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
[ ] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e) (2)
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
ADVANCED TISSUE SCIENCES, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X ] Fee not required.
[ ] Fee computed on table below per Exchange Act rules 14a-6(i) (4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 011 (a) (2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
----------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 20, 1997
-----------------------------------------
To the Stockholders of Advanced Tissue Sciences, Inc.:
Notice is hereby given that the 1997 Annual Meeting of Stockholders of
Advanced Tissue Sciences, Inc., a Delaware corporation (the "Company"), will
be held at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La
Jolla, California 92037 on Tuesday, May 20, 1997 at 10:00 A.M. Pacific
Daylight Savings Time for the following purposes:
1. to elect seven directors to serve for the term of one year or
until their respective successors have been elected and qualified;
2. to approve an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of
Common Stock, $.01 par value per share, from 50,000,000 shares to
100,000,000 shares;
3. to approve the Company's 1997 Stock Incentive Plan;
4. to approve the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31,
1997; and
5. to transact such other business as may properly come before the
Annual Meeting.
The close of business on March 31, 1997 has been fixed as the record date
for the determination of stockholders entitled to notice of, and to vote at,
the Annual Meeting and any adjournment thereof and only stockholders of record
at such time will be so entitled to vote.
You are cordially invited to attend the Annual Meeting in person. Even
if you plan to attend the Annual Meeting, please promptly complete, sign, date
and return the enclosed proxy card in the enclosed self-addressed, stamped
envelope. It will assist us in keeping down the expenses of the Annual
Meeting if all stockholders return their signed proxies promptly, whether they
own a few shares or many shares.
A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK ENTITLED
TO VOTE AT THE ANNUAL MEETING MUST BE REPRESENTED AT THE ANNUAL MEETING, IN
PERSON OR REPRESENTED IN PROXY, IN ORDER TO CONSTITUTE A QUORUM FOR THE
TRANSACTION OF BUSINESS AT THE ANNUAL MEETING. PLEASE RETURN YOUR PROXY CARD
IN ORDER TO ENSURE THAT A QUORUM IS OBTAINED AND TO AVOID THE ADDITIONAL COSTS
TO THE COMPANY OF ADJOURNING THE ANNUAL MEETING AND RESOLICITING PROXIES.
YOUR VOTE IS IMPORTANT.
BY ORDER OF THE BOARD OF DIRECTORS,
Richard A. Fink
Secretary
La Jolla, California
April [10], 1997
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
------------------------------
PROXY STATEMENT
------------------------------
This proxy statement and the enclosed proxy card are furnished in
connection with the 1997 Annual Meeting of Stockholders (the "Annual Meeting")
of Advanced Tissue Sciences, Inc. (the "Company") which will be held at the
Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla,
California, on Tuesday, May 20, 1997 at 10:00 A.M. Pacific Daylight Savings
Time. Stockholders of record at the close of business on March 31, 1997 are
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof.
On March 31, 1997, there were [37,480,997] shares of Common Stock, $.01
par value per share, issued and outstanding. Each share of Common Stock is
entitled to one vote. A majority of the shares of Common Stock entitled to
vote will constitute a quorum.
The enclosed proxy is being solicited by members of the Company's Board
of Directors and is revocable at any time prior to its exercise. A proxy may
be revoked by delivery of a written revocation to the Secretary of the
Company, by presentation of a subsequent proxy, properly signed, or by
attendance at the Annual Meeting and voting in person.
Proxies will be solicited by mail and telephone by the Company and Morrow
& Co., 909 Third Avenue, New York, New York 10022, which has been engaged by
the Company for a fee of $6,000, plus expenses, for this purpose. The Company
will request banks, brokerage houses and other institutions to forward the
soliciting material to persons for whom they hold shares and to obtain
authorization for the execution of proxies. The Company will reimburse banks,
brokerage houses and other institutions for their reasonable expenses in
forwarding the Company's proxy materials to beneficial owners. All costs
associated with the solicitation of proxies will be borne by the Company.
Proxies in the accompanying form that are properly executed, duly returned to
the management and not revoked will be voted as specified thereon.
This proxy statement, the enclosed proxy card and the Company's Annual
Report to Stockholders for the fiscal year ended December 31, 1996, are
scheduled to be mailed commencing on or about April [10], 1997 to stockholders
of record on March 31, 1997.
The principal executive offices of the Company are located at 10933 North
Torrey Pines Road, La Jolla, California 92037.
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
The enclosed proxy will be voted, unless authority is withheld or the
proxy is revoked, for the election of a Board of Directors consisting of the
seven nominees named herein to hold office as directors until the next annual
meeting or until their respective successors shall be elected and qualified.
If any nominee shall be unable to serve, the proxies will be voted for a
substitute person nominated by the directors. The holders of a majority of
shares of Common Stock voting at the Annual Meeting in person or by proxy,
assuming such shares constitute a quorum, will be able to elect all of the
directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES NAMED BELOW.
DIRECTORS AND NOMINEES
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Arthur J. Benvenuto 53 Chairman of the Board of Directors
and Chief Executive Officer
Dr. Gail K. Naughton 41 Director, President and Chief Operating
Officer
Jerome E. Groopman, M.D. 45 Director and Chairman of the Company's
Scientific Advisory Board
Jack L. Heckel 65 Director
Dayton Ogden 52 Director
David S. Tappan, Jr. 74 Director
Dr. Gail R. Wilensky 53 Director
</TABLE>
Arthur J. Benvenuto has been Chairman of the Board and Chief Executive
Officer since September 1995 and had been Chairman of the Board, President and
Chief Executive Officer of the Company since June 1988. Prior to joining the
Company, Mr. Benvenuto was associated with Eli Lilly & Company for more than
twenty years. Mr. Benvenuto served as President and General Manager of Eli
Lilly Canada, Inc. from October 1986 to June 1988 and was President and Chief
Executive Officer of IVAC Corporation, an Eli Lilly & Company medical device
subsidiary, from January 1982 to September 1986. Prior to January 1982, Mr.
Benvenuto was the Director and then the Vice President of Marketing and Sales
at IVAC Corporation. Mr. Benvenuto also held various positions in marketing
planning, human resources and sales management within the pharmaceutical
division of Eli Lilly & Company. He received his B.S. in Pharmacy from St.
John's University. Mr. Benvenuto currently serves as a Director of Project
HOPE and GalaGen, Inc.
Gail K. Naughton, Ph.D., a co-founder of the Company and a co-inventor of
its core technology, has been a Director of the Company since its inception
and has been President and Chief Operating Officer of the Company since
September 1995. Prior to September 1995, Dr. Naughton had been Executive Vice
President and Chief Operating Officer of the Company since June 1991. Dr.
Naughton served as Senior Vice President and Chief Scientific Officer of the
Company from January 1989 to June 1991, and Principal Scientist of the Company
from its inception to December 1988. Dr. Naughton received her M.S. in
histology in 1978 and her Ph.D. in Basic Medical Sciences from New York
University Medical Center in 1981, and completed her post-doctoral training at
New York University Medical Center in the Department of Dermatology. Dr.
Naughton was an Assistant Professor of Research at New York University Medical
Center for two years prior to joining City University of New York in 1985.
Dr. Naughton's primary fields of research include cell and tissue culture
technology, dermatology and hematology. Dr. Naughton holds numerous issued
patents and has been extensively published in the field of tissue engineering.
Dr. Naughton is on the advisory boards of the Department of Bioengineering at
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<PAGE>
Johns Hopkins University and The Georgia Institute of Technology, and is a
member of the industrial liaison board at the University of California, San
Diego, The Georgia Institute of Technology, [The Massachusetts Institute of
Technology and the University of Washington]. Dr. Naughton is a member of the
Board of Directors of Scripps Bank in La Jolla, California and the San Diego
Burn Institute.
Jerome E. Groopman, M.D. has been a Director of the Company since May
1993. Since October 1996, Dr. Groopman has been Chief, Division of
Experimental Medicine, Beth Israel Deaconess Medical Center, having been
Chief, Division of Hematology/Oncology, New England Deaconess Hospital since
1985. Dr. Groopman holds the Dina and Raphael Recanati Professorship in
Immunology at Harvard Medical School and has been a Professor of Medicine,
Harvard Medical School since 1993. Dr. Groopman's primary expertise is in
human retroviruses, specifically in the AIDS virus, and in cell communication.
Dr. Groopman has served on the Biological Response Modifers Advisory Committee
to the Food and Drug Administration and as an advisor to the National Heart
Lung Blood Institute.
Jack L. Heckel has been a Director of the Company since September 1990.
Mr. Heckel served as President and Chief Operating Officer of GenCorp Inc., a
technology-based company with strong positions in aerospace, automotive and
related polymer products from January 1987 until his retirement in November
1993. Mr. Heckel served as Chairman of the Board of Aerojet, a division of
GenCorp Inc., from 1985 to January 1987, and as President prior to 1985. Mr.
Heckel serves as a director of the WD-40 Company and Applied Power,
Incorporated.
Dayton Ogden became a Director of the Company in September 1996. Mr.
Ogden was named President of Spencer Stuart Worldwide, an international
executive search firm, in October 1996 after having previously served as Chief
Executive Officer Spenser Stuart for nine years. Mr. Ogden serves as a
director of the American Business Conference, Project HOPE and the Directors'
Institute, an executive education joint venture between The Wharton School of
Business and Spencer Stuart, which trains new directors in corporate
governance. Mr. Ogden is a frequent contributor to the annual corporate
governance conference at the J.L. Kellogg Graduate School of Management at
Northwestern University.
David S. Tappan, Jr. has been a Director of the Company since October
1992. Mr. Tappan served as Chairman of the Board and Chief Executive Officer
of Fluor Corporation, an international engineering, construction and
technical services company, from 1984 until his retirement in 1990. Mr.
Tappan is a director of Genentech, Inc. and Allianz Insurance Company. Mr.
Tappan also is a Trustee for the University of Southern California and The
Scripps Research Institute.
Gail R. Wilensky, Ph.D. has been a Director of the Company since January
1993. Since January 1993, Dr. Wilensky has been serving as a Senior Fellow at
Project HOPE. From March 1992 to January 1993, Dr. Wilensky served in the
Bush Administration as Deputy Assistant to the President for Policy
Development, responsible for advising the President on health and welfare
issues. Prior to her tenure in the White House, from January 1990 to March
1992, Dr. Wilensky served as the Administrator of the Health Care Financing
Administration (HCFA) in the Department of Health and Human Services, where
she directed the Medicare and Medicaid programs. From April 1983 to January
1990, Dr. Wilensky was Vice President, Division of Health Affairs at Project
HOPE. Dr. Wilensky is an elected member of the Institute of Medicine of the
National Academy of Sciences. Dr. Wilensky is currently chairperson and has
also served as a member of the Physician Payment Review Commission and the
Health Advisory Committee of the General Accounting Office. Dr. Wilensky
serves as a director of Capstone Pharmacy, Coram Healthcare Corporation,
NeoPath, Inc., Quest Diagnostics Incorporated, Shared Medical Systems
Corporation, St. Jude Medical, Inc., Syncor International Corporation and
United HealthCare Corporation.
Directors are elected by the Company's stockholders at each annual
meeting or, in the case of a vacancy, are appointed by the directors then in
office, to serve until the next annual meeting or until their successors are
elected and qualified.
On March 31, 1997, the directors and all officers of the Company
beneficially owned in the aggregate [4,182,029] shares of the Company's Common
Stock, including [2,635,597] shares subject to the exercise of stock
-3-
<PAGE>
options exercisable or becoming exercisable within 60 days. This aggregate
ownership represents approximately [10.4]% of the total outstanding shares,
including shares deemed to be beneficially owned. See "Principal
Stockholders."
BOARD MEETINGS AND COMMITTEES
During the year ended December 31, 1996, the Board of Directors held five
meetings. All directors participated in at least 75% of the meetings of the
Board of Directors and the committees of the Board of Directors on which they
served, except for Dr. Groopman. The committees of the Board of Directors
include the Audit Committee and the Compensation and Stock Option Committee
(the "Compensation Committee"). In September 1996, the Board of Directors
formed a Nominating and Corporate Governance Committee. No meetings of the
Nominating and Corporate Governance Committee were held in 1996.
The Audit Committee recommends the appointment of the independent
auditors for the Company, reviews and approves the scope of the annual audit
undertaken by the independent auditors and reviews the independence of the
accounting firm. The Audit Committee also reviews the audit and non-audit
fees of the independent auditors and the adequacy of the Company's internal
control procedures. The Audit Committee met four times during the year ended
December 31, 1996. The current members of the Audit Committee are Jack L.
Heckel and Dr. Gail R. Wilensky.
The Compensation Committee reviews and recommends to the Board of
Directors remuneration arrangements for the Company's officers and key
employees and reviews and recommends compensation plans. In addition, the
Compensation Committee administers the Company's 1992 Stock Option/Stock
Issuance Plan (the "1992 Plan") and determines the key employees to be granted
options under such plan and the number of shares to be granted. The
Compensation Committee will perform similar functions for the 1997 Stock
Incentive Plan (the "1997 Plan"), if approved at the 1997 Annual Meeting. The
Compensation Committee also determines the individuals and other entities to
be granted warrants which are issued other than pursuant to the Company's
stock option plan, including the number of shares, and the terms and
conditions with respect to which such warrants are granted. The Compensation
Committee met four times during the year ended December 31, 1996. The current
members of the Compensation Committee are David S. Tappan, Jr., Jack L. Heckel
and Dayton Ogden.
The Nominating and Corporate Governance Committee's primary function will
be to assist the Board of Directors in identifying and recommending candidates
with the appropriate qualifications and experience to serve on the Company's
Board of Directors. In addition, the Nominating and Corporate Governance
Committee will review and, as appropriate, make recommendations with respect
to such topics as corporate governance and performance of the Board of
Directors. It is expected the Nominating and Corporate Governance Committee
will meet twice a year.
Director Compensation. Each member of the Board of Directors who is not an
officer or employee of the Company receives travel and expense reimbursement
and $1,000 in connection with attending regular or special (except for
telephonic) meetings of the Board of Directors or Compensation, Audit or
Nominating and Corporate Governance Committees of the Board of Directors. Dr.
Groopman also receives $20,000 annually in connection with services rendered
to the Company as Chairman of the Scientific Advisory Board. In addition,
under the 1992 Plan, each non-employee member of the Board of Directors is
automatically granted a non-statutory stock option to purchase 50,000 shares
of Common Stock at an exercise price equal to 100% of the market price of the
Common Stock at the time of initial election or appointment to the Board of
Directors. In general, one-third of the option becomes exercisable upon each
subsequent Annual Meeting of Stockholders, as long as such individual remains
a non-employee director. Under the 1992 Plan, each non-employee director will
receive an additional 50,000 share option grant upon re-election to the Board
of Directors at each Annual Meeting of Stockholders that the final installment
of his or her last previous grant becomes exercisable. Upon their election to
the Board of Directors in 1996, Dr. Groopman, Mr. Heckel, Mr. Ogden and Dr.
Wilensky each received such an automatic 50,000 share option grant. These
options will become exercisable in installments as specified above for Dr.
Groopman, Mr. Heckel and Dr. Wilensky at $17.50 per share and for Mr. Ogden at
$14.75 per share.
-4-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 31, 1997, certain information
as to the stock ownership of each of (a) the Company's directors and director
nominees, (b) the Named Executive Officers under "Executive Compensation -
Summary Compensation Table," (c) each person who is known by the Company to
own beneficially more than 5% of the Company's voting securities and (d) all
directors, nominees and executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PERCENTAGE OF
NAME AND ADDRESS OF COMON STOCK AS OF COMMON STOCK
BENEFICIAL OWNER POSITION MARCH 31, 1997 (1) OUTSTANDING (2)
- ------------------------------- ------------------------ -------------------- ---------------
<S> <C> <C> <C>
Arthur J. Benvenuto Chairman of the Board of [2,150,000] (3) [5.5]%
Advanced Tissue Sciences, Inc. Directors and Chief
10933 North Torrey Pines Road Executive Officer
La Jolla, CA 92037
Dr. Gail K. Naughton Director, President and [1,460,000] (4) [3.8]%
Advanced Tissue Sciences, Inc. Chief Operating Officer
10933 North Torrey Pines Road
La Jolla, CA 92037
Jerome E. Groopman, M.D. Director and Chairman of [86,666] (5) *
Beth Israel Deaconess Medical Company's Scientific
Center Advisory Board
One Deaconess Road
Boston, MA 02215
Dayton Ogden Director [20,541] (6) *
Spencer Stuart
695 East Main Street
Stamford, CT 06901
Jack L. Heckel Director [121,223] (7) *
27390 Oak Knoll Drive
Bonita Springs, FL 33923
David S. Tappan, Jr. Director [83,333] (8) *
Fluor Corporation
3333 Michelson Drive
Irvine, CA 92730
Dr. Gail R. Wilensky Director [69,666] (9) *
Project HOPE
7500 Old Georgetown Road
Bethesda, MD 20814
Terry E. Gibson Vice President, Operations [75,000] (10) *
Advanced Tissue Sciences, Inc.
10933 North Torrey Pines Road
La Jolla, CA 92037
Ellen G. Redding Vice President, Regulatory [25,600] (11) *
Advanced Tissue Sciences, Inc. Affairs and Quality Systems
10933 North Torrey Pines Road
La Jolla, CA 92037
</TABLE>
(Continued on following page)
-5-
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PERCENTAGE OF
NAME AND ADDRESS OF COMMON STOCK AS OF COMMON STOCK
BENEFICIAL OWNER POSITION MARCH 31, 1997 (1) OUTSTANDING (2)
- ------------------------------ ------------------------ --------------------- ---------------
<S> <C> <C> <C>
Michael V. Swanson Vice President, Finance [90,000] (12) *
Advanced Tissue Sciences, Inc. and Administration
10933 North Torrey Pines Road
La Jolla, CA 92037
State of Wisconsin Investment Board [2,404,800] [6.4]%
P.O. Box 7842
Madison, WI 53707
Directors and executive officers as a [4,182,029] (13) [10.4]%
group (consisting of 10 persons)
_________________
* Less than one percent.
</TABLE>
(1) Sole voting and investment power unless otherwise stated.
(2) Based on [37,480,997] shares of Common Stock outstanding, plus each
beneficial owner's options to purchase shares of Common Stock currently
exercisable or becoming exercisable within 60 days and any other
beneficially owned shares.
(3) Includes options to purchase [1,450,000] shares of Common Stock which
are currently exercisable.
(4) Includes [283,616] shares of Common Stock held as custodian for her
minor children; and options granted to purchase [625,000] shares of
Common Stock which are currently exercisable.
(5) Includes options to purchase (i) [70,000] shares of Common Stock which
are currently exercisable and (ii) [16,666] shares of Common Stock
becoming exercisable within sixty days.
(6) Includes [16,666] shares of Common Stock becoming exercisable within
sixty days.
(7) Includes [4,557] shares of Common Stock held by a trust and options to
purchase (i) [100,000] shares of Common Stock which are currently
exercisable and (ii) [16,666] shares of Common Stock becoming
exercisable within sixty days.
(8) Includes options to purchase (i) [66,666] shares of Common Stock which
are currently exercisable and (ii) [16,667] shares of Common Stock
becoming exercisable within sixty days.
(9) Includes [3,000] shares of Common Stock held by Dr. Wilensky's spouse
in a retirement plan and options to purchase (i) [50,000] shares of
Common Stock which are currently exercisable and (ii) [16,666] shares
of Common Stock becoming exercisable within sixty days.
(10) Includes options to purchase (i) [60,000] shares of Common Stock
which are currently exercisable and (ii) [15,000] shares of Common Stock
becoming exercisable within sixty days.
(11) Includes options to purchase (i) [23,600] shares of Common Stock
which are currently exercisable and (ii) [2,000] shares of Common Stock
becoming exercisable within sixty days.
(12) Beneficial ownership consists of options granted to purchase shares
of Common Stock which are currently exercisable.
(13) Includes options to purchase (i) [2,535,266] shares of Common Stock
which are currently exercisable and (ii) [100,331] shares of Common Stock
becoming exercisable within sixty days.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires directors
and officers of the Company, and persons who own more than ten percent of a
registered class of the Company's equity securities ("Reporting Persons") to
file with the Securities and Exchange Commission (the "SEC") reports on Forms
3, 4 and 5 of initial ownership and of changes in beneficial ownership of
Common Stock. To the Company's knowledge, all statements of beneficial
ownership required to be filed with the SEC in fiscal 1996 were timely filed,
except Mr. Jack L. Heckel, a director of the Company, filed a Form 4 on May 8,
1996 reporting the disposition of 800 shares of Common Stock on February 9,
1994, which disposition should have been filed by March 10, 1994. The Company
did not become aware of this exception until 1996.
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<PAGE>
EXECUTIVE OFFICERS
The following table names the Company's executive officers as of March
31, 1997. The officers of the Company serve at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Arthur J. Benvenuto 53 Chairman of the Board of Directors
and Chief Executive Officer
Dr. Gail K. Naughton 41 Director, President and Chief
Operating Officer
Terry E. Gibson 56 Vice President, Operations
Ellen G. Redding 46 Vice President, Regulatory Affairs
and Quality Systems
Michael V. Swanson 42 Vice President, Finance and
Administration
</TABLE>
Information on the business backgrounds of Arthur J. Benvenuto and Dr.
Gail K. Naughton is set forth above under the heading "Directors and
Nominees."
Terry E. Gibson joined the Company as Vice President, Operations, in
April 1992. From October 1990 to April 1992, Mr. Gibson provided consulting
services in areas such as strategic planning, facilities planning, and
production and operating performance to biotechnology, diagnostic and health
care companies. Mr. Gibson served as Vice President, Operations for Meridian
Diagnostics, Inc., which develops, manufactures and markets diagnostic
products, from August 1988 to October 1990. From June 1986 to August 1988,
Mr. Gibson was Director of Manufacturing for Ortho Diagnostic Systems Inc., a
Johnson & Johnson Company, which produces a full line of diagnostic and blood
banking products. Prior to June 1986, he spent over twelve years with
Amersham Corporation, a diversified medical, research and industrial products
company. Mr. Gibson holds B.S. degrees in Chemistry and Biological Sciences,
and Pharmacy and an M.S. in Bionucleonics from Purdue University.
Ellen G. Redding was appointed Vice President, Regulatory Affairs and
Quality Systems in September 1996, having previously served as Executive
Director, Regulatory Affairs and Quality Assurance (August 1995 to September
1996), Executive Director, Regulatory Affairs (May 1994 to August 1995),
Senior Director, Regulatory Affairs (December 1993 to May 1994), Director,
Regulatory Affairs and Quality Assurance (June 1991 to December 1993) and as
Senior Manager, Regulatory Affairs and Quality Assurance (September 1990 to
June 1991). Before joining the Company, Ms. Redding served as Manager,
Regulatory Affairs and Quality Assurance at Ioptex Research, Inc., a
manufacturer of implantable optical devices, from 1986 to 1990. From 1985 to
1986 she was a Clinical Research Associate at Intermedics Intraocular, Inc., a
manufacturer of implantable optical devices. At Collagen Corporation, from
1984 to 1985, she was the Medical Monitor. Prior to 1984, Ms. Redding spent
over thirteen years in the nursing field. Ms. Redding holds an M.S. degree in
nursing from the University of Pennsylvania, a B.S. in nursing from Fitchburg
State College and a diploma in nursing from Children's Hospital School of
Nursing.
Michael V. Swanson was appointed Vice President, Finance and
Administration, of the Company in September 1992, having previously served as
Vice President, Finance from June 1991 and as Director of Finance from March
1990. Mr. Swanson served as Director of Finance of Fisher Scientific Group
Inc., a health and scientific technology holding company, from June 1987
through August 1989, and at its parent, The Henley Group, Inc., a widely
diversified holding company, from June 1986 to June 1987. From July 1977 to
June 1986, Mr. Swanson worked for the public accounting firm of Deloitte
Haskins & Sells (now Deloitte & Touche LLP) advancing to the position of audit
manager. Mr. Swanson received his B.S. in Business Administration from the
California Polytechnic State University at San Luis Obispo and received an
M.B.A. from the University of Southern California.
-7-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, for services
rendered in all capacities to the Company, for each of the last three calendar
years by the Company's Chief Executive Officer and each of the four other
highest paid executive officers whose salary and bonus for calendar 1995 was
in excess of $100,000 (the "Named Executive Officers").
- ------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
LONG-
OTHER TERM
ANNUAL COMPEN- ALL OTHER
COMPEN- SATION COMPEN-
NAME AND YEAR SALARY BONUS SATION OPTIONS SATION
PRINCIPAL POSITION (1) ($) (2) ($) (3) ($) (4) (SHS) (5) ($) (6)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arthur J. Benvenuto 1996 348,750 129,500 1,728 500,000 1,380
Chairman and Chief 1995 310,000 95,000 1,354 0 1,380
Executive Officer 1994 284,327 75,000 1,354 0 1,380
Dr. Gail K. Naughton 1996 249,039 92,500 408 500,000 470
Director, President and 1995 220,000 65,000 306 0 470
Chief Operating Officer 1994 199,519 55,000 198 0 353
Terry E. Gibson 1996 150,019 40,500 900 0 0
Vice President, 1995 132,500 23,188 675 0 0
Operations 1994 124,712 16,413 432 0 0
Ellen G. Redding 1996 144,615 39,150 331 20,000 0
Vice President, Regu- 1995 100,086 12,631 174 0 0
latory Affairs and 1994 87,624 8,197 102 10,000 0
Quality Systems
Michael V. Swanson 1996 175,448 47,250 257 75,000 0
Vice President, Finance 1995 152,539 33,519 189 0 0
and Administration 1994 140,651 24,640 189 0 0
===================================================================================
</TABLE>
(1) The periods presented are the calendar years ended December 31, 1996,
1995 and 1994.
(2) Consists of base salary earned (including amounts deferred pursuant to
plans established under sections 125 and 401(k) of the Internal Revenue
Code) by the Named Executive Officers for the periods presented.
(3) Includes bonuses earned, whether or not paid in such year, by the
Named Executive Officers.
(4) Amounts represent the compensation attributable to life insurance in
excess of $50,000 provided the Named Executive Officers under the
Company's group life insurance plan for all employees.
(5) During the periods presented, the only form of long-term compensation
utilized by the Company has been the grant of stock options. The
Company has not awarded restricted stock options or stock appreciation
rights, or made any long-term incentive payouts.
(6) Amounts represent the premium paid for term life insurance coverage
provided for the Named Executive Officers in addition to their coverage
under the Company's group life insurance plan for all employees.
-8-
<PAGE>
Options. The following table sets forth the details of options granted to the
Named Executive Officers listed in the Summary Compensation Table during
fiscal year 1996 under the Company's 1992 Stock Option/Stock Issuance Plan.
No stock appreciation rights (SARs) have been granted by the Company.
- -------------------------------------------------------------------------------
OPTIONS/SAR GRANTS IN FISCAL YEAR 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS GRANT DATE VALUE
--------------------------------------------------- -----------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL POTENTIAL REALIZABLE
UNDERLYING OPTIONS VALUE AT ASSUMED
OPTIONS\ GRANTED TO EXERCISE ANNUAL RATE OF STOCK
SARS EMPLOYEES OR BASE PRICE APPRECIATION FOR
GRANTED IN FISCAL PRICE EXPIRATION OPTION TERM (3)
------------------------
NAME (#) (1)(2) YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------ ---------- ----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Arthur J. Benvenuto 500,000 30.1% 13.50 3/18/06 4,245,039 10,757,761
Dr. Gail K. Naughton 500,000 30.1% 13.50 3/18/06 4,245,039 10,757,761
Terry E. Gibson 0 0.0% 0.00 0 0 0
Ellen G. Redding 10,000 0.6% 13.50 3/18/06 84,901 215,155
10,000 0.6% 14.75 9/10/06 92,962 235,077
Michael V. Swanson 75,000 4.5% 13.50 3/18/06 636,756 1,613,664
=======================================================================================================
</TABLE>
(1) The exercise price of the options granted during fiscal year 1996 was
equal to the closing market price of the Company's Common Stock on the
date the option was granted. The options become exercisable in five
successive equal annual installments beginning on the first anniversary
of the grant date.
(2) All options granted in 1996 to the Named Executive Officers were under
the 1992 Plan. The grants are for non-statutory stock options, except
for 37,000 shares to each Mr. Benvenuto, Dr. Naughton and Mr. Swanson
and for 20,000 shares to Ms. Redding which are incentive stock options.
(3) The 5% and 10% assumed rates of appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of future Common Stock prices.
Option Exercises and Holdings. The following table sets forth information
regarding the exercise of options in fiscal year 1996 and the number of
options held by the Named Executive Officers listed in the Summary
Compensation Table, including the value of such in-the-money options as of
December 31, 1996. The closing price of the Company's Common Stock on
December 31, 1996 used to calculate such values was $9.5625 per share. No
SARs have ever been granted by the Company.
- -------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1996
AND OPTION/SAR VALUES AS OF DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES NUMBER OF VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT YEAR END (#) AT YEAR END ($)
-------------------- ---------------------
EXERCISE REALIZED EXERCIS- UNEXER- EXERCIS- UNEXER-
NAME (#) ($) ABLE CISABLE ABLE CISABLE
---- ------- -------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arthur J. Benvenuto 0 0 1,350,000 500,000 7,446,375 0
Dr. Gail K. Naughton 0 0 525,000 500,000 2,202,563 0
Terry E. Gibson 0 0 60,000 15,000 0 0
Ellen G. Redding 0 0 21,600 26,000 65,600 22,125
Michael V. Swanson 0 0 75,000 75,000 287,813 0
================================================================================================
</TABLE>
-9-
<PAGE>
Employment Agreements/Change in Control Arrangements. The Company has no
employment agreements with any of the Named Executive Officers or any other of
its employees. In the event the Company is acquired by merger, consolidation
or asset sale, outstanding options which are not assumed by the successor
corporation, or replaced with a comparable option to purchase shares of the
capital stock of the successor corporation, are to be automatically
accelerated in full, except to the extent such acceleration is otherwise
limited by the terms of the instrument evidencing such grant. The
Compensation Committee or the full Board of Directors has the discretionary
authority, exercisable either in advance or at the time of certain hostile
changes in control of the Company (whether effected through a tender offer for
outstanding shares of the Company's outstanding stock or a proxy contest for
Board of Directors membership), to provide for the automatic acceleration of
one or more such option grants outstanding at the time of such a hostile
change in control. They also have the authority to condition any such option
acceleration upon the subsequent termination of the optionee's service within
a specified period following the change in control. All outstanding options
held by the executive officers are either fully exercisable or provide for
automatic acceleration upon the involuntary termination of the officers'
employment following an acquisition of the Company by merger or asset sale or
upon a hostile change of control.
Compensation Committee Interlocks and Insider Participation. No member of the
Compensation Committee is a former or current officer or employee of the
Company. See "Directors and Nominees" and "Board Meetings and Committees" for
a discussion of the Compensation Committee members' background and
relationship to the Company. No member of the Compensation Committee is a
current or former officer or employee of the Company, and no officers of the
Company serve or have ever served on compensation committees of entities at
which Board members serve or have served as officers.
COMPENSATION COMMITTEE REPORT
The report set forth below has been provided by the Compensation
Committee and describes the philosophy and process considered by the
Compensation Committee in administering the Company's executive compensation
program.
- -------------------------------------------------------------------------------
COMPENSATION COMMITTEE REPORT*
- -------------------------------------------------------------------------------
The Company's executive compensation program is administered by the
Compensation and Stock Option Committee. The executive compensation program
is structured and administered to support the Company's mission, strategy and
values.
Compensation Philosophy
The Company's executive compensation program has been designed to enable
the Company to attract, motivate and retain senior management by providing
what the Company believes is a competitive total compensation package based on
performance. The executive compensation program is composed of three
principal elements: (1) competitive base salaries which reflect individual
performance, (2) annual performance-based incentive opportunities which are
variable and payable in cash for the achievement of corporate goals (as
discussed below under "Compensation of the Chief Executive Officer") approved
by the Compensation Committee and individual goals established in consultation
with the Chief Executive Officer, and (3) long-term stock-based incentive
opportunities pursuant to a stock option plan geared to strengthen the
mutuality of interests between senior management and the Company's
stockholders.
As an executive officer's level of responsibility increases, a greater
portion of his or her potential total compensation opportunity is based on
performance incentives, causing greater variability in the individual's
absolute compensation level from year to year. In addition, the higher that
one rises in the organization, the greater the mix of compensation shifts to
reliance on the value of the Company's Common Stock through stock-based
awards.
As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, the Company will not be allowed a federal income tax
deduction for compensation paid to certain executive officers,
-10-
<PAGE>
to the extent that compensation exceeds $1 million per officer in any one
year. This limitation does not apply to compensation paid to the Named
Executive Officers which qualifies as performance-based compensation. The
Compensation Committee has not and does not intend to set compensation levels
which would exceed the $1 million limit in 1997. In addition, the Company
obtained stockholder approval for certain amendments to the Company's 1992
Plan at its 1994 Annual Meeting such that any compensation deemed paid in
connection with the exercise of options granted under the 1992 Plan at an
exercise price equal to the market price of the shares on the grant date will
qualify as performance-based compensation. If approved by stockholders,
options granted under the 1997 Plan will also qualify as performance-based
compensation.
The Compensation Process
Early in each fiscal year, the Compensation Committee reviews with the
Chief Executive Officer and the Executive Director, Human Resources, an annual
salary plan for the Company's executive officers. This salary plan is based
on industry, peer group and national surveys conducted by a nationally-
recognized compensation consulting firm which specializes in the
biotechnology/biomedical industries, and performance evaluation based upon
past and expected future contributions of the individual executive officers.
In particular, the Compensation Committee obtains and reviews comparative
total compensation figures from (i) a group of approximately 50 diverse
companies in the biomedical/biotechnology industries with greater than 150 but
less than 500 employees, (ii) a select group of approximately 35 companies
which are considered leaders in the biotechnology industry by virtue of their
market capitalization, and (iii) a select group of biotechnology companies at
a similar stage of development.
Base salary levels for each of the Company's executive officers, with the
exception of the Chief Executive Officer, are established annually within
ranges determined by analysis of comparative compensation. The mid-point of
such ranges is designed to be comparable to the 50th percentile of survey data
obtained as set forth above. Under the Company's bonus program, each
executive officer may earn an annual targeted cash incentive which is
calculated as a percentage of such officer's base salary, 50% of which is
based on the accomplishment of corporate goals (which are the same as those
discussed below for the Chief Executive Officer) and 50% on the achievement of
individual goals set at the beginning of each year. Such targeted cash
incentive amounts range from approximately 17% to approximately 35% depending
on the level of the executive officer.
Long-term incentive compensation is provided through stock options which
are granted to executive officers of the Company upon hire. The amount of
stock options granted is a function of position and level of responsibility,
and options become exercisable in equal annual installments over a five-year
period. The Compensation Committee, in its discretion, may grant additional
options to executive officers for increases in level of responsibility and
promotions, in recognition of sustained exceptional performance or annually
based upon company and individual performance.
Each year, the Compensation Committee has retained an outside,
independent compensation consulting firm, which specializes in the
biotechnology/biomedical industries, to review and evaluate the Company's
process of establishing, reviewing and adjusting the compensation of the
Company's executive officers. After its most recent review, conducted in
March 1997, such consulting firm concluded that the process presently employed
by the Company in obtaining, analyzing and employing comparative data, and
implementing the Company's compensation programs for the Company's executive
officers and for the Chief Executive Officer, is consistent with industry
norms and appropriate and reasonable under the circumstances.
Compensation of the Chief Executive Officer
The Compensation Committee annually reviews and fixes the base salary of
the Chief Executive Officer based in part on the competitive compensation data
discussed above, and the Compensation Committee's assessment of his past
performance and its expectation as to his future contributions in leading the
Company and its development. As the Company has been in the development
stage, the profitability of the Company is not considered in setting the Chief
Executive Officer's compensation; however, the Committee does consider a
-11-
<PAGE>
number of financial factors, including the Company's ability to secure
financing, expense reduction and control, and the efficient use of working
capital to achieve corporate goals. In determining the Chief Executive
Officer's base salary for each year, the Committee also considers significant
accomplishments made by the Company during the prior year and other
performance factors, such as the effectiveness of the Chief Executive Officer
in establishing the Company's strategic direction. The annual cash bonus paid
to the Chief Executive Officer, if any, is entirely dependent on the
accomplishment by the Company of certain corporate goals established by
management and approved by the Board of Directors near the commencement of
each fiscal year. Factors considered by the Compensation Committee in
determining the Chief Executive Officer's annual base salary and bonus, if
any, are not subject to any specific weighting or formula.
In determining the Chief Executive Officer's base salary for 1996 as
reported in the cash compensation table, the Compensation Committee considered
1995 accomplishments as well as the comparative competitive compensation data
and performance factors discussed above. The major accomplishments of the
Company in 1995 which the Committee considered included: (i) obtaining
expedited review from the U.S. Food and Drug Administration (the "FDA") for
Dermagraft-TC (tm), a temporary covering for severe burns, and completion of
patient enrollment in the pivotal trial of Dermagraft-TC in the United States;
(ii) the successful interim analysis of Dermagraft (R) in the treatment of
diabetic foot ulcers in the United States; (iii) continued progress in the
Company's cartilage joint venture with respect to preclinical data on the
repair of articular cartilage and meniscus; (iv) demonstrating the feasibility
of creating heart valve replacement products and advancing the development of
tissue engineered vascular grafts; (v) the successful completion of a series
of private placements; and (vi) entering into an evaluation and option
agreement related to a stem cell proliferation factor.
In determining the Chief Executive Officer's bonus eligibility for 1996,
the Committee considered the Chief Executive Officer's role in the Company's
achievement of the following corporate objectives: (i) the recommendation for
approval of Dermagraft-TC, the Company's first therapeutic product, by an
independent advisory committee convened by the FDA; (ii) successful inspection
of the Company's manufacturing facility for Dermagraft-TC, which is required
for approval for product marketing; (iii) submission of a Premarket Approval
("PMA") application for Dermagraft in the treatment of diabetic foot ulcers
under the FDA's expedited review process; (iv) submission of an
Investigational Device Exemption ("IDE") for a pilot clinical trial of tissue
engineered articular cartilage; (v) entering into agreement for a fifty-fifty
joint venture with a worldwide leader in wound care for the global
commercialization of Dermagraft in the treatment of diabetic foot ulcers; and
(vi) obtaining financing.
David S. Tappan, Jr., Chairman Jack L. Heckel Dayton Ogden
==============================================================================
* The Compensation Committee Report is (i) not "soliciting material," (ii)
not deemed filed with the Securities and Exchange Commission and (iii)
not to be incorporated by reference in any filing of the Company under
the Securities Act of 1933, as amended (the "1933 Act") or the
Securities Exchange Act of 1934, as amended (the "1934 Act").
-12-
<PAGE>
The following chart compares the cumulative total stockholder return on
the Company's Common Stock over the five-year period ended December 31, 1996
with the cumulative total return for (i) the NASDAQ Stock Market (U.S.
Companies) and (ii) the Chicago Board of Exchange Biotech (CBOE) Index. The
CBOE index is a price weighted, not a market weighted index. The chart
assumes $100 invested on January 1, 1991 and that dividends are reinvested.
- ------------------------------------------------------------------------------
COMMON STOCK PERFORMANCE
- ------------------------------------------------------------------------------
(Performance Graph appears here)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Advanced Tissue Sciences, Inc. $100 $ 93 $ 55 $ 55 $ 68 $ 64
NASDAQ Stock Market $100 $116 $134 $131 $185 $227
Chicago Board of Exchange Biotech Index $100 $ 78 $ 58 $ 51 $ 83 $ 79
</TABLE>
There can be no assurance that the Company's stock performance will continue
into the future with the same or similar trends depicted in the graph above.
The market price of the Company's stock in recent years has fluctuated
significantly and it is likely that the price of the stock will fluctuate in
the future. The Company does not make or endorse any prediction as to future
stock performance. In addition, the Common Stock Performance chart above is
(i) not "soliciting material," (ii) not deemed filed with the Securities and
Exchange Commission and (iii) not to be incorporated by reference in any
filing of the Company under the 1933 Act or the 1934 Act.
==============================================================================
CERTAIN TRANSACTIONS
The Company has entered into indemnification agreements with each of its
directors and officers which provide such individuals with indemnification
rights, which are in addition to those provided by the Company's Bylaws. One
significant difference between the indemnification rights provided under the
Company's Bylaws and those provided under the indemnification agreements is
that, under the Bylaws determinations are made on a case-by-case basis that
the individual claiming indemnity meets certain specified standards of
conduct. Under the indemnification agreements, a determination that a
director or officer has met these standards is not required for such
indemnity, although the agreements exclude indemnity for conduct which is
adjudged to be knowingly fraudulent, deliberately dishonest or to constitute
willful misconduct. The Company also currently maintains policies of
insurance under which its directors and officers are insured, within the
limits and subject to the limitations of the policies, against certain
expenses in connection with the defense of actions, suits or proceedings, and
certain liabilities which might be imposed as a result of such actions, suits
or proceedings, to which they are parties by reason of being or having been
such directors or officers.
-13-
<PAGE>
On March 31, 1997, Arthur J. Benvenuto, Chairman of the Board and Chief
Executive Officer, and Dr. Gail K. Naughton, President and Chief Operating
Officer, were indebted to the Company in the amount of $[1,038,759] (including
$[120,259] representing accrued interest) and $[386,474] (including $[36,474]
representing accrued interest), respectively. Mr. Benvenuto's loan was for
the exercise of an employee stock option and is evidenced by a promissory note
bearing interest at the rate of 6.75% per annum with principal and interest
due in May 1998. Dr. Naughton's loan bears interest at the rate of 6.75% per
annum and is due in July 1998. Each loan is secured by shares of Common Stock
of the Company and becomes due and payable within 180 days of termination
(other than due to death or disability). In addition, Mr. Benvenuto and Dr.
Naughton must each use the proceeds from the sale of shares of the Company's
Common Stock securing such loans to repay amounts owing under his or her loan.
PROPOSAL 2
PROPOSED AMENDMENT TO RESTATED CERTIFICATE OF INCOPORATION
The present capital structure of the Company authorizes 50,000,000 shares
of Common Stock. The Board of Directors believes this capital structure is
inadequate for the present and future needs of the Company. Therefore, the
Board of Directors considers it advisable to amend the Company's Restated
Certificate of Incorporation dated July 1, 1992 as amended by that certain
Certificate of Designation dated January 13, 1995 (the "Company's Restated
Certificate") to increase the number of shares of Common Stock authorized by
Article Fourth, Section I from 50,000,000 shares to 100,000,000 shares. The
Board of Directors believes this capital structure more appropriately reflects
the present and future needs of the Company and recommends such amendment to
the Company's stockholders for adoption.
Of the 50,000,000 shares of Common Stock now authorized to be issued
under the Company's Restated Certificate, as of March 31, 1997, [37,480,997]
shares were outstanding, and [5,518,057] shares were reserved for issuance
upon the exercise of outstanding options under the 1992 Stock Option/Stock
Issuance Plan and other options and warrants. In addition, the Board of
Directors has adopted the 1997 Stock Incentive Plan, subject to stockholder
approval, pursuant to which an additional 3,000,000 shares of Common Stock
will be reserved for issuance. Holders of the Company's Common Stock have
no preemptive rights.
PURPOSE OF AUTHORIZING ADDITIONAL COMMON STOCK
Authorizing an additional 50,000,000 shares of Common Stock would give
the Board of Directors the express authority, without further action of the
stockholders, to issue such Common Stock from time to time as the Board of
Directors deems necessary. The Company has no present plans or commitments
with respect to the issuance of the proposed additional shares of Common
Stock, except for the reservation and issuance of additional shares pursuant
to the 1997 Plan, if approved by the stockholders at the 1997 Annual Meeting.
The Board of Directors believes it is necessary to have the ability to issue
such additional Common Stock for general corporate purposes. Potential uses
of the additional authorized shares may include acquisition transactions,
equity financing, stock dividends or stock splits without further action by
the stockholders, unless such action were specifically required by applicable
law or rules of any stock exchange on which the Company's securities may then
be listed.
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's stockholders depending upon
the exact nature and circumstances of any actual issuances of authorized but
unissued shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable
law) in one or more transactions that could make a change in control or
takeover of the Company more difficult. For example, additional shares could
be issued by the Company so as to dilute the stock ownership or voting rights
of persons seeking to obtain control of the Company. Similarly, the issuance
of additional shares to certain persons allied with the Company's management
could have the effect of making it more difficult to remove the Company's
current management by diluting the stock ownership or voting rights of persons
seeking to cause such removal. In addition, an issuance of additional shares
by the Company could have an effect on the potential realizable value of a
stockholder's investment. In the
-14-
<PAGE>
absence of a proportionate increase in the Company's earnings and book value,
an increase in the aggregate number of outstanding shares of the Company
caused by the issuance of the additional shares would dilute the earnings per
share and book value per share of all outstanding shares of the Company's
Common Stock. If such factors were reflected in the price per share of Common
Stock, the potential realizable value of a stockholder's investment could be
adversely affected.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding shares of the
Company entitled to vote at the 1997 Annual Meeting is required for approval
of the amendment to the Company's Restated Certificate of Incorporation
authorizing 50,000,000 additional shares of Common Stock. If such approval is
obtained, the amendment will become effective immediately upon filing with the
Delaware Secretary of State.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION.
PROPOSAL 3
PROPOSED 1997 STOCK INCENTIVE PLAN
INTRODUCTION
The Company's stockholders are being asked to approve the 1997 Stock
Incentive Plan (the "1997 Plan") which will serve as the successor to the
Company's existing 1992 Stock Option/Stock Issuance Plan (the "1992 Plan").
The Board of Directors considers it advisable at this time to replace the 1992
Plan with a new equity incentive program which will (i) serve to attract and
retain the services of those individuals essential to the Company's growth and
financial success, (ii) remove certain restrictions on the eligibility of
non-employee Board members to serve as Plan Administrator and permit the
Company to take advantage of the recent amendments to Rule 16b-3 of the
Securities Exchange Act of 1934, as amended, which exempts certain officer and
director transactions under stock plans from the short-swing liability
provisions of the federal securities laws, (iii) render the non-employee Board
members eligible to receive discretionary option grants and direct stock
issuances and (iv) make certain other improvements which will facilitate
administration of the Company's equity incentive programs.
The 1997 Plan will become effective when approved by the Company's
stockholders at the 1997 Annual Meeting. The 1992 Plan will terminate, and no
further option grants or share issuances will be made under the 1992 Plan
after such date. However, all outstanding options under the 1992 Plan will
continue to be governed by the terms and conditions of the existing option
agreements for those grants.
DESCRIPTION OF THE 1997 PLAN
The following is a summary of the principal features of the 1997 Plan,
together with the tax and accounting implications applicable to transactions
effected under such plan. However, the summary does not purport to be a
complete description of all the provisions of the 1997 Plan. Any stockholder
of the Company who wishes to obtain a copy of the actual plan document may do
so upon written request to the Corporate Secretary at the Company's principal
executive offices in La Jolla, California.
Structure. The 1997 Plan will contain three (3) separate equity incentive
programs: (i) a Discretionary Option Grant Program, (ii) a Stock Issuance
Program, and (iii) an Automatic Option Grant Program. The principal features
of each program are described below.
Administration. The Compensation Committee of the Board of Directors will
serve as the initial Plan Administrator with respect to the Discretionary
Option Grant and Stock Issuance Programs. However, one or more additional
committees of the Board of Directors may be appointed to administer those
programs with
-15-
<PAGE>
respect to certain designated classes of individuals in the Company's service.
The term "Plan Administrator" as used in this summary will mean the
Compensation Committee and any other appointed committee acting within the
scope of its administrative authority under the 1997 Plan. Administration of
the Automatic Option Grant Program will be self-executing in accordance with
the express provisions of such program.
Share Reserve. The initial share reserve for the 1997 Plan will comprise of
(i) the number of shares which remain available for issuance under the 1992
Plan as of the date of the 1997 Annual Meeting ([4,048,417] shares as of March
31, 1997), and (ii) an increase of 3,000,000 shares, subject to approval by
the stockholders at the 1997 Annual Meeting.
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will
be made to the securities issuable (in the aggregate and to each participant)
under the 1997 Plan and to each outstanding option.
Shares subject to any outstanding options under the 1997 Plan (including
options transferred from the 1992 Plan) which expire or otherwise terminate
prior to exercise will be available for subsequent issuance. Unvested shares
issued under the 1997 Plan and subsequently repurchased by the Company
pursuant to its repurchase rights under the 1997 Plan will also be available
for subsequent issuance.
Eligibility. Officers and employees, non-employee Board members and
independent consultants and advisors in the service of the Company or its
parent and subsidiaries (whether now existing or subsequently established)
will be eligible to participate in the Discretionary Option Grant and Stock
Issuance Programs. Only non-employee members of the Board will be eligible to
participate in the Automatic Option Grant Program.
As of March 31, 1997, [5] executive officers, [191] other employees, and
[5] non-employee Board members were eligible to participate in the 1997 Plan.
Valuation. The fair market value per share of Common Stock on any relevant
date under the 1997 Plan will be the closing selling price per share on that
date on the Nasdaq National Market. On March 31, 1997, the closing selling
price per share was $[______].
DISCRETIONARY OPTION GRANT PROGRAM
The options granted under the Discretionary Option Grant Program may be
either incentive stock options under the federal tax laws or non-statutory
options. Each granted option will have an exercise price per share not less
than one hundred percent (100%) of the fair market value per share of Common
Stock on the option grant date, and no granted option will have a term in
excess of ten (10) years. The shares subject to each option will generally
vest in a series of installments over a specified period of service measured
from the grant date.
Upon cessation of service, the optionee will have a limited period of
time in which to exercise any outstanding option to the extent exercisable for
vested shares. The Plan Administrator will have complete discretion to extend
the period following the optionee's cessation of service during which his or
her outstanding options may be exercised and/or to accelerate the
exercisability or vesting of such options in whole or in part. Such
discretion may be exercised at any time while the options remain outstanding,
whether before or after the optionee's actual cessation of service.
Incentive stock options granted under the Discretionary Option Grant
Program may not be assigned or transferred, except by the provisions of the
optionee's will or the laws of inheritance following his or her death.
Non-statutory options may be assigned or transferred pursuant to the
optionee's will or the laws of inheritance and may also be assigned during the
optionee's lifetime, in connection with the optionee's estate plan, to members
of his or her immediate family or to a trust established exclusively for the
benefit of such individuals.
-16-
<PAGE>
The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program (including
outstanding options under the Predecessor Plan) and to issue replacement
options with an exercise price based on the fair market price of Common Stock
at the time of the new grant.
STOCK ISSUANCE PROGRAM
Shares may be issued under the Stock Issuance Program for such valid
consideration under the Delaware General Corporation Law as the Plan
Administrator deems appropriate, provided the value of such consideration, as
determined by the Plan Administrator, is not less than the fair market value
of the issued shares on the date of issuance. Shares may also be issued as a
bonus for past services.
Shares issued as a bonus for past services will be fully vested upon
issuance. All other shares issued under the program will be subject to a
vesting schedule tied to the performance of service or the attainment of
designated financial or key project milestones.
The Plan Administrator will have the sole and exclusive authority,
exercisable upon a participant's termination of service, to vest any or all
unvested shares of Common Stock at the time held by that participant, to the
extent the Plan Administrator determines that such vesting provides an
appropriate severance benefit under the circumstances.
The provisions of the Stock Issuance Program under the 1997 Plan will be
substantially the same as those in effect under the Stock Issuance Program of
the 1992 Plan.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program in effect under the 1992 Plan
each individual who is currently serving as a non-employee Board member has
received an automatic option grant for 50,000 shares which becomes exercisable
in a series of three (3) equal annual installments over the optionee's
continued period of Board service. Under the Automatic Option Grant Program
of the 1997 Plan, each individual who first becomes a non-employee Board
member on or after the date of the 1997 Annual Meeting, whether through
election by the stockholders or appointment by the Board of Directors, will
receive, at the time of such initial election or appointment, an automatic
option grant for 50,000 shares of Common Stock. In addition, on the date of
each annual stockholders meeting, beginning with the 1997 Annual Meeting, each
individual who is re-elected as a non-employee Board member and who has
previously received an automatic option grant under the 1992 Plan which has
become exercisable for the final one-third (1/3) installment of the option
shares in the year of such meeting, will automatically be granted at that
meeting a stock option to purchase an additional 50,000 shares of Common
Stock. Each non-employee Board member will continue to receive additional
option grants under the Automatic Option Grant Program of the 1997 Plan on the
date of every third Annual Stockholders Meeting thereafter during the period
of his or her continued service.
Each option will have an exercise price per share equal to 100% of the
fair market value per share of Common Stock on the option grant date and a
maximum term of ten (10) years measured from the grant date. The option will
be immediately exercisable for all the option shares, but any purchased shares
will be subject to repurchase by the Company, at the exercise price paid per
share, upon the optionee's cessation of Board service prior to vesting in
those shares. The shares subject to each option will vest (and the Company's
repurchase rights will lapse) in three (3) successive equal annual
installments over the optionee's period of Board service, with the first such
installment to vest upon the optionee's completion of one year of Board
service measured from the option grant date.
The shares subject to each outstanding automatic option grant will
immediately vest should any of the following events occur while the optionee
continues in Board service: (i) the optionee's death or permanent disability,
(ii) an acquisition of the Company by merger or asset sale or (iii) the
successful completion of a hostile tender offer for more than fifty percent
(50%) of the outstanding voting securities or a change in the
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<PAGE>
majority of the Board occasioned by one or more contested elections for Board
of Directors membership. Each automatic option grant held by an optionee upon
his or her termination of Board of Directors service will remain exercisable,
for any or all of the option shares in which the optionee is vested at the
time of such termination, for up to a twelve (12)-month period following such
termination date.
Automatic option grants may be assigned by the provisions of the
optionee's will or the laws of inheritance following his or her death and may
also be assigned during the optionee's lifetime, in connection with the
optionee's estate plan, to members of his or her immediate family or to a
trust established exclusively for the benefit of such individuals.
GENERAL PROVISIONS
Acceleration. In the event that the Company is acquired by merger or asset
sale, each outstanding option under the Discretionary Option Grant Program
which is not to be assumed or replaced by the successor corporation will
automatically accelerate in full, and all unvested shares under the Stock
Issuance Program will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have complete discretion
to grant one or more options under the Discretionary Option Grant Program
which will become fully exercisable for all the option shares in the event
those options are assumed in the acquisition and the optionee's service with
the Company or the acquiring entity is involuntarily terminated or the
optionee resigns for good cause within a designated period following such
acquisition. The Plan Administrator will have similar discretion to grant
options which will become fully exercisable for all the option shares should
the optionee's service terminate, whether involuntarily or through a
resignation for good reason, within a designated period following a hostile
change in control of the Company (whether by successful tender offer for more
than fifty percent (50%) of the outstanding voting stock or by proxy contest
for the election of Board of Directors members). The Plan Administrator may
also provide for the automatic vesting of any outstanding shares under the
Stock Issuance Program upon similar terms and conditions.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
Financial Assistance. The Plan Administrator may institute a loan program to
assist one or more participants in financing the exercise of outstanding
options or the purchase of shares under the 1997 Plan. The Plan Administrator
will determine the terms of any such assistance. However, the maximum amount
of financing provided any participant may not exceed the cash consideration
payable for the issued shares plus all applicable taxes incurred in connection
with the acquisition of the shares.
Changes in Capitalization. In the event any change is made to the outstanding
shares of Common Stock by reason of any recapitalization, stock dividend,
stock split, combination of shares, exchange of shares or other change in
corporate structure effected without the Company's receipt of consideration,
appropriate adjustments will be made to (i) the maximum number and/or class of
securities issuable under the 1997 Plan, (ii) the number and/or class of
securities for which any one person may be granted stock options and direct
stock issuances under the 1997 Plan and the 1992 Plan per calendar year, (iii)
the number and/or class of securities for which grants are subsequently to be
made under the Automatic Option Grant Program to new and continuing
non-employee Board members and (iv) the number and/or class of securities and
the exercise price per share in effect under each outstanding option in order
to prevent the dilution or enlargement of benefits thereunder.
Special Tax Election. The Plan Administrator may provide one or more holders
of options or unvested shares with the right to have the Company withhold a
portion of the shares otherwise issuable to such individuals in satisfaction
of the tax liability incurred by such individuals in connection with the
exercise of those options or the vesting of those shares. Alternatively, the
Plan Administrator may allow such individuals to deliver previously acquired
shares of Common Stock in payment of such tax liability.
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<PAGE>
Amendment and Termination. The Board of Directors may amend or modify the
1997 Plan in any or all respects whatsoever subject to any required
stockholder approval. The Board of Directors may terminate the 1997 Plan at
any time, and the 1997 Plan will in all events terminate upon the expiration
of its ten (10)-year term measured from the date of its adoption by the Board
of Directors.
Stock Awards. No options have been granted and no stock issuances have been
made under the 1997 Plan as of March 31, 1997. The table below shows, as to
each of the Company's executive officers named in the Summary Compensation
Table that were granted options during the period, and as to the various
indicated individuals and groups, the number of shares of Common Stock subject
to options granted under the 1992 Plan during the period beginning January 1,
1996 and ending on March 31, 1997, together with the weighted average exercise
price payable per share.
<TABLE>
<CAPTION>
OPTIONS GRANTED WEIGHTED AVERAGE
NAME AND POSITION (NUMBER OF SHARES) EXERCISE PRICE
- ----------------------- ------------------ -----------------
<S> <C> <C>
Arthur J. Benvenuto 500,000 $13.50
Chairman and Chief Executive
Officer
Dr. Gail K. Naughton 500,000 $13.50
President and Chief Operating
Officer
Ellen G. Redding 20,000 $14.12
Vice President, Regulatory and
Quality Systems
Michael V. Swanson 75,000 $13.50
Vice President, Finance and
Administration
All current executive officers 1,095,000 $13.51
as a group (four persons)
All current non-employee directors 200,000 $16.81
as a group (four persons)
All employees, excluding executive 444,428 $13.79
officers, as a group (97 persons)
</TABLE>
As of March 31, 1997, options covering [3,807,091] shares of Common
Stock were outstanding under the 1992 Plan, [208,456] shares remained
available for future option grant and [422,953] shares have been issued
under the 1992 Plan.
FEDERAL INCOME TAX CONSEQUENCES
Option Grants. Options granted under the 1997 Plan may be either incentive
stock options which satisfy the requirements of Section 422 of the Internal
Revenue Code or non-statutory options which are not intended to meet such
requirements. The Federal income tax treatment for the two types of options
differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made
the subject of a taxable disposition. For Federal tax purposes, dispositions
are divided into two categories: (i) qualifying and (ii) disqualifying. A
qualifying disposition occurs if the sale or other disposition is made after
the optionee has held the shares for more than two years after the option
grant date and more than one year after the exercise date. If either of these
two holding periods is not satisfied, then a disqualifying disposition will
result.
If the optionee makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to an income tax deduction, for the
taxable year in which such disposition occurs, equal to the excess of (i) the
fair market value of such shares on the option exercise date over (ii) the
exercise price paid for the
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<PAGE>
shares. In no other instance will the Company be allowed a deduction with
respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but
will have to report as ordinary income, as and when the Company's repurchase
right lapses, an amount equal to the excess of (i) the fair market value of
the shares on the date the repurchase right lapses over (ii) the exercise
price paid for the shares. The optionee may, however, elect under Section
83(b) of the Internal Revenue Code to include as ordinary income in the year
of exercise of the option an amount equal to the excess of (i) the fair market
value of the purchased shares on the exercise date over (ii) the exercise
price paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the repurchase
right lapses.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for
the taxable year of the Company in which such ordinary income is recognized by
the optionee.
Direct Stock Issuances. The tax principles applicable to direct stock
issuances under the 1997 Plan will be substantially the same as those
summarized above for the exercise of non-statutory option grants.
Deductibility of Executive Compensation. The Company anticipates that any
compensation deemed paid by it in connection with disqualifying dispositions
of incentive stock option shares or exercises of non-statutory options granted
with exercise prices equal to the fair market value of the option shares on
the grant date will qualify as performance-based compensation for purposes of
Code Section 162(m) and will not have to be taken into account for purposes of
the $1 million limitation per covered individual on the deductibility of the
compensation paid to certain executive officers of the Company. Accordingly,
all compensation deemed paid with respect to those options will remain
deductible by the Company without limitation under Code Section 162(m).
ACCOUNTING TREATMENT
Option grants or stock issuances made at 100% of fair market value on the
grant or issue date will not result in any charge to the Company's earnings,
but the Company must disclose, in footnotes to the Company's financial
statements, the impact the outstanding options would have upon the Company's
reported earnings were the value of those options treated as a compensation
expense. The number of outstanding options may be a factor in determining the
Company's earnings per share.
NEW PLAN BENEFITS
As of March 31, 1997, no stock options or direct stock issuances have
been granted under the 1997 Plan.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of
the Company present or represented and entitled to vote at the 1997 Annual
Meeting is required for approval of the 1997 Plan. If such approval is
obtained, the 1997 Plan will become effective on the date of the 1997 Annual
Meeting. Should such stockholder approval not be obtained, then the 1997 Plan
will not be implemented and the 1992 Plan will continue in full force and
effect.
-20-
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1997
STOCK INCENTIVE PLAN. THE BOARD OF DIRECTORS BELIEVES THAT IT IS IN THE BEST
INTEREST OF THE COMPANY TO MAINTAIN A STOCK INCENTIVE PROGRAM FOR THE
COMPANY'S EMPLOYEES, OFFICERS AND NON-EMPLOYEE DIRECTORS TO ATTRACT AND RETAIN
THE SERVICES OF THOSE INDIVIDUALS ESSENTIAL TO THE COMPANY'S GROWTH AND
FINANCIAL SUCCESS, TO MORE CLOSELY ALIGN INDIVIDUAL'S INTERESTS WITH THOSE OF
THE STOCKHOLDERS, AND TO ENCOURAGE SUCH INDIVIDUALS TO REMAIN IN THE COMPANY'S
SERVICE.
PROPOSAL 4
SELECTION OF AUDITORS
Subject to stockholder approval at the Annual Meeting, the Board of
Directors has selected Ernst & Young LLP ("Ernst & Young") as the Company's
independent auditors for the fiscal year ending December 31, 1997. Ernst &
Young was first engaged as the Company's independent auditors for the fiscal
year ended January 31, 1991. The affirmative vote of a majority of the votes
cast on this Proposal 4 shall constitute approval of Ernst & Young as the
Company's independent auditors for calendar year 1997.
A representative of Ernst & Young is expected to be present at the Annual
Meeting. The representative will have an opportunity to make a statement and
will be available to respond to appropriate questions from stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
PROPOSALS FOR THE 1998 ANNUAL MEETING
The next annual meeting of stockholders is scheduled to be held in May
1998. Stockholder proposals for inclusion in the Company's proxy statement
for that meeting must be received at the Company's principal office not later
than December 31, 1997. Stockholder proposals must be mailed to the Company's
principal executive office at 10933 North Torrey Pines Road, La Jolla,
California 92037 to the attention of the Corporate Secretary.
OTHER MATTERS
Management does not know of any other matters to be brought before the
Annual Meeting. If any other matter is properly presented for consideration
at the Annual Meeting, it is intended that the proxies will be voted by the
persons named therein in accordance with their judgment on such matters. The
Company's Annual Report to Stockholders for the year ended December 31, 1996
is enclosed herewith.
Your cooperation in giving this matter your immediate attention and
returning your proxies will be appreciated.
By Order of the Board of Directors,
Richard A. Fink
Secretary
La Jolla, California
April [10] 1997
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<PAGE>
(Proxy Card - Front)
ADVANCED TISSUE SCIENCES, INC.
10933 NORTH TORREY PINES ROAD, LA JOLLA, CALIFORNIA 92037
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Arthur J. Benvenuto and Dr. Gail K.
Naughton, and each of them, with full power of substitution, the proxy or
proxies of the undersigned to vote all shares of Common Stock of Advanced
Tissue Sciences, Inc. (the "Company") which the undersigned is entitled to
vote at the 1997 Annual Meeting of Stockholders and at any adjournments or
postponements thereof, with the same force and effect as the undersigned might
or could do if personally present thereat. The shares represented by this
proxy shall be voted in the following manner:
(continued and to be signed on the reverse side)
<PAGE>
(Proxy Card - Back)
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 THROUGH 4.
--------------- ----------
ACCOUNT NUMBER COMMON
1. TO ELECT THE FOLLOWING SEVEN-MEMBER BOARD OF DIRECTORS to serve until
their successors have been duly elected and qualified: Arthur J.
Benvenuto; Dr. Gail K. Naughton; Jerome E. Groopman, M.D.;
Jack L. Heckel; Dayton Ogden; David S. Tappan, Jr.; and
Dr. Gail R. Wilensky. (THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR)
[ ] FOR all nominees above [ ] WITHHOLD AUTHORITY
(except as marked to the contrary) to vote for the nominees
listed above
To withhold authority to vote for any nominee, strike a line through the
nominee's name set forth above. In the event a nominee is unable or
declines to serve, this proxy will be voted in the election of directors
in the manner described in the Proxy Statement for the 1997 Annual
Meeting of Stockholders.
2. TO APPROVE AN AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES of
Common Stock, $.01 par value per share, from 50,000,000 shares
to 100,000,000 shares. (THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. TO APPROVE THE 1997 STOCK INCENTIVE PLAN. (THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. TO APPROVE THE APPOINTMENT OF ERNST & YOUNG LLP as independent auditors
of the Company for the fiscal year ending December 31, 1997. (THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and at any adjournment
or postponements thereof.
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 president or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
Dated: , 1997
-------------------------------------------
(Signature)
-------------------------------------------
(Signature if held jointly)
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD USING THE ENCLOSED
SELF-ADDRESSED STAMPED ENVELOPE.
ADVANCED TISSUE SCIENCES, INC.
1997 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1997 Stock Incentive Plan is intended to promote the interests
of Advanced Tissue Sciences Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation. This Plan
shall serve as the successor equity incentive program to the Corporation's
1992 Stock Option/Stock Issuance Plan.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
- the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary), and
- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at
periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders.
B. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. The members of
the Secondary Committee may be Board members who are Employees eligible to
receive discretionary option grants or direct stock issuances under the Plan
or any other stock option, stock appreciation, stock bonus or other stock plan
of the Corporation (or any Parent or Subsidiary).
C. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate
the functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority
(subject to the provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for proper administration of the
Discretionary Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of
such programs and any outstanding options or stock issuances thereunder as it
may deem necessary or advisable. Decisions of the Plan Administrator within
the scope of its administrative functions under the Plan shall be final and
binding on all parties who have an interest in the Discretionary Option Grant
and Stock Issuance Programs under its jurisdiction or any option or stock
issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as
Board members for their service on such committee. No member of the Primary
Committee or the Secondary Committee shall be liable for any act or omission
made in good faith with respect to the Plan or any option grants or stock
issuances under the Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under such program.
-2-
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs are as follows:
(i) employees,
(ii) non-employee members of the Board or the board
of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or
times when such option grants are to be made, the number of shares to be
covered by each such grant, the status of the granted option as either an
Incentive Option or a Non-Statutory Option, the time or times when each option
is to become exercisable, the vesting schedule (if any) applicable to the
option shares and the maximum term for which the option is to remain
outstanding and (ii) with respect to stock issuances under the Stock Issuance
Program, which eligible persons are to receive stock issuances, the time or
times when such issuances are to be made, the number of shares to be issued to
each Participant, the vesting schedule (if any) applicable to the issued
shares and the consideration for such shares.
C. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.
D. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Plan Effective Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held on or after the
Plan Effective Date.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock initially reserved for issuance over the term of the
Plan shall not exceed [7,000,000] shares. Such authorized share reserve is
comprised of (i) the number of shares which remain available for issuance, as
-3-
<PAGE>
of the Plan Effective Date, under the Predecessor Plan as last approved by the
Corporation's stockholders (estimated to be 4,000,000 shares in the aggregate
as of [March __, 1997], including the shares subject to the outstanding
options to be incorporated into the Plan), and (ii) an increase of 3,000,000
shares, adopted by the Board on March [___], 1997, but subject to approval by
the Corporation's stockholders at the 1997 Annual Meeting.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances
for more than 750,000 shares of Common Stock in the aggregate per calendar
year, beginning with the 1997 calendar year.
C. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan)
shall be available for subsequent issuance under the Plan to the extent those
options expire or terminate for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation, at the original exercise or issue price paid
per share, pursuant to the Corporation's repurchase rights under the Plan
shall be added back to the number of shares of Common Stock reserved for
issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under
the Plan. However, should the exercise price of an option under the Plan be
paid with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Corporation in satisfaction of the
withholding taxes incurred in connection with the exercise of an option or the
vesting of a stock issuance under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the
gross number of shares for which the option is exercised or which vest under
the stock issuance, and not by the net number of shares of Common Stock issued
to the holder of such option or stock issuance.
D. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under this Plan per calendar year, (iii) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members, (iv) the number and/or class of securities and the exercise
price per share in effect under each outstanding option under the Plan and (v)
the number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plan.
Such adjustments to the outstanding options are to be effected in a manner
which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
-4-
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in one or
more of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
exercisable at such time or times, during such period and for such number of
-5-
<PAGE>
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term in
excess of ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable for
such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but no
such option shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease to
be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall terminate
immediately and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
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(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the number
of vested shares of Common Stock for which such option is exercisable at the
time of the Optionee's cessation of Service but also with respect to one or
more additional installments in which the Optionee would have vested had the
Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of
the Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, a
Non-Statutory Option may, in connection with the Optionee's estate plan, be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established
exclusively for one or more such family members. The assigned portion may
only be exercised by the person or persons who acquire a proprietary interest
in the option pursuant to the assignment. The terms applicable to the assigned
portion shall be the same as those in effect for the option immediately prior
to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
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B. EXERCISE PRICE. The exercise price per share shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of
grant) for which one or more options granted to any Employee under the Plan
(or any other option plan of the Corporation or any Parent or Subsidiary) may
for the first time become exercisable as Incentive Options during any one
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two (2) or more such options
which become exercisable for the first time in the same calendar year, the
foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are
granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option
is granted is a 10% Stockholder, then the exercise price per share shall not
be less than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the option grant date, and the option term shall not exceed
five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock
at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. However, an outstanding
option shall not so accelerate if and to the extent: (i) such option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof), (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those option shares or (iii) the acceleration
of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are to be
assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
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C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be
made to (i) the exercise price payable per share under each outstanding
option, provided the aggregate exercise price payable for such securities
shall remain the same, (ii) the maximum number and/or class of securities
available for issuance over the remaining term of the Plan and (iii) the
maximum number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year.
E. The Plan Administrator shall have full power and authority to
grant one or more options under the Discretionary Option Grant Program which
will automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those options are assumed or replaced and do
not otherwise accelerate. Any options so accelerated shall remain exercisable
for fully-vested shares until the earlier of (i) the expiration of the option
term or (ii) the expiration of the one (1)-year period measured from the
effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to shares held by the Optionee at the time of
such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.
F. The Plan Administrator shall have full power and authority to
grant one or more options under the Discretionary Option Grant Program which
will automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Change in Control. Each option so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination. In addition, the Plan Administrator may
provide that one or more of the Corporation's outstanding repurchase rights
with respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.
G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as
an Incentive Option only to the extent the applicable One Hundred Thousand
Dollar limitation is not exceeded. To the extent such dollar limitation is
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exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
H. The outstanding options shall in no way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program (including outstanding options incorporated from the
Predecessor Plan) and to grant in substitution new options covering the same
or different number of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new
grant date.
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ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Five,
shares of Common Stock may be issued under the Stock Issuance Program for any
of the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified
performance objectives. The elements of the vesting schedule applicable to
any unvested shares of Common Stock issued under the Stock Issuance Program,
namely:
(i) the Service period to be completed by the
Participant or the performance objectives to be attained,
(ii) the number of installments in which the shares
are to vest,
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(iii) the interval or intervals (if any) which are to
lapse between installments, and
(iv) the effect which death, Permanent Disability or
other event designated by the Plan Administrator is to have upon the vesting
schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which
the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the
Stock Issuance Program, whether or not the Participant's interest in those
shares is vested. Accordingly, the Participant shall have the right to vote
such shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock
which would otherwise occur upon the cessation of the Participant's Service or
the non-attainment of the performance objectives applicable to those shares.
Such waiver shall result in the immediate vesting of the Participant's
interest in the shares as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
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II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase/cancellation
rights under the Stock Issuance Program shall terminate automatically, and all
the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent (i) those repurchase/cancellation rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or
any time while the Corporation's repurchase/cancellation rights with respect
to such shares remain outstanding under the Stock Issuance Program, to provide
that those rights shall automatically terminate in whole or in part, and the
shares of Common Stock subject to those terminated rights shall immediately
vest, in the event the Participant's Service should subsequently terminate by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of any Corporate
Transaction in which those repurchase/cancellation rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the unvested shares are issued or
any time while the Corporation's repurchase/cancellation rights with respect
to such shares remain outstanding under the Stock Issuance Program, to provide
that those rights shall automatically terminate in whole or in part, and the
shares of Common Stock subject to those terminated rights shall immediately
vest, in the event the Participant's Service should subsequently terminate by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of any Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
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ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates
specified below:
1. Each individual who is first elected or appointed as a
non-employee Board member on or at any time after the Plan Effective Date
shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase 50,000 shares of Common Stock.
2. On the date of each Annual Stockholders Meeting,
beginning with the 1997 Annual Meeting, each individual who (i) is to continue
to serve as an Eligible Director, whether or not that individual is standing
for re-election to the Board at that particular Annual Meeting, and (ii) holds
an outstanding option under the Automatic Option Grant Program of the
Predecessor Plan or the Plan, the final one-third of which option vests or
becomes exercisable in the year of such meeting, shall automatically be
granted a Non-Statutory Option to purchase 50,000 shares of Common Stock.
Each non-employee Board member shall continue to receive an additional option
grant under the Automatic Option Grant Program on the date of every third
Annual Stockholders Meeting thereafter during the period of his or her
continued service as a non-employee Board member. There shall be no limit on
the number of such 50,000-share option grants any one Eligible Director may
receive over his or her period of Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall be payable in one or more of
the alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
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Corporation, at the exercise price paid per share, upon the Optionee's
cessation of Board service prior to vesting in those shares. The shares
subject to each option grant shall vest, and the Corporation's repurchase
right with respect to those shares shall lapse, in a series of three (3)
successive equal annual installments over the Optionee's period of continued
Board service, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant
date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will or
in accordance with the laws of descent and distribution) shall have a twelve
(12)-month period following the date of such cessation of Board service in
which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the time
of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may, during
the twelve (12)-month exercise period following such cessation of Board
service, be exercised for all or any portion of those shares as fully-vested
shares of Common Stock.
(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service for any
reason other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time exercisable
for vested shares.
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II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation
of the Corporate Transaction, each automatic option grant shall terminate and
cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof).
B. In connection with any Change in Control, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Change in Control, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Each such option shall remain
exercisable for such fully-vested option shares until the expiration or sooner
termination of the option term.
C. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
D. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
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ARTICLE FIVE
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program
or the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one
or more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In no event may the maximum credit
available to the Optionee or Participant exceed the sum of (i) the aggregate
option exercise price or purchase price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability incurred
by the Optionee or the Participant in connection with the option exercise or
share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options or the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options granted or the shares issued under the
Automatic Option Grant Program) with the right to use shares of Common Stock
in satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options or the vesting of their shares.
Such right may be provided to any such holder in either or both of the
following formats:
Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes)
with an aggregate Fair Market Value equal to the percentage of the Taxes (not
to exceed one hundred percent (100%)) designated by the holder.
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III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on March [__], 1997, but
shall not become effective unless approved by the Corporation's stockholders
at the 1997 Annual Meeting. The date of such meeting is hereby designated the
"Plan Effective Date".
B. The Plan shall serve as the successor to the Predecessor
Plan, and no further option grants or direct stock issuances shall be made
under the Predecessor Plan after the Plan Effective Date. All options
outstanding under the Predecessor Plan on the Plan Effective Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated
shall continue to be governed solely by the terms of the documents evidencing
such option, and no provision of the Plan shall be deemed to affect or
otherwise modify the rights or obligations of the holders of such incorporated
options with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated
from the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) [March
____], 2007, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Upon such plan termination, all outstanding option grants and
unvested stock issuances shall thereafter continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no
such amendment or modification shall adversely affect the rights and
obligations with respect to stock options or unvested stock issuances at the
time outstanding under the Plan unless the Optionee or the Participant
consents to such amendment or modification. In addition, certain amendments
may require stockholder approval pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program and shares of Common Stock may be
issued under the Stock Issuance Program that are in each instance in excess of
the number of shares then available for issuance under the Plan, provided any
excess shares actually issued under those programs shall be held in escrow
until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under
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the Plan. If such stockholder approval is not obtained within twelve (12)
months after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were
held in escrow, and such shares shall thereupon be automatically cancelled and
cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock (i) upon
the exercise of any granted option or (ii) under the Stock Issuance Program
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
stock options granted under it and the shares of Common Stock issued pursuant
to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws,
including the filing and effectiveness of the Form S-8 registration statement
for the shares of Common Stock issuable under the Plan, and all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining such person)
or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate such person's Service at any time for any
reason, with or without cause.
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APPENDIX
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The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Corporation), of beneficial ownership (within the meaning of Rule
13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the Corporation's
stockholders, or
(ii) a change in the composition of the Board over a period
of twenty-four (24) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been
elected or nominated for election as Board members during such period by at
least a majority of the Board members described in clause (A) who were still
in office at the time the Board approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately prior
to such transaction, or
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(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean Advanced Tissue Sciences Inc., a Delaware
corporation, and its successors.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
I. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible
to participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question, as
such price is reported on the Nasdaq National Market or any successor system.
If there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
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M. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
N. INVOLUNTARY TERMINATION shall mean the termination of the Service
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A)
a change in his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and participation in any
corporate-performance based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of such individual's place of employment by
more than fifty (50) miles, provided and only if such change, reduction or
relocation is effected by the Corporation without the individual's consent.
O. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized
use or disclosure by such person of confidential information or trade secrets
of the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds
for the dismissal or discharge of any Optionee, Participant or other person in
the Service of the Corporation (or any Parent or Subsidiary).
P. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
R. OPTIONEE shall mean any person to whom an option is granted under
the Discretionary Option Grant or Automatic Option Grant Program.
S. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
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T. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
U. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more. However, solely for purposes of the Automatic
Option Grant Program, Permanent Disability or Permanently Disabled shall mean
the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration
of twelve (12) months or more.
V. PLAN shall mean the Corporation's 1997 Stock Incentive Plan, as
set forth in this document.
W. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity
is carrying out its administrative functions under those programs with respect
to the persons under its jurisdiction.
X. PLAN EFFECTIVE DATE shall mean [_____________], 1997, the date of
the 1997 Annual Meeting at which the Plan will be submitted for approval by
the Corporation's stockholders.
Y. PREDECESSOR PLAN shall mean the Corporation's 1992 Stock
Option/Stock Issuance Plan, in effect immediately prior to the Plan Effective
Date hereunder.
Z. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AA. SECONDARY COMMITTEE shall mean a committee of one (1) or more
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
AB. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AC. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant or stock issuance.
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AD. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
AE. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
AF. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
AG. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
AH. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those
options or the vesting of those shares.
AI. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any
Parent or Subsidiary).
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