SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14 (A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e) (2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 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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(3) Per unit price or other underlying value of transaction computed
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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.
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 23, 2000
To the Stockholders of Advanced Tissue Sciences, Inc.:
Notice is hereby given that the 2000 Annual Meeting of Stockholders of
Advanced Tissue Sciences, Inc., a Delaware corporation (the "Company"), will be
held at the Hilton La Jolla Torrey Pines, 10950 North Torrey Pines Road, La
Jolla, California 92037 on Tuesday, May 23, 2000 at 10:00 A.M. Pacific Daylight
Savings Time for the following purposes:
1. to elect eight directors to serve for the term of one year or until
their respective successors have been elected and qualified;
2. to approve and adopt the Amended and Restated Bylaws of the Company;
3. to approve the appointment of Ernst & Young LLP as independent auditors
of the Company for the fiscal year ending December 31, 2000; and
4. to transact such other business as may properly come before the Annual
Meeting.
The close of business on March 31, 2000 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,
/s/ Mark J. Gergen
Mark J. Gergen
Secretary
La Jolla, California
April 14, 2000
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
PROXY STATEMENT
This proxy statement and the enclosed proxy card are furnished in
connection with the 2000 Annual Meeting of Stockholders (the "Annual Meeting")
of Advanced Tissue Sciences, Inc. (the "Company") which will be held at the
Hilton La Jolla Torrey Pines, 10950 North Torrey Pines Road, La Jolla,
California, on Tuesday, May 23, 2000 at 10:00 A.M. Pacific Daylight Savings
Time. Stockholders of record at the close of business on March 31, 2000 are
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof.
On March 31, 2000, there were 59,844,128 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 approximately $4,000, 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 Company 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, 1999, are
scheduled to be mailed commencing on or about April 21, 2000 to stockholders
of record on March 31, 2000.
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 eight
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
Name Age Position
---- --- --------
Arthur J. Benvenuto 56 Chairman of the Board of Directors
and Chief Executive Officer
Dr. Gail K. Naughton 44 Director, President and Chief Operating
Officer
Jerome E. Groopman, M.D. 48 Director and Chairman of the Company's
Scientific Advisory Board
Jack L. Heckel 68 Director
Ronald L. Nelson 47 Director
Dayton Ogden 55 Director
David S. Tappan, Jr. 77 Director
Dr. Gail R. Wilensky 56 Director
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 from June 1988 through September 1995.
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.
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 in
1986 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 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, the San Diego Burn Institute and The Charles H. and Anna S. Stern
Foundation.
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<PAGE>
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 Medicine 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 the AIDS
virus, cancer and blood diseases. Dr. Groopman has served on the Biological
Response Modifers Advisory Committee to the U.S. 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 APW Ltd.
Ronald L. Nelson became a Director of the Company in June 1997. Mr. Nelson
is a founding member of the senior management team of DreamWorks L.L.C., a
multi-media entertainment company. Mr. Nelson has served as Chief Operating
Officer for DreamWorks since November 1994. Prior to joining DreamWorks, Mr.
Nelson was affiliated with Paramount Communications (formerly Gulf & Western,
Inc.) from 1979 to 1994, serving as Executive Vice President and Chief Financial
Officer from January 1990 to March 1994. Mr. Nelson also serves as a director
of Charter Communications, Inc.
Dayton Ogden became a Director of the Company in September 1996. Mr. Ogden
was named Chairman of Spencer Stuart Worldwide, an international executive
search firm, in May 1999 after having previously served as President since
October 1996 and as Chief Executive Officer for the previous nine years. Mr.
Ogden serves as a director of the American Business Conference and Project HOPE.
Mr. Ogden is a frequent contributor to a wide variety of corporate governance
conferences.
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 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 of the Medicare Payment Advisory
Commission and has also served as chair of the Physician Payment Review
Commission and as a member of the Health Advisory Committee of the General
Accounting Office. Dr. Wilensky serves as a director of ManorCare, 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, 2000, the directors and all officers of the Company bene-
ficially owned in the aggregate 5,018,308 shares of the Company's Common
Stock, including 3,253,333 shares subject to the exercise of stock options
exercisable or becoming exercisable within 60 days. This aggregate ownership
represents approximately 8.0% of the total outstanding shares, including
shares deemed to be beneficially owned. See "Principal Stockholders."
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<PAGE>
BOARD MEETINGS AND COMMITTEES
During the year ended December 31, 1999, the Board of Directors held seven
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. The committees of the Board of Directors include the Audit Committee,
the Compensation and Stock Option Committee (the "Compensation Committee") and
the Nominating and Corporate Governance Committee.
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.
In addition, the Audit Committee reviews and discusses the year end financial
statements with the Company's management and the Company's independent auditors.
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, 1999. The
Audit Committee is composed of three independent members. The current members of
the Audit Committee are Jack L. Heckel (Chairman), Ronald L. Nelson and Dr. Gail
R. Wilensky.
The Compensation Committee reviews and approves remuneration arrangements
for the Company's officers and key employees and approves compensation plans. In
addition, the Compensation Committee administers the Company's 1997 Stock
Incentive Plan (the "1997 Plan") and determines the key employees to be granted
options and awards under such plan and the number of shares to be granted. 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 five
times during the year ended December 31, 1999. The current members of the
Compensation Committee are David S. Tappan, Jr. (Chairman), Jack L. Heckel and
Dayton Ogden.
The Nominating and Corporate Governance Committee's primary function is 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
reviews and, as appropriate, makes recommendations with respect to such topics
as corporate governance and the performance of the Board of Directors. During
1999, meetings of the Nominating and Corporate Governance Committee were held as
part of the Board of Directors' regular quarterly meetings. The full Board of
Directors serves on the Nominating and Corporate Governance Committee with
Dayton Ogden as Chairman.
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 1997 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. The options are 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
non-employee director's cessation of Board service prior to vesting in those
shares. The shares subject to the option become vested and the Company's
repurchase rights lapse in three successive equal annual installments measured
from the grant date. Under the 1997 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 in the year during which the
final installment of his or her last previous grant vests. During 1999, Dr.
Groopman, Mr. Heckel, Mr. Ogden and Dr. Wilensky each received such a share
option grant. These options are exercisable at $3.75 per share and will vest in
annual equal installments over three years.
Pursuant to a consulting agreement with the Company, Dr. Wilensky provides
consulting and advisory services to the Company in the area of reimbursement and
health care financing. Dr. Wilensky is compensated for
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<PAGE>
these services at a rate of $2,500 per day (not to exceed $25,000 annually) plus
the reimbursement of expenses. The agreement terminates in February 2001 or upon
30 days prior written notice by either party.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 31, 2000, 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 Common Stock as of Common Stock
Beneficial Owner Position March 31, 2000 (1) Outstanding (2)
- --------------------------------- --------------------- ---------------------- ---------------
<S> <C> <C> <C>
Arthur J. Benvenuto Chairman of the Board 2,186,578 (3) 3.6%
Advanced Tissue Sciences, Inc. of Directors and Chief
10933 North Torrey Pines Road Executive Officer
La Jolla, CA 92037
Dr. Gail K. Naughton Director, President and 1,697,008 (4) 2.8%
Advanced Tissue Sciences, Inc. Chief Operating Officer
10933 North Torrey Pines Road
La Jolla, CA 92037
Jerome E. Groopman, M.D. Director and Chairman 170,000 (5) *
Beth Israel Deaconess Medical of Company's Scientific
Center Advisory Board
One Deaconess Road
Boston, MA 02215
Jack L. Heckel Director 180,847 (6) *
27390 Oak Knoll Drive
Bonita Springs, FL 33923
Ronald L. Nelson Director 70,000 (7) *
DreamWorks L.L.C.
100 Universal City Plaza
Universal City, CA 91608
Dayton Ogden Director 103,875 (8) *
Spencer Stuart
695 East Main Street
Stamford, CT 06901
David S. Tappan, Jr. Director 150,000 (9) *
620 Newport Center Drive
Newport Beach, CA 92660
Dr. Gail R. Wilensky Director 153,000 (10) *
Project HOPE
7500 Old Georgetown Road
Bethesda, MD 20814
Joseph R. Kletzel, II Executive Vice 43,000 (11) *
Advanced Tissue Sciences, Inc. President
10933 North Torrey Pines Road
La Jolla, CA 92037
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership Percentage of
Name and Address of Common Stock as of Common Stock
Beneficial Owner Position March 31, 2000 (1) Outstanding (2)
- --------------------------------- --------------------- ---------------------- ---------------
<S> <C> <C> <C>
David L. Horwitz, M.D., Ph.D. Senior Vice President, 33,000 (12) *
Advanced Tissue Sciences, Inc. Technology
10933 North Torrey Pines Road
La Jolla, CA 92037
Michael V. Swanson Senior Vice President and 155,000 (13) *
Advanced Tissue Sciences, Inc. Chief Financial Officer
10933 North Torrey Pines Road
La Jolla, CA 92037
State of Wisconsin Investment 9,370,500 (14) 15.7%
Board
P.O. Box 7842
Madison, WI 53707
Smith & Nephew SNATS, Inc. 4,333,710 (15) 7.2%
1450 Brooks Road
Memphis, TN 38116
Directors and executive officers as a 5,018,308 (16) 8.0%
group (consisting of 13 persons)
</TABLE>
- -----------------
* Less than one percent.
(1) Sole voting and investment power unless otherwise stated.
(2) Based on 59,844,128 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 1,400,000 shares of Common Stock which are
currently exercisable or become exercisable within 60 days and 300,000
shares of restricted Common Stock which are subject to repurchase rights
by the Company.
(4) Includes 283,616 shares of Common Stock held as custodian for Dr.
Naughton's minor children, options to purchase 783,333 shares of
Common Stock which are currently exercisable or become exercisable within
60 days.
(5) Beneficial ownership represents options to purchase 170,000 shares of
Common Stock.
(6) Includes 5,847 shares of Common Stock held by a trust and options to
purchase 150,000 shares of Common Stock.
(7) Includes options to purchase 50,000 shares of Common Stock.
(8) Includes options to purchase 100,000 shares of Common Stock.
(9) Beneficial ownership represents options to purchase 150,000 shares of
Common Stock.
(10) Includes 3,000 shares of Common Stock held by Dr. Wilensky's spouse in a
retirement plan and options to purchase 150,000 shares of Common Stock.
(11) Beneficial ownership represents options to purchase 43,000 shares of
Common Stock which are currently exercisable or become exercisable within
60 days.
(12) Beneficial ownership consists of options to purchase 33,000 shares of
Common Stock which are currently exercisable.
(13) Beneficial ownership consists of options to purchase 155,000 shares of
Common Stock which are currently exercisable or become exercisable within
60 days.
(14) Pursuant to a Schedule 13G filed with the SEC on February 4, 2000, the
State of Wisconsin Investment Board reported that it had sole dispositive
power and sole voting power over 7,620,500 shares of Common Stock. In
addition, the State of Wisconsin Investment Board exercised warrants for
1,750,000 shares of Common Stock. See "Certain Transactions."
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<PAGE>
(15) Pursuant to a Schedule 13G filed with the SEC on July 9, 1999, Smith &
Nephew SNATS, Inc., Smith & Nephew Holdings, Inc. and Smith & Nephew plc
reported that they had sole dispositive power and sole voting power over
4,333,710 shares of Common Stock. Both Smith & Nephew Holdings, Inc. and
Smith & Nephew SNATS, Inc. are indirect, wholly-owned subsidiaries of
Smith & Nephew plc.
(16) Includes (i) options to purchase 3,253,333 shares of Common Stock which
are currently exercisable or become exercisable within 60 days, 250,000
shares of which are subject to repurchase rights, and (ii) 300,000 share
of restricted Common Stock which are subject to repurchase rights by the
Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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. Based solely on the Company's review of the reporting forms received by
it, and written representations from certain persons that no Form 5 reports were
required to be filed by those persons, the Company believes that all statements
of beneficial ownership required to be filed with the SEC in fiscal 1999 were
timely filed.
EXECUTIVE OFFICERS
The following table names the Company's executive officers as of March 31,
2000. The officers of the Company serve at the discretion of the Board of
Directors.
Name Age Position
---- --- --------
Arthur J. Benvenuto 56 Chairman of the Board of Directors and
Chief Executive Officer
Dr. Gail K. Naughton 44 Director, President and Chief Operating
Officer
David L. Horwitz, M.D., Ph.D. 57 Senior Vice President, Technology
Michael V. Swanson 45 Senior Vice President and Chief
Financial Officer
Charles E. Anderson 51 Vice President, Quality
Mark J. Gergen 38 Vice President, General Counsel and
Secretary
Terry E. Gibson 59 Vice President, Operations
Information on the business backgrounds of Arthur J. Benvenuto and Dr. Gail
K. Naughton is set forth above under the heading "Directors and Nominees."
David L. Horwitz, M.D., Ph.D. joined the Company as Senior Vice President,
Technology, in January 1998. Prior to joining the Company, Dr. Horwitz served as
Executive Vice President from March 1994 to September 1997 and Vice President of
Medical and Regulatory Affairs from April 1992 to March 1994 at SciClone
Pharmaceuticals, a biopharmaceutical company. Dr. Horwitz spent ten years at
Baxter Healthcare Corporation prior to 1992, most recently as Vice President,
Medical & Professional Affairs in the I.V. Systems Division. From 1979 to 1992,
Dr. Horwitz was on the faculty at the University of Illinois at Chicago, and
from 1972 to 1979 was a faculty member at the University of Chicago. Dr. Horwitz
holds an M.B.A. in general management from Lake Forest Graduate School of
Management, a Ph.D. in physiology and an M.D. from the University of Chicago,
and an undergraduate degree in chemistry and physics from Harvard University.
Michael V. Swanson was appointed Senior Vice President and Chief Financial
Officer, of the Company in May 1999, having previously served as Vice President,
Finance and Administration since September 1992, Vice President, Finance from
June 1991 and as Director of Finance from March 1990. Mr. Swanson was Secretary
for the Company from May 1999 to March 2000. Mr. Swanson served as Director of
Finance of Fisher Scientific Group Inc., a health and scientific technology
holding company, from June 1987 through
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<PAGE>
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 an M.B.A. from the University of Southern California and a B.S. in
Business Administration from the California Polytechnic State University at San
Luis Obispo.
Charles E. Anderson was appointed Vice President, Quality, in October 1998.
From October 1997 to October 1998, Mr. Anderson served as Vice President of
Quality Assurance and from October 1995 to October 1997 as Director of Quality
Assurance at Genzyme Corporation, a biopharmaceutical company. From January 1992
to August 1995, Mr. Anderson was employed by Xoma Corporation, a
biopharmaceutical company, most recently as Vice President of Quality Control
and Quality Assurance. Prior to 1992, Mr. Anderson spent 19 years in various
management positions in quality and manufacturing at Parke Davis and various
Roche Pharmaceutical subsidiaries. Mr. Anderson holds an M.S. degree in Quality
Management from Tampa College and a B.S. in Chemistry from the University of
Illinois at Chicago.
Mark J. Gergen joined the Company as Vice President, General Counsel and
Secretary in March 2000. From June 1999 to March 2000, Mr. Gergen was Associate
General Counsel of Premier, Inc., a national alliance of hospitals and health-
care systems. From November 1997 to June 1999, Mr. Gergen was Senior Division
Counsel at Medtronic, Inc., a therapeutic medical technology company, having
served in various legal capacities from August 1994 to November 1997. Mr.
Gergen was employed by Jostens, Inc., an educational software and recognition
company, from April 1990 to July 1994, most recently as Senior Division Counsel.
Prior to April 1990, Mr. Gergen was an associates at the law firms of Messerli &
Kramer and LeFevere, Lefler, Kennedy, O'Brien & Drawz in Minneapolis, Minnesota.
Mr. Gergen holds a J.D. from the University of Minnesota Law School and a B.A.
in Business Administration from Minot State University.
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 healthcare 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 12 years with Amersham Corporation, a diversified
medical, research and industrial products company. Mr. Gibson holds a M.S. in
Bionucleonics and B.S. degrees in Chemistry and Biological Sciences and Pharmacy
from Purdue University.
8
<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 1999 was in
excess of $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-term
--------------------------------- Compensation (5)
Other ---------------------------
Annual Restricted All Other
Compen- Stock Compen-
Name and Year Salary Bonus sation Awards Options sation
Principal Position (1) ($)(2) ($)(3) ($)(4) ($) (shs) ($)(6)
- ------------------------- --------- -------- ---------- ------------ ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Arthur J. Benvenuto 1999 400,000 102,900 2,478 1,122,000 (7) 450,000 1,380
Chairman and Chief 1998 399,000 0 2,936 0 0 (8) 1,380
Executive Officer 1997 367,028 102,900 1,829 0 0 1,380
Dr. Gail K. Naughton 1999 300,000 78,400 405 0 250,000 470
Director, President and 1998 299,385 0 480 0 0 470
Chief Operating Officer 1997 279,193 78,400 939 0 0 470
Joseph R. Kletzel, II 1999 240,000 0 30,738 (9) 0 0 0
Executive Vice 1998 174,005 0 196,546 (9) 0 115,000 0
President 1997 0 0 0 0 0 0
David L. Horwitz, 1999 225,000 50,200 289,894 (9) 0 0 0
M.D., Ph.D. 1998 223,316 0 61,074 (9) 0 90,000 0
Senior Vice President, 1997 0 0 0 0 0 0
Technology
Michael V. Swanson 1999 207,188 48,700 414 0 75,000 0
Senior Vice President and 1998 206,661 0 295 0 25,000 0
Chief Financial Officer 1997 189,701 47,520 286 0 0 0
=================================================================================================================
</TABLE>
(1) The periods presented are the calendar years ended December 31, 1999,
1998 and 1997.
(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.
Executives hired during the periods presented include Mr. Kletzel (hired
in May 1998) and Dr. Horwitz (hired in January 1998). Mr. Kletzel resigned
from being an officer of the Company in February 2000.
(3) Includes bonuses earned, whether or not paid in such year, by the Named
Executive Officers. No bonuses were paid in 1998 to any executive
officers of the Company.
(4) Except as noted in (9) below, 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, long-term compensation utilized by the
Company has been the grant of stock options and a restricted stock award.
The Company has not awarded 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.
(7) Represents a restricted stock award of 300,000 shares in May 1999. The
restricted stock award had a value of $750,000 based on the closing price
of the Company's common stock of $2.50 per share at December 31, 1999.
One half of the awarded shares will vest upon the earlier of (a) Mr.
Benvenuto's completion of five years of service with the Company or
(b) U.S. Food and Drug Administration (FDA) premarket approval of
Dermagraft(R) for the treatment of diabetic foot ulcers during his period
of service. The other half of the shares will vest in a series of three
successive equal annual installments over his period of continued
service with the Company. Dividends, if any, will accrue to the
restricted stock award shares.
9
<PAGE>
(8) Does not include stock options vested and exercisable for 300,000 shares
of common stock which were granted in 1988 and extended during 1998. These
options, which were due to expire in June 1998, were extended for an
additional five years to June 2003. Half of these stock options are
exercisable at an exercise price of $1.47 per share and the other half are
exercisable at $1.67 per share.
(9) Includes reimbursement of relocation expenses paid to Mr. Kletzel of
$29,929 (including $8,906 for the reimbursement of taxes) and $196,113
(including $44,940 for the reimbursement of taxes) in 1999 and 1998,
respectively, and the reimbursement of relocation expenses paid to Dr.
Horwitz of $288,655 (including $86,507 for the reimbursement of taxes) and
$59,560 (including $10,169 for the reimbursement of taxes) in 1999 and
1998, respectively.
Options. The following table sets forth the details of options granted to the
- -------
Named Executive Officers listed in the Summary Compensation Table during
fiscal year 1999 under the 1997 Plan. No stock appreciation rights (SARs) have
ever been granted by the Company.
OPTIONS/SAR GRANTS IN FISCAL YEAR 1999
- --------------------------------------
<TABLE>
<CAPTION>
Individual Grants Grant Date Value
----------------------------------------------------- ------------------------
Number of Percent of Potential Realizable
Securities Total Value at Assumed
Underlying Options Annual Rate of Stock
Options/ Granted to Exercise Price Appreciation for
SARs Employees or Base Option Term (3)
Granted In Fiscal Price Expiration -------------------------
Name (#)(1)(2) Year ($/Sh) Date 5% ($) 10% ($)
- ---------------------- ------------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arthur J. Benvenuto 450,000 12.73% 3.75 5/24/09 1,061,260 2,689,440
Dr. Gail K. Naughton 250,000 7.07% 3.75 5/24/09 589,589 1,494,134
Joseph R. Kletzel, II 0 0.0% 0.00 0 0 0
David L. Horwitz, 0 0.0% 0.00 0 0 0
M.D., Ph.D.
Michael V. Swanson 25,000 0.71% 3.75 5/24/09 58,959 149,413
50,000 1.41% 3.63 12/12/09 68,174 215,917
=============================================================================================================
</TABLE>
(1) The exercise prices of the options granted during fiscal year 1999 were
equal to the closing market price of the Company's Common Stock on the
date the options were granted, with the exception of the option with an
expiration date of December 12, 2009 which was granted to Mr. Swanson on
December 13, 1999. The exercise price of such grant to Mr. Swanson was
above the closing market price of the Company's Common Stock on the date
of grant. This option became fully vested and exercisable on March 22,
2000. Except for this grant, Mr. Swanson's options become exercisable in
five successive equal annual installments beginning on the first
anniversary of the grant date. The options granted to Mr. Benvenuto and
Dr. Naughton become exercisable in three successive equal annual
installments beginning on the first anniversary of the grant date.
(2) All options granted in 1999 to the Named Executive Officers were under the
1997 Plan. The grants are for incentive stock options, except for 423,282
shares to Mr. Benvenuto, 223,334 shares to Dr. Naughton and 60,000 shares
to Mr. Swanson, which are non-statutory stock options.
(3) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the SEC and do not represent the Company's estimate or projection of
future Common Stock prices.
10
<PAGE>
Option Exercises and Holdings. The following table sets forth information
- -----------------------------
regarding the exercise of options in fiscal year 1999 and the number of options
held by the Named Executive Officers listed in the Summary Compensation Table,
including the value of in-the-money options as of December 31, 1999. The closing
price of the Company's Common Stock on December 31, 1999 used to calculate such
values was $2.50 per share. No SARs have ever been granted by the Company.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1999
AND OPTION/SAR VALUES AS OF DECEMBER 31, 1999
- ----------------------------------------------------
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired at Year End (#) at Year End ($)
on Value -------------------------- ------------------------
Exercise Realized Exercis- Unexer- Exercis- Unexer-
Name (#) ($) able cisable able cisable
- ------------------------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arthur J. Benvenuto 550,000 1,201,750 1,100,000 650,000 279,000 0
Dr. Gail K. Naughton 225,000 449,438 600,000 450,000 0 0
Joseph R. Kletzel, II 0 0 23,000 92,000 0 0
David L. Horwitz, 0 0 18,000 72,000 0 0
M.D., Ph.D.
Michael V. Swanson 0 0 125,000 125,000 0 0
=============================================================================================================
</TABLE>
Employment Agreements/Change in Control Arrangements. The Company has no
- ----------------------------------------------------
employment agreements with any of the Named Executive Officers or any of its
other 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
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.
In May 1999, the Compensation Committee approved special long-term
incentive compensation programs for both Arthur J. Benvenuto, Chairman and Chief
Executive Officer, and Dr. Gail K. Naughton, President and Chief Operating
Officer. Each program contains several components including special bonuses tied
to the approval of Dermagraft for the treatment of diabetic foot ulcers in the
United States, stock awards to align the officers' interests with those of the
Company's stockholders and the modification of certain loan terms designed to
encourage retention of these officers. For additional disclosure regarding
long-term incentive compensation programs, see "Compensation Committee Report -
Special Long-Term Compensation Packages."
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 officers of the Company serve or have ever served on
compensation committees of entities at which Board members serve or have served
as officers.
11
<PAGE>
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 both
individual and company 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, 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 cash compensation levels which would exceed
the $1 million limit in 2000. In addition, the Company's 1997 Stock Incentive
Plan (the "1997 Plan") is structured so that any compensation deemed paid in
connection with the exercise of options granted under the 1997 Plan or the
disposition of shares acquired under such plan will qualify as performance-based
compensation.
The Compensation Process
Early in each fiscal year, the Compensation Committee reviews with the
Chief Executive Officer an annual salary plan for the Company's executive
officers based on information prepared by Human Resources. 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 evaluations 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 70 diverse public
companies in the biomedical/biotechnology industries with greater than 150 but
less than 500 employees, (ii) a select group of approximately 45 companies which
are considered leaders in the biotechnology industry by virtue of their market
capitalization, and (iii) a select group of public biotechnology companies.
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 the survey data obtained
as set forth above. Under the Company's bonus program in effect for the 1999
fiscal year, the annual targeted cash incentive for each executive officer was
calculated as a percentage of such officer's base salary, 70% of which is based
on the accomplishment of corporate goals (which are the same as those discussed
below for the Chief
12
<PAGE>
Executive Officer) and 30% on the achievement of individual goals set at the
beginning of each year. For the 1999 fiscal year, such targeted cash incentive
amounts ranged from approximately 24% to approximately 30% of base salary
depending on the level of the executive officer.
Long-term incentive compensation is provided primarily through stock option
grants under the 1997 Plan. The amount of each grant is a function of the
individual's position and level of responsibility, and options generally become
exercisable in equal annual installments over a five-year period measured from
the grant date. The Compensation Committee, in its discretion, may grant
additional options to executive officers, including the Chief Executive Officer,
for increases in level of responsibility and promotions, in recognition of
sustained exceptional performance or annually based upon company and individual
performance. The option grant will have value to the executive officer only if
he or she continues in the Company's service during the vesting period and then
only if the market price of the underlying option shares appreciates over the
option term. As indicated below, the Compensation Committee also authorized a
restricted stock grant of 300,000 shares of the Company's common stock under the
1997 Plan to the Chief Executive Officer as part of a special long-term
incentive program implemented for him during the 1999 fiscal 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 February 2000, 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. Due to the stages of development and
commercialization of the Company's therapeutic products, profitability of the
Company has not been a primary factor considered in setting the Chief Executive
Officer's compensation; however, the Committee does consider a number of
financial factors, including the Company's ability to secure financing, progress
toward profitability, 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 1999 as
reported in the cash compensation table, the Compensation Committee considered
1998 accomplishments as well as the comparative competitive compensation data
and performance factors discussed above. The objectives for 1998 which the
Compensation Committee considered included: (i) progress in obtaining regulatory
approvals for Dermagraft in the treatment of diabetic foot ulcers; (ii) success
in achieving sales targets, production goals and cost objectives; (iii)
expansion of the Company's alliance with Smith & Nephew plc to include the
development of Dermagraft and TransCyte(TM) for the treatment of pressure and
venous ulcers and other skin tissue wounds, and the sales and marketing of
TransCyte for burns in the United States; (iv) advancing the development of
tissue engineered cartilage and cardiovascular products; and (v) obtaining
financing for the business. Although the Company was successful in achieving
many of those objectives for 1998, the Chief Executive Officer and executive
management recommended, and the Compensation Committee accepted management's
recommendation, that any base salary increases be deferred in 1999 in part due
to the FDA's decision not to approve the Company's submission for approval of
Dermagraft for the treatment of diabetic foot ulcers without data from an
additional clinical trial.
13
<PAGE>
In determining the Chief Executive Officer's bonus eligibility for 1999,
the Compensation Committee considered the Chief Executive Officer's role in the
achievement of a number of pre-established corporate objectives. Those
objectives considered by the Compensation Committee for 1999 included: (i)
progress toward obtaining regulatory approvals for Dermagraft in the treatment
of diabetic foot ulcers, (ii) success in achieving sales targets, production
goals and operating loss and cash expenditure objectives, (iii) success in
obtaining additional financing for the Company, (iv) advancing TransCyte and
Dermagraft into additional product indications and (v) advancing the development
of tissue engineered cartilage and cardiovascular products.
Special Long-Term Incentive Compensation Packages
In May 1999, the Compensation Committee approved special long-term
incentive compensation programs for both Arthur J. Benvenuto, Chairman and Chief
Executive Officer, and Dr. Gail K. Naughton, President and Chief Operating
Officer. Each program contains several components including special bonuses tied
to the approval of Dermagraft for the treatment of diabetic foot ulcers in the
United States, stock awards to align the officers' interests with those of the
Company's stockholders and the modification of certain loan terms designed to
encourage retention.
The special long-term incentive program for Mr. Benvenuto includes a
$500,000 cash bonus upon FDA approval of Dermagraft in the treatment of diabetic
foot ulcers, a restricted stock award and a stock option grant, and adjustments
to the repayment terms currently in effect for Mr. Benvenuto's outstanding
indebtedness to the Company. More specifically, Mr. Benvenuto was issued 300,000
restricted shares of the Company's common stock at $0.01 per share. Such shares
are unvested and subject to cancellation in the event Mr. Benvenuto ceases to
remain in the Company's service prior to vesting in those shares. One half of
the awarded shares will vest upon the earlier of (a) Mr. Benvenuto's completion
of five years of service with the Company or (b) FDA approval of Dermagraft in
the treatment of diabetic foot ulcers during his period of service. The other
half of the shares will vest in a series of three successive equal annual
installments over his period of continued service with the Company. Mr.
Benvenuto was also granted a stock option to purchase 450,000 shares of the
Company's common stock at an exercise price of $3.75 per share, the closing
selling price per share on the grant date of that option. The option will become
exercisable for the option shares in a series of three successive equal annual
installments upon his completion of each year of service over the three-year
period measured from the grant date of the option.
Several adjustments were also made to the repayment terms currently in
effect for Mr. Benvenuto's outstanding indebtedness to the Company in the
principal amount of $918,500. The due date for repayment was extended to May 25,
2004; however, the loan becomes due and payable in full on an accelerated basis
one hundred eighty days after any cessation of his service. If Mr. Benvenuto
remains as Chief Executive Officer through May 25, 2002 or if the Company
achieves certain net operating income targets during Mr. Benvenuto's service as
Chief Executive Officer, then the due date for payment following any cessation
of service will be extended from one hundred eighty days to one year. The
interest rate of the note was set to 5.15% per annum, compounded semi-annually.
Dr. Naughton's special long-term incentive compensation program consists of
a $200,000 cash bonus upon FDA approval of Dermagraft in the treatment of
diabetic foot ulcers, a stock option grant and adjustments to the repayment
terms on her outstanding indebtedness to the Company. Specifically, Dr. Naughton
was granted a stock option to purchase 250,000 shares of the Company's common
stock at an exercise price of $3.75 per share, the closing selling per share of
the Company's common stock on the grant date of that option. The option will
become exercisable for the option shares in a series of three successive equal
annual installments upon her completion of each year of service over the
three-year period measured from the grant date of the option. In addition, the
repayment terms currently in effect for Dr. Naughton's outstanding indebtedness
to the Company in the principal amount of $350,000 were adjusted to extend the
due date to July 18, 2004; however, the loan will become due and payable in full
on an accelerated basis one hundred eighty days after any cessation of her
service. If Dr. Naughton remains as President and Chief Operating Officer
through July 18, 2002 or, if the Company achieves certain net operating income
targets, then the due date for payment following any cessation of service will
be extended from one hundred eighty days to one year. The interest rate of the
note was increased to 5.74% per annum, compounded semi-annually.
14
<PAGE>
Further to Mr. Benvenuto's and Dr. Naughton's indebtedness, should the
Company be acquired by merger or asset sale, or there be a change in ownership
of more than fifty percent of the Company's outstanding voting securities during
Mr. Benvenuto's service as Chief Executive Officer or Dr. Naughton's service as
President and Chief Operating Officer, and his or her service as such should
subsequently be terminated by the successor entity (including a constructive
termination), then the outstanding unpaid balance of his or her notes (principal
and all accrued interest) will immediately be cancelled.
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").
The following chart compares the cumulative total stockholder return on the
Company's Common Stock over the five-year period ended December 31, 1999 with
the cumulative total return for (i) the NASDAQ Stock Market (U.S. Companies),
and (ii) the NASDAQ Pharmaceutical Index. The chart assumes $100 invested on
December 31, 1994 and that dividends are reinvested.
- --------------------------------------------------------------------------------
COMMON STOCK PERFORMANCE
- --------------------------------------------------------------------------------
(Performance Graph appears here)
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------
Advanced Tissue
Sciences, Inc. $ 100 $ 123 $ 116 $ 150 $ 31 $ 30
NASDAQ Stock Market (US) $ 100 $ 141 $ 174 $ 213 $ 300 $ 542
NASDAQ Pharmaceutical Index $ 100 $ 183 $ 184 $ 190 $ 242 $ 452
================================================================================
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.
15
<PAGE>
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 By-laws. One
significant difference between the indemnification rights provided under the
Company's B-laws and those provided under the indemnification agreements is
that, under the By-laws, 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.
On March 31, 2000, 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 $1,246,203 (including
$327,703 representing accrued interest) and $462,665 (including $112,665
representing accrued interest), respectively. Mr. Benvenuto's loan was for the
exercise of an employee stock option and Dr. Naughton's loan was related to the
purchase of her residence.
In May 1999, several adjustments were made to the repayment terms currently
in effect for Mr. Benvenuto's and Dr. Naughton's outstanding indebtedness to the
Company. The due date for repayment of Mr. Benvenuto's loan was extended to May
25, 2004; however, the loan becomes due and payable in full on an accelerated
basis one hundred eighty days after any cessation of his service. If Mr.
Benvenuto remains as Chief Executive Officer through May 25, 2002 or if the
Company achieves certain net operating income targets during Mr. Benvenuto's
service as Chief Executive Officer, then the due date for payment following any
cessation of service will be extended from one hundred eighty days to one year.
The interest rate of the note was set to 5.15% per annum, compounded
semi-annually. The repayment terms currently in effect for Dr. Naughton's
outstanding indebtedness to the Company were adjusted to extend the due date to
July 18, 2004; however, the loan will become due and payable in full on an
accelerated basis one hundred eighty days after any cessation of her service. If
Dr. Naughton remains as President and Chief Operating Officer through July 18,
2002 or, if the Company achieves certain net operating income targets, then the
due date for payment following any cessation of service will be extended from
one hundred eighty days to one year. The interest rate of the note was increased
to 5.74% per annum, compounded semi-annually.
In November 1999, the State of Wisconsin Investment Board purchased
3,750,000 units at $4.00 per unit in connection with a public offering by the
Company. The units separated immediately upon issuance into 3,750,000 shares of
Advanced Tissue Sciences' common stock and warrants to purchase an additional
1,750,000 shares of common stock at $4.00 per share. In January 2000, the State
of Wisconsin Investment Board exercised its warrants and purchased the
additional 1,750,000 shares of Advanced Tissue Sciences' common stock.
The Company has two joint ventures with Smith & Nephew. The first joint
venture, the NeoCyte Joint Venture, was formed in May 1994 and is developing
tissue-engineered orthopedic cartilage products, initially focusing on the
repair of cartilage in knee joints. Under the terms of the NeoCyte Joint Venture
agreement, Advanced Tissue Sciences will be responsible for supervising the
manufacturing of cartilage tissue products. Through Advanced Tissue Sciences and
Smith & Nephew, the NeoCyte Joint Venture is executing the research and
development programs and will utilize Smith & Nephew's established selling and
distribution network to market its products.
The second joint venture, the Dermagraft Joint Venture, was formed in April
1996 and covers the application of Advanced Tissue Sciences' tissue engineering
technology for skin wounds. The Dermagraft Joint Venture includes Dermagraft(R)
for the treatment of diabetic foot ulcers, TransCyte(TM) for the temporary
covering of second and third-degree burns and future developments for venous
ulcers, pressure ulcers, burns and other non-aesthetic wound care treatments.
The Company and Smith & Nephew share in the revenues and expenses of the
Dermagraft Joint Venture. During June 1999, the Company received at $15 million
payment from Smith & Nephew through the joint venture and converted a $10
million loan from Smith & Nephew related to
16
<PAGE>
the Dermagraft Joint Venture into approximately 2.8 million shares of the
Company's Common Stock as allowed under the terms of the loan agreement. The
Company can also receive from the achievement of certain milestones related to
regulatory approvals, reimbursement and sales levels, subject to and payable
from certain minimum levels of operating profit, additional payments of up to
$136 million plus royalties on product sales from Smith & Nephew. Under the
Dermagraft Joint Venture, the Company is responsible for manufacturing and Smith
& Nephew is responsible for the sales and marketing of the joint venture's
products.
PROPOSAL 2
APPROVE AND ADOPT AMENDED AND RESTATED BY-LAWS
The Board of Directors has determined that it is in the best interest of
the Company and its stockholders to amend the Company's existing Restated
By-laws (the "By-laws") to add a new Article XI, entitled "Stock Options."
Article XI would not allow any stock option already issued and outstanding under
any stock option plan to be repriced to a lower exercise price at any time
during the term of such option, without prior stockholder approval. The
amendment would not modify or in any way limit the ability to cancel and regrant
options as may be permitted under and pursuant to the terms of the Company's
stock option plans, as approved by the Company's stockholders.
If approved by the stockholders, Article XI of the By-laws would be amended
to provide as follows:
"In no event shall any stock option already issued and outstanding
under any stock option plan, as approved by the Company's
stockholders, be repriced to a lower exercise price at any time during
the term of such option, without the prior affirmative vote of a
majority of shares of stock of the Corporation present at a
stockholders meeting in person or by proxy and entitled to vote
thereon. Not withstanding anything to the contrary herein, nothing
herein is intended to modify or in any way limit the ability to cancel
and regrant options as may be permitted under and pursuant to the
terms of the Company's stock option plans, as approved by the
Company's stockholders. Any amendment or repeal of this Article XI
requires the affirmative vote of the holders of a majority of shares
of stock of the Company present at a stockholders meeting in person or
by proxy and entitled to vote thereon."
The affirmative vote of a majority of the votes cast on this Proposal 2
shall constitute approval of the amendment to the By-laws as stated above.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION OF
THE AMENDMENT TO THE BY-LAWS.
PROPOSAL 3
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, 2000. 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 3 shall constitute approval of Ernst & Young as the Company's
independent auditors for calendar year 2000.
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.
17
<PAGE>
PROPOSALS FOR THE 2001 ANNUAL MEETING
The next annual meeting of stockholders is scheduled to be held in May
2001. 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 22, 2000. 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.
In addition, the proxies solicited by the Board of Directors for the annual
meeting of the stockholders in calendar year 2001 will confer discretionary
authority to vote on any stockholder proposal presented at that meeting, unless
the Company is provided with notice of such proposal no later than March 7,
2001.
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, 1999 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,
/s/ Mark J. Gergen
Mark J. Gergen
Secretary
La Jolla, California
April 14, 2000
18
<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
2000 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, 2 and 3.
-------------------- ----------------
ACCOUNT NUMBER COMMON
1. TO ELECT THE FOLLOWING EIGHT-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; Ronald L.
Nelson; 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 2000 Annual Meeting of Stockholders.
2. TO APPROVE AND ADOPT THE AMENDED AND RESTATED BYLAWS of the Company.
(THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR)
/ / FOR / / AGAINST / / ABSTAIN
3. TO APPROVE THE APPOINTMENT OF ERNST & YOUNG LLP as independent auditors
of the Company for the fiscal year ending December 31, 2000 (THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR)
/ / FOR / / AGAINST / / ABSTAIN
4. 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
an authorized person.
Dated:______________________________, 2000
__________________________________________
(Signature)
__________________________________________
(Signature if held jointly)
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD USING THE
ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE.
