<PAGE> 1
SCHEDULE 14A/A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
- --------------------------
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-l1(c) or Rule 14a-12
[ ] Confidential for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
Interneuron Pharmaceuticals, 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:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-ll(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> 2
INTERNEURON PHARMACEUTICALS, INC.
ONE LEDGEMONT CENTER
99 HAYDEN AVENUE
LEXINGTON, MASSACHUSETTS 02173
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 3, 1998
To the Stockholders:
Notice is hereby given that the Annual Meeting of the Stockholders of
Interneuron Pharmaceuticals, Inc. (the "Company") will be held on March 3, 1998,
at 10:00 a.m. local time at The DoubleTree Guest Suites, 550 Winter Street,
Waltham, Massachusetts 02154. The Annual Meeting is called for the following
purposes:
1. To elect a board of ten directors;
2. To approve and ratify the Company's 1998 Employee Stock Option
Plan;
3. To approve and ratify the appointment of Coopers & Lybrand L.L.P.
as the independent auditors of the Company; and
4. To consider and take action upon such other matters as may
properly come before the meeting or any adjournment or adjournments
thereof.
The close of business on January 23, 1998 has been fixed as the record date
for the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting. The stock transfer books of the Company will not be closed.
All stockholders are cordially invited to attend the Annual Meeting.
Whether or not you expect to attend, you are respectfully requested by the Board
of Directors to sign, date and return the enclosed proxy promptly. Stockholders
who execute proxies retain the right to revoke them at any time prior to the
voting thereof. A return envelope which requires no postage if mailed in the
United States is enclosed for your convenience.
By Order of the Board of Directors,
Glenn L. Cooper, M.D.,
President and Chief Executive Officer
Dated: January 28, 1998
<PAGE> 3
INTERNEURON PHARMACEUTICALS, INC.
ONE LEDGEMONT CENTER
99 HAYDEN AVENUE
LEXINGTON, MASSACHUSETTS 02173
(781) 861-8444
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Interneuron Pharmaceuticals, Inc., a
Delaware corporation (the "Company"), for the Annual Meeting of Stockholders to
be held at The DoubleTree Guest Suites, 550 Winter Street, Waltham,
Massachusetts 02154 on March 3, 1998, at 10:00 a.m. and for any adjournment or
adjournments thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting of Stockholders. Any stockholder giving such a proxy has the
power to revoke it at any time before it is voted. Written notice of such
revocation should be forwarded directly to the Vice President, Corporate
Communications of the Company, at the above stated address. Attendance at the
Annual Meeting will not have the effect of revoking the proxy unless such
written notice is given or the stockholder votes by ballot at the Annual
Meeting.
If the enclosed proxy is properly executed and returned, the shares
represented thereby will be voted in accordance with the directions thereon and
otherwise in accordance with the judgment of the persons designated as proxies.
Any proxy on which no direction is specified will be voted in favor of the
actions described in this Proxy Statement, including the election of the
nominees set forth under the caption "Election of Directors", the approval and
ratification of the 1998 Employee Stock Option Plan (the "1998 Plan"), and the
approval and ratification of the appointment of Coopers & Lybrand L.L.P. as the
independent auditors of the Company.
The approximate date on which this Proxy Statement and the accompanying
form of proxy will first be mailed or given to the Company's stockholders is
February 6, 1998.
Your vote is important. Accordingly, you are urged to sign and return the
accompanying proxy card whether or not you plan to attend the Annual Meeting. If
you do attend, you may vote by ballot at the Annual Meeting, thereby cancelling
any proxy previously given.
<PAGE> 4
VOTING SECURITIES
Holders of shares of Common Stock, par value $.001 per share (the
"Shares"), and holders of shares of Series B and Series C Convertible Preferred
Stock, par value $.001 per share (the "Preferred Shares") of record as of the
close of business on January 23, 1998, are entitled to notice of and to vote at
the Annual Meeting on all matters except that the holders of the Preferred
Shares are not entitled to vote for the election of directors. Except as set
forth in the preceding sentence, each outstanding Share is entitled to one vote
upon all matters to be acted upon at the Annual Meeting. For purposes of voting
at the Annual Meeting on all matters except the election of directors, the
Preferred Shares are treated as converted into Shares. Accordingly, on the
record date there were issued and outstanding (i) 41,283,603 Shares (excluding
treasury shares) entitled to vote for the election of directors, and (ii) an
aggregate of 41,905,825 Shares, giving effect to the right to vote 622,222
Shares held by the holder of the 244,425 Series B and Series C Preferred Shares,
voting as one class, entitled to vote on all other matters. A majority of the
outstanding Shares entitled to vote on any matter and represented at the Annual
Meeting in person or by proxy shall constitute a quorum. Assuming a quorum is
present, the affirmative vote of a plurality of the 41,283,603 Shares so
represented and entitled to vote is necessary to elect the directors, and the
affirmative vote of a majority of the 41,905,825 Shares so represented and
entitled to vote, excluding broker non-votes, is necessary to approve the 1998
Plan and the appointment of Coopers & Lybrand L.L.P. as the independent auditors
of the Company. Abstentions and broker non-votes are counted for purposes of
determining the presence or absence of a quorum for the transaction of business.
If a stockholder, present in person or by proxy, abstains on any matter, the
stockholder's Shares will not be voted on such matter. Thus, an abstention from
voting on any matter has the same legal effect as a vote "against" the matter,
even though the stockholder may interpret such action differently. Except for
determining the presence or absence of a quorum for the transaction of business,
broker non-votes are not counted for any purpose in determining whether a matter
has been approved.
2
<PAGE> 5
PRINCIPAL STOCKHOLDERS
Set forth below is information concerning stock ownership of all persons
known by the Company to own beneficially 5% or more of the Shares or Preferred
Shares, each director, each executive officer named under "Executive
Compensation" and all directors and executive officers of the Company as a group
based upon the number of outstanding Shares and Preferred Shares as of January
23, 1998.
<TABLE>
<CAPTION>
AMOUNT & PERCENT OF
NATURE OF BENEFICIAL OUTSTANDING
NAME OF STOCKHOLDER OWNERSHIP(1) CLASS(16)
- ----------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Lindsay A. Rosenwald, M.D. ................................ 2,638,485(2) 6.4%
Glenn L. Cooper, M.D. ..................................... 942,206(3) 2.2%
Mark S. Butler............................................. 520,500(4)(5) 1.2%
Thomas F. Farb............................................. 307,622(5)(6) *
Bobby W. Sandage, Jr., Ph.D. .............................. 437,228(5)(7) 1.0%
Harry J. Gray.............................................. 77,500(8) *
Alexander M. Haig, Jr...................................... 230,000(9) *
Peter Barton Hutt.......................................... 77,500(10) *
Malcolm Morville, Ph.D..................................... 77,500(10) *
Robert K. Mueller.......................................... 77,500(10) *
Lee J. Schroeder........................................... 77,500(10) *
David B. Sharrock.......................................... 101,750(11) *
Richard Wurtman, M.D....................................... 974,434(12) 2.3%
J. Morton Davis............................................ 10,466,958(13) 25.4%
c/o D.H. Blair Investment
Banking Corp.
44 Wall Street
New York, New York 10005
American Home Products Corp. .............................. 244,425(14) 100%
Five Giralda Farms
Madison, New Jersey 07940
All directors and executive officers
as a group (13 persons).................................. 6,539,725(15) 14.9%
</TABLE>
- ---------------
* less than 1%
(1) Beneficial ownership is defined in accordance with the rules of the
Securities and Exchange Commission ("S.E.C.") and generally means the power
to vote and/or to dispose of the securities regardless of any economic
interest therein.
(2) Includes (i) 7,671 Shares issuable upon exercise of outstanding warrants,
(ii) 300,000 Shares which have been pledged in favor of a bank to secure
certain lease obligations of an affiliate of Dr. Rosenwald, and (iii)
118,333 Shares issuable upon exercise of options exercisable within 60
days, but excludes (i) 66,667 Shares issuable upon exercise of options
which are not exercisable within 60 days, (ii) 658,481 Shares owned by Dr.
Rosenwald's wife, as to which Shares Dr. Rosenwald disclaims beneficial
ownership, and (iii) 37,800 Shares owned by two limited partnerships, the
limited partners of which include Dr. Rosenwald's wife and children, as to
which Shares Dr. Rosenwald disclaims beneficial ownership.
(3) Includes (i) 7,206 Shares, (ii) 860,000 Shares issuable upon exercise of
options exercisable within 60 days, and (iii) 75,000 Shares subject to
restricted stock awards which may vest within 60 days, but excludes (i)
960,000 Shares issuable upon exercise of options which are not exercisable
within 60 days, (ii) 150,000 Shares subject to restricted stock awards
which do not vest within 60 days, and (iii) the following held by Dr.
Cooper's wife, an employee of the Company: (a) 70,000 Shares issuable upon
exercise of options and (b) 34,200 Shares subject to restricted stock
awards, as to all of which Shares Dr. Cooper disclaims beneficial
ownership.
3
<PAGE> 6
(4) Includes (i) 7,500 Shares, (ii) 3,000 Shares owned by Mr. Butler's
children, and (iii) 460,000 Shares issuable upon exercise of options
exercisable within 60 days, but excludes 510,000 Shares issuable upon
exercise of options which are not exercisable within 60 days.
(5) Includes 50,000 Shares subject to restricted stock awards which may vest
within 60 days, but excludes 100,000 Shares subject to restricted stock
awards which do not vest within 60 days.
(6) Includes (i) 10,955 Shares and (ii) 246,667 Shares issuable upon exercise
of options exercisable within 60 days, but excludes 543,333 Shares issuable
upon exercise of options which are not exercisable within 60 days.
(7) Includes (i) 2,228 Shares and (ii) 385,000 Shares issuable upon exercise of
options exercisable within 60 days, but excludes 560,000 Shares issuable
upon exercise of options which are not exercisable within 60 days.
(8) Includes (i) 50,500 Shares and (ii) 27,000 Shares issuable upon exercise of
options exercisable within 60 days, but excludes 4,500 Shares issuable upon
exercise of options which are not exercisable within 60 days.
(9) Includes (i) 202,500 Shares and (ii) 27,500 Shares issuable upon exercise
of options exercisable within 60 days, but excludes 4,500 Shares issuable
upon exercise of options which are not exercisable within 60 days.
(10) Represents Shares issuable upon exercise of options exercisable within 60
days, but excludes 4,500 Shares issuable upon exercise of options which are
not exercisable within 60 days.
(11) Represents Shares issuable upon exercise of options exercisable within 60
days, but excludes 29,250 Shares issuable upon exercise of options which
are not exercisable within 60 days.
(12) Includes (i) 817,259 Shares, (ii) 1,342 Shares owned by Dr. Wurtman's adult
son, who has granted Dr. Wurtman an irrevocable proxy to vote such Shares
and (iii) 155,833 Shares issuable upon exercise of options exercisable
within 60 days, but excludes, (i) 71,167 Shares issuable upon exercise of
options which are not exercisable within 60 days, and (ii) 77,128 Shares
owned by Judith Wurtman, Dr. Wurtman's wife, as to which Dr. Wurtman
disclaims beneficial ownership.
(13) Includes (i) 6,956 Shares owned by J. Morton Davis; (ii) 8,711,337 Shares
owned by D.H. Blair Investment Banking Corp. ("Blair Banking") which is
owned by J. Morton Davis; (iii) 323,300 Shares owned by Mr. Davis' wife;
(iv) 677,865 Shares owned by Rivkalex Corp., the sole stockholder of which
is Mr. Davis' wife; (v) 247,500 Shares owned by Engex, Inc., a closed-end
investment company of which Mr. Davis is the Chairman of the Board and
Blair Banking is the largest stockholder; and (vi) 500,000 Shares held by
the J. Morton Davis Retirement Annuity Trust of which Mr. Davis' wife is
the trustee. Blair Banking and Mr. Davis disclaim beneficial ownership of
the Shares owned by Mr. Davis' wife and Rivkalex.
Excludes (i) an aggregate of 2,665,424 Shares owned by the adult children
(including the wife of Dr. Rosenwald) of Mr. Davis; (ii) an aggregate of
286,599 Shares owned by sons-in-law of Mr. Davis, who are officers of D.H.
Blair & Co., Inc. ("Blair"), a company substantially owned by family
members (including the wife of Dr. Rosenwald) of Mr. Davis; (iii) 91,250
Shares owned jointly by two adult children of Mr. Davis and their
respective spouses, who are officers of Blair; (iv) 37,800 Shares owned by
two limited partnerships, the limited partners of which are family members
of Mr. Davis (including the wife and children of Dr. Rosenwald); (v)
777,297 Shares owned by The Morton Foundation, a charitable foundation of
which Mr. Davis' wife and two of their adult children are the trustees and
for which a proxy to vote and dispose of such Shares is held by a third
party; and (vi) 600,000 Shares owned by four charitable foundations, the
trustees, officers and directors of which are various family members of Mr.
Davis, and for three of which a proxy to vote and dispose of such Shares is
held by a third party, as to all of which Shares Blair Banking and Mr.
Davis disclaim beneficial ownership.
(14) Represents Preferred Shares, which constitute all of the outstanding
Preferred Shares, and which are convertible into 622,222 Shares, each
entitled to one vote per Share, on a converted basis, on all matters except
the election of directors. AHP also owns 9,935 Shares.
4
<PAGE> 7
(15) Includes (i) 2,692,083 Shares issuable upon exercise of options exercisable
within 60 days, (ii) 7,671 Shares issuable upon exercise of outstanding
warrants, and (iii) 225,000 Shares subject to restricted stock awards which
may become fully vested within 60 days, but excludes (i) 2,767,417 Shares
issuable upon exercise of options which are not exercisable within 60 days,
and (ii) 450,000 Shares subject to restricted stock awards which do not
vest within 60 days.
(16) All holders own Shares, with the exception of AHP which owns 244,425
Preferred Shares (convertible into 622,222 Shares) and 9,935 Shares. The
numbers in this column reflect:
(a) for holders of Shares the percent of class is calculated on the basis
of 41,283,603 Shares outstanding, excluding 622,222 Shares issuable
upon conversion of the Preferred Shares, representing the number of
Shares outstanding and entitled to vote for the election of directors
of the Company.
(b) for holders of Preferred Shares, the percent of class is calculated on
the basis of 244,425 Preferred Shares outstanding.
5
<PAGE> 8
ELECTION OF DIRECTORS
At the Annual Meeting, ten directors will be elected by the stockholders to
serve until the next Annual Meeting of Stockholders or until their successors
are elected and shall qualify. Each of the nominees is currently a director of
the Company. Management recommends that the persons named below be elected as
directors of the Company and it is intended that the accompanying proxy will be
voted for the election as directors of the ten persons named below, unless the
proxy contains contrary instructions. The Company has no reason to believe that
any of the nominees will not be a candidate or will be unable to serve. However,
in the event that any of the nominees should become unable or unwilling to serve
as a director, the persons named in the proxy have advised that they will vote
for the election of such person or persons as shall be designated by management.
The following sets forth certain information relating to the ten nominees
for election to the Board of Directors.
LINDSAY A. ROSENWALD, M.D. (42) was a co-founder and since February 1989
has been Chairman of the Board of Directors of the Company. Dr. Rosenwald has
been the Chairman and President of The Castle Group Ltd. ("Castle"), a
biotechnology and biopharmaceutical venture capital firm, since October 1991,
the Chairman and President of Paramount Capital Investments, LLC, a
biotechnology, biomedical and biopharmaceutical merchant banking firm, since
1995, the Chairman and President of Paramount Capital, Inc., an investment
banking firm, since February 1992, and the founder, Chairman and President of
Paramount Capital Asset Management, Inc., a money management firm specializing
in the life sciences industry, since June 1994. From 1987 until 1991, Dr.
Rosenwald was a Managing Director, Corporate Finance at Blair, an investment
banking firm. Dr. Rosenwald received his M.D. from Temple University School of
Medicine and his B.S. in Finance from Pennsylvania State University. Dr.
Rosenwald is a member of the Board of Directors of the following publicly-traded
pharmaceutical or biotechnology companies: Atlantic Pharmaceuticals, Inc.,
Avigen, Inc., BioCryst Pharmaceuticals, Inc., Neose Technologies, Inc., Sparta
Pharmaceuticals, Inc., Titan Pharmaceuticals, Inc., VimRx Pharmaceuticals, Inc.,
and Xenometrix, Inc., and is a director of a number of privately held companies
in the biotechnology or pharmaceutical fields.
GLENN L. COOPER, M.D. (45) has been President, Chief Executive Officer and
a director of the Company since May 1993. Dr. Cooper was President and Chief
Executive Officer of Progenitor, Inc. ("Progenitor"), now a minority-owned
subsidiary of the Company, from September 1992 to June 1994. Dr. Cooper is also
Chairman of the Board of Directors of Intercardia, Inc. ("Intercardia"), a
majority-owned subsidiary of the Company and Progenitor, and is a director of
each of Transcell Technologies, Inc. ("Transcell") and InterNutria, Inc.
("InterNutria"), majority-owned subsidiaries of the Company, and serves as
acting President and Chief Executive Officer of Transcell, as well as a director
of Aeolus Pharmaceuticals, Inc. ("Aeolus"), a subsidiary of Intercardia, and
Genta, Inc., a public biotechnology company. Prior to joining Progenitor, Dr.
Cooper was Executive Vice President and Chief Operating Officer of Sphinx
Pharmaceuticals Corporation from August 1990. Dr. Cooper had been associated
with Eli Lilly since 1985, most recently, from June 1987 to July 1990, as
Director, Clinical Research, Europe, of Lilly Research Center Limited; from
October 1986 to May 1987 as International Medical Advisor, International
Research Coordination of Lilly Research Laboratories; and from June 1985 to
September 1986 as Medical Advisor, Regulatory Affairs, Chemotherapy Division at
Lilly Research Laboratories. Dr. Cooper received his M.D. from Tufts University
School of Medicine, performed his postdoctoral training in Internal Medicine and
Infectious Diseases at the New England Deaconess Hospital and Massachusetts
General Hospital and received his A.B. from Harvard College.
HARRY J. GRAY (78) has been a director of the Company since May 1993. Mr.
Gray was associated with United Technologies Corp. for 17 years and was its
President from 1971 until 1972 when he became its Chairman and Chief Executive
Officer until his retirement in 1986. Mr. Gray is currently Chairman and Chief
Executive Officer of Harry Gray Associates of Florida, a private investment
firm, Chairman and Chief Executive Officer of Mott Corporation and Chairman and
Chief Executive Officer of Worldwide Fulfillment and Distribution, Inc.
("Worldwide").
6
<PAGE> 9
ALEXANDER M. HAIG, JR. (73) has been a director of the Company since
January 1990. Since August 1982, General Haig has been Chairman and President of
Worldwide Associates, Inc., a business adviser to both U.S. and foreign
companies in connection with international marketing and sales activities. From
January 1981 until July 1982, General Haig served as Secretary of State of the
United States. From November 1979 until January 1981, General Haig was President
and Chief Operating Officer of United Technologies Corp. and is currently a
senior consultant to such corporation. From 1974 through 1979, General Haig was
the Supreme Allied Commander of NATO. Prior to that, he was White House Chief of
Staff under the Nixon and Ford Administrations. General Haig currently serves on
the Board of Directors of America Online, Inc. and MGM Grand, Inc. and is also a
director of Progenitor.
PETER BARTON HUTT (63) has been a director of the Company since April 1994.
Mr. Hutt has been a partner of Covington & Burling, a Washington, D.C. law firm,
since 1975 and from 1968 through 1971, and has been associated with the firm
since 1960. He served as Chief Counsel of the Food and Drug Administration
("FDA") from 1971 to 1975. He currently serves on the Board of Directors of
several developmental stage pharmaceutical companies, including Emisphere
Technologies, Inc. and Sparta Pharmaceuticals, Inc. Mr. Hutt received a B.A.
from Yale University, an L.L.B. from Harvard University and an L.L.M. from New
York University.
MALCOLM MORVILLE, PH.D. (52) has been a director of the Company since
February 1993. Since February 1993, Dr. Morville has been President and Chief
Executive Officer and a director of Phytera, Inc., a plant and marine
microbial-based biotechnology company. Dr. Morville is also Chairman and a
member of the Board of Directors of Phytera A/S and a member of the Board of
Directors of Phytera Ltd. and Phytera Symbion ApS, all of which are wholly-owned
subsidiaries of Phytera, Inc. From June 1988 through January 1993, Dr. Morville
held various positions with ImmuLogic Pharmaceutical Corporation, including
Division Vice President, Allergic Diseases Strategic Business Unit and Senior
Vice President, Development and Preclinical Research. From 1970 to June 1988,
Dr. Morville held various positions with Pfizer Central Research, including
Director, Immunology and Infectious Diseases and Assistant Director, Metabolic
Diseases and General Pharmacology. Dr. Morville received his Ph.D. and his B.Sc.
in Biochemistry at the University of Manchester Institute of Science and
Technology (U.K.).
ROBERT K. MUELLER (84) has been a director of the Company since February
1993. Mr. Mueller was Chairman of the Board of Arthur D. Little, Inc. from 1977
until his retirement in 1989 and currently serves as a consultant to such
entity, and is a member of the Board of Directors of its U.K. subsidiary, Arthur
D. Little, Ltd. (U.K.) and Decision Resources, Inc. From 1935 to 1968, when he
joined Arthur D. Little, Inc., Mr. Mueller held various positions with Monsanto
Company, including director, member of the executive committee and vice
president positions. Mr. Mueller is the author of numerous books and articles on
management and corporate governance, and received his M.S. in Chemistry from the
University of Michigan, his B.S. in Chemical Engineering from Washington
University and completed the Advanced Management Program at Harvard University.
LEE J. SCHROEDER (69) has been a director of the Company since August 1991.
Since 1985, Mr. Schroeder has been the President of Lee Schroeder & Associates,
Inc., a pharmaceutical consulting firm. Mr. Schroeder was President and Chief
Operating Officer of FoxMeyer Lincoln Drug Co., a wholesale drug company, from
February 1983 to March 1985 and was the Executive Vice President, responsible
for United States pharmaceutical operations, and a member of the executive
committee of Sandoz, Inc. from April 1981 to February 1983, and was Vice
President and General Manager of Dorsey Laboratories, a division of Sandoz,
Inc., from November 1974 to April 1981. Mr. Schroeder is also a member of the
Board of Directors of Ascent Pediatrics, Inc., Celgene Corporation, Harris
Laboratories, and MGI Pharma Inc.
DAVID B. SHARROCK (61) has been a director of the Company since February
1995. Mr. Sharrock was associated with Marion Merrell Dow Inc. and its
predecessor companies for over thirty-five years until his retirement in
December 1993. Most recently, since December 1989, he served as Executive Vice
President and Chief Operating Officer and a director, and in 1988, he was named
President and Chief Operating Officer of Merrell Dow Pharmaceuticals Inc. Mr.
Sharrock has been a consultant to the Company since February
7
<PAGE> 10
1994 and is also a director of Intercardia and Progenitor and member of the
Board of Directors of Cincinnati Bell Inc. and Unitog Co.
RICHARD WURTMAN, M.D. (61) was a co-founder of the Company and has been a
director of the Company and Chairman of the Scientific Advisors since the
Company's inception in October 1988. Dr. Wurtman is the Cecil H. Green
Distinguished Professor in the Department of Brain and Cognitive Sciences at the
Massachusetts Institute of Technology ("MIT") where he has been a full-time
Professor of Neuroendocrine Regulation since 1967 and a Professor of
Neuropharmacology at the Whitaker College of Health Sciences, Technology and
Management at MIT. Since July 1985, he has been the Director of the Clinical
Research Center at MIT. Since 1978, he has been a part-time Professor of
Neuroendocrine Regulation at Harvard University. Dr. Wurtman received his M.D.
from Harvard University and his B.A. from the University of Pennsylvania. Dr.
Wurtman is a consultant to the Company and devotes only a portion of his time
(limited to a maximum of five days per month) to the Company and also is a
consultant to other pharmaceutical entities, including Les Laboratoires Servier
("Servier") and Grupo Ferrer ("Ferrer").
Directors are elected by the Company's stockholders at each annual meeting
or, in the case of a vacancy, are appointed by the directors then in office, to
serve until the next annual meeting or until their successors are elected and
qualified. Officers are appointed by and serve at the discretion of the Board of
Directors.
The Board of Directors of the Company held 12 meetings during the fiscal
year ended September 30, 1997 ("fiscal 1997"). Each of the directors, except for
Drs. Morville and Wurtman who each attended 8 of the 12 meetings of the Board,
attended at least 75% of the aggregate number of meetings of the Board of
Directors and the committees thereof on which such director served, held during
fiscal 1997. As a result of significant corporate developments during fiscal
1997, there were a greater number of special meetings of the Board held on
relatively short notice than in prior fiscal years. Drs. Morville and Wurtman
had attended at least 75% of the aggregate number of meetings of the Board of
Directors and the committees thereof on which such director served during each
of fiscal 1995 and 1996.
The Audit Committee consists of General Haig, Mr. Mueller and Mr.
Schroeder. The Audit Committee reviews, with the Company's independent auditors,
the annual financial statements of the Company and makes annual recommendations
to the Board of Directors for the appointment of independent public auditors for
the ensuing year. The Audit Committee also reviews the plans and results for the
audit engagement, the effectiveness and adequacy of the financial and accounting
functions, organization, internal controls and related party transactions. The
Audit Committee met 3 times during fiscal 1997.
The Compensation Committee, which consists of Mr. Gray, General Haig, Dr.
Morville and Mr. Sharrock, reviews and determines, the compensation of all
executive officers of the Company, reviews general policy matters relating to
compensation and benefits of employees of the Company, administers the Company's
stock option and other employee compensation plans, including the 1994 Long-Term
Incentive Plan, as amended (the "1994 Plan"), the 1997 Equity Incentive Plan
(the "1997 Plan") and the 1998 Plan, consults with management on matters
concerning compensation and makes recommendations to the Board of Directors on
compensation matters where approval of the Board of Directors is required. The
Compensation Committee met 4 times during fiscal 1997, including 2 meetings
during regular meetings of the Board of Directors. The Company does not have a
nominating committee.
8
<PAGE> 11
DIRECTOR COMPENSATION
With the exception of General Haig, who receives a $10,000 fee per meeting
attended, non-employee directors (except Drs. Rosenwald and Wurtman) of the
Company receive a fee of $2,000 per in-person meeting attended. For each meeting
held by telephone conference, such directors receive a percentage of the regular
meeting fee. Except for Dr. Rosenwald, each non-employee director is reimbursed
for expenses actually incurred in attending meetings. During fiscal 1997 each
director (except Drs. Rosenwald and Cooper) received options to purchase 5,000
Shares, subject to annual vesting, as an automatic grant under the 1994 Plan. On
the date following the date of the Annual Meeting (and each annual meeting of
the stockholders), each director of the Company (except Drs. Rosenwald and
Cooper) will receive automatic grants of options to purchase 5,000 Shares under
the 1994 Plan, which options will be exercisable at a price equal to the fair
market value of the Company's Shares on the date of grant. In December 1996, the
Company granted options to purchase 100,000 Shares, subject to annual vesting,
to each of Drs. Rosenwald and Wurtman. In October 1997, the Company granted
options to purchase 25,000 Shares, all immediately exercisable, to each of the
directors of the Company, except Dr. Cooper, under the 1994 Plan. All of the
options granted to directors of the Company during fiscal 1997 and in October
1997 are exercisable at a price equal to fair market value of the Company's
Shares on the date of grant.
The Company has a Consulting and Non-Competition Agreement with each of Dr.
Wurtman and Mr. Sharrock and a Management Agreement with Dr. Rosenwald. During
fiscal 1997, the Company paid Drs. Wurtman and Rosenwald fees of $156,808 and
$30,000, respectively, pursuant to their agreements. In fiscal 1997, the Company
and its subsidiaries paid or accrued to Mr. Sharrock, who also serves as a
director of Intercardia and Progenitor, and as a consultant to Progenitor: (i)
consulting fees for consulting services rendered by Mr. Sharrock to the Company
and to Progenitor of $25,000 and $13,000, respectively; (ii) $8,000 in
directors' fees from Intercardia; and (iii) granted options, including options
to purchase 3,000 and 25,000 shares of common stock of Intercardia and
Progenitor, respectively, to Mr. Sharrock. General Haig also serves as a
director of Progenitor. In fiscal 1997, Progenitor granted options to purchase
25,000 shares of Progenitor common stock to General Haig. The options granted by
Progenitor to each of General Haig and Mr. Sharrock, and by Intercardia to Mr.
Sharrock, are all exercisable at a price equal to the fair market value of such
company's common stock on the date of grant.
9
<PAGE> 12
EXECUTIVE COMPENSATION*
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to executive officers whose annual compensation exceeded $100,000 for fiscal
1997 (collectively, the "named executive officers") for services during the
fiscal years ended September 30, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------- LONG TERM
OTHER COMPENSATION/
ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(2)(3) OPTIONS(#)(4) ($)(5)
- --------------------------------- ----- ------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Glenn L. Cooper, M.D............. 1997 337,115 126,000 105,896 345,000 4,571
President and Chief 1996 287,500 195,000 215,202 95,000 4,152
Executive Officer 1995 250,000 75,000 -- 455,000 4,083
Mark S. Butler................... 1997 235,021 71,550 -- 150,000 3,385
Executive Vice President, 1996 222,500 138,750 20,374 150,000 2,968
Chief Administrative Officer 1995 215,000 64,500 50,333 120,000 2,405
and General Counsel
Thomas F. Farb................... 1997 219,353 66,780 -- 150,000 10,626
Executive Vice President, 1996 207,500 130,500 -- 125,000 5,369
Chief Financial Officer 1995 200,000 60,000 35,779 120,000 6,526
and Treasurer
Bobby W. Sandage, Jr., Ph.D...... 1997 219,353 66,780 -- 250,000 1,627
Executive Vice President, 1996 203,962 115,500 -- -- 1,575
Research and Development, 1995 186,566 55,755 -- 220,000 1,633
Chief Scientific Officer
</TABLE>
- ---------------
* For a summary of certain executive compensation awards made during the first
quarter of the Company's fiscal year ending September 30, 1998, see
"Employee Retention Plan Adopted in Fiscal 1998."
(1) The salaries listed include contributions made by the named executive
officers to the Company's 401(k) Plan in the following amounts: (i) for
fiscal 1997, $11,600 for Dr. Cooper, $11,600 for Mr. Butler, $11,600 for Mr.
Farb and $9,500 for Dr. Sandage; (ii) for fiscal 1996, $9,800 for Dr.
Cooper, $8,063 for Mr. Butler $6,300 for Mr. Farb and $9,878 for Dr.
Sandage; and (iii) for fiscal 1995, $4,700 for Dr. Cooper, $9,241 for Mr.
Butler and $9,678 for Dr. Sandage.
(2) Amounts shown in this column include compensation accrued in the fiscal year
set forth, portions of which may have been paid in a subsequent fiscal year.
(3) Amounts shown in this column consist of the following: (i) debt forgiveness
for Dr. Cooper in the following amounts: for fiscal 1997, $56,897, and for
fiscal 1996, $115,626; (ii) moving and relocation or temporary living
expenses in the following amounts: (a) for fiscal 1996, for Mr. Butler
$12,890; and (b) for fiscal 1995, for Mr. Butler, $27,772 and for Mr. Farb,
$22,000 and (iii) reimbursements for the payment of taxes incurred, and tax
gross-up payment to cover such taxes, in connection with compensation, as
listed in (i) and (ii) herein in the following amounts: (a) for fiscal 1997,
$48,999 for Dr. Cooper; (b) for fiscal 1996, $99,576 for Dr. Cooper, $7,484
for Mr. Butler; and (c) for fiscal 1995, $22,563 for Mr. Butler and $13,779
for Mr. Farb.
(4) Consists of options granted under the 1994 Plan, except for Dr. Cooper (i)
for fiscal 1997, which also includes 20,000 and 25,000 options granted to
Dr. Cooper by Transcell and Progenitor, respectively, (ii) for fiscal 1996,
which consists of (a) 50,000 options granted to Dr. Cooper by Transcell; and
(b) options to purchase an aggregate of 45,000 Shares granted under the 1994
Plan to Dr. Cooper's wife, the Company's Vice President of Human Resources,
and (iii) for fiscal 1995, options to purchase an aggregate of 35,000 Shares
granted under the 1994 Plan to Dr. Cooper's wife. Dr. Cooper disclaims
beneficial ownership as to all Shares owned by his wife.
10
<PAGE> 13
(5) Amounts shown in this column include the following:
(a) disability insurance premiums on behalf of the named executive
officers, in the following amounts: (i) for fiscal 1997, $1,235 for Dr.
Cooper, $893 for Mr. Butler, $9,833 for Mr. Farb and $834 for Dr.
Sandage; (ii) for fiscal 1996, $1,054 for Dr. Cooper, $935 for Mr.
Butler, $4,710 for Mr. Farb and $853 for Dr. Sandage; and (iii) for
fiscal 1995, $1,350 for Dr. Cooper, $1,161 for Mr. Butler, $6,162 for
Mr. Farb and $1,003 for Dr. Sandage.
(b) group term life insurance premiums on behalf of the named executive
officers, in the following amounts: (i) for fiscal 1997, $1,122 for Dr.
Cooper, $2,492 for Mr. Butler, $793 for Mr. Farb and $793 for Dr.
Sandage; (ii) for fiscal 1996, $1,020 for Dr. Cooper, $2,033 for Mr.
Butler, $659 for Mr. Farb and $722 for Dr. Sandage; and (iii) for
fiscal 1995, $765 for Dr. Cooper, $1,244 for Mr. Butler, $354 for Mr.
Farb and $630 for Dr. Sandage. The Company has also made term life
insurance premium payments on behalf of Dr. Cooper in the following
amounts: (i) for fiscal 1997, $2,214 for Dr. Cooper; (ii) for fiscal
1996, $2,078; and (iii) for fiscal 1995, $1,968.
The following table sets forth certain information with respect to
individual grants of stock options made by the Company and its subsidiaries
during fiscal 1997 to the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
--------------------------------------------------- RATES OF
NO. OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(9)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(8) PRICE DATE 5% 10%
- ------------------------------------- ---------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Glenn L. Cooper, M.D................. 300,000(1) 24.3% $ 20.125 12/18/06 $3,796,951 $9,622,220
20,000(2) 3.6% $ 0.260 8/11/07 $ 3,271 $ 8,278
25,000(3) 1.2% $ 5.375 3/27/07 $ 84,508 $ 214,159
Mark S. Butler....................... 150,000(4) 12.1% $ 20.125 12/18/06 $1,898,476 $4,811,110
Thomas F. Farb....................... 150,000(5) 12.1% $ 20.125 12/18/06 $1,898,476 $4,811,110
Bobby W. Sandage, Jr., Ph.D. ........ 150,000(6) 12.1% $ 20.125 12/18/06 $1,898,476 $4,811,110
100,000(7) 8.1% $ 28.125 3/5/07 $1,768,766 $4,482,401
</TABLE>
- ---------------
(1) These options are exercisable in equal annual installments cumulatively over
three years commencing May 1998.
(2) Represents options granted by Transcell, a majority-owned subsidiary of the
Company which is not a reporting company under the Securities and Exchange
Act of 1934, as amended (the "1934 Act"), to Dr. Cooper, who is Chairman of
the Board and Acting President of Transcell. The options are exercisable in
two equal annual installments commencing March 1998.
(3) Represents options granted by Progenitor, a minority-owned subsidiary of the
Company which became a reporting company under the Exchange Act on August 6,
1997, to Dr. Cooper, who is Chairman of the Board of Progenitor. The options
are immediately exercisable.
(4) These options are exercisable in equal annual installments cumulatively over
three years commencing October 1998.
(5) These options are exercisable in equal annual installments cumulatively over
three years commencing December 1998.
(6) These options are exercisable in equal annual installments cumulatively over
three years commencing April 1998.
(7) These options are exercisable commencing March 2004, subject to an
accelerated vesting provision which provides that in the event that
CerAxon(TM) is approved by the FDA, the options shall become exercisable in
full on the date of such approval.
11
<PAGE> 14
(8) Based on the total number of options granted by the Company to its employees
during fiscal 1997, except for the grant by (i) Transcell to Dr. Cooper,
which percentage is calculated on the basis of total option grants by
Transcell to employees of Transcell during fiscal 1997, and (b) Progenitor
to Dr. Cooper, which percentage is calculated on the basis of total option
grants by Progenitor to employees of Progenitor during fiscal 1997
(excluding options granted during fiscal 1997 by Mercator Genetics, Inc.,
which was acquired by Progenitor simultaneously with the closing of
Progenitor's public offering in August 1997).
(9) Calculated by multiplying the exercise price by the annual appreciation rate
shown (as prescribed by S.E.C. rules and compounded for the term of the
options), subtracting the exercise price per share and multiplying the gain
per share by the number of shares covered by the options. These amounts are
not intended to forecast possible future appreciation, if any, of the price
of the Company's Shares or the price of common stock of Transcell or
Progenitor. The actual value realized upon exercise of the options to
purchase Company Shares or shares of common stock of Progenitor will depend
on the fair market value of such shares on the date of exercise.
There is no public market for the common stock of Transcell, and the actual
value realized upon exercise of the options to purchase shares of common stock
of Transcell will depend upon the fair market value of the common stock of
Transcell on the date of exercise, which will depend in part on whether a public
market for Transcell's common stock is established. In November 1997, Transcell,
Intercardia and the Company executed a letter of intent relating to the proposed
acquisition by Intercardia of Transcell and certain related technology rights
owned by Interneuron (the "Proposed Transcell Acquisition") in exchange for the
issuance of shares of common stock of Intercardia, as well as the issuance of
options to purchase Intercardia common stock to option holders of Transcell. The
number of shares of Intercardia common stock to be issued in connection with the
Proposed Transcell Acquisition will be determined prior to its closing and will
depend upon the price of Intercardia's common stock. The Proposed Transcell
Acquisition is subject to a number of conditions, including due diligence,
execution of definitive agreements and approval by stockholders of each of
Intercardia and Transcell. As a result, if the Proposed Transcell Acquisition is
consummated, the option held by Dr. Cooper to purchase shares of common stock of
Transcell will be exchanged for an option to purchase shares of common stock of
Intercardia, the actual value realized upon exercise of which will depend upon
the fair market value of the common stock of Intercardia on the date of
exercise.
The following table sets forth certain information with respect to each
exercise of stock options during fiscal 1997 by named executive officers and the
number and value of unexercised options held by each of the named executive
officers as of September 30, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL FISCAL YEAR-END
ACQUIRED ON VALUE YEAR-END EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(#) UNEXERCISABLE ($)(1)
- ---------------------------- -------------- ----------- ---------------------- -------------------------
<S> <C> <C> <C> <C>
Glenn L. Cooper, M.D........ -- -- 860,000/460,000 $3,195,000/$772,500
Mark S. Butler.............. -- -- 410,000/310,000 $1,095,000/$360,000
Thomas F. Farb.............. 10,000 97,500 246,667/293,333 $ 794,375/$360,000
Bobby W. Sandage, Jr.,
Ph.D...................... -- -- 385,000/310,000 $1,504,375/$360,000
</TABLE>
- ---------------
(1) Calculated by multiplying the number of unexercised in-the-money options
outstanding at September 30, 1997 by the difference between the fair market
value of the Common Stock at September 30, 1997 ($12.00) and the option
exercise price.
12
<PAGE> 15
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
In April 1996, the Company entered into an employment agreement (the
"Cooper Agreement") with Dr. Cooper, which supersedes a prior agreement, to
continue to serve as President and Chief Executive Officer of the Company for a
term of three years, subject to one-year renewal periods upon the mutual
agreement of Dr. Cooper and the Company. The Cooper Agreement provides for Dr.
Cooper to receive an annual base salary of $300,000, which was increased to
$350,000 per annum in December 1996, plus bonuses based on the achievement of
milestones to be agreed upon between the Company and Dr. Cooper and payable
under the Senior Executive Bonus Plan. In December 1997, the Compensation
Committee recommended an increase in the base annual salary of Dr. Cooper, which
Dr. Cooper voluntarily declined in light of other compensation awarded to him.
See "Employee Retention Plan Adopted in Fiscal 1998." The Company provides Dr.
Cooper with a $1,000,000 life insurance policy payable to the beneficiary of his
choice.
In October 1993, the Company loaned Dr. Cooper $140,000 (the "Company
Loan") which was used to repay the balance of a loan made to Dr. Cooper by
Progenitor. Pursuant to the Cooper Agreement, the Company Loan was evidenced by
a promissory note which provided for the repayment of the balance, plus accrued
interest, which amounts would be forgiven by the Company upon the achievement of
specified milestones. As of September 30, 1997, an aggregate of 100% or $172,523
of the Company Loan, including accrued interest, was forgiven based upon the
achievement of specified milestones, including $56,897, in fiscal 1997, upon the
achievement of a final specified milestone.
The Cooper Agreement provides that Dr. Cooper may not, during the term of
the agreement and for a year from the date of termination of employment, engage
in any business competitive with the Company or its research activities. If Dr.
Cooper is terminated for reasons other than cause, he is entitled to receive his
base salary plus pro-rated average bonuses, subject to set-off from other
employment, for a twelve-month period. In the event of a Change in Control, as
defined under the Cooper Agreement, Dr. Cooper is entitled to receive his base
salary due for the remaining portion of his employment agreement, either in a
lump sum or installments, at the discretion of the Company.
Pursuant to a letter agreement between the Company and Bobby W. Sandage,
Jr., Ph.D. effective November 1991, Dr. Sandage, the Company's Executive Vice
President, Research and Development, Chief Scientific Officer receives a base
annual salary, which was increased to $222,600 in December 1996 and $265,000 in
December 1997, to be reviewed annually. Dr. Sandage was eligible to participate
in the Company's Senior Executive Bonus Plan for fiscal 1997. If Dr. Sandage is
terminated for reason other than cause, he is entitled to salary and benefits
coverage for the earlier of up to six months or until he finds a new position.
Dr. Sandage may continue to consult with third parties in fields unrelated to
Company business during non-working hours.
Effective December 1993, the Company entered into a letter agreement with
Mark S. Butler, the Company's Executive Vice President, Chief Administrative
Officer and General Counsel. The agreement provides for a base salary, which was
increased to $238,500 in December 1996 and $265,000 in December 1997, to be
reviewed annually. Mr. Butler was also eligible to participate in the Company's
Senior Executive Bonus Plan for fiscal 1997. If Mr. Butler is terminated for
reason other than cause or if Mr. Butler elects to terminate for just cause, Mr.
Butler is entitled to receive salary for a period of nine months following such
termination, subject to set-off from other employment.
In April 1994, the Company entered into a letter agreement with Thomas F.
Farb, the Company's Executive Vice President, Chief Financial Officer and
Treasurer. The agreement provides for a base salary, which was increased to
$222,600 in December 1996 and $265,000 in December 1997, to be reviewed
annually. Mr. Farb was also eligible to participate in the Company's Senior
Executive Bonus Plan for fiscal 1997. If Mr. Farb is terminated for reason other
than cause or if Mr. Farb elects to terminate for just cause, Mr. Farb is
entitled to receive salary for a period of nine months following such
termination, subject to set-off from other employment.
13
<PAGE> 16
In the event of certain transactions, including those which may result in a
change in control, as defined under each of the Company's 1989 Plan, 1994 Plan
and 1997 Plan, unvested installments of options to purchase Shares or awards of
restricted stock held by executive officers of the Company may be subject to
accelerated vesting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Company's executive officers,
directors and persons who beneficially own more than 10% of a registered class
of the Company's equity securities to file with the S.E.C. initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Such executive officers, directors, and greater than
10% beneficial owners are required by S.E.C. regulation to furnish the Company
with copies of all Section 16(a) forms filed by such reporting persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and greater than 10% beneficial owners were complied with, except that
an initial report on Form 3 was filed on February 12, 1997 by Dale Ritter, who
became the Company's principal accounting officer (an executive officer under
the 1934 Act) on December 28, 1996, and reports on Form 4 reporting the exercise
of options on February 17, and April 28, 1997 were filed by Harry Gray on April
9, and June 4, 1997, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the members of the Compensation Committee were: Mr.
Gray, General Haig, Dr. Morville and Mr. Sharrock. Mr. Sharrock, who serves as
the Chairman of the Company's Compensation Committee, is also a consultant to
the Company and Progenitor and a director of Progenitor and Intercardia. In
fiscal 1997, the Company and its subsidiaries paid or accrued to Mr. Sharrock:
(i) an aggregate of $38,000 in consulting fees, including $25,000 and $13,000 in
fees for consulting services rendered by Mr. Sharrock to the Company and
Progenitor, respectively; (ii) $8,000 in directors' fees from Intercardia; and
(iii) granted options, including options to purchase 3,000 and 25,000 shares of
common stock of each of Intercardia and Progenitor, respectively, to Mr.
Sharrock. The options granted to Mr. Sharrock by each of Progenitor and
Intercardia are exercisable at a price equal to the fair market value of such
company's common stock on the date of grant. In fiscal 1997, InterNutria entered
into a product distribution agreement with Worldwide, of which Mr. Gray is the
Chairman and Chief Executive Officer. In fiscal 1997, InterNutria paid
approximately $117,000 to Worldwide pursuant to the terms of the agreement. See
"Certain Transactions."
14
<PAGE> 17
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION(1)
The goal of the Company's executive compensation policy is to ensure that
an appropriate relationship exists between executive compensation and the
creation of stockholder value, while at the same time attracting, motivating and
retaining executive officers. The Compensation Committee's informal executive
compensation philosophy (which applies generally to all executive officers of
the Company, including the President and Chief Executive Officer, Glenn L.
Cooper, M.D.) considers a number of factors, which may include:
- providing levels of compensation competitive with companies in comparable
industries which are at a similar stage of development and in the
Company's geographic area;
- integrating the compensation of the executive officers of the Company
with the achievement of performance goals;
- rewarding above average corporate performance; and
- recognizing and providing incentive for individual initiative and
achievement.
During fiscal 1997, the compensation of executive officers was weighted in
part toward bonus compensation contingent upon the Company achieving certain
business and financial objectives during the fiscal year. The Compensation
Committee also endorses the position that equity ownership by the executive
officers of the Company is beneficial in aligning their interests with those of
the stockholders, especially in the enhancement of stockholder value by
providing the executive officers with longer-term incentives. Accordingly,
compensation structures for the executive officers of the Company generally
include a combination of salary, bonuses and stock options. Base salary and
bonus awards are determined based on a range of measures and internal targets
set before the start of each fiscal year and in part by comparison to the
compensation of executive officers of comparable biotechnology and
pharmaceutical companies. The Compensation Committee considers the Company's
performance under these measures and uses its subjective judgment and discretion
in approving individual compensation.
In formulating the Senior Executive Bonus Plan for fiscal 1997 for
executive officers of the Company, including Dr. Cooper, the Compensation
Committee adopted performance measures tied to a number of business and
financial objectives to be achieved during fiscal 1997 and assigns relative
weighting to each objective. The Senior Executive Bonus Plan for fiscal 1997
entitled the named executive officers of the Company to a bonus equal to varying
percentages of base salary depending upon achieving these objectives which
included: (i) specified net sales levels of Redux(TM), including certain
co-promotion objectives(2); (ii) achieving defined clinical or regulatory
product development milestones; (iii) consummation of certain corporate
transactions, including liquidity events for the Company's subsidiaries; and
(iv) the Company's Common Stock price level. A percentage of the performance
targets for fiscal 1997 were realized and, accordingly, under the terms of the
Senior Executive Bonus Plan for fiscal 1997, Dr. Cooper received a bonus
- ---------------
1 The material in this report is not soliciting material, is not deemed filed
with the S.E.C. and is not incorporated by reference in any filing of the
Company under the 1933 Act or the 1934 Act, whether made before or after the
date of this proxy statement and irrespective of any general incorporation
language in such filing.
2 On September 15, 1997, the Company withdrew Redux from the market.
Accordingly, this performance measure ceased to be applicable on such date. In
response to the perceived risk of attrition of key management and other
personnel and employee morale issues resulting after the withdrawal of Redux and
related negative media coverage and legal proceedings, and in line with the
general goals of the Company's executive compensation policy, in October 1997,
the Board of Directors authorized, and in November 1997, pursuant to Board
authorization, the Compensation Committee approved, several components of a
management and employee retention program which were designed to motivate,
retain and provide incentive to the Company's management and other employees.
See "Employee Retention Plan Adopted in Fiscal 1998."
15
<PAGE> 18
of $126,000, and Messrs. Butler and Farb and Dr. Sandage received bonuses
of $71,550, $66,780, and $66,780, respectively.
The Compensation Committee implements its policy on longer-term
compensation to executive officers, including the chief executive officer,
generally by granting to an executive officer upon joining the Company stock
options with vesting over a three year period commencing one year from the date
of grant and, prior to the period in which the final installment of previously
granted options become exercisable, granting a new option to purchase at least
50% of the number of Shares issuable upon exercise of the original option with
vesting commencing one year after the previous option grant becomes fully
vested. As a result, during fiscal 1997, each of Dr. Cooper, Messrs. Butler and
Farb and Dr. Sandage were granted options to purchase Shares representing
approximately 50% of the number of options originally granted to each of such
named executive officers, to commence vesting approximately one year after the
period in which the original options granted to such executive officers become
fully vested.
The compensation received during fiscal 1997 by Dr. Cooper was governed in
part by the Cooper Agreement, entered into in April 1996, and substantially in
accordance with the policies discussed above relating to all executive officers.
In addition, in adopting the Senior Executive Bonus Plan for fiscal 1997, and
establishing the percentage of salary used in calculating the bonus payment to
Dr. Cooper, and approval of such bonus, the Compensation Committee also
considered a subjective evaluation of Dr. Cooper's performance and ability to
influence the Company's near and long-term growth.
TAX DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") limits the ability of the Company to deduct for tax purposes
compensation over $1,000,000 to any of the named executive officers unless, in
general, the compensation is paid pursuant to a plan which is performance
related, non-discretionary and has been approved by the Company's stockholders.
The Company may not have complied during fiscal 1997 with Section 162(m) for
option grants, although the Company should not incur compensation during fiscal
1997 to any of the named executive officers in excess of $1,000,000.
David B. Sharrock, Chairman
General Alexander M. Haig, Jr.
Harry J. Gray
Malcolm Morville, Ph.D.
EMPLOYEE RETENTION PLAN ADOPTED IN FISCAL 1998
In line with the general goals of the Company's executive compensation
policy, in October 1997, the Board of Directors authorized for adoption and,
pursuant to Board authorization, in November 1997, the Compensation Committee
approved, several components of a management and employee incentive and
retention program (the "Retention Plan"). The Retention Plan was determined to
be in the best interests of the Company in order to motivate, retain and provide
incentive to the Company's management and other employees, particularly in
response to the perceived risk of attrition of key personnel and employee morale
issues resulting after the withdrawal of Redux, the Company's first
pharmaceutical product which had accounted for substantially all of the
Company's revenues, and related negative media coverage and legal proceedings.
The components of the Retention Plan include: (i) options to purchase Shares
under the 1994 Plan to all employees of the Company, including each of the
executive officers; (ii) the Company's agreement to sell an aggregate of 10% of
the shares of common stock of InterNutria owned by the Company to the four
executive officers of the Company for nominal consideration; and (iii) the
adoption of the 1997 Equity Incentive Plan ("1997 Plan") and grant of restricted
stock awards thereunder to each of the executive officers and all employees of
the Company. Each of these equity components is subject to vesting criteria.
Pursuant to the Retention Plan, in October 1997, each of the executive
officers of the Company received options to purchase Shares pursuant to the 1994
Plan in the following amounts: 500,000 Shares to Dr. Cooper; and 250,000 Shares
to each of Messrs. Butler and Farb and Dr. Sandage all exercisable at the fair
market
16
<PAGE> 19
value on the date of grant in three equal annual installments on a cumulative
basis commencing one year from the date of grant. Although these options were
originally granted for a term of 10 years, each executive officer subsequently
voluntarily agreed to reduce the option term to seven years. Options to purchase
an aggregate of 495,000 Shares were granted to all employees of the Company,
other than the executive officers. Further, the Company agreed to sell to each
of Dr. Cooper, Messrs. Butler and Farb and Dr. Sandage, 2.5% of the common stock
of InterNutria owned by the Company (an aggregate of 10% of such common stock)
at a purchase price of $.001 per share, subject to certain repurchase rights.
In addition, pursuant to the Retention Plan, the Company adopted the 1997
Plan, as summarized below, which covers an aggregate of 1,750,000 shares that
may be issued pursuant to restricted stock awards upon satisfaction of specified
vesting periods, in consideration of services rendered to the Company or such
other consideration as the Board of Directors or the Compensation Committee of
the Board may determine.
Each of the executive officers of the Company received an award of
restricted stock in consideration of services rendered to the Company. The
awards consist of 225,000 Shares subject to awards granted to Dr. Cooper; and
150,000 Shares subject to awards granted to each of Messrs. Butler and Farb and
Dr. Sandage. In addition, 653,704 Shares are subject to awards granted to other
employees of the Company. The number of Shares subject to each employee's award
were based primarily on the employee's base compensation.
The Shares may be sold immediately upon vesting of the Shares, which was
originally scheduled to commence in January 1998 and extends through May 2000
and which is subject to automatic extension during a Black-Out Period (as
defined below) with respect to Shares subject to outstanding restricted stock
awards. The Company has a registration statement on Form S-8 relating to the
issuance of Shares under the 1997 Plan and the resale of the Shares subject to
awards granted to the executive officers.
The Company is not submitting the 1997 Plan for stockholder approval and is
providing the following summary of the 1997 Plan for information purposes only.
SUMMARY OF 1997 EQUITY INCENTIVE PLAN (THE "1997 PLAN")
The 1997 Plan, which expires in November 2007, and is intended to comply
with Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of
1934 (the "Exchange Act"), is administered by the Board of Directors or the
Committee. The purposes of the Plan are to ensure the retention of existing
executive personnel and other employees and to provide additional incentive by
permitting such individuals to participate in the ownership of the Company, and
the criteria to be utilized by the Board of Directors or the Committee in
granting Restricted Stock Awards pursuant to the Plan will be consistent with
these purposes.
Awards of Shares under the 1997 Plan may be made only to such employees and
officers of the Company as the Board of Directors or the Committee shall select
from time to time in its sole discretion. A recipient may receive more than one
award under the Plan. The Board of Directors or the Committee will, in its
discretion, determine (subject to the terms of the Plan) who will be granted
awards, the time or times at which such award shall be made, the number of
Shares to be subject to each award, the vesting or restriction period or
performance criteria, if any, applicable to each award, and the payment if any,
to be made by the awardee in consideration of the award or the Shares subject to
such award. Awards may be granted for services rendered and without any other
payment or consideration (other than, if required, the par value of the Shares),
or may provide for a payment of cash or deferred consideration which is less
than the fair market value of the awarded Shares on the date of grant. In making
such determinations, consideration may be given to the value of the services
rendered by the respective individuals, their present and potential
contributions to the success of the Company and its subsidiaries and such other
factors deemed relevant in accomplishing the purpose of the Plan. The terms and
conditions of an award shall be included in an agreement (a "Stock Award
Agreement") between each Recipient and the Company.
Awards may be made by the Board or the Committee subject to the restriction
that the Shares subject to the award may be repurchased by the Company at a
fixed price or a price established by formula, under
17
<PAGE> 20
specific circumstances. In addition, any Shares subject to an award may be
subject to vesting based on continued employment with the Company and that the
award shall terminate upon the termination of a Recipient's employment. Vesting
may be based on the passage of time or the satisfaction of certain predetermined
performance criteria as determined by the Committee, unless the award terminates
or the Shares vest earlier by any of the following events: (i) a Recipient's
death; (ii) a Recipient's disability; (iii) the occurrence of a trigger event,
as defined in the Plan; (iv) the Recipient's termination or early retirement;
and (v) any other time determined by the Committee in its sole discretion. Each
Stock Award Agreement will set forth, and each certificate evidencing Shares
issued pursuant to awards would bear a legend giving notice of, the restrictions
in the grant.
Vesting dates may be extended to new vesting dates under conditions
determined by the Board or the Committee, including automatic extension in the
event vesting would occur during a "Black-Out Period". A Black Out Period
generally means any period of time during which the Recipient is unable to sell
Shares as a result of legal or contractual restrictions on such sale, including
but not limited to periods in which (a) the Recipient is subject to a "lock-up"
agreement with a third party executed in connection with a public offering or
other financing transaction by the Company prohibiting the sale by Recipient of
Shares for a specified period of time without such third party's consent or (b)
the Recipient is subject to "insider-trading" restrictions imposed by the
Company or by law.
An award Recipient will not have any of the rights of a stockholder with
respect to the Shares covered by the award, including the right to vote such
Shares or the right to receive cash or stock dividends with respect thereto,
until such time as the Shares covered by the Restricted Stock Award have vested.
The 1997 Plan provides for acceleration of vesting in the event of certain
changes in control. Such acceleration may cause the consideration involved to be
treated in whole or in part as parachute payments under the Code. Acceleration
of benefits under other Company plans and other contracts with employees in the
event of such change of control could be subject to being combined with Plan
accelerations for "parachute payment" purposes. Any such "parachute payments"
may be non-deductible to the Company in whole or in part and the Recipient may
be subject to a 20% excise tax on all or part of such payments (in addition to
other taxes ordinarily payable).
No Restricted Stock Award may by sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent and distribution, except as set forth in the Plan or the Stock Award
Agreement.
The Board or the Committee may at any time terminate the 1997 Plan or make
such amendments thereto as it shall deem advisable and in the best interest of
the Company, without action on the part of the stockholders of the Company;
provided, however, that the Committee shall not, without the approval of the
stockholders of the Company, make any such changes which require stockholder
approval. In any case, no such termination or amendment shall, without the
consent of the individual to whom any award shall theretofore have been granted,
affect or impair the rights of such individual under such award.
Federal Income Tax Consequences
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of the Plan and does
not attempt to describe all possible federal or other tax consequences. The
following is not intended to be an exhaustive analysis of the tax consequences
relating to Restricted Stock Awards or Shares issuable under the Plan. For
instance, the treatment of awards or Shares vesting under state and local tax
laws, which are not described below, may differ from their treatment for Federal
income tax purposes.
The grant of Restricted Stock Awards should not result in income for the
Recipient or in a deduction for the Company for federal income tax purposes at
the date of grant, assuming the Shares are subject to vesting based upon
continued employment as intended by the Company. Upon satisfaction of the
vesting requirements, the Recipient would recognize ordinary compensation income
equal to the excess, if any, of the fair market value of the Shares over the
amount paid therefor by the Recipient. Fair market value would be
18
<PAGE> 21
determined without regard to other marketability restrictions imposed by the
securities laws. The tax consequences of a disposition of Shares vary depending
on the period such stock is held before its disposition. If the Recipient
disposes of Shares within 12 months of the Vesting Date, the Recipient
recognizes short-term capital gain in the year of disposition in an amount equal
to the excess (if any) of the sales proceeds of the Shares over the fair market
value of the Shares on the Vesting Date. If the Recipient disposes of Shares
more than 12 months but not more than 18 months after the Vesting Date, the
Recipient will recognize capital gains taxed at the maximum federal rate of 28%
and if the Recipient disposes of Shares more than 18 months after the Vesting
Date, the Recipient will recognize capital gains taxed at the maximum federal
rate of 20%.
An opportunity exists for the Recipient to make an election under Section
83(b) of the Internal Revenue Code (the "Code") which will allow the Recipient
to include the value of the Shares in taxable income on the date of grant
instead of the date of vesting. If a Section 83(b) election is made, any
appreciation or depreciation that occurs during the vesting period will receive
capital gain or loss treatment. Upon sale of the Shares, the Recipient would
recognize taxable capital gain income or loss equal to the fair market of the
Shares at that time less the value at the grant date. The election under Section
83(b) must be made within 30 days of the date of the grant of the Shares. If
stock is forfeited during the vesting period, an election under Section 83(b)
could be detrimental, as the Recipient would have no means to recover the tax
paid.
The 1997 Plan provides for acceleration of vesting in the event of certain
changes in control. Such acceleration may cause the consideration involved to be
treated in whole or in part as parachute payments under the Code. Acceleration
of benefits under other Company plans and other contracts with employees in the
event of such change of control could be subject to being combined with Plan
accelerations for "parachute payment" purposes. Any such "parachute payments"
may be non-deductible to the Company in whole or in part and the Recipient may
be subject to a 20% excise tax on all or part of such payments (in addition to
other taxes ordinarily payable).
Internal Revenue Code Limits on Deductibility
Because the Company is not submitting the 1997 Plan for stockholder
approval, the requirements of Section 162(m) will not have been met and,
accordingly, deduction of compensation in excess of the Section 162(m) limit
arising under the 1997 Plan will not be available to the Company to the extent
such amount exceeds $1,000,000 per year.
19
<PAGE> 22
STOCK PRICE PERFORMANCE PRESENTATION
The following chart compares the cumulative total stockholder return on the
Company's Shares with the cumulative total stockholder return of (i) the Nasdaq
Market Index and (ii) a peer group index consisting of companies reporting under
the Standard Industrial Classification Code 2834 (Pharmaceutical Preparations):
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG INTERNEURON PHARMACEUTICALS, INC. ("IPI"),
NASDAQ MARKET INDEX AND PEER GROUP INDEX ("SIC")(1)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ MARKET
(FISCAL YEAR COVERED) IPI SIC INDEX
<S> <C> <C> <C>
1992 100 100 100
1993 110.17 84.9 130.05
1994 83.9 95.49 137.62
1995 155.93 138.04 167.1
1996 383.05 183.15 195.08
1997 162.71 260.21 265.16
</TABLE>
- ---------------
(1) Assumes $100 invested on September 30, 1992 and assumes dividends
reinvested. Measurement points are at the last trading day of the fiscal
years ended September 30, 1992, 1993, 1994, 1995, 1996 and 1997. The
material in this chart is not soliciting material, is not deemed filed with
the S.E.C. and is not incorporated by reference in any filing of the Company
under the Securities Act of 1993, as amended, (the "1933 Act") or the 1934
Act, whether made before or after the date of this proxy statement and
irrespective of any general incorporation language in such filing. A list of
the companies included in the Peer Group Index will be furnished by the
Company to any stockholder upon written request to the Vice President,
Corporate Communications.
CERTAIN TRANSACTIONS
In November 1995, the Company entered into a Consultant and Non-Competition
Agreement with Dr. Richard Wurtman which entitles Dr. Wurtman to an annual
consulting fee of $150,000, subject to increases. Under this agreement, Dr.
Wurtman received $156,808 in consulting fees from the Company in fiscal 1997.
Effective as of April 5, 1995, InterNutria entered into a Consultant and
Non-Competition Agreement with Judith Wurtman, Ph.D., the wife of Dr. Richard
Wurtman and a director of InterNutria. InterNutria was organized by the Company
in April 1995 to develop commercial applications of nutritional and dietary
supplement products. The agreement with Dr. Judith Wurtman entitles her to an
annual
20
<PAGE> 23
consulting fee from InterNutria of $85,000, subject to increases. In addition,
Dr. Judith Wurtman received options to purchase approximately 5% of the
outstanding common stock of InterNutria. During fiscal 1997, Dr. Judith Wurtman
received $94,312 in consulting fees from InterNutria.
Drs. Richard Wurtman and Judith Wurtman have advised the Company that in
accordance with MIT policy, they are entitled to receive from MIT a percentage
of any royalties received by MIT in connection with MIT's licenses of
dexfenfluramine to Servier and citicoline to Ferrer. They have further advised
that in accordance with such policy, they are not entitled to share in royalties
derived by MIT from any licensee in which they have an equity interest (such as
the Company).
In fiscal 1997, the Company made contributions of approximately $147,000 to
The Center for Brain Science and Metabolism Charitable Trust, of which Dr.
Richard Wurtman is the Scientific Director. This trust provides grants and
fellowships to not-for-profit institutions, including MIT, and post-doctoral
fellows for research in brain behavior, nutrition and pharmacology and has
supported research on citicoline and melatonin.
In November 1995, the Company and InterNutria entered into an Asset
Purchase Agreement with AVAX Technologies, formerly Walden Laboratories, Inc.
("AVAX"), pursuant to which InterNutria purchased substantially all of the
assets of AVAX, including PMS Escape, a product developed for the treatment of
pre-menstrual syndrome, and related intellectual property, for consideration
payable in Shares with a fair market value at the date of payment equal to an
aggregate of $2,400,000, payable in two equal annual installments in December
1996 and 1997. Accordingly, in December 1996 and 1997, the Company issued an
aggregate of 55,422 and 112,793 Shares, respectively, which Shares were
distributed to certain stockholders of AVAX in accordance with the terms of the
Asset Purchase Agreement. Dr. Richard Wurtman and Dr. Rosenwald are stockholders
of AVAX, Dr. Judith Wurtman previously served as an executive officer, director
and principal stockholder of AVAX, and certain other officers and directors of
the Company are stockholders of AVAX. None of such individuals received any of
the Shares constituting the purchase price for the AVAX assets.
In October 1997, the Company agreed to sell to each of Dr. Cooper, Messrs.
Butler and Farb and Dr. Sandage, 2.5% of the capital stock of InterNutria held
by the Company (an aggregate of 10%) for a purchase price of $.001 per share,
subject to vesting restrictions.
Dr. Rosenwald receives a management fee, which includes his out-of-pocket
expenses incurred in providing services to the Company, of $2,500 per month
under a management agreement with the Company. For fiscal 1997, the Company paid
$30,000 to Dr. Rosenwald pursuant to this agreement.
Dr. Rosenwald is the Chairman and President of Castle, a venture capital
firm engaged in locating, investigating and funding scientific inventions or
technologies which are perceived to have potential commercial application in the
pharmaceutical or health care industries, generally with the goal of forming a
new company to exploit such inventions or technologies. Castle has presented
certain of such opportunities to the Company, as well as to other companies, and
may in the future continue to do so, although neither Dr. Rosenwald nor Castle
has any agreement to do so and there can be no assurance that any inventions,
technologies or companies discovered or funded by Castle will be presented to
the Company. The Board of Directors of the Company adopted a policy for
compensating Castle or the Castle employee (excluding Dr. Rosenwald) responsible
for the introduction (the "Castle Finder") for any arrangement entered into by
the Company as a result of Castle's introduction. No compensation was paid to
Castle Finders during fiscal 1997.
In fiscal 1997, the Company and its subsidiaries paid or accrued to Mr.
Sharrock, who also serves as a director of Progenitor and Intercardia, and as a
consultant to Progenitor: (i) an aggregate of $38,000 in consulting fees,
including $25,000 and $13,000 in fees for consulting services rendered by Mr.
Sharrock to the Company and Progenitor, respectively; (ii) $8,000 in directors'
fees from Intercardia; and (iii) granted options, including options to purchase
3,000 and 25,000 shares of common stock of Intercardia and Progenitor,
respectively, to Mr. Sharrock. General Haig also serves as a director of
Progenitor. In fiscal 1997, Progenitor granted options to purchase 25,000 shares
of Progenitor common stock to General Haig. The options granted
21
<PAGE> 24
by Progenitor to each of General Haig and Mr. Sharrock, and by Intercardia to
Mr. Sharrock, are all exercisable at a price equal to the fair market value of
such company's common stock on the date of grant. See "Director Compensation."
In fiscal 1996, the Company entered into a consulting agreement with Dr.
Gale Cooper, a psychiatrist and the sister of Glenn L. Cooper, M.D., for a term
of one year subject to automatic renewals of one year periods, unless earlier
terminated, pursuant to which Dr. Gale Cooper performs certain medical marketing
services on behalf of the Company. Dr. Gale Cooper received $97,000 in
consulting fees pursuant to such agreement in fiscal 1997. In addition, Dr. Gale
Cooper has acted as a clinical investigator in certain clinical trials relating
to products under development by the Company or its corporate partners, and
received approximately $265,000 in fiscal 1997 in her capacity as one of six
investigators in a clinical trial sponsored by the Company. The Company believes
that the terms of these transactions are at least as favorable to the Company as
could have been obtained from a non-affiliated third party.
In October 1993, the Company loaned Glenn Cooper $140,000 (the "Company
Loan"), which was used by Dr. Cooper to repay the balance of a loan made to him
by Progenitor. As of September 30, 1997, an aggregate of 100% or $172,523 of the
Company Loan, including accrued interest, had been forgiven based upon the
achievement of specified milestones, including $56,897 forgiven in fiscal 1997
upon the achievement of the final specified milestone.
Option grants for fiscal 1997 to named executive officers are set forth in
the table to this Proxy Statement entitled "Securities Underlying Option/SAR
Grants in Last Fiscal Year." In December 1996, the Company granted options to
purchase 100,000 Shares, subject to annual vesting, to each of Drs. Rosenwald
and Wurtman, which are exercisable at a price equal to the fair market value of
the Company's Shares on the date of grant. In fiscal 1997, the Company also
granted options to certain of the Company's directors pursuant to automatic
grant provisions. See "Director Compensation."
In fiscal 1997, InterNutria entered into a product distribution agreement
with Worldwide. Mr. Gray, a director of the Company, is the Chairman and Chief
Executive Officer of Worldwide. In fiscal 1997, InterNutria paid approximately
$117,000 to Worldwide pursuant to the terms of the agreement.
In fiscal 1997, the Company retained the services of Covington & Burling, a
law firm of which Mr. Hutt, a director of the Company, is a partner.
In the first quarter of fiscal 1998, the Company granted options under the
1994 Plan to purchase (i) 25,000 Shares to each of the directors of the Company,
except Dr. Cooper, all of which are immediately exercisable, (ii) 500,000 Shares
to Dr. Cooper and (iii) 250,000 Shares to each of Messrs. Butler and Farb and
Dr. Sandage. The options granted to the executive officers vest over a three
year period commencing one year from the date of grant and originally had a 10
year term. Each executive officer subsequently agreed to reduce the option term
to seven years. All of these options were granted at an exercise price equal to
the fair market value of the Shares on the date of grant. The Company also
granted an award of Shares to each of the executive officers of the Company,
subject to vesting in the following amounts: 225,000 Shares to Dr. Cooper; and
150,000 Shares to each of Messrs. Butler and Farb and Dr. Sandage. See "Employee
Retention Plan Adopted in Fiscal 1998". In accordance with the terms of the 1994
Plan, on the day after the Annual Meeting date, all of the directors of the
Company (except Drs. Rosenwald and Cooper) will receive automatic grants of
options to purchase 5,000 Shares, which will be exercisable at a price equal to
the fair market value of the Company's Shares on the date of grant. See
"Director Compensation."
APPROVAL AND RATIFICATION OF THE 1998 EMPLOYEE STOCK OPTION PLAN
GENERAL
On January 21, 1998, the Board of Directors adopted the 1998 Employee Stock
Option Plan (the "1998 Plan"), pursuant to which employees, officers and
directors and consultants of the Company and any subsidiary corporations are
eligible to receive incentive stock options ("incentive options") within the
meaning of Section 422 of the Code, and options that do not qualify as incentive
options ("non-qualified options") provided, however, that persons who were
executive officers or directors of the Company, as of the date of adoption of
the 1998 Plan by the Board of Directors, are not eligible to receive options
under the 1998 Plan.
22
<PAGE> 25
The 1998 Plan covers 1,500,000 of the Company's Shares. The 1998 Plan, which
expires in January 2005, is administered by the Board of Directors or a
committee of the Board of Directors (the "Committee"). The purposes of the 1998
Plan are to attract, motivate and ensure the retention of key employees, and to
provide additional incentive by permitting such individuals to participate in
the ownership of the Company, and the criteria to be utilized by the Board of
Directors or the Committee in granting options pursuant to the 1998 Plan will be
consistent with these purposes.
Although the Company maintains the 1994 Plan, as of December 31, 1997,
there were approximately 600,000 Shares available for issuance under the 1994
Plan. The Company recently filed a New Drug Application with the FDA relating to
the use of CerAxon to treat ischemic stroke. While the Company is unable to
predict whether FDA approval will be obtained, assuming such approval, the
Company is currently planning to conduct sole direct marketing of the product
which would include expanding the Company's sales force and hiring additional
medical, marketing and administrative personnel. The Company believes that the
1998 Plan will provide a significant component of the compensation of such
individuals and assist the Company in attracting and retaining qualified
individuals.
OPTIONS
Options granted under the 1998 Plan may be either incentive options or
non-qualified options. Incentive options granted under the 1998 Plan are
exercisable for a period of up to seven years from the date of grant at an
exercise price which is not less than the fair market value of the Shares on the
date of the grant, except that the term of an incentive option granted under the
1998 Plan to a stockholder owning more than 10% of the outstanding voting power
may not exceed five years and its exercise price may not be less than 110% of
the fair market value of the Shares on the date of the grant. To the extent that
the aggregate fair market value, as of the date of grant, of the Shares for
which incentive options become exercisable for the first time by an optionee
during the calendar year exceeds $100,000, the portion of such option which is
in excess of the $100,000 limitation will be treated as a non-qualified option.
Additionally, the aggregate number of Shares that may be subject to options
granted to any person in a calendar year shall not exceed 25% of the maximum
number of Shares which may be issued from time to time under the 1998 Plan.
Options granted under the 1998 Plan to employees of the Company may be exercised
only while the optionee is employed or retained by the Company or within 6
months of the date of termination of the employment relationship (3 months in
case of incentive options). However, options which are exercisable at the time
of termination by reason of death or permanent disability of the optionee may be
exercised within 12 months of the date of termination of the employment
relationship. Upon the exercise of an option, payment may be made by cash or by
any other means that the Board of Directors or the Committee determines. No
option may be granted under the 1998 Plan after January 2005.
Options may be granted to such employees, officers or directors of the
Company or any subsidiary of the Company as the Board of Directors or the
Committee shall select from time to time in its sole discretion, provided that
only employees of the Company or a subsidiary of the Company shall be eligible
to receive incentive options; further provided that, no person who was, as of
the date of adoption of the 1998 Plan by the Board of Directors, an executive
officer or director of the Company, is eligible to receive an option grant under
the 1998 Plan.
As of January 23, 1998, approximately 200 persons of the Company were
eligible to receive grants under the 1998 Plan. The number of future officers
and directors of the Company eligible to receive grants under the 1998 Plan is
not determinable. An optionee may be granted more than one option under the 1998
Plan. The Board of Directors or the Committee will, in its discretion, determine
(subject to the terms of the 1998 Plan) who will be granted options, the time or
times at which options shall be granted, and the number of Shares subject to
each option, whether the options are incentive options or non-qualified options,
and the manner in which options may be exercised. In making such determination,
consideration may be given to the value of the services rendered by the
respective individuals, their present and potential contributions to the success
of the Company and its subsidiaries and such other factors deemed relevant in
accomplishing the purpose of the 1998 Plan.
Under the 1998 Plan, the optionee has none of the rights of a stockholder
with respect to the Shares issuable upon the exercise of the option until such
Shares shall be issued upon such exercise. No adjustment
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<PAGE> 26
shall be made for dividends or distributions or other rights for which the
record date is prior to the date of exercise, except as provided in the 1998
Plan. During the lifetime of the optionee, an option shall be exercisable only
by the optionee. No option may be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
decent and distribution, except that non-qualified options may be transferred by
the optionee during his lifetime to certain permitted transferees, subject to
certain conditions.
The Board of Directors may amend or terminate the 1998 Plan except that
stockholder approval is required if required by Rule 16b-3 or Section 422 of the
Code. No action taken by the Board may materially and adversely affect any
outstanding option grant without the consent of the optionee.
FEDERAL INCOME TAX CONSEQUENCES
Under current tax law, there are no Federal income tax consequences to
either the employee or the Company on the grant of non-qualified options if
granted under the terms set forth in the 1998 Plan. Upon exercise of a
non-qualified option, the excess of the fair market value of the Shares subject
to the option over the option price (the "Spread") at the date of exercise is
taxable as ordinary income to the optionee in the year it is exercised and is
generally deductible by the Company as compensation for Federal income tax
purposes. The optionee's basis in the Shares will be equal to the fair market
value on the date taxation is imposed and the holding period commences on such
date.
Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of such option, assuming that the optionee
was an employee of the Company from the date the option was granted until 3
months before such exercise. However, upon exercise, the Spread must be added to
regular Federal taxable income in computing the optionee's "alternative minimum
tax" liability. An optionee's basis in the Shares received on exercise of an
incentive stock option will be the option price of such Shares for regular
income tax purposes. No deduction is allowable to the Company for Federal income
tax purposes in connection with the grant or exercise of such option.
If the holder of Shares acquired through exercise of an incentive option
sells such Shares within two years of the date of grant of such option or within
one year from the date of exercise of such option (a "Disqualifying
Disposition"), the optionee will realize income taxable at ordinary rates.
Ordinary income is reportable during the year of such sale equal to the
difference between the option price and the fair market value of the Shares at
the date the option is exercised, but the amount includable as ordinary income
shall not exceed the excess, if any, of the proceeds of such sale over the
option price. In addition to ordinary income, a Disqualifying Disposition may
result in taxable income subject to capital gains treatment if the sales
proceeds exceed the optionee's basis in the Shares (i.e., the option price plus
the amount includable as ordinary income). The amount of the optionee's taxable
ordinary income will generally be deductible by the Company in the year of the
Disqualifying Disposition.
At the time of sale of Shares received upon exercise of an option (other
than a Disqualifying Disposition of Shares received upon the exercise of an
incentive option), any gain or loss is long-term or short-term capital gain or
loss, depending upon the holding period. If the Optionee disposes of Shares
received upon exercise of an option within 12 months of the Exercise Date, the
Optionee recognizes short-term capital gain in the year of disposition in an
amount equal to the excess (if any) of the sales proceeds of the Shares over the
exercise price. If the Optionee disposes of Shares more than 12 months but not
more than 18 months after the Exercise Date, the Optionee will recognize capital
gains taxed at the maximum federal rate of 28% and if the Optionee disposes of
Shares more than 18 months after the Exercise Date, the Optionee will recognize
capital gains taxed at the maximum federal rate of 20%.
The foregoing is not intended to be an exhaustive analysis of the tax
consequences relating to stock options issued under the 1998 Plan. For instance,
the treatment of options under state and local tax laws, which are not described
above, may differ from their treatment for Federal income tax purposes.
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<PAGE> 27
SECTION 162(M) LIMITS ON DEDUCTIBILITY
Although the Company's current executive officers are not eligible to
receive options under the 1998 Plan, future executive officers subject to
Section 162(m) of the Code may receive options under the Plan. Assuming
stockholder approval of the 1998 plan, the Company believes the 1998 Plan should
meet the requirements of Section 162(m).
Through January 23, 1998 options to purchase an aggregate of 66,429 Shares
have been granted under the 1998 Plan at an exercise price of $10.50 per Share.
The following table sets forth certain information with respect to grants
of stock options made under the 1998 Plan:
NEW PLAN BENEFITS
1998 EMPLOYEE STOCK OPTION PLAN
<TABLE>
<CAPTION>
NAME AND POSITION(1) DOLLAR VALUE(2) NUMBER OF OPTIONS
---------------------------------------- ----------------- -----------------
<S> <C> <C>
Non-Executive Employee Group............ $198,463/$462,504 46,429
</TABLE>
- ---------------
(1) Pursuant to the terms of the 1998 Plan, none of the current executive
officers and directors of the Company are eligible to receive option grants.
Accordingly, the future benefits to each of them under the 1998 Plan is nil.
(2) Calculated by multiplying the exercise price by an annual appreciation rate
of 5% and 10%, respectively, (and compounded for the term of the options),
subtracting the exercise price per share and multiplying the gain per share
by the number of shares covered by the options. These amounts are not
intended to forecast possible future appreciation, if any, of the price of
the Company's Shares. The actual value realized upon exercise of the options
to purchase Company Shares will depend on the fair market value of such
shares on the date of exercise.
Future grants under the 1998 Plan have not yet been determined.
The affirmative vote of the holders of the majority of the Shares present
in person or by proxy at the Annual Meeting and entitled to vote on the matter
is required to approve and ratify the 1998 Plan. In the event stockholder
approval of the 1998 Plan is not obtained by January 1999, no incentive options
may be granted under the 1998 Plan. The Board of Directors recommends a vote FOR
the 1998 Plan, and the persons named in the accompanying proxy will vote in
accordance with the choice specified thereon or, if no choice is properly
indicated, in favor of the approval and ratification.
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APPROVAL AND RATIFICATION OF THE
APPOINTMENT OF INDEPENDENT AUDITORS
The Management of the Company recommends a vote for the approval and
ratification of the appointment of Coopers & Lybrand L.L.P., Certified Public
Accountants, as the Company's independent auditors for the fiscal year ending
September 30, 1998. Coopers & Lybrand L.L.P. have been the Company's auditors
for the past fiscal year and has no direct or indirect financial interest in the
Company. A representative of Coopers & Lybrand L.L.P. is expected to be present
at the Annual Meeting of Stockholders with the opportunity to make a statement
if he or she desires to do so, and shall be available to respond to appropriate
questions.
GENERAL
The Management of the Company does not know of any matters other than those
stated in this Proxy Statement which are to be presented for action at the
meeting. If any other matters should properly come before the meeting, it is
intended that proxies in the accompanying form will be voted on any such other
matters in accordance with the judgment of the persons voting such proxies.
Discretionary authority to vote on such matters is conferred by such proxies
upon the persons voting them.
The Company will bear the cost of preparing, printing, assembling and
mailing the proxy, Proxy Statement and other material which may be sent to
stockholders in connection with this solicitation. It is contemplated that
brokerage houses will forward the proxy materials to beneficial owners at the
request of the Company. In addition to the solicitation of proxies by use of the
mails, officers and regular employees of the Company may solicit by telephone
proxies without additional compensation. The Company does not expect to pay any
compensation for the solicitation of proxies.
The Company will provide without charge to each person being solicited by
this Proxy Statement, on the written request of any such person, a copy of the
Annual Report of the Company on Form 10-K for the fiscal year ended September
30, 1997 (as filed with the S.E.C.) including the financial statements thereto.
All such requests should be directed to Vice President, Corporate
Communications, Interneuron Pharmaceuticals, Inc., One Ledgemont Center, 99
Hayden Avenue, Lexington, Massachusetts 02173.
STOCKHOLDER PROPOSALS
The Annual Meeting of Stockholders for the fiscal year ending September 30,
1998 is expected to be held in March 1999. All proposals intended to be
presented at the Company's next Annual Meeting of Stockholders must be received
in writing and in compliances with S.E.C. requirements, at the Company's
executive office no later than September 30, 1998, for inclusion in the Proxy
Statement and form of proxy related to that meeting.
By Order of the Board of Directors,
Glenn L. Cooper, M.D.
President and Chief Executive Officer
Dated: January 28, 1998
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EXHIBIT A
INTERNEURON PHARMACEUTICALS, INC.
1998 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for INTERNEURON
PHARMACEUTICALS, INC. (the "Company") and its stockholders the benefits arising
from capital stock ownership by employees, officers and directors of, and
consultants to, the Company who are expected to contribute to the Company's
future growth and success. Except where the context otherwise requires, the term
"Company" shall include all present and future subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended or replaced from time to time (the "Code"). Those provisions of the Plan
which make express reference to Section 422 shall apply only to Incentive Stock
Options (as that term is defined in the Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a committee
designated by the Board of Directors, the "Committee") and may be either
incentive stock options ("Incentive Stock Options") meeting the requirements of
Section 422 of the Code or non-statutory options which are not intended to meet
the requirements of Section 422 of the Code.
(b) Administration. The Plan will be administered by the Board of
Directors or the Committee, whose construction and interpretation of the terms
and provisions of the Plan shall be final and conclusive. The delegation of
powers to the Committee shall be consistent with applicable laws or regulations
(including, without limitation, applicable state law and Rule 16b-3 ("Rule
16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), or any successor rule). The Board of Directors or the Committee may in
its sole discretion grant options to purchase shares of the Company's Common
Stock, $.001 par value per share ("Common Stock") and issue shares upon exercise
of such options as provided in the Plan. The Board of Directors or the Committee
shall have authority, subject to the express provisions of the Plan, to construe
the respective option agreements and the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the terms and
provisions of the respective option agreements, which need not be identical, and
to make all other determinations in the judgment of the Board of Directors or
the Committee necessary or desirable for the administration of the Plan. The
Board of Directors or the Committee may correct any defect or supply any
omission or reconcile any inconsistency in the Plan or in any option agreement
in the manner and to the extent it shall deem expedient to carry the Plan into
effect and it shall be the sole and final judge of such expediency. No director
or person acting pursuant to authority delegated by the Board of Directors or
the Committee shall be liable for any action or determination under the Plan
made in good faith. Subject to adjustment as provided in Section 15 below, the
aggregate number of shares of Common Stock that may be subject to Options
granted to any person in a calendar year shall not exceed 25% of the maximum
number of shares which may be issued and sold under the Plan, as set forth in
Section 4 hereof, as such section may be amended from time to time.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply to the Company only at such time as
the Company's Common Stock is registered under the Exchange Act, subject to the
last sentence of Section 3(b), and then only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. ELIGIBILITY.
(a) Options may be granted to persons who are, at the time of grant,
employees, officers or directors of, and consultants to, the Company
("Participants") provided, that Incentive Stock Options may only be granted to
individuals who are employees of the Company (within the meaning of Section
3401(c) of the
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Code) and provided further, that no person who is, as of the date of adoption of
the Plan by the Board of Directors, an executive officer or director of
Interneuron Pharmaceuticals, Inc. shall be eligible to receive an option grant
under the Plan. A person who has been granted an option may, if he or she is
otherwise eligible, be granted additional options if the Board of Directors or
the Committee shall so determine.
(b) Grant of Options to Reporting Persons. The selection of a director or
an officer who is a Reporting Person (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either by the Board of Directors by
the Committee.
4. STOCK SUBJECT TO PLAN.
The stock subject to options granted under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. Subject to adjustment as
provided in Section 15 below, the maximum number of shares of Common Stock of
the Company which may be issued and sold under the Plan is one million five
hundred thousand (1,500,000) shares. If an option granted under the Plan shall
expire, terminate or is cancelled for any reason without having been exercised
in full, the unpurchased shares subject to such option shall again be available
for subsequent option grants under the Plan.
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient of
an option shall, if requested by the Company, execute an option agreement in
such form not inconsistent with the Plan as may be approved by the Board of
Directors or the Committee. Such option agreements may differ among recipients.
6. PURCHASE PRICE.
(a) General. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors or the
Committee at the time of grant of such option; provided, however, that in the
case of an Incentive Stock Option, the exercise price shall not be less than
100% of the Fair Market Value (as hereinafter defined) of such stock, at the
time of grant of such option, or less than 110% of such Fair Market Value in the
case of options described in Section 11(b). "Fair Market Value" of a share of
Common Stock of the Company as of a specified date for the purposes of the Plan
shall mean the closing price of a share of the Common Stock on the principal
securities exchange (including the Nasdaq National Market) on which such shares
are traded on the day immediately preceding the date as of which Fair Market
Value is being determined, or on the next preceding date on which such shares
are traded if no shares were traded on such immediately preceding day, or if the
shares are not traded on a securities exchange, Fair Market Value shall be
deemed to be the average of the high bid and low asked prices of the shares in
the over-the-counter market on the day immediately preceding the date as of
which Fair Market Value is being determined or on the next preceding date on
which such high bid and low asked prices were recorded. If the shares are not
publicly traded, Fair Market Value of a share of Common Stock (including, in the
case of any repurchase of shares, any distributions with respect thereto which
would be repurchased with the shares) shall be determined in good faith by the
Board of Directors or the Committee. In no case shall Fair Market Value be
determined with regard to restrictions other than restrictions which, by their
terms, will never lapse.
(b) Payment of Purchase Price. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or by any other means which the Board of Directors or the Committee determines
are consistent with the purpose of the Plan and with applicable laws and
regulations (including, without limitation, the provisions of Rule 16b-3 and
Regulation T promulgated by the Federal Reserve Board).
7. OPTION PERIOD.
Subject to earlier termination as provided in the Plan, each option and all
rights thereunder shall expire on such date as determined by the Board of
Directors or the Committee and set forth in the applicable option
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agreement, provided, that such date shall not be later than seven (7) years
after the date on which the option is granted.
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the option agreement evidencing such option, subject to the provisions
of the Plan. Subject to the requirements in the immediately preceding sentence,
if an option is not at the time of grant immediately exercisable, the Board of
Directors or the Committee may (i) in the agreement evidencing such option,
provide for the acceleration of the exercise date or dates of the subject option
upon the occurrence of specified events, and/or (ii) at any time prior to the
complete termination of an option, accelerate the exercise date or dates of such
option.
9. TRANSFERABILITY OF OPTIONS.
No incentive stock option granted under this Plan shall be assignable or
otherwise transferable by the optionee except by will or by the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
in the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder. The Board of Directors or the Committee may, in its
discretion, authorize all or a portion of any non-statutory options to be
granted to an optionee to be on terms which permit transfer by such optionee to
(i) the spouse, children or grandchildren of the optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only partners, provided that (w) the options must be held by the
optionee for a period of at least one month prior to transfer, (x) there may be
no consideration for any such transfer, (y) the stock option agreement pursuant
to which such options are granted must be approved by the Board of Directors or
the Committee, and must expressly provide for transferability in a manner
consistent with this Section, and (z) subsequent transfers of transferred
options shall be prohibited except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder. Following transfer, any such options shall continue to be subject to
the same terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of the Plan the term "optionee" shall be deemed to
refer to the transferee. The events of termination of employment of Section 10
hereof shall continue to be applied with respect to the original optionee. An
option may be exercised during the lifetime of the optionee only by the original
optionee. In the event an optionee dies during his employment by the Company or
any of its subsidiaries, or during the three-month period following the date of
termination of such employment, his option shall thereafter be exercisable,
during the period specified in the option agreement, by his executors or
administrators to the full extent to which such option was exercisable by the
optionee at the time of his death during the periods set forth in Section 10 or
11(d).
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11(d) with respect to Incentive Stock Options
and except as otherwise determined by the Committee at the date of grant of an
Option, and subject to the provisions of the Plan, an optionee may exercise an
option at any time within six (6) months following the termination of the
optionee's employment or other relationship with the Company or within one (1)
year if such termination was due to the death or disability of the optionee but,
except in the case of the optionee's death, in no event later than the
expiration date of the Option. If the termination of the optionee's employment
is for cause or is otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the option shall
expire immediately upon such termination, except as otherwise determined by the
Board of Directors. The Board of Directors shall have the power to determine
what constitutes a termination for cause or a breach of an employment or
confidentiality or non-disclosure agreement, whether an optionee has been
terminated for cause or has breached such an agreement, and the date upon which
such termination for cause or breach occurs. Any such determinations shall be
final and conclusive and binding upon the optionee.
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11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% Stockholder. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the Fair Market Value
of one share of Common Stock at the time of grant; and
(ii) The option exercise period shall not exceed five years from the
date of grant.
(c) Dollar Limitation. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate Fair Market Value, as of the
respective date or dates of grant, of more than $100,000.
(d) Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), provided, that the agreement with respect to such option
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory
option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the
period of one year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provisions thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within
the period of one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. ADDITIONAL PROVISIONS.
(a) Additional Option Provisions. The Board of Directors or the Committee
may, in its sole discretion, include additional provisions in option agreements
covering options granted under the Plan, including without limitation
restrictions on transfer, repurchase rights, rights of first refusal,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors or the Committee;
provided, that such additional provisions shall not be inconsistent with any
other term or condition of the Plan and such additional
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provisions shall not cause any Incentive Stock Option granted under the Plan to
fail to qualify as an Incentive Stock Option within the meaning of Section 422
of the Code.
(b) Acceleration, Extension, Etc. The Board of Directors or the Committee
may, in its sole discretion, (i) accelerate the date or dates on which all or
any particular option or options granted under the Plan may be exercised or (ii)
extend the dates during which all, or any particular, option or options granted
under the Plan may be exercised; provided, however, that no such extension shall
be permitted if it would cause the Plan to fail to comply with Section 422 of
the Code or with Rule 16b-3 (if applicable).
13. GENERAL RESTRICTIONS.
(a) Investment Representations. The Company may require any optionee, as a
condition of exercising such option, to give written assurances in substance and
form satisfactory to the Company to the effect that such person is acquiring the
Common Stock subject to the option or award, for his or her own account for
investment and not with any present intention of selling or otherwise
distributing the same, and to such other effects as the Company deems necessary
or appropriate in order to comply with federal and applicable state securities
laws, or with covenants or representations made by the Company in connection
with any public offering of its Common Stock, including any "lock-up" or other
restriction on transferability.
(b) Compliance with Securities Law. Each Option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
or award upon any securities exchange or automated quotation system or under any
state or federal law, or the consent or approval of any governmental or
regulatory body, or that the disclosure of non-public information or the
satisfaction of any other condition is necessary as a condition of, or in
connection with the issuance of shares thereunder, such option may not be
exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification, or to satisfy such condition.
14. RIGHTS AS A STOCKHOLDER.
The holder of an option shall have no rights as a stockholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS, REORGANIZATIONS AND RELATED
TRANSACTIONS.
(a) Recapitalizations and Related Transactions. If, through or as a result
of any recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar transaction, (i) the outstanding shares of Common
Stock are increased, decreased or exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other non-cash assets are distributed with respect to such
shares of Common Stock or other securities, an appropriate and proportionate
adjustment shall be made in (x) the maximum number and kind of shares reserved
for issuance under or otherwise referred to in the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment (i) would cause the Plan
to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would
be considered as the adoption of a new plan requiring stockholder approval.
(b) Reorganization, Merger and Related Transactions. All outstanding
Options under the Plan shall become fully exercisable for a period of sixty (60)
days following the occurrence of any Trigger Event,
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whether or not such Options are then exercisable under the provisions of the
applicable agreements relating thereto. For purposes of the Plan, a "Trigger
Event" is any one of the following events:
(i) the date on which shares of Common Stock are first purchased
pursuant to a tender offer or exchange offer (other than such an offer by
the Company, any Subsidiary, any employee benefit plan of the Company or of
any Subsidiary or any entity holding shares or other securities of the
Company for or pursuant to the terms of such plan), whether or not such
offer is approved or opposed by the Company and regardless of the number of
shares purchased pursuant to such offer;
(ii) the date the Company acquires knowledge that any person or group
deemed a person under Section 13(d)-3 of the Exchange Act (other than the
Company, any Subsidiary, any employee benefit plan of the Company or of any
Subsidiary or any entity holding shares of Common Stock or other securities
of the Company for or pursuant to the terms of any such plan or any
individual or entity or group or affiliate thereof which acquired its
beneficial ownership interest prior to the date the Plan was adopted by the
Board), in a transaction or series of transactions, has become the
beneficial owner, directly or indirectly (with beneficial ownership
determined as provided in Rule 13d-3, or any successor rule, under the
Exchange Act), of securities of the Company entitling the person or group
to 30% or more of all votes (without consideration of the rights of any
class or stock to elect directors by a separate class vote) to which all
shareholders of the Company would be entitled in the election of the Board
of Directors were an election held on such date;
(iii) the date, during any period of two consecutive years, when
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease for any reason to constitute at least a
majority thereof, unless the election, or the nomination for election by
the stockholders of the Company, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period; and
(iv) the date of approval by the stockholders of the Company of an
agreement (a "reorganization agreement") providing for:
(A) The merger or consolidation of the Company with another
corporation where the stockholders of the Company, immediately prior to
the merger or consolidation, do not beneficially own, immediately after
the merger or consolidation, shares of the corporation issuing cash or
securities in the merger or consolidation entitling such stockholders to
65% or more of all votes (without consideration of the rights of any
class of stock to elect directors by a separate class vote) to which all
shareholders of such corporation would be entitled in the election of
directors or where the members of the Board of Directors of the Company,
immediately prior to the merger or consolidation, do not, immediately
after the merger or consolidation, constitute a majority of the Board of
Directors of the corporation issuing cash or securities in the merger or
consolidation; or
(B) The sale or other disposition of all or substantially all the
assets of the Company.
(c) Board Authority to Make Adjustments. Any adjustments under this
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) General. In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i) in
the event of a merger under the terms of which holders of the Common Stock of
the Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
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times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options, and (ii) in the event the provisions of Section
15 are not applicable, provide that all or any outstanding options shall become
exercisable in full immediately prior to such event and upon written notice to
the optionees, provide that all unexercised options will terminate immediately
prior to the consummation of such transaction unless exercised by the optionee
within a specified period following the date of such notice.
(b) Substitute Options. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect; provided, however, that if at any time the
approval of the stockholders of the Company is required under Section 422 of the
Code or any successor provision with respect to Incentive Stock Options, or
under Rule 16b-3, the Board of Directors may not effect such modification or
amendment without such approval; and provided, further, that the provisions of
Section 3(b) hereof shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employer Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
(b) The modification or amendment of the Plan shall not, without the
consent of an optionee, adversely affect his or her rights under an option
previously granted to him or her. With the consent of the optionee affected, the
Board of Directors may amend outstanding option agreements in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to amend
or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option to the extent necessary to ensure the
qualification of the Plan under Rule 16b-3.
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be
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withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a Fair
Market Value equal to such withholding obligation as of the date that the amount
of tax to be withheld is to be determined. An optionee who has made an election
pursuant to this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to any repurchase,
forfeiture, unfulfilled vesting or other similar requirements.
(b) The acceptance of shares of Common Stock upon exercise of an Incentive
Stock Option shall constitute an agreement by the optionee (i) to notify the
Company if any or all of such shares are disposed of by the optionee within two
years from the date the option was granted or within one year from the date the
shares were issued to the optionee pursuant to the exercise of the option, and
(ii) if required by law, to remit to the Company, at the time of and in the case
of any such disposition, an amount sufficient to satisfy the Company's federal,
state and local withholding tax obligations with respect to such disposition,
whether or not, as to both (i) and (ii), the optionee is in the employ of the
Company at the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting Person whose
options have been granted in accordance with the provisions of Section 3(b)
herein, no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3.
21. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) Effective Date. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring stockholder approval shall become effective when adopted by
the Board of Directors; amendments requiring stockholder approval (as provided
in Section 19) shall become effective when adopted by the Board of Directors,
but no Incentive Stock Option granted after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate upon the earlier of (i) the close of business on the
day next preceding the tenth anniversary of the date of its adoption by the
Board of Directors, or (ii) the date on which all shares available for issuance
under the Plan shall have been issued pursuant to the exercise or cancellation
of options granted under the Plan. If the date of termination is determined
under (i) above, then options outstanding on such date shall continue to have
force and effect in accordance with the provisions of the instruments evidencing
such options.
22. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
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23. GOVERNING LAW.
The provisions of this Plan shall be governed and construed in accordance
with the laws of the State of Delaware without regard to the principles of
conflicts of laws.
Adopted by the Board of Directors on January 21, 1998.
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SIGNATURE
Pursuant to the requirements of Section 13 of the Securities and Exchange
Act of 1934, the Registrant has only caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNEURON PHARMACEUTICALS, INC.
Date: February 3, 1998 By: /s/ Thomas F. Farb
----------------------------
Thomas F. Farb
Executive Vice President,
Chief Financial Officer
and Treasurer
