<PAGE> 1
SCHEDULE 14A
(RULE 14-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14 OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant (X)
Filed by a Party other than the Registrant o
Check the appropriate box:
o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
(X) Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
INNERDYNE, INC.
(Name of Registrant as Specified In Its Charter)
----------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required.
o 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:
<PAGE> 2
INNERDYNE, INC.
-----------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 22, 1998
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
InnerDyne, Inc., a Delaware corporation (the "Company"), will be held on Friday,
May 22, 1998 at 9:00 a.m., local time, at the Company's principal executive
offices at 1244 Reamwood Avenue, Sunnyvale, California 94089 for the following
purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To authorize an amendment to the Company's 1996 Stock Option Plan
to increase the number of shares of Common Stock reserved for
issuance thereunder by 1,000,000 shares to an aggregate of
2,000,000 shares.
3. To authorize an amendment to the Company's 1991 Employee Stock
Purchase Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 250,000 shares to an
aggregate of 550,000 shares.
4. To ratify the appointment of KPMG Peat Marwick as independent
auditors of the Company for the fiscal year ending December 31,
1998.
5. To transact such other business as may properly come before the
meeting or any postponement or adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on April 6, 1998 are entitled to notice of and to vote at the Annual
Meeting and any adjournments thereof. All stockholders are cordially invited to
attend the Annual Meeting. However, to assure your representation at the
meeting, you are urged to mark, sign, date and return the enclosed proxy as
promptly as possible in the postage-prepaid envelope enclosed for that purpose.
Any stockholder attending the meeting may vote in person even if he or she
returned a proxy.
Very truly yours,
/s/ CRAIG W. JOHNSON
---------------------------------------
Craig W. Johnson
Secretary
Sunnyvale, California
April 17, 1998
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN
THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. IF A QUORUM IS NOT REACHED, THE COMPANY COULD
HAVE THE ADDED EXPENSE OF RE-ISSUING THESE PROXY MATERIALS. IF YOU
ATTEND THE MEETING AND SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE
IN PERSON. THANK YOU FOR ACTING PROMPTLY.
<PAGE> 3
INNERDYNE, INC.
-----------
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
InnerDyne, Inc. (the "Company" or "InnerDyne") for use at the Annual Meeting of
Stockholders to be held Friday, May 22, 1998 at 9:00 a.m., local time, or at any
postponement or adjournment thereof (the "Annual Meeting"), for the purposes set
forth herein and in the accompanying Notice of Annual Meeting of Stockholders.
The Annual Meeting will be held at the Company's principal executive offices at
1244 Reamwood Avenue, Sunnyvale, California 94089. The Company's telephone
number at its principal executive offices is (408) 745-6010.
These proxy solicitation materials were mailed on or about April 17,
1998 to all stockholders entitled to vote at the Annual Meeting.
RECORD DATE
Stockholders of record of the Company's Common Stock at the close of
business on April 6, 1998 are entitled to notice of, and to vote at, the Annual
Meeting. At the April 6, 1998 record date, 21,760,477 shares of the Company's
Common Stock were issued and outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the
person giving it any time before its use by delivering to the Company
(Attention: Robert A. Stern, Inspector of Elections) a written notice of
revocation or a duly executed proxy bearing a later date or by attending the
meeting and voting in person.
VOTING AND SOLICITATION
Holders of shares of Common Stock are entitled to one vote per share on
all matters, except that all such holders are entitled to cumulate their votes
in the election of directors.
Every stockholder voting for the election of directors may cumulate such
stockholder's votes and give one candidate the number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
stockholder's shares are entitled, or may distribute such stockholder's votes on
the same principle among as many candidates as the stockholder may select,
provided that votes cannot be cast for more than six candidates. However, no
stockholder shall be entitled to cumulate votes unless the names of the
candidates for which votes are being cumulated have been placed in nomination
prior to the voting and the stockholder, or any other stockholder, has given
notice at the meeting, prior to the voting, of the stockholder's intention to
cumulate the stockholder's votes. On all other matters, each share of Common
Stock has one vote.
Votes cast by proxy or in person at the Annual Meeting will be tabulated
by the Inspector of Elections (the "Inspector") with the assistance of the
Company's transfer agent. The Inspector will also determine whether or not a
quorum is present. Except with respect to the election of directors where
cumulative voting is invoked and except in certain other specific circumstances,
the affirmative vote of a majority of shares present in person or represented by
proxy at a duly held meeting at which a quorum is present is required under
Delaware law for approval of proposals presented to stockholders. In general,
Delaware law also provides that a quorum consists of a majority of the shares
entitled to vote and present in person or represented by proxy. The Inspector
will treat abstentions as shares that are present and entitled to vote
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for purposes of determining the presence of a quorum and as negative votes for
purposes of determining the approval of any matter submitted to the stockholders
for a vote. Any proxy which is returned using the form of proxy enclosed and
which is not marked as to a particular item will be voted for each of the four
proposals being presented to stockholders at the meeting, and as the proxy
holders deem advisable on other matters that may come before the meeting, as the
case may be, with respect to the item not marked. If a broker indicates on the
enclosed proxy or its substitute that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present with respect to that matter. The Company believes that the
tabulation procedures to be followed by the Inspector are consistent with the
general statutory requirements in Delaware concerning voting of shares and
determination of a quorum.
The cost of soliciting proxies will be borne by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners. Proxies may also be solicited
by certain of the Company's directors, officers and regular employees, without
additional compensation, personally or by telephone or telegram.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Proposals of stockholders that are intended to be presented by such
stockholders at the Company's 1999 Annual Meeting of Stockholders must be
received by the Company no later than December 18, 1998 in order that such
proposals may be included in the proxy statement and form of proxy relating to
that meeting.
PROPOSAL NO. 1:
ELECTION OF DIRECTORS
NOMINEES
A board of six directors is to be elected at the meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for management's six nominees named below, all of whom are currently directors
of the Company.
In the event that any nominee of the Company is unable or declines to
serve as a director at the time of the Annual Meeting, the proxies will be voted
for any nominee who shall be designated by the present Board of Directors to
fill the vacancy. In the event that additional persons are nominated for
election as directors, the proxy holders intend to vote all proxies received by
them in such a manner in accordance with cumulative voting as will assure the
election of as many of the nominees listed below as possible and, in such event,
the specific nominees to be voted for will be determined by the proxy holders.
It is expected that all nominees will be able and willing to serve as directors.
The term of office of each person elected as a director will continue until the
next Annual Meeting of Stockholders, until such director's successor has
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been elected and qualified or until such director resigns as a director of the
Company. The names of the nominees, and certain information about them as of
December 31, 1997, are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- -----
<S> <C> <C>
William G. Mavity 48 President and Chief Executive 1993
Officer of the Company
Edward W. Benecke(1) 55 President of Medical Contracts 1995
Associates, a provider of
consulting services to health
care companies in the areas of
marketing and distribution
Robert M. Curtis(2)(3) 52 President of VanMed, a medical 1993
venture capital incubator
Eugene J. Fischer(1) 51 General Partner of Pathfinder 1989
Venture Capital Funds, a group of
venture capital funds
Guy P. Nohra(2) 37 Vice President of Burr, Egan, 1994
Deleage & Co., a venture capital
firm
Steven N. Weiss(2)(3) 51 General Partner of Montgomery 1987
Medical Ventures II, L.P., a
venture capital firm
</TABLE>
- -----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Subcommittee of the Compensation Committee.
Except as set forth below, each of the nominees has been engaged in his
principal occupation described above during the past five years. There is no
family relationship between any of the directors or executive officers of the
Company.
Mr. Mavity joined the Company as President, Chief Executive Officer and
a director in October 1993, after having spent more than twenty years in various
capacities with the 3M Company ("3M"), including more than ten years within a
number of the operating units of 3M's health care business. From August 1992
until October 1993, Mr. Mavity served as Operations Director for 3M's Medical
Device Division. From April 1989 until August 1992, Mr. Mavity served as General
Manager of 3M's Sarns cardiovascular surgery business unit. From July 1988 until
April 1989, Mr. Mavity served as Manufacturing Manager for the Sarns subsidiary.
Mr. Mavity holds a B.E.A. degree from the University of Delaware.
Mr. Benecke has served as a director of the Company since 1995. Mr.
Benecke is the President of Medical Contracts Associates, an organization that
provides consulting services to health care companies in the areas of marketing
and distribution. Prior to forming the above entity in 1994, Mr. Benecke spent
25 years within various units of Johnson & Johnson, one of the world's leading
suppliers of health care products. From 1987 to 1993, he was Vice President of
Corporate National Accounts and headed an organization responsible for
implementing and managing Johnson & Johnson's multi-company agreements and
overall business relationships with the major multi-hospital systems and
alliances in the United States. Mr. Benecke holds a B.S. degree in business
administration from Southeast Missouri State University.
Mr. Curtis has served as a director of the Company since 1995 and has
also served periodically as a consultant to the Company on an "as-needed" basis
since that time. Mr. Curtis is President of VanMed, a medical venture capital
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incubator, which identifies, reviews, arranges funding for and manages the early
stage success of seed health care investment opportunities. From 1991 to 1996,
he was Principal of Robert Curtis Associates, a business development and
management consulting firm. From 1990 to 1991, Mr. Curtis served as President,
Chief Executive Officer and Chairman of Urosystems, Inc., which was sold to
Medtronic, Inc. From 1976 to 1990, he held a number of positions at Shiley,
Inc., a manufacturer of medical devices, and its parent corporation, Pfizer,
Inc., a diversified health care products company. He has served, at various
times, as President, Chief Executive Officer and Chairman of the Board of
Shiley, Inc. and as a Senior Vice President and a member of the Board of
Directors of Pfizer Hospital Products Group, the medical device division of
Pfizer, Inc. Mr. Curtis holds BS and MS degrees from the University of
California, Berkeley.
Mr. Fischer has served as a director of the Company since 1989. Since
1989, he has been a general partner of Pathfinder Venture Capital Funds, a group
of venture capital funds. Since 1996, he has also been a managing member of the
general partner of Capstone Ventures, a venture capital fund. From 1983 to 1988,
he was a general partner of Technology Funding, Ltd., a venture capital
management company, where he was responsible for investments in computer and
software technology, medical systems and pharmaceuticals. Mr. Fischer holds B.S.
and M.S. degrees from the University of Minnesota and the University of
California, respectively. Mr. Fischer also serves as a director of a number of
privately held companies.
Mr. Nohra has served as a director of InnerDyne since 1994. He is a Vice
President of Burr, Egan, Deleage & Co. where he has worked since 1989, and has
been a general partner of certain funds affiliated with Burr, Egan, Deleage &
Co. since 1992. Mr. Nohra is also a general partner of Alta California Partners,
L.P. Prior to joining Burr, Egan, Deleage & Co., Mr. Nohra was Product Manager
of Medical Products with Security Pacific Trading Corporation, where he managed
the medical product line in Asia. He holds a B.A. from Stanford University and
an M.B.A. from the University of Chicago Graduate School of Business. Mr. Nohra
also serves as a director of Interpore International, an orthopedics company,
Euphonix, Inc. and a number of privately held companies.
Mr. Weiss has served as a director of the Company since 1987. Since
1987, he has been a general partner of Montgomery Medical Ventures II, L.P., a
venture capital firm. Mr. Weiss has held a number of senior management positions
in the medical device industry and holds B.S. and M.S. degrees from City College
of New York and an M.B.A. from Fordham University. Mr. Weiss also serves as a
director of KeraVision, Inc. and a number of privately held companies.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of six meetings
during the fiscal year ended December 31, 1997. The Board of Directors has an
Audit Committee and a Compensation Committee. The Compensation Committee has a
Stock Option Subcommittee. There is no committee performing the functions of a
nominating committee.
The Audit Committee of the Board of Directors reviews the results and
scope of the audit and other services provided by the Company's independent
auditors, approves fee arrangements with auditors and reports the results of its
review to the full Board of Directors and to management. This Committee, which
consists of directors Fischer and Benecke, held one meeting during fiscal 1997.
The Compensation Committee of the Board of Directors and its Stock
Option Subcommittee, where appropriate, administer the Company's incentive
compensation and benefit plans (including stock plans) for individuals subject
to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in conjunction with the Board of Directors, establish salaries,
incentives and other forms of compensation for directors, officers and other
employees. The Compensation Committee, which consists of directors Curtis, Nohra
and Weiss, held two meetings during fiscal 1997. The Stock Option Subcommittee,
which consists of directors Curtis and Weiss, held three meetings during fiscal
1997.
No incumbent director attended fewer than 75 percent of the aggregate
number of meetings of the Board of Directors and of the committees, if any, upon
which such director served during fiscal 1997.
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COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for expenses actually incurred
in attending meetings of the Board of Directors and its committees. In addition,
nonemployee members of the Board of Directors receive a yearly fee of $6,000
(distributed quarterly and pro rated in the event that the director serves for
only part of the quarter). The Board of Directors fee for Mr. Nohra is paid
directly to Burr, Egan, Deleage & Co., the Board of Directors fee for Mr. Weiss
is paid directly to Montgomery Medical Ventures II, L.P., and the Board of
Directors fee for Mr. Fischer is paid directly to Pathfinder Ventures, Inc. An
entity affiliated with Mr. Benecke provided $40,000 in consulting services to
the Company in 1997. See "Certain Relationships and Related Transactions." Mr.
Curtis has a consulting agreement with the Company which was inactive during
1996 and 1997 and has remained so to date in 1998. The Company did not pay any
consulting fees to Mr. Curtis in 1997. See "Certain Relationships and Related
Transactions."
Each nonemployee director participates in the Company's 1991 Directors'
Stock Option Plan, pursuant to which nonemployee directors are automatically
granted options to purchase shares of Common Stock of the Company on the terms
and conditions set forth in such plan. During the fiscal year ended December 31,
1997, options to purchase 10,000 shares of Common Stock at an exercise price of
$2.6875 per share were granted under the Company's 1991 Directors' Stock Option
Plan to each of Messrs. Benecke, Curtis, Fischer, Nohra and Weiss.
Medical Contracts Associates ("MCA"), an entity of which Edward W.
Benecke is President, has been retained by the Company to assist in the
procurement and servicing of contracts with group purchasing organizations.
Under the arrangement, the Company pays MCA $10,000 per quarter plus an
additional amount for certain contracts entered into with the assistance of MCA.
The Company paid MCA an aggregate of $40,000 in 1997. As of December 31, 1997,
the Company owed no money to MCA. See "Certain Relationships and Related
Transactions."
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Mr. Weiss has consented, without admitting or denying any wrongdoing, to
the entry of an administrative cease and desist order issued by the Securities
and Exchange Commission on July 1, 1997 in connection with allegations that he
did not timely file certain reports required as a result of his indirect
beneficial ownership in Montgomery Medical Ventures II, L.P., a California
Limited Partnership ("MMV") under Section 16 of the Exchange Act. Mr. Weiss is a
general partner of MMV. Mr. Weiss has informed the Company that he believes that
the alleged untimely filings were inadvertent and resulted neither in any
economic harm to any person nor economic gain to Mr. Weiss or MMV.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE NOMINEES LISTED
ABOVE.
PROPOSAL NO. 2:
AMENDMENT OF THE 1996 STOCK OPTION PLAN
At the Annual Meeting, the Company's stockholders are being asked to
approve an amendment to the Company's 1996 Stock Option Plan (the "1996 Option
Plan") that would increase the number of shares of Common Stock reserved for
issuance thereunder by 1,000,000 shares to an aggregate of 2,000,000 shares.
GENERAL
The 1996 Option Plan was adopted by the Board of Directors in March 1996
and was approved by the Company's stockholders in May 1996. A total of 1,000,000
shares of Common Stock are currently reserved for issuance under the 1996 Option
Plan. On March 24, 1998, the Board of Directors amended the 1996 Option Plan,
subject to stockholder approval, to increase the number of shares reserved for
issuance thereunder by 1,000,000 shares of Common Stock to an aggregate of
2,000,000 shares. As of December 31, 1997, approximately 209,600 shares
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remained available for issuance pursuant to the 1996 Option Plan (not including
the additional 1,000,000 shares reserved by the Board of Directors, for which
stockholder approval is being requested). Accordingly, stockholders are being
asked to approve an amendment to the 1996 Option Plan at the Annual Meeting.
Options granted under the 1996 Option Plan may be either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or nonstatutory stock options at the discretion
of the Board of Directors and as reflected in the terms of the written option
agreement. The 1996 Option Plan is not a qualified deferred compensation plan
under Section 401(a) of the Code, and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended. Shares not
purchased under an option prior to its expiration are made available for future
option grants under the 1996 Option Plan.
The actual benefits, if any, to the holders of stock options issued
under the 1996 Option Plan are not determinable as all grants to be made under
the 1996 Option Plan are discretionary and, prior to exercise, the value, if
any, of such stock options to their holders is represented by the difference
between the market price of a share of the Company's Common Stock on the date of
exercise and the exercise price of a holder's stock option. During the year
ended December 31, 1997, (i) options to purchase 270,000 shares of Common Stock
were issued pursuant to the 1996 Option Plan to the current executive officers
as a group (four persons); (ii) no options to purchase shares of Common Stock
were issued pursuant to the 1996 Option Plan to the current directors who are
not executive officers, as a group (five persons), and (iii) options to purchase
302,000 shares of Common Stock were issued pursuant to the 1996 Option Plan to
all other employees and consultants, including current officers who are not
executive officers, as a group (48 persons). As of December 31, 1997, the price
of the Company's Common Stock was $2.6875 per share.
PURPOSE
The purposes of the 1996 Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the employees and consultants of the Company and to
promote the success of the Company's business.
ADMINISTRATION
The 1996 Option Plan may be administered by the Board of Directors or by
a committee of the Board of Directors (the "Administrator"). At the present
time, the 1996 Option Plan is being administered by the Board of Directors and
the Stock Option Subcommittee of the Compensation Committee of the Board of
Directors. Members of the Board of Directors receive no additional compensation
for their services in connection with the administration of the 1996 Option
Plan. All questions of interpretation of the 1996 Option Plan are determined by
the Administrator and its decisions are final and binding upon all participants.
ELIGIBILITY
The 1996 Option Plan provides that either incentive stock options or
nonstatutory stock options may be granted to employees (including officers and
directors who are also employees) of the Company or any subsidiary. In addition,
the 1996 Option Plan provides that nonstatutory stock options may be granted to
consultants of the Company or any of its subsidiaries. The Administrator selects
the optionees and determines the number of shares to be subject to each option.
As of December 31, 1997, 109 employees were eligible to receive grants pursuant
to the 1996 Option Plan. The 1996 Option Plan provides that the maximum number
of shares of Common Stock which may be granted under options to any one employee
during any fiscal year shall be 800,000, subject to adjustment as provided in
the 1996 Option Plan.
TERMS OF OPTIONS
Each option is evidenced by a stock option agreement between the Company
and the optionee. Each option is subject to the following additional terms and
conditions:
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(a) Exercise of the Option. The Administrator determines when options
may be exercised. An option is exercised by giving written notice of exercise to
the Company specifying the number of shares of Common Stock to be purchased and
by tendering payment of the purchase price. The purchase price of the shares
purchased upon exercise of an option shall be paid in consideration of such form
as is determined by the Administrator and specified in the option agreement.
Such form of consideration may vary for each option and may include cash, check,
shares of the Company's Common Stock having a fair market value on the date of
exercise equal to the exercise price (subject to certain limitations) or
assignment of the proceeds of some or all of the shares being acquired upon
exercise of the option.
(b) Exercise Price. The exercise price of all incentive stock options
granted under the 1996 Option Plan must be at least equal to the fair market
value of the Common Stock of the Company on the date of grant. The exercise
price of all nonstatutory stock options granted under the 1996 Option Plan must
be at least equal to the fair market value of the Common Stock on the date of
grant for grants made to certain of the Company's executive officers and at
least 85% of the fair market value of the Common Stock on the date of grant for
all other persons. The exercise price of any option granted to an employee who
owns stock representing more than 10% of the voting power of all classes of
stock of the Company or any parent or subsidiary of the Company must equal at
least 110% of the fair market value of the Common Stock on the date of grant.
The fair market value per share is equal to the closing price of the Company's
Common Stock on the Nasdaq National Market on the date of grant.
(c) Termination of Employment. If the optionee's employment or
consulting relationship terminates for any reason other than disability or
death, options under the 1996 Option Plan may be exercised not later than 30
days (or such other period of time not exceeding the date of expiration of the
term of such option as set forth in the written option agreement) after such
termination and may be exercised only to the extent the option was exercisable
on the date of termination. In no event may an option be exercised by any person
after the expiration of its term.
(d) Disability. If an optionee is unable to continue his or her
employment or consulting relationship with the Company as a result of his or her
total and permanent disability, options may be exercised within six months of
termination (or such other period of time not exceeding the date of expiration
of the term of such option as set forth in the written option agreement) and may
be exercised only to the extent the option was exercisable on the date of
termination. In no event may an option be exercised after the expiration of its
term.
(e) Death. Under the 1996 Option Plan, if an optionee should die
while employed or retained by the Company, and such optionee has been
continuously employed or retained by the Company since the date of grant of the
option, the option may be exercised within six months after the date of death
(or such other period of time, not exceeding the date of expiration of the term
of such option as set forth in the written option agreement) by the optionee's
estate or by a person who acquired the right to exercise the option by bequest
or inheritance to the extent the optionee would have been entitled to exercise
the option had the optionee continued living and remained employed or retained
by the Company for three months after the date of death, but in no event may the
option be exercised after its termination date.
If an optionee should die within 30 days (or such other period of time
not exceeding the date of expiration of the term of such option as set forth in
the written option agreement) after the optionee has ceased to be continuously
employed or retained by the Company, the option may be exercised within six
months after the date of death (or such other period of time, not exceeding the
date of expiration of the term of such option as set forth in the written option
agreement) by the optionee's estate or by a person who acquired the right to
exercise the option by bequest or inheritance to the extent that the optionee
was entitled to exercise the option at the date of termination, but in no event
may the option be exercised after its termination date.
(f) Termination of Options. The 1996 Option Plan provides that
options granted have the term provided in the option agreement. In general,
these agreements provide for a term of between five and ten years. Incentive
stock options granted to an optionee who, immediately before the grant of such
option, owned more than 10% of the voting power of all classes of stock of the
Company or any parent or subsidiary of the Company, may not in any case have a
term of more than five years. No option may be exercised by any person after its
expiration.
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(g) Option Not Transferable. An option is nontransferable by the
optionee other than by will or the laws of descent and distribution, and is
exercisable only by the optionee during his or her lifetime or, in the event of
the optionee's death, by a person who acquires the right to exercise the option
by bequest or inheritance or by reason of the death.
(h) Acceleration of Options. In the event of certain changes in
control of the Company, the 1996 Option Plan requires that each outstanding
option be assumed or an equivalent option substituted by the successor
corporation; provided, however, that the Administrator may, in lieu of such
assumption or substitution, provide for the optionee to have the right to
exercise the option as to all or a portion of the stock subject thereto,
including shares which would not otherwise be exercisable, in which case each
option will be exercisable for 15 days from the date of notice of such
determination, after which period the option would terminate if unexercised.
(i) Other Provisions. The option agreement may contain such other
terms, provisions and conditions not inconsistent with the 1996 Option Plan as
may be determined by the Administrator.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event any change, such as a stock split, reverse stock split,
stock dividend, combination or reclassification, is made in the Company's
capitalization that results in an increase or decrease in the number of
outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price of each
outstanding option, the number of shares subject to each option, the annual
limitation on grants to employees, as well as the number of shares available for
issuance under the 1996 Option Plan. In the event of the proposed dissolution or
liquidation of the Company, each option will terminate unless otherwise provided
by the Administrator. The Administrator may declare that any option shall
terminate as of a date fixed by the Administrator and give each optionee the
right to exercise his or her option as to all or any part of the optioned stock,
including shares as to which the option would not otherwise be exercisable.
AMENDMENT AND TERMINATION
The Board of Directors may amend the 1996 Option Plan at any time or
from time to time or may terminate it without approval of the stockholders;
provided, however, that stockholder approval is required for any amendment to
the 1996 Option Plan that increases the number of shares subject to the 1996
Option Plan, changes the designation of the class of persons eligible to be
granted options, changes the limitation on grants to employees or results in a
change which would require stockholder approval to qualify options granted under
the 1996 Option Plan as performance-based compensation under Section 162(m) of
the Code, or results in any revision or amendment requiring stockholder approval
in order to preserve the qualification of the 1996 Option Plan under Rule 16b-3.
No action by the Board of Directors or stockholders may alter or impair any
option previously granted under the 1996 Option Plan. The 1996 Option Plan
terminates in March 2006 (unless terminated at an earlier date by the Board of
Directors), provided that any options then outstanding under the 1996 Option
Plan will remain outstanding until they expire by their terms.
FEDERAL INCOME TAX ASPECTS OF THE 1996 OPTION PLAN
The following is a brief summary of the United States federal income tax
consequences of transactions under the 1996 Option Plan based on federal income
tax laws in effect as of the date of this proxy statement (which laws could
change at any time hereafter). This summary is not intended to be exhaustive and
does not discuss the tax consequences of a participant's death or provisions of
the income tax laws of any municipality, state or other country in which an
optionee may reside. This summary does not purport to be complete. The Company
advises all optionees to consult their own tax advisors concerning tax
implications of option grants and exercises, and the disposition of shares
acquired upon such exercise, under the 1996 Option Plan.
Options granted under the 1996 Option Plan may be either "incentive
stock options," as defined in Section 422 of the Code, or nonstatutory stock
options.
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<PAGE> 11
If an option granted under the 1996 Option Plan is an incentive stock
option, the optionee will recognize no income upon grant of the incentive stock
option and incur no regular tax liability upon its exercise, although the
exercise of an incentive stock option may give rise to alternative minimum tax
(see below). The Company will not be allowed a deduction for federal income tax
purposes as result of the exercise of an incentive stock option regardless of
the applicability of the alternative minimum tax. Upon the sale or exchange of
the shares more than two years after grant of the option and more than one year
after receipt of the shares by the optionee, any gain will be treated as
long-term capital gain. If both of these holding periods are not satisfied (a
"disqualifying disposition"), the optionee will recognize ordinary income equal
to the difference between the exercise price and the lower of the fair market
value of the stock at the date of the option exercise or the sale price of the
stock. The Company will be entitled to a deduction in the same amount as the
ordinary income recognized by the optionee. Any gain recognized on such a
disqualifying disposition of the shares in excess of the amount treated as
ordinary income will be characterized as long-term capital gain if the sale
occurs more than one year after exercise of the option or as short-term capital
gain if the sale is made earlier. For individual taxpayers, the current federal
long-term capital gains rate is 28% if the shares are held for more than one
year but not more than 18 months before disposition, and 20% if the shares are
held more than 18 months before disposition. Capital losses are allowed in full
against capital gains plus $3,000 of other income.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory stock options. An optionee will not recognize any
taxable income under U.S. tax laws at the time he or she is granted a
nonstatutory stock option. However, upon its exercise, the optionee will
recognize ordinary income for tax purposes measured by the excess of the then
fair market value of the shares over the exercise price. In certain
circumstances, where the shares are subject to a substantial risk of forfeiture
when acquired, the date of taxation may be deferred unless the optionee files an
election with the Internal Revenue Service under Section 83(b) of the Code. The
income recognized by an optionee who is also an employee of the Company will be
subject to income and employment tax withholding by the Company by payment in
cash or out of the current earnings paid to the optionee. Upon sale of such
shares by the optionee, any difference between the sales price and the exercise
price, to the extent not recognized as ordinary income as provided above, will
be treated as capital gain or loss, and will qualify for long-term capital gain
or loss treatment if the shares have been held for more than one year from the
date of exercise.
ALTERNATIVE MINIMUM TAX
As noted above, the exercise of an incentive stock option may subject
the optionee to the alternative minimum tax ("AMT") under Section 55 of the
Code. The AMT is calculated for federal tax purposes by applying a tax rate of
26% to alternative minimum taxable income up to $175,000 ($87,500 for married
taxpayers filing separately) and 28% to alternative minimum taxable income above
$175,000. Alternative minimum taxable income for federal tax purposes is equal
to (i) taxable income adjusted for certain items, plus (ii) items of tax
preference less (iii) an exemption amount of $45,000 for joint returns, $33,750
for unmarried individual returns and $22,500 for married individuals filing
separately (with the exemption amounts phased out for upper-income taxpayers).
AMT will be due if the tax determined under the foregoing formula exceeds the
regular tax of the taxpayer for the year.
In computing alternative minimum taxable income, shares purchased upon
exercise of an incentive stock option are treated as if they had been acquired
by the optionee pursuant to a nonstatutory stock option, as described above. As
a result, the optionee recognizes alternative minimum taxable income equal to
the excess of the fair market value of the stock on the date of exercise over
the option exercise price. Because the AMT rules are complex and their effects
depend upon the personal circumstances of each taxpayer, an optionee should
consult his or her own tax advisor prior to exercising an incentive stock
option.
If an optionee pays AMT, the amount of such AMT may be carried forward
as a credit against any subsequent year's regular tax in excess of the AMT.
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<PAGE> 12
PAYMENTS IN RESPECT TO A CHANGE OF CONTROL
The 1996 Option Plan authorizes the Administrator to accelerate the
vesting of options in the event of the Company's merger with another corporation
or sale of all or substantially all of its assets. Such acceleration or payment
may cause part or all of the consideration involved to be treated as a
"parachute payment" under the Code, which may subject the recipient thereof to a
20% excise tax and which may not be deductible by the participant's employer.
REQUIRED VOTE
The approval of the amendment to the 1996 Option Plan that would
increase the number of shares reserved for issuance thereunder by 1,000,000
shares of Common Stock to an aggregate of 2,000,000 shares requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled to
vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE
COMPANY'S 1996 STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON
STOCK RESERVED FOR ISSUANCE THEREUNDER BY 1,000,000 SHARES TO AN AGGREGATE OF
2,000,000 SHARES.
PROPOSAL NO. 3:
AMENDMENT OF THE 1991
EMPLOYEE STOCK PURCHASE PLAN
At the Annual Meeting, the Company's stockholders are being asked to
approve an amendment to the 1991 Employee Stock Purchase Plan (the "1991
Purchase Plan") that would increase the number of shares of Common Stock
reserved for issuance thereunder by 250,000 shares to an aggregate of 550,000
shares.
GENERAL
The 1991 Purchase Plan was adopted by the Board of Directors in October
1991 and was approved by the Company's stockholders in January 1992. Originally,
100,000 shares of Common Stock were reserved for issuance under the 1991
Purchase Plan. In May 1995, the Company's stockholders approved an amendment to
the 1991 Purchase Plan increasing the number of shares reserved for issuance
thereunder by 200,000 shares to an aggregate of 300,000 shares. On March 24,
1998, the Board of Directors further amended the 1991 Purchase Plan, subject to
stockholder approval, to increase the number of shares of Common Stock reserved
for issuance thereunder by 250,000 shares, to an aggregate of 550,000 shares.
The 1991 Purchase Plan is implemented with consecutive six-month
offering periods beginning on the first day on which the Nasdaq National Market
and national stock exchanges are open for trading in May and November of each
year. The Board of Directors may change the duration of offering periods by
announcement at least 15 days prior to the start of the first offering period to
be affected.
As of December 31, 1997, 200,953 shares of Common Stock had been
purchased pursuant to the 1991 Purchase Plan and 99,047 shares remained
available for purchase (not including the additional 250,000 shares reserved by
the Board of Directors, for which stockholder approval is being requested). The
Company believes that the increase in shares reserved for issuance under the
1991 Purchase Plan is necessary due to increasing subscription levels under the
1991 Purchase Plan by the Company's employees.
During the year ended December 31, 1997, (i) 14,823 shares of Common
Stock were purchased pursuant to the 1991 Purchase Plan by the current executive
officers as a group (four persons); (ii) no shares of Common Stock were
purchased pursuant to the 1991 Purchase Plan by the current directors who are
not executive officers, as a group (five
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<PAGE> 13
persons), and (iii) 79,210 shares of Common Stock were purchased pursuant to the
1991 Purchase Plan by all employees, including current officers who are not
executive officers, as a group (48 persons).
The Board of Directors believes that in order to attract and retain
highly qualified employees and to provide such employees with adequate incentive
through their proprietary interest in the Company, it is necessary to amend the
1991 Purchase Plan to reserve the additional 250,000 shares of Common Stock for
issuance thereunder.
PURPOSE
The purposes of the 1991 Purchase Plan are to provide employees of the
Company and its subsidiaries with an opportunity to purchase Common Stock of the
Company through accumulated payroll deductions, to attract and retain qualified
personnel, to provide additional incentive to the employees of the Company and
to promote the success of the Company's business.
ADMINISTRATION
The 1991 Purchase Plan may be administered by the Board of Directors or
a committee appointed by the Board. At the present time, the 1991 Purchase Plan
is being administered by the Board of Directors. All questions of interpretation
or application of the 1991 Purchase Plan are determined by the Board of
Directors or its appointed committee, and its decisions are final and binding
upon all participants.
ELIGIBILITY AND PARTICIPATION
Employees who are employed for at least 20 hours per week and five
months per calendar year with the Company (including subsidiaries of the Company
approved by the Board of Directors) are eligible to participate in the 1991
Purchase Plan, subject to certain limitations imposed by Section 423(b) of the
Code and limitations on stock ownership as set forth in the 1991 Purchase Plan.
As of December 31, 1997, a total of approximately 109 employees were eligible
for participation in the 1991 Purchase Plan. Eligible employees become
participants in the 1991 Purchase Plan by filing with the payroll office of the
Company a subscription agreement authorizing payroll deductions at least five
business days prior to the applicable offering date, unless a later time for
filing the subscription agreement has been set by the Board of Directors.
TERMS
(a) Grant and Exercise of Option. At the beginning of an offering
period, each participant is granted an option to purchase that number of shares
equal to up to ten percent of the participant's aggregate compensation which the
participant receives on each pay day during the offering period divided by the
lower of 85% of the fair market value of a share of the Company's Common Stock
(i) at the beginning of the offering period or (ii) at the end of the offering
period, subject to the limitations set forth below. In no event may an employee
be granted an option under the 1991 Purchase Plan (i) if, immediately after the
grant, such employee would own stock and/or hold outstanding options to purchase
stock possessing five percent or more of the total combined voting power or
value of all classes of stock of the Company or of any subsidiary of the
Company, or (ii) which permits his or her rights to purchase stock under all
employee stock purchase plans of the Company and its subsidiaries to accrue at a
rate which exceeds $25,000 worth of stock for each calendar year in which such
option is outstanding at any time. The Company may make a pro rata reduction in
the number of shares subject to options if the total number of shares that would
otherwise be subject to options granted at the beginning of an offering period
exceeds the number of remaining available shares under the 1991 Purchase Plan.
Unless an employee withdraws his or her participation in the 1991 Purchase Plan
by giving written notice to the Company of his or her election to withdraw all
accumulated payroll deductions prior to the end of an offering period, the
employee's option for the purchase of shares will be exercised automatically at
the end of the offering period, and the maximum number of full shares subject to
the option which are purchasable with the accumulated payroll deductions in his
or her account will be purchased at the applicable purchase price determined as
provided below.
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<PAGE> 14
(b) Purchase Price. The purchase price per share at which shares are
sold to participating employees under the 1991 Purchase Plan is the lower of (i)
85% of the fair market value per share of the Common Stock at the time the
option is granted at the commencement of the offering period, and (ii) 85% of
the fair market value per share of the Common Stock at the time the option is
exercised on the last day of the offering period. The fair market value of the
Common Stock on a given date shall be the closing price of the Common Stock for
such date, as reported on the Nasdaq National Market.
(c) Payroll Deductions. The purchase price of the shares to be
acquired under the 1991 Purchase Plan is accumulated by payroll deductions over
the six-month offering period. The deductions may not be more than ten percent
of a participant's aggregate compensation during the offering period. A
participant may discontinue or may decrease his or her participation in the 1991
Purchase Plan or may increase or decrease his or her rate of payroll deductions
at any time during the offering period. The Board of Directors is authorized to
limit the number of participation rate changes during any offering period;
provided, however, that a participant's payroll deduction may be decreased to 0%
at any time during any offering period that is scheduled to end during a
calendar year if the aggregate of all payroll deductions that were previously
used to purchase stock under the 1991 Purchase Plan in a prior offering period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the current offering period equal $21,250 (85% of $25,000, which
is the maximum amount of stock that can be purchased under the plan in any
calendar year). Payroll deductions for a participant shall commence on the first
payroll following ten business days after the Company's receipt of the new
subscription agreement and shall continue until his or her participation is
terminated as provided in the 1991 Purchase Plan. No interest accrues on the
payroll deductions of a participant in the 1991 Purchase Plan.
(d) Termination of Employment. In the event an employee fails to
remain an employee of the Company for at least 20 hours per week during the
applicable offering period for any reason, including retirement or death, the
participant will be deemed to have withdrawn from the 1991 Purchase Plan and the
participant's option will be terminated. In such event, the payroll deductions
credited to the participant's account will be returned, without interest, to him
or her or, in the case of death, to the person or persons entitled thereto, as
provided in the 1991 Purchase Plan.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event any change is made in the Company's capitalization during
an offering period, such as a stock split or stock dividend, which results in an
increase or decrease in the number of shares of Common Stock outstanding without
receipt of consideration by the Company, appropriate adjustment shall be made in
the purchase price and in the number of shares subject to options under the 1991
Purchase Plan; provided, however, that conversion of any convertible securities
of the Company shall not be deemed to have been effected "without receipt of
consideration."
AMENDMENT AND TERMINATION
The Board of Directors may at any time amend or terminate the 1991
Purchase Plan, but no amendment or termination shall be made that would impair
the rights of any participant under any grant theretofore made, without his or
her consent; provided, however, that an offering period may be terminated if the
Board of Directors determines that the termination of the 1991 Purchase Plan is
in the best interest of the Company. In addition, the Company shall obtain
stockholder approval of any amendment to the 1991 Purchase Plan in such a manner
and to the extent necessary to comply with Rule 16b-3 under the Exchange Act
and/or Section 423 of the Code (or any other applicable law or regulation). In
any event, the 1991 Purchase Plan will terminate in October 2001.
The Board of Directors or its committee may at any time, without
stockholder consent and without regard to whether any participant rights may be
adversely affected, establish limitations or procedures as the Board of
Directors or its committee determines advisable; provided, however, that such
limitations or procedures are consistent with the 1991 Purchase Plan.
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<PAGE> 15
FEDERAL INCOME TAX ASPECTS OF THE 1991 PURCHASE PLAN
The following is a brief summary of the United States federal income tax
consequences of transactions under the 1991 Purchase Plan based on federal
income tax laws in effect as of the date of this proxy statement (which laws
could change at any time hereafter). This summary is not intended to be
exhaustive and does not discuss the tax consequences of a participant's death or
provisions of the income tax laws of any municipality, state or other country in
which an optionee may reside. This summary does not purport to be complete. The
Company advises all participants to consult their own tax advisors concerning
tax implications of option grants and exercises, and the disposition of shares
acquired upon such exercises, under the 1991 Purchase Plan.
The 1991 Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no income will be taxable to a participant
at the time of grant of the option or purchase of shares. Upon disposition of
the shares, the participant will generally be subject to tax, and the amount of
the tax will depend upon how long the participant has held the shares. If the
shares have been held by the participant for more than two years after the date
of option grant and one year after the date of purchase, the participant will
recognize ordinary income measured as the lesser of (a) the excess of the fair
market value of the shares at the time of such disposition over the purchase
price, or (b) an amount equal to 15% of the fair market value of the shares as
of the first day of the offering period. Any additional gain will be treated as
long-term capital gain, taxed at a rate of 28% if the shares are held for more
than one year but not more than 18 months after the date of purchase, and 20% if
the shares are held more than 18 months after the date of purchase. If the
shares are disposed of before the expiration of these holding periods, the
excess of the fair market value of the shares on the exercise date over the
option price will be treated as ordinary income, and any further gain or loss on
such disposition will be long-term or short-term capital gain or loss, depending
on whether or not the shares are disposed of more than one year after the date
of purchase. The Company is not entitled to a deduction for amounts taxed as
ordinary income or capital gain to a participant except to the extent of
ordinary income reported by participants upon disposition of shares prior to the
expiration of the holding periods described above.
REQUIRED VOTE
The approval of the amendment of the 1991 Purchase Plan requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled to
vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
AMENDMENT OF THE 1991 PURCHASE PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON
STOCK RESERVED FOR ISSUANCE THEREUNDER BY 250,000 SHARES TO AN AGGREGATE OF
550,000 SHARES.
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<PAGE> 16
PROPOSAL NO. 4:
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG Peat Marwick, independent
auditors, to audit the consolidated financial statements of the Company for the
fiscal year ending December 31, 1998, and recommends that stockholders vote for
ratification of such appointment. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection.
KPMG Peat Marwick has audited the Company's financial statements
annually since its inception. Representatives of KPMG Peat Marwick are expected
to be present at the meeting, with the opportunity to make a statement if they
desire to do so, and to respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF KPMG PEAT MARWICK AS INDEPENDENT AUDITORS FOR THE COMPANY.
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<PAGE> 17
COMMON STOCK OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of December 31, 1997 as to (i) each person who is known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's directors and nominees, (iii) each of the
executive officers named in the Summary Compensation Table beginning on page 20,
and (iv) all directors and executive officers as a group. Unless otherwise
indicated, the address of each of the named individuals is c/o InnerDyne, Inc.,
1244 Reamwood Avenue, Sunnyvale, CA 94089.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF TOTAL
------------------------------------ ------ --------
<S> <C> <C>
Entities affiliated with Burr, Egan, Deleage & Co. (2)........... 2,126,067 9.8%
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Perkins Capital Management, Inc. (3)............................. 1,727,700 7.9%
730 East Lake Street
Wayzata, MN 55391-1769
Entities affiliated with Chancellor LGT Asset Management, Inc.... 1,567,500 7.2%
1166 Avenue of the Americas
New York, NY 10036
Trimark Financial Corporation (4)................................ 1,418,716 6.5%
One First Canadian Place, Suite 5600
P.O. Box 487
Toronto, Ontario
Canada M5X 1E5
Montgomery Medical Ventures II, L.P.............................. 1,303,918 6.0%
600 Montgomery Street
San Francisco, CA 94111
Pathfinder Venture Capital Fund III, L.P......................... 1,279,765 5.9%
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Edward W. Benecke (5)............................................ 24,249 *
Robert M. Curtis (6)............................................. 72,000 *
Eugene J. Fischer (7)............................................ 1,302,263 *
Daniel J. Genter (8)............................................. 125,276 *
William G. Mavity (9)............................................ 522,812 2.4%
Guy P. Nohra (10)................................................ 2,152,067 9.9%
Michael J. Orth (11)............................................. 90,802 *
Robert A. Stern (12)............................................. 115,935 *
Steven N. Weiss (13)............................................. 1,313,918 6.0%
All directors and executive officers as a group (9 persons) (14). 5,719,322 25.2%
</TABLE>
- -----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options currently exercisable, or exercisable within 60 days,
are deemed outstanding for computing the percentage
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<PAGE> 18
of the person holding such option but are not outstanding for computing
the percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them. Percent
of total calculated based on 21,740,896 shares outstanding as of
December 31, 1997.
(2) Includes 1,798,054 shares held by ALTA IV Limited Partnership and
328,013 shares held by C.V. Sofinnova Partners Five.
(3) Consists of 533,100 shares with sole voting power and 1,727,700 shares
with sole dispositive power.
(4) Includes 1,418,716 shares held by certain Trimark mutual funds for which
Trimark Investment Management Inc. ("TIMI") acts as an investment
adviser and manager. Trimark Financial Corporation owns 100% of the
voting equity securities of TIMI.
(5) Includes 24,249 shares subject to options exercisable within 60 days of
December 31, 1997.
(6) Includes 72,000 shares subject to options exercisable within 60 days of
December 31, 1997.
(7) Includes 1,279,765 shares held by Pathfinder Venture Capital Fund III,
L.P., of which Mr. Fischer is a general partner. He may be deemed to be
a beneficial owner of such shares because of his position as a general
partner of such partnership. Mr. Fischer disclaims beneficial ownership
of such shares except to the extent of his proportionate partnership
interest therein. Also includes 22,000 shares subject to options
exercisable within 60 days of December 31, 1997.
(8) Includes 119,999 shares subject to options exercisable within 60 days of
December 31, 1997.
(9) Includes 499,540 shares subject to options exercisable within 60 days of
December 31, 1997.
(10) Includes 1,798,054 shares held by ALTA IV Limited Partnership and
328,013 shares held by C.V. Sofinnova Partners Five. These funds are
affiliated with Burr, Egan, Deleage & Co., of which Mr. Nohra is a Vice
President. Mr. Nohra disclaims beneficial ownership of such shares. Also
includes 26,000 shares subject to options exercisable within 60 days of
December 31, 1997.
(11) Includes 89,997 shares subject to options exercisable within 60 days of
December 31, 1997.
(12) Includes 110,935 shares subject to options exercisable within 60 days of
December 31, 1997.
(13) Includes 1,303,918 shares held by Montgomery Medical Ventures II, L.P.,
of which Mr. Weiss is a general partner of the general partner of such
entity. He disclaims beneficial ownership of such shares, except to the
extent of his proportionate partnership interest therein.
(14) Includes 964,720 shares subject to options exercisable within 60 days
December 31, 1997 held by all executive officers and directors of the
Company.
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including this proxy statement, in whole or in part, the following
report and the performance graph on page 19 shall not be incorporated by
reference into any such filings.
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<PAGE> 19
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION POLICIES
The compensation of the Chief Executive Officer and the management
employees who report to the Chief Executive Officer is established and
periodically reviewed by the Board of Directors. The Board of Directors
establishes executive compensation to be competitive with that of comparable
companies in order to help motivate and retain the talent, leadership skills and
experience needed to help successfully guide the Company, and to provide a
strong incentive for key personnel to achieve the Company's financial, product
development and sales and marketing objectives.
The Company's salary levels are determined by comparisons with companies
with similar characteristics in the medical device industry. Salary increases
are determined based on the individual performance of the executive, the
performance of the Company, any change in the responsibilities of the executive
and comparisons to industry compensation data. Compensation consists of base
salary, bonus and stock options
Bonuses for the Chief Executive Officer are determined each year by the
Compensation Committee. Bonuses for other executive employees are based on
recommendations made by the Chief Executive Officer to the Compensation
Committee. All bonus considerations are based on individual performance, Company
performance and, if applicable, changes in responsibility.
The Company uses stock options as an important part of the compensation
of its executive employees. The Company has used stock options to keep salaries
and bonuses at relatively modest levels. All employee stock options are granted
pursuant to one of the Company's stock option plans. The Company makes stock
option grants periodically at no less than 100% of the market price of the
Company's Common Stock on the day prior to the date of the grant.
The Company has entered into "change of control" arrangements with
William G. Mavity, Daniel J. Genter, Michael J. Orth and Robert A. Stern and has
entered into severance arrangements with William G. Mavity and Robert A. Stern.
See "Compensation of Executive Officers - Employment Agreements."
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The compensation of William G. Mavity, President and Chief Executive
Officer, consists of base salary, an annual bonus, stock options and an auto
allowance.
The Compensation Committee of the Board of Directors is responsible for
reviewing Mr. Mavity's compensation by examining his performance in comparison
with the achievement of the Company's financial, business and other goals, and
giving consideration to his length of service and to competitive chief executive
officer compensation information.
Mr. Mavity has served as the Company's President and Chief Executive
Officer since October 1993. Mr. Mavity's base salary from January 1, 1997
through October 5, 1997 was $247,500 per year. Effective October 6, 1997, Mr.
Mavity's base salary was increased to $262,500 per year. The Compensation
Committee believes that this increase was appropriate in light of Mr. Mavity's
personal performance, the performance of the Company and comparable base salary
information for similarly situated chief executive officers.
For 1998, Mr. Mavity is eligible to receive a cash bonus of up to 25% of
his base salary, with the specific bonus amount being determined by measurement
against performance milestones established by the Compensation Committee of the
Board. Based on Mr. Mavity's personal performance in 1997 and measurement
against milestones, in February 1998, the Compensation Committee awarded Mr.
Mavity a bonus of $55,000.
Mr. Mavity's compensation is also structured to provide a long-term
focus on the Company's operating performance through the grant of stock options.
In September 1997, Mr. Mavity was granted an option to purchase 100,000 shares
of Common Stock at an exercise price of $2.875 per share, with vesting over a
four-year period.
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<PAGE> 20
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Compensation Committee has considered the impact of Section 162(m)
of the Internal Revenue Code of 1986, as amended, adopted under the Omnibus
Budget Reconciliation Act of 1993, which section disallows a deduction for any
publicly held corporation for individual compensation exceeding $1 million in
any taxable year for the Chief Executive Officer and four other most highly
compensated executive officers, unless such compensation meets the requirements
for the "performance-based" exception to the general rule. Since the cash
compensation paid by the Company to each of its executive officers is expected
to be well below $1 million, and the Compensation Committee believes that
options granted under the Company's 1996 Stock Option Plan will meet the
requirements for qualifying as performance-based compensation, the Compensation
Committee believes that this section will not affect the tax deductions
available to the Company. It will be the Compensation Committee's policy to
qualify, to the extent reasonable, the executive officers' compensation for
deductibility under applicable tax law.
COMPENSATION COMMITTEE
Robert M. Curtis
Guy P. Nohra
Steven N. Weiss
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
See "Proposal No. 1: Election of Directors - Compensation of Directors"
for a discussion of certain information with respect to directors serving on the
Compensation Committee.
The members of the Compensation Committee of the Board of Directors are
Robert M. Curtis, Guy P. Nohra and Steven N. Weiss. No member of the
Compensation Committee or executive officer of the Company has a relationship
that would constitute an interlocking relationship with executive officers or
directors of another entity.
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<PAGE> 21
PERFORMANCE GRAPH
The following graph summarizes cumulative total stockholder return data
(assuming reinvestment of dividends) for the five-year period beginning December
31, 1992. The graph assumes that $100 was invested on December 31, 1992: (i) in
the Common Stock of InnerDyne, (ii) in the Nasdaq Market Index (provided by
Media General Financial Services, Inc.) and (iii) in the MG Medical Instruments
and Supplies Index (also provided by Media General Financial Services, Inc.).
The stock price performance on the following graph is not necessarily indicative
of future stock price performance.
[GRAPH]
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
InnerDyne, Inc. Common Stock 100 32.00 60.00 44.00 52.00 43.00
- -----------------------------------------------------------------------------------------------------
Nasdaq Market Index 100 84.65 93.05 150.15 157.54 186.78
- -----------------------------------------------------------------------------------------------------
MG Medical Instruments and Supplies Index 100 119.95 125.94 163.35 202.99 248.30
- -----------------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the Company for
each of the three years ended December 31, 1997, 1996 and 1995, to the Company's
Chief Executive Officer and the other most highly compensated executive officers
of the Company whose total annual salary and bonus exceeded $100,000 for 1997.
The Company had only three executive officers other than the Chief Executive
Officer in 1997.
-19-
<PAGE> 22
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ------------
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#) ($)(2)
- --------------------------- ---- --------- ----------- --------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
William G. Mavity(3)........... 1997 $250,673 $45,000 $7,200 100,000 $46
President and Chief 1996 230,608 45,000 2,957 225,000 22
Executive Officer 1995 193,846 20,000 100,775 0 34
Robert A. Stern(4)............. 1997 148,385 15,000 0 25,000 46
Vice President and Chief 1996 135,692 0 26,083 200,000 22
Financial Officer
Daniel J. Genter(5)............ 1997 165,262 30,439 6,642 45,000 46
Senior Vice President 1996 116,923 30,000 22,979 225,000 16
of Sales and Marketing
Michael J. Orth(6)............. 1997 129,306 50,500 0 100,000 46
Vice President of Research 1996 118,750 0 0 25,000 20
and Development 1995 91,773 0 0 100,000 20
</TABLE>
- -----------
(1) 1997 bonuses were paid in 1998 to executive officers based upon performance
in 1997. 1996 bonuses were paid in 1997 based upon performance in 1996.
1995 bonuses were paid in 1996 based upon performance in 1995.
(2) Reflects the cost of insurance premiums paid by the Company for term life
insurance under the Company's group life insurance employee benefit.
(3) Mr. Mavity has a severance arrangement with the Company pursuant to which
he is entitled to the equivalent of one year's salary in the event his
employment is terminated without cause. He also has a "change of control"
arrangement with the Company. See "Employment Agreements." Other Annual
Compensation for 1996 and 1997 consists of lease costs for an automobile
provided for Mr. Mavity's use. Other Annual Compensation for 1995 consists
of amounts paid by the Company related to temporary housing and relocation
for Mr. Mavity, in addition to lease costs for an automobile provided for
Mr. Mavity's use.
(4) Mr. Stern commenced employment with the Company in January 1996. Mr. Stern
has a severance arrangement with the Company pursuant to which he is
entitled to the equivalent of six months' salary in the event his
employment is terminated without cause. He also has a "change of control"
arrangement with the Company. See "Employment Agreements." Other Annual
Compensation for Mr. Stern for 1996 consists of amounts paid by the Company
related to his relocation to California.
(5) Mr. Genter commenced employment with the Company in April 1996. He has a
"change of control" arrangement with the Company. See "Employment
Agreements." Other Annual Compensation for 1997 consists of an automobile
allowance provided to Mr. Genter. Other Annual Compensation for Mr. Genter
in 1996 consists of amounts paid by the Company related to his relocation
to California, in addition to an automobile allowance provided to Mr.
Genter.
(6) Mr. Orth commenced employment with the Company in March 1995. He also has a
"change of control" arrangement with the Company. See "Employment
Agreements."
-20-
<PAGE> 23
STOCK OPTION GRANTS IN FISCAL 1997
The following table sets forth information for the executive officers
named in the Summary Compensation Table with respect to grants of options to
purchase Common Stock of the Company made in 1997 and the value of all options
held by such executive officers on December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (2)
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME (SHARES) FISCAL YEAR(1) ($ PER SHARE) DATE 5%($) 10%($)
--------------- -------------- ------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
William G. Mavity ..... 100,000 14.7% $2.8750 9/9/02 $79,431 $175,522
Robert A. Stern ....... 25,000 3.7% $3.5625 1/21/02 $24,606 $54,374
Daniel J. Genter ...... 25,000 3.7% $2.6250 3/25/02 $18,131 $40,065
20,000 2.9% $2.7500 6/13/02 $15,195 $33,578
Michael J. Orth ....... 60,000 8.8% $2.6250 3/25/02 $43,514 $96,155
40,000 5.9% $2.7500 6/13/02 $30,391 $67,156
</TABLE>
- -----------
(1) The Company granted options to employees to purchase an aggregate of
682,000 shares of Common Stock during 1997.
(2) Potential realizable values are reported net of the option exercise price
but before taxes associated with exercise. These amounts represent certain
assumed rates of appreciation only. Actual realized gains, if any, on stock
option exercises are dependent on future performance of the Company's
Common Stock, as well as the optionee's continued employment through the
vesting period.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information for the executive officers
named in the Summary Compensation Table with respect to exercises in 1997 of
options to purchase Common Stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ON YEAR-END(#) AT FISCAL YEAR-END ($)
NAME EXERCISE(#) VALUE REALIZED($)(1) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- ---- ----------- -------------------- --------------------------- ------------------------------
<S> <C> <C> <C> <C>
William G. Mavity.... 0 0 478,698/337,968 $335,674/$173,179
Robert A. Stern...... 0 0 95,832/129,168 $0/$0
Daniel J. Genter..... 0 0 110,831/159,169 $0/$1,563
Michael J. Orth .... 0 0 83,330/141,670 $0/$3,750
</TABLE>
- -----------
(1) Value calculated by determining the difference between the fair market
value of underlying securities at exercise date (for value realized) or
year-end (for value at year-end), and the exercise price. The closing price
of the Company's Common Stock on December 31, 1997 was $2.6875 per share.
-21-
<PAGE> 24
EMPLOYMENT AGREEMENTS
William G. Mavity and Robert A. Stern, officers of the Company, have
employment agreements with the Company pursuant to which they are entitled to
the equivalent of one year's and six months' salary, respectively, in the event
of termination of employment without cause.
The Company has adopted certain "change of control" arrangements with
William G. Mavity, Robert A. Stern, Michael J. Orth and Daniel J. Genter
pursuant to which all options granted to such executive officers to purchase the
Company's Common Stock shall immediately vest in the event that such officer's
employment is involuntary terminated without cause within a specified period of
time following a change of control. Mr. Mavity's change of control agreement
terminates upon the earlier of (i) the date that all obligations of the parties
under the agreement have been satisfied or (ii) two years after a change of
control. Mr. Stern's, Mr. Genter's and Mr. Orth's change of control agreements
terminate upon the earlier of (i) the date that all obligations of the parties
under the agreements have been satisfied or (ii) one year after a change of
control. Events constituting a change of control include (i) any person
acquiring 50% or more of the total voting power represented by the Company's
then outstanding voting securities without the approval of the Board, (ii) any
merger, sale of assets or liquidation of the Company in which the Company's
outstanding voting securities prior to the transaction cease to represent at
least 50% of the total voting power represented by the voting securities of the
Company or of the surviving entity after the transaction or (iii) replacing a
majority of the Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Medical Contracts Associates ("MCA"), an entity of which Edward W.
Benecke is President, has been retained by the Company to assist in the
procurement and servicing of contracts with group purchasing organizations.
Under the arrangement, the Company pays MCA $10,000 per quarter plus an
additional amount for certain contracts entered into with the assistance of MCA.
The Company paid MCA an aggregate of $40,000 in 1997. As of December 31, 1997,
the Company owed no money to MCA. See "Proposal No. 1: Election of Directors --
Compensation of Directors." Mr. Curtis has a consulting agreement with the
Company which was inactive during 1996 and 1997 and has remained so to date in
1998. The Company did not pay any consulting fees to Mr. Curtis in 1997. See
"Proposal No. 1: Election of Directors -- Compensation of Directors."
See "Compensation of Executive Officers - Employment Agreements" for a
description of certain severance and change of control arrangements between the
Company and William G. Mavity, Robert A. Stern, Michael J. Orth and Daniel J.
Genter, officers of the Company.
Certain of the Company's stockholders have rights to require the Company
to register shares of the Company's Common Stock from time to time pursuant to
the Securities Act of 1933, as amended.
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties.
The Company has entered into indemnification agreements with each of its
directors and executive officers which may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers, to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' liability insurance if
available on reasonable terms.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
its executive officers and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission (the "SEC"). Specific filing deadlines for
these reports have been established, and the Company is required to disclose in
this Proxy Statement any failure to file by these dates during the fiscal year
ended December 31, 1997. To the best of the
-22-
<PAGE> 25
Company's knowledge, all of these filing requirements have been satisfied. In
making this statement, the Company has relied solely on its review of copies of
such reports received by the Company and on written representations of its
directors and executive officers and any ten percent holders that no other
reports were required.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the shares they represent as
the Board of Directors may recommend.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ CRAIG W. JOHNSON
--------------------------------------
Craig W. Johnson
Secretary
Dated: April 17, 1998
-23-
<PAGE> 26
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
INNERDYNE, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of InnerDyne, Inc., a Delaware corporation
("InnerDyne"), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, each dated April 17, 1998, and hereby
appoints William G. Mavity and Robert A. Stern, and each of them, with full
power of substitution, as proxies, and authorizes them to represent and to
vote, as designated on the reverse, all the stock of InnerDyne that the
undersigned is entitled to vote at the 1998 Annual Meeting of Stockholders of
INNERDYNE, INC. to be held on May 22, 1998, and at any postponement or
adjournment thereof, as follows:
If no direction is made, this proxy will be voted FOR each of the
proposals being presented to stockholders at the annual meeting. If this proxy
is executed in such manner as not to withhold authority to vote for the
election of any nominee to the Board of Directors, it shall be deemed to grant
such authority.
CONTINUED AND TO BE DATED AND SIGNED ON REVERSE SIDE
<PAGE> 27
Please mark your
votes as in this
[X] example.
<TABLE>
<S> <C> <C> <C>
FOR all nominees WITHHOLD authority to Nominees: Edward W. Benecke
listed at right vote for all nominees Robert M. Curtis
(except as indicated) listed at Eugene J. Fischer
(except as indicated) listed at William G. Mavity
Guy P. Nohra
1. ELECTION OF Steven N. Weiss
DIRECTORS [ ] [ ]
</TABLE>
If you wish to withhold authority to vote for any
individual nominee, write that nominee's name on
the line below.
________________________________________________
2. PROPOSAL TO AUTHORIZE AN AMENDMENT TO FOR AGAINST ABSTAIN
THE COMPANY'S 1996 STOCK OPTION PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON [ ] [ ] [ ]
STOCK RESERVED FOR ISSUANCE THEREUNDER
BY 1,000,000 SHARES TO AN AGGREGATE OF
2,000,000 SHARES.
3. PROPOSAL TO AUTHORIZE AN AMENDMENT TO THE
COMPANY'S 1998 EMPLOYEE STOCK PURCHASE
PLAN TO INCREASE THE NUMBER OF SHARES OF [ ] [ ] [ ]
COMMON STOCK RESERVED FOR ISSUANCE
THEREUNDER BY 250,000 SHARES TO AN AGGREGATE
OF 550,000 SHARES.
4. PROPOSAL TO APPROVE THE APPOINTMENT OF KPMG
PEAT MARWICK AS THE INDEPENDENT AUDITORS OF
INNERDYNE FOR THE FISCAL YEAR ENDING [ ] [ ] [ ]
DECEMBER 31, 1998.
and in their discretion, the proxies are authorized to vote on such other
matter or matters as may properly come before the meeting and any
postponement(s) or adjournment(s) thereof.
SIGNATURE ___________________ SIGNATURE ___________________ Dated _______ , 1998
NOTE: Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by an authorized person.
