIATED AS IT WILL SAVE THE EXPENSE OF FURTHER MAILINGS.
By Order of the Board of Directors
Nancy C. Broadbent,
Secretary
Newtown, Pennsylvania
April 12, 1999
-26-
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY FOR THE ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby constitutes and appoints Brian M. Gallagher, Ph.D.
and Nancy C. Broadbent, and each of them, his or her true and lawful agent and
proxy with full power of substitution in each, to represent and to vote on
behalf of the undersigned all of the shares of CollaGenex Pharmaceuticals, Inc.
(the "Company") which the undersigned is entitled to vote at the Annual Meeting
of Stockholders of the Company to be held at the Marriott Hotel, 1201 Market
Street, Philadelphia, Pennsylvania at 8:30 A.M., local time, on Tuesday, May 11,
1999, and at any adjournment or adjournments thereof, upon the following
proposals more fully described in the Notice of Annual Meeting of Stockholders
and Proxy Statement for the Meeting (receipt of which is hereby acknowledged).
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
(continued and to be signed on reverse side)
<PAGE>
Please Detach and Mail In the Envelope Provided
A [X]Please mark your votes as in this example.
1. ELECTION OF FOR WITHHELD Nominees:
DIRECTORS. [ ] [ ] Helmer P.K. Agersborg, Ph.D.
VOTE FOR all the nominees listed at right; Brian M. Gallagher, Ph.D.
except vote withheld from the following James E. Daverman
nominee(s) (if any). Pieter J. Schiller
Peter R. Barnett, D.M.D
Robert J. Easton
Stephen W. Ritterbush, Ph.D.
Terrence E. Winters. Ph.D.
------------------------------
2. APPROVAL OF PROPOSAL TO AMEND THE COMPANY'S 1996 STOCK OPTION PLAN TO
INCREASE THE MAXIMUM AGGREGATE NUMBER OF SHARES OF COMMON STOCK AVAILABLE
FOR ISSUANCE THEREUNDER FROM 750,000 SHARES TO 1,500,000 SHARES AND TO
RESERVE AN ADDITIONAL 750,000 SHARES OF COMMON STOCK OF THE COMPANY FOR
ISSUANCE IN CONNECTION WITH AWARDS GRANTED UNDER THE 1996 STOCK OPTION
PLAN.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. TO APPROVE THE CONSUMMATION OF A PRIVATE PLACEMENT FOR AGAINST ABSTAIN
PURSUANT TO WHICH THE COMPANY SHALL ISSUE SHARES OF SERIES D CUMULATIVE
CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE, REPRESENTING 21.2% OF THE
ISSUED AND OUTSTANDING EQUITY SECURITIES OF THE COMPANY.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. APPROVAL OF PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY FOR THE YEAR ENDING DECEMBER 31, 1999.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. In his or her discretion, the proxy is authorized to vote upon other
matters as may properly come before the Meeting.
I will I will not
[ ] [ ]
attend the Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
Signature of Stockholder Signature of Stockholder Dated:
---------- -------- ------
IF HELD JOINTLY
NOTE: THIS PROXY MUST BE SIGNED EXACTLY AS THE NAME APPEARS HEREON. WHEN SHARES
ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. IF THE SIGNER IS A
CORPORATION, PLEASE SIGN FULL CORPORATE NAME BY DULY AUTHORIZED OFFICER,
GIVING FULL TITLE AS SUCH. IF THE SIGNER IS A PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED PERSON.
<PAGE>
APPENDIX A
CERTIFICATE OF DESIGNATION
<PAGE>
Appendix A
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
COLLAGENEX PHARMACEUTICALS, INC.
CollaGenex Pharmaceuticals, Inc., a Delaware corporation (the
"Corporation"), pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware (the "DGCL"), does hereby make this
Certificate of Designation under the corporate seal of the Corporation and does
hereby state and certify that pursuant to the authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, the Board of
Directors has duly adopted the following resolutions:
RESOLVED, that pursuant to Article Fifth of the Certificate of
Incorporation, as amended (which authorizes five million (5,000,000) shares of
Preferred Stock, par value $0.01 per share, none of which is presently issued
and outstanding), the Board of Directors hereby fixes the designations and
preferences and relative participating, optional and other special rights and
qualifications, limitations and restrictions of a series of Preferred Stock
consisting of 200,000 shares to be designated as Series D Cumulative Convertible
Preferred Stock.
Series D Convertible Preferred Stock
- ------------------------------------
RESOLVED, that the holders of Series D Cumulative Convertible
Preferred Stock, except as otherwise provided by law, shall have and possess the
following rights and preferences.
A. Series D Convertible Preferred Stock.
------------------------------------
1. DESIGNATION, NUMBER OF SHARES. This series of Preferred Stock shall
be designated as Series D Cumulative Convertible Preferred Stock ("Series D
Preferred Stock"), and the number of shares that shall constitute such series
shall be 200,000. The par value of Series D Preferred Stock shall be $0.01 per
share.
2. RANK. With respect to dividend rights and rights on liquidation,
winding up and dissolution of the Corporation, Series D Preferred Stock shall
rank senior to:
(i) the Common Stock, par value $0.01 per share ("Common Stock"), of
the Corporation; and
(ii) each other class of capital stock or class or series of preferred
stock issued by the Corporation after the date hereof (in accordance with
Paragraph A.8.(b)(ii) hereof), the terms of which shall specifically provide
that such class or series shall rank junior to Series D Preferred Stock as to
dividend distributions or distributions upon liquidation, winding up and
dissolution of the Corporation (each of the securities in clauses (i) and (ii)
above collectively referred to as "Junior Securities").
3. DIVIDEND PROVISIONS.
(a) Each holder of Series D Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends on each share of Series D Preferred Stock
as follows: (i) during the first three (3) years after the date of the original
issuance of the Series D Preferred Stock (the "Common Stock Dividend Period"),
the Company shall pay such dividends at a rate equal to eight and four-tenths
percent (8.4%) per share per annum in fully paid, registered, non-assessable
shares of Common Stock which shares of such Common Stock shall be valued at one
hundred percent (100%) of the average trading price on the Nasdaq National
Market ("NASDAQ") for the five (5) trading days immediately prior to the
Dividend Declaration Date (as defined in Paragraph B. hereof); and (ii) after
the Common Stock Dividend Period, the Company shall pay cash dividends on each
share of Series D Preferred Stock at a rate equal to eight percent (8%) per
share per annum. At all times, dividends paid in cash shall be paid at a rate
equal to eight percent (8%)
<PAGE>
per share per annum and dividends paid in Common Stock shall be paid at a rate
of eight and four-tenths percent (8.4%) per share per annum.
(b) All dividends, whether payable in cash or in shares of Common
Stock, shall be cumulative, whether or not earned or declared, and shall accrue
on a daily basis beginning on the date of the original issuance of Series D
Preferred Stock (whether or not funds are legally available for the declaration
and/or payment of such dividends), and shall be payable semi-annually in arrears
on each Dividend Payment Date (as defined in Paragraph B. hereof), commencing on
the first Dividend Payment Date after the date of the original issuance of such
Series D Preferred Stock. Each dividend on Series D Preferred Stock shall be
payable to the holders of record of Series D Preferred Stock as they appear on
the stock register of the Corporation on such record date as may be fixed by the
Board of Directors, which record date shall not be less than ten (10) nor more
than sixty (60) calendar days prior to the applicable Dividend Payment Date.
(c) Commencing on the sixth (6th) anniversary of the date of the
original issuance of the Series D Preferred Stock, the annual dividend rate
referenced above in Paragraph A.3.(a) shall increase by one percent (1%) per
annum until the earlier of the date that all of the shares of Series D Preferred
Stock are (i) converted into shares of Common Stock in accordance with Paragraph
A.5. hereof, or (ii) redeemed in accordance with Paragraph A.6. hereof.
(d) Dividends shall cease to accrue in respect of any shares of Series
D Preferred Stock on the date such shares are (i) converted into shares of
Common Stock in accordance with Paragraph A.5. hereof, or (ii) are redeemed in
accordance with Paragraph A.6. hereof.
(e) Accrued dividends on the Series D Preferred Stock, if not paid on
the first or any subsequent Dividend Payment Date following accrual, shall
thereafter accrue additional dividends ("Additional Dividends") in respect
thereof, compounded semi-annually, at the rate specified hereinabove in
Paragraph A.3.(a) hereof or as specified hereinbelow in Paragraph A.3.(h)
hereof; during the first six (6) years after the date of the original issuance
of the Series D Preferred Stock, and at the applicable increased dividend rate
for each year thereafter.
(f) All dividends paid with respect to shares of Series D Preferred
Stock pursuant to Paragraph A.3.(a) shall be paid pro rata to the holders of
Series D Preferred Stock of record entitled thereto.
(g) Dividends on account of arrears for any past Dividend Period may
be declared and paid at any time, without reference to any regular Dividend
Payment Date, to the holders of Series D Preferred Stock of record on any date
as may be fixed by the Board of Directors, which date is not more than thirty
(30) calendar days prior to the payment of such dividends.
(h) The dividend payable to holders of Series D Preferred Stock as set
forth above in Paragraph A.3.(a) shall be doubled (the "Default Dividends"),
which Default Dividends shall be payable in either cash or Common Stock at the
choosing of each holder of Series D Preferred Stock upon the occurrence and
during the continuance of any of the following events (each an "Event of
Default" and collectively the "Events of Default") not cured or not curable,
upon the giving of written notice thereof to the Corporation by the holders of a
majority of the shares of Series D Preferred Stock then outstanding:
(i) in the event that the Corporation does not (A) declare the
dividend payable on the shares of Series D Preferred Stock within (30) calendar
days of the Dividend Declaration Date, (B) fulfill its dividend payment
obligation in full for the Series D Preferred Stock, as set forth herein, within
thirty (30) calendar days after said dividend payment is due and payable, or (C)
fulfill its dividend payment obligation in the form of either cash or stock as
required herein; or
(ii) in the event that the Corporation shall have materially
breached any of the representations and warranties contained in any of the Stock
Purchase Agreement or the Stockholders and Registration Rights Agreement and any
registration statement filed by the Company in relation thereto; or
-2-
<PAGE>
(iii) in the event that the Corporation shall have materially
breached any of the covenants or agreements contained in any of the Stock
Purchase Agreement or the Stockholders and Registration Rights Agreement and
such breach shall not have been cured to the satisfaction of the holders of
record of a majority of the shares of Series D Preferred Stock then outstanding
within thirty (30) calendar days after the date of giving of notice of such
breach to the Corporation; or
(iv) in the event of the acceleration of any indebtedness of the
Corporation with a principal amount in excess of One Million Dollars
($1,000,000); or
(v) in the event of the receipt of a final non-appealable
judgment against the Corporation in an amount that is uninsured in excess of One
Million Dollars ($1,000,000); or
(vi) in the event that the Corporation shall (A) apply for or
consent to the appointment of a receiver, trustee or liquidator for the
Corporation or any of its property; (B) admit in writing its inability to pay
debts as they mature; (C) make a general assignment for the benefit of
Creditors; (D) be adjudicated bankrupt or insolvent; (E) file a voluntary
petition in bankruptcy, a petition or answer seeking reorganization or an
arrangement with creditors to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against it in
any proceeding under any such law; or (F) have failed to have an involuntary
petition in bankruptcy filed against it dismissed and discharged within sixty
(60) calendar days after the date of such filing; corporate actions shall be
taken for the purpose of effecting any of the foregoing; or an order, judgment
or decree shall be entered without the application, approval or consent of the
Corporation, by any court of competent jurisdiction, approving a petition
seeking reorganization of the Corporation or of all or a substantial part of its
assets, and such order, judgment or decree shall continue unstayed and in effect
for sixty (60) calendar days (a "Bankruptcy"); or
(vii) in the event that either (A) any court of competent
jurisdiction finds that any of the patents owned or licensed by the Corporation
are invalid in any material respect; or (B) any of the patents owned or licensed
by the Corporation materially infringe upon any other patent; provided, however,
-------- -------
that in the event of either (A) or (B), Investor, in good faith, determines that
such finding will have a Material Adverse Effect on the Corporation; or
(viii) if at any time after the date the first share of Series D
Preferred Stock is issued, shares of Common Stock are not actively publicly
traded on the American Stock Exchange, NASDAQ or NYSE; or
(ix) in the event that the Corporation consolidates or merges the
Corporation with or into any other corporation or corporations, or sells,
conveys or disposes of all or substantially all of the assets of the Corporation
or enters into a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Corporation is sold or
otherwise disposed of (a "Change in Control").
In addition to the foregoing, in the event that the Board of Directors
continues to fail to declare and pay accrued dividends and/or Default Dividends
on the shares of Series D Preferred Stock after the Corporation has been
notified of an Event of Default in accordance with Paragraph A.3.(h)(i) hereof,
which is not curable or has not been cured within the period of time prescribed
for the Corporation to effectuate such a cure, the holders of record of a
majority of shares of Series D Preferred Stock shall have the option, during the
continuance of such an Event of Default, to elect to have the Conversion Price
reset to the then fair market value of the Common Stock of the Corporation, as
determined by using the five (5) day trailing average closing price of the
Common Stock of the Corporation, as reported on NASDAQ. Any reset of the
Conversion Price hereunder shall be effective on the day immediately after the
date of the holders' notice to the Corporation.
Notwithstanding the foregoing, in the event that the Corporation is unable
to meet its obligation to pay cash dividends in the form of cash because of (a)
a deficiency in the cash position of the Corporation such that the payment of
such dividends in cash would have a Material Adverse Effect on the Corporation,
or (b) a
-3-
<PAGE>
prohibition by the DGCL, then the Corporation shall be permitted to pay Default
Dividends in shares of Common Stock during such time the condition described in
this paragraph continues.
(i) The holders of Series D Preferred Stock shall be entitled to
receive the dividends provided for in Paragraph A.3.(a) hereof in preference to
and in priority over any dividends upon any of the Junior Securities. Such
dividends on the Series D Preferred Stock shall be cumulative, whether or not
earned or declared, so that if at any time full Accumulated Dividends (as
defined in Paragraph B. of this Agreement) on all shares of Series D Preferred
Stock then outstanding have not been paid for all Dividend Periods then elapsed
and a prorated dividend on the Series D Preferred Stock at the rate aforesaid
from the Dividend Payment Date immediately preceding the Junior Payment Date (as
defined below) to the Junior Payment Date have not been paid or set aside for
payment, the amount of such unpaid dividends shall be paid before any sum shall
be set aside for or applied by the Corporation to the purchase, redemption or
other acquisition for value of any shares of Junior Securities (either pursuant
to any applicable sinking fund requirement or otherwise) or any dividend or
other distribution shall be paid or declared and set apart for payment on any
Junior Securities (the date of any such actions to be referred to as the "Junior
Payment Date"); provided, however, that the restrictions set forth in this
-------- -------
sentence shall not apply to the purchase or other acquisition of Junior
Securities pursuant to any employee or director incentive or benefit plan or
arrangement (including any employment, severance or consulting agreement) of the
Corporation or any subsidiary of the Corporation heretofore or hereafter
adopted.
(j) Dividends payable on Series D Preferred Stock for any period less
than one (1) year shall be computed on the basis of a 360-day year consisting of
twelve 30-day months plus the actual number of calendar days elapsed in the
month for which such dividends are payable.
4. LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of all shares of
Series D Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders an
amount in cash equal to One Hundred Dollars ($100.00) in cash per share, plus an
amount equal to full cumulative dividends (whether or not earned or declared)
accrued and unpaid thereon, including Default Dividends and Additional
Dividends, to the date of final distribution and no more, before any
distribution is made on any Junior Securities. After payment in full pursuant to
this Paragraph A.4., the holders of Series D Preferred Stock shall not be
entitled to any further participation in any distribution in the event of
liquidation, dissolution or winding up of the affairs of the Corporation.
5. CONVERSION.
(a) RIGHT OF CONVERSION. Each share of Series D Preferred Stock shall
be convertible, at the option of the holder thereof, at any time, and from time
to time, after the date of issuance of such share, at the office of the
Corporation or any transfer agent for the Series D Preferred Stock, into such
number of fully paid, registered, non-assessable shares of Common Stock as is
determined by dividing One Hundred Dollars ($100.00) by the Conversion Price.
The "Conversion Price" for the Series D Preferred Stock shall be Eleven Dollars
($11.00) per share. The Conversion Price for the Series D Preferred Stock shall
be subject to adjustment as set forth in Paragraph A.5.(c) hereof.
(b) PROCEDURES FOR VOLUNTARY CONVERSION. Before any holder of shares
of Series D Preferred Stock shall be entitled to convert any of such shares into
shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series D Preferred Stock, and shall give written notice
by mail, postage prepaid, or hand delivery, to the Corporation at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of Common
Stock are to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holders of shares of Series
D Preferred Stock, or to the nominee or nominees of such holders, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Series D Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable
-4-
<PAGE>
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Securities Act of 1933, as amended, the conversion may, at the option of any
holder tendering the Series D Preferred Stock for conversion, be conditioned
upon the effectiveness of such offering, in which event the person(s) entitled
to receive Common Stock issuable upon such conversion of the Series D Preferred
Stock shall not be deemed to have converted such Series D Preferred Stock until
immediately prior to the effectiveness of such offering and the Corporation
shall deliver to such holders tendering Series D Preferred Stock for conversion
written notice of the anticipated date of such effectiveness no less than ten
(10) calendar days prior thereto.
(c) ADJUSTMENTS OF CONVERSION PRICE. So long as any shares of Series D
Preferred Stock are outstanding, the Conversion Price of the Series D Preferred
Stock shall be subject to adjustment from time to time as follows:
(i) (A) Upon issuance (or deemed issuance pursuant to the
provisions hereof) by the Corporation of any Additional Stock (as defined below)
after the date of issuance of Series D Preferred Stock, without consideration or
for an Effective Price per share, or, in the case of Convertible Securities, a
conversion price per share, less than the Conversion Price for the Series D
Preferred Stock in effect immediately prior to the issuance (or deemed issuance)
of such Additional Stock, then the Conversion Price for the Series D Preferred
Stock in effect immediately prior to each (such issuance or deemed issuance)
shall be adjusted, if the issuance occurs after the initial twelve (12) month
period after the date of original issuance of the Series D Preferred Stock, to a
price determined by the following formula: (A + B) / (C + D), where "A" equals
the number of shares of Common Stock outstanding immediately prior to such
issuance or sale multiplied by the then applicable Conversion Price, where "B"
equals the consideration, if any, received by the Corporation upon such issuance
or sale, where "C" equals the total number of shares of Common Stock outstanding
prior to issuance of the additional shares and where "D" equals any Additional
Stock or any conversion shares, or any other shares reserved for issuance which
are associated with such financing, immediately after such issuance or sale. See
Exhibit A hereto for an example of the formula set forth herein.
(B) No adjustment of the Conversion Price for Series D
Preferred Stock shall be made in an amount less than one-half of One Cent
($0.005) per share, provided that any adjustments which are not required to be
made by reason of this sentence shall be carried forward and shall be taken into
account in any subsequent adjustment to the Conversion Price. No adjustment of
the Conversion Price for the Series D Preferred Stock pursuant to this Paragraph
A.5.(c)(i) shall have the effect of increasing such Conversion Price for the
Series D Preferred Stock above the Conversion Price in effect immediately prior
to such adjustment.
(C) In the case of the issuance of securities of the
Corporation for cash, the amount of consideration received by the Corporation
for such securities shall be deemed to be the amount of cash paid therefor
before deducting any discounts, commissions or other expenses allowed, paid or
incurred by the Corporation for any underwriting or otherwise in connection with
the issuance and sale thereof.
(D) In the case of the issuance of securities of the
Corporation for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to have a dollar value equal to
the fair market value of such non-cash consideration, irrespective of any
accounting treatment thereof, as determined by a vote of the majority of the
Board of Directors including the affirmative vote of the Series D Preferred
Director.
(E) In the case of the issuance (whether before, on or after
the date of issuance of Series D Preferred Stock) of Options or Convertible
Securities, the following provisions shall apply for all purposes of this
Paragraph A.5.(c)(i) and Paragraph A.5.(c)(ii) hereof:
(1) With respect to Options to purchase Common Stock, the aggregate
maximum number of shares of Common Stock deliverable upon exercise of
such Options shall be deemed to have been issued at the time such
Options were issued and for a consideration equal to the consideration
(determined in the manner provided in Subparagraph
-5-
<PAGE>
A.5.(c)(i)(C) and Subparagraph A.5.(c)(i)(D) hereof), if any, received
by the Corporation for such Options plus the minimum exercise price
provided in such Options for Common Stock issuable thereunder.
(2) With respect to Convertible Securities and Options to purchase
Convertible Securities, the aggregate maximum number of shares of
Common Stock deliverable upon the conversion or exchange of any such
Convertible Securities and the aggregate maximum number of shares of
Common Stock issuable upon the exercise of such Options to purchase
Convertible Securities and the subsequent conversion or exchange of
such Convertible Securities shall be deemed to have been issued at the
time such Convertible Securities or such Options were issued and for a
consideration equal to the consideration, if any, received by the
Corporation for any such Convertible Securities and Options, plus the
minimum additional consideration, if any, to be received by the
Corporation upon the conversion or exchange of such Convertible
Securities or the exercise of such Options and the conversion or
exchange of the Convertible Securities issuable upon exercise of such
Options (the consideration in each case to be determined in the manner
provided in Subparagraphs A.5.(c)(i)(C) and A.5.(c)(i)(D) hereof).
(3) In the event of any change in the number of shares of Common Stock
deliverable, or in the consideration payable to the Corporation, upon
exercise of such Options or upon conversion or exchange of such
Convertible Securities, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Conversion
Price of the Series D Preferred Stock, to the extent in any way
affected by or computed using such Options or Convertible Securities,
shall be recomputed to reflect such change, but no further adjustment
shall be made for the actual issuance of Common Stock or any payment
of such consideration upon the exercise of any such Options or the
conversion or exchange of such Convertible Securities.
(4) Upon the expiration or termination of any such Options or any such
rights to convert or exchange Convertible Securities, the Conversion
Price of the Series D Preferred Stock, to the extent in any way
affected by or computed using such Options or Convertible Securities,
shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and Options and Convertible Securities which
remain in effect) that were actually issued upon the exercise of such
Options or upon the conversion or exchange of such Convertible
Securities.
(5) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to Subparagraphs
A.5.(c)(i)(E)(1) and (2) hereof shall be appropriately adjusted to
reflect any change, termination or expiration of the type described in
either Subparagraph A.5.(c)(i)(E)(3) or (4) hereof.
(ii) "Additional Stock" shall mean any shares of Common Stock or
shares of Common Stock issuable pursuant to Convertible Securities issued or
Options (or deemed to have been issued pursuant to Paragraph A.5.(c)(i)(E)
hereof) by the Corporation after the date of issuance of Series D Preferred
Stock, except:
(A) Common Stock issued pursuant to a transaction described
in Paragraph A.5.(c)(iii) hereof;
(B) Common Stock or options to purchase such Common Stock
issued to officers, employees or directors of, or consultants to, the
Corporation, pursuant to any agreement, plan or arrangement approved by the
Board of Directors of the Corporation; provided, however, that the maximum
-------- -------
number of shares of Common Stock heretofore or hereafter issued or issuable
pursuant to all such agreements, plans and
-6-
<PAGE>
arrangements shall not exceed an aggregate (as constituted on the date hereof)
of Two Million Three Hundred Two Thousand (2,302,000) shares of Common Stock
("Permitted Options"); and
(C) Common Stock issued or issuable upon conversion of
shares of Series D Preferred Stock.
(iii) In the event the Corporation at any time or from time to
time after the date of issuance of Series D Preferred Stock fixes a record date
for the effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of shares of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock or
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend, distribution, split or subdivision if no record date
is fixed), the Conversion Price of the Series D Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of Series D Preferred Stock shall be increased in
proportion to such increase in the aggregate number of shares issuable with
respect to Common Stock Equivalents, with the number of shares issuable with
respect to Common Stock Equivalents determined from time to time in the manner
provided for deemed issuances in Subparagraph A.5.(c)(i)(E) hereof.
(iv) If the number of shares of Common Stock outstanding at any
time after the date of issuance of Series D Preferred Stock is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for the Series D Preferred
Stock shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of Series D Preferred Stock shall be
decreased in proportion to such decrease in the outstanding shares of Common
Stock.
(d) OTHER DISTRIBUTIONS. In the event the Corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Paragraph A.5.(c)(iii) hereof, then, in
each such case for the purpose of this Paragraph A.5.(d), the holders of shares
of Series D Preferred Stock shall be entitled to a proportionate share of any
such distribution as though they were holders of the number of shares of Common
Stock into which their shares of Series D Preferred Stock are convertible as of
the record date fixed for the determination of the holders of shares of Common
Stock entitled to receive such distribution.
(e) RECAPITALIZATION. If at any time or from time to time there shall
be a recapitalization or reclassification of Common Stock (other than a
subdivision, combination or consolidation, merger or sale of assets or stock
transaction provided for in Paragraph A.6. hereof), provision shall be made so
that each holder of shares of Series D Preferred Stock shall thereafter be
entitled to receive, upon conversion of the Series D Preferred Stock, the number
of shares of stock or other securities or property of the Corporation or
otherwise, receivable upon such recapitalization or reclassification by a holder
of the number of shares of Common Stock into which such shares of Series D
Preferred Stock could have been converted immediately prior to such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Paragraph A.5. with respect to the rights
of the holders of shares of Series D Preferred Stock after the recapitalization
or reclassification to the end that the provisions of this Paragraph A.5.
(including adjustments of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series D Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
(f) NO IMPAIRMENT. The Corporation will not, by amendment of this
Certificate of Incorporation or through any reorganization, recapitalization or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation,
but will at all times in good faith assist in the carrying out of all the
provisions of this Paragraph A.5. and in the taking
-7-
<PAGE>
of all such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of shares of Series D Preferred Stock against
impairment.
(g) NO FRACTIONAL SHARES. No fractional shares shall be issued upon
conversion of the Series D Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded upward to the nearest whole share, and there
shall be no payment to a holder of shares of Series D Preferred Stock for any
such rounded fractional share. Whether or not fractional shares result from such
conversion shall be determined on the basis of the total number of shares of
Series D Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion.
(h) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of the Series D Preferred
Stock pursuant to this Paragraph A.5., the Corporation, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of shares of Series D Preferred
Stock a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based, certified
by the Corporation's President or Chief Financial Officer. The Corporation
shall, upon the written request at any time of any holder of shares of Series D
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment and readjustment, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of Series D Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of shares of Series D Preferred Stock, at least twenty
(20) calendar days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION, DIVIDENDS. The
Corporation shall at all times take appropriate steps to reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of (i) effecting the conversion of the shares of Series D Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series D
Preferred Stock, and (ii) the payment of dividends as contemplated in Paragraph
A.3.(a). If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of Series D Preferred Stock or the payment of dividends, then in addition
to such other remedies as shall be available to the holder of such shares of
Series D Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes.
(k) NOTICES. Any notice required by the provisions of this Paragraph
A.5. to be given to the holders of shares of Series D Preferred Stock shall be
deemed given when received if delivered via courier or sent by facsimile, by
telex, or by United States mail, postage prepaid, and addressed to each holder
of record at his, her or its address appearing on the books of the Corporation.
(l) MANDATORY CONVERSION.
(i) All or a portion of the shares of Series D Preferred Stock
shall, at the option of the Corporation (as determined by the Board of
Directors), automatically be converted into fully paid, registered and
non-assessable shares of Common Stock in accordance with Paragraph A.5.(a)(i)
above, if at any time after the date the first share of Series D Preferred Stock
is issued, the following two conditions are met:
-8-
<PAGE>
(A) the Closing Common Stock Market Price (as defined in
Paragraph B.(d) hereof) for forty (40) consecutive trading days is at least two
hundred percent (200%) of the Conversion Price then in effect; and
(B) an effective shelf registration (in accordance with
Section 5(b) of the Stockholders and Registration Rights Agreement) is in effect
for the shares of Common Stock to be issued upon conversion of the shares of
Series D Preferred Stock.
(ii) If the Corporation has elected to convert Series D Preferred
Stock into Common Stock pursuant to Paragraph A.5.(l)(i) above, the Corporation
will provide written notice of mandatory conversion of shares of Series D
Preferred Stock to each holder of record of Series D Preferred Stock no less
than thirty (30) nor more than sixty (60) calendar days prior to the date fixed
for conversion by first class mail, postage prepaid, to each holder at such
holder's address as it appears on the stock register of the Corporation. The
Corporation's obligation to deliver shares of Common Stock shall be deemed
fulfilled if, on the mandatory conversion date, the Corporation shall deposit
with a bank or trust company in New York, New York having capital of at least
One Hundred Million Dollars ($100,000,000), such number of shares of Common
Stock as are required to be delivered by the Corporation upon the conversion of
the shares of Series D Preferred Stock so called for conversion. Provided the
Corporation has fulfilled its obligation to deposit shares as provided in the
foregoing sentence, effective on the mandatory conversion date fixed by the
Corporation and notified to the holders of Series D Preferred Stock, each
outstanding share of Series D Preferred Stock shall be converted into a fully
paid, registered, and non-assessable share of Common Stock at the Conversion
Price then in effect, automatically and without any action on the part of any
holder of shares of Series D Preferred Stock, and each such share of Common
Stock shall be deemed outstanding from and after the mandatory conversion date.
6. OPTIONAL REDEMPTION.
(a) If at any time after the date of original issuance of the shares
of Series D Preferred Stock less than five percent (5%) of the shares of Series
D Preferred Stock originally issued are outstanding, the Corporation shall be
entitled, at the Corporation's option, to redeem the shares of Series D
Preferred Stock then outstanding for an amount equal to one hundred (100%) of
the original issue price per share plus an amount equal in full to cumulative
accrued dividends and Default Dividends (whether or not earned or declared)
accrued and unpaid thereon.
(b) In the event that on and after the third (3rd) anniversary of the
date of the original issuance of the Series D Preferred Stock and continuing
until the fifth (5th) anniversary thereof a Change in Control occurs, the
Corporation shall be entitled, at its option, to redeem all of the shares of
Series D Preferred Stock then outstanding for an amount equal to one hundred
twenty percent (120%) per share of the liquidation preference plus an amount
equal in full to cumulative accrued dividends and Default Dividends (whether or
not earned or declared) accrued and unpaid thereon from the date of original
issuance of the Series D Preferred Stock until the date of redemption.
(c) If at any time after the fifth (5th) anniversary of the date of
the original issuance of the Series D Preferred Stock a Change in Control
occurs, the Corporation shall be entitled, at its option, to redeem all of the
shares of Series D Preferred Stock then outstanding for an amount equal to one
hundred percent (100%) per share of the liquidation preference plus an amount
equal in full to cumulative dividends and Default Dividends (whether or not
earned or declared) accrued and unpaid thereon from the date of original
issuance of the Series D Preferred Stock until the date of redemption.
(d) If the Corporation elects to redeem Series D Preferred Stock
pursuant to this Paragraph 6A.(a), (b) or (c), the Corporation will provide
written notice of such optional redemption of shares of Series D Preferred Stock
to each holder of record of Series D Preferred Stock not less than thirty (30)
calendar days prior to the date fixed for redemption by first class mail,
postage prepaid, to each holder and such holder's address as it appears on the
stock register of the Corporation.
-9-
<PAGE>
7. STATUS OF CONVERTED STOCK. In the event any shares of Series D Preferred
Stock are converted to Common Stock pursuant to Paragraph A.5. hereof, or are
redeemed by the Corporation pursuant to Paragraph A.6. hereof, the shares so
converted or so redeemed shall be canceled, retired and eliminated and shall not
be reissued by the Corporation. The Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
8. VOTING RIGHTS.
(a) GENERAL. The holders of Series D Preferred Stock shall be entitled
to vote together with the holders of Common Stock on all matters to be voted on
by the Corporation on an as-converted basis.
(b) CLASS VOTING RIGHTS.
(i) Except as otherwise provided below, a vote of at least a
majority of the shares of the Series D Preferred Stock then outstanding shall be
sufficient to take any action requiring the vote of the Series D Preferred Stock
as a separate class. At any meeting where the Series D Preferred Stock shall
have the right to vote as a separate class, the presence, in person or by proxy,
of a majority of the then outstanding shares of Series D Preferred Stock shall
constitute a quorum of such class.
(ii) So long as any Series D Preferred Stock is outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of all outstanding shares of Series D
Preferred Stock voting separately as a class, given in person or by proxy,
either in writing or by resolution adopted at an annual or special meeting
called for this purpose (A) amend, alter or repeal any provision of the
Certificate of Incorporation or By-laws of the Corporation, each as amended, so
as to affect, in any manner adverse to the holders of Series D Preferred Stock,
the relative rights, preferences, qualifications, limitations or restrictions of
the Series D Preferred Stock; (B) create, authorize, designate or reclassify any
authorized stock of the Corporation into, or increase the authorized amount of,
or issue any capital stock that ranks senior to or pari passu with the Series D
---- -----
Preferred Stock, or any Junior Securities, whether voluntary or involuntary, or
any security convertible into such a class or series, which are required to be
redeemed by the Corporation at any time that any shares of Series D Preferred
Stock are outstanding; (C) during the first twelve (12) months after Closing
issue Common Stock or securities convertible into Common Stock at a price or
conversion price (except options under the Option Plans) below the Conversion
Price then in effect; or (D) take any other action on which the holders of
Series D Preferred Stock shall be entitled by law to vote separately as a class.
(iii) The Corporation shall not, without the express written
approval of the holders of record of a majority of the shares of Series D
Preferred Stock then outstanding take any of the following actions:
(A) DIVIDENDS. The Corporation shall not declare or pay any
dividend or distribution on any shares of capital stock of the Corporation other
than dividends on Series D Preferred Stock.
(B) INDEBTEDNESS. The Corporation and its subsidiary shall
not (x) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Corporation, guarantee any
debt securities of another person, enter into any "keep well" or other agreement
to maintain any financial statement condition of another person or enter into
any arrangement having the economic effect of any of the foregoing, except that
the Corporation may incur such indebtedness in any amount not to exceed Ten
Million Dollars ($10,000,000) in the aggregate outstanding at any time only for
the Corporation's working capital requirements in the ordinary course of
business ("Working Capital Loans"); or (y) make any loans, advances of capital
contributions to, or investments in, any other person, other than to the
Corporation or its subsidiaries.
-10-
<PAGE>
(C) DISPOSITIONS. The Corporation shall not enter into or
effect a recapitalization, corporate reorganization (including, without
limitation, any distribution of assets to a subsidiary of the Corporation) or
liquidation, sell, assign, lease or otherwise dispose (including by way of
mortgage, license, encumbrance or any lien) of any assets or securities, except
for (i) transactions in the ordinary course of business or (ii) any pledge,
assignment, encumbrance, lien or other disposition of working capital assets
(accounts receivable and inventory) directly related to the Working Capital Loan
(as defined in Section 2(b)(ii) above), or effectuate any split, subdivision or
combination of any Equity Securities, or enter into a material contract or
release or relinquish any material contract rights not in the ordinary course of
business, or make any amendments, or modifications thereto. Notwithstanding the
foregoing, the Corporation shall not, at any time, sell, assign, lease or
otherwise dispose (including by way of pledge, mortgage, license, encumbrance or
any lien) of any license, patent or Intellectual Property of the Corporation,
except in the ordinary course of business, without the express written approval
of the holders of a majority of the shares of Series D Preferred Stock then
outstanding. For purposes of the foregoing sentence, ordinary course of business
shall include, without limitation, (a) licenses for purposes of research,
development, manufacturing, marketing and/or distribution and (b) the
abandonment of any Intellectual Property which the Corporation determines is of
insignificant benefit to the Corporation and which could not, individually or in
the aggregate, have a Material Adverse Effect on the Corporation.
(D) RESEARCH AND DEVELOPMENT EXPENDITURES. The Corporation
shall not make research and development expenditures in excess of Seven Million
Dollars ($7,000,000) in any one (1) continuous twelve (12) month period, unless
the Corporation has reported positive net income (calculated in accordance with
generally accepted accounting principles consistently applied, reported on all
necessary and appropriate filings of SEC Documents and only excluding any
extraordinary or unusual gains) for four (4) consecutive quarters immediately
prior to such twelve (12) month period.
(E) ACQUISITIONS. The Corporation shall not merge or
consolidate with, purchase, lease or otherwise make any acquisition of all or
substantially all of the assets, properties or securities of, any person or
entity in a transaction or series of related transactions with any calendar year
period in excess of Ten Million Dollars ($10,000,000).
(F) PROTECTIVE AGREEMENTS. The Corporation shall not: (i)
enter into any non-disclosure agreement, that is not substantially in the form
utilized by the Corporation as of the effective date of this Certificate of
Designation, with each new employee hired after the date of Closing; and (ii)
enter into any non-competition agreement, that is not substantially in the form
utilized by the Corporation, with each new officer hired after the date of
Closing. The Corporation shall not terminate, amend or modify in any material
respect any agreement relating to matters of non-disclosure or non-competition.
(G) BENEFIT PLANS. The Corporation shall not adopt or amend
in any material respect any collective bargaining agreement or any Employee
Benefit Plan of the Corporation which, individually or in the aggregate, could
reasonably by expected to have a Material Adverse Effect.
(c) BOARD OF DIRECTORS. The Board of Directors of the Corporation
shall consist of not less than five (5) and not more than nine (9) directors. At
each annual meeting of the stockholders of the Corporation, and at each special
meeting of the stockholders of the Corporation called for the purpose of
electing directors of the Corporation, and at any time at which stockholders of
the Corporation shall have the right to, or shall, vote for or consent in
writing to the election of directors of the Corporation, then, and in each such
event, until the occurrence of an Event of Default, (i) the holders of record of
shares of Series D Preferred Stock voting together as a separate class shall be
entitled, but not obligated, to elect one (1) director, who shall be nominated
by the holders of record of a majority of the shares of Series D Preferred Stock
then outstanding (the "Series D Preferred Stock Director"), and (ii) the holders
of record of shares of Common Stock shall elect the remaining directors, up to a
maximum of eight (8), all of whom shall be nominated by the Board of Directors
of the Corporation (collectively, the "Common Directors"). At any such meeting
called for the purpose of electing directors, the presence in person or by proxy
of (i) the holders of record of a majority of the shares of Series D Preferred
Stock then outstanding, in the case of the election of the Series D Preferred
Stock Director and (ii) the holders of record of a majority of the shares of
each of the Common Stock, in the case of the election of a Common
-11-
<PAGE>
Director, shall constitute a quorum for the election of directors to be elected
by such holders. A vacancy in any directorship entitled to be elected by the
holders of record of shares of Series D Preferred Stock (including without
limitation, a vacancy resulting from the decision during an earlier election by
the holders of the Series D Preferred Stock not to fill the directorship to be
held by the Series D Preferred Stock Director) shall be filled only by vote or
written consent of the holders of record of shares of Series D Preferred Stock,
in the manner set forth herein. A vacancy in any directorship elected by the
holders of record of Common Stock shall be filled only by vote or written
consent of the holders of record of shares of Common Stock, in the manner set
forth herein. Each Common Director who shall have been elected as provided in
this Paragraph A.8.(c) may be removed during his or her term of office, whether
with or without cause, only by the holders of record of a majority of the shares
of Common Stock then outstanding, and each Series D Preferred Stock Director who
shall have been elected as provided in this Paragraph A.8.(c) may be removed
during his or her term of office, whether with or without cause, by the holders
of record of a majority of the shares of Series D Preferred Stock then
outstanding. Each Common Director and the Series D Preferred Stock Director
shall be entitled to one (1) vote on all matters which directors are entitled to
vote on. The holders of record of a majority of the shares of Series D Preferred
Stock then outstanding shall have the right to call meetings of the Board of
Directors and management of the Corporation, upon no less than five (5) calendar
days' prior written notice; provided, that such meetings are called no more
--------
frequently than once per fiscal quarter; and, provided, further, so long as no
Event of Default has occurred or is continuing, a meeting may be called only if
the Board of Directors has not held a board meeting or scheduled a board meeting
for the calendar quarter in which such holders of Series D Preferred Stock seek
to call a meeting. During such time as holders of record of a majority of the
Series D Preferred Stock then outstanding are entitled to elect the Series D
Preferred Stock Director to the Board of Directors, such holders shall also be
entitled to have such Series D Preferred Stock Director serve on the
compensation committee of the Board of Directors and any special committee
created by the Board of Directors not in the ordinary course of business and the
Corporation shall cause such Series D Preferred Stock Director to be so
appointed; provided, however, that if such Series D Preferred Stock Director
-------- -------
would not be considered "independent" or "disinterested" (i) for purposes of any
applicable rule of NASDAQ or (ii) for purposes of any special committee formed
in connection with any transaction or potential transaction involving the
Corporation and Investor or any Purchaser, then such Series D Preferred Stock
Director shall not be eligible to be appointed to such committee.
9. LACK OF PUBLIC MARKET. If the Common Stock of the Corporation ceases to
be listed or authorized to be quoted on any national securities exchange or the
public market for the Common Stock of the Corporation otherwise ceases to exist,
the Corporation shall engage an investment bank, reasonably acceptable to the
Corporation and the holders of record of a majority of the shares of the Series
D Preferred Stock, to determine the fair market value price of the Common Stock,
from time to time, in connection with Paragraphs A.3., A.5. and A.6.
B. Definitions. As used herein, the following terms shall have the following
-----------
definitions:
(a) "Accumulated Dividends" means with respect to any share of
Series D Preferred Stock, the dividends that have accrued on such shares as of
such specific date for Dividend Periods ending on or prior to such date and that
have not previously been paid in cash, including Additional Dividends and
Default Dividends.
(b) "Additional Dividends" has the meaning given to such term in
Paragraph A.(3)(e).
(c) "Additional Stock" has the meaning set forth in Paragraph
A.(5)(c)(ii).
(d) "Closing Common Stock Market Price" for any day means the
last sale price regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices regular way, in either case as
reported on American Stock Exchange, NASDAQ, NYSE or any other national
securities market.
-12-
<PAGE>
(e) "Common Stock Equivalents" has the meaning set forth in
Paragraph A.(5)(c)(iii) hereof.
(f) "Conversion Price" has the meaning set forth in Paragraph
A.(5)(a) hereof.
(g) "Convertible Securities" means any indebtedness or shares of
stock convertible into or exchangeable for Common Stock.
(h) "Dividend Declaration Date" means the last trading day on
NASDAQ immediately prior to June 30 and December 31 of each year in which any
shares of the Series D Preferred Stock are outstanding.
(i) "Dividend Payment Dates" means July 31 and January 31 of each
year (or, if such day is not a business day, the next succeeding day that is a
business day); provided, however, that with respect to July 31, 1999, the
-------- -------
Dividend Declaration Date shall be the later to occur of (i) July 31, 1999, or
(ii) the date on which the Corporation's registration statement with respect to
the Common Stock with which dividends are then to be paid is declared effective
by the Securities and Exchange Commission.
(j) "Dividend Period" means the Initial Dividend Period and,
thereafter, each Semi-Annual Dividend Period.
(k) "Effective Price" of shares of Additional Stock means the
quotient determined by dividing (i) the total number of such shares of
Additional Stock issued or sold, or deemed to have been issued or sold, by the
Corporation under Paragraph A.(5)(c) hereof, into (ii) the consideration
received by the Corporation under Paragraph A.(5)(c) hereof for the issuance of
such shares of Additional Stock.
(l) "Initial Dividend Period" means the dividend period
commencing on the date of issuance of the Series D Preferred Stock and ending on
the first Dividend Payment Date to occur thereafter.
(m) "Investor" means OCM Principal Opportunities Fund, L.P.
(n) "Intellectual Property" has the meaning set forth in the
Stock Purchase Agreement.
(o) "Junior Payment Date" has the meaning set forth in Paragraph
A.(3)(i) hereof.
(p) "Junior Securities" has the meaning set forth in Paragraph
A.(2) hereof.
(q) "Material Adverse Effect" shall mean (i) any adverse change
in the condition (financial or otherwise), assets (including, without
limitation, patents and licenses to patents), liabilities, business, results of
operations or prospects of the Company or its Subsidiary, which change
individually or in the aggregate, is material to the Company or its Subsidiary,
or (ii) any event, matter, condition or effect which impairs the ability of the
Company or its Subsidiary to perform on a timely basis its obligations
hereunder. Materiality under clauses (i) or (ii) hereof shall be determined in
good faith by the holders of record of a majority of the shares of Series D
Preferred Stock.
(r) "NASDAQ" shall have the meaning set forth in Paragraph A.3(a)
hereof.
(s) "NYSE" shall mean the New York Stock Exchange.
(t) "Option" means rights, options or warrants to subscribe for,
purchase or otherwise acquire Common Stock or Convertible Securities.
-13-
<PAGE>
(u) "Purchaser" and "Purchasers" shall mean those persons,
individually and collectively, other than Investor the Corporation who are
parties to the Stock Purchase Agreement, as identified on Exhibit D to the Stock
Purchase Agreement.
(v) "Permitted Options" has the meaning set forth in Paragraph
A.(5)(c)(ii)(B) hereof.
(w) "Semi-Annual Dividend Periods" means the semi-annual periods
(1) commencing on each January 1 and ending on each June 30 and (2) commencing
on July 1 and ending on each December 31.
(x) "Stockholders and Registration Rights Agreement" means the
Stockholders and Registration Rights Agreement dated as of March __, 1999,
between the Corporation, the Investor and the Purchasers named therein, the
Schedules and Exhibits thereto, and any certificate or other document required
thereby, as the same may be amended from time to time.
(y) "Stock Purchase Agreement" means the Stock Purchase Agreement
dated as of March __, 1999, between the Corporation, Investor and the Purchasers
named therein, the Schedules and Exhibits thereto, and any certificate or other
document required thereby, as the same may be amended from time to time.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be
signed on the _____ day of _____, 1999.
------------------------------
OFFICER
- 18 -
<PAGE>
EXHIBIT A
Example of Application of Formula for Adjustment of Conversion Price.
If, twelve (12) months after the original issuance of the Series D
Preferred Stock, 9,000,000 shares of Common Stock were then outstanding and the
Company were to issue 100,000 shares of Common Stock (the Additional Stock) for
$10.00 per share (and thus, less than the $11 Conversion Price for Series D
Preferred Stock then in effect), the Conversion Price would be adjusted as
follows:
[(A+B)] / [(C +D)]
[(9,000,000 x $11) + (100,000 x $10)] / [(9,000,000) +(100,000)]
[(99,000,000)+($1,000,000 )] / [(9,100,000)]
[(100,000,000)] / [(9,100,000)]
= $10.99
COLLAGENEX PHARMACEUTICALS, INC.
1996 STOCK PLAN
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, non-Employee members of the Board
and Consultants of the Company and its Subsidiaries and to promote the success
of the Company's business. Options granted under the Plan may be incentive stock
options (as defined under Section 422 of the Code) or non-statutory stock
options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code, as amended,
and the regulations promulgated thereunder. Stock purchase rights may also be
granted under the Plan.
2. CERTAIN DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its Committees appointed
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee appointed by the Board of Directors in
accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means CollaGenex Pharmaceuticals, Inc., a Delaware
corporation.
(g) "Consultant" means any person, including an advisor, who is engaged by
the Company or any Parent or subsidiary to render services and is compensated
for such services, and any director of the Company whether compensated for such
services or not.
(h) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Employee shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Board, provided that such leave is for a period of not
more than ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) transfers between
locations of the Company or between the Company, its Subsidiaries or its
successor.
<PAGE>
(i) "Employee" means any person, including officers and directors, employed
by the Company or any Parent or Subsidiary of the Company. The payment of a
director's fee by the Company shall not be sufficient to constitute "employment"
by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(k) "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 National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, 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 system or exchange for the last market trading day prior
to the time of determination as reported in the Wall Street Journal or such
other source as the Administrator deems reliable or;
(ii) If the Common Stock is quoted on Nasdaq (but not on the National
Market System thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be
the mean between the high and low asked prices for the Common Stock or;
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
(o) "Optioned Stock" means the Common Stock subject to an Option.
(p) "Optionee" means an Employee or Consultant who receives an Option.
(q) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 1996 Stock Plan.
(s) "Restricted Stock" means shares of Common Stock acquired pursuant to a
grant of stock purchase rights under Section 11 below.
-2-
<PAGE>
(t) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 13 of the Plan.
(u) "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 750,000 shares of Common Stock, such number of shares
determined on a post-reverse stock split recapitalization basis, such
recapitalization to be completed upon consummation of the Company's proposed
initial public offering of Common Stock. The shares may be authorized, but
unissued, or reacquired Common Stock.
If an option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) Administration With Respect to Directors and officers. With
respect to grants of Options or stock purchase rights to Employees who are
also officers or directors of the Company, the Plan shall be administered
by (A) the Board if the Board may administer the Plan in compliance with
Rule 16b-3 promulgated under the Exchange Act or any successor thereto
("Rule 16b-3") with respect to a plan intended to qualify thereunder as a
discretionary plan, or (B) a Committee designated by the Board to
administer the Plan, which Committee shall be constituted in such a manner
as to permit the Plan to comply with Rule 16b-3 with respect to a plan
intended to qualify thereunder as a discretionary plan. Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify
thereunder as a discretionary plan.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-3, the
Plan may be administered by different bodies with respect to directors,
non-director officers and Employees who are neither directors nor officers.
(iii) Administration With Respect to Consultants and Other Employees.
With respect to grants of Options or stock purchase rights to Employees who
are neither directors nor officers of the Company or to Consultants, the
Plan shall be administered by (A) the Board, if the Board may administer
the Plan in compliance with Rule 16b-3, or (B) a Committee designated by
-3-
<PAGE>
the Board, which Committee shall be constituted in such a manner as to
satisfy the legal requirements relating to the administration of incentive
stock option plans, if any, of Delaware corporate law and applicable
securities laws and of the Code (the "Applicable Laws"). Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and
in the case of a Committee, 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 of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the officers, Consultants and Employees to whom Options
and stock purchase rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and stock
purchase rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be covered
by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation or waiver of
forfeiture restrictions regarding any Option or other award and/or the
shares of Common Stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion);
(vii) to determine whether and under what circumstances an Option may
be settled in cash under subsection 9(f) instead of Common Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the
amount, if any, of any deemed earnings on any deferred amount during any
deferral period);
-4-
<PAGE>
(ix) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by
such Option shall have declined since the date the Option was granted; and
(x) to determine the terms and restrictions applicable to stock
purchase rights and the Restricted Stock purchased by exercising such stock
purchase rights.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all Optionees
and any other holders of any Options.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Employees and Consultants.
Incentive Stock Options may be granted only to Employees. An Employee or
Consultant who has been granted an Option may, if he is otherwise eligible, be
granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the Fair Market Value
of the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his right or the Company's right to terminate
his employment or consulting relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 19 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 15 of the
Plan.
-5-
<PAGE>
7. TERM OF OPTION. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
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 Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, 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, 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
(A) granted to a person who, at the time of the grant of such
Option, 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
the grant.
(B) granted to any person, the per Share exercise price shall be
no less than 85% of the Fair Market Value per Share on the date
of grant.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option either have been owned by the Optionee for
more than six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (y) 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, (5) authorization from the Company to retain from the
total number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
-6-
<PAGE>
for the total number of Shares as to which the option is exercised, (6) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) by delivering an irrevocable
subscription agreement for the Shares which irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be 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 EMPLOYMENT. In the event of termination of an Optionee's
consulting relationship or Continuous Status as an Employee with the Company (as
the case may be), such Optionee may, but only within ninety (90) days (or such
other period of time as is determined by the Board, with such determination in
the case of an Incentive Stock Option being made at the time of grant of the
Option and not exceeding ninety (90) days) after the date of such termination
(but in no event later than the expiration date of the term of such Option as
set forth in the Option Agreement), exercise his Option to the extent that
Optionee was entitled to exercise
-7-
<PAGE>
it at the date of such termination. To the extent that Optionee was not entitled
to exercise the Option at the date of such termination, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b)
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option
may be exercised, at any time within twelve (12) months following the date of
death (but in no event later than the expiration date of the term of such Option
as set forth in the Option Agreement), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent the Optionee was entitled to exercise the Option at the date
of death. To the extent that Optionee was not entitled to exercise the Option at
the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.
(e) RULE 16b-3. Options granted to persons subject to Section 16(b) of the
Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
(f) 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.
10. NON-TRANSFERABILITY OF OPTIONS. The Option 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. The terms of the Option shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Optionee.
-8-
<PAGE>
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 of the terms, conditions and restrictions related to the offer,
including the number of Shares that such person shall be entitled to purchase,
the price to be paid (which price shall not be less than 50% of the Fair Market
Value of the Shares as of the date of the offer), and the time within which such
person must accept such offer, which shall in no event exceed thirty (30) days
from the date upon which the Administrator made the determination to grant the
stock purchase right. 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
employment 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 such rate as the Committee may determine.
(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. In addition, the
provisions of Restricted Stock purchase agreements need not be the same with
respect to each purchaser.
(d) RIGHTS AS A SHAREHOLDER. Once the stock purchase right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder 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. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or stock purchase right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold
-9-
<PAGE>
from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the stock purchase right, if any, 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 (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Right as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of the
Administrator;
(d) if the Optionee is subject to Rule 16b-3, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or stock purchase
right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, 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 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
-10-
<PAGE>
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.
In the event of the proposed dissolution or liquidation of the Company,
the Board shall notify the Optionee at least fifteen (15) days prior to such
proposed action. To the extent it has not been previously exercised, the Option
will terminate immediately prior to the consummation of such proposed action. In
the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets
(hereinafter, a "merger"), the Option shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation. In the event that such successor corporation does
not agree to assume the Option or to substitute an equivalent option, the Board
shall, in lieu of such assumption or substitution, provide for the Optionee to
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. If the Board
makes an Option fully exercisable in lieu of assumption or substitution in the
event of a merger, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the Option will terminate upon the expiration of such period. For
the purposes of this paragraph, the Option shall be considered assumed if,
following the merger, the Option or right confers the right to purchase, for
each Share of stock subject to the Option immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property) received in
the merger 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
was not solely common stock of the successor corporation or its Parent, the
Board may, with the consent of the successor corporation and the participant,
provide for the consideration to be received upon the exercise of the Option,
for each Share of stock subject to the Option, 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. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted 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 discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
-11-
<PAGE>
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option 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 by any of
the aforementioned relevant provisions of law.
17. 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.
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 liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and stock purchase rights shall be evidenced by
written agreements in such form as the Board shall approve from time to time.
19. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.
-12-
<PAGE>
20. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
