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 240.14a-11(c) or 240.14a-12
SERAGEN, INC.
- -------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
N/A
------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
N/A
------------------------------------------------------------------
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 now it was determined):
N/A
------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
N/A
------------------------------------------------------------------
5) Total fee paid:
N/A
------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing:
1) Amount previously paid:
______________________________________
2) Form, Schedule or Registration Statement No:
______________________________________
3) Filing party:
______________________________________
4) Date filed:
______________________________________
PAGE
<PAGE>
April 15, 1998
Dear Seragen Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of
Shareholders to be held at the offices of the Company, 97 South Street,
Hopkinton, Massachusetts, on May 21, 1998 at 3:00 p.m, local time.
At the Annual Meeting, six members will be elected to the Board of
Directors, the Company will seek shareholder approval of a proposal to amend
the Company's 1992 Long Term Incentive Plan to increase the number of shares
available under the plan from 16,000,000 to 24,000,000 and to set the maximum
number of shares with respect to which options may be granted in any one
calendar year to any one individual at 10,000,000, and the Company will seek
shareholder ratification of the selection of Arthur Andersen LLP as
independent auditors for the Company for the fiscal year ending December 31,
1998. The Board of Directors recommends the approval of each of these
proposals. In addition to the formal items of business to be brought before
the Annual Meeting, I will report on the Company's recent operations. This
will be followed by a question and answer period.
Your participation in Seragen's affairs is important, regardless of the
number of shares you hold. To ensure your representation, even if you cannot
attend the Annual Meeting, please sign, date and return the enclosed proxy
promptly.
We look forward to seeing you on May 21st.
Sincerely,
/s/ Reed R. Prior
Reed R. Prior
Chairman, Chief Executive
Officer and Treasurer
<PAGE>
SERAGEN, INC.
NOTICE OF 1998 ANNUAL MEETING OF SHAREHOLDERS
April 15, 1998
Notice is hereby given that the 1998 Annual Meeting of Shareholders of
Seragen, Inc. will be held at the offices of the Company, 97 South Street,
Hopkinton, Massachusetts, on May 21, 1998 at 3:00 p.m., for the following
purposes:
1. To elect six directors to hold office until the next annual
meeting of shareholders and until their successors are elected and qualified
or until their earlier resignation or removal.
2. To approve an amendment to the Company's 1992 Long Term Incentive
Plan to increase the number of shares available under that plan from
16,000,000 to 24,000,000 and to set the maximum number of shares with respect
to which options may be granted in any one calendar year to any one individual
at 10,000,000.
3. To ratify the selection of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998.
4. To transact such other business as properly may come before the
Annual Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on April 6, 1998
as the record date for the determination of shareholders entitled to notice of
and to vote at the Annual Meeting and at any adjournments thereof. All
shareholders are cordially invited to attend the Annual Meeting. However, to
ensure your representation, you are requested to complete, sign, date and
return the enclosed proxy card as soon as possible in accordance with the
instructions on the card. A return addressed envelope is enclosed for your
convenience.
By Order of the Board of Directors,
/s/ Reed R. Prior
Reed R. Prior
Chairman, Chief Executive Officer
and Treasurer
Seragen, Inc.
97 South Street
Hopkinton, Massachusetts 01748
April 15, 1998
<PAGE>
SERAGEN, INC.
97 South Street
Hopkinton, Massachusetts 01748
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Seragen, Inc. (the "Company") of proxies to be voted
at the 1998 Annual Meeting of Shareholders of the Company (the "Annual
Meeting") on May 21, 1998, and at any and all adjournments thereof.
This Proxy Statement, the accompanying proxy card and the Annual Report
to Shareholders are being mailed to shareholders on or about April 20, 1998.
Business at the Annual Meeting will be conducted in accordance with the
procedures determined by the presiding officer and will generally be limited
to matters properly brought before the Annual Meeting by or at the suggestion
of the Board of Directors or by a shareholder pursuant to provisions of the
Company's By-Laws requiring advance notice and disclosure of relevant
information.
The voting securities of the Company outstanding on April 6, 1998, the
record date for the Annual Meeting, consisted of 27,271,414 shares of common
stock, $.01 par value per share (the "Common Stock"), each share of which is
entitled to one vote, and 23,800 shares of Series B Preferred Stock (the
"Series B Shares"), each share of which is entitled to 250 votes on each
matter submitted to a vote of shareholders. The last reported sale price of
the Company's Common Stock on the OTC Bulletin Board as of April 6, 1998 was
$0.43. There is no public market for the Series B Shares. Holders of Series
D Preferred Stock ("Series D Shares") are not entitled to vote on any of the
matters intended to be submitted to a vote at the Annual Meeting.
Shareholders do not have cumulative voting rights. With respect to the
tabulation of votes, abstentions and broker non-votes will not be counted as
votes cast, and, accordingly, will have no effect on the vote.
<PAGE>
TABLE OF CONTENTS
Page
THE ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . 1
VOTING OF PROXIES . . . . . . . . . . . . . . . . . . . . . . 1
ATTENDANCE AT ANNUAL MEETING. . . . . . . . . . . . . . . . . 1
ELECTION OF DIRECTORS
PROPOSAL 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
THE BOARD OF DIRECTORS AND ITS COMMITTEES . . . . . . . . . . 4
Board Meetings . . . . . . . . . . . . . . . . . . . . . 4
Certain Committees of the Board. . . . . . . . . . . . . 4
Director Compensation. . . . . . . . . . . . . . . . . . 4
Other Arrangements . . . . . . . . . . . . . . . . . . . 5
EXECUTIVE OFFICERS OF THE COMPANY . . . . . . . . . . . . . . 5
Terms of Office; Relationships . . . . . . . . . . . . . 6
EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 6
Option Grants. . . . . . . . . . . . . . . . . . . . . . 7
Fiscal Year-End Option Values. . . . . . . . . . . . . . 9
Compensation Committee Report on Executive Compensation. 9
Performance Graph. . . . . . . . . . . . . . . . . . . . 12
Employment and Consulting Agreements; Change in
Control Arrangements . . . . . . . . . . . . . . . . . . 13
Compensation Committee Interlocks and Insider
Participation. . . . . . . . . . . . . . . . . . . . . . 17
CERTAIN TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . 19
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE . . . 22
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 23
AMENDMENT OF THE 1992 LONG TERM INCENTIVE PLAN
PROPOSAL 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
DESCRIPTION OF INCENTIVE PLAN . . . . . . . . . . . . . . . . 27
Purposes Of The Incentive Plan . . . . . . . . . . . . . 27
Administration . . . . . . . . . . . . . . . . . . . . . 27
Eligibility. . . . . . . . . . . . . . . . . . . . . . . 27
Shares Available For Awards. . . . . . . . . . . . . . . 27
Awards Under The Incentive Plan. . . . . . . . . . . . . 28
Change in Control Provisions . . . . . . . . . . . . . . 29
Adjustments. . . . . . . . . . . . . . . . . . . . . . . 30
Amendments of the Incentive Plan . . . . . . . . . . . . 30
Duration of the Incentive Plan . . . . . . . . . . . . . 30
INCENTIVE PLAN BENEFITS . . . . . . . . . . . . . . . . . . . 30
REASONS FOR THE PROPOSED AMENDMENT. . . . . . . . . . . . . . 32
Increase in Number of Shares Available For Distribution. 32
Limitation on Grants to Any One Individual Employee. . . 32
MARKET PRICE OF THE COMPANY'S COMMON STOCK. . . . . . . . . . 33
FEDERAL INCOME TAX CONSEQUENCES OF GRANTS . . . . . . . . . . 33
Incentive Stock Options. . . . . . . . . . . . . . . . . 33
Non-Qualified Stock Options. . . . . . . . . . . . . . . 33
SARs/Limited SARs. . . . . . . . . . . . . . . . . . . . 34
Restricted Stock . . . . . . . . . . . . . . . . . . . . 34
Deferred Stock . . . . . . . . . . . . . . . . . . . . . 34
i
<PAGE>
Stock Purchase Rights. . . . . . . . . . . . . . . . . . 35
Other Stock-Based Awards . . . . . . . . . . . . . . . . 35
Section 83(h) of the Code. . . . . . . . . . . . . . . . 35
Section 162(m) of the Code . . . . . . . . . . . . . . . 35
Other Tax Consequences . . . . . . . . . . . . . . . . . 36
APPROVAL REQUIRED FOR AMENDMENTS TO INCENTIVE PLAN. . . . . . 36
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
PROPOSAL 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PROXY SOLICITATION. . . . . . . . . . . . . . . . . . . . . . 38
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
FOR NEXT YEAR'S ANNUAL MEETING. . . . . . . . . . . . . . . . 38
ATTENDANCE OF INDEPENDENT AUDITORS AT ANNUAL MEETING. . . . . 38
ANNUAL REPORT TO SHAREHOLDERS . . . . . . . . . . . . . . . . 38
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 38
ii
PAGE
<PAGE>
THE ANNUAL MEETING
VOTING OF PROXIES
Because many shareholders are unable to attend the Company's Annual
Meeting, the Board of Directors is soliciting proxies to give each shareholder
an opportunity to vote on all matters scheduled to come before the Annual
Meeting, as they are set forth in this Proxy Statement. Shareholders are
urged to read carefully the material in this Proxy Statement, specify their
choice on each matter by marking the appropriate boxes on the enclosed proxy
card, and sign, date and return the card in the enclosed stamped envelope.
Where a shareholder specifies a choice on the proxy as to how his or her
shares are to be voted on a particular matter, the shares will be voted
accordingly. If no choice is specified, the shares will be voted FOR the
election of each of the six nominees for Director named in this Proxy
Statement, FOR the proposal to amend the Company's 1992 Long Term Incentive
Plan (the "Incentive Plan"), and FOR ratification of the selection of
independent auditors. A shareholder may revoke or revise the proxy that is
conferred by the enclosed proxy card at any time before the Annual Meeting by
delivering to the Company a written notice of revocation (which may take any
form) or a duly executed proxy bearing a later date, or by voting by ballot at
the Annual Meeting.
Shareholders of record at the close of business on April 6, 1998 are
entitled to receive notice of the Annual Meeting and to vote the shares held
by them on that date. The holders of a majority of the issued and outstanding
shares of capital stock of the Company entitled to vote at the Annual Meeting
must be present in person or represented by proxy at the Annual Meeting in
order to constitute a quorum for the conduct of business at the Annual
Meeting.
The vote required for approval of each item to be considered at the
Annual Meeting is discussed below under the description of each item.
Shareholder proxies will be received by the Bank of Boston, the Company's
independent proxy processing agent. The proxy vote will be certified by an
independent Inspector of Election. Proxies and ballots that identify the vote
of individual shareholders are kept confidential until the final vote has been
tabulated at the Annual Meeting, except where disclosure is necessary to meet
legal requirements or in a contested proxy solicitation and in cases where
shareholders write comments on their proxy cards.
ATTENDANCE AT ANNUAL MEETING
To ensure the availability of adequate space for shareholders wishing to
attend the Annual Meeting, priority seating will be given to shareholders of
record and beneficial owners of the Company's stock having evidence of such
ownership, or their authorized representatives, and to the invited guests of
management. In addition, a shareholder may bring one guest. In order that
seating may be equitably allocated, a shareholder wishing to bring more than
one guest must contact Lora Maurer, Manager - Investor Relations/Corporate
Communications, telephone 508-435-2331, in advance of the Annual Meeting.
1
<PAGE>
ELECTION OF DIRECTORS
PROPOSAL 1
The Board has nominated the six individuals listed below, each of whom
currently is a Director, for election as a Director at the Annual Meeting.
Each Director elected at the meeting will hold office until the next annual
meeting of shareholders and until his or her successor is duly elected and
qualified or until his or her earlier resignation or removal. The Company's
By-Laws authorize the Board of Directors from time to time to determine the
number of its members. Vacancies in unexpired terms and any additional
positions created by Board action may be filled by the existing Board of
Directors.
The Board of Directors currently consists of six members. Pursuant to a
shareholders agreement, holders of shares representing a majority of the
voting power of the Company's securities have agreed to increase the size of
the Board of Directors to nine. However, as of the date of this Proxy
Statement, no persons have been identified to fill the positions that would be
created by such an increase in the Board's size. See "Certain Transactions."
The following information sets forth biographical summaries and ages (as
of March 30, 1998) of each of the six persons who has been nominated by the
Board of Directors for election as a Director of the Company. Information
with respect to the number of shares of the Company's Common Stock
beneficially owned by each nominee as of April 6, 1998, appears on pages 23
through 26 of this Proxy Statement.
Name Age Positions with the Company
Reed R. Prior . . . . . 46 Chairman of the Board of Directors,
Chief Executive Officer, Treasurer
and Director
Gerald S.J. Cassidy . . 57 Director
Kenneth G. Condon . . . 50 Director
Norman A. Jacobs . . . 60 Director
Jean C. Nichols, Ph.D. 46 President, Chief Technology Officer,
Secretary and Director
John R. Silber, Ph.D. 71 Director
Reed R. Prior -- Mr. Prior was elected Chairman of the Board of Directors
and a member of the Executive Committee of the Company and Chief Executive
Officer and Treasurer in November 1996. Prior to joining the Company, Mr.
Prior's career included several positions as CEO of various biomedical
companies in early development stages or in turnaround situations. From 1995
to 1996 he served as President and Chief Executive Officer of ActiMed
Laboratories, a privately-held medical diagnostics company. From 1992 to
1995, he was President and Chief Executive Officer of Receptor Laboratories,
Inc., a start-up biopharmaceutical firm which was sold to Cytel Corporation in
July 1995. From 1990 to 1991, Mr. Prior served as President and Chief
Executive Officer of Genex Corporation, which merged with Enzon, Inc. in
October 1991. From 1986 to 1990, Mr. Prior was President and Chief Executive
Officer of i-Stat Corporation (Nasdaq: STAT), a medical diagnostics company.
Mr. Prior earned a B.S. in biophysics from Michigan State University, and
received an M.B.A. from Harvard Business School.
Gerald S.J. Cassidy -- Mr. Cassidy has served as a member of the Board of
Directors of the Company since December 1987. Mr. Cassidy is the founder,
Chairman and CEO of the Cassidy Companies, Inc., an independent Washington,
D.C. based network of public affairs communications companies consisting of
Cassidy & Associates, Inc. (a government relations firm), Powell Tate, Inc. (a
2
<PAGE>
public relations and financial communications firm), Boland & Madigan, Inc. (a
commerce-oriented government relations firm), Frederick Schneiders Research
Inc. (a public opinion research firm) and Bork & Associates, Inc. (a
litigation support services firm). Prior to the establishment of Cassidy &
Associates in 1975, he worked as a Trial Attorney in the South Florida Migrant
Legal Services Program, as Executive Director and General Counsel of the
Democratic National Committee's Reform Commission, and as General Counsel of
the U.S. Senate's Select Committee on Nutrition and Human Needs. He has been
a featured speaker on legislative issues, government and politics at numerous
governmental, university, industry and trade association conferences. He is a
member of the Board of Trustees of Villanova University; the Board of
Overseers for the School of Nutrition at Tufts University; the Board of
Trustees of Fontbonne College; and a member of the Board of Trustees of the
Washington Theological Union. He served on the Board of Trustees of Tougaloo
College from 1987 to 1997; the Board of Directors of the Children's Inn at the
National Institute of Health (NIH) from 1987 to 1998; and was a member of the
Steering Committee of The Capital Campaign for Villanova University 1993 to
1997. Mr. Cassidy is a graduate of Villanova University (B.S. 1963) and the
Cornell University Law School (J.D. 1967). In 1995 he received an Honorary
Doctor of Social Science Degree from Villanova University.
Kenneth G. Condon, C.P.A., C.F.P. -- Mr. Condon has served as a member of
the Board of Directors of the Company since January 1992. He has also served
as Boston University's Treasurer since 1992 and its Vice President for
Financial Affairs since 1986. Prior to his serving in such capacity, Mr.
Condon served as Associate Vice President for Financial and Business Affairs,
Comptroller, Acting Comptroller and Manager of Unrestricted Funds of Boston
University. Mr. Condon is the former Chairman of the Board and Director of
Bayfunds, Inc. and also served as President and as a Director of the Financial
Executive Institute of Massachusetts. He is currently a member of the
BankBoston Advisory Board and is a member of the Board of Trustees of Newbury
College. He is also a Director of Insmed Pharmaceuticals, Inc. and is a
Director and member of the Executive Committee of the Boston Municipal
Research Bureau. Mr. Condon is a Certified Public Accountant and a Certified
Financial Planner and holds a B.S. in Economics and Mathematics from Tufts
University and an M.B.A. in Finance from The Wharton School of the University
of Pennsylvania.
Norman A. Jacobs -- Mr. Jacobs has served as a member of the Board of
Directors of the Company since 1990. Mr. Jacobs has served as Vice President,
Business Development, Worldwide Injection Systems of Becton Dickinson and
Company since February 1998. From September 1990 to January 1998, Mr. Jacobs
was President of Becton Dickinson Transdermal Systems, a unit of Becton
Dickinson and Company. From January 1990 to September 1990, Mr. Jacobs acted
as a consultant to biotechnology companies, including Seragen. From 1986
through 1989, Mr. Jacobs was President of BioTechnica International, a genetic
engineering research company. Mr. Jacobs was one of the founders, in 1962, of
Amicon Corporation, which is a manufacturer of laboratory separation systems
and adhesives and polymer specialty materials. He served as President of
Amicon from 1971 through 1983, and as President of the Amicon Division of W.R.
Grace from 1983 to 1985. He earned an M.B.A. from Harvard Business School, an
M.S. in Chemical Engineering from the Massachusetts Institute of Technology.,
and a B.E. in Chemical Engineering from Yale University.
Jean C. Nichols, Ph.D. -- Dr. Nichols was elected President and Chief
Technology Officer and a member of the Board of Directors of the Company in
November 1996 and was elected Secretary in March 1998. From 1992 to 1996, she
served as Senior Vice President, and from 1987 to August 1992, as Vice
President of Development for the Company. From 1984 to 1987, Dr. Nichols was
Director of Research and Development, and from 1983 to 1984, served as the
Company's scientific liaison. Dr. Nichols received a B.S. in Biology and a
Ph.D. in Bacteriology and Immunology from the University of North Carolina.
Upon completion of her studies, Dr. Nichols was a Research Fellow at the
Harvard Medical School. Before joining the Company, she held the position of
Instructor in the Department of Microbiology and Molecular Genetics at the
Harvard Medical School.
John R. Silber, Ph.D. -- Dr. Silber has served as a member of The Board
of Directors of the Company since August 1987. He is the Chancellor of Boston
University and has been a member of its Board of Trustees since 1971. Dr.
Silber received a B.A. from Trinity University and an M.A. and Ph.D. in
philosophy from Yale University. Dr. Silber is Chairman of the Massachusetts
State Board of Education, Vice President of the United States Strategic
Institute in Washington, D.C., a director of U.S. Surgical Corporation, a
director of Americans for Medical Progress, and a director of Mutual of
America Institutional Funds, Inc.
3
<PAGE>
Unless authority to vote for a nominee is withheld, the shares
represented by the enclosed proxy will be voted FOR the election of each of
the nominees. In the event that any nominee shall become unable or unwilling
to accept nomination or election, the shares represented by the enclosed proxy
will be voted for the election of a replacement nominee designated by the
Board of Directors or, if no such replacement nominee is designated, the
number of directors to be elected will be reduced. The Board has no reason to
believe that any nominee will be unable or unwilling to serve.
Directors are elected by a plurality of the votes cast. The holders of
Common Stock are entitled to one vote per share. The holders of Series B
Shares are entitled to 250 votes per share. The holders of Common Stock and
Series B Shares vote together as a single class.
THE BOARD OF DIRECTORS RECOMMENDS ELECTION OF REED R. PRIOR, GERALD S.J.
CASSIDY, KENNETH G. CONDON, NORMAN A. JACOBS, JEAN C. NICHOLS AND JOHN R.
SILBER AS DIRECTORS.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board Meetings
During 1997, the Board of Directors held seven meetings. All incumbent
directors attended more than 75% of the meetings of the Board and the Board
committees on which they served during the year.
Certain Committees of the Board
Following are the current members and functions of the Compensation and
Audit Committees of the Board of Directors. The Company has no standing
nominating committee.
The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company and
reviews general policy matters relating to compensation and benefits of
employees of the Company. The Compensation Committee currently consists of
Messrs. Cassidy and Jacobs. During 1997, the Compensation Committee met once.
The Audit Committee oversees the performance and reviews the scope of the
audit performed by the Company's independent auditors. The Audit Committee
also reviews audit plans and procedures, changes in accounting policies and
the use of the independent auditors for non-audit services. The Audit
Committee currently consists of Messrs. Cassidy, Condon and Jacobs. During
1997, the Audit Committee did not meet. The audit committee has met once in
1998.
Director Compensation
Fees. The Company pays its Directors who are not officers or employees
of the Company, or Trustees of Boston University, an annual retainer of
$10,000, plus $1,000 per meeting of the Board of Directors of the Company and
$500 per meeting of any committee of the Board of Directors which occurs on a
day other than a day on which a Board of Directors meeting is held.
Non-Employee Director Stock Options. Under the Company's 1992
Non-Employee Director Non-Qualified Stock Option Plan (the "Director Plan"), a
Director who is not an officer or employee of the Company or a Trustee of
Boston University (as long as Boston University owns greater than 5% of any
class of the Company's outstanding securities) on the date that an eligible
Director is first elected as a Director is eligible to receive option grants
to purchase 5,000 shares of Common Stock at an exercise price equal to the
fair market value of the Common Stock on the day the option is granted, except
that any such grant to a Director who was awarded options to purchase stock in
connection with his or her prior service as a Director of the Company is
reduced by the number of shares underlying the previous grants. At the
commencement of each subsequent 12-month period in which an eligible Director
4
<PAGE>
is elected to continue in office, the Director is granted an additional option
to purchase 1,000 shares of Common Stock at an exercise price equal to fair
market value of the Common Stock on the grant date. Each option has a term of
five years and becomes exercisable in full upon the recipient's completion
after the date of grant of a full term of office as a member of the Board of
Directors. If the term is not completed, or if the Director has failed to
attend at least 75% of the regularly called meetings during the term, the
option for that term is forfeited. Options cease to be exercisable 60 days
after the date the optionee ceases to be a Director for any reason other than
death or disability. Options cease to be exercisable 180 days after the date
the optionee ceases to be a Director by reason of disability or death. In no
event, however, is an option exercisable after the expiration date of the
option.
Other Arrangements
Pursuant to a shareholders agreement, holders of shares representing a
majority of the voting power of the Company's securities have agreed to vote
their shares for the election of Mr. Prior as a Director. In addition, these
shareholders have agreed to vote their shares for the election of three
additional nominees with experience in the pharmaceutical industry who would
be "outside" Directors if elected and who are reasonably acceptable to Mr.
Prior. No such persons have yet been nominated. See "Certain Transactions."
Dr. John R. Murphy, a former Director, has a consulting agreement with
the Company. See "Executive Compensation -- Employment and Consulting
Agreements; Change in Control Arrangements" and "Certain Transactions." On
July 29, 1997, the Company granted to Dr. Murphy options to purchase 80,675
shares of Common Stock at $.72 per share (options to purchase 61,675 shares
granted in exchange for outstanding options with exercise prices ranging from
$4.63 to $15.00, options to purchase 4,000 shares granted in exchange for
outstanding options granted under the Director Plan with exercise prices
ranging from $4.625 to $8.625, and a new grant of options to purchase 15,000
shares). These options were granted under the Company's Incentive Plan. On
December 16, 1997, the Company amended the grant of options to purchase 15,000
shares to accelerate the vesting of 2,500 of those options and to delete a
provision that those options will terminate on termination of Dr. Murphy's
consulting agreement with the Company.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their positions held as officers,
and their respective ages (as of March 24, 1998) are as follows:
Positions Held Officer of the
Name Age with the Company Company Since
- ---- --- ---------------- --------------
Reed R. Prior 46 Chairman of the Board of 1996
Directors, Chief Executive
Officer and Treasurer
Jean C. Nichols, Ph.D. 46 Director, President, Chief 1987
Technology Officer and
Secretary
Elizabeth C. Chen 34 Vice President of Business 1997
Development
Information concerning the business experience of Mr. Prior and Dr.
Nichols is provided above under "Election of Directors."
Elizabeth C. Chen -- Ms. Chen joined the Company in January 1997 as Vice
President of Business Development. In January 1998, Ms. Chen was formally
appointed to the additional position of President and Chief Executive Officer
of Marathon Biopharmaceuticals LLC, the contract service organization formed
from the Company's former operating division. Prior to joining the Company,
Ms. Chen had been Vice President - General Manager of ActiMed Laboratories,
Inc., a privately-held medical technology company. From 1992 to 1996, Ms.
5
<PAGE>
Chen was an independent consultant to a number of venture capital funds and a
variety of start-up biotech companies. From 1985 to 1992, Ms. Chen held a
number of positions in business development and marketing planning at Merck &
Company, Inc., Migliara/Kaplan and T. Rowe Price. Ms. Chen holds a B.A. in
Organizational Behavior from Yale University and an M.B.A. from The Wharton
School of the University of Pennsylvania.
Terms of Office; Relationships
The officers of the Company are elected annually by the Board of
Directors at a meeting held immediately following each annual meeting of
shareholders or as soon afterward as necessary and convenient in order to fill
vacancies or newly created offices. Each officer holds office until his or
her successor is duly elected and qualified or until his or her death,
resignation or removal, if earlier. Any officer or agent elected or appointed
by the Board of Directors may be removed by the Board of Directors whenever in
its judgment the best interests of the Company will be served thereby, but
such removal is to be without prejudice to the contractual rights, if any, of
any person so removed.
There are no family relationships among the executive officers and
Directors of the Company. There are no other arrangements or understandings
between any officer and any other person pursuant to which that officer was
selected.
EXECUTIVE COMPENSATION
The following table summarizes the compensation for the fiscal years
ended December 31, 1997, 1996, and 1995, of the chief executive officer of the
Company and all other persons who served as executive officers of the Company
during the last fiscal year (the "Named Executive Officers"), for services
rendered to the Company in all capacities.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------
LONG-TERM
COMPENSATION
OTHER Securities
NAME AND ANNUAL Underlying
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION Options #
- ------------------ ---- --------- -------- ------------ -----------
<S> <C> <C> <C> <C>
<C>
Reed R. Prior 1997 $350,000 - $104,808(2) 7,110,461
Chairman, Chief Executive 1996 55,417(3) $100,000(4) 17,845(5) 4,885,747
Officer and Treasurer
Jean C. Nichols, Ph.D. 1997 225,000 - 42,656(6) 2,116,525
President And Chief 1996 195,542(7) - - 692,752(8)
Technology Officer 1995 190,000 - - 18,000(9)
Elizabeth C. Chen 1997 168,438(10) - 46,265(11) 2,894,174
Vice President for Business
Development
</TABLE>
(1) Portions of Annual Compensation have been deferred under the Company's
Employee Savings Plan. These amounts are included in calculation of
"Salary" and "Bonus" as reflected in the table.
6
<PAGE>
(2) Amount includes payment of a housing allowance, including an income tax
allowance covering the tax due on reimbursement of such expenses, of
$74,432, relocation cost of $3,397 and accrued vacation payment of
$26,979.
(3) In fiscal year 1996, Mr. Prior was paid $55,417 base salary for his
partial year of service to the Company. His annual base salary was
$350,000.
(4) In fiscal year 1996, Mr. Prior was paid a $100,000 signing bonus.
(5) Amount includes payment of a housing allowance, including an income tax
allowance covering the tax due on reimbursement of such expenses, of
$17,845.
(6) Amount includes payment of accrued vacation of $42,656.
(7) In fiscal year 1996, Dr. Nichols was paid $195,542, which represents
$190,000 base salary through November 5, 1996, and $225,000 base salary
from November 6, 1996 through December 31, 1996.
(8) Represents an option granted on December 18, 1996 comprised of (i)
514,164 shares and (ii) 164,409 shares which were granted upon
cancellation of options for an equal number of shares. Also includes an
option for 14,179 shares which was canceled on December 18, 1996.
(9) Represents options which were canceled as of December 18, 1996, and
reissued at a lower price, such options are included in fiscal year
1996.
(10) In fiscal year 1997, Ms. Chen was paid $168,438 base salary for her
partial year of service to the Company. Her annual base salary was
$175,000.
(11) Amount includes payment of a housing allowance, including an income tax
allowance covering the tax due on reimbursement of such expenses, of
$46,265.
Option Grants
The following table sets out the material terms of each grant of a stock
option to a Named Executive Officer during the last fiscal year, including the
number of options granted, the exercise price and the expiration date, as well
as the percentage that the grant represents of total options granted to
employees during the fiscal year. In addition, in accordance with rules of
the SEC, the table discloses hypothetical gains that would be realized by the
holders of the options if the options were exercised on the expiration dates.
These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over the
full option term. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent on the future performance of the Common Stock and
overall market conditions.
7
<PAGE>
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS
-------------------------- POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----- ------------ ----------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Reed R. Prior 898,828 7.0% $1.31 12/18/06 $545,634 1,371,819
473,828 3.7% $1.00 12/18/06 278,431 695,063
2,105,981 16.4% $0.63 12/18/06 747,356 1,852,071
3,631,824 28.2% $0.28 12/18/06 517,913 1,372,786
Jean C. Nichols, Ph.D. 124,894 1.0% $1.31 12/18/06 75,817 190,617
135,293 1.0% $1.00 12/18/06 79,501 198,463
681,336 5.3% $0.63 12/18/06 241,788 599,190
1,175,002 9.1% $0.28 12/18/06 180,501 444,137
Elizabeth C. Chen 1,544,102 12.0% $0.72 07/29/07 698,205 1,769,388
495,525 3.9% $0.63 07/29/07 190,540 480,480
854,547 6.6% $0.28 07/29/07 142,485 356,723
</TABLE>
(1) All options were granted under the Company's Incentive Plan and have an
exercise price equal to the fair market value of the Company's Common
Stock on the date of grant. See "Employment and Consulting Agreements;
Change in Control Arrangements." All options vest either monthly or
quarterly over a three to five year period. Under the terms of the
Incentive Plan, upon a change in control or a potential change in control
(each as defined in the Incentive Plan), all options will be fully vested
and, unless otherwise determined by the committee administering the plan,
cashed out. In the event of a merger or consolidation, the options
terminate unless they are assumed by the merged or consolidated
corporation or that corporation issues substitute options; however, if
that corporation does not assume the options or issue substitute options,
the options immediately vest in full. Under the Incentive Plan,
optionees may settle any tax withholding obligations with the Company's
Common Stock. The committee that administers the Incentive Plan has
authority: to substitute new options for previously granted options
(including previously granted options having higher exercise prices); to
accelerate the vesting of options upon termination of the optionee's
employment due to death, disability or retirement; and generally to amend
the terms of any option, including the exercise price (so long as the
optionee consents to any amendment that impairs his or her rights).
Currently, the Company has 16 million shares of Common Stock for issuance
under the Incentive Plan. As of April 6, 1998, the Company had granted, net
of cancellations, options to purchase 19,618,577 shares of Common Stock, and
options to purchase 3,803,192 shares of Common Stock have been granted subject
to shareholder approval of a further amendment to the Incentive Plan to
increase the number of shares available for issuance under the plan. See
"Amendment of the 1992 Long Term Incentive Plan."
8
<PAGE>
Fiscal Year-End Option Values
No stock options were exercised by any of the Named Executive Officers in
fiscal year 1997. The following table sets forth the number of shares covered
by both exercisable and unexercisable stock options held by each of the Named
Executive Officers as of December 31, 1997, and the value of "in-the-money"
options, which represent the positive spread, if any, between the exercise
price of a stock option and the year-end price of Common Stock.
<TABLE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL YEAR
OPTIONS AT FISCAL YEAR END(#) END($)(1)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Reed R. Prior 3,498,852 8,497,356 - -
Jean C. Nichols, Ph.D. 1,141,981 1,708,117 - -
Elizabeth C. Chen 844,118 2,059,056 - -
</TABLE>
(1) Based on the last reported sale price of the Common Stock as of December
31, 1997 of $0.28.
Compensation Committee Report on Executive Compensation
The Compensation Committee is composed entirely of outside Directors.
The Compensation Committee approves stock option grants for key employees and
is responsible for developing and making recommendations to the Board of
Directors with respect to the Company's executive compensation policies. In
addition, the Compensation Committee, pursuant to authority delegated by the
Board, determines on an annual basis the compensation to be paid to the Chief
Executive Officer and to each of the other executive officers of the Company.
The objectives of the Company's executive compensation program are to:
- Provide a competitive compensation package that will attract and
retain superior talent and reward performance.
- Support the achievement of desired Company performance.
- Align the interests of executives with the long-term interests of
shareholders through award opportunities that can result in
ownership of Common Stock.
Executive Officer Compensation Program. The Company's executive officer
compensation program is comprised of base salary, annual bonus, long-term
incentive compensation in the form of stock options, and various benefits,
including health, life and disability plans, generally available to employees
of the Company.
In considering compensation of the Company's executives, one of the
factors the Compensation Committee takes into account is the anticipated tax
treatment to the Company of various components of compensation. In that
connection, the Company evaluates and considers the potential impact of
Section 162(m) of the Internal Revenue Code, which was added to the tax code
by the Omnibus Budget Reconciliation Act of 1993. Section 162(m) eliminates
the deductibility by the Company of certain executive compensation in excess
of $1 million per year per person. The Compensation Committee's policy is to
9
<PAGE>
take reasonable measures to preserve the full deductibility of executive
compensation, to the extent consistent with its other compensation objectives.
Base Salary. The Compensation Committee reviews base salary levels for
the Company's executive officers on an annual basis. Base salaries are set
competitively relative to companies in the biotechnology industry and other
comparable companies, which may not be the same companies included in the
Company's peer group for purposes of the Performance Graph below. In
determining salaries, the Compensation Committee also takes into consideration
individual experience and performance, and competitive compensation data
provided through independent sources. The Compensation Committee seeks to
compare the salaries paid by companies similar in size and stage of
development to the Company. Within this comparison group, the Company seeks
to make comparisons to executives at a comparable level of experience and at a
comparable level of responsibility and expected level of contribution to the
Company's performance. In setting base salaries, the Compensation Committee
also takes into account the intense competition among biotechnology companies
to attract talented personnel.
Annual Bonus. The Compensation Committee determines the amount of annual
cash bonuses for each executive based on achievements of the Company and
individual performance. In this way, the Company seeks to reward teamwork as
well as individual effort.
Long Term Incentive Compensation. The Company's Incentive Plan
authorizes a committee of not less than two disinterested Directors to grant
stock-based awards to executive officers. This plan is designed to align a
significant portion of the executive compensation program with shareholder
interests. The amounts of the awards are designed to reward past performance
and to create incentives to meet long-term objectives. Awards are made at a
level calculated to be competitive within the biotechnology industry, which
may not include the same companies included in the Company's peer group for
purposes of the Performance Graph below, as well as a broader group of
companies of comparable size and complexity. In determining the amount of
each grant, the Compensation Committee takes into account the number of shares
held by the executive prior to the grant. In December 1996, Mr. Prior and Dr.
Nichols were granted options to purchase 4,885,747 shares and 678,573 shares,
respectively, at an exercise price of $1.31, which represents the fair market
value on the date of grant. As described above, some of Dr. Nichols' options
reflect repriced options. On July 29, 1997, the Company granted to Ms. Chen
options to purchase 1,544,102 shares of Common Stock, at an exercise price of
$0.72 per share, which represents the fair market value on the date of grant.
The options awarded to Mr. Prior, Dr. Nichols, and Ms. Chen contain certain
anti-dilution provisions, as described below under "Employment and Consulting
Agreements; Change in Control Arrangements."
Benefits. The Company provides to the executive officers health, life
and disability benefits that are generally available to Company employees.
Chief Executive Officer Compensation. Mr. Prior was elected to the
positions of Chairman, Chief Executive Officer and Treasurer in November 1996.
At the time he was hired by the Company, Mr. Prior entered into an employment
agreement with the Company which was negotiated as a condition to his joining
the Company. Under the agreement, Mr. Prior received a signing bonus of
$100,000 and an annual salary of $350,000. Under Mr. Prior's employment
agreement, Mr. Prior is entitled to receive salary increases and bonuses as
determined by the Board of Directors or Compensation Committee. The
Compensation Committee did not award Mr. Prior a bonus for 1997.
As part of the compensation package negotiated with Mr. Prior at the time
of his hiring in November 1996, the Company granted a stock option to Mr.
Prior to purchase 4,885,747 shares at an exercise price of $1.31, which
represents the fair market value on the date of grant.
In connection with the hiring of Mr. Prior, the Company entered into an
agreement (the "Shareholders Agreement") with Boston University and the other
holders of the Series B Shares, and Mr. Prior. Pursuant to this agreement,
the holders of the Series B Shares have agreed to vote their respective shares
of the Company's capital stock to: (i) maintain the number of persons
10
<PAGE>
comprising the Board of Directors at nine; (ii) not to elect more than two
persons designated by or affiliated with Boston University to the Board of
Directors; (iii) to elect Mr. Prior as a Director; and (iv) to elect three
outside directors with experience in the pharmaceutical industry reasonably
acceptable to Mr. Prior. In addition, the Shareholders Agreement grants Mr.
Prior rights of co-sale in the event Boston University chooses to sell over
50% of its stock in the Company to a third party. Boston University also
agrees to pay its pro rata share of Mr. Prior's Asset Value Realization Bonus
(as defined in Mr. Prior's employment agreement) in the event that the Company
fails to pay such bonus. See "Certain Transactions."
The Compensation Committee determined that Mr. Prior's compensation
package is competitive with compensation paid to executive officers of similar
companies in the biotechnology industry who have similar experience to Mr.
Prior's experience. The Board of Directors engaged a professional recruiting
firm to assist in identifying and negotiating with suitable candidates for
Chief Executive Officer. In connection with this search, the Board of
Directors considered a pool of over ten candidates for the position.
Following identification of initial candidates, the Board narrowed its search
in recognition that difficulties that the Company had encountered demanded a
combination of skills in the biotechnology industry coupled with skills in
turn-around situations. Furthermore, the executive had to be immediately
available to assume the position of chief executive officer. The Compensation
Committee discussed financial arrangements with three candidates who
successfully passed the initial screening. Each candidate requested a
different combination of long and short-term incentives, but in the opinion of
the Compensation Committee, Mr. Prior's request as a whole was comparable to
the compensation package that the Company expected would be required to
recruit any one of the other candidates. Although no formal survey of
compensation was conducted for the industry, based on the knowledge of the
members of the Compensation Committee, and the previous advice of the
professional recruiter regarding other candidates, the compensation package
agreed to with Mr. Prior was reasonable. The signing bonus paid to Mr. Prior
is reasonable for the industry. In determining Mr. Prior's compensation, the
Compensation Committee also considered the factors described above under "Base
Salary."
Compensation Committee
Norman A. Jacobs, Chairman
Gerald S. J. Cassidy
11
<PAGE>
Performance Graph
The following graph compares the annual percentage change in cumulative
total shareholder return, assuming reinvestment of dividends, during a period
commencing on January 1, 1993, and ending December 31, 1997, of the Nasdaq
Stock Market Total Return Index and an index composed of the Company's peer
industry group, with the annual percentage change in the cumulative total
return of the Company's Common Stock for the same period. The index
representing the Company's peer industry group is the Nasdaq Pharmaceutical
Stocks Total Return Index, calculated and supplied by the Center for Research
in Security Prices. This index represents all companies trading on Nasdaq
under the Standard Industrial Classification (SIC) Code for pharmaceuticals,
including biotechnology companies. The stock performance on the graph is not
necessarily indicative of future price performance.
Comparison of Five-Tear Cumulative Total Returns
Performance Report for Seragen, Inc.
Prepared by the Center for Research in Security Prices
Produced on 4/10/98 including data to 12/31/97
Company Index:
Cusip Ticker Class SIC Exchange
- ----- ------ ----- --- --------
81747410 SRGN 2830 NASDAQ
Fiscal Year-end is 12/31/97
Market Index: Nasdaq Stock Market (US Companies)
Peer Index: Nasdaq Pharmaceuticals Stocks
SIC 2830-2839 US & Foreign
Date Company Index Market Index Peer Index
- ---- ------------- ------------ ----------
12/31/92 100.000 100.000 100.000
1/29/93 120.408 102.846 92.948
2/26/93 69.388 99.010 71.341
3/31/93 74.490 101.875 71.984
4/30/93 71.429 97.528 72.740
5/28/93 73.469 103.350 75.720
6/30/93 69.388 103.826 75.860
7/30/93 69.388 103.949 73.683
8/31/93 60.204 109.321 77.609
9/30/93 61.224 112.577 82.242
10/29/93 79.592 115.107 89.515
11/30/93 55.102 111.676 87.551
12/31/93 53.061 114.790 89.132
1/31/94 55.102 118.274 91.842
2/28/94 52.041 117.170 83.574
3/31/94 46.939 109.964 72.698
4/29/94 52.551 108.537 69.773
5/31/94 44.898 108.801 68.831
6/30/94 45.918 104.822 63.455
7/29/94 51.020 106.972 65.375
8/31/94 57.653 113.792 72.469
9/30/94 51.020 113.501 71.469
10/31/94 44.898 115.732 69.026
11/30/94 48.980 111.892 69.331
12/30/94 38.776 112.206 67.084
1/31/95 38.776 112.835 70.798
2/28/95 38.776 118.802 73.472
3/31/95 47.704 122.325 72.422
4/28/95 56.122 126.177 74.456
5/31/95 52.041 129.432 75.395
6/30/95 51.020 139.921 84.228
7/31/95 48.980 150.207 91.480
8/31/95 54.082 153.252 102.300
9/29/95 54.082 156.776 105.244
10/31/95 47.959 155.878 101.302
11/30/95 43.878 159.538 106.385
12/29/95 33.673 158.688 122.722
1/31/96 31.633 159.470 133.452
2/29/96 28.571 165.539 130.874
3/29/96 41.837 166.088 127.685
4/30/96 33.673 179.868 134.277
5/31/96 39.286 188.126 138.823
6/28/96 35.714 179.646 124.029
7/31/96 30.612 163.650 110.568
8/30/96 26.531 172.818 118.580
9/30/96 21.429 186.037 126.865
10/31/96 16.582 183.982 121.139
11/29/96 12.245 195.356 119.411
12/31/96 8.163 195.180 123.079
1/31/97 11.224 209.051 133.429
2/28/97 9.694 197.495 134.291
3/31/97 8.163 184.602 116.890
4/30/97 10.204 190.373 109.961
5/30/97 12.245 211.956 126.532
6/30/97 8.163 218.441 126.189
7/31/97 5.357 241.500 129.781
8/29/97 7.908 241.132 128.239
9/30/97 5.102 255.398 141.552
10/31/97 4.592 242.178 134.342
11/28/97 4.245 243.390 130.164
12/31/97 2.286 239.567 127.087
*The index level for all series was set to 100.0 on 12/31/92
12
<PAGE>
Employment and Consulting Agreements; Change in Control Arrangements
Employment Agreement with Reed R. Prior. On November 6, 1996, the
Company entered into an employment agreement with Reed R. Prior pursuant to
which Mr. Prior is serving as Chief Executive Officer and Treasurer of the
Company. Mr. Prior's initial annual base salary is $350,000. Mr. Prior was
reimbursed for his moving expenses in relocating to an apartment in the Boston
area. In addition, the Company pays Mr. Prior up to $4,500 per month as
reimbursement for rental of an apartment, living expenses and weekly commuting
between the Company's offices and his permanent residence. The Company will
reimburse Mr. Prior for any additional taxes that he incurs as a result of the
Company's reimbursement of living, commuting or moving expenses. Mr. Prior is
entitled to participate in the bonus and benefit programs that are available
to the Company's employees, and is entitled to health, life and disability
insurance.
Pursuant to Mr. Prior's employment agreement, in December 1996, the
Company issued to Mr. Prior an option to purchase 4,885,747 shares of Common
Stock, which number of shares was equal to 8.5% of the Company's Common Stock
outstanding on the grant date on a fully diluted basis, at a price of $1.31
per share, to vest in 48 monthly increments during the term of the employment
agreement. The Company has the obligation to register all of the shares
underlying options for resale.
The agreement also provides for anti-dilution protections which, among
other things, require the Company to issue additional options to Mr. Prior as
necessary to cause the number of shares underlying his stock options to equal
but not exceed 8.5% of the Company's outstanding Common Stock on a fully
diluted basis. These anti-dilution provisions will be applicable until the
Company sells a cumulative total of $20,000,000 in equity or convertible
securities to non-affiliated persons. Pursuant to these anti-dilution
provisions, on March 31, 1997, June 30, 1997, September 30, 1997, December 31,
1997, and March 31, 1998, the Company granted to Mr. Prior options to purchase
898,828, 473,828, 2,105,981, 3,631,824, and 0 shares of Common Stock,
respectively. The Company will issue additional options to Mr. Prior on
June 30, 1998, as a result of conversion of Series D Shares into Common Stock
and any other issuances of Common Stock occurring before June 30, 1998. The
number of options to be granted on June 30, 1998 is not determinable at this
time, although the number of options granted may be significant.
Under the agreement, Mr. Prior is entitled to receive payments in the
event of certain transactions that may be deemed a "change in ownership" of
the Company. A "change in ownership" includes: (i) any acquisition of all or
substantially all of the Company's equity securities or operating assets,
whether by way of merger, sale of assets, stock purchase, tender offer or
otherwise; or (ii) the sale or out-licensing of the majority (in value) of the
Company's technology assets. In this event, Mr. Prior is entitled to receive
an "Asset Value Realization Bonus" equal to 8.5% of the net proceeds from the
change in ownership transaction. The amount that the Company must pay Mr.
Prior will be reduced by the amount of gain recognized by Mr. Prior as a
result of his sale of Common Stock of the Company acquired as a result of
exercise of options (or deemed sales in certain circumstances when he is able
to, but does not, sell). The Company's sale of its operating facility to
Boston University did not constitute a "change in ownership" for purposes of
Mr. Prior's agreement.
The agreement with Mr. Prior continues until terminated by either party
on written notice of not less than 30 days. The agreement may be terminated
by the Company with or without "just cause." In the event the Company
terminates Mr. Prior's employment other than for "just cause," or in the event
that Mr. Prior terminates his employment for "good reason," the Company is
required to pay Mr. Prior as severance a lump sum payment equal to one year's
salary based on the annual rate in effect on the date of termination. Upon
such termination, Mr. Prior will also be entitled to accelerated vesting of
his stock options. "Just cause," as defined in the agreement, consists of
fraud, a felony conviction, or a breach of a material term of the agreement or
willful failure to perform material duties, which default is not cured
following written notice (all as defined in the agreement). "Good reason," as
defined in the agreement, includes: (i) the refusal by the Board of Directors
of a bona fide financing offer; (ii) refusal of the Board of Directors to
approve major spending cuts or operational changes; (iii) breach by the
Company of a material term under the employment agreement; (iv) a "change in
13
<PAGE>
ownership" as defined in Mr. Prior's employment agreement; or (v) a "change in
control" as defined under the Incentive Plan. Mr. Prior is entitled to
receive a lump sum payment equal to one year's salary in the event of death or
of physical or mental disability of a nature sufficient to result in his
termination by the Board. Pursuant to the terms of the agreement, the Company
established an irrevocable letter of credit in an amount equal to $175,000,
naming Mr. Prior as the beneficiary, as partial security for the Company's
severance obligations. The agreement also includes non-competition,
confidentiality and indemnification provisions.
Mr. Prior also is party to the Shareholders Agreement. See "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
Employment Agreement with Jean C. Nichols. On November 6, 1996, the
Company entered into an employment agreement with Jean C. Nichols, Ph.D.,
pursuant to which Dr. Nichols was promoted to and serves as President and
Chief Technology Officer of the Company. The agreement was amended in certain
respects and restated as of September 22, 1997. Dr. Nichols' agreement also
provides that she serve as a Director of the Company. Dr. Nichols' annual
base salary is $225,000. Dr. Nichols is entitled to participate in the bonus
and benefit programs that are available to the Company's employees, and is
entitled to health, life and disability insurance.
Pursuant to Dr. Nichols' employment agreement, in December 1996, the
Company issued to Dr. Nichols an option to purchase 678,573 shares of Common
Stock, which number of shares was equal to 1.275% of the Company's Common
Stock outstanding on the grant date less 54,000 shares covered by options
previously granted to Dr. Nichols, at a price of $1.31 per share, to vest in
36 monthly increments during the term of the agreement, and canceled options
for 164,409 shares of Common Stock. The Company has the obligation to
register all of the shares underlying options for resale.
On September 30, 1997, the Company issued additional options to
Dr. Nichols sufficient to bring her total options to a number giving her the
right to purchase Common Stock equal to 2.75% of the Company's Common Stock,
on a fully diluted basis.
The agreement as amended provides for anti-dilution protections which,
among other things, require the Company to issue additional options as
necessary to cause the number of shares underlying her stock options to equal
but not exceed 2.75% of the Company's outstanding Common Stock on a fully
diluted basis. These anti-dilution provisions will be applicable until the
Company sells a cumulative total of $20,000,000 in equity or convertible
securities to non-affiliated persons. Pursuant to these anti-dilution
provisions and the amendment of Dr. Nichols' employment agreement increasing
her option percentage from 1.275% to 2.75%, on March 31, 1997, June 30, 1997,
September 30, 1997, December 31, 1997, and March 31, 1998, the Company granted
to Dr. Nichols options to purchase 124,894, 135,293, 681,336, 1,175,002, and
998,698 shares of Common Stock, respectively. The Company will issue
additional options to Dr. Nichols on June 30 1998 as a result of conversion of
Series D Shares into Common Stock and any other issuances of Common Stock
occurring before June 30, 1998. The number of options to be granted on
June 30, 1998 is not determinable at this time, although the number of options
granted may be significant.
Under the agreement, Dr. Nichols is entitled to receive payments in the
event of certain transactions that may be deemed a "change in ownership" of
the Company. A "change in ownership" includes: (i) any acquisition of all or
substantially all of the Company's equity securities or operating assets,
whether by way of merger, sale of assets, stock purchase, tender offer or
otherwise; or (ii) the sale or out-licensing of the majority (in value) of the
Company's technology assets. In the event of a "change in ownership,"
Dr. Nichols is entitled to receive an "Asset Value Realization Bonus" equal to
2.75% of the net proceeds from the change in ownership transaction. The
amount that the Company must pay Dr. Nichols will be reduced by the amount of
gain recognized by Dr. Nichols as a result of her sale of Common Stock of the
Company acquired as a result of exercise of options (or deemed sales in
certain circumstances when she is able to, but does not, sell). In the event
of a change in ownership after which the purchaser makes Dr. Nichols a bona
fide employment offer, Dr. Nichols' Asset Value Realization Bonus will be
14
<PAGE>
payable to her as follows: 25% on the closing of the change in ownership, 25%
two months after closing, 25% four months after closing, and 25% six months
after closing, the obligation of the Company to make each such payment in
respect of the Asset Value Realization Bonus being subject to Dr. Nichols'
continued employment with the purchaser at the time the payment falls due. If
the purchaser terminates Dr. Nichols' employment without "just cause" or if
Dr. Nichols terminates her employment with the purchaser for "good reason" (as
defined below, except that a change in ownership or a change in control will
not constitute good reason for this purpose and the termination of
Dr. Nichols' employment by agreement, death, or disability will constitute
good reason for this purpose), Dr. Nichols will be entitled to receive the
entire amount of her Asset Value Realization Bonus as a lump sum payment. The
Company's sale of its operating facility to Boston University did not
constitute a "change in ownership" for purposes of Dr. Nichols' agreement.
The Company's agreement with Dr. Nichols continues until terminated by
either party on written notice of not less than 30 days. The agreement may be
terminated by the Company with or without just cause. In the event the
Company terminates Dr. Nichols' employment other than for just cause, or in
the event that Dr. Nichols terminates her employment for good reason, the
Company is required to pay Dr. Nichols as severance a lump sum payment equal
to one year's salary based on the annual rate in effect on the date of
termination. Upon such termination, the Company will also provide Dr. Nichols
with accelerated vesting of her stock options. "Just cause," as defined in
the agreement, consists of fraud, a felony conviction, or a breach of a
material term of the agreement or willful failure to perform material duties
which default is not cured following written notice (all as defined in the
agreement). "Good reason," as defined in the agreement, includes: (i) the
failure of Dr. Nichols to continue as a member of the Board of Directors,
unless Dr. Nichols resigns from that position; (ii) an act of bad faith by the
Company resulting in Dr. Nichols' resignation from the Company; (iii) breach
by the Company of a material term under the employment agreement; (iv) a
"change in ownership" as defined in Dr. Nichols' employment agreement; or (v)
a "change in control" as defined under the Incentive Plan. Dr. Nichols is
entitled to receive one year's salary in the event of death or disability.
The agreement also includes non-competition, confidentiality and
indemnification provisions.
Employment Agreement with Elizabeth C. Chen. On January 15, 1997, the
Company entered into an employment agreement with Elizabeth C. Chen, pursuant
to which Ms. Chen was appointed as Vice President of Business Development of
the Company. Ms. Chen's annual base salary is $175,000. In addition, the
Company reimburses Ms. Chen for all reasonable costs incurred by her in
obtaining accommodations in the Boston area and for weekly commuting between
the Company's offices and her permanent residence. The Company will reimburse
Ms. Chen for any additional taxes that she incurs as a result of the Company's
reimbursement of living or commuting expenses. Ms. Chen is entitled to
participate in the bonus and benefit programs that are available to the
Company's employees, and is entitled to health, life and disability insurance.
Pursuant to Ms. Chen's employment agreement, in July 1997, the Company
issued to Ms. Chen an option to purchase 1,544,102 shares of Common Stock,
which number of shares was equal to 2.0% of the Company's Common Stock
outstanding on the grant date, at a price of $0.72 per share, to vest in 48
monthly increments during the term of the agreement. The Company has the
obligation to register all of the shares underlying options for resale.
The agreement also provides for anti-dilution protections which, among
other things, require the Company to issue additional options as necessary to
cause the number of shares underlying her stock options to equal but not
exceed 2.0% of the Company's outstanding Common Stock on a fully diluted
basis. These anti-dilution provisions will be applicable until the Company
sells a cumulative total of $20,000,000 in equity or convertible securities to
non-affiliated persons. Pursuant to these anti-dilution provisions, on
September 30, 1997, December 31, 1997, and March 31, 1998, the Company granted
to Ms. Chen options to purchase 495,525, 854,547, and 0 shares of Common
Stock, respectively. The Company will issue additional options to Ms. Chen on
June 30, 1998, as a result of conversion of Series D Shares into Common Stock
and any other issuances of Common Stock occurring before June 30, 1998. The
number of options to be granted on June 30, 1998 is not determinable at this
time, although the number of options granted may be significant.
15
<PAGE>
Under the agreement, Ms. Chen is entitled to receive payments in the
event of certain transactions that may be deemed a "change in ownership" of
the Company. A "change in ownership" includes: (i) any acquisition of all or
substantially all of the Company's equity securities or operating assets,
whether by way of merger, sale of assets, stock purchase, tender offer or
otherwise; or (ii) the sale or out-licensing of the majority (in value) of the
Company's technology assets. In the event of a "change in ownership,"
Ms. Chen is entitled to receive an "Asset Value Realization Bonus" equal to
2.0% of the net proceeds from the change in ownership transaction. The amount
that the Company must pay Ms. Chen will be reduced by the amount of gain
recognized by Ms. Chen as a result of her sale of Common Stock of the Company
acquired as a result of exercise of options (or deemed sales in certain
circumstances when she is able to, but does not, sell). The Company's sale of
its operating facility to Boston University did not constitute a "change in
ownership" for purposes of Ms. Chen's agreement.
The Company's agreement with Ms. Chen continues until terminated by
either party on written notice of not less than 30 days. The agreement may be
terminated by the Company with or without just cause. In the event the
Company terminates Ms. Chen's employment other than for just cause, or in the
event that Ms. Chen terminates her employment for good reason, the Company is
required to pay Ms. Chen as severance a lump sum payment equal to one year's
salary based on the annual rate in effect on the date of termination and any
remaining obligations for accommodations in the Boston area. Upon such
termination, the Company will also provide Ms. Chen with accelerated vesting
of her stock options. The Company also will continue to provide Ms. Chen and
her family with the same group health plan benefits coverage provided to them
prior to her termination for the maximum period set forth in the continuation
coverage requirements under COBRA, up to a maximum of 12 months following
termination.
"Just cause," as defined in the agreement, consists of fraud, a felony
conviction, or a breach of a material term of the agreement or willful failure
to perform material duties which default is not cured following written notice
(all as defined in the agreement). "Good reason," as defined in the
agreement, includes: (i) an act of bad faith by the Company resulting in
Ms. Chen's resignation from the Company; (ii) breach by the Company of a
material term under the employment agreement; (iii) a "change in ownership" as
defined in Ms. Chen's employment agreement; (iv) a "change in control" as
defined under the Incentive Plan; (v) insolvency of the Company; or (vi) the
Company's failure to grant Ms. Chen options within the time periods specified
in the employment agreement. The agreement also includes non-competition,
confidentiality and indemnification provisions.
Chen Consulting Arrangement with Marathon. The Company currently
provides Elizabeth Chen's services to Marathon as the president and chief
executive officer of Marathon. During the term of this consulting
arrangement, Ms. Chen will devote 75% of her professional time to managing
Marathon and 25% of her professional time to the Company. Marathon will
reimburse the Company for an allocable portion of Ms. Chen's salary and other
cash compensation.
Option Plans. Under the Company's Incentive Plan, upon a change in
control or a potential change in control, the vesting of options granted to
the Named Executive Officers under the Incentive Plan will be accelerated, and
the value of the options will, unless otherwise determined by the Compensation
Committee, be cashed out at a price to be determined at the time of the cash
out. Specifically, in the event of (i) a Change in Control, or (ii) a
Potential Change in Control but only if and to the extent determined by the
Board of Directors or the Compensation Committee: (a) all SARs outstanding for
at least six months and all Stock Options will become fully exercisable and
vested; (b) all limitations applicable to any award of Restricted Stock,
Deferred Stock, or an Other Stock-Based Award will lapse and the shares to
which the award relates will be deemed fully vested; and (c) unless the
Compensation Committee determines otherwise prior to a Change in Control, the
value of all vested awards under the Incentive Plan will be cashed out on the
basis of the Change in Control Price, which generally is defined as the
highest price per share of Common Stock paid in any transaction during the
60-day period preceding the Change in Control.
A "Change in Control" generally is deemed to occur if: (i) any person or
group (other than Boston University acquires, directly or indirectly,
16
<PAGE>
beneficial ownership of 20% or more of the combined voting power of the
Company's then-outstanding securities; (ii) within any 24-month period there
is a change in a majority of the Company's Directors that is not approved by
the incumbent Directors; or (iii) a transaction occurs requiring shareholder
approval for the acquisition of the Company by another entity through asset
purchase, merger, or otherwise.
A "Potential Change in Control" generally is deemed to occur if: (i)
shareholders approve an agreement by the Company, the consummation of which
would result in a Change in Control; or (ii) any person or group (other than
Boston University acquires, directly or indirectly, beneficial ownership of 5%
or more of the combined voting power of the Company's then-outstanding
securities and the Board of Directors adopts a resolution declaring that a
Potential Change in Control has occurred.
Although the exact amount to be paid by the Company cannot be determined,
such amount could be in excess of $100,000 for each of the Named Executive
Officers.
Agreements with Others. The Company has a consulting agreement with
Dr. John R. Murphy, a former Director of the Company. Pursuant to this
agreement, Dr. Murphy was paid a consulting fee of $50,000 during the fiscal
year ended 1997 to provide consulting services on biotechnology matters. The
Company has extended this agreement to December 31, 1998 at a rate of $50,000
per year. The Company may elect to impose a two year non-competition period
following the termination or cancellation of the agreement, provided the
Company compensates Dr. Murphy during such period at one-half the rate of
compensation in effect at the time the termination or cancellation occurs.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during fiscal year 1997 were
Messrs. Cassidy and Jacobs.
In June 1995, the Company finalized three separate lines of credit, which
were guaranteed by three different parties, for a total of $23.8 million in
guaranteed bank financing for the Company. The Company issued warrants to the
guarantors for the purchase of 2,776,664 shares of Common Stock at an exercise
price of $4.75 per share. These warrants were immediately exercisable and
expire in 2005. Boston University, the Company's majority shareholder, was
the lead guarantor, providing a guaranty of $11.8 million in exchange for a
warrant to purchase 1,376,666 shares of Common Stock. Gerald S.J. Cassidy, a
member of the Company's Board of Directors, provided a guaranty of $2 million
in exchange for a warrant to purchase 233,332 shares of Common Stock. Leon C.
Hirsch and Turi Josefsen provided guaranties of the remaining $10 million in
exchange for warrants to purchase an aggregate of 1,166,666 shares of Common
Stock (see "Common Stock Ownership of Certain Beneficial Owners and
Management").
In July 1996, the Company restructured its arrangement with the
guarantors of the Company's $23.8 million loan financing to release the
Company from its obligations to the bank lenders. Under the restructured
arrangement, the guarantors assumed the Company's obligations to the banks,
and in consideration the Company issued Series B preferred stock ("Series B
Shares") and warrants to the guarantors. The Company issued an aggregate of
23,800 Series B Shares. Each Series B Share is convertible at any time at the
investor's option into a number of shares of Common Stock determined by
dividing $1,000 by the average of the closing sale prices of the Common Stock
as reported on Nasdaq for the ten consecutive trading days immediately
preceding the conversion date. The holders of Series B Shares are entitled to
receive a cumulative dividend payable in arrears in cash, quarterly on the
last day of each calendar quarter, commencing on September 30, 1996 at an
annual rate equal to the prime rate plus 1-1/2% through June 1999 and at an
increasing percentage rate thereafter up to a maximum rate of the prime rate
plus 5% from and after July 1, 2003. The holders of Series B Shares are
entitled to vote on any matters submitted to the Company's shareholders. Each
Series B Share is entitled to a vote equivalent to 250 shares of Common Stock.
Each Series B Share has a liquidation preference equal to $1,000 plus an
amount equal to any accrued and unpaid dividends from the date of issuance of
the Series B Shares. At any time, with the approval of the Company's Board of
Directors, Audit Committee or comparable body, the Company may redeem any or
17
<PAGE>
all of the Series B Shares for cash. The redemption price per Series B Share
is $1,000 plus an amount equal to any accrued and unpaid dividends from the
date of issuance of the Series B Shares. The recipients of the Series B
Shares also were issued warrants to purchase a total of 5,950,000 shares of
Common Stock (warrants for the purchase of 250,000 shares of Common Stock for
every $1,000,000 of Series B Shares purchased) at an exercise price of $4.00
per share. The warrants are exercisable commencing on January 1, 1997, and
expire on July 1, 2006. In addition, each holder of Series B Shares is
entitled to receive additional warrants pursuant to certain anti-dilution
provisions. Each such additional warrant will have an exercise price of $4.00
per share, will be exercisable commencing on January 1, 1997, and will expire
on July 1, 2006 (see "Common Stock Ownership of Certain Beneficial Owners and
Management").
In connection with the issuance of the Series B Shares, the Company
formed Seragen Technology, Inc. ("STI"). The Company transferred all of its
existing and future United States patents and patent applications (the
"Patents") to STI in exchange for 214,200 shares of STI's Class A Common Stock
and 23,800 shares of STI's Class B Common Stock (the "Class B Shares"). Each
share of STI Class A Common Stock is owned by the Company. The Company has
transferred the Class B Shares to the holders of the Series B Shares.
STI has no operations, and its sole asset is the Patents. Its authorized
capital stock consists of 214,200 shares of Class A Common Stock and 23,800
shares of Class B Common Stock, all of which, as described in the paragraph
above, is issued and outstanding. Each share of STI Class A Common Stock and
STI Class B Common Stock is entitled to one vote on all matters submitted to a
vote of STI shareholders, voting together as a single class.
Simultaneously with the contribution of the Patents to STI, the Company
entered into a license agreement with STI pursuant to which STI granted to the
Company an irrevocable worldwide exclusive license with respect to the Patents
(the "Irrevocable License Agreement"). Under the terms of the Irrevocable
License Agreement, the Company is obligated to pay quarterly royalties to STI
in an amount equal to the amount of any dividend that the holders of the
Series B Shares are entitled to receive but have not received by the royalty
due date (which is one day after each quarterly dividend payment date for the
Series B Shares). The shares of STI Class B Common Stock, in turn, are
entitled to receive cumulative dividends equal to any royalty payable to STI
under the Irrevocable License Agreement.
STI has executed a collateral assignment of the Patents in favor of the
holders of the Class B Shares, which is being held by an escrow agent. The
escrow agent is required to deliver the collateral assignment to the holders
of the Class B Shares if dividends on the Class B Shares are in arrears and
STI fails for 60 days, after the receipt of notice from the holders of the
Class B Shares, to pay the dividends due. Likewise, the holders of Class B
Shares have executed a reassignment of the Patents to STI, which also is being
held by the escrow agent. The escrow agent is obligated to deliver the
reassignment of the Patents to STI upon the redemption by STI of all of the
Class B Shares. The Class B Shares are required to be redeemed upon the
redemption or conversion of Series B Shares in a number equal to the number of
Series B Shares redeemed or converted. The collateral assignment of the
Patents secures only STI's dividend payment obligations on the Class B Shares
and does not secure any other amounts (e.g., the liquidation preference of the
Series B Shares). The collateral assignment of the Patents has no effect
until the escrow agent is instructed to deliver it to the holders of the Class
B Shares.
The Company has not paid the cash dividends due December 31, 1996,
March 31, 1997, June 30, 1997, September 30, 1997, December 31, 1997, and
March 31, 1998, on the Series B Shares, nor has the Company made the royalty
payments due to STI on January 1, 1997, April 1, 1997, July 1, 1997,
October 1, 1997, January 1, 1998, and April 1, 1998. Correspondingly, STI has
not paid the dividends due January 1, 1997, April 1, 1997, July 1, 1997,
October 1, 1997, January 1, 1998, and April 1, 1998, on the Class B Shares.
The Company does not expect STI to make any dividend payments due on the Class
B Shares in 1998.
Delivery of notice by the agent for the holders of the Class B Shares to
the escrow agent in accordance with the collateral assignment of the Patents
is the only condition to delivery of the collateral assignment of the Patents
to the holders of the Class B Shares. If the holders of the Class B Shares
were to deliver this notice to the escrow agent, they would thereafter have
the right to foreclose on the Patents, subject to the Company's rights under
18
<PAGE>
the Irrevocable License Agreement. The holders of the Series B Shares have
not yet delivered a notice of default to the escrow agent, although they have
the current right to do so.
On November 6, 1996, the Company entered into a shareholders agreement
(the "Shareholders Agreement") with Boston University, Leon C. Hirsch, Turi
Josefsen, Gerald S.J. Cassidy and Loretta P. Cassidy (collectively, the
"Shareholders") and Reed R. Prior with respect to the election of directors
and other matters. Pursuant to this agreement, the Shareholders have agreed
to vote their respective shares to: (i) maintain the number of persons
comprising the Board of Directors at nine (the Shareholders and Mr. Prior have
waived this requirement until such time as it is possible to attract
additional candidates with sufficient experience and stature in the
pharmaceutical industry to make their election desirable); (ii) not to elect
more than two persons designated by or affiliated with Boston University to
the Board of Directors; (iii) to elect Mr. Prior as a Director; and (iv) to
elect three outside directors with experience in the pharmaceutical industry
reasonably acceptable to Mr. Prior. In addition, the Shareholders Agreement
grants Mr. Prior rights of co-sale in the event Boston University chooses to
sell over 50% of its stock in the Company to a third party. Boston University
also agrees to pay its pro-rata share of Mr. Prior's Asset Value Realization
Bonus (as defined in Mr. Prior's employment agreement) in the event that the
Company fails to pay such bonus.
CERTAIN TRANSACTIONS
In August 1987, Boston University, Nycomed (formerly Nyegaard & Co. AS)
and the Company entered into a purchase and sale agreement pursuant to which
Boston University, which then owned approximately 6% of the Company's
outstanding Common Stock, acquired from Nycomed 1,691,761 shares of the
Company's Common Stock, which represented all of Nycomed's ownership interest
in the Company and approximately 71% of the then outstanding Common Stock of
the Company. As part of this transaction, Boston University acquired all of
Nycomed's rights to technology, inventions, patents and other proprietary
rights (the "Technology") which were primarily related to or useful in the
development of the Company's fusion protein products and also acquired the
world-wide exclusive rights to manufacture, use, sell and market products (the
"Products") derived from or including the Technology (the "Technology and
Marketing Rights"). In exchange for the acquisition of these assets, Boston
University paid $25,000,000 to Nycomed and assumed Nycomed's obligations to
the Company, including a commitment to finance and carry out the Company's
research and development program and an obligation to guaranty the Company's
leases at its facilities in Hopkinton, Massachusetts. In addition, pursuant to
the agreement, the Company is obligated to pay Nycomed a continuing royalty
with respect to sales of the Products and to give Nycomed rights of first
negotiation to market the Products in the territory covered by the agreement.
In connection with this agreement, Nycomed and Boston University entered into
a Noncompetition and Confidentiality Agreement under which Nycomed agreed to
maintain in confidence proprietary information and intellectual property in
connection with the Company's business and not to compete with the Company's
business. The Noncompetition and Confidentiality Agreement expired in August
1992. The Company believes that the expiration of this Agreement will not
materially adversely affect the Company's business.
In connection with the sale of stock to Boston University, Nycomed also
transferred to Boston University a debt owed to Nycomed by the Company in the
principal amount of $1,050,000. In 1988, Boston University converted this debt
plus accrued interest thereon into 95,488 shares of Common Stock, based on a
conversion price equal to $15.00 per share of Common Stock.
In connection with Boston University's acquisition of the majority
interest in the Company in 1987, Boston University guaranteed the Company's
obligations under a $10,000,000 line of credit with The First National Bank of
Chicago (the "Bank") to provide short-term operating funds for the Company
(the "Guaranty"). Boston University pledged certain collateral to the Bank to
secure the Guaranty. In 1992, the Company repaid the line of credit,
resulting in a termination of the Guaranty. In return for providing the
Guaranty, the Company issued to Boston University a warrant (the "Bank
Warrant") that was exercisable to purchase up to 500,000 shares of Common
Stock, at an exercise price of $11.80 per share, at any time prior to
January 28, 1993. The Bank Warrant expired unexercised.
19
<PAGE>
In January 1988, pursuant to a Technology Purchase and Royalty Agreement
(the "Technology Agreement"), which was contemplated at the time Boston
University acquired the Technology from Nycomed, Boston University transferred
to the Company the Technology and Marketing Rights obtained from Nycomed in
exchange for a continuing royalty on sales of the Products until the
expiration of all patents. Thereafter, the Company agreed to pay Boston
University a reduced royalty based on a percentage of net sales for a period
of 10 years after the expiration of such patents. The Technology Agreement
provides Boston University with a security interest in the Technology and
Marketing Rights to secure the Company's compliance with the terms of the
agreement and also provides that upon a default by the Company in the terms of
the Technology Agreement, the agreement will terminate and the Technology and
Marketing Rights will revert to Boston University. The Technology Agreement
provides for default in the event that (i) the Company defaults in the
performance of any material term of that agreement, (ii) the Company defaults
in the performance of a related financing agreement (which since has been
terminated) or in any indebtedness guaranteed by Boston University (none of
which currently exists), (iii) the Company ceases to continue as a going
concern, or (iv) the Company is placed under receivership.
As of April 6, 1998, Boston University beneficially owned 11,659,702
shares (or approximately 43%) of the Company's outstanding Common Stock. In
addition, Boston University beneficially owns a stock option to purchase
15,000 shares, a warrant to purchase 1,376,666 shares, a warrant to purchase
10,011,181 shares subject to anti-dilution provisions (as defined), shares
issuable on conversion of 11,800 Series B Shares and shares issuable on
conversion of 5,000 Series C Shares. As of April 6, 1998, if all outstanding
securities were converted to Common Stock, Boston University would own
48,168,932 shares of Common Stock.
Dr. John R. Murphy, a former director of the Company, has a consulting
agreement with the Company pursuant to which he received consulting fees of
$50,000 in the fiscal year ended 1997. The Company has extended this
agreement through December 31, 1998, at a rate of $50,000 per year.
In June 1995, the Company finalized three separate lines of credit for a
total of $23.8 million in guaranteed bank financing for the Company. The
lines of credit were guaranteed in various amounts by Boston University, Leon
C. Hirsch, Turi Josefsen, and Gerald S.J. Cassidy, in exchange for which the
Company provided warrants to the guarantors. For a description of this
transaction, see "Executive Compensation -- Compensation Committee Interlocks
and Insider Participation."
In July 1996, the Company restructured its arrangement with the
guarantors of the Company's $23.8 million loan financing to release the
Company of its liability to the bank lenders. Under the restructured
arrangement, the guarantors assumed the Company's obligations to the banks,
and in consideration the Company issued Series B Shares and warrants to the
guarantors. For a description of this transaction, see "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
In September 1996, the Company raised $5 million through the sale of
5,000 Series C Shares in a private placement with Boston University. The
Series C Shares were convertible at the option of the holder into shares of
the Company's Common Stock at a conversion price equal to the lesser of $2.75
or 73 percent of the average closing bid prices for a five-day period prior to
the conversion date, up to a maximum of 3,360,625 shares of Common Stock. Any
shares the investor was unable to convert due to this limitation could be
exchanged for $1,150 per share in cash. Terms of the Series C Shares also
provided for 8% cumulative dividends payable in shares of Common Stock at the
time of each conversion. Each Series C Share had a liquidation preference
equal to $1,000 plus an amount equal to any accrued and unpaid dividends from
the date of issuance of the Series C Shares in the event of liquidation,
dissolution or winding up of the Company. The holders of the Series C shares
were not entitled to vote, separately as a series or otherwise, on any matter
submitted to a vote of the Company's shareholders.
Effective March 30, 1998, 1,060 Series C Shares automatically converted,
in accordance with the terms of the Series C preferred stock, into 3,360,625
shares of the Company's common stock and 3,940 Series C Shares were, as
required by the terms of the Series C preferred stock, purchased by the
Company for an aggregate purchase price of $4,530,461. Following these
20
<PAGE>
transactions, no Series C Shares remained outstanding. The purchase price for
the Series C Shares purchased by the Company has not yet been paid by the
Company, nor has Boston University, the holder of the Series C Shares,
demanded payment of the purchase price. As a result, the Company currently is
indebted to Boston University for this amount.
On November 6, 1996, the Company entered into the Shareholders Agreement
with the Shareholders and Reed R. Prior. For a description of the
Shareholders Agreement, see "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation."
As of February 14, 1997, the Company entered into an agreement to sell
its operating division, which includes substantially all of the Company's
assets and personnel other than (i) its patents (which have been previously
pledged to secure certain dividend obligations; see "Executive Compensation --
Compensation Committee Interlocks and Insider Participation") and other
intellectual property, (ii) certain management personnel, and (iii) assets
utilized by the retained management personnel in the performance of their
duties (collectively, the "Operating Division"), to Boston University or a
designated affiliate for $5 million. The agreement was approved and ratified
by the Company's stockholders on December 16, 1997, and the transaction was
completed on December 31, 1997. Prior to closing, Boston University paid the
Company $4.5 million as a deposit and assumed responsibility for the
facility's operations, including responsibility for operating costs. At the
closing, Boston University paid the remaining $500,000 of the purchase price,
and the Company transferred to Boston University all assets and personnel
associated with the Operating Division. The Company assigned to Marathon or
Boston University the leases for the Company's premises (all of which were
leased by the Company), subject to an obligation on the part of Marathon to
sublet a portion of the premises back to the Company for use by the Company as
its offices. In addition, The Company assigned to Boston University the
leases for Operating Division equipment and other property that the Company
leases. The Company also assigned its rights under certain of its contracts
relating to the Operating Division (e.g., clinical trial contracts) to Boston
University. Finally, effective on the closing of the sale of the Operating
Division, the Company's employees associated with the Operating Division
(approximately 90) were offered employment by Marathon.
As of February 14, 1997, the Company also entered into a service
agreement with Boston University providing for the purchase by the Company of
certain services related to product research, development, manufacturing,
clinical trials, quality control, and quality assurance. This service contract
expires in January 1999 and is subject to early termination provisions, as
defined, including the option of Boston University to terminate the agreement
if losses during a contract year exceed $9.0 million and the Company does not
reimburse Boston University for the losses in excess of $9.0 million. The
service agreement may be renewed for two successive one-year terms at the
option of the Company. The Company has the option to repurchase the assets
comprising the manufacturing and clinical operations facilities. The Company
has agreed to pay Boston University approximately $5.5 million and $6.6
million in years 1 and 2 of this contract, respectively. The fees can be
mutually increased or decreased, but may not be reduced to less than $4.3
million per contract year. The Company and Marathon are currently negotiating
a reduction in the fees payable in 1997 and for 1998 based on the actual
service rendered in 1997 and those anticipated for 1998. The Company has not
paid the service fees, and Marathon has not demanded payment. As a result,
the Company currently is indebted to Marathon in the amount of $5.8 million as
of February 28, 1998. The service agreement has reduced substantially the
Company's operating costs in research and development, as the Company is
contracting solely for the services that the Company requires for clinical and
manufacturing purposes.
On July 31, 1997, the Company entered into an evaluation license and
option agreement (the "USSC License Agreement") with United States Surgical
Corporation ("USSC") granting USSC an option on worldwide rights to the
Company's DAB389EGF molecule (the "EGF Fusion Protein") for restenosis in
cardiovascular applications. Leon C. Hirsch, who beneficially owns more than
5% of the Company's Common Stock, is the Chairman of USSC and beneficially
owns 7.8% of the common stock of USSC. Turi Josefsen, who beneficially owns
more than 5% of the Company's Common Stock, is a director of USSC and
beneficially owns 1.8% of the common stock of USSC. John R. Silber, a
director of the Company, is a director of USSC and beneficially owns .02% of
the common stock of USSC. Pursuant to the USSC License Agreement, USSC made
21
<PAGE>
an initial payment to the Company of $5.0 million on July 31, 1997. Under the
USSC License Agreement, USSC is entitled to acquire an exclusive license to
the EGF Fusion Protein technology, at any time during a 15-month evaluation
period, upon the payment to the Company of an additional $5.0 million. In
addition, the Company issued to USSC a warrant for the purchase of 500,000
shares of the Company's Common Stock at a purchase price of $.5625 per share,
the closing sale price for shares of the Company's Common Stock on the date
prior to the date the warrant was issued. The Company will value this warrant
and record it as a charge to general and administrative expense in the quarter
ending September 30, 1997. USSC has agreed to fund trials associated with the
development of EGF Fusion Protein for restenosis. If USSC's option to obtain
any exclusive license of the EGF Fusion Protein technology is exercised,
milestone payments will be payable by USSC to the Company up to a maximum
amount of $22.5 million. In addition, USSC will be obligated to pay the
Company royalties on commercial sales of the licensed product. In the event
USSC chooses not to exercise the option, the USSC License Agreement will
terminate, and, in exchange, USSC will receive $5.0 million worth of the
Company's Common Stock valued at the average of the closing prices of the
Company's Common Stock (i) for the ten trading days preceding the date of the
USSC License Agreement or (ii) for the ten trading days preceding the date on
which USSC chooses not to exercise the option, whichever is lower. The
Company will record the $5.0 million initial payment from USSC as a liability.
In the event that USSC exercises its option to license the EGF Fusion Protein,
the $5.0 million will be recorded as revenue at that time. In the event that
USSC chooses not to exercise the option, the $5.0 million will be recorded as
stockholders' equity.
In January 1998, the Company subleased approximately 7,000 square feet of
office space in two buildings in Hopkinton, Massachusetts from Marathon. The
subleases on each of the buildings expires in January 1999 and the Company can
exercise, at its option, two one-year extensions on each sublease.
In February 1998, the Company entered into a license agreement with
DiagnoCure Inc. ("DiagnoCure") of Quebec, Canada pursuant to which the Company
licensed certain of its technology for use in connection with nanoerythrosomes
as bioactive agent carriers for cancer treatment, immunotherapy, gene therapy,
and gene diagnostic applications. The license agreement provides for
specified royalties to be paid to the Company by DiagnoCure on sales of
products containing the licensed Company technology and on fees and other
payments received by DiagnoCure pursuant to any sublicense or similar
transaction involving the licensed Company technology. In connection with the
license agreement, DiagnoCure agreed to undertake certain research and
development activities with John R. Murphy, Ph.D., a former director of the
Company, at Boston University Medical Center/University Hospital.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who beneficially own
more than 10% of the Company's Common Stock to file with the SEC initial
reports of beneficial ownership and reports of changes in beneficial ownership
of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% beneficial owners are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms that
they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, there was compliance during the fiscal year ended
December 31, 1997, with all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners.
22
<PAGE>
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 6, 1998, by:
(i) each person known by the Company to own beneficially 5% or more of its
outstanding Common Stock; (ii) each Director; (iii) each Named Executive
Officer; and (iv) all Directors and executive officers as a group. Except as
otherwise indicated, the named beneficial owner has sole voting and sole
investment power with respect to the shares shown as beneficially owned.
Unless otherwise indicated, the address of each person or entity listed below
is c/o Seragen, Inc., 97 South Street, Hopkinton, Massachusetts 01748.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
OWNED (1)(2)
NAME(**) NUMBER OF SHARES PERCENT
- -------- ---------------- -------
<S> <C> <C>
Boston University 48,392,619(3)(4) 75.6%
881 Commonwealth Avenue
Boston, MA 02215
Leon C. Hirsch 21,781,801(3)(5) 44.4%
150 Glover Avenue
Norwalk, CT 06856
Turi Josefsen 9,335,057(3)(6) 25.5%
150 Glover Avenue
Norwalk, CT 06856
Gerald S.J. Cassidy 6,253,561(3)(7) 18.7%
700 13th Street, N.W., Suite 400
Washington, DC 20005
Eli Lilly and Company 1,787,092 6.6%
Lilly Corporate Center
Indianapolis, IN 46285
Elizabeth Chen 1,205,883(8) 4.2%
Kenneth G. Condon, C.P.A. 5,200(4)(9) *
Norman A. Jacobs 19,000(10) *
Jean C. Nichols, Ph.D. 2,166,169(11) 7.4%
Reed R. Prior 4,998,362(12) 15.5%
John R. Silber, Ph.D. 178,500(13) *
147 Bay State Road
Boston, MA 02215
All Officers and Directors as a Group 15,005,725 35.7%
</TABLE>
23
<PAGE>
- ---------------------
* Represents beneficial ownership of less than 1% of the Common Stock.
(1) A person or group is deemed to have "beneficial ownership" of any
shares as of April 6, 1998, that such person or persons comprising the
group has the right to acquire within 60 days after such date. Any
securities not outstanding which are subject to options, warrants, rights
or conversion privileges of which a person or group has ownership are
deemed to be outstanding only for the purpose of computing the percentage
of outstanding securities of the class owned by such person or group; but
are not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
(2) Percentage ownership is based on 27,271,414 shares of Common Stock
outstanding as of March 30, 1998.
(3) Includes a portion of 50,530,786 shares of Common Stock issuable upon
conversion of Series B Shares and assumes that Series B Shares are
convertible at a conversion price of $0.47, the conversion price in
effect on April 6, 1998, based on the average of the closing sale prices
of the Common Stock for the ten consecutive trading days preceding that
date.
(4) The Boston University Nominee Partnership is a partnership that was
created to act as the record holder of certain securities owned by Boston
University. Mr. Condon is a general partner of the partnership and is
required to vote and take other actions with respect to such shares of
Common Stock as instructed by duly authorized officers of Boston
University. The officers of Boston University are duly authorized by the
actions of the Trustees of Boston University. Mr. Condon (a general
partner of the Boston University Nominee Partnership) and Dr. Silber (a
Trustee of Boston University) disclaim beneficial ownership of these
shares. The ownership of the partnership includes 15,000 shares issuable
upon exercise of stock options, a warrant to purchase 1,376,666 shares
exercisable at $4.75 per share, a warrant to purchase 10,288,172 shares
exercisable at $4.00 per share and 25,053,079 shares of Common Stock
issuable upon conversion of 11,800 Series B Shares. Pursuant to the
anti-dilution provisions of certain of its warrants, Boston University
may be entitled to receive additional warrants in the event that USSC
declines to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology and thereby becomes entitled to
receive shares of Common Stock. See "Certain Relationships and Related
Transactions." Due to the fact that the price at which shares of Common
Stock would be issuable to USSC under the USSC License Agreement cannot
be determined until USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology, the
Company is unable at this time to determine the number of additional
warrants that would be issuable to Boston University in the event that
USSC were to decline to exercise its option under the USSC License
Agreement to acquire the EGF Fusion Protein technology. Boston
University has entered into the Shareholders Agreement with respect to
the election of directors and other matters. See "Certain Relationships
and Related Transactions."
(5) Consists of a warrant to purchase 816,666 shares exercisable at $4.75 per
share, a warrant to purchase 6,103,139 shares exercisable at $4.00 per
share, and 7,000 Series B Shares convertible into 14,861,996 shares of
Common Stock. Does not include 2,615,630 shares issuable upon exercise
of warrants and does not include 6,369,427 shares of Common Stock
issuable upon conversion of 3,000 Series B Shares held by Turi Josefsen,
Mr. Hirsch's wife, as to which Mr. Hirsch disclaims beneficial ownership.
Pursuant to the anti-dilution provisions of certain of its warrants, Mr.
Hirsch may be entitled to receive additional warrants in the event that
USSC declines to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology and thereby becomes entitled to
receive shares of Common Stock. See "Certain Relationships and Related
Transactions." Due to the fact that the price at which shares of Common
Stock would be issuable to USSC under the USSC License Agreement cannot
be determined until USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology, the
Company is unable at this time to determine the number of additional
24
<PAGE>
warrants that would be issuable to Mr. Hirsch in the event that USSC were
to decline to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology. Mr. Hirsch has entered into
the Shareholders Agreement with respect to the election of directors and
other matters. See "Certain Relationships and Related Transactions."
(6) Consists of a warrant to purchase 350,000 shares exercisable at $4.75 per
share, a warrant to purchase 2,615,630 shares exercisable at $4.00 per
share, and 3,000 Series B Shares convertible into 6,369,427 shares of
Common Stock. Does not include 6,103,139 shares issuable upon exercise
of warrants and does not include 14,861,996 shares of Common Stock
issuable upon conversion of 7,000 Series B Shares held by Leon C. Hirsch,
Ms. Josefsen's husband, as to which Ms. Josefsen disclaims beneficial
ownership. Pursuant to the anti-dilution provisions of certain of its
warrants, Ms. Josefsen may be entitled to receive additional warrants in
the event that USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology and
thereby becomes entitled to receive shares of Common Stock. See "Certain
Relationships and Related Transactions." Due to the fact that the price
at which shares of Common Stock would be issuable to USSC under the USSC
License Agreement cannot be determined until USSC declines to exercise
its option under the USSC License Agreement to acquire the EGF Fusion
Protein technology, the Company is unable at this time to determine the
number of additional warrants that would be issuable to Ms. Josefsen in
the event that USSC were to decline to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology.
Ms. Josefsen has entered into the Shareholders Agreement with respect to
the election of directors and other matters. See "Certain Relationships
and Related Transactions."
(7) Includes 9,000 shares issuable upon exercise of options held by Mr.
Cassidy, a warrant to purchase 233,332 shares exercisable at $4.75 per
share, a warrant to purchase 1,743,775 shares exercisable at $4.00 per
share, and 4,246,285 shares of Common Stock issuable upon conversion of
2,000 Series B Shares. Mr. Cassidy's Series B Shares and warrants are
owned jointly with his wife, Loretta P. Cassidy. Pursuant to the anti-
dilution provisions of certain of its warrants, Mr. Cassidy may be
entitled to receive additional warrants in the event that USSC declines
to exercise its option under the USSC License Agreement to acquire the
EGF Fusion Protein technology and thereby becomes entitled to receive
shares of Common Stock. See "Certain Relationships and Related
Transactions." Due to the fact that the price at which shares of Common
Stock would be issuable to USSC under the USSC License Agreement cannot
be determined until USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology, the
Company is unable at this time to determine the number of additional
warrants that would be issuable to Mr. Cassidy in the event that USSC
were to decline to exercise its option under the USSC License Agreement
to acquire the EGF Fusion Protein technology. Mr. and Mrs. Cassidy have
entered into the Shareholders Agreement with respect to the election of
directors and other matters. See "Certain Relationships and Related
Transactions."
(8) Consists of 1,205,883 shares issuable upon exercise of options held by
Ms. Chen that are exercisable within 60 days. Pursuant to the anti-
dilution provisions of her options, Ms. Chen may be entitled to receive
additional options in the event that USSC declines to exercise its option
under the USSC License Agreement to acquire the EGF Fusion Protein
technology and thereby becomes entitled to receive shares of Common
Stock. See "Certain Relationships and Related Transactions." Due to the
fact that the price at which shares of Common Stock would be issuable to
USSC under the USSC License Agreement cannot be determined until USSC
declines to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology, the Company is unable at this
time to determine the number of additional options that would be issuable
to Ms. Chen in the event that USSC were to decline to exercise its option
under the USSC License Agreement to acquire the EGF Fusion Protein
technology.
(9) Consists of 4,000 shares issuable upon exercise of options held by Mr.
Condon.
(10) Consists of 19,000 shares issuable upon exercise of options held by Mr.
Jacobs.
25
<PAGE>
(11) Includes 2,157,663 shares issuable upon exercise of options held by Dr.
Nichols that are exercisable within 60 days. Pursuant to the anti-
dilution provisions of her options, Dr. Nichols may be entitled to
receive additional options in the event that USSC declines to exercise
its option under the USSC License Agreement to acquire the EGF Fusion
Protein technology and thereby becomes entitled to receive shares of
Common Stock. See "Certain Relationships and Related Transactions." Due
to the fact that the price at which shares of Common Stock would be
issuable to USSC under the USSC License Agreement cannot be determined
until USSC declines to exercise its option under the USSC License
Agreement to acquire the EGF Fusion Protein technology, the Company is
unable at this time to determine the number of additional options that
would be issuable to Dr. Nichols in the event that USSC were to decline
to exercise its option under the USSC License Agreement to acquire the
EGF Fusion Protein technology.
(12) Consists of 4,998,362 shares issuable upon exercise of options held by
Mr. Prior that are exercisable within 60 days. Pursuant to the anti-
dilution provisions of his options, Mr. Prior may be entitled to receive
additional options in the event that USSC declines to exercise its option
under the USSC License Agreement to acquire the EGF Fusion Protein
technology and thereby becomes entitled to receive shares of Common
Stock. See "Certain Relationships and Related Transactions." Due to the
fact that the price at which shares of Common Stock would be issuable to
USSC under the USSC License Agreement cannot be determined until USSC
declines to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology, the Company is unable at this
time to determine the number of additional options that would be issuable
to Mr. Prior in the event that USSC were to decline to exercise its
option under the USSC License Agreement to acquire the EGF Fusion Protein
technology. Mr. Prior has entered into the Shareholders Agreement with
respect to the election of directors and other matters. See "Certain
Relationships and Related Transactions."
(13) Includes a warrant to purchase 7,500 shares exercisable at $10.00 per
share. Dr. Silber's shares and warrant are owned jointly with his wife,
Kathryn U. Silber.
26
<PAGE>
AMENDMENT OF THE 1992 LONG TERM INCENTIVE PLAN
PROPOSAL 2
The Company is seeking shareholder approval of an amendment to the 1992
Long Term Incentive Plan (the "Incentive Plan") to increase from 16.0 million
to 24.0 million the number of shares of Common Stock available for issuance
under the Incentive Plan and a proposal to set the maximum number of shares
with respect to which options may be granted to any one individual employee in
any one calendar year at 10.0 million.
DESCRIPTION OF INCENTIVE PLAN
The following summary of the material terms of the Incentive Plan is
qualified in its entirety by reference to the text of the Incentive Plan.
Purposes of the Incentive Plan
The Incentive Plan is intended to promote the interests of the Company
and its shareholders by enabling the Company to attract, retain, and reward
employees of and consultants to the Company. In addition, the Incentive Plan
is intended to align the interests of the recipients of awards with those of
the Company by providing such persons with performance-based stock incentives,
other equity interests or equity-based incentives, and performance-based
incentives payable in cash.
Administration
The Incentive Plan currently is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee has full
authority to select the persons to whom awards are made and to establish,
within the limits of the Incentive Plan, the terms of such awards. The
Compensation Committee also has authority to adopt, alter and repeal rules,
guidelines and practices for the administration of the Incentive Plan, to
interpret the terms of the Incentive Plan and any awards issued under the
Incentive Plan, and otherwise to supervise the administration of the Incentive
Plan.
Eligibility
Any employee or consultant of the Company or any of its subsidiaries or
affiliates (including such persons who also are directors of the Company), and
any member of the Scientific and Medical Advisory Board, who the Compensation
Committee determines is responsible for or contributes to the management
growth or profitability of the Company (or any of its subsidiaries or
affiliates) generally is eligible to receive an award under the Incentive
Plan. Directors of the Company who are not employees or consultants are not
eligible to participate in the plan. Approximately 15 persons currently are
eligible to participate in the Incentive Plan.
Shares Available for Awards
Currently the maximum aggregate number of shares authorized for
distribution pursuant to awards under the Incentive Plan is 16.0 million.
Such shares may be previously unissued shares or Treasury shares. Any shares
of Common Stock that are the subject of a Stock Option award that is not
exercised, or a Restricted Stock or other award that is forfeited, are
reinstated as shares available for distribution under the Incentive Plan.
27
<PAGE>
Awards under the Incentive Plan
The Compensation Committee may make the following types of awards under
the Incentive Plan.
Stock Options. Stock Options may be granted alone, in addition to, or in
tandem with other awards granted under the Incentive Plan. Stock Options may
be either Incentive Stock Options or Non-Qualified Stock Options. However,
Incentive Stock Options may be granted only to employees. The exercise price
of a Stock Option is determined by the Compensation Committee and may be equal
to, greater than, or less than the fair market price of the Common Stock on
the grant date, except that the exercise price of an Incentive Stock Option
generally may not be less than 100% of fair market value of the Common Stock
on the grant date. The term of each Stock Option generally may not be longer
than 10 years from the date of the grant. No individual employee may be
granted in any calendar year Stock Options to purchase more than 9.0 million
shares of Common Stock.
Stock Options become exercisable at such times and subject to such terms
and conditions as the Compensation Committee may determine on or after the
date of grant; provided that, unless the Compensation Committee determines
otherwise, no Stock Option may be exercisable during the first six months
following the grant date, except in the event of a Change in Control or on the
death or disability of the recipient. The Compensation Committee may provide
that a Stock Option is exercisable only in installments. In the Compensation
Committee's discretion, the holder of a Stock Option may pay the exercise
price: (i) in full or in part with shares of Common Stock; (ii) in the case
of a Non-Qualified Stock Option, with Restricted Stock or Deferred Stock;
(iii) pursuant to a cashless exercise program approved by the Compensation
Committee; or (iv) in any combination of (i), (ii), or (iii). Unless
otherwise provided by the terms of the Stock Option grant, Stock Options are
not transferable other than by will or by the laws of descent and
distribution.
At any time, the Compensation Committee may offer to purchase, in
exchange for a payment in cash, Common Stock, Restricted Stock or Deferred
Stock, a previously granted Stock Option on such terms and conditions as the
Compensation Committee determines. If the terms of the Stock Option so
provide, the Compensation Committee may require that all or part of the shares
issued on exercise of a Stock Option take the form of Restricted Stock or
Deferred Stock.
Stock Appreciation Rights. A stock appreciation right (a "SAR") entitles
the holder to receive upon exercise either cash in an amount, or shares of
Common Stock having a value, equal to the excess of the fair market value of a
share of Common Stock on the date of exercise over the exercise price of the
SAR. SARs may be granted only in tandem with Stock Options, which means that
when the Stock Option is exercised the corresponding SAR is canceled or when
the SAR is exercised the corresponding Stock Option is canceled. In the case
of a Non-Qualified Stock Option, a corresponding SAR may be granted at or
after the grant date of the Stock Option. In the case of an Incentive Stock
Option, the corresponding SAR may be granted only at the time of the grant of
the Stock Option. A SAR is exercisable only to the extent that the
corresponding Stock Option is exercisable and is transferable only to the
extent that the corresponding Stock Option is transferrable. Because of the
restriction described above on grants of Stock Options, no individual employee
may be granted in any calendar year SARs with respect to more than 10.0
million shares of Common Stock.
Restricted Stock. A Restricted Stock award consists of shares of Common
Stock that are awarded subject to forfeiture if certain terms and conditions
of the award are not satisfied. Restricted Stock may be issued either alone,
in addition to, or in tandem with other awards granted under the Incentive
Plan. The Compensation Committee may condition a grant of Restricted Stock on
the attainment of specified performance goals or other factors. During the
restricted period, the recipient may not sell or transfer shares of Restricted
Stock. The Compensation Committee may provide for the lapse of restrictions
in installments and may accelerate or waive restrictions in whole or in part
based on service, performance, or other factors or criteria. A holder of
Restricted Stock has all other rights of a holder of Common Stock, including
the right to vote the shares and the right to receive dividends. However, the
Compensation Committee may require or permit the deferral of cash dividend
payments or may require the reinvestment of cash dividends in additional
shares of Restricted Stock.
28
<PAGE>
Deferred Stock. A Deferred Stock award represents the right to receive
shares of Common Stock at the end of a specific deferral period. Deferred
Stock may be issued either alone, in addition to, or in tandem with other
awards granted under the Incentive Plan. The Compensation Committee may
condition a grant of Deferred Stock on the attainment of specified performance
goals or other factors or criteria. During the deferral period, the recipient
may not sell or transfer shares of Deferred Stock. The Compensation Committee
may accelerate the vesting of a Deferred Stock award or may waive the deferral
limitations, in whole or in part, based on service, performance, or other
factors or criteria. Unless determined otherwise by the Compensation
Committee, a holder of Deferred Stock has the right to receive payments equal
to the amount of dividends declared during the deferral period. However, the
Compensation Committee may require that such payments be deferred and deemed
reinvested in additional shares of Deferred Stock.
Stock Purchase Rights. Stock Purchase Rights entitle the recipient to
purchase shares of Common Stock (including Restricted Stock and Deferred
Stock) at a purchase price determined by the Compensation Committee that is
equal to: (i) the fair market value of the Common Stock on the grant date;
(ii) 50% of fair market value on the grant date; (iii) an amount equal to the
book value of the Common Stock on the grant date; or (iv) an amount equal to
the par value of the Common Stock on the grant date. The Compensation
Committee may impose deferral, forfeiture, or other terms and conditions on
the Stock Purchase Rights. Stock Purchase Rights generally are exercisable
for a period after the grant date, not exceeding 30 days, that is determined
by the Compensation Committee.
Other Stock-Based Awards. The Compensation Committee also may make other
awards of Common Stock and other awards that are valued in whole or in part by
reference to Common Stock. These Other Stock-Based Awards may include,
without limitation, performance shares, convertible preferred stock,
convertible debentures, exchangeable securities, and Common Stock or options
valued by reference to book value or subsidiary performance. Other
Stock-Based Awards may be granted alone, in addition to, or in tandem with
other awards under the Incentive Plan. Shares of Common Stock subject to
Other Stock-Based Awards may not be sold or transferred before the later of:
(i) the date on which shares of Common Stock are issued in connection with the
award; and (ii) the date on which any applicable restriction, performance, or
deferral period lapses. The Compensation Committee may grant a recipient of
an Other Stock-Based Award the right to receive dividends or interest
currently or on a deferred basis or may require that such payments be
reinvested in additional shares of Common Stock or otherwise be reinvested.
Common Stock issued on a bonus basis under an Other Stock-Based Award may be
issued for no cash consideration. Common Stock purchased pursuant to a
purchase right granted as an Other Stock-Based Award must be priced at least
50% of the fair market value of the Common Stock on the grant date.
Change in Control Provisions
In the event of (i) a Change in Control, or (ii) a Potential Change in
Control but only if and to the extent determined by the Board of Directors or
the Compensation Committee: (a) all SARs outstanding for at least six months
and all Stock Options will become fully exercisable and vested; (b) all
limitations applicable to any award of Restricted Stock, Deferred Stock, or an
Other Stock-Based Award will lapse and the shares to which the award relates
will be deemed fully vested; and (c) unless the Compensation Committee
determines otherwise prior to a Change in Control, the value of all vested
awards under the Incentive Plan will be cashed out on the basis of the Change
in Control Price, which generally is defined as the highest price per share of
Common Stock paid in any transaction during the 60-day period preceding the
Change in Control.
A "Change in Control" generally is deemed to occur if: (i) any person or
group (other than Boston University acquires, directly or indirectly,
beneficial ownership of 20% or more of the combined voting power of the
Company's then-outstanding securities; (ii) within any 24-month period there
is a change in a majority of the Company's Directors that is not approved by
the incumbent Directors; or (iii) a transaction occurs requiring shareholder
approval for the acquisition of the Company by another entity through asset
purchase, merger, or otherwise.
29
<PAGE>
A "Potential Change in Control" generally is deemed to occur if: (i)
shareholders approve an agreement by the Company, the consummation of which
would result in a Change in Control; or (ii) any person or group (other than
Boston University acquires, directly or indirectly, beneficial ownership of 5%
or more of the combined voting power of the Company's then-outstanding
securities and the Board of Directors adopts a resolution declaring that a
Potential Change in Control has occurred.
Adjustments
In the event of a recapitalization, stock dividend, stock split,
reclassification, or other change in corporate structure affecting the Common
Stock, an adjustment will be made in the aggregate number of shares of Common
Stock reserved for issuance under the Incentive Plan, the number and option
price of shares subject to outstanding Stock Options and SARs, and the number
and purchase price of shares subject to other outstanding awards as the
Compensation Committee determines to be appropriate. In the event of an
issuance of Common Stock by the Company that may have a dilutive effect on the
recipients of outstanding awards under the Incentive Plan, the Compensation
Committee has discretion to adjust the number and purchase price of shares
subject to outstanding awards and the number of shares available for issuance
under the plan.
In the event of a merger or consolidation of the Company with another
entity, all outstanding Stock Options and other awards will terminate or be
forfeited, unless the Board of Directors arranges to have the surviving entity
assume the Company's obligations under the awards or the Compensation
Committee determines otherwise. If the surviving entity in a merger or
consolidation does not assume the Company's obligations under the awards or
issue substitute awards, all awards will be immediately exercisable and fully
vested without regard to any restrictions otherwise imposed by the Incentive
Plan.
Amendments of the Incentive Plan
The Board of Directors may amend, alter, or discontinue the Incentive
Plan, but shareholder approval is required in the case of any amendment that
would: (i) increase the number of shares available for distribution under the
Incentive Plan; (ii) change the pricing terms applicable to Stock Purchase
Rights; (iii) change the classification of persons eligible to participate in
the Incentive Plan; or (iv) extend the maximum term of Stock Options.
Duration of the Incentive Plan
The Incentive Plan became effective on January 31, 1992, and unless
earlier terminated by the Board of Directors will expire on January 31, 2002.
INCENTIVE PLAN BENEFITS
As of December 17, 1997, there were 2,839,803 shares remaining available
for distribution under the Incentive Plan.
Pursuant to anti-dilution provisions of the Company's employment
agreements with Mr. Prior, Dr. Nichols, and Ms. Chen, on December 31, 1997,
the Company granted to Mr. Prior options to purchase 3,631,824 shares of
Common Stock, to Dr. Nichols options to purchase 1,175,002 shares of Common
Stock, and to Ms. Chen options to purchase 854,547 shares of Common Stock and
on March 31, 1998, the Company granted to Dr. Nichols an option to purchase
998,698 shares of Common Stock. See "Election of Directors -- Executive
Compensation -- Employment and Consulting Agreements; Change in Control
Arrangements." Between December 18, 1997, and March 31, 1998 options to
purchase 17,076 shares that had been granted to various individual employees
and that expired unexercised reverted to the pool of shares available for
distribution pursuant to the terms of the Incentive Plan. Because of the
availability of new shares authorized for distribution under the Incentive
30
<PAGE>
Plan as a result of these forfeitures, 2,434,043 shares in the case of
Mr. Prior, 798,670 shares in the case of Dr. Nichols, and 570,479 shares in
the case Ms. Chen have been granted subject to shareholder approval.
The Company is obligated in certain circumstances pursuant to
anti-dilution provisions in their employment agreements with the Company to
issue additional options to Mr. Prior, Dr. Nichols and Ms. Chen. Under the
Company's employment agreement with Mr. Prior, the Company has agreed to issue
additional options as necessary to cause the number of shares underlying his
options to equal 8.5% of the Company's outstanding Common Stock on a fully
diluted basis. Under the Company's employment agreement with Dr. Nichols, the
Company has agreed to issue additional options as necessary to cause the
number of shares underlying her stock options to equal 2.75% of the Company's
outstanding Common Sock on a fully diluted basis. Under the Company's
employment agreement with Ms. Chen, the Company has agreed to issue additional
options as necessary to cause the number of shares underlying her options to
equal 2.0% of the Company's outstanding Common Stock on a fully diluted basis.
These anti-dilution provisions will be applicable until the Company raises a
cumulative total of $20 million from the sale of equity or convertible
securities to non-affiliated persons. Pursuant to these agreements, the
Company will issue additional options to Mr. Prior, Dr. Nichols and Ms. Chen
on June 30, 1998, as a result of conversion of Series D Shares into Common
Stock and any other issuances of Common Stock occurring before June 30, 1998.
The number of options to be granted on June 30, 1998 is not determinable at
this time, although the number of options granted may be significant.
Other future awards under the Incentive Plan will be made in the
Compensation Committee's discretion in accordance with the provisions of the
Incentive Plan. As such, other future awards are not determinable.
The following table sets forth as of March 31, 1998, the number of shares
underlying options that have been granted to the named individuals and groups
subject only to either the availability of additional shares for distribution
arising from award forfeitures or shareholder approval of the proposed
amendment to increase the number of shares authorized under the Incentive
Plan.
NEW PLAN BENEFITS
Name and Number of Shares
Principal Position Underlying Options
- ------------------ ------------------
Reed R. Prior 2,434,043
Chairman, Chief Executive Officer
and Treasurer
Jean C. Nichols, Ph.D. 798,670
President, Chief Technology
Officer and Secretary
Elizabeth Chen 570,479
Vice President of Business
Development
All Current Executive Officers 3,803,192
as a Group
All Current Non-Executive Directors 0
as a Group
All Non-Executive Officer Employees 0
as a Group
31
<PAGE>
REASONS FOR THE PROPOSED AMENDMENTS
Increase in Number of Shares Available For Distribution
Pursuant to the terms of the Incentive Plan, only the amendment to
increase the number of shares of Common Stock available for distribution under
the Plan requires shareholder approval.
All of the shares of Common Stock originally authorized for distribution
under the Incentive Plan either have been distributed or are reserved for
issuance pursuant to outstanding awards. As of April 6, 1998, the Company has
awarded Stock Options to purchase a total of 19,618,577 shares of Common Stock
(net of cancellations), which exceeds, by 3,803,192 shares, the number of
shares currently available for distribution under the Incentive Plan. Thus,
the Company has granted Stock Options subject to shareholder approval.
The Board of Directors believes that it is necessary to increase the
number of shares authorized for distribution under the Incentive Plan in order
to be able to attract and maintain qualified personnel, including executive
officers. The Company's employment agreements with its executive officers
require the Company to issue options to purchase more shares of Common Stock
than are currently authorized for distribution under the Incentive Plan. The
increase is necessary, therefore, for the Stock Options already granted to
Mr. Prior, Dr. Nichols, and Ms. Chen, subject to shareholder approval of the
increase in the number of authorized shares under the Incentive Plan, and to
allow for additional Stock Options which the Company may be required to grant
pursuant to anti-dilution provisions in these executives' employment
agreements and which may be required to provide sufficient options for other
existing and/or new employees.
Limitation on Grants to Any One Individual Employee
In 1996, the Board of Directors approved an amendment to the Incentive
Plan to impose a 5.0 million share limitation on the number of shares with
respect to which stock options may be granted in any one calendar year to any
one individual. Shareholder approval of this amendment was not required under
the terms of the Incentive Plan, and the amendment was not then submitted for
shareholder approval. However, because shareholders have never approved this
limitation on the number of shares with respect to which stock options may be
granted to any one individual, grants of stock options and tandem SARs under
the Incentive Plan currently do not qualify for an exemption from the
limitation on deductibility of non-performance based executive compensation
found in section 162(m) of the Internal Revenue Code (the "Code").
The Company is contractually obligated to grant anti-dilution options to
its executive officers. See "Election of Directors -- Executive Compensation
- -- Employment and Consulting Agreements; Change in Control Arrangements." Due
to the declining share price of the Company's Common Stock and its
corresponding effect on the number of shares into which outstanding shares of
the Company's preferred stock may convert, the Company was required to grant
significant anti-dilution options in 1997. In 1997, Mr. Prior was granted
anti-dilution options for 7,110,461 shares of common stock which exceeded the
5.0 million share cap imposed by the Incentive Plan. As a result, on April
15, 1998, the Board of Directors approved an amendment to the Incentive Plan,
to be effective from January 1, 1997 to increase the limit on the number of
shares with respect to which stock options may be granted to any one
individual from 5.0 million to 10.0 million shares. The Board of Directors
believes this increase was necessary to allow the Company to meet its
obligations under its executive employment contracts.
The Board of Directors also desires to enhance the Company's ability in
relevant circumstances to deduct executive compensation provided by the
Company under the Incentive Plan, and therefore believes it to be desirable
that the Incentive Plant qualify for exception from the limitation on
deductibility of non-performance based executive compensation that is found in
section 162(m) of the Code. In order for grants of stock options and tandem
SARs under the Incentive Plan to qualify for this exemption, a limit on the
number of shares with respect to which stock options may be granted to any one
individual must be approved by the Company's shareholders. For the foregoing
reasons, the Board is seeking shareholder approval of this proposal.
32
<PAGE>
MARKET PRICE OF THE COMPANY'S COMMON STOCK
The last reported sale price of the Company's Common Stock as reported on
the OTC Bulletin Board on April 6, 1998 was $0.43. OTC Bulletin Board
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not represent actual transactions.
FEDERAL INCOME TAX CONSEQUENCES OF GRANTS
Incentive Stock Options
The Incentive Stock Options under the Incentive Plan are intended to
constitute "incentive stock options" within the meaning of section 422 of the
Code. Incentive stock options are subject to special federal income tax
treatment. No federal income tax is imposed on the optionee upon the grant or
the exercise of an incentive stock option if the optionee does not dispose of
shares acquired pursuant to the exercise within the two-year period beginning
on the date the option was granted or within the one-year period beginning on
the date the option was exercised (collectively, the "Holding Period"), and if
the optionee has continuously been an employee of the Company from the date of
grant to three months before the date of exercise (or twelve months in the
event of retirement, death or disability). If the optionee does not dispose
of shares acquired pursuant to the exercise within the Holding Period and if
the optionee meets the above-mentioned employment requirements, the Company
would not be entitled to any deduction for federal income tax purposes in
connection with the grant or exercise of the option or the disposition of the
shares so acquired. With respect to an incentive stock option, the difference
between the fair market value of the shares on the date of exercise and the
exercise price must be included in the optionee's alternative minimum taxable
income. However, if the optionee exercises an incentive stock option and
disposes of the shares received in the same year and the amount realized is
less than the fair market value of the shares on the date of exercise, the
amount included in alternative minimum taxable income will not exceed the
amount realized over the adjusted basis of the shares.
Upon disposition of the shares received upon exercise of an incentive
stock option after the Holding Period by an optionee who meets the
bove-mentioned employment requirements, any appreciation of the shares above
the exercise price should constitute capital gain. If an optionee disposes of
shares acquired pursuant to the exercise of an incentive stock option prior to
the end of the Holding Period or if an optionee does not meet the
above-mentioned employment requirements, the optionee will be treated as
having received, at the time of disposition, ordinary income. In such event,
the Company may claim a deduction at the same time and in the same amount as
the optionee recognizes ordinary income. The amount recognized as ordinary
income is the excess of the fair market value of the shares at the time of
exercise (or in the case of a sale in which a loss would be recognized, the
amount realized on the sale if less) over the exercise price; any amount
realized in excess of the fair market value of the shares at the time of
exercise would be treated as capital gain.
Non-Qualified Stock Options
As a general rule, no federal income tax is imposed on the optionee upon
the grant of a Non-Qualified Stock Option such as those available under the
Incentive Plan, and the Company is not entitled to a tax deduction by reason
of such a grant. Generally, upon the exercise of a Non-Qualified Stock
Option, the optionee will be treated as receiving ordinary income in the year
of exercise in an amount equal to the excess of the fair market value of the
shares on the date of exercise over the exercise price paid for such shares.
Upon the exercise of a Non-Qualified Stock Option, the Company may claim a
deduction at the same time and in the same amount as ordinary income is
recognized by the optionee. Upon a subsequent disposition of the shares
received upon exercise of a Non-Qualified Stock Option, any appreciation after
the date of exercise should qualify as capital gain.
If the shares received upon the exercise of a Non-Qualified Stock Option
are transferred to the optionee subject to certain restrictions, then, unless
the optionee elects otherwise, realization of ordinary income by the optionee
will be deferred, along with the Company's tax deduction, until the time the
33
<PAGE>
restrictions lapse. When the restrictions lapse, the optionee will be treated
as receiving ordinary income in an amount equal to the excess of the fair
market value of the shares at the time the restrictions lapse over the
exercise price paid for the shares.
SARs/Limited SARs
No tax is imposed on an optionee pursuant to a grant of a SAR or Limited
SAR. Upon exercise of a SAR or Limited SAR, the optionee will recognize
ordinary income equal to the amount of cash received (or, if payment is made
in Common Stock, the fair market value on the date of exercise of the Common
Stock received), and the Company will be entitled to a corresponding
deduction. SARs and Limited SARs issued in tandem with Incentive Stock
Options under the Incentive Plan are intended to satisfy the requirements of
applicable federal income tax regulations so as not to disqualify the related
Incentive Stock Options from treatment as "incentive stock options" under
section 422 of the Code.
Restricted Stock
A grantee who has been granted Restricted Stock under the Incentive Plan
consisting of Common Stock that is subject to restrictions will not recognize
income for federal income tax purposes at the time of grant, and the Company
will not be entitled to a deduction at that time, if the restrictions
simultaneously prevent the stock's transfer and constitute a substantial risk
of forfeiture for federal income tax purposes. When the restrictions lapse,
the grantee will recognize ordinary income in an amount equal to the excess of
the fair market value of the shares at such time over the amount (if any) paid
for the shares, and the Company will be entitled to a corresponding deduction.
If dividends are paid in cash to the grantee during the period that the
restrictions apply, the dividends will constitute ordinary income to the
grantee for federal income tax purposes at the time they are paid, and the
Company will be entitled to a corresponding deduction.
Notwithstanding the foregoing, the grantee may elect to recognize income
with respect to a grant of Restricted Stock at the time the grant is made
rather than later on when the restrictions lapse. If the grantee makes such
an election, the grantee will recognize ordinary income for federal income tax
purposes in an amount equal to the fair market value of the Restricted Stock
on the date of grant, determined as if the restrictions did not apply, less
the amount (if any) the grantee pays for the stock. In such case: (i) the
Company will be entitled to a deduction at the same time and in the same
amount as the grantee recognizes ordinary income; (ii) dividends paid to the
grantee on or after the date of grant will constitute ordinary income taxable
as dividends to the grantee and will not be deductible by the Company, even
though the dividends are paid during the period the restrictions apply; and
(iii) there generally will be no further federal income tax consequences to
the grantee or the Company when the restrictions lapse.
Deferred Stock
Deferred Stock awarded to a grantee will not be delivered to the grantee
until after a specified period of time (the "Deferral Period"). Upon delivery
of the shares at the close of the Deferral Period, the grantee may be required
to make a payment for the shares and/or the shares may be subject to
restrictions similar to those imposed on Restricted Stock. In general, once
the shares have been delivered, the Deferred Stock will constitute ordinary
income to the grantee for federal income tax purposes at the earlier of the
time the shares are freely transferable or are no longer subject to a
substantial risk of forfeiture. The Company will be entitled to a deduction
in the same amount and at the same time as the grantee recognizes ordinary
income. The amount of the grantee's ordinary income and of the Company's
deduction will equal the excess of the fair market value of the Deferred Stock
at the time of income inclusion over the price (if any) the grantee pays for
the stock. In general, any dividends paid to the grantee with respect to the
Deferred Stock (and not deemed reinvested in additional Deferred Stock) prior
to the time of income inclusion will be treated as ordinary income at the time
of payment and will be deductible by the Company at such time.
34
<PAGE>
Stock Purchase Rights
Stock Purchase Rights generally will be taxed in the same manner as
Non-Qualified Stock Options, that is, the purchaser will not recognize
ordinary income upon issuance of the rights but rather upon their exercise in
an amount equal to the excess of the fair market value of the stock at that
time over the purchase price paid. The Company will be entitled to a
deduction at the same time and in the same amount.
Notwithstanding the foregoing, if Restricted Stock is issued to the
purchaser upon the exercise of a Stock Purchase Right and is subject to
restrictions that simultaneously prevent the stock's transfer and constitute a
substantial risk of forfeiture for federal income tax purposes, the purchaser
will not recognize ordinary income at the time of purchase, but rather at the
time the restrictions lapse. The amount of ordinary income realized will be
the excess of the fair market value of the stock at the time the restrictions
lapse over the purchase price paid. However, the purchaser may elect to
recognize ordinary income with respect to the purchase of Restricted Stock at
the time of purchase, rather than later on when the restrictions lapse, in
much the same manner as previously described above in the discussion of the
taxation of Restricted Stock.
Other Stock-Based Awards
The Compensation Committee may issue Other Stock-Based Awards, including,
without limitation, performance shares, convertible preferred stock, convert-
ible debentures, exchangeable securities, and Common Stock or Options valued
by reference to book value or subsidiary performance. These awards may be
subject to such restrictions as may be imposed by the Compensation Committee.
In general, grantees receiving such awards will be required to recognize the
fair market value of the award as ordinary income on the date that the award
becomes freely transferable or is no longer subject to a substantial risk of
forfeiture, and the Company will be entitled to a corresponding deduction at
that time.
Section 83(h) of the Code
Regulations under section 83(h) of the Code generally require the Company
to satisfy applicable federal income tax reporting requirements as a
precondition to claiming deductions in connection with the Incentive Plan.
Section 162(m) of the Code
Section 162(m) of the Code generally precludes a public corporation from
taking a deduction for annual compensation in excess of $1 million paid to its
chief executive officer or any of its four other highest-paid officers.
Compensation that qualifies under section 162(m) of the Code as
performance-based" is specifically exempt from the deduction limit. However,
the Incentive Plan currently does not satisfy the requirements for
qualification under section 162(m) because, among other things, shareholders
have not approved the Incentive Plan's limitation on grants to any one
individual employee. The Compensation Committee tries to ensure that the
Incentive Plan provides flexibility with respect to whether shares awarded by
the Compensation Committee will qualify as performance-based compensation
under section 162(m) of the Code, and thus the Company is seeking shareholder
approval of the limitation on grants to any one individual employee. Any
stock option grants under the plan before shareholder approval of this change
will not qualify for deduction under section 162(m).
Based on section 162(m) of the Code and the regulations issued
thereunder, the Company believes that any compensation attributable to a Stock
Option or SAR granted under the Incentive Plan, after shareholders have
approved the limitation on grants in one calendar year to any one individual
employee, that has an exercise price that is at least equal to the fair market
value of the shares subject to the Stock Option or SAR on the date of grant
should qualify as performance-based compensation, and, accordingly, the
Company's deduction for such compensation should not be limited by section
162(m) of the Code. However, section 162(m) of the Code could limit the
Company's deduction with respect to compensation attributable to a Stock
Option or SAR that had an exercise price less than the fair market value of
the shares on the date of grant and with respect to compensation attributable
35
<PAGE>
to a Stock Option or SAR granted under the Plan before shareholders have
approved the limitation on grants in one calendar year to any one individual
employee. Section 162(m) also could limit the Company's deduction with
respect to other awards of Stock or other Stock-based awards under the Plan.
Other Tax Consequences
The Incentive Plan is not qualified under section 401(a) of the Code.
The comments set forth in the above paragraphs are only a summary of
certain of the federal tax consequences relating to the Incentive Plan. No
consideration has been given to the effects of state, local, or other tax laws
(including other federal tax laws) on the Incentive Plan or grantees
thereunder. As a general matter, the Company will be subject to federal
income tax reporting requirements with respect to all grantees and to federal
withholding and employment tax requirements with respect to grantees who are
employees of the Company.
In view of the complexity of the tax aspects of transactions involving
the grant and exercise of Incentive Stock Options, Non-Qualified Stock
Options, SARs, Limited SARs, Restricted Stock, Deferred Stock, Stock Purchase
Rights, and the receipt and disposition of shares of Common Stock in connec-
tion with these and other awards under the Incentive Plan, and because the
impact of taxes will vary depending on individual circumstances, each grantee
receiving an award under the Incentive Plan should consult his or her own tax
advisor to determine the tax consequences in his or her particular
circumstances.
APPROVAL REQUIRED FOR AMENDMENTS TO INCENTIVE PLAN
Approval of the amendments to the Company's Incentive Plan requires the
affirmative vote of a majority of the votes cast at the Annual Meeting.
Holders of Common Stock are entitled to one vote per share. Holders of
Series B Shares are entitled to 250 votes per share. Holders of Common Stock
and Series B Shares will vote together as a class on the proposal. With
respect to the tabulation of votes, abstentions and broker non-votes will not
be counted as votes cast and, accordingly, will have no effect on the vote.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE ADOPTION OF THE PROPOSED
AMENDMENTS TO THE COMPANY'S 1992 LONG TERM INCENTIVE PLAN.
36
<PAGE>
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
PROPOSAL 3
The Audit Committee recommended and the Board of Directors approved the
appointment of Arthur Andersen LLP as independent auditors for the fiscal year
ending December 31, 1998.
On March 12, 1997, the Board of Directors of the Company, at the
recommendation of the Company's Audit Committee, voted to replace Coopers &
Lybrand L.L.P., with Arthur Andersen LLP as the Company's independent auditors
effective March 12, 1997. Coopers & Lybrand L.L.P.'s reports for the last two
fiscal years contained no adverse opinions, disclaimers, or qualifications or
modifications as to uncertainty, audit scope or accounting principles, except
that the report on the 1995 financial statements included an explanatory
paragraph concerning factors which raise substantial doubt about the Company's
ability to continue as a going concern. During such two fiscal year period
and the subsequent interim period since then, there have been no disagreements
with Coopers & Lybrand L.L.P. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure
which, if not resolved to the satisfaction of Coopers & Lybrand L.L.P., would
have caused it to make reference to the subject matter of disagreement in
connection with its reports.
Ratification of Arthur Andersen LLP as the Company's independent auditors
requires the affirmative vote of a majority of the votes cast at the Annual
Meeting. Holders of Common Stock are entitled to one vote per share. Holders
of Series B Shares are entitled to 250 votes per share. Holders of Common
Stock and Series B Shares will vote together as a class on the ratification.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE SELECTION OF ARTHUR ANDERSEN
LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER
31, 1998.
37
<PAGE>
PROXY SOLICITATION
The cost of the solicitation of proxies will be borne by the Company. In
addition to solicitation by mail, directors and officers of the Company,
without receiving any additional compensation, may solicit proxies personally
or by telephone or facsimile. The Company anticipates that it may, at it own
expense, engage a solicitation agent to solicit proxies by telephone. The
Company will request brokerage houses, banks, and other custodians or nominees
holding stock in their names for others to forward proxy materials to their
customers or principals who are the beneficial owners of shares and will
reimburse them for their expenses in doing so.
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
FOR NEXT YEAR'S ANNUAL MEETING
The proxy rules adopted by the SEC provide that certain shareholder
proposals must be included in the Proxy Statement for the Company's Annual
Meeting. For a proposal to be considered for inclusion in next year's proxy
statement, it must be received by the Company no later than November 20, 1998.
ATTENDANCE OF INDEPENDENT AUDITORS AT ANNUAL MEETING
Representatives of Arthur Andersen LLP will be present at the Annual
Meeting and will have the opportunity to make such statements as they may
desire. They also will be available to respond to appropriate questions from
the shareholders present.
ANNUAL REPORT TO SHAREHOLDERS
Included in this mailing is the Company's Annual Report to Shareholders
on Form 10-K, which includes the Company's audited financial statements for
the year ended December 31, 1997.
OTHER MATTERS
The Board of Directors knows of no other matters to be presented at the
Annual Meeting. However, if any other business properly comes up for action
at the Annual Meeting or any adjournment of the Annual Meeting, the persons
acting under the proxies in the form enclosed with this Proxy Statement will
vote on these other matters according to their discretion.
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY CARD IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors,
/s/ Reed R. Prior
Reed R. Prior
Chairman, Chief Executive Officer and
Treasurer
Hopkinton, Massachusetts
April 15, 1998
38
<PAGE>
SERAGEN, INC.
97 South Street, Hopkinton, MA 01748
Proxy for 1998 Annual Meeting of Shareholders
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby acknowledges receipt of the Seragen, Inc. Notice
of Annual Meeting of Shareholders and Proxy Statement dated April 15, 1998,
and, revoking all previous proxies, hereby appoints Reed R. Prior and Jean C.
Nichols, or either of them, as the undersigned's attorneys-in-fact and
proxies, each with power of substitution and with all the powers the
undersigned would possess if present, to vote all shares of the Common Stock
of Seragen, Inc. which the undersigned would be entitled to vote if personally
present at the Annual Meeting of Shareholders to be held on May 21, 1998 at
3:00 p.m. at the offices of the Company at 97 South Street, Hopkinton,
Massachusetts, and any adjournments thereof.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
[X] Please mark votes as in this example.
The shares represented hereby will be voted as directed by this proxy, but if
no determination is made they will be voted FOR the election of all nominees,
FOR the proposed amendments to the 1992 Long Term Incentive Plan, and FOR
ratification of the independent auditors. The Board of Directors recommends a
vote for all three proposals.
1. ELECTION OF DIRECTORS
Nominees: Reed R. Prior,
Gerald S.J. Cassidy,
Kenneth G. Condon,
Norman A. Jacobs,
Jean C. Nichols
John R. Silber.
FOR WITHHELD
FOR except vote withheld from the following nominee(s):
______________________________________________________
2. APPROVAL OF PROPOSED AMENDMENT TO 1992 LONG TERM INCENTIVE PLAN
FOR AGAINST ABSTAIN
3. RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
FOR AGAINST ABSTAIN
In their discretion, the proxies are authorized to vote upon such other
matters as may lawfully come before the meeting and all adjournments thereof.
If one or more of the nominees for Director becomes unavailable for election
and the Board of Directors designates one or more substitute nominees, the
proxies are authorized to vote for such substitute nominees.
MARK HERE FOR ADDRESS
CHANGE AND NOTE AT RIGHT
[ ]
NOTE: Please date and sign exactly as your name(s) appear(s) hereon. If
acting as attorney, executor, trustee, or in any other representative
capacity, sign name and title.
Signature: ____________________________
Date _________________________________
Signature: ____________________________
Date _________________________________
