SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check he appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule
14a-12
PENEDERM INCORPORATED
(Name of Registrant as Specified in Its Charter)
PENEDERM INCORPORATED
(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)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
___________________________________________________________
2) Aggregate number of securities to which transaction applies:
___________________________________________________________
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: *
___________________________________________________________
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 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
PENEDERM INCORPORATED
_______________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
June 16, 1997
TO THE SHAREHOLDERS OF PENEDERM INCORPORATED:
NOTICE IS HEREBY GIVEN that the Annual Meeting of
Shareholders of Penederm Incorporated, a California corporation
(the "Company"), will be held on Monday, June 16, 1997 at 10:00
a.m., Pacific time, at the Westin Hotel - San Francisco Airport,
1 Bayshore Highway, Millbrae, California, for the following
purposes:
1. To elect directors to serve for the ensuing year
and until their successors are elected.
2. To approve a change in the Company's state of
incorporation from California to Delaware through the
merger of the Company into a newly formed Delaware
corporation that is a wholly-owned subsidiary of the
Company.
3. To approve an amendment to the Penederm
Incorporated Equity Incentive Plan to increase by
400,000 the number of shares reserved for issuance
under that plan.
4. To approve an amendment to the Penederm
Incorporated Employee Stock Purchase Plan to increase
by 50,000 the number of shares reserved for issuance
under that plan.
5. To transact such other business as may properly
come before the meeting or any adjournments thereof.
The foregoing items of business are more fully described in
the Proxy Statement accompanying this Notice.
Only shareholders of record at the close of business on
April 25, 1997 (the "Record Date") are entitled to notice of and
to vote at the meeting and any adjournments thereof.
All shareholders are cordially invited to attend the meeting
in person. Any shareholder attending the meeting may vote in
person even if such shareholder previously signed and returned a
proxy.
FOR THE BOARD OF DIRECTORS
Lloyd H. Malchow
President and Chief Executive
Officer
Foster City, California
May 8, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY
IN THE ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF
YOUR SHARES.
PENEDERM INCORPORATED
_______________
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
The enclosed Proxy is solicited on behalf of the Board of
Directors (the "Board") of Penederm Incorporated (the "Company")
for use at the Company's Annual Meeting of Shareholders (the
"Annual Meeting") to be held Monday, June 16, 1997 at 10:00 a.m.,
Pacific time, or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Shareholders. The Annual Meeting will be held
at the Westin Hotel - San Francisco Airport, 1 Bayshore Highway,
Millbrae, California. The Company's principal executive offices
are located at 320 Lakeside Drive, Foster City, California 94404.
The telephone number at that address is (415) 358-0100.
These proxy solicitation materials were mailed on or about
May 8, 1997 to all shareholders entitled to vote at the Annual
Meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
Record Date and Shares Outstanding
Shareholders of record at the close of business on April 25,
1997 (the "Record Date") are entitled to notice of, and to vote
at, the Annual Meeting. At the Record Date, [_________] shares
of the Company's common stock (the "Common Stock") were issued,
outstanding and entitled to vote at the meeting.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked
by the person giving it at any time before its use by delivering
to the Secretary of the Company a written notice of revocation or
a duly executed proxy bearing a later date or by attending the
Annual Meeting and voting in person.
Voting and Solicitation
Every shareholder voting for the election of directors may
exercise cumulative voting rights and give one candidate a number
of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's
shares are entitled, or distribute such shareholder's votes on
the same principle among as many candidates as the shareholder
may select, provided that votes cannot be cast for more than
seven candidates. However, no shareholder shall be entitled to
cumulate votes unless the candidate's name has been placed in
nomination prior to the voting and the shareholder, or any other
shareholder, has given notice at the meeting prior to the voting
of the intention to cumulate votes. On all other matters each
share is entitled to one vote on each proposal or item that comes
before the Annual Meeting.
The Company intends to include abstentions and broker non-
votes as present or represented for purposes of establishing a
quorum for the transaction of business. However, abstentions are
counted as votes against a proposal for purposes of determining
whether or not a proposal has been approved, whereas broker non-
votes are not counted for purposes of determining whether a
proposal has been approved.
Solicitation of proxies may be made by directors, officers
and other employees of the Company by personal interview,
telephone, facsimile or other method. No additional compensation
will be paid for any such services. Costs of solicitation,
including preparation, assembly, printing and mailing of this
proxy statement, the proxy and any other information furnished to
the shareholders, will be borne by the Company. The Company may
reimburse the reasonable charges and expenses of brokerage houses
or other nominees or fiduciaries for forwarding proxy materials
to, and obtaining authority to execute proxies from, beneficial
owners for whose account they hold shares of Common Stock.
PROPOSAL ONE
Election of Directors
Nominees
The By-Laws of the Company provide for a Board consisting of
not fewer than five nor more than nine directors. The size of
the Board is set at seven effective as of the date of the Annual
Meeting. Seven directors are to be elected at the Annual
Meeting. Unless otherwise instructed, the proxy holders will
vote the proxies received by them for the seven nominees named
below. All of the nominees named below are presently directors
of the Company. In the event that any nominee is unable or
declines to serve as a director at the time of the Annual
Meeting, the proxies will be voted for any nominee who shall be
designated by the present Board to fill the vacancy. In the
event that additional persons are nominated for election as
directors, the proxy holders intend to vote all proxies received
by them in such a manner in accordance with cumulative voting as
will ensure the election of as many of the nominees listed below
as possible. In such event, the specific nominees for whom such
votes will be cumulated will be determined by the proxy holders.
The term of office of each person elected as a director will
continue until the next Annual Meeting of Shareholders or until
his successor has been elected and qualified. It is not expected
that any nominee will be unable or will decline to serve as a
director.
The name of and certain other information regarding each
nominee is set forth in the table below.
Director
Name of Nominee Age Position with the Company Since
David E. Collins 62 Chairman of the Board 1994
Lloyd H. Malchow 43 Director, President and 1993
Chief Executive Officer
Robert F. Allnutt 61 Director 1996
William I. Bergman 65 Director 1991
Mark J. Gabrielson 41 Director 1996
Harvey S. Sadow, Ph.D. 74 Director 1990
Gerald D. Weinstein, M.D. 60 Director 1987
There is no family relationship between any of the directors
or executive officers of the Company.
Mr. Collins was appointed Chairman of the Board of the
Company effective January 1, 1997 and served as a director since
December 1994. From 1989 to October 1994, Mr. Collins was an
Executive Vice President of Schering Plough Corporation and
President of its Healthcare Products Division until his
retirement. Prior to his employment with Schering Plough
Corporation he worked for Johnson & Johnson for 26 years in
various capacities and was a member of its executive committee
from 1982 through 1988. Mr. Collins has served as Chairman of
the Council on Family Health and of the Non-Prescription Drug
Manufacturers Association. Mr. Collins is a director of Calypte
Biomedical, a prescription diagnostic company, Lander, Inc., a
private consumer products company, MGI Pharma, a public
pharmaceutical company, and Scandipharm, a private pharmaceutical
company.
Mr. Malchow has served as President, Chief Executive Officer
and a director of the Company since January 1995. Prior to that,
he served as the Company's President and Chief Operating Officer
and as a director from May 1993 through January 1995. He was the
Vice President and General Manager of the Herbert Skin Care
Division of Allergan, Inc. from 1992 to May 1993. From 1983 to
1991 Mr. Malchow held various positions, including Vice
President, Sales of Allergan Medical Optics (formerly American
Medical Optics prior to acquisition by Allergan in 1985) and,
most recently, Vice President for Global Development, Skin Care.
He holds a B.A. from Carroll College, a M.A. from the University
of Maryland and a M.B.A. from Pepperdine University.
Mr. Allnutt has been a director of the Company since May
1996. Since February 1995 Mr. Allnutt has been a Senior
Counselor at APCO Associates, a public relations firm. From 1985
to 1995 he was the Executive Vice President of the Pharmaceutical
Manufacturers Association (now PhRMA), a trade association
representing multinational research based pharmaceutical
companies. Prior to that, he served for 25 years in a variety of
positions with the Federal government, including Associate Deputy
Administrator for NASA, Assistant Administrator of the Energy
Research and Development Administration, Staff Director of the
United States Senate Committee on Aeronautics and Space and
Associate General Counsel of the United States Commission on
Government Procurement. Mr. Allnutt is a director of Cortex
Pharmaceuticals, Inc. a development stage neuroscience company,
and Cypros Pharmaceuticals, Inc., a drug and diagnostics product
company.
Mr. Bergman has been a director of the Company since March
1991. Mr. Bergman served in various positions with Richardson-
Vicks Inc., a personal care products company, from 1952 until he
retired in 1990. After Procter & Gamble Co. acquired Richardson-
Vicks Inc., he served as President of Richardson-Vicks U.S.A. and
Vice President of Procter & Gamble Co. until his retirement. Mr.
Bergman is the President and a past Chairman of the Council on
Family Health and is a past Chairman of the Nonprescription Drug
Manufacturers Association. Mr. Bergman is a director of ZymeTx
Inc.
Mr. Gabrielson has been a director of the Company since May
1996. Since 1995, he has served as President of Access
Management Services, Inc., a medical technology sourcing,
transfer and corporate development firm. In addition, since
January 1991 Mr. Gabrielson has been a general partner of Prince
Ventures, L.P., a venture capital management firm that serves as
the general partner of Prince Venture Partners III, L.P.
("Prince"). In addition, Mr. Gabrielson is the President of
Pharmaply, Inc., Chairman of Strategic Marketing Information,
Inc., and Chairman of ONTYX, Inc., all private companies. Prior
to joining Prince, Mr. Gabrielson served in a variety of
marketing and business positions with SmithKline since July 1978.
Mr. Gabrielson is also a director of Inhale Therapeutic Systems,
Inc., a drug delivery company.
Dr. Sadow has been a director of the Company since February
1990. He was President and Chief Executive Officer of Boehringer
Ingelheim Corporation, a health care company, from 1971 to 1988
and of Boehringer Ingelheim Pharmaceuticals, Inc., an ethical
specialty pharmaceutical company, from 1984 to 1988. In 1988, he
became Chairman of the Board of both Boehringer Ingelheim
Corporation and Boehringer Ingelheim Pharmaceuticals. He retired
as Chairman of the Board of both companies in 1990 and continued
serving as a director of both companies until 1993. Dr. Sadow is
also the Chairman of the Board of Cortex Pharmaceuticals, Inc., a
development stage neuroscience company, and Cholestech
Corporation, a medical diagnostics company, and a director of
Anika Research Corp., a hyaluronic acid research company,
Houghton Pharmaceuticals Inc., a drug discovery company, and
several privately-held health care related companies. Dr. Sadow
served as the President of the Connecticut Academy of Science and
Engineering.
Dr. Weinstein is a founder of the Company and has been a
director since inception. He is a co-inventor of the technology
underlying the Company's TopiCare Delivery Compounds. Dr.
Weinstein has been the Chairman of the Department of Dermatology
at the University of California, Irvine, College of Medicine
since 1979. Dr. Weinstein is a staff member at the University of
California, Irvine Medical Center, the Veterans Administration
Hospital in Long Beach, California and the Irvine Medical Center.
Dr. Weinstein received a B.A. from the University of Pennsylvania
and a M.D. from the University of Pennsylvania School of
Medicine.
Board Meetings and Committees
The Board held a total of six meetings during the fiscal
year ended December 31, 1996. No director attended fewer than 75
percent of the aggregate of all meetings of the Board and of the
committees, if any, upon which such director served.
The Audit Committee currently consists of Mr. Collins and
Dr. Sadow. The principal functions of the Audit Committee are to
recommend engagement of the Company's independent auditors, to
consult with the Company's auditors concerning the scope of the
audit and to review with them the results of their examination,
to review and approve any material accounting policy changes
affecting the Company's operating results and to review the
Company's financial control procedures and personnel. The Audit
Committee held one meeting during fiscal 1996.
The Compensation Committee currently consists of Dr. Sadow,
Mr. Bergman and Dr. Weinstein. The Compensation Committee
determines compensation and benefits for the Company's executive
officers and administers the Company's equity incentive plans.
The Compensation Committee, which consists solely of outside
directors ineligible to participate in the Company's
discretionary employee stock programs, has sole and exclusive
authority to grant stock options to officers and to directors who
are also employees or consultants of the Company. The
Compensation Committee held one meeting during fiscal 1996.
The Board does not have a nominating committee.
Compensation of Directors
The Company pays directors' fees to each director who is not
an employee of, nor an affiliate of investors in, the Company.
During fiscal 1996, the individuals who served as such directors
during that period received a fee of $500 for each Board meeting
attended and $200 for each Board committee meeting attended. All
non-employee directors receive reimbursement for expenses
actually incurred in attending meetings of the Board and its
committees. The Penederm Incorporated 1994 Nonemployee Directors
Stock Option Plan (the "Directors Plan") provides that when a
person who is not, and has not been in the preceding twelve
months, an officer or an employee of the Company and who has not
previously been a member of the Board is elected or appointed a
member of the Board, the Company will grant that person on the
effective date of such election or appointment an option to
purchase 7,500 shares of the Company's Common Stock ("Initial
Grant"). The Directors Plan further provides that at the first
meeting of the Board immediately following the annual meeting of
shareholders of the Company, the Company will grant to each
nonemployee director then in office (other than a nonemployee
director who received an initial option grant under the Directors
Plan on or after the record date for the annual meeting) an
option to purchase 7,500 shares of Common Stock ("Annual Grant").
The Directors Plan also provides that any non-employee director
who did not receive either an Initial Grant or an Annual Grant
between the record date for the 1995 annual meeting and the date
of the annual meeting in 1996 would be granted an option to
purchase 12,500 shares in lieu of an Annual Grant in 1996.
Options granted under the Directors Plan vest over one year from
the date of grant and are fully exercisable on the first
anniversary of the option grant. The exercise price of option
grants made under the Directors Plan is equal to the fair market
value of the Common Stock on the date of grant.
MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding
beneficial ownership of the Common Stock as of April 25, 1997 (i)
by each person who is known by the Company to own beneficially
more than 5 percent of the Common Stock, (ii) by each of the
Company's directors, (iii) by each of the Company's executive
officers named in the Summary Compensation Table under the
caption "Executive Compensation" below and (iv) by all directors
and executive officers as a group.
Number of Percentage
Shares of Shares
Beneficially Beneficially
Name Owned(1) Owned(1)(2)
FRANKLIN RESOURCES, INC. (3) 1,239,500 15.3%
777 Mariners Island Blvd.
San Mateo, California 94404
Charles B. Johnson 1,239,500 15.3%
Rupert H. Johnson, Jr. 1,239,500 15.3%
Franklin Advisers, Inc. 1,239,500 15.3%
SAFECO ASSET MANAGEMENT and SAFECO 1,111,467 13.7%
CORPORATION (4)
Safeco Plaza
Seattle, Washington 98185
SAFECO COMMON STOCK TRUST (5) 763,600 9.4%
Safeco Plaza
Seattle, Washington 98185
S-E-BANKEN FONDER 585,100 7.2%
Jakobsbergsgatan 17
Stockholm
Sweden
Mark J. Gabrielson (6) 341,591 4.2%
Lloyd H. Malchow(7) 302,000 3.6%
John W. Quigley, Jr., Ph.D.(8) 152,881 1.9%
William Gutshall(9) 58,000 *
Edward Ebbers(10) 49,375 *
Gerald D. Weinstein, M.D.(11) 45,250 *
Terry L. Opdendyk(12) 44,061 *
David E. Collins(13) 32,500 *
William I. Bergman(14) 17,500 *
Harvey S. Sadow, Ph.D.(15) 20,000 *
Robert F. Allnutt (16) 8,500 *
Edgar A. Luce 27,827 *
All directors and executive officers as 1,071,658 13.2%
a group (11 persons)(17)
_______________
* Less than one percent.
(1) This table is based upon information supplied by directors,
officers and certain principal shareholders, as well as
information included in Securities and Exchange Commission
filings made by principal shareholders and other third party
sources. Unless otherwise indicated in the footnotes to
this table and subject to the community property laws where
applicable, each of the shareholders named in this table has
sole voting and investment power with respect to the shares
shown. Percentage of ownership is based on [_________]
shares of Common Stock outstanding as of April 25, 1997.
(2) Shares issuable upon exercise of outstanding options are
considered outstanding for purposes of calculating the
percentage of Common Stock of the person holding such
options, but are not deemed outstanding for computing the
percentage of ownership of any other person.
(3) The shares are reported to be beneficially owned by one or
more investment companies or other managed accounts which
are advised by Franklin Advisers, Inc. ("FAI") which is an
investment advisory subsidiary of Franklin Resources, Inc.
("FRI"). FAI reports sole voting and dispositive power over
the shares. Charles B. Johnson and Rupert H. Johnson, Jr.
(the "Principal Shareholders") report that they each own in
excess of 10% of the outstanding common stock of FRI. FRI,
the Principal Shareholders and FAI disclaim beneficial
ownership of the shares.
(4) SAFECO Common Stock Trust reports shared voting and
dispositive power for the shares shown.
(5) SAFECO Asset Management Company and SAFECO Corporation
indicate shared voting and dispositive power and disclaim
beneficial ownership of the shares shown, reporting that the
shares are owned by registered investment companies for
which they serve as advisor.
(6) Includes 334,091 shares held by Prince Venture Partners III,
L.P. and 7,500 shares issuable upon exercise of outstanding
options. Mr. Gabrielson is the general partner of Prince
Ventures and the general partner of Prince Venture Partners
III, L.P.
(7) Includes 302,000 shares issuable upon exercise of
outstanding options; 196,167 of such shares are not subject
to repurchase on or after June 25, 1997.
(8) Includes 120,944 shares issuable upon exercise of
outstanding options; 60,793 of such shares are not subject
to repurchase on or after June 25, 1997.
(9) Includes 58,000 shares issuable upon exercise of outstanding
options; 41,167 of such shares are not subject to repurchase
on or after June 25, 1997.
(10) Includes 49,375 shares issuable upon exercise of outstanding
options; 40,602 of such shares are not subject to repurchase
on or after June 25, 1997.
(11) Includes 17,500 shares issuable upon exercise of outstanding
options.
(12) Includes 17,500 shares issuable upon exercise of outstanding
options.
(13) Includes 17,500 shares issuable upon exercise of outstanding
options.
(14) Includes 25,000 shares issuable upon exercise of outstanding
options.
(15) Includes 20,000 shares issuable upon exercise of outstanding
options.
(16) Includes 7,500 shares issuable upon exercise of outstanding
options.
(17) Includes 635,319 shares issuable upon exercise of
outstanding options; 338,729 of such shares are not subject
to repurchase on or after June 25, 1997.
Executive Compensation
The following table sets forth the total compensation for
the fiscal years ended December 31, 1994, 1995 and 1996 of the
Chief Executive Officer and each of the executive officers of the
Company who served as executive officers at fiscal year end.
None of the named executive officers earned any bonuses or
compensation for the fiscal years other than as set forth in the
table or received any restricted stock awards, stock appreciation
rights or long-term incentive plan payouts.
<TABLE>
Summary Compensation Table
<CAPTION>
Long-Term
Annual Annual Compensa- Other
Compensa- Compensa- tion Compensation
Fiscal tion tion Options
Name and Principal Position Year Salary($) Bonus($) (#) (1)
<S> <C> <C> <C> <C> <C>
Lloyd H. Malchow 1996 204,555 50,222 155,000 4,492
President, Chief 1995 195,000 21,840 22,000 4,493
Executive Officer 1994 178,549 33,469 25,000 3,500
and Director(2)
John W. Quigley, Jr., Ph.D. 1996 167,349 16,334 49,500 4,492
Vice President, 1995 161,340 11,697 9,000 4,493
Research and 1994 150,785 25,445 - 3,013
Development
Edgar A. Luce 1996 139,055 13,110 18,000 4,170
Vice President, Finance 1995 127,147 10,807 7,600 3,811
and Administration, 1994 118,782 17,871 5,000 2,444
Treasurer and Secretary
(3)
Edward Ebbers 1996 127,109 18,565 37,000 3,812
Vice President, 1995 112,000 6,272 6,625 3,356
Sales and Marketing 1994 16,969 -- 7,500 --
William Gutshall 1996 115,664 15,910 27,000 2,314
Vice President, 1995 109,419 7,440 21,000 2,184
Operations 1994 100,875 -- 5,000 --
</TABLE>
_______________
(1) This column includes the value of the shares of Common Stock contributed by
the Company to each executive officer's 401(k) account under the Penederm
Incorporated 401(k) Plan. The shares are contributed effective as of the
last trading day of the year and the number of shares contributed was based
on the closing price of the Common Stock on that date.
(2) Mr. Malchow was appointed Chief Executive Officer of the Company as of
January 1, 1995.
(3) Mr. Luce's employment with the Company terminated on December 31, 1996.
The following table sets forth certain information regarding
grants of stock options made during the fiscal year ended
December 31, 1996 to the executive officers named in the Summary
Compensation Table. Since inception, the Company has not granted
any stock appreciation rights.
<TABLE>
Option Grants in Last Fiscal Year
Individual Grants
<CAPTION>
% of
Total Potential Realizable
Options Value at Assumed
Granted Annual Rates of Stock
to Price Appreciation
Options Employees Exercise For Option Term (4)
Granted in Fiscal Price Expiration
Name (#)(1) Year(2) ($/sh) Date(3) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Lloyd H. Malchow 50,000 12.0 % $16.875 5/14/06 530,629 1,344,720
30,000 7.1 % $6.25 8/14/06 117,918 298,826
75,000 18.0 % $12.375 12/31/06 583,692 1,479,192
155,000 37.1 % 1,232,240 3,122,739
John W. Quigley, Jr., Ph.D. 18,000 4.3 % $16.875 5/14/06 191,027 484,099
9,000 2.1 % $6.25 8/14/06 35,375 89,648
22,500 5.4 % $12.375 12/31/06 175,108 443,758
49,500 11.8 % 401,510 1,017,505
Edgar A. Luce 12,000 2.9 % $16.875 5/14/06 127,351 322,733
6,000 1.4 % $6.25 8/14/06 23,584 59,765
18,000 4.3 % 150,935 382,498
Edward Ebbers 16,000 3.8 % $13.25 3/4/06 133,326 337,873
6,000 1.5 % $6.25 8/14/06 23,584 59,765
15,000 3.6 % $12.375 12/31/06 116,739 295,838
37,000 8.9 % 273,649 693,477
William Gutshall 6,000 1.4 % $16.875 5/14/06 63,676 161,366
6,000 1.4 % $6.25 8/14/06 23,583 59,765
15,000 3.6 % $12.375 12/31/06 116,739 295,838
27,000 6.5 % 203,998 516,970
</TABLE>
_______________
(1) The options included in this table are all immediately
exercisable, but the shares issuable upon option exercise
are subject to a right of repurchase by the Company upon
employment termination, which right of repurchase expires
over a period of five years.
(2) The total number of options granted to the Company's
employees during fiscal year 1996 was 417,793.
(3) The options are subject to earlier expiration in the event
of the officer's termination of employment with the Company.
(4) Potential realizable value is based on an assumption that
the market price of the stock appreciates at the stated
rate, compounded annually, from the date of grant until the
end of the ten-year option term. These values are
calculated based on requirements promulgated by the
Securities and Exchange Commission and do not reflect the
Company's estimate of future stock price appreciation.
The following table sets forth certain information regarding
exercises of stock options during the fiscal year ended December
31, 1996 to the executive officers named in the Summary
Compensation Table. Value realized is considered to be the
difference between exercise price and market price on the date of
exercise. Value of unexercised options is considered to be the
difference between exercise price and market price of $12.375 per
share on December 31, 1996.
<TABLE>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year Fiscal Year
Shares End(#) End($)
Acquired
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (1) (1)
<S> <C> <C> <C> <C>
Lloyd H. Malchow - - 302,000/- 844,019/-
John W. Quigley, Jr., Ph.D 22,500 312,750 120,944/- 602,109/-
Edward Ebbers 1,750 15,531 49,375/- 12,914/-
Edgar A. Luce - - 34,160/- 393,150/-
William Gutshall - - 58,000/- 87,050/-
</TABLE>
_______________
(1) The options included in this table are all immediately
exercisable, but the shares issuable upon option exercise
are subject to a right of repurchase by the Company upon
employment termination, which right of repurchase expires
over a period of time. At December 31, 1996, the number of
shares subject to repurchase under these options and their
value were as follows: Mr. Malchow -- 216,167 shares having
a value of $652,106; Dr. Quigley -- 65,793 shares having a
value of $173,041; Mr. Ebbers -- 44,701 shares having a
value of $84,836; and Mr. Gutshall -- 45,417 shares having a
value of $160,074.
The Company did not make any awards during the fiscal year
ended December 31, 1996 to any of the executive officers named in
the Summary Compensation Table under any long-term incentive plan
providing compensation intended to serve as incentive for
performance to occur over a period longer than one fiscal year,
excluding stock options.
Report of the Compensation Committee of the Board of Directors
The Compensation Committee is comprised of three independent
nonemployee directors. As members of the Compensation Committee,
it is our responsibility to determine the most effective total
executive compensation strategy, based upon the business needs of
the Company and consistent with shareholders' interests, to
administer the Company's executive compensation plans, programs
and policies, to monitor corporate performance and its
relationship to compensation of executive officers, and to make
appropriate recommendations concerning matters of compensation.
Compensation Philosophy
The Company was formed in 1987 as a private company and
initially offered Common Stock to the public in 1993. The major
goals of the compensation program are to align compensation with
the attainment of key business objectives and to enable the
Company to attract, retain and reward capable executives who can
contribute to the continued success of the Company. Equity
participation and a strong alignment to shareholders' interests
are key elements of the Company's compensation philosophy. Four
key goals form the basis of compensation decisions for all
employees of the Company:
1. To attract and retain the most highly qualified
management and employee team;
2. To pay competitively compared to similar drug
delivery and biopharmaceutical companies and to provide
appropriate reward opportunities for achieving high
levels of performance compared to similar organizations
in the marketplace;
3. To emphasize sustained performance by aligning
rewards with shareholder interests, especially through
the use of equity participation programs; and
4. To motivate executives and employees to achieve
the Company's annual and long-term business goals and
encourage behavior toward the fulfillment of those
objectives.
As a result of this philosophy, the Company's executive
compensation program consists of base salary, incentive stock
options, performance share awards and standard benefits.
Base Salary. The Compensation Committee recognizes the
importance of maintaining compensation practices and levels of
compensation competitive with drug delivery and biopharmaceutical
companies in comparable stages of development. For external
marketplace comparison purposes, a group of approximately 72
companies operating in our industry are utilized for determining
competitive compensation levels.
Base salary represents the fixed component of the executive
compensation program. The Company's philosophy regarding base
salaries is conservative, maintaining salaries somewhat below or
at approximately the competitive industry median. Determination
of base salary levels is established on an annual review of
marketplace competitiveness with similar biopharmaceutical and
drug delivery companies, and on individual performance. Periodic
increases in base salary relate to individual contributions
evaluated against established objectives, relative marketplace
competitiveness levels, length of service, and the industry's
annual competitive pay practice movement.
Stock Options. The Compensation Committee strongly believes
that one of the important goals of the compensation program
should be to provide key employees who have significant
responsibility for the management, growth, and future success of
the company with an opportunity to increase their ownership of
the Company and potentially gain financially from Company stock
price increases. The interests of shareholders, executives and
employees should thereby be closely aligned. Executives and key
employees are eligible to receive stock options generally not
more often than once a year, giving them the right to purchase
shares of Common Stock of the Company in the future at a price
equal to fair market value at the date of grant.
Under the Company's stock option plans, shares of the
Company's Common Stock may be purchased at the fair market value
on the date of grant. All grants must be exercised according to
the provisions of the Company's stock option plans. All
outstanding options expire ten years from the date of grant.
Performance Share Awards. The Compensation Committee also
believes that a component of compensation of the executive
management of the Company should be related to the Company's and
the executive's specific objectives. Accordingly, the
Compensation Committee granted performance share awards to the
executive officers. These awards consisted of a bonus of a
designated maximum percentage of salary payable in cash or stock,
at the discretion of the Compensation Committee, based upon the
achievement of both the Company's and the individual executive's
targeted objectives.
Other Benefits. The Company's philosophy is to provide
adequate health- and welfare-oriented benefits to executives and
employees, but to maintain a highly conservative position with
respect to executive benefits. The Company provides no executive
benefits.
1996 Compensation for the Chief Executive Officer
In 1996, Lloyd Malchow was paid a salary of $204,555. Mr.
Malchow was granted a performance share award in early 1996,
which was paid in cash during the first quarter of 1997, based
upon the Compensation Committee's evaluation of the attainment of
the Company's and Mr. Malchow's stated objectives. The total
cash compensation paid to Mr. Malchow in 1996 is approximately
the industry median for chief executive officers of the
competitive industry comparative group.
Summary
The Compensation Committee believes that the compensation of
executives by the Company is appropriate and competitive with the
compensation provided by other drug delivery and
biopharmaceutical companies with which the Company competes for
executives and employees. The Committee believes its
compensation strategy, principles, and practices result in a
compensation program tied to shareholder returns and linked to
the achievement of annual and longer-term financial and
operational results of the Company on behalf of the Company's
shareholders.
The Compensation Committee of the Board of Directors
- William I. Bergman
- Dr. Harvey S. Sadow
- Dr. Gerald D. Weinstein
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company currently consists
of Mr. Bergman, Dr. Sadow and Dr. Weinstein.
Certain Relationships and Related Transactions
Dr. Quigley, Senior Vice President, Research and Development
of the Company, borrowed $125,000 from the Company under a
promissory note dated June 15, 1990. The promissory note bears
simple interest at the rate of 8.82 percent per annum, payable
quarterly, and matures upon the earlier of (i) demand by the
Company, which demand may be made at any time after June 15,
1992, or (ii) termination of Dr. Quigley's employment with the
Company. Under an Amended and Restated Pledge Agreement executed
by Dr. Quigley and the Company in November 1994, the obligation
under the promissory note is secured by a portion of Dr.
Quigley's options to purchase Common Stock of the Company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires the Company's directors
and executive officers, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file
reports of ownership on Form 3 and changes in ownership on Form 4
or 5 with the Securities and Exchange Commission and the National
Association of Securities Dealers. Such officers, directors and
ten percent shareholders are also required by Securities and
Exchange Commission rules to furnish the Company with copies of
all Section 16(a) forms that they file.
Based solely on its review of copies of such reports
received or written representations from certain reporting
persons, the Company believes that, during the fiscal year ended
December 31, 1996, there has been no failure by any of its
officers, directors or ten percent shareholders to file on a
timely basis any reports required by Section 16(a) other than the
failure by Dr. Gerald D. Weinstein to timely file three reports
on Form 4, which forms covered four transactions that were
therefore not reported on a timely basis.
Stock Price Performance Graph
The following graph illustrates a comparison of the
cumulative total shareholder return (change in stock price plus
reinvested dividends) of the Company's Common Stock with the
Nasdaq Stock Market Index (U.S.) (the "Nasdaq Composite Index")
and the CRSP Nasdaq Pharmaceutical Stock Index (the "Nasdaq
Pharmaceutical Index"). Although the Securities and Exchange
Commission regulations generally require the graph to cover a
five-year period, the graph below covers a 38-month period since
the Company's Common Stock has been publicly traded only since
November 3, 1993. The comparisons in the graph are required by
the Securities and Exchange Commission and are not intended to
forecast or be indicative of possible future performance of the
Company's Common Stock.
[EDGAR REPRESENTATION OF DATA POINTS ON STOCK PRICE PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
10/29/93
11/3/93 12/31/93 12/30/94 12/29/95 12/31/96
<S> <C> <C> <C> <C> <C>
Penederm Incorporated 100 100 57 103 112
Nasdaq Composite Index 100 100 97 138 170
Nasdaq Pharmaceutical Index 100 100 75 137 137
</TABLE>
The comparison assumes a $100 investment on November 3, 1993
(the date of the Company's initial public offering) in the
Company's Common Stock and on October 29, 1993 in the securities
comprising the Nasdaq Composite Index and the securities
comprising the Nasdaq Pharmaceutical Index.
PROPOSAL TWO
Reincorporation in Delaware
Introduction
At the Annual Meeting, shareholders will be asked to approve
a proposal to change the state of incorporation of the Company
from California to Delaware. The Board of Directors believes
that the best interests of the Company and its shareholders will
be served by the proposed reincorporation. The proposal
regarding reincorporation and certain differences between
applicable California and Delaware law are summarized below. The
summary is not complete. It is qualified in its entirety by
reference to: (a) the Agreement of Merger (the "Agreement")
between the Company (sometimes referred to as the "California
Company") and a newly-formed Delaware corporation named "Penederm
Incorporated" that is a wholly-owned subsidiary of the Company
and that would become the new public company after the
reincorporation (the "Delaware Company"); (b) the Certificate of
Incorporation of the Delaware Company (the "Delaware
Certificate"); (c) the Bylaws of the Delaware Company (the
"Delaware Bylaws"); (d) the Articles of Incorporation of the
California Company (the "California Articles"); (e) the Bylaws of
the California Company (the "California Bylaws"); (f) the
Delaware General Corporation Law and related case law (the
"Delaware Law") and (g) the California General Corporation Law
and related case law (the "California Law"). The Agreement, the
Delaware Certificate and the Delaware Bylaws are attached to this
proxy statement as Appendices A, B and C, respectively. The
California Articles and the California Bylaws are available for
inspection at the principal office of the Company and will also
be sent to shareholders on request at a nominal charge to cover
costs. Requests should be directed to Michael A. Bates, Penederm
Incorporated, 320 Lakeside Drive, Suite A, Foster City,
California 94404, telephone (415) 358-0100.
If approved, the reincorporation will be accomplished by
merging the California Company into the Delaware Company (the
"Merger"). After the Merger, the Delaware Company will continue
to operate the business of the Company under the name Penederm
Incorporated. The reincorporation will not result in any change
in the business, management, fiscal year, assets, liabilities,
net worth or location of the headquarters or other facilities of
the Company. The directors elected at the Annual Meeting will
become the directors of the Delaware Company. The Delaware
Company will continue all stock option and purchase plans of the
California Company, as well as the Company's shareholder rights
plan. Each option or right to purchase shares of the California
Company's Common Stock under those plans will become an option or
right to purchase the same number of shares of the Delaware
Company's common stock at the same price and on the same terms
and conditions as is presently the case. The Delaware Company
will also continue all other employee benefit arrangements of the
California Company without change.
When the Merger becomes effective, each outstanding share of
the California Company's Common Stock, no par value, will become
one share of the Delaware Company's common stock, $.01 par value
per share. Each stock certificate representing outstanding
shares of the California Company's common stock will then
represent a like number of shares of the Delaware Company's
common stock. SHAREHOLDERS NEED NOT EXCHANGE THEIR EXISTING
STOCK CERTIFICATES FOR STOCK CERTIFICATES OF THE DELAWARE
COMPANY. However, shareholders may exchange their certificates
if they wish. The Common Stock of the Company is listed for
trading on the Nasdaq National Market, and after the Merger the
Delaware Company's Common Stock will continue to be traded on the
Nasdaq National Market under the same symbol ("DERM").
Under the California Law, shareholders have the right to
exercise so-called "dissenters' rights" in connection with
certain mergers and receive cash for their shares. However, the
California Law does not grant dissenters' rights in connection
with mergers such as the Merger.
APPROVAL OF THE PROPOSED REINCORPORATION BY SHAREHOLDERS
WILL CONSTITUTE APPROVAL OF THE AGREEMENT, THE MERGER, THE
DELAWARE CERTIFICATE, THE DELAWARE BYLAWS AND THE ASSUMPTION BY
THE DELAWARE COMPANY OF THE CALIFORNIA COMPANY'S EMPLOYEE BENEFIT
PLANS AND STOCK OPTION AND PURCHASE PLANS.
In accordance with California Law, the affirmative vote of a
majority of the outstanding shares of Common Stock is required
for approval of the reincorporation proposal. The
reincorporation proposal has been approved by the California
Company's Board of Directors, which unanimously recommends a vote
in favor of the proposal. The Company expects to complete the
Merger promptly if and after shareholders grant that approval.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
REINCORPORATION PROPOSAL.
Principal Reasons for the Proposed Reincorporation
Well-Established Principles of Corporate Governance. As the
Company plans for the future, the Board of Directors and
management believe it essential to be able to draw upon well-
established principles of corporate governance in making legal
and business decisions. The Delaware Law includes numerous
judicial precedents that address required and permitted conduct
of corporations and their boards of directors. The California
Law includes far fewer such precedents. The Company believes
that shareholders will benefit from the well-established
principles of the Delaware Law.
Prominence and Flexibility of the Delaware Law. The Company
also believes that the prominence and flexibility of the Delaware
Law provide a beneficial foundation on which business and
corporate governance decisions can be based. The Company
believes that shareholders will benefit from the responsiveness
of the Delaware Law to their needs and those of the Company.
Delaware for many years has followed a policy of encouraging
incorporation in that state, and, in furtherance of that policy,
Delaware has been a leader in adopting, construing and
implementing comprehensive and flexible corporate laws that are
responsive to the legal and business needs of corporations
organized under its laws. Many corporations have initially
chosen Delaware for their state of incorporation and many other
corporations have changed their domicile to Delaware. Both the
legislature and courts in Delaware have demonstrated an ability
and willingness to act quickly and effectively to meet changing
business needs, and Delaware courts have developed considerable
expertise in dealing with corporate issues.
Increased Ability to Attract and Retain Qualified Directors.
The Company seeks to continue to attract and retain the most
capable individuals available to serve as its directors and
officers. The Delaware Law permits corporations to limit the
liability of directors and provide indemnification to its
directors and officers to a somewhat greater degree than has
traditionally been the case under California law. The Board of
Directors thus believes that reincorporation can be a factor in
attracting quality individuals to the Board and management,
encouraging existing directors and officers to continue to serve
in these capacities and freeing those persons to make corporate
decisions on the merits rather than out of a desire to avoid
personal liability. Although to date the Company has not
experienced difficulty in attracting and retaining qualified
directors and officers, personal liability is increasingly
expressed as a concern. One reason is that, in November 1996,
California's voters were asked to approve a law that could have
expanded the liability and further limited the indemnification
rights of directors and officers in connection with certain
lawsuits based on securities laws (Proposition 211). Although
voters rejected that proposal, it is possible that, in the
future, California will enact laws that adversely affect the
ability of corporations incorporated in that state to attract and
retain quality directors and officers.
Certain Possible Disadvantages
Despite the unanimous belief of the Board of Directors that
the proposed reincorporation is in the best interests of the
California Company and its shareholders, it should be noted that
some commentators criticize the Delaware Law because it does not
afford shareholders the same rights and protections as are
available in, for example, California. The next section of this
proxy statement discusses certain of those differences. In
addition, the Delaware Certificate and the Delaware Bylaws
contain certain provisions that the California Company could have
adopted but has not adopted, which affect the relative rights and
powers of shareholders and management, and shareholders'
participation in corporate decision-making. These provisions are
discussed in the next section of this proxy statement.
Certain Differences Between the Charter Documents and Applicable
Laws
There are certain ways in which, by causing the Company to
be governed by the Delaware Law, the Delaware Certificate and the
Delaware Bylaws, reincorporation will alter the rights and powers
of shareholders and management, and reduce shareholder
participation in certain corporate decisions. Some of these
provisions have anti-takeover implications. In addition, the
Delaware Company could implement additional changes in the future
that further alter the rights and powers of stockholders and
management. Some of those changes could be effected by
amendments to the Delaware Certificate after stockholder
approval. Others could be effected by amendments to the Delaware
Bylaws without stockholder approval. To reflect the language
difference found in the respective statutes of the two states,
the following discussion uses the word "shareholder" with respect
to California and "stockholder" with respect to Delaware.
Shareholder Action by Written Consent. The Delaware
Certificate provides that stockholders may act only at an annual
or special meeting of stockholders and not by written consent.
The California Law permits California corporations to include a
similar provision in its articles of incorporation. However, the
California Articles do not contain such a provision, and the
California Bylaws specifically provide for shareholders to act by
written consent. The elimination of the right of shareholders to
act by written consent could make more difficult or discourage
attempts to acquire control of the Company or wage a proxy
contest.
Special Shareholder Meetings. The Delaware Bylaws provide
that special meetings of stockholders can be called only by the
Board of Directors, the Chair of the Board or the President of
the Delaware Company. The Delaware Bylaws also limit the
business permitted to be conducted at special meetings of
stockholders to matters which the Board of Directors brings
before those meetings. Under the California Law and as set forth
in the California Bylaws, a special meeting of shareholders may
be called by a corporation's board of directors, the Chairman of
the Board, its President or holders of stock entitled to cast not
less than ten percent of the votes at a meeting (five percent
under certain circumstances).
Cumulative Voting. Cumulative voting enables less than half
the shares that vote for director to elect one or more (but not a
majority of) directors. Under non-cumulative voting, a majority
of the shares that vote elects all the directors. Both the
Delaware Law and the California Law permit corporations like the
Company to eliminate (or not to grant) rights to elect directors
by cumulative voting. The California Bylaws provide for
cumulative voting. Because the Delaware Certificate does not
grant stockholders the right to elect directors by cumulative
voting, stockholders will not have that right if the Company
reincorporates in Delaware.
Business Combinations. The Delaware Law subjects to special
stockholder approval requirements certain transactions involving
a corporation and significant stockholders. The California Law
also has provisions that address certain transactions with
significant shareholders and with certain other parties as well.
Under Section 203 of the Delaware Law ("Section 203"),
certain "business combinations" with an "interested stockholder"
are subject to a three-year moratorium unless specified
conditions are met. The three-year period begins when the
interested stockholder attains that status. With exceptions, an
interested stockholder is a person or group that "owns" at least
15 percent of the corporation's outstanding voting stock or is
affiliated with the corporation and owned at least 15 percent of
such stock at any time within three years. A person is deemed to
own shares, for this purpose, if that person beneficially owns
the shares, has a right to acquire them, has a right to vote them
(subject to exceptions) or is party to an agreement regarding
their acquisition, holding, voting or disposition with the person
that beneficially owns them. "Business combinations" include,
among other transactions: (a) mergers with or caused by the
interested stockholder; (b) certain sales or other dispositions
of assets to the interested stockholder if the market value of
the assets equals at least ten percent of the total market value
of the corporation's consolidated assets or outstanding stock;
(c) certain issuances of stock by the corporation to the
interested stockholder and (d) certain loans, advances,
guarantees, pledges and other benefits extended to, or conferred
upon, the interested stockholder.
The three-year moratorium does not apply if: (a) before the
stockholder became an interested stockholder, the board of
directors approved the business combination or the transaction
that caused the person to become an interested stockholder;
(b) the interested stockholder owns 85 percent of the
corporation's voting stock after completion of the transaction
that caused the stockholder to become an interested stockholder
(certain shares are excluded from this 85 percent calculation) or
(c) at the time the person became an interested stockholder or
after that time, the board approved the business combination and
the combination is also approved by holders of 66-2/3 percent of
the voting stock not owned by the interested stockholder.
Although a Delaware corporation may elect not to be governed by
Section 203, the Delaware Company does not intend to make that
election. Accordingly, Section 203 will apply to the Delaware
Company.
The Company believes that Section 203 may have the effect of
encouraging potential acquirors to negotiate with the Delaware
Company's Board of Directors instead of launching a hostile
acquisition attempt. Section 203 also has the effect of limiting
the ability of potential acquirors to make a two-tiered bid for a
Delaware corporation in which all stockholders would not be
treated equally. Section 203 may deter potential unfriendly
offers or other efforts to obtain control of the Delaware Company
that are not approved by its Board of Directors. It could,
therefore, deprive stockholders of opportunities to realize a
premium on their stock.
The California Law requires that holders of common stock
receive common stock in a merger of a California corporation with
the holder of more than 50 percent but less than 90 percent of
such common stock, unless all the shareholders approve the merger
or the California Department of Corporations approves the merger
after a hearing as to fairness. This provision may have the
effect of making a cash-out merger by a majority shareholder more
difficult to accomplish and deterring a tender offer that would
precede such a merger.
The California Law also provides that, with exceptions, when
a tender offer or a proposal for a reorganization or sale of
assets is made by an "interested party" (in general, a
controlling or managing party of the target corporation), a
fairness opinion regarding the consideration to be paid to
shareholders must be delivered to the shareholders. Furthermore,
if a tender for shares or vote is sought pursuant to an
interested party's proposal and another party makes a later
proposal at least ten days before the date of acceptance of the
interested party's tender or proposal, the shareholders must be
informed of the later offer and be afforded a reasonable
opportunity to withdraw any vote, consent, proxy or tendered
shares. The Delaware Law has no comparable provision.
Shareholder Rights Plan. In November 1996, the Board of
Directors adopted a shareholder rights plan for the California
Company. The plan is designed to deter any attempt to acquire
the California Company in a manner or on terms not approved by
the Board of Directors, and to assist the Company's shareholders
in realizing fair value and equal treatment in the event of any
takeover of the Company and to protect the Company and its
shareholders against coercive takeover tactics. If the
reincorporation is completed, the Board of Directors will cause
the Delaware Company to continue the shareholder rights plan.
All rights under that plan to purchase shares of the California
Company's stock would become rights to purchase shares of the
Delaware Company's stock.
Liability of Directors. The California Articles provide for
the elimination of personal monetary liability of directors to
the fullest extent permitted by the California Law. The Delaware
Certificate provides for the elimination of personal monetary
liability of directors to the fullest extent permitted by the
Delaware Law.
The Delaware Law may permit somewhat broader elimination of
such liability than the California Law permits. The Delaware Law
permits the elimination of personal monetary liability of a
director to the corporation or its stockholders for breaches of
the director's fiduciary duty, other than for: (a) breaches of
the director's duty of loyalty; (b) acts or omissions not in good
faith or which involve intentional misconduct or a knowing
violation of law; (c) unlawful dividends or stock repurchases and
(d) transactions from which the director derived an improper
personal benefit. The California Law permits the elimination of
personal monetary liability of a director in actions brought by
or in right of the corporation for breaches of the director's
duties to the corporation and its shareholders, other than for
(among other things): (a) acts or omissions that involve
intentional misconduct or a knowing or culpable violation of law;
(b) acts or omissions the director believes to be contrary to the
best interests of the corporation or its shareholders or that
involve the absence of good faith; (c) transactions from which
the director derived an improper personal benefit; (d) acts or
omissions that show a reckless disregard for the director's duty
to the corporation or its shareholders in circumstances in which
the director was aware, or should have been aware, in the
ordinary course of performing the director's duties, of a risk of
serious injury to the corporation or its shareholders and
(e) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's
duties to the corporation or its shareholders.
Indemnification. California and Delaware both permit
corporations to indemnify their officers, directors, employees
and other agents under certain circumstances. While the
indemnification provisions of the California Law and the Delaware
Law are similar, they differ in certain respects.
The California Law permits indemnification for expenses,
judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with third party actions (i.e.,
actions not brought by the corporation or derivatively on behalf
of the corporation) if the person to be indemnified acted in good
faith and in a manner that person reasonably believed to be in
the best interests of the corporation and its shareholders, as
determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent
directors is not obtainable), a majority vote of a quorum of the
shareholders (excluding shares owned by the indemnified party) or
the court handling the action. The Delaware Law permits such
indemnification if the person to be indemnified is determined to
have acted in good faith and in a manner that person reasonably
believed to be in or not opposed to the best interests of the
corporation. The Delaware Law therefore appears to permit
indemnification even though the indemnified person is unable to
demonstrate that his or her conduct was reasonably believed to be
in the best interests of the corporation.
Both the California Law and the Delaware Law also permit
indemnification for expenses (but not judgments, fines,
settlements or other amounts) actually and reasonably incurred in
actions brought directly by the corporation or derivatively on
the corporation's behalf. However, no such indemnification is
permitted if the person is adjudged liable to the corporation in
the performance of that person's duties to the corporation and
its shareholders, unless and to the extent a court determines
that indemnification is appropriate. The California Law further
provides that the corporation cannot indemnify amounts paid in
settling or otherwise disposing of such an action without court
approval or for expenses incurred in defending such an action
which is settled or otherwise disposed of without court approval.
The Delaware Law allows indemnification of such amounts paid and
expenses incurred in connection with direct or derivative actions
that are settled or otherwise disposed of without court approval.
The California Law requires indemnification against expenses
actually and reasonably incurred in direct, derivative and third
party actions when the individual has successfully defended the
action on the merits. The Delaware Law requires such
indemnification in connection with a successful defense on the
merits or otherwise. Accordingly, the Delaware Law requires
indemnification where the individual prevails for "technical"
reasons such as the bar of an applicable statute of limitations.
The California Law permits corporations to include in their
articles of incorporation a provision that extends the scope of
indemnification through agreements, bylaws or other corporate
action beyond that specifically authorized by statute.
Similarly, the Delaware Law states that the indemnification
provided by statute is not exclusive of any other indemnification
rights under any by-law, agreement, vote of stockholders or
disinterested directors, or otherwise. This feature of the
Delaware Law is potentially broader than the California
provision, because the California provision states that any such
"excess" indemnification cannot extend to conduct from which
directors may not be exonerated by a provision in the articles of
incorporation. The Delaware provision does not contain a similar
requirement. Both the California Articles and the California
Bylaws, as well as the Delaware Certificate, provide for "excess"
indemnification.
There has never been, nor is there any pending or, to the
Company's knowledge, threatened litigation or other proceeding
involving any of its directors in which the rights of the Company
or its shareholders would have been or would be affected if the
Company were already a Delaware corporation as set forth in this
reincorporation proposal. In considering the reincorporation
proposal, the Board recognized that the individual directors have
a personal interest in obtaining the benefits of the Delaware Law
and that the expense to the Company might be greater after
reincorporation to the extent any director or officer is
indemnified in circumstances where indemnification would not be
available under the California Law. The Board believes, however,
that the overall effect of reincorporation is to provide a legal
environment that enhances the Company's ability to continue to
attract and retain high quality directors and officers.
Single Class of Directors. The California Company has a
single class of directors and the Delaware Company initially will
have a single class of directors. That means that shareholders
vote to elect all the directors each year. By contrast, under a
"classified" or "staggered" board, directors are divided into
classes and shareholders vote for the members of only one class
at each annual shareholder meeting. One possible effect of a
classified board is that dissident shareholders cannot as easily
or quickly acquire control of the board. Classified boards are
permitted under both the California Law and the Delaware Law;
however, under the California Law if a board is divided into two
classes the authorized number of directors must be at least six,
and if the board is divided into three classes the authorized
number of directors must be at least nine. The Delaware Law has
no similar requirement.
Removal of Directors. Under the California Law, any
director or the entire board may be removed, with or without
cause, with the approval of a majority of the outstanding shares
entitled to vote. However, for corporations like the California
Company that permit cumulative voting, no director may be removed
(unless the entire board is removed) if the number of votes cast
against removal would be sufficient to elect the director under
cumulative voting.
Under the Delaware Law, a director of a corporation that
does not have a classified board may be removed with or without
cause by stockholder vote, subject to limitations for
corporations that permit cumulative voting. A director of a
corporation that has a classified board can be removed only for
cause, unless its certificate of incorporation provides
otherwise. As mentioned, the Delaware Company will not have a
classified board. The Delaware Bylaws provide that directors may
be removed, with or without cause, at an annual meeting or at a
special meeting of stockholders called for that purpose.
Therefore, after reincorporation, stockholders of the Delaware
Company will still be entitled to remove directors without cause.
However, minority stockholders who in some cases could have
blocked removal will no longer have that ability, because the
Delaware Company will not have cumulative voting.
Filling Board Vacancies. Under the California Law,
shareholders may fill any vacancy on the board not otherwise
filled by the board. Unless the articles or bylaws provide
otherwise, the board may fill any vacancy other than one caused
by removal of a director. A vacancy created by removal may be
filled only by the shareholders, unless the corporation's
articles of incorporation or bylaws also authorize the board to
fill such vacancies. The California Bylaws do not permit the
Board to fill such vacancies. Under the Delaware Law, vacancies
and newly-created directorships may be filled by a majority of
the directors then in office or by the stockholders, unless
otherwise provided in the certificate of incorporation or bylaws.
Neither the Delaware Certificate nor the Delaware Bylaws restrict
the ability of the Delaware Company's stockholders to fill board
vacancies.
Rights of Dissenting Shareholders. Under both the
California Law and the Delaware Law, a shareholder of a
corporation that participates in certain major transactions may
receive cash equal to the fair value (Delaware) or fair market
value (California) of the shareholder's stock (determined by
agreement between the shareholder and corporation or by a court)
in lieu of the consideration the shareholder would have received
in the transaction, if the shareholder follows certain
procedures. The California Law and the Delaware Law differ with
respect to the circumstances under which such dissenters' rights
are available. The Delaware Law does not require dissenters'
rights with respect to: (a) a sale of assets; (b) a merger if the
shares of the corporation are, for example, traded on the Nasdaq
National Market as the Company's are or (c) a merger in which the
corporation survives and no vote of its stockholders is required
to approve the merger. The California Law affords dissenters'
rights in certain sale-of-assets transactions. In addition, the
California exceptions for dissenters' rights in mergers are
somewhat different than Delaware's. Dissenters' rights are
available for certain (not all) mergers involving California
corporations whose shares are traded on the Nasdaq National
Market.
Dividends. Both the California Law and the Delaware Law
impose limitations on a corporation's ability to pay dividends or
make other distributions to shareholders or redeem their stock.
These laws are intended to protect creditors. Under the
California Law, such distributions generally are limited either
to retained earnings or to an amount that would leave the
corporation with tangible assets equal in value to at least 125
percent of its liabilities and with current assets at least equal
in value to its current liabilities (or 125 percent of its
current liabilities if the average pre-tax and pre-interest
earnings for the preceding two fiscal years were less than its
average interest expense for those years). In general, the
Delaware Law permits distributions and stock repurchases out of
surplus or, if there is no surplus, out of net profits for the
current and preceding fiscal years.
Certain Loans. The California Law requires that any loan or
guaranty by the corporation to or for a director or officer must
be approved by shareholders, unless extended or granted under a
plan approved by shareholders. Shareholders may also approve a
bylaw authorizing the corporation's board of directors to approve
loans or guaranties to or for officers (including officers who
are also directors), if the board determines that the loan or
guaranty may reasonably be expected to benefit the corporation.
The California Bylaws contain such a provision. Under the
Delaware Law, a corporation may make loans to, guarantee the
obligations of or otherwise assist its officers or other
employees (including any officer or other employee who is also a
director) when, in the board's judgment, such action may
reasonably be expected to benefit the corporation.
Inspection of Shareholder List. Both the California Law and
the Delaware Law allow any shareholder to inspect the shareholder
list for a purpose reasonably related to the shareholder's
interest as a shareholder. In addition, the California Law
grants an absolute right to inspect and copy the shareholder list
to holders of at least five percent of a corporation's voting
shares and holders of at least one percent of such shares who
filed a "Schedule 14B" with the Securities and Exchange
Commission relating to the election of directors. The Delaware
Law does not provide an absolute right of inspection. Lack of
access to shareholder records, even though unrelated to a
shareholder's interest as a shareholder, could result in
impairment of the shareholder's ability to coordinate support for
or opposition to proposals.
Shareholder Votes on Certain Transactions and Events. Both
California and Delaware law generally require that holders of at
least a majority of the outstanding voting shares of both
corporations participating in a merger approve the merger. As
set forth above, the Delaware Law contains a supermajority
stockholder voting requirement (66-2/3 percent of the voting
stock not owned by the "interested stockholder") for certain
"business combinations" including mergers involving "interested
stockholders".
The Delaware Law does not require a vote by stockholders of
a surviving corporation in a merger (unless the corporation
provides otherwise in its certificate of incorporation) if: (a)
the merger agreement does not amend the corporation's existing
certificate of incorporation; (b) each share of the surviving
corporation outstanding before the merger is unchanged in the
merger and (c) the number of shares issued by the surviving
corporation in the merger does not exceed 20 percent of the
shares outstanding immediately before the merger. The California
Law contains a similar exception from the shareholder approval
requirement for reorganizations where the shareholders
immediately before the reorganization will own equity securities
immediately after the reorganization constituting more than five-
sixths of the voting power of the surviving or acquiring
corporation. Both the California Law and the Delaware Law also
require that a sale of all or substantially all of the
corporation's assets be approved by a majority of the
corporation's voting shares, and the supermajority stockholder
voting requirement of Section 203 of the Delaware Law applies to
certain sales of assets by the Delaware Company to an "interested
stockholder".
With certain exceptions, the California Law also requires
that mergers, reorganizations, certain sales of assets and
similar transactions be approved by a majority vote of each class
of outstanding shares. The Delaware Law generally does not
require class voting, except in certain transactions involving an
amendment to the certificate of incorporation that adversely
affects a specific class of shares. If the Delaware Company ever
issues shares of a new class of stock, its holders would thus
vote with the holders of the common stock unless the Delaware
Certificate stated otherwise.
Size of the Board. The California Articles establish a
range of five through nine authorized directors for the
California Company and specify that the exact number of directors
will be fixed from time to time by board resolution or a bylaw
adopted by the Board or the shareholders. The Board has fixed
the number of directors for the California Company at seven
effective on the date of the Annual Meeting. The Delaware Bylaws
also establish a range of five through nine authorized directors,
with the exact number to be determined by board resolution. The
initial fixed number of authorized directors for the Delaware
Company will also be seven.
Amendment of Certificate or Articles of Incorporation.
Under both the Delaware Law and the California Law, a
corporation's certificate or articles of incorporation may be
amended only if the amendment is approved by the board and by
holders of a majority of its voting shares.
Amendment of Bylaws. The bylaws of a California corporation
may be amended by shareholders holding a majority of the
outstanding voting shares or by the board. However, if the
number or range of directors is specified in the bylaws, that
provision can only be changed with shareholder approval.
Shareholders of a California corporation can adopt a bylaw
limiting the power of the board to amend the bylaws. Under the
Delaware Law, the bylaws may be amended only by the stockholders,
unless the corporation's certificate of incorporation also
confers that power on the board. The Delaware Certificate
authorizes the Delaware Company's Board of Directors to amend the
Delaware Bylaws. Accordingly, the Board of the Delaware Company
will have the ability to change the range of the number of
directors without stockholder approval. The Board of the
California Company does not have that ability.
Interested Director Transactions. Under the California Law,
contracts and other transactions in which one or more of a
corporation's directors have a material financial interest are
not void or voidable because of that interest if certain
conditions are met. Under the Delaware Law, contracts and other
transactions in which one or more of a corporation's directors or
officers have a financial interest are not void or voidable
because of that interest if certain conditions are met. With
exceptions, those conditions are similar under California and
Delaware law. Under both laws: (a) either the shareholders or
the board must approve any such contract or transaction after
disclosure of the material facts and, in the case of board
approval, the contract or transaction must also be "just and
reasonable" (in California) or "fair" (in Delaware) to the
corporation or (b) the contract or transaction must have been
just and reasonable or fair as to the corporation at the time it
was approved. In the latter case, the California Law places the
burden of proof on the interested director. Under the California
Law, if shareholder approval is sought, the interested director
is not entitled to vote the director's shares with respect to the
contract or transaction. Also under the California Law, if board
approval is sought, the contract or transaction must be approved
by a majority vote of a quorum of the directors without counting
the vote of the interested directors. However, interested
directors may be counted for purposes of establishing a quorum.
Under the Delaware Law, if board approval is sought, the contract
or transaction must be approved by a majority of the
disinterested directors even if less than a majority of a quorum.
The Company is not aware of any plans to propose any transaction
involving directors of the Company.
Voting by Ballot. The California Law provides that the
election of directors may proceed in the manner set forth in a
corporation's bylaws. The California Bylaws provide for the
election of directors by voice vote or by ballot, unless before
the voting begins a shareholder demands voting by ballot, in
which case such vote shall be by ballot. Under the Delaware Law,
the right to vote by ballot may be restricted if so provided in
the certificate of incorporation. The Delaware Certificate
provides that election of directors need not be by written ballot
unless the bylaws so provide. The Delaware Bylaws do not require
election of directors to be by ballot. Stockholders of the
Delaware Company will therefore not be entitled to demand
election by written ballot. It may be more difficult for a
stockholder to contest the outcome of a vote that has not been
conducted by written ballot.
Shareholder Derivative Suits. The California Law provides
that a shareholder bringing a derivative action on behalf of a
corporation need not have been a shareholder at the time of the
transaction to which the action relates if certain tests are met.
In general, under the Delaware Law a shareholder may only bring a
derivative action if the shareholder was such at the time of the
transaction. The California Law also provides that the
corporation or defendant in a derivative suit may seek a court
order requiring that the plaintiff shareholder furnish a bond for
security. The Delaware Law does not have such a feature.
Dissolution. Under the California Law, holders of shares
having 50 percent or more of the corporation's total voting power
may authorize a corporation's dissolution without board approval.
That right may not be modified by the articles of incorporation.
Under the Delaware Law, unless the board approves the
dissolution, the dissolution must be approved by holders of
shares having 100 percent of the corporation's voting power.
Application of the California Law to Delaware Corporations
Under Section 2115 of the California Law, certain foreign
corporations (i.e., corporations not organized under California
law) are placed in a special category if they have
characteristics of ownership and operation which indicate that
they have significant contacts with California. So long as a
Delaware or other foreign corporation is in this special
category, and it does not qualify for one of the statutory
exemptions, it is subject to a number of key provisions of the
California Law applicable to corporations incorporated in
California. Among the more important provisions are those
relating to the election and removal of directors, cumulative
voting, prohibition of classified boards of directors, standards
of liability and indemnification of directors, distributions,
dividends and repurchases of shares, shareholder meetings,
approval of certain corporate transactions, dissenters' and
appraisal rights and inspection of corporate records.
Exemptions from Section 2115 are provided for corporations
whose shares are listed on a major national securities exchange
or are traded on the Nasdaq National Market and which have 800 or
more shareholders of record. After the proposed reincorporation,
the common stock of the Delaware Company will be traded on the
Nasdaq National Market, and held beneficially by more than 800
stockholders as of the record date of its most recent annual
meeting and, accordingly, the Delaware Company will be exempt
from Section 2115.
Certain Federal Income Tax Considerations
The Company has received an opinion of counsel that, for
federal income tax purposes, no gain or loss will be recognized
by shareholders as a result of the reincorporation. In addition,
counsel has opined that each holder of the California Company's
shares should have the same basis in the stock of the Delaware
Company received in the reincorporation as that holder had in
that holder's shares of the California Company just before the
reincorporation. Moreover, such person's holding period with
respect to that stock of the Delaware Company should include the
period during which the holder held the corresponding shares of
the California Company, assuming the latter were held as capital
assets at the time of the reincorporation. Shareholders should
consult their own tax advisors as to any effect of the
reincorporation on them under state, local or foreign income tax
laws.
The Company has also received an opinion of counsel that the
Company will not recognize any gain or loss for federal income
tax purposes as a result of the reincorporation, and that the
Delaware Company will succeed, without adjustment, to the federal
income tax attributes of the California Company.
PROPOSAL THREE
Approval of an Amendment to the Penederm Incorporated
Equity Incentive Plan
Background
The Board has approved, subject to shareholder approval, an
amendment to the Penederm Incorporated Equity Incentive Plan (the
"Incentive Plan") increasing the aggregate number of shares
reserved for issuance thereunder by 400,000 from 1,312,500 to
1,712,500.
Description of the Proposal
Currently, the Incentive Plan provides that a total of
1,312,500 shares of Common Stock may be issued thereunder. As of
December 31, 1996, there were 152,933 shares that were currently
available for option grant under the Incentive Plan. The
proposed amendment to the Incentive Plan increases the number of
shares available for issuance under the Incentive Plan by 400,000
shares to a total of 1,712,500 shares, in order to ensure that
there will be a sufficient reserve of shares to permit the grant
of further options to existing and new employees of and
consultants to the Company.
The following table shows the number of shares awarded to
the executive officers named in the Summary Compensation Table
and the identified groups under the Incentive Plan in the year
ended December 31, 1996. All options were granted at fair market
value as of the date of grant.
Number
Name and Position of Shares
Lloyd H. Malchow 155,000
President, Chief Executive Officer and Director
John W. Quigley, Jr., Ph.D. 49,500
Vice President, Research and Development
Edgar A. Luce (1) 18,000
Vice President, Finance and Administration,
Treasurer and Secretary
Edward Ebbers 37,000
Vice President, Sales and Marketing
William Gutshall 27,000
Vice President, Operations
All executive officers as a group 286,500
All directors who are executive officers as a group 155,000
All directors who are not executive officers as a 0
group
All employees (other than executive officers) as a 188,793
group
_______________
(1) Mr. Luce's employment with the Company terminated on
December 31, 1996.
Description of the Incentive Plan
The Incentive Plan is intended to strengthen the Company by
providing selected eligible key employees of, and consultants to,
the Company an opportunity to participate in the Company's future
by offering them an opportunity to acquire stock in the Company
so as to retain, attract and motivate them. Administration of
the Incentive Plan may either by the Board or a Committee of the
Board (in either case, the "Committee"). The Committee may
select key employees, including executive officers, or
consultants to receive awards under the Incentive Plan and has
broad discretion to determine the amount and type of awards and
terms and conditions of the awards. Individual grants will
generally be based on a person's present and potential
contribution to the Company. Nonemployee directors and members
of the Committee are not eligible to participate in the Incentive
Plan. As of March 31, 1997, the Company had approximately 46
employees eligible to participate in the Incentive Plan. Since
the grant of awards is based upon a determination made by the
Committee after a consideration of various factors, the Company
currently cannot determine the nature and amount of any awards
that will be granted in the future to any eligible individual or
group of individuals. However, the maximum number of shares that
can be granted under the Incentive Plan to any executive officer
whose compensation is required to be disclosed pursuant to the
rules and regulations under the Exchange Act is 500,000 (generally,
the chief executive officer and the four other most highly
compensated executive officers).
Awards may be granted in the form of incentive stock options
("ISOs") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("the "Code"), nonqualified
stock options ("NQOS") (each ISO or NQO, an "Option," and
collectively, "Options"), restricted stock ("Restricted Stock"),
stock purchase rights ("Stock Purchase Rights") or performance
shares ("Performance Shares"). Any award may be granted either
alone or in addition to other awards granted under the Incentive
Plan. The Committee may condition the grant of the award upon
the attainment of specified Company, group or division
performance goals or other criteria, which need not be the same
for all participants. No award may be granted under the
Incentive Plan on or after September 30, 2003, but outstanding
awards may extend beyond that date.
Options. Options granted under the Incentive Plan may be
ISOs or NQOs. The exercise price of ISOs may not be less than
the fair market value of the shares subject to the Option on the
date of grant. The exercise price of NQOs must be at least 85
percent of the fair market value of the shares subject to the
Option on the date of grant. The term of any ISO granted under
the plan may not exceed ten years and the term of any NQO may not
exceed 15 years. Certain other limitations are also applicable
to ISOs in order to take advantage of the favorable tax treatment
that may be available for ISOs.
Restricted Stock. Restricted Stock awards consist of non-
transferable shares of Common Stock of the Company. The
Committee may provide for the lapse of the transfer restrictions
over a period of not more than ten years, or may accelerate or
waive such restrictions, in whole or in part, based on service,
performance or other criteria determined by the Committee.
Stock Purchase Rights. Stock Purchase Rights consist of a
grant to purchase Common Stock at a purchase price of not less
than 85 percent of the fair market value of the Common Stock on
the grant date. Stock Purchase Rights are generally exercisable
for a period of up to 30 days after the grant date.
Performance Shares. Performance Shares are shares of Common
Stock issuable upon the attainment of performance criteria. At
the time of a grant the Committee will determine the number of
shares of Common Stock to be awarded at the end of the
performance period if and to the extent that the specified
performance targets are met. The consideration payable by a
participant with respect to a Performance Share award will be
determined by the Committee but may not exceed 50 percent of the
fair market value of the Common Stock on the date of grant. The
Committee will determine the performance period (which currently
is required to be at least one year and not more than six years),
the performance objectives to be used in granting the awards and
the extent to which awards have been earned. Performance periods
may overlap, and participants may be awarded Performance Shares
having different performance criteria. Performance Share awards
may be payable in cash or stock, at the discretion of the
Committee, and may bear interest or earn dividends.
The consideration payable upon issuance or exercise of an
award and any taxes related to an award may be paid in cash, by
promissory note of the participant, or by delivery of other
property, including securities of the Company, as authorized by
the Committee. The Company generally will not receive any
consideration upon the grant of any awards, although the
Incentive Plan provides that consideration may be payable with
respect to the grant of Performance Shares. Awards generally may
be exercised at any time within three months after a
participant's employment by, or consulting relationship with, the
Company terminates (but, only to the extent exercisable or
payable at the time of termination). If termination is due to
the participant's death, retirement or disability, the award may
be exercised for two years thereafter. Shares issued under an
award may be subject to a right of repurchase by the Company. No
award shall be assignable or otherwise transferable by a
participant other than by will or by the laws of descent and
distribution.
The Committee may adjust the performance goals and
measurements applicable to awards. The Committee also may waive
in whole or in part any or all restrictions, conditions, vesting
or forfeiture with respect to any award granted under the
Incentive Plan.
The Board may amend, alter or discontinue the Incentive Plan
or any award at any time, except that the consent of a
participant is required if the participant's rights under an
outstanding award would be impaired. In addition, the
shareholders of the Company must approve any amendment,
alteration or discontinuance of the Incentive Plan that would
(i) increase the total number of shares reserved under the
Incentive Plan, (ii) with respect to provisions solely as they
relate to ISOs, to the extent required for the Incentive Plan to
comply with Section 422 of the Code, (iii) to the extent required
by other applicable laws, rules or regulations or (iv) to the
extent that the Board otherwise concludes that shareholder
approval is advisable.
The Incentive Plan constitutes an unfunded plan for
incentive and deferred compensation. The Committee may authorize
the creation of trusts or arrangements to meet the obligations
under the Incentive Plan to deliver stock or make payments.
In the event of a "change in control" of the Company, as
defined in the Incentive Plan, the Board may, subject to certain
limitations, accelerate the vesting provisions of awards or may
cash out the awards. A "change in control" is defined to include
the acquisition of 20 percent or more of the voting power of the
Company's outstanding stock, a proxy solicitation for one or more
directors without support of the then current Board, a
dissolution or liquidation of the Company and certain asset
sales, mergers or reorganizations or other changes in ownership
of the Company's assets or stock.
Certain Federal Income Tax Consequences
THE FOLLOWING SUMMARY OF FEDERAL INCOME TAX
CONSEQUENCES IS BASED UPON EXISTING STATUTES, REGULATIONS AND
INTERPRETATIONS THEREOF. THE APPLICABLE RULES ARE COMPLEX, AND
INCOME TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH PLAN PARTICIPANT. THIS PROXY STATEMENT
DESCRIBES FEDERAL INCOME TAX CONSEQUENCES OF GENERAL
APPLICABILITY, BUT DOES NOT PURPORT TO DESCRIBE PARTICULAR
CONSEQUENCES TO EACH INDIVIDUAL PLAN PARTICIPANT, OR FOREIGN,
STATE OR LOCAL INCOME TAX CONSEQUENCES, WHICH MAY DIFFER FROM THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.
Incentive Stock Options
Awards; Exercise. ISOs are intended to constitute
"incentive stock options" within the meaning of Section 422 of
the Code. ISOs may be granted only to employees of the Company
(including directors who are also employees). The recipient of
an Option (the "Optionee") does not recognize taxable income upon
either the grant or exercise of an ISO. However, the excess of
the fair market value of the shares purchased upon exercise over
the Option exercise price (the "Option Spread") is includable in
the Optionee's "alternative minimum taxable income" ("AMTI") for
purposes of the alternative minimum tax ("AMT"). The Option
Spread is generally measured on the date of exercise and is
includable in AMTI in the year of exercise. Special rules
regarding the time of AMTI inclusion may apply for shares subject
to a repurchase right or other "substantial risk of forfeiture"
(including, in the case of each person subject to the reporting
requirements of Section 16 of the Exchange Act, any limitations
on resale of shares imposed under Section 16(b) of the Exchange
Act). In addition, when stock is acquired subject to a
"substantial risk of forfeiture", an Optionee's holding period
for purposes of determining whether any capital gain or loss on
sale is long-term will generally not begin until the restriction
lapses or the Optionee files an election under Section 83(b) of
the Code (a "Section 83(b) Election").
Sale of Option Shares. If an Optionee holds the shares
purchased under an ISO for at least two years from the date the
ISO was granted and for at least one year from the date the ISO
was exercised, any gain from a sale of the shares other than to
the Company should be taxable as capital gain. Under these
circumstances, the Company would not be entitled to a tax
deduction at the time the ISO was exercised or at the time the
stock was sold. If an Optionee were to dispose of stock acquired
pursuant to an ISO before the end of the required holding periods
(a "Disqualifying Disposition"), the amount by which the market
value of the stock at the time the ISO was exercised exceeded the
exercise price (or, if less, the amount of gain realized on the
sale) would be taxable as ordinary income, and the Company would
be entitled to a corresponding tax deduction. Such income is
subject to information reporting requirements and may become
subject to withholding. Gain from a Disqualifying Disposition in
excess of the amount required to be recognized as ordinary income
is capital gain. Optionees are required to notify the Company
immediately prior to making a Disqualifying Disposition. If
stock is sold to the Company rather than to a third party, the
sale may not produce capital gain or loss. A sale of shares to
the Company will constitute a redemption of such shares, which
could be taxable as a dividend unless the redemption is "not
necessarily equivalent to a dividend" within the meaning of the
Code.
Exercise With Stock. If an Optionee pays for ISO
shares with shares of the Company acquired under an ISO or a
qualified employee stock purchase plan ("statutory option
stock"), the tender of shares is a Disqualifying Disposition of
the statutory option stock if the above described (or other
applicable) holding periods respecting those shares have not been
satisfied. If the holding periods with respect to the statutory
option stock are satisfied, or the shares were not acquired under
a statutory stock option of the Company, then any appreciation in
value of the surrendered shares is not taxable upon surrender.
Special basis and holding period rules apply where previously-
owned stock is used to exercise an ISO.
Nonqualified Stock Options
Award; Exercise. An Optionee is not taxable upon the
award of a NQO. Federal income tax consequences upon exercise
will depend upon whether the shares thereby acquired are subject
to a "substantial risk of forfeiture." If the shares are not
subject to a substantial risk of forfeiture, or if they are so
restricted and the Optionee files a Section 83(b) Election with
respect to the shares, the Optionee will have ordinary income at
the time of exercise measured by the Option Spread on the
exercise date. The Optionee's tax basis in the shares will be
their fair market value on the date of exercise, and the holding
period for purposes of determining whether capital gain or loss
upon sale is long- or short-term also will begin on that date.
If the shares are subject to a substantial risk of forfeiture and
no Section 83(b) Election is filed, the Optionee will not be
taxable upon exercise, but instead will have ordinary income, on
the date the restrictions lapse, in an amount equal to the
difference between the amount paid for the shares under the
Option and their fair market value as of the date of lapse; in
addition, the Optionee's holding period will begin on the date of
lapse.
Whether or not the shares are subject to a substantial
risk of forfeiture, the amount of ordinary income taxable to an
Optionee who was an employee at the time of grant constitutes
"supplemental wages" subject to withholding of income and
employment taxes by the Company, and the Company receives a
corresponding income tax deduction.
Sale of Option Shares. Upon sale, other than to the
Company, of shares acquired under a NQO, an Optionee generally
will recognize capital gain or loss to the extent of the
difference between the sale price and the Optionee's tax basis in
the shares, which will be long-term gain or loss if the
employee's holding period in the shares is more than one year.
If stock is sold to the Company rather than to a third party, the
sale may not produce capital gain or loss. A sale of shares to
the Company will constitute a redemption of such shares, which
could be taxable as a dividend unless the redemption is "not
necessarily equivalent to a dividend" within the meaning of the
Code.
Exercise with Stock. If an Optionee tenders Common
Stock (other than statutory option stock -- see above) to pay all
or part of the exercise price of a NQO, the Optionee will not
have a taxable gain or deductible loss on the surrendered shares.
Instead, shares acquired upon exercise that are equal in value to
the fair market value of the shares surrendered in payment are
treated as if they had been substituted for the surrendered
shares, taking as their basis and holding period the basis and
holding period that the Optionee had in the surrendered shares.
The additional shares are treated as newly acquired with a zero
basis.
If the surrendered shares are statutory option stock as
described above under "Incentive Stock Options", with respect to
which the applicable holding period requirements for favorable
income tax treatment have not expired, then the newly acquired
shares substituted for the statutory option shares should remain
subject to the federal income tax rules governing the surrendered
shares, but the surrender should not constitute a "disqualifying
disposition" of the surrendered stock.
Restricted Stock
Upon receipt of Restricted Stock, a recipient generally
has taxable income in the amount of the excess of the then fair
market value of the Common Stock over any consideration paid for
the Common Stock (the "spread"). However, if the Common Stock is
subject to a "substantial risk of forfeiture" (described under
"Incentive Stock Options," above) and the recipient does not make
a Section 83(b) Election, the recipient will have taxable income
upon lapse of the risk of forfeiture, rather than at receipt, in
an amount equal to the spread on the date of lapse. The taxable
income constitutes supplemental wages subject to federal income
and employment tax withholding, and the Company receives a
corresponding income tax deduction. Supplemental wages are
subject to federal income and employment tax. The consequences
upon sale or disposition of Restricted Stock generally are the
same as for Common Stock acquired under a NQO (see above).
Performance Shares
Depending on the exact terms of an award of Performance
Shares, the Award could be treated for tax purposes in the same
manner as a Restricted Stock Award, i.e., as receipt of property,
subject to restrictions.
Stock Purchase Rights
The tax treatment of Stock Purchase Rights is identical
to that of NQOs, as described above.
Special Federal Income Tax Consideration Due to Short Swing
Profit Rule
The potential liability of a person subject to
Section 16 of the Exchange Act to repay short-swing profits from
the resale of shares acquired under a Company plan constitutes a
"substantial risk of forfeiture" within the meaning of the above-
described rules, which is treated as lapsing at such time as the
potential liability under Section 16 lapses. Persons subject to
Section 16 who would be required by Section 16 to repay profits
from the immediate resale of stock acquired under a Company plan
should consider whether to file a Section 83(b) Election at the
time they acquire stock under a Company plan in order to avoid
deferral of the date that they are deemed to acquire shares for
federal income tax purposes.
Proposal
Shareholders are being asked to approve the amendment to the
Incentive Plan. The affirmative vote of the holders of a
majority of the outstanding shares of the Common Stock of the
Company represented and voting at the Annual Meeting is required
to adopt the amendment to the Incentive Plan.
Board Recommendation
THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL.
PROPOSAL FOUR
Approval of an Amendment to the Penederm Incorporated
Employee Stock Purchase Plan
Background
The Board has approved, subject to shareholder approval, an
amendment to the Penederm Incorporated Employee Stock Purchase
Plan (the "Purchase Plan") increasing the aggregate number of
shares reserved for issuance thereunder by 50,000 from 100,000 to
150,000.
Description of the Proposal
Currently, the Purchase Plan provides that a total of
100,000 shares of Common Stock may be issued thereunder. A total
of 52,123 shares have been issued under the Purchase Plan. The
proposed amendment to the Purchase Plan increases the number of
shares available for issuance under the Purchase Plan by 50,000
shares to a total of 150,000 shares, in order to ensure that
there will be a sufficient reserve of shares to permit further
purchases by existing and new employees of the Company.
The following table shows the number of shares purchased by
the executive officers named in the Summary Compensation Table
and the identified groups under the Purchase Plan in the year
ended December 31, 1996 and the "Dollar Value" of those shares.
The "Dollar Value" is the difference between the fair market
value of the Common Stock on the dates of purchase and the
participant's purchase price.
<TABLE>
<CAPTION>
Dollar Number
Name and Position Value ($) of Shares
<S> <C> <C>
Lloyd H. Malchow 36,511 3,463
President, Chief Executive Officer and Director
John W. Quigley, Jr., Ph.D. 29,894 2,835
Vice President, Research and Development
Edgar A. Luce (1) 14,630 2,349
Vice President, Finance and Administration,
Treasurer and Secretary
Edward Ebbers 22,586 2,150
Vice President, Operations
William Gutshall -- 0
Vice President, Operations
All executive officers as a group 103,621 10,797
All directors who are executive officers as a group 36,511 3,463
All directors who are not executive officers as a group -- 0
All employees (other than executive officers) as a group 274,971 26,277
</TABLE>
_______________
(1) Mr. Luce's employment with the Company terminated on
December 31, 1996.
Description of Plan
All employees, including executive officers and directors
who are employees, customarily employed more than 20 hours per
week and more than five months per year by the Company are
eligible to participate in the Purchase Plan as of the first
enrollment date following employment. However, employees who
hold, directly or through options, five percent or more of the
stock of the Company are not eligible to participate. As of
March 31, 1997 approximately 38 employees of the Company were
eligible to participate in the Purchase Plan.
Participants in the Purchase Plan may elect to make
contributions to the Purchase Plan up to a maximum of seven
percent (or other percentage set by the Board) of compensation.
On the last trading date of each June and December, or such other
dates as may be established by the Board from time to time, the
Company applies the funds then in each participant's account to
the purchase of shares. The cost of each share purchased is 85
percent of the lower of the closing prices for Common Stock on:
(i) the first trading day in the enrollment period in which the
purchase is made; and (ii) the purchase date. The length of the
enrollment period may not exceed a maximum of 24 months.
Enrollment dates are the first business day of July and January,
or such other dates as may be established by the Board from time
to time. The Board has limited the maximum number of shares that
may be purchased by a participant during any enrollment period,
and no participant's right to acquire shares may accrue at a rate
exceeding $25,000 of fair market value of Common Stock
(determined as of the first trading day in an enrollment period)
in any calendar year.
The Board may administer the Purchase Plan or may delegate
its authority to a committee. The Board may amend or terminate
the Purchase Plan at any time and may provide for an adjustment
in the purchase price and the number and kind of securities
available under the Purchase Plan in the event of a
reorganization, recapitalization, stock split, or other similar
event. However, amendments to increase the number of shares
reserved for purchase, or that would otherwise require
shareholder approval in order to comply with federal securities
regulations, require shareholder approval. Shares available
under the Purchase Plan may be either outstanding shares
repurchased by the Company or newly issued shares.
Certain Federal Income Tax Consequences
In general, participants will not have taxable income or
loss under the Purchase Plan until they sell or otherwise dispose
of shares acquired under the Purchase Plan (or die holding such
shares). If the shares are held, as of the date of sale or
disposition, for longer than both: (i) two years after the
beginning of the enrollment period during which the shares were
purchased; and (ii) one year following purchase, a participant
will have taxable ordinary income equal to 15 percent of the fair
market value of the shares on the first day of the enrollment
period (but not in excess of the gain on the sale). Any
additional gain from the sale will be long-term capital gain.
The Company is not entitled to an income tax deduction if the
holding periods are satisfied.
If the shares are disposed of before the expiration of both
of the foregoing holding periods (a "disqualifying disposition"),
a participant will have taxable ordinary income equal to the
excess of the fair market value of the shares on the purchase
date over the purchase price. In addition, the participant will
have taxable capital gain (or loss) measured by the difference
between the sale price and the participant's purchase price plus
the amount of ordinary income recognized, which gain (or loss)
will be long-term if the shares have been held as of the date of
sale for more than one year. The Company is entitled to an
income tax deduction equal to the amount of ordinary income
recognized by a participant in a disqualifying disposition.
Special rules apply to participants who are directors or
officers.
Proposal
Shareholders are being asked to approve the amendment to the
Purchase Plan. The affirmative vote of the holders of a majority
of the outstanding shares of the Common Stock of the Company
represented and voting at the Annual Meeting is required to adopt
the amendment to the Purchase Plan.
Board Recommendation
THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL.
INDEPENDENT AUDITORS
The Board has selected Ernst & Young LLP as independent
auditors to audit the financial statements of the Company for the
1997 fiscal year. Ernst & Young LLP has been engaged as the
Company's auditors since 1995. Representatives of Ernst &
Young LLP are expected to be present at the Annual Meeting and
will have an opportunity to make a statement if they desire to do
so. The representatives of Ernst & Young LLP also will be
available to respond to questions raised during the meeting.
SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company which are intended
to be presented at the Company's 1998 meeting of shareholders
must be received by the Secretary of the Company no later than
January 8, 1998 in order to be included in the proxy soliciting
material relating to that meeting.
OTHER MATTERS
The Company knows of no other matters to be submitted at the
Annual Meeting. If any other matters properly come before the
Annual Meeting, it is the intention of the persons named in the
enclosed proxy to vote the shares they represent as the Board may
recommend.
THE BOARD OF DIRECTORS
Dated: May 8, 1997
Penederm Incorporated
PROXY PROXY
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) Lloyd H. Malchow and
Michael A. Bates, or either of them, each with full power of
substitution, the lawful attorneys and proxies of the undersigned
to vote as designated below, and, in their discretion, upon such
other business as may properly be presented to the meeting, all
of the shares of PENEDERM INCORPORATED which the undersigned
shall be entitled to vote at the Annual Meeting of Shareholders
to be held on June 16, 1997, and at any adjournments or
postponements thereof.
1. To elect as directors David E. Collins, Lloyd H.
Malchow, Robert F. Allnutt, William I. Bergman, Mark J.
Gabrielson, Harvey S. Sadow, Ph.D. and Gerald D. Weinstein.
[ ] FOR all nominees listed (except as indicated
below)
[ ] WITHHOLD AUTHORITY to vote (as to all nominees)
To withhold authority to vote for any individual nominee,
write that nominee's name on the line provided below:
_______________________________________________________
2. To approve the proposed change in Penederm
Incorporated's state of incorporation from California to
Delaware.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the proposed amendment to the Penederm
Incorporated Equity Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve the proposed amendment to the Penederm
Incorporated Employee Stock Purchase Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy, when properly executed, will be voted in the
manner directed by the undersigned shareholder. WHEN NO CHOICE
IS INDICATED, THIS PROXY WILL BE VOTED FOR THE NOMINEES OR
PROPOSALS LISTED ABOVE. The proxy holders in their discretion
may cumulate votes for the election of directors. This proxy may
be revoked at any time prior to the time it is voted by any means
described in the accompanying Proxy Statement.
_______________________________
(Signature)
_______________________________
(Signature)
Please
date and sign exactly as name(s)
appear(s) hereon. If shares are
held jointly, each holder should
sign. Please give full title and
capacity in which signing if not
signing as an individual.
Dated: _______________, 1997
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND MAIL IT PROMPTLY IN
THE ENCLOSED ENVELOPE TO ASSURE REPRESENTATION OF YOUR SHARES.
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
PENEDERM INCORPORATION,
a California corporation
and
PENEDERM INCORPORATED,
a Delaware corporation
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is
dated as of ______ __, 1997 between Penederm Incorporated, a
California corporation ("Penederm California"), and Penederm
Incorporated, a Delaware corporation ("Penederm Delaware"),
a wholly owned subsidiary of Penederm California.
BACKGROUND
A. Penederm California is a corporation duly
organized, validly existing and in good standing under the
laws of the State of California and, on the date of this
Agreement, has authority to issue 40,000,000 shares
consisting of 30,000,000 shares of Common Stock, no par
value, and 10,000,000 shares of Preferred Stock, no par
value, of which [_________] shares of Common Stock and no
shares of Preferred Stock are issued and outstanding.
B. Penederm Delaware is a corporation duly
organized, validly existing and in good standing under the
laws of the State of Delaware and, on the date of this Agreement,
has authority to issue 40,000,000 shares, consisting of
30,000,000 shares of Common Stock, $0.01 par value, and
10,000,000 shares of Preferred Stock, $0.01 par value, of which
one share of Common Stock is issued and outstanding and owned
by Penederm California and no shares of Preferred Stock are
issued and outstanding.
C. The Board of Directors of each of Penederm California
and Penederm Delaware have determined that it is advisable
and in the best interests of each of such corporations that
Penederm California merge into Penederm Delaware upon the terms
and subject to the conditions set forth in this Agreement, for
the purpose of effecting the reincorporation of Penederm California
in the State of Delaware and have, by resolutions duly adopted,
approved this Agreement and directed that it be submitted to a
vote of their respective stockholders and executed by the
undersigned officers.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE I
DEFINITIONS
When used in this Agreement (and in any Exhibit in
which such terms are not otherwise defined) the following
terms shall have the following meanings:
"California Common Stock" shall mean shares of Common
Stock, no par value, of Penederm California.
"California Preferred Stock" shall mean shares of
Preferred Stock, no par value, of Penederm California.
"Certificate of Merger" shall mean the Certificate of
Merger of Penederm California into Penederm Delaware to be
filed with the Secretary of State of the State of Delaware
in substantially the form attached hereto as Exhibit 2.1.
"Delaware Common Stock" shall mean shares of Common
Stock, $0.01 par value, of Penederm Delaware.
"Delaware Preferred Stock" shall mean shares of
Preferred Stock, $0.01 par value, of Penederm Delaware.
"Effective Time" shall mean the time when the
Certificate of Merger is filed with the Secretary of State
of the State of Delaware and the Merger becomes effective.
"Merger" shall mean the merger of Penederm
California into Penederm Delaware.
"Shareholders' Meeting" shall mean the annual meeting
of shareholders of Penederm California to be held on
June 16, 1997, to approve and adopt this Agreement, among other
things.
"Surviving Corporation" shall mean Penederm Delaware
from and after the Effective Time.
ARTICLE II
MERGER
2.1 Merger. At the Effective Time, the
Merger shall become effective under Section 252
of the Delaware General Corporation Law and
Section 1108(d) of the California General
Corporation Law, and Penederm California shall
merge into Penederm Delaware, the separate
existence of Penederm California shall cease and
Penederm Delaware shall continue in existence as
the surviving corporation under the Delaware
General Corporation Law.
2.2 Filings. On or prior to the Closing Date,
Penederm California and Penederm Delaware shall cause:
(a) an executed counterpart of the
Certificate of Merger to be filed with the
Secretary of State of California; and
(b) the Certificate of Merger to be
filed with the Secretary of State of Delaware.
As soon as practicable after the Effective Time,
the Surviving Corporation shall cause the
Certificate of Merger to be filed with the
County Recorder of the county in
which the registered office of Penederm Delaware
in the State of Delaware is located and shall
cause such other local filings to be made as are
required under the laws of the State of
California.
2.3 Effects of the Merger. At the
Effective Time:
(a) the separate existence of Penederm
California shall cease and Penederm California
shall be merged into Penederm Delaware;
(b) the Certificate of Incorporation
of Penederm Delaware shall continue as the
Certificate of Incorporation of the Surviving
Corporation;
(c) the Bylaws of Penederm Delaware shall
continue as the Bylaws of the Surviving Corporation;
(d) each officer and director of
Penederm California in office immediately prior
to the Effective Time shall serve in the same
capacity as an officer or director of the Surviving
Corporation immediately after the Effective Time;
(e) each share of California Common
Stock outstanding immediately prior to the
Effective Time shall be converted into one share
of Delaware Common Stock pursuant to Article
III;
(f) without further transfer, act,
or deed, the separate existence of Penederm
California shall cease and the Surviving
Corporation shall possess all the rights,
privileges, powers and franchises, and shall be
subject to all the restrictions, disabilities
and duties, of Penederm California; and all
property, real, personal and mixed, and all
debts due to Penederm California on whatever
account, as well as stock subscriptions and all
other things belonging to Penederm California
shall be vested in the Surviving Corporation;
and all property, rights, privileges, powers and
franchises, and all and every other interest of
Penederm California shall be thereafter as
effectually the property of the Surviving
Corporation as they were of Penederm California,
and the title to any real estate vested by deed
or otherwise in Penederm California shall not
revert or be in any way impaired by reason of
the Merger; and all rights of creditors of
Penederm California and all liens upon any
property of Penederm California shall be
preserved unimpaired and all debts, liabilities
and duties of Penederm California shall attach
to the Surviving Corporation and may be enforced
against it to the same extent as if such debts,
liabilities and duties had been incurred or
contracted by it.
2.4 Further Assurances. Penederm
California agrees that if, at any time after the
Effective Time, the Surviving Corporation shall
consider or be advised that any further deeds,
assignments or assurances are necessary or
desirable to vest, perfect or confirm in the
Surviving Corporation title to any property or
rights of Penederm California, the Surviving
Corporation and its officers and directors may
execute and deliver all such deeds, assignments
and assurances and do all other things necessary
or desirable to vest, perfect or confirm title
to such property or rights in the Surviving
Corporation and otherwise to carry out the
purposes of this Agreement, in the name of
Penederm California or otherwise.
ARTICLE III
CONVERSION OF STOCK
3.1 Conversion of Stock. At the
Effective Time, the stock of Penederm California shall be
converted into stock of Penederm Delaware, as
follows:
(a) each share of California Common
Stock issued and outstanding immediately prior
to the Effective Time shall, by virtue of the
Merger and without any action on the part of the
holder thereof, be converted into one share of
Delaware Common Stock; and
(b) each share of Delaware Common
Stock issued and outstanding immediately prior
to the Effective Time shall be canceled and
retired and no stock shall be issued in the
Merger in respect thereof.
3.2 Stock Certificates. At and after the
Effective Time, all of the outstanding certificates
which immediately prior to the Effective Time
represented shares of California Common Stock
shall be deemed for all purposes to evidence
ownership of, and to represent, shares of
Delaware Common Stock into which the shares of California
Common Stock formerly represented by such certificates
have been converted as provided in this
Agreement. The registered owner on the books and
records of Penederm Delaware or its transfer
agent of any outstanding stock certificate
shall, until such certificate shall have been
surrendered for transfer or otherwise accounted
for to Penederm Delaware or its transfer agents,
have and be entitled to exercise any voting and
other rights with respect to, and to receive any
dividends and other distributions upon, the
shares of Delaware Common Stock evidenced by
such outstanding certificate as provided above.
3.3 Stock Options. Each right or
option to purchase shares of California Common
Stock granted under the Penederm Incorporated
Equity Incentive Plan, the Penederm Incorporated
1994 Nonemployee Directors Stock Option Plan,
the Penederm Incorporated Employee Stock
Purchase Plan, the Penederm Incorporated
Employee Stock Option Plan and the Penederm
Incorporated Consultant Stock Option Plan
(collectively, the "Plans") which is outstanding
immediately prior to the Effective Time, shall
by virtue of the Merger and without any action
on the part of the holder thereof, be converted
into and become an option to purchase the same
number of shares of Delaware Common Stock at the
same option price per share, and upon the same
terms and subject to the same conditions as in
effect at the Effective Time. The same number
of shares of Delaware Common Stock shall be
reserved for purposes of said Plans as is equal
to the number of shares of California Common
Stock so reserved as of the Effective Time. As
of the Effective Time, Penederm Delaware hereby
assumes the Plans and all obligations of
Penederm California under the Plans including
the outstanding options or awards or portions
thereof granted pursuant to the Plans.
3.4 Rights Agreement. Each right to purchase
shares of California Common Stock outstanding under the
Rights Agreement, dated November 20, 1996,
between Penederm California and ChaseMellon
Shareholder Services, LLC (the "Rights
Agreement") shall become a right to purchase the
same number of shares of Delaware Common Stock
at the same price and on the same terms and
conditions as set forth in the Rights Agreement
and Penederm Delaware shall assume all rights
and obligations of Penederm California under the
Rights Agreement immediately as of the Effective
Time.
3.5 Validity of Delaware Common Stock.
All shares of Delaware Common Stock into which
California Common Stock are to be converted
pursuant to the Merger shall not be subject to
any statutory or contractual preemptive rights,
shall be validly issued, fully paid and
nonassessable and shall be issued in full
satisfaction of all rights pertaining to such
California Common Stock.
3.6 Rights of Former Holders. From and after
the Effective Time, no holder of certificates which
evidenced California Common Stock immediately
prior to the Effective Time shall have any rights
with respect to the shares formerly evidenced by
those certificates, other than to receive the shares
of Delaware Common Stock into which such California
Common Stock shall have been converted pursuant to
the Merger.
ARTICLE IV
GENERAL
4.1 Consents. Each of Penederm California and
Penederm Delaware shall use its best efforts to obtain
the consent and approval of each person (other than
shareholders of Penederm California in their capacities
as such) whose consent or approval shall be required in
order to permit consummation of the Merger.
4.2 Governmental Authorizations. Each of
Penederm California and Penederm Delaware shall
cooperate in filing any necessary reports or other
documents with any federal, state, local or foreign
authorities having jurisdiction with respect to the
Merger.
4.3 Waiver and Amendment. This Agreement may be
amended by action of the Board of Directors of each
of Penederm California and Penederm Delaware without
action by the stockholders of the parties, except that
(a) any amendment to Section 3.1, (b) any amendment changing
the terms, rights, powers or preferences of the Delaware
Common Stock, or (c) any amendment altering any terms of
this Agreement if such alteration would adversely affect
the holders of California Common Stock or Delaware Common
Stock must be approved by a majority of the voting
power of the outstanding California Common Stock.
4.4 Termination. This Agreement may be
terminated and the Merger and other transactions
provided for by this Agreement abandoned at any
time prior to the Effective Time, whether before
or after adoption and approval of this Agreement
at the Shareholders' Meeting, by action of the
Board of Directors of Penederm California if the
Board determines that the consummation of the
transactions contemplated by this Agreement
would not, for any reason, be in the best
interests of Penederm California and its
shareholders.
4.5 Entire Agreement. This Agreement
(including any exhibits), contains the entire
agreement among the parties with respect to the
Merger and supersedes all prior and concurrent
arrangements, letters of intent or understandings
relating to the Merger.
4.6 Counterparts. This Agreement may be
executed in two or more counterparts, each of
which shall be an original, but all of which
when taken together shall constitute one and the
same agreement. This Agreement shall become
effective when one or more counterparts has been
signed by each of the parties and delivered to
each of the other parties.
4.7 Headings. The article, section and
paragraph headings in this Agreement have been
inserted for identification and reference and
shall not by themselves determine the meaning
or interpretation of any provision of this
Agreement.
4.8 Governing Law. This Agreement shall
be governed by and construed in accordance with
the laws of the State of Delaware and, so far
as applicable, the merger provisions of the
California General Corporation Law.
IN WITNESS WHEREOF, the parties have caused
this Agreement to be executed as of the date
first above written.
PENEDERM INCORPORATED,
a California corporation
By:
Title:
By:
Title:
PENEDERM INCORPORATED,
a Delaware corporation
By:
Title:
By:
Title:
APPENDIX B
CERTIFICATE OF INCORPORATION
OF
PENEDERM INCORPORATED
The undersigned, for purposes of incorporating and
organizing a corporation under the General Corporation Law of the
State of Delaware, does hereby certify as follows:
FIRST. The name of the corporation is Penederm
Incorporated.
SECOND. The name of its registered office in the State of
Delaware is Corporation Service Company. The address of its
registered agent in the State of Delaware is 1013 Centre Road,
City of Wilmington, County of New Castle, Delaware 19805.
THIRD. The nature of the business or purposes to be
conducted or promoted is to engage in any lawful act or activity
for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH. The total number of shares of all classes of
capital stock which the corporation shall have authority to issue
is 40,000,000 shares, comprised of 30,000,000 shares of Common
Stock with a par value of $.01 per share (the "Common Stock") and
10,000,000 shares of Preferred Stock with a par value of $.01 per
share (the "Preferred Stock"). A description of the respective
classes of stock and a statement of the designations,
preferences, voting powers (if any), relative, participating,
optional or other special rights and privileges and the
qualifications, limitations and restrictions of the Preferred
Stock and Common Stock are as follows:
A. PREFERRED STOCK
1. In General. The Preferred Stock may be issued
in one or more series at such time or times and for such
consideration as the board of directors may determine. Each
series shall be designated so as to distinguish the shares of
that series from the shares of all other series and classes.
Except as may be expressly provided in this Certificate of
Incorporation, including any certificate of designations for a
series of Preferred Stock, different series of Preferred Stock
shall not be construed to constitute different classes of shares
for the purpose of voting by classes.
2. Certificates of Designation. The board of
directors is authorized, subject to any limitations prescribed by
law, to provide for the issuance of the shares of Preferred Stock
in one or more series, and by filing a certificate pursuant to
the applicable law of the State of Delaware, to establish from
time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. The number of authorized
share of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Preferred Stock, or
of any series thereof, unless a vote of any such holders is
required pursuant to the certificate or certificates establishing
the series of Preferred Stock.
B. COMMON STOCK
1. Relative Rights of Preferred Stock and Common
Stock. Except as otherwise required by this Certificate of
Incorporation, all powers, preferences and rights and
qualifications, limitations, or restrictions of the Common Stock
are subject to those that may be fixed with respect to any shares
of the Preferred Stock.
2. Voting Rights. Except as otherwise required
by law or this Certificate of Incorporation, including any
certificate of designation for a series of Preferred Stock, each
holder of Common Stock shall have one vote in respect of each
share of stock held of record by that holder on the books of the
corporation for the election of directors and on all matters
submitted to a vote of stockholders of the corporation.
3. Dividends. Subject to any preferential rights
of the Preferred Stock, the holders of shares of Common Stock
shall be entitled to receive, when and if declared by the board
of directors, out of the assets of the corporation which by law
are available therefor, dividends payable in cash, in property or
in shares of capital stock.
4. Dissolution, Liquidation or Winding Up. In
the event of any dissolution, liquidation or winding up of the
affairs of the corporation, after distribution in full of the
preferential amounts, if any, to be distributed to the holders of
shares of the Preferred Stock, holders of Common Stock shall be
entitled, unless otherwise provided by law or this Certificate of
Incorporation, including any certificate of designation for a
series of Preferred Stock, to receive all of the remaining assets
of the corporation of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of
Common Stock held by them.
FIFTH. The corporation is to have perpetual existence.
SIXTH. Any action required or permitted to be taken by the
stockholders of the corporation must be effected at an annual or
special meeting of stockholders of the corporation and may not be
effected by any consent in writing of the stockholders. Special
meetings of stockholders of the corporation may be called only by
the corporation's Board of Directors, its Chair of the Board of
Directors or its President. Business transacted at special
meetings shall be confined to the purpose or purposes stated in
the notice of meeting.
SEVENTH.
A. In furtherance and not in limitation of the powers
conferred by the laws of the State of Delaware, the board of
directors of the corporation is expressly authorized to adopt,
amend or repeal the by-laws of the corporation.
B. Elections of directors need not be by written
ballot unless the by-laws of the corporation so provide.
C. The books of the corporation may be kept at such
place within or without the State of Delaware as the by-laws of
the corporation may provide or as may be designated from time to
time by the board of directors of the corporation.
EIGHTH. Whenever a compromise or arrangement is proposed
between this corporation and its creditors or any class of them
and/or between this corporation and its stockholders or any class
of them, any court of equitable jurisdiction within the State of
Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this
corporation under Section 291 of Title 8 of the Delaware Code or
on the application of trustees in dissolution or of any receiver
or receivers appointed for this corporation under Section 279 of
Title 8 of the Delaware Code, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be
summoned in such manner as that court directs. If a majority in
number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to
any compromise or arrangement and to any reorganization of this
corporation as a consequence of such compromise or arrangement,
the compromise or arrangement and the reorganization shall, if
sanctioned by the court to which the application has been made,
be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this
corporation, as the case may be, and also on this corporation.
NINTH. No director of the corporation shall be personally
liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for
liability: (a) for any breach of the director's duty of loyalty
to the corporation or its stockholders; (b) for acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of law; (c) under Section 174 of the Delaware
General Corporation Law or (d) for any transaction from which the
director derived any improper personal benefit. If the Delaware
General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. Any repeal
or modification of this paragraph shall not adversely affect any
right or protection of a director of the corporation existing at
the time of the repeal or modification.
TENTH.
A. RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is
threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he or
she is or was a director, officer or employee of the
corporation or is or was serving at the request of the
corporation as a director or officer, employee or agent of
another corporation, or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee
or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless
by the corporation to the fullest extent authorized or permitted by
the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the corporation to
provide broader indemnification rights than that law permitted
the corporation to provide before the amendment) against all
expenses, liabilities and losses (including, without limitation,
attorneys' fees, judgments, fines, ERISA excise taxes and
penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection
therewith. Such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and
administrators. However, the corporation shall indemnify any
such person seeking indemnity in connection with an action, suit
or proceeding (or part thereof) initiated by that person only if
that action, suit or proceeding (or part thereof) was authorized
by the board of directors of the corporation. The rights set
forth in this Article TENTH shall be contract rights and shall
include the right to be paid expenses incurred in defending any
such proceeding in advance of its final disposition. However,
the payment of such expenses incurred by a director or officer of
the corporation in his or her capacity as a director or officer
(and not in any other capacity in which service was or is
rendered by such person while a director or officer, including,
without limitation, service to an employee benefit plan) in
advance of the final disposition of such proceeding shall be made
only upon delivery to the corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so
advanced if it should be determined ultimately that such director
or officer is not entitled to be so indemnified.
B. RIGHT OF CLAIMANT TO BRING SUIT
If a claim under Paragraph A of this Article TENTH
is not paid in full by the corporation within 90 days after a
written claim has been received by the corporation, the claimant
may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim. If successful in whole
or in part, the claimant shall be entitled to be paid the expense
of prosecuting that claim. It shall be a defense to any such
action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its
final disposition where the required undertaking, if any, has
been tendered to this corporation) that the claimant has not met
the standards of conduct which make it permissible under the
Delaware General Corporation Law for the corporation to indemnify
the claimant for the amount claimed. However, the burden of
proving such defense shall be on the corporation. Neither the
failure of the corporation (including its board of directors,
independent legal counsel or its stockholders) to have made a
determination before the commencement of such action that
indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set
forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its board of
directors, independent legal counsel or its stockholders) that
the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
C. NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by Paragraphs A
and B of this Article TENTH shall not be exclusive of any other
rights which such person may have or hereafter may acquire under
any statute, provision of the Certificate of Incorporation,
by-law, agreement, vote of stockholders or of disinterested
directors, or otherwise.
D. EXPENSES AS A WITNESS
To the extent that any director, officer or
employee of the corporation is by reason of such position,
or a position with another entity at the request of the
corporation, a witness in any action, suit or proceeding, he or
she shall be indemnified against all costs and expenses actually
and reasonably incurred by him or her on his or her behalf in
connection therewith.
E. INDEMNITY AGREEMENTS
The corporation may enter into agreements with any
director, officer, employee or agent of the corporation or any
person who serves at the request of the corporation as a
director, officer, employee, or agent of another corporation or
other enterprise, providing for indemnification to the fullest
extent permissible under the Delaware General Corporation Law.
F. EFFECT OF REPEAL OR MODIFICATION
Any repeal or modification of this Article TENTH
shall not adversely affect any right of indemnification of a
director, officer or employee or agent of the corporation
existing at the time of such repeal or modification with respect
to any action or omission occurring before the repeal or
modification.
G. SEPARABILITY
Each and every paragraph, sentence, term and
provision of this Article TENTH is separate and distinct. If any
paragraph, sentence, term or provision is held to be invalid or
unenforceable for any reason, such invalidity or unenforceability
shall not affect the validity or enforceability of any other such
paragraph, sentence, term or provision. To the extent required
in order to make any such paragraph, sentence, term or provision
of this Article TENTH valid or enforceable, the corporation
shall, and the indemnitee or potential indemnitee may, request a
court of competent jurisdiction to modify the paragraph,
sentence, term or provision in order to preserve its validity and
provide the broadest possible indemnification permitted by
applicable law.
H. INSURANCE
The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or
agent of the corporation or another corporation, partnership,
joint venture, trust or other enterprise against any expense,
liability or loss of the type referred to in this Article TENTH,
whether or not the corporation would have the power to indemnify
such person against such expense, liability or loss under
applicable law.
ELEVENTH. The corporation reserves the right to amend or
repeal any provision of this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights
conferred upon any stockholders by this Certificate of
Incorporation are granted subject to this reservation.
TWELFTH. The powers of the incorporator are to terminate
upon the filing of this Certificate of Incorporation with the
Secretary of the State of Delaware. The name and mailing address
of the person who is to serve as the initial director of the
corporation until the first annual meeting of stockholders of the
corporation, or until his successor is elected and qualified is:
Michael Bates, Penederm Incorporated, 320 Lakeside Drive, Foster
City, California 94404.
The undersigned incorporator hereby acknowledges that the
foregoing Certificate of Incorporation is his act and deed on
this _____ day of _________________, 1997.
______________________________
Michael Bates, Incorporator
APPENDIX C
BYLAWS OF
PENEDERM INCORPORATED
OFFICES
1. Registered Office. The registered office of the
corporation shall be in the City of Wilmington, County of New
Castle, State of Delaware.
2. Other Offices. The corporation may also have
offices at such other places both within and without the State of
Delaware as the board of directors may from time to time
determine or the business of the corporation may require.
STOCKHOLDERS
3. Annual Meeting. Unless the board of directors or
the President of the corporation selects a different time or
date, the annual meeting of stockholders shall be held at 11:00
a.m. on the first Tuesday of the fifth calendar month following
the end of the corporation's fiscal year. The annual meeting
shall be for the purpose of electing a board of directors and
transacting such other business as may properly be brought before
the meeting.
4. Special Meeting. Special meetings of stockholders
may be called at any time by the board of directors, the Chairman
of the Board or the President of the corporation.
5. Place. Meetings of stockholders shall be held at
the principal executive office of the corporation or at any other
place, within or without California, which is designated by the
board of directors or the President.
6. Notice.
(a) Annual and Special Meetings. A written notice of
each meeting of stockholders shall be given not more than 60 days
and, except as provided below, not less than ten days before the
meeting to each stockholder entitled to vote at the meeting. The
notice shall state the place, date and hour of the meeting and,
if directors are to be elected at the meeting, the names of the
nominees intended to be presented by management for election.
The notice shall also state (i) in the case of an annual meeting,
those matters which the board of directors intends to present for
action by the stockholders, and (ii) in the case of a special
meeting, the general nature of the business to be transacted and
that no other business may be transacted. Notice shall be
delivered personally, by mail or other means addressed to the
stockholder at the address of such stockholder appearing on the
books of the corporation, the address given by the stockholder to
the corporation for the purpose of notice or as otherwise
provided by law.
(b) Adjourned Meetings. Notice of an adjourned
meeting need not be given if (i) the meeting is adjourned for 45
days or less, (ii) the time and place of the adjourned meeting
are announced at the meeting at which the adjournment is taken
and (iii) no new record date is fixed for the adjourned meeting.
Otherwise, notice of the adjourned meeting shall be given as in
the case of an original meeting.
7. Record Date. The board of directors may fix in
advance a record date for the determination of the stockholders
entitled to notice of any meeting, to vote, to receive any
dividend or other distribution or allotment of rights or to
exercise any rights. The record date shall be not more than 60
nor less than ten days prior to the date of the meeting nor more
than 60 days prior to such other action. If no record date is
fixed, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the
close of business on the business day next preceding the day on
which notice is given, or, if notice is waived, the close of
business on the business day next preceding the day on which the
meeting is held. Except as otherwise provided by law, when a
record date is fixed, as provided herein, only stockholders on
the record date are entitled to notice and to vote, to receive
the dividend, distribution or allotment of rights or to exercise
rights, as the case may be, notwithstanding any transfer of
shares on the books of the corporation occurring after the record
date. Except as otherwise provided by law, the corporation shall
be entitled to treat the holder of record of any shares as the
holder in fact of such shares and shall not be bound to recognize
any equitable or other claim to or interest in such shares on the
part of any other person, whether or not the corporation shall
have express or other notice of such claim or interest. A
determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any
adjournment of the meeting unless the board of directors fixes a
new record date. The board of directors shall fix a new record
date if the adjourned meeting takes place more than 45 days after
the date set for the original meeting.
8. Quorum. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for
more than 30 days, or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to
vote at the meeting.
9. Required Vote. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock
having voting power present in person or represented by proxy
shall decide any question brought before such meeting, unless the
question is one upon which by express provision of statute or of
the certificate of incorporation, a different vote is required,
in which case such express provision shall govern and control the
decision of such question.
10. Proxies and Voting. At any meeting of the
stockholders, every stockholder entitled to vote may vote in
person or by proxy authorized by an instrument in writing filed
in accordance with the procedure established for the meeting.
Unless otherwise provided in the certificate of incorporation,
each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such stockholder, but
no proxy shall be voted on after three years from its date,
unless the proxy provides for a longer period.
11. Lost Stock Certificates. The corporation may
cause a new stock certificate to be issued in place of any
certificate previously issued by the corporation alleged to have
been lost, stolen or destroyed. The corporation may, at its
discretion and as a condition precedent to such issuance, require
the owner of such certificate to deliver an affidavit stating
that such certificate was lost, stolen or destroyed or to give
the corporation a bond or other security sufficient to indemnify
it against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or
destruction or the issuance of a new certificate.
BOARD OF DIRECTORS
12. Number. The number of directors who shall
constitute the whole board not be less than five nor more than
nine. The exact number of directors shall be determined from
time to time by resolution of the board of directors.
13. Powers. The business of the corporation shall be
managed by or under the direction of its board of directors,
which may exercise all such powers of the corporation and do all
such lawful acts and things as are not by statute or by the
certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
14. Election. Except as provided in Section 15, the
directors shall be elected at the annual meeting of the
stockholders. Each director elected shall hold office until his
or her successor is elected and qualified. Directors need not be
stockholders.
15. Term of Office and Vacancies. Vacancies and
newly created directorships resulting from any increase in the
authorized number of directors elected by all of the stockholders
having the right to vote as a single class may be filled by a
majority of the directors then in office, though less than a
quorum, or by a sole remaining director; whenever the holders of
any class or classes of stock or series thereof are entitled,
pursuant to the certificate of incorporation, to elect one or
more directors, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the
directors elected by such class or classes or series then in
office, or by a sole remaining director so elected. The
directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in
office, then an election of directors may be held in the manner
provided by statute.
16. Removal. Unless otherwise restricted by the
certificate of incorporation, bylaws or statute, any director or
the entire board of directors may be removed, with or without
cause, by the holders of a majority of shares entitled to vote at
an election of directors.
17. Resignation. Any director may resign by giving
notice to the board of directors, the Chairman of the Board, the
President or the Secretary. The resignation of a director shall
be effective when given unless the director specifies a later
time. The resignation shall be effective regardless of whether
it is accepted by the corporation.
18. Compensation. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the board of
directors shall have the authority to fix the compensation of
directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be
paid a fixed sum for attendance at each meeting of the board of
directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of special
or standing committees may be allowed like compensation for
attending committee meetings.
19. Committees. The board of directors may, by
resolution passed by a majority of the whole board, designate one
or more committees, each committee to consist of one or more of
the directors of the corporation. The board many designate one
or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the
committee.
Any committee, to the extent provided in the resolution
of the board of directors, shall have and may exercise all the
powers and authority of the board of directors in the management
of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may
require it; but no committee shall have the power or authority of
the board of directors in reference to:
(a) amending the certificate of incorporation (except
to the extent provided in resolutions of the board of directors
and permitted by the General Corporation Law of the State of
Delaware);
(b) adopting an agreement of merger or consolidation;
(c) recommending to the stockholders the sale, lease
or exchange of all or substantially all of the corporation's
property and assets;
(d) recommending to the stockholders a dissolution of
the corporation or a revocation of a dissolution;
(e) adopting, amending or repealing the bylaws of the
corporation;
(f) filling a vacancy on the board of directors;
(g) amending or repealing any resolution of the board
of directors which by its express terms is not so amendable or
repealable;
(h) declaring or making a distribution to the
stockholders of the corporation, except at a rate, in a periodic
amount or within a price range determined by the board of
directors; or
(i) appointing any other committees of the board or
the members of any committee.
Unless the resolution or the certificate of incorporation
expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of
stock or to adopt a certificate of ownership and merger pursuant
to the General Corporation Law of Delaware. Such committee or
committees shall have such name or names as may be determined
from time to time by resolution adopted by the board of
directors.
Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when
required.
20. Time and Place of Meetings and Telephone Meetings.
Unless the board of directors determines otherwise, the board
shall hold a regular meeting during each quarter of the
corporation's fiscal year. One such meeting shall take place
immediately following the annual meeting of stockholders. All
meetings of directors shall be held at the principal executive
office of the corporation or at such other place, within or
without the State of Delaware, as shall be designated in the
notice of the meeting or in a resolution of the board of
directors. Directors may participate in a meeting through use of
conference telephone or similar communications equipment,
provided that all members participating in the meeting can hear
each other.
21. Call. Meetings of the board of directors, whether
regular or special, may be called by the Chairman of the Board,
the President, the Secretary, the Treasurer or any two directors.
22. Notice. Regular meetings of the board of
directors may be held without notice if the time of such meetings
has been fixed by the board. Special meetings shall be held upon
four days' notice by mail or 48 hours' notice delivered
personally or by telephone or telegraph, and regular meetings
shall be held upon similar notice if notice is required for such
meetings. Neither a notice nor a waiver of notice must specify
the purpose of any regular or special meeting. Notice of the
time and place of holding an adjourned meeting need not be given
to absent directors if the time and place of the adjourned
meeting is announced at the meeting at which the adjournment is
taken, but if a meeting is adjourned for more than 24 hours,
notice of the adjourned meeting shall be given prior to the time
of such meeting to the directors who were not present at the time
of the adjournment.
23. Meeting Without Regular Call and Notice. The
transactions of any meeting of the board of directors, however
called and noticed or wherever held, are as valid as though had
at a meeting duly held after regular call and notice if a quorum
is present and if, either before or after the meeting, each of
the directors not present signs a written waiver of notice, a
consent to the holding of the meeting or an approval of the
minutes of the meeting. For such purposes, a director shall not
be considered present at a meeting if, although in attendance at
the meeting, the director protests the lack of notice prior to
the meeting or at its commencement.
24. Action Without Meeting. Any action required or
permitted to be taken by the board of directors may be taken
without a meeting, if all of the members of the board
individually or collectively consent in writing to such action.
25. Quorum and Required Vote. At all meetings of the
board a majority of the directors shall constitute a quorum for
the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall
be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of
incorporation. If a quorum shall not be present at any meeting
of the board of directors the directors present thereat may
adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
26. Committee Meetings. The principles set forth in
Sections 20 through 25 of these bylaws shall apply to committees
of the board of directors and to actions taken by such
committees.
OFFICERS
27. Titles and Relation to board of directors. The
officers of the corporation shall include a Chairman of the Board
or a President or both, a Secretary and a Treasurer. The board
of directors may also choose one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers or other officers.
Any number of offices may be held by the same person. All
officers shall perform their duties and exercise their powers
subject to the direction of the board of directors.
28. Election, Term of Office and Vacancies. At its
regular meeting after each annual meeting of stockholders, the
board of directors shall choose the officers of the corporation.
The board may choose additional officers or fill vacant offices
at any other time. No officer must be a member of the board of
directors except the Chairman of the Board. The officers shall
hold office until their successors are chosen, except that the
board of directors may remove any officer at any time.
29. Resignation. Any officer may resign at any time
upon notice to the corporation without prejudice to the rights,
if any, of the corporation under any contract to which the
officer is a party. The resignation of an officer shall be
effective when given unless the officer specifies a later time.
The resignation shall be effective regardless of whether it is
accepted by the corporation.
30. Chairman of the Board; President. If the board of
directors elects a Chairman of the Board, such officer shall
preside over all meetings of the board of directors and of
stockholders. If there be no Chairman of the Board, the
President shall perform such duties. The board of directors
shall designate either the Chairman of the Board or the President
as the chief executive officer and may prescribe the duties and
powers of the chief executive officer. If there is no Chairman
of the Board, the President shall be the chief executive officer.
31. Secretary. Unless otherwise determined by the
board of directors or the chief executive officer, the Secretary
shall have the following powers and duties:
(a) Record of Corporate Proceedings. The Secretary
shall attend all meetings of stockholders and the board of
directors and its committees and shall record all votes and the
minutes of such meetings in a book to be kept at the principal
executive office of the corporation or at such other place as the
board may determine. The Secretary shall keep at the
corporation's principal executive office, if in California, or at
its principal business office in California if the principal
executive office is not in California, the original or a copy of
these bylaws, as amended.
(b) Record of Shares. Unless a transfer agent is
appointed by the board of directors to keep a share register, the
Secretary shall keep a share register at the principal executive
office of the corporation showing the names of the stockholders
and their addresses, the number and class of shares held by each,
the number and date of certificates issued and the number and
date of cancellation of each certificate surrendered for
cancellation.
(c) Notices. The Secretary shall give such notices as
may be required by law or these bylaws.
32. Treasurer. Unless the board of directors
designates another chief financial officer, the Treasurer shall
be the chief financial officer of the corporation. Unless
otherwise determined by the board of directors or the chief
executive officer, the Treasurer shall have custody of the
corporate funds and securities, shall keep adequate and correct
accounts of the corporation's properties and business
transactions, shall disburse such funds of the corporation as may
be ordered by the board or the chief executive officer (taking
proper vouchers for such disbursements), and shall render to the
chief executive officer and the board, at regular meetings of the
board or whenever the board may require, an account of all
transactions and the financial condition of the corporation.
33. Other Officers. The other officers of the
corporation, if any, shall exercise such powers and perform such
duties as the board of directors or the chief executive officer
shall prescribe.
34. Salaries. The board of directors shall fix the
salary of the chief executive officer and may fix the salaries of
other employees of the corporation, including the other officers.
If the board does not fix the salaries of the other officers, the
chief executive officer shall fix such salaries.
AMENDMENT OF
BYLAWS
35. Bylaws may be adopted, amended or repealed by the
affirmative vote of a majority of the outstanding shares entitled
to vote or by the board of directors.
PENEDERM INCORPORATED
EQUITY INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
(a) Purpose. The purpose of the Plan is to provide selected
eligible employees and directors of, and consultants to, Penederm
Incorporated, a California corporation, its subsidiaries and
affiliates an opportunity to participate in the Company's future
by offering them an opportunity to acquire stock in the Company
so as to retain, attract and motivate them.
(b) Definitions. For purposes of the Plan, the following
terms have the following meanings:
(i) "Award" means any award under the Plan, including any
Option, Restricted Stock, Stock Purchase Right or Performance
Share Award.
(ii) "Award Agreement" means, with respect to each Award,
the signed written agreement between the Company and the Plan
participant setting forth the terms and conditions of the Award.
(iii) "Board" means the Board of Directors of the Company.
(iv) "Change in Control" has the meaning set forth in
Section 9(a).
(v) "Change in Control Price" has the meaning set forth
in Section 9(c).
(vi) "Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute.
(vii) "Commission" means the Securities and Exchange
Commission and any successor agency.
(viii) "Committee" means the Committee referred to in
Section 2, or the Board in its capacity as administrator of the
Plan in accordance with Section 2.
(ix) "Company" means Penederm Incorporated, a California
corporation.
(x) "Disability" means permanent and total disability as
determined by the Committee for purposes of the Plan.
(xi) "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, and any successor statute.
(xii) "Fair Market Value" means as of any given date (a) if
the Stock is listed on any established stock exchange or a
national market system, the closing sales price for the Stock or
the closing bid if no sales were reported, as quoted on such
system or exchange, as reported in the Wall Street Journal; or
(b) in the absence of an established market for the Stock, the
fair market value of the Stock as determined by the Committee in
good faith.
(xiii) "Incentive Stock Option" means any Option intended to
be and designated as an "incentive stock option" within the
meaning of Section 422 of the Code.
(xiv) "Nonqualified Stock Option" means any Option that is
not an Incentive Stock Option.
(xv) "Option" means an option granted under Section 5.
(xvi) "Performance Period" means the period determined by
the Committee under Section 8(a).
(xvii) "Performance Share" means the equivalent, as of any
time such assessment is made, of the Fair Market Value of one
share of Stock.
(xviii) "Performance Share Award" means an Award under
Section 8.
(xix) "Plan" means this Penederm Incorporated Equity
Incentive Plan, as amended from time to time.
(xx) "Restricted Stock" means an Award of Stock subject to
restrictions, as more fully described in Section 6.
(xxi) "Restriction Period" means the period determined by
the Committee under Section 6(b).
(xxii) "Rule 16b-3" means Rule 16b-3 under Section 16(b) of
the Exchange Act, as amended from time to time, and any successor
rule.
(xxiii) "Stock" means the no par value Common Stock of the
Company, and any successor security.
(xxiv) "Stock Purchase Right" means an Award granted under
Section 7.
(xxv) "Subsidiary" has the meaning set forth in Section 424
of the Code.
(xxvi) "Tax Date" means the date defined in Section 10(f).
(xxvii) "Termination" means, for purposes of the Plan, with
respect to a participant, that the participant has ceased to be,
for any reason, employed by,
consulting to, or a director of, the Company, a subsidiary or an
affiliate; provided, that for purposes of this definition, if so
determined by the President of the Company, in his sole
discretion, Termination shall not include a change in status from
an employee of, to a consultant to or director of, the Company or
any subsidiary or affiliate, or vice versa.
SECTION 2. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Board
or, upon delegation by the Board, by a committee of the Board
appointed by the Board that will satisfy Rule 16b-3 and Section
162(m) of the Code, as in effect with respect to the Company from
time to time. In connection with the administration of the Plan,
the Committee shall have the powers possessed by the Board. The
Committee may act only by a majority of its members, except that
the Committee may from time to time select another committee or
one or more other persons to be responsible for any matters so
long as such selection comports with the requirements of Section
162(m) of the Code and Rule 16b-3. The Board at any time may
abolish the Committee and revest in the Board the administration
of the Plan.
(b) Authority. The Committee shall grant Awards to eligible
employees and consultants. In particular and without limitation,
the Committee, subject to the terms of the Plan, shall:
(i) select the directors, officers, other key employees
and consultants to whom Awards may be granted;
(ii) determine whether and to what extent Awards are
to be granted under the Plan;
(iii) determine the number of shares to be covered by
each Award granted under the Plan;
(iv) determine the terms and conditions of any Award
granted under the Plan and any related loans to be made by the
Company, based upon factors determined by the Committee; and
(v) determine to what extent and under what circumstances
any Award payments may be deferred by a participant.
(c) Committee Determinations Binding. The Committee may
adopt, alter and repeal administrative rules, guidelines and
practices governing the Plan as it from time to time shall deem
advisable, may interpret the terms and provisions of the Plan,
any Award and any Award Agreement and may otherwise supervise the
administration of the Plan. Any determination made by the
Committee pursuant to the provisions of the Plan with respect to
any Award shall be made in its sole discretion at the time of the
grant of the Award or, unless in contravention of any express
term of the Plan or Award, at any later time. All decisions made
by the Committee under the Plan shall be binding on all persons,
including the Company and Plan participants.
SECTION 3. STOCK SUBJECT TO PLAN.
(a) Number of Shares. The total number of shares of Stock
reserved and available for issuance pursuant to Awards under this
Plan and pursuant to options under each of this Company's
Employee Stock Option Plan and Consultant Stock Option Plan shall
be 1,712,500 shares. Such shares may consist, in whole or in
part, of authorized and unissued shares or treasury shares or
shares reacquired in private transactions or open market
purchases, but all shares issued under the Plan, the Employee
Stock Option Plan and the Consultant Stock Option Plan,
regardless of source shall be counted against the 1,712,500 share
limitation. If any Option terminates or expires without being
exercised in full or if any shares of Stock subject to an Award
are forfeited, or if an Award otherwise terminates without a
payment being made to the participant in the form of Stock, the
shares issuable under such Option or Award shall again be
available for issuance in connection with Awards. To the extent
an Award is paid in cash, the number of shares of Stock
representing, at Fair Market Value on the date of the payment,
the value of the cash payment shall not be available for later
grant under the Plan, the Employee Stock Option Plan or the
Consultant Stock Option Plan. Any Award under this Plan shall be
governed by the terms of the Plan and any applicable Award
Agreement.
(b) Adjustments. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split or
other change in corporate structure affecting the Stock, such
substitution or adjustments shall be made in the aggregate number
of shares of Stock reserved for issuance under the Plan, in the
number and exercise price of shares subject to outstanding
Options, and in the number of shares subject to other outstanding
Awards, as may be determined to be appropriate by the Committee,
in its sole discretion; provided, however, that the number of
shares subject to any Award shall always be a whole number.
SECTION 4. ELIGIBILITY.
Awards may be granted to directors, officers and other key
employees of, and consultants to, the Company, its subsidiaries
and affiliates.
SECTION 5. STOCK OPTIONS.
(a) Types. Any Option granted under the Plan shall be in
such form as the Committee may from time to time approve. The
Committee shall have the authority to grant to any participant
Incentive Stock Options, Nonqualified Stock Options or both types
of Options. Incentive Stock Options may be granted only to
employees of the Company, its parent (within the meaning of
Section 424(e) of the Code) or Subsidiaries. Any portion of an
Option that is not designated as, or does not qualify as, an
Incentive Stock Option shall constitute a Nonqualified Stock
Option.
(b) Terms and Conditions. Options granted under the Plan
shall be subject to the following terms and conditions:
(i) Option Term. The term of each Option shall be fixed
by the Committee, but no Incentive Stock Option shall be
exercisable more than ten (10) years after the date the Option is
granted, and no Nonqualified Stock Option shall be exercisable
more than fifteen (15) years after the date the Option is
granted. If, at the time the Company grants an Incentive Stock
Option, the optionee owns directly or by attribution stock
possessing more than 10% of the total combined voting power of
all classes of stock of the Company, or any parent or Subsidiary
of the Company, the Incentive Stock Option shall not be
exercisable more than five (5) years after the date of grant.
(ii) Grant Date. The Company may grant Options under
the Plan at any time and from time to time before the Plan
terminates. The Committee shall specify the date of grant or, if
it fails to, the date of grant shall be the date of action taken
by the Committee to grant the Option. However, if an Option is
approved in anticipation of employment, the date of grant shall
be the date the intended optionee is first treated as an employee
for payroll purposes.
(iii) Exercise Price. The exercise price per share of
Stock purchasable under an Option shall be equal to at least 85%
of the Fair Market Value on the date of grant, and in the case of
Incentive Stock Options shall be equal to at least the Fair
Market Value on the date of grant; provided, however, that if, at
the time the Company grants an Incentive Stock Option, the
optionee owns directly or by attribution stock possessing more
than 10% of the total combined voting power of all classes of
stock of the Company, or any parent or Subsidiary of the Company,
then the exercise price shall be not less than 110% of the Fair
Market Value on the date the Incentive Stock Option is granted.
(iv) Exercisability. Subject to the other provisions
of the Plan, an Option shall be exercisable in its entirety at
grant or at such times and in such amounts as are specified in
the Award Agreement evidencing the Option. The Committee, in its
absolute discretion, at any time may waive any limitations
respecting the time at which an Option first becomes exercisable
in whole or in part.
(v) Method of Exercise; Payment. To the extent the right
to purchase shares has accrued, Options may be exercised, in
whole or in part, from time to time, by written notice from the
optionee to the Company stating the number of shares being
purchased, accompanied by payment of the exercise price for the
shares.
(vi) No Disqualification. Notwithstanding any other
provision in the Plan, no term of the Plan relating to Incentive
Stock Options shall be interpreted, amended or altered nor shall
any discretion or authority granted under the Plan be exercised
so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the optionee affected, to disqualify any
Incentive Stock Option under such Section 422.
SECTION 6. RESTRICTED STOCK.
(a) Price. The Committee may grant to a participant
Restricted Stock. The grantee shall pay no consideration
therefor.
(b) Restrictions. Subject to the provisions of the Plan and
the Award Agreement, during the Restriction Period set by the
Committee, commencing with, and not exceeding ten (10) years
from, the date of such Award, the participant shall not be
permitted to sell, assign, transfer, pledge or otherwise encumber
shares of Restricted Stock. Within these limits, the Committee
may provide for the lapse of such restrictions in installments
and may accelerate or waive such restrictions, in whole or in
part, based on service, performance or such other factors or
criteria as the Committee may determine.
(c) Dividends. Unless otherwise determined by the Committee,
with respect to dividends on shares of Restricted Stock,
dividends payable in cash shall be automatically reinvested in
additional Restricted Stock, and dividends payable in Stock shall
be paid in the form of Restricted Stock.
(d) Termination. Except to the extent otherwise provided in
the Award Agreement and pursuant to Section 6(b), in the event of
a Termination during the Restriction Period, all shares still
subject to restriction shall be forfeited by the participant.
SECTION 7. STOCK PURCHASE RIGHTS.
(a) Price. The Committee may grant Stock Purchase Rights
which shall enable the recipients to purchase Stock at a price
equal to not less than 85% of its Fair Market Value on the date
of grant.
(b) Exercisability. Stock Purchase Rights shall be
exercisable for a period determined by the Committee not
exceeding 30 days from the date of the grant.
SECTION 8. PERFORMANCE SHARES.
(a) Awards. The Committee shall determine the nature, length
and starting date of the Performance Period for each Performance
Share Award, which period shall be at least one (1) year (subject
to Section 9) and not more than six (6) years. The consideration
payable by a participant with respect to a Performance Share
Award shall be an amount determined by the Committee in the
exercise of the Committee's discretion at the time of the Award;
provided, that the amount of consideration may be zero and may in
no event exceed 50% of the Fair Market Value at the time of
grant. The Committee shall determine the performance objectives
to be used in awarding Performance Shares and the extent to which
such Performance Shares have been earned. Performance Periods
may overlap and participants may participate simultaneously with
respect to Performance Share Awards that are subject to different
Performance Periods and different performance factors and
criteria. At the beginning of each Performance Period, the
Committee shall determine for each Performance Share Award
subject to such Performance Period the number of shares of Stock
(which may consist of Restricted Stock) to be awarded to the
participant at the end of the Performance Period if and to the
extent that the relevant measures of performance for such
Performance Share Award are met. Such number of shares of Stock
may be fixed or may vary in accordance with such performance or
other criteria as may be determined by the Committee. The
Committee may provide that (i) amounts equivalent to interest at
such rates as the Committee may determine, or (ii) amounts
equivalent to dividends paid by the Company upon outstanding
Stock shall be payable with respect to Performance Share Awards.
(b) Termination. Except as otherwise provided in the Award
Agreement or determined by the Committee, in the event of a
Termination during a Performance Period, the participant shall
not be entitled to any payment with respect to the Performance
Shares subject to the Performance Period.
(c) Form of Payment. Payment shall be made in the form of
cash or whole shares of Stock, as the Committee, in its
discretion, shall determine.
SECTION 9. CHANGE IN CONTROL.
(a) Definition of "Change in Control". For purposes of
Section 9(b), a "Change in Control" means the occurrence of any
one of the following:
(i) Any "person", as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, a
subsidiary, an affiliate, or a Company employee benefit plan,
including any trustee of such plan acting as trustee) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of
the Company's then outstanding securities;
(ii) the solicitation of proxies (within the meaning
of Rule 14a-1(k) under the Exchange Act and any successor rule)
with respect to the election of any director of the Company
where such solicitation is for any candidate who is not a
candidate proposed by a majority of the Board in office prior to
the time of such election; or
(iii) the dissolution or liquidation (partial or total)
of the Company or a sale of assets involving 30% or more of the
assets of the Company, any merger or reorganization of the
Company whether or not another entity is the survivor, a
transaction pursuant to which the holders, as a group, of all of
the shares of the Company outstanding prior to the transaction
hold, as a group, less than 70% of the shares of the Company
outstanding after the transaction, or any other event which the
Board determines, in its discretion, would materially alter the
structure of the Company or its ownership.
(b) Impact of Event. In the event of a "Change in Control"
as defined in Section 9(a), but only if and to the extent so
specifically determined by the Board in its discretion, which
determination may be amended or reversed only by the affirmative
vote of a majority of the persons who were directors at the time
such determination was made, acceleration and valuation
provisions no more favorable to participants than the following
may apply:
(i) Subject to Section 5(b)(vi), any Options outstanding
as of the date such Change in Control is determined to have
occurred and not then exercisable and vested shall become fully
exercisable and vested.
(ii) The restrictions and limitations applicable to
any Restricted Stock and Stock Purchase Rights shall lapse, and
such Restricted Stock shall become fully vested.
(iii) The value (net of any exercise price) of all
outstanding Options, Restricted Stock and Stock Purchase Rights,
unless otherwise determined by the Committee at or after grant
and subject to Rule 16b-3, shall be cashed out on the basis of
the "Change in Control Price", as defined in Section 9(c), as of
the date such Change in Control is determined to have occurred or
such other date as the Board may determine prior to the Change in
Control.
(iv) Any outstanding Performance Share Awards shall be
vested and paid in full as if all performance criteria had been
met.
(c) Change in Control Price. For purposes of this Section 9,
"Change in Control Price" means the highest price per share paid
in any transaction reported on the National Market System of the
National Association of Securities Dealers, Inc. Automated
Quotation System or paid or offered in any bona fide transaction
related to a potential or actual Change in Control of the Company
at any time during the preceding 60-day period as determined by
the Board, except that, in the case of Incentive Stock Options,
such price shall be based only on transactions reported for the
date on which the Board decides to cash out such Options.
SECTION 10. GENERAL PROVISIONS.
(a) Award Grants. Any Award may be granted either alone or
in addition to other Awards granted under the Plan. Subject to
the terms and restrictions set forth elsewhere in the Plan, the
Committee shall determine the consideration, if any, payable by
the participant for any Award and, in addition to those set forth
in the Plan, any other terms and conditions of the Awards. The
Committee may condition the grant or payment of any Award upon
the attainment of specified performance goals or such other
factors or criteria, including vesting based on continued
employment or consulting, as the Committee shall determine.
Performance objectives may vary from participant to participant
and among groups of participants and shall be based upon such
Company, subsidiary, group or division factors or criteria as the
Committee may deem appropriate, including, but not limited to,
earnings per share or return on equity. The other provisions of
Awards also need not be the same with respect to each recipient.
Unless specified otherwise in the Plan or by the Committee, the
date of grant of an Award shall be the date of action by the
Committee to grant the Award. The Committee may also substitute
new Options for previously granted Options, including previously
granted Options having higher exercise prices.
(b) Award Agreement. As soon as practicable after the date
of an Award grant, the Company and the participant shall enter
into a written Award Agreement identifying the date of grant, and
specifying the terms and conditions of the Award. Options are
not exercisable until after execution of the Award agreement by
the Company and the Plan participant, but a delay in execution of
the agreement shall not affect the validity of the Option grant.
(c) Certificates. All certificates for shares of Stock or
other securities delivered under the Plan shall be subject to
such stock transfer orders, legends and other restrictions as the
Committee may deem advisable under the rules, regulations and
other requirements of the Commission, any market in which the
Stock is then traded and any applicable federal, state or foreign
securities law.
(d) Termination. Unless otherwise provided in the applicable
Award Agreement or by the Committee, in the event of Termination
for any reason other than death, retirement or Disability, Awards
held at the date of Termination (and only to the extent then
exercisable or payable, as the case may be) may be exercised in
whole or in part at any time within three (3) months after the
date of Termination, or such lesser period specified in the Award
Agreement (but in no event after the expiration date of the
Award), but not thereafter. If Termination is due to retirement
or to death or Disability, Awards held at the date of Termination
(and only to the extent then exercisable or payable, as the case
may be) may be exercised in whole or in part by the participant
in the case of retirement or Disability, by the participant's
guardian or legal representative or by the person to whom the
Award is transferred by will or the laws of descent and
distribution, at any time within two (2) years from the date of
Termination or any lesser period specified in the Award Agreement
(but in no event after the expiration of the Award).
(e) Delivery of Purchase Price. If and only to the extent
authorized by the Committee, participants may make all or any
portion of any payment due to the Company
(i) with respect to the consideration payable for an
Award,
(ii) upon exercise of an Award, or
(iii) with respect to federal, state, local or foreign
tax payable in connection with an Award, by delivery of (x) cash,
(y) check, or (z) any property other than cash (including a
promissory note of the participant or shares of Stock or
securities) so long as, if applicable, such property constitutes
valid consideration for the Stock under, and otherwise complies
with, applicable law. No promissory note under the Plan shall
have a term (including extensions) of more than five years or
shall be of a principal amount exceeding 90% of the purchase
price paid by the borrower.
(f) Tax Withholding. Any shares or other securities so
withheld or tendered will be valued by the Committee as of the
date they are withheld or tendered; provided, however, that Stock
shall be valued at Fair Market Value on such date. The value of
the shares withheld or tendered may not exceed the required
federal, state, local and foreign withholding tax obligations as
computed by the Company. Unless the Committee permits otherwise,
the participant shall pay to the Company in cash, promptly when
the amount of such obligations becomes determinable (the "Tax
Date"), all applicable federal, state, local and foreign
withholding taxes that the Committee in its discretion determines
to result, (i) from the lapse of restrictions imposed upon an
Award, (ii) upon exercise of an Award, or (iii) from a transfer
or other disposition of shares acquired upon exercise or payment
of an Award, or otherwise related to the Award or the shares
acquired in connection with an Award.
A participant who has received an Award or payment under
an Award may, to the extent, if any, authorized by the Committee
in its discretion, make an election to (x) deliver to the Company
a promissory note of the participant on the terms set forth in
Section 10(e), or (y) tender any such securities to the Company
to pay the amount of tax that the Committee in its discretion
determines to be required to be withheld by the Company;
provided, however, that such election shall be subject to the
disapproval of the Committee.
(g) No Transferability. No Award shall be assignable or
otherwise transferable by the participant other than by will or
by the laws of descent and distribution. During the life of a
participant, an Award shall be exercisable, and any elections
with respect to an Award may be made, only by the participant or
participant's guardian or legal representative.
(h) Adjustment of Awards; Waivers. Subject to Section
5(b)(vi), the Committee may adjust the performance goals and
measurements applicable to Awards (i) to take into account
changes in law and accounting and tax rules, (ii) to make such
adjustments as the Committee deems necessary or appropriate to
reflect the inclusion or exclusion of the impact of extraordinary
or unusual items, events or circumstances in order to avoid
windfalls or hardships, and (iii) to make such adjustments as the
Committee deems necessary or appropriate to reflect any material
changes in business conditions. In the event of hardship or
other special circumstances of a participant and otherwise in its
discretion, the Committee may waive in whole or in part any or
all restrictions, conditions, vesting, or forfeiture with respect
to any Award granted to such participant.
(i) Non-Competition. The Committee may condition its
discretionary waiver of a forfeiture, the acceleration of vesting
at the time of Termination of a participant holding any
unexercised or unearned Award, the waiver of restrictions on any
Award, or the extension of the expiration period to a period not
longer than that provided by the Plan upon such participant's
agreement (and compliance with such agreement) to (i) not engage
in any business or activity competitive with any business or
activity conducted by the Company and (ii) be available for
consultations at the request of the Company's management, all on
such terms and conditions (including conditions in addition to
(i) and (ii)) as the Committee may determine.
(j) Dividends. The reinvestment of dividends in additional
Stock or Restricted Stock at the time of any dividend payment
pursuant to Section 6(c) shall only be permissible if sufficient
shares of Stock are available under Section 3 for such
reinvestment (taking into account then outstanding Awards).
(k) Regulatory Compliance. Each Award under the Plan shall
be subject to the condition that, if at any time the Committee
shall determine that (i) the listing, registration or
qualification of the shares of Stock upon any securities exchange
or for trading in any securities market or under any state or
federal law, (ii) the consent or approval of any government or
regulatory body or (iii) an agreement by the participant with
respect thereto, is necessary or desirable, then such Award shall
not be consummated in whole or in part unless such listing,
registration, qualification, consent, approval or agreement shall
have been effected or obtained free of any conditions not
acceptable to the Committee.
(l) Rights as Shareholder. Unless the Plan or the Committee
expressly specifies otherwise, an optionee shall have no rights
as a shareholder with respect to any shares covered by an Award
until the stock certificates representing the shares are actually
delivered to the optionee. Subject to Sections 3(b) and 6(c), no
adjustment shall be made for dividends or other rights for which
the record date is prior to the date the certificates are
delivered.
(m) Beneficiary Designation. The Committee, in its
discretion, may establish procedures for a participant to
designate a beneficiary to whom any amounts payable in the event
of the participant's death are to be paid.
(n) Additional Plans. Nothing contained in the Plan shall
prevent the Company, a subsidiary or an affiliate from adopting
other or additional compensation arrangements for its employees
and consultants.
(o) No Employment Rights. The adoption of the Plan shall not
confer upon any employee any right to continued employment nor
shall it interfere in any way with the right of the Company, a
subsidiary or an affiliate to terminate the employment of any
employee at any time.
(p) Rule 16b-3. Notwithstanding any provision of the Plan,
the Plan shall always be administered, and Awards shall always be
granted and exercised, in such a manner as to conform to the
provisions of Rule 16b-3.
(q) Governing Law. The Plan and all Awards shall be governed
by and construed in accordance with the laws of the State of
California.
(r) Use of Proceeds. All cash proceeds to the Company under
the Plan shall constitute general funds of the Company.
(s) Unfunded Status of Plan. The Plan shall constitute an
"unfunded" plan for incentive and deferred compensation. The
Committee may authorize the creation of trusts or arrangements to
meet the obligations created under the Plan to deliver Stock or
make payments; provided, however, that unless the Committee
otherwise determines, the existence of such trusts or other
arrangements shall be consistent with the "unfunded" status of
the Plan.
(t) Assumption by Successor. The obligations of the Company
under the Plan and under any outstanding Award may be assumed by
any successor corporation, which for purposes of the Plan shall
be included within the meaning of "Company".
(u) Limitation on Award Grants to Certain Executive Officers.
The Company may not grant Awards under the Plan for more than
500,000 shares to any executive officer whose compensation is
required to be disclosed under Item 402 of Regulation S-K.
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan or any
Award, but no amendment, alteration or discontinuance shall be
made which would impair the rights of a participant under an
outstanding Award without the participant's consent. No
amendment, alteration or discontinuance shall require shareholder
approval except (a) an increase in the total number of shares
reserved for issuance pursuant to Awards under the Plan, (b) with
respect to provisions solely as they relate to Incentive Stock
Options, to the extent required for the Plan to comply with
Section 422 of the Code, (c) to the extent required by other
applicable laws, rules or regulations or (d) to the extent that
the Board otherwise concludes that shareholder approval is
advisable.
SECTION 12. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is adopted by the
Board but all Awards shall be conditioned upon approval of the
Plan (a) at a duly held shareholders' meeting by the affirmative
vote of the holders of a majority of the voting power of the
shares of the Company entitled to vote and represented in person
or by proxy at the meeting, or (b) by an action by written
consent of the holders of a majority of the voting power of the
shares of the Company entitled to vote.
SECTION 13. TERM OF PLAN.
No Award shall be granted on or after September 30, 2003, but
Awards granted prior to September 30, 2003 may extend beyond that
date.
PENEDERM INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose
This Penederm Incorporated Employee Stock Purchase Plan
(the "Plan") is designed to encourage and assist employees of
Penederm Incorporated (the "Company") to acquire an equity
interest in the Company through the purchase of shares of Company
common stock (the "Common Stock").
2. Administration
The Plan shall be administered by the Board of
Directors of the Company (or by a committee of the Board that
will satisfy Rule 16b-3 of the Securities and Exchange Commission
("Rule 16b-3") as in effect with respect to the Company from time
to time, which in either case is referred to as the "Board") in
accordance with Rule 16b-3. The Board may from time to time
select a committee or persons (the "Administrator"), to be
responsible for any matters so long as such selection comports
with the requirements of Rule 16b-3. Subject to the express
provisions of the Plan, to the overall supervision of the Board,
and to the limitations of Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code"), the Administrator may
administer and interpret the Plan in any manner it believes to be
desirable, and any such interpretation shall be conclusive and
binding on the Company and all participants.
3. Number of Shares
(a) The total number of shares of Common Stock
reserved and available for issuance pursuant to this Plan shall
be 150,000. Such shares may consist, in whole or in part, of
authorized and unissued shares or treasury shares reacquired in
private transactions or open market purchases, but all shares
issued under this Plan shall be counted against the 150,000 share
limitation.
(b) In the event of any reorganization,
recapitalization, stock split, reverse stock split, stock
dividend, combination of shares, merger, consolidation, offering
of rights, or other similar change in the capital structure of
the Company, the Board may make such adjustment, if any, as it
deems appropriate in the number, kind, and purchase price of the
shares available for purchase under the Plan and in the maximum
number of shares subject to any option under the Plan.
4. Eligibility Requirements
(a) Each employee of the Company, except those
described in the next paragraph, shall become eligible to
participate in the Plan in accordance with Section 5 on the first
Enrollment Date on or following commencement of his or her
employment by the Company or following such period of employment
as is designated by the Board from time to time. Participation
in the Plan is entirely voluntary.
(b) The following employees are not eligible to
participate in the Plan:
(i) employees who would, immediately upon
enrollment in the Plan, own directly or indirectly (including
options or rights to acquire stock possessing) five percent or
more of the total combined voting power or value of all classes
of stock of the Company or any subsidiary of the Company; and
(ii) employees who are customarily employed by the
Company less than 20 hours per week or less than five months in
any calendar year.
(c) "Employee" shall mean any individual who is an
employee of the Company or a Participating Subsidiary within the
meaning of Section 3401(c) of the Code and the Treasury
Regulations thereunder. "Subsidiary" shall mean any corporation
described in Section 424(e) or (f) of the Code. "Participating
Subsidiary" shall mean a subsidiary which has been designated by
the Administrator as covered by the Plan.
5. Enrollment
Any eligible employee may enroll or re-enroll in the
Plan each year as of the first trading day of (i) July 1995,
(ii) the sixth month following such month, and (iii) each yearly
anniversary of such months (e.g. any January and July), or such
other days as may be established by the Board from time to time
(the "Enrollment Dates"). In order to enroll, an eligible
employee must complete, sign, and submit to the Company an
enrollment form. Any enrollment form received by the Company by
the 15th day of the month preceding an Enrollment Date (or by the
Enrollment Date in the case of employees hired after such 15th
day), or such other date established by the Administrator from
time to time, will be effective on that Enrollment Date. For
purposes of the Plan, a "trading day" is any day on which regular
trading occurs on any established stock exchange or market system
on which the Common Stock is traded.
6. Grant of Option on Enrollment
(a) Enrollment or re-enrollment by a participant in
the Plan on an Enrollment Date will constitute the grant by the
Company to the participant of an option to purchase shares of
Common Stock from the Company under the Plan. Any participant
whose option expires and who has not withdrawn from the Plan will
automatically be re-enrolled in the Plan and granted a new option
on the Enrollment Date immediately following the date on which
the option expires.
(b) Except as provided in Section 9, each option
granted under the Plan shall have the following terms:
(i) each option granted under the Plan will have
a term of not more than 24 months or such shorter option period
as may be established by the Board from time to time;
notwithstanding the foregoing, however, whether or not all shares
have been purchased thereunder, the option will expire on the
earlier to occur of (A) the completion of the purchase of shares
on the last Purchase Date occurring within 24 months after the
Enrollment Date for such option, or such shorter option period as
may be established by the Board before an Enrollment Date for all
options to be granted on such date or (B) the date on which the
employee's participation in the Plan terminates for any reason;
(ii) payment for shares purchased under the option
will be made only through payroll withholding in accordance with
Section 7;
(iii) purchase of shares upon exercise of the
option will be effected only on the Purchase Dates established in
accordance with Section 8;
(iv) the price per share under the option will be
determined as provided in Section 8;
(v) the number of shares available for purchase
under an option will, unless otherwise established by the Board
before an Enrollment Date for all options to be granted on such
date, be determined by dividing $25,000 by the fair market value
of a share of Common Stock on the Enrollment Date and by
multiplying the result by the number of calendar years included
in whole or in part in the period from grant to expiration of the
option;
(vi) the option (taken together with all other
options then outstanding under this and all other similar stock
purchase plans of the Company and any subsidiary of the Company,
collectively "Options") will in no event give the participant the
right to purchase shares at a rate per calendar year which
accrues in excess of $25,000 of fair market value of such shares,
determined at the applicable Enrollment Date; and
(vii) the option will in all respects be subject to
the terms and conditions of the Plan, as interpreted by the
Administrator from time to time.
7. Payroll and Tax Withholding; Use by Company
(a) Each participant shall elect to have amounts
withheld from his or her compensation paid by the Company during
the option period, at a rate equal to any whole percentage up to
a maximum percentage as the Board may establish from time to time
before an Enrollment Date. Compensation includes regular salary
payments, commissions, overtime pay and any other compensation as
may be determined from time to time by the Board of Directors,
but excludes all other payments including, without limitation,
long-term disability or workers compensation payments, car
allowances, employee referral bonuses, relocation payments,
expense reimbursements (including but not limited to travel,
entertainment, and moving expenses), salary gross-up payments,
and non-cash recognition awards. The participant shall designate
a rate of withholding in his or her enrollment form and may elect
to increase or decrease the rate of contribution effective as of
any Enrollment Date, by delivery to the Company, not later than
15 days before such Enrollment Date, of a written notice
indicating the revised withholding rate.
(b) Payroll withholdings shall be credited to an
account maintained for purposes of the Plan on behalf of each
participant, as soon as administratively feasible after the
withholding occurs. The Company shall be entitled to use the
withholdings for any corporate purpose, shall have no obligation
to pay interest on withholdings to any participant, and shall not
be obligated to segregate withholdings.
(c) Upon disposition of shares acquired by exercise of
an option, the participant shall pay, or make provision adequate
to the Company for payment of, all federal, state, and other tax
(and similar) withholdings that the Company determines, in its
discretion, are required due to the disposition, including any
such withholding that the Company determines in its discretion is
necessary to allow the Company to claim tax deductions or other
benefits in connection with the disposition. A participant shall
make such similar provisions for payment that the Company
determines, in its discretion, are required due to the exercise
of an option, including such provisions as are necessary to allow
the Company to claim tax deductions or other benefits in
connection with the exercise of the option.
8. Purchase of Shares
(a) On the last trading day of each month immediately
preceding a month containing an Enrollment Date, or on such other
days as may be established by the Board from time to time, prior
to an Enrollment Date for all options to be granted on an
Enrollment Date (each a "Purchase Date"), the Company shall apply
the funds then credited to each participant's payroll
withholdings account to the purchase of whole shares of Common
Stock. The cost to the participant for the shares purchased
under any option shall be not less than 85 percent of the lower
of:
(i) the fair market value of the Common Stock on
the Enrollment Date for such option; or
(ii) the fair market value of the Common Stock on
that Purchase Date.
The "fair market value" of the Common Stock on a date shall be
the closing price of the Common Stock on such date on any
established stock exchange or market system if the Common Stock
is traded on such an exchange or market system (and the largest
such exchange or market system if the Common Stock is traded on
more than one), if the Common Stock is not so traded then the
mean between the bid and asked prices for Common Stock on such
date as quoted on Nasdaq National Market or reported in The Wall
Street Journal or similar publication if such prices are so
quoted or reported, or the fair market value on such date as
determined by the Administrator if shares of Common Stock are not
so traded, quoted, or reported.
(b) Any funds in an amount less than the cost of one
share of Common Stock left in a participant's payroll
withholdings account on a Purchase Date shall be carried forward
in such account for application on the next Purchase Date, and
any additional amount shall be distributed to the participant.
(c) If at any Purchase Date, the shares available
under the Plan are less than the number all participants would
otherwise be entitled to purchase on such date, purchases shall
be reduced proportionately to eliminate the deficit. Any funds
that cannot be applied to the purchase of shares due to such a
reduction shall be refunded to participants as soon as
administratively feasible.
9. Withdrawal from the Plan
A participant may withdraw from the Plan in full (but
not in part) at any time, effective after written notice thereof
is received by the Company. All funds credited to a
participant's payroll withholdings account shall be distributed
to him or her without interest within 60 days after notice of
withdrawal is received by the Company. Any eligible employee who
has withdrawn from the Plan may enroll in the Plan again on any
subsequent Enrollment Date in accordance with the provisions of
Section 5.
10. Termination of Employment
Participation in the Plan terminates immediately when a
participant ceases to be employed by the Company for any reason
whatsoever (including death or disability) or otherwise becomes
ineligible to participate in the Plan. As soon as
administratively feasible after termination, the Company shall
pay to the participant or his or her beneficiary or legal
representative, all amounts credited to the participant's payroll
withholdings account; provided, however, that if a participant
ceases to be employed by the Company because of the commencement
of employment with a Subsidiary of the Company that is not a
Participating Subsidiary, funds then credited to such
participant's payroll withholdings account shall be applied to
the purchase of whole shares of Common Stock at the next Purchase
Date, and any funds remaining after such purchase shall be paid
to the participant.
11. Designation of Beneficiary
(a) Each participant may designate one or more
beneficiaries in the event of death and may, in his or her sole
discretion, change such designation at any time. Any such
designation shall be effective upon receipt in written form by
the Company and shall control over any disposition by will or
otherwise.
(b) As soon as administratively feasible after the
death of a participant, amounts credited to his or her account
shall be paid in cash to the designated beneficiaries or, in the
absence of a designation, to the executor, administrator, or
other legal representative of the participant's estate. Such
payment shall relieve the Company of further liability with
respect to the Plan on account of the deceased participant. If
more than one beneficiary is designated, each beneficiary shall
receive an equal portion of the account unless the participant
has given express contrary written instructions.
12. Assignment
(a) The rights of a participant under the Plan shall
not be assignable by such participant, by operation of law or
otherwise. No participant may create a lien on any funds,
securities, rights, or other property held by the Company for the
account of the participant under the Plan, except to the extent
that there has been a designation of beneficiaries in accordance
with the Plan, and except to the extent permitted by the laws of
descent and distribution if beneficiaries have not been
designated.
(b) A participant's right to purchase shares under the
Plan shall be exercisable only during the participant's lifetime
and only by him or her, except that a participant may direct the
Company in the enrollment form to issue share certificates to the
participant and his or her spouse in community property, to the
participant jointly with one or more other persons with right of
survivorship, or to certain forms of trusts approved by the
Administrator.
13. Administrative Assistance
If the Administrator in its discretion so elects, it
may retain a brokerage firm, bank, or other financial institution
to assist in the purchase of shares, delivery of reports, or
other administrative aspects of the Plan. If the Administrator
so elects, each participant shall be deemed upon enrollment in
the Plan to have authorized the establishment of an account on
his or her behalf at such institution. Shares purchased by a
participant under the Plan shall be held in the account in the
name in which the share certificate would otherwise be issued
pursuant to Section 12(b).
14. Costs
All costs and expenses incurred in administering the
Plan shall be paid by the Company, except that any stamp duties
or transfer taxes applicable to participation in the Plan may be
charged to the account of such participant by the Company. Any
brokerage fees for the purchase of shares by a participant shall
be paid by the Company, but brokerage fees for the resale of
shares by a participant shall be borne by the participant.
15. Equal Rights and Privileges
All eligible employees shall have equal rights and
privileges with respect to the Plan so that the Plan qualifies as
an "employee stock purchase plan" within the meaning of Section
423 of the Code and the related Treasury Regulations. Any
provision of the Plan which is inconsistent with Section 423 of
the Code shall without further act or amendment by the Company or
the Board be reformed to comply with the requirements of Section
423. This Section 16 shall take precedence over all other
provisions of the Plan.
16. Applicable Law
The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of
California.
17. Modification and Termination
(a) The Board may amend, alter, or terminate the Plan
at any time, including amendments to outstanding options. No
amendment shall be effective unless within 12 months after it is
adopted by the Board, it is approved by the holders of a majority
of the votes cast at a duly held stockholders' meeting at which a
quorum of the voting power of the Company is represented in
person or by proxy, if such amendment would:
(i) increase the number of shares reserved for
purchase under the Plan; or
(ii) require stockholder approval in order to
comply with SEC Rule 16b-3.
(b) In the event the Plan is terminated, the Board may
elect to terminate all outstanding options either immediately or
upon completion of the purchase of shares on the next Purchase
Date, or may elect to permit options to expire in accordance with
their terms (and participation to continue through such
expiration dates). If the options are terminated prior to
expiration, all funds contributed to the Plan that have not been
used to purchase shares shall be returned to the participants as
soon as administratively feasible.
(c) In the event of the sale of all or substantially
all of the assets of the Company or the Company, or the merger of
the Company or the Company with or into another corporation, or
the dissolution or liquidation of the Company, a Purchase Date
shall occur on the trading day immediately preceding the date of
such event, unless otherwise provided by the Board in its sole
discretion, including provision for the assumption or
substitution of each option under the Plan by the successor or
surviving corporation, or a parent or subsidiary thereof.
18. Rights as an Employee
Nothing in the Plan shall be construed to give any
person the right to remain in the employ of the Company or to
affect the Company's right to terminate the employment of any
person at any time with or without cause.
19. Rights as a Stockholder; Delivery of Certificates
Unless otherwise determined by the Board, certificates
evidencing shares purchased on any Purchase Date shall be
delivered to participants as soon as administratively feasible.
Participants shall be treated as the owners of their shares
effective as of the Purchase Date.
