SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 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)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
___________________________________________________________
2) Aggregate number of securities to which transaction applies:
___________________________________________________________
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: *
___________________________________________________________
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 STOCKHOLDERS
June 24, 1998
TO THE STOCKHOLDERS OF PENEDERM INCORPORATED:
NOTICE IS HEREBY GIVEN that the Annual Meeting of
Stockholders of Penederm Incorporated, a Delaware corporation
(the "Company"), will be held on Wednesday, June 24, 1998 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 an amendment to the Penederm Incorporated
1994 Nonemployee Directors Stock Option Plan to
increase by 150,000 the number of shares of Common
Stock reserved for issuance thereunder.
3. 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 stockholders of record at the close of business on
April 27, 1998 (the "Record Date") are entitled to notice of, and
to vote at, the meeting and any adjournments thereof.
All stockholders are cordially invited to attend the meeting
in person. Any stockholder attending the meeting may vote in
person even if such stockholder previously signed and returned a
proxy.
FOR THE BOARD OF DIRECTORS
Lloyd H. Malchow
President and Chief Executive Officer
Foster City, California
May 11, 1998
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
__________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
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 Stockholders (the
"Annual Meeting") to be held Wednesday, June 24, 1998 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 Stockholders. 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 (650)
358-0100.
These proxy solicitation materials were mailed on or about
May 11, 1998 to all stockholders entitled to vote at the Annual
Meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
Record Date and Shares Outstanding
Stockholders of record at the close of business on April 27,
1998 (the "Record Date") are entitled to notice of, and to vote
at, the Annual Meeting. At the Record Date, 8,365,270 shares of
the Company's Common Stock, par value $0.01 per share (the
"Common Stock"), were issued, outstanding and entitled to vote at
the Annual Meeting. Holders of Common Stock are entitled to one
vote for each share of Common Stock held. In order to constitute
a quorum for conduct of business at the Annual Meeting, a
majority of the outstanding shares of Common Stock entitled to
vote at the Annual Meeting must be represented at the Annual
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. Mere attendance at the
Annual Meeting will not serve to revoke a proxy.
Voting and Solicitation
Shares represented by proxies that reflect abstentions or
broker non-votes will be counted as shares that are present and
entitled to vote for purposes of determining the presence of a
quorum. Directors will be elected by a favorable vote of a
plurality of the shares of voting stock present and entitled to
vote, in person or by proxy, at the Annual Meeting. Accordingly,
abstentions or broker non-votes as to the election of directors
will not affect the election of the candidates receiving the
plurality of votes. All other proposals to come before the
Annual Meeting require the approval of a majority of the shares
of stock having voting power present. Abstentions as to a
particular proposal will have the same effect as votes against
the proposal. Broker non-votes, however, will be treated as
unvoted for the purpose of determining approval of such proposal
and will not be counted as votes for or against such proposal.
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 stockholders, 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 bylaws 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 eight. Eight directors are to be elected at
the Annual Meeting. Unless otherwise instructed, the proxy
holders will vote the proxies received by them for the eight
nominees named below. All of the nominees named below are
presently directors of the Company and, except for Mr. Smith,
were elected to their present term by the stockholders 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. The Board has no reason
to believe that any of the persons named below will be unable or
unwilling to serve as a director if elected.
The term of office of each person elected as a director will
continue until the next Annual Meeting of Stockholders or until
his successor has been elected and qualified.
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 64 Chairman of the Board 1994
Lloyd H. Malchow 44 Director, President and 1993
Chief Executive Officer
Robert F. Allnutt 62 Director 1996
William I. Bergman 66 Director 1991
Mark J. Gabrielson 42 Director 1996
Harvey S. Sadow, Ph.D. 75 Director 1990
Joseph E. Smith. 59 Director 1998
Gerald D. Weinstein, M.D. 61 Director 1987
There is no family relationship between any of the directors
or executive officers of the Company. The Restated Certificate
of Incorporation and bylaws of the Company contain provisions
eliminating or limiting the personal liability of directors for
violations of a director's fiduciary duty to the extent permitted
by the Delaware General Corporation Law.
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; and Clainel Enterprises, Inc.
a private investment 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.
Mr. Malchow 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., a private company engaged in research and development of
human diagnostics.
Mr. Gabrielson has been a director of the Company since May
1996. 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"). Prior to joining Prince, Mr.
Gabrielson served in a variety of marketing and business
positions with SmithKline Beecham plc since July 1978. Mr.
Gabrielson is also a director of Inhale Therapeutic Systems, a
drug delivery company and a number of private companies.
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 Therapeutics, Inc., a hyaluronic acid research company,
Trega Biosciences, Inc., a public 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.
Mr. Smith has been a director of the Company since February
1998. Mr. Smith served in various senior management positions
with Warner-Lambert Company from March 1989 until he retired in
September 1997, including Corporate Vice President of Warner-
Lambert and President of its Pharmaceuticals Division (Parke-
Davis). Prior to joining Warner-Lambert Company, Mr. Smith
worked for Rorer Pharmaceutical Corporation as president for
three years and before that he worked for Johnson & Johnson for
21 years in various capacities. Mr. Smith is a director of
VIVUS, Inc., a pharmaceutical company, Boren, Lepore, Inc., a
company that provides outsourced promotional, marketing and
educational services to the pharmaceutical industry, and Senus
Corp., a privately-held biotechnology company. Mr. Smith also
serves on the Board of Trustees of the International Longevity
Center. Mr. Smith earned his MBA degree from the Wharton School
of the University of Pennsylvania.
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, 1997. 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 1997.
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 1997.
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 1997, the individuals who served as such directors
during that period received fees of $6,200 for their services as
directors except for Dr. Weinstein who received $12,000 pursuant
to a consulting arrangement with the Company in lieu of such
fees. As a result of an increase in board fees put in effect
in June 1997, the Company expects to pay $10,000 to each
outside director in fiscal 1998 for service on the Board.
In addition, 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 10,000 shares of the Company's Common Stock.
The Directors Plan further provides that at the first meeting of
the Board immediately following the annual meeting of
stockholders 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 that annual meeting) an
option to purchase 10,000 shares of Common Stock, or 15,000
shares in the case of the Chairman of the Board. 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 27, 1998 (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 of
Shares Shares
Beneficially Beneficially
Name Owned (1) Owned (1) (2)
FRANKLIN RESOURCES, INC. (3) 1,439,300 17.2%
777 Mariners Island Blvd.
San Mateo, California 94404
Charles B. Johnson 1,439,300 17.2
Rupert H. Johnson, Jr. 1,439,300 17.2
Franklin Advisers, Inc. 1,434,400 17.1
SAFECO CORPORATION 1,450,467 17.3
Safeco Plaza
Seattle, Washington 98185
SAFECO ASSET MANAGEMENT(4) 1,312,967 15.7
Safeco Plaza
Seattle, Washington 98185
SAFECO COMMON STOCK TRUST (5) 792,500 9.5
Safeco Plaza
Seattle, Washington 98185
SAFECO RESOURSES SERIES TRUST(6) 520,467 6.2
Safeco Plaza
Seattle, Washington 98185
Mark J. Gabrielson (7) 287,591 3.4
Lloyd H. Malchow(8) 359,840 4.1
John W. Quigley, Jr., Ph.D.(9) 137,333 1.6
William Gutshall(10) 61,000 *
Edward Ebbers(11) 58,771 *
Michael A. Bates (12) 63,949 *
Gerald D. Weinstein, M.D.(13) 55,225 *
David E. Collins(14) 47,500 *
William I. Bergman(15) 35,000 *
Harvey S. Sadow, Ph.D.(16) 37,500 *
Robert F. Allnutt (17) 18,500 *
Joseph E. Smith (18) 3,369 *
All directors and executive officers as 1,165,578 12.7%
a group (12 persons)(19)
_______________
* Less than one percent.
(1) This table is based upon information supplied by directors,
officers and certain principal stockholders, as well as
information included in Securities and Exchange Commission
filings made by principal stockholders 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 stockholders named in this table has
sole voting and investment power with respect to the shares
shown. Percentage of ownership is based on 8,365,270 shares
of Common Stock outstanding as of April 27, 1998.
(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 Stockholders") report that they each own in
excess of 10% of the outstanding common stock of FRI. FRI,
the Principal Stockholders 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) SAFECO Resources Series Trust reports shares voting and
dispositive power for the shares shown.
(7) Includes 270,091 shares held by Prince Venture Partners III,
L.P. and 17,500 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.
(8) Includes 352,000 shares issuable upon exercise of
outstanding options; 159,888 of such shares are not subject
to repurchase on or after June 26, 1998.
(9) Includes 130,944 shares issuable upon exercise of
outstanding options; 69,511 of such shares are not subject
to repurchase on or after June 26, 1998.
(10) Includes 61,000 shares issuable upon exercise of outstanding
options; 23,582 of such shares are not subject to repurchase
on or after June 26, 1998.
(11) Includes 54,375 shares issuable upon exercise of outstanding
options; 19,777 of such shares are not subject to repurchase
on or after June 26, 1998.
(12) Includes 59,250 shares issuable upon exercise of
outstanding options; 13,685 of such shares are not subject
to repurchase on or after June 26, 1998.
(13) Includes 27,500 shares issuable upon exercise of outstanding
options.
(14) Includes 32,500 shares issuable upon exercise of outstanding
options.
(15) Includes 35,000 shares issuable upon exercise of outstanding
options.
(16) Includes 27,500 shares issuable upon exercise of outstanding
options.
(17) Includes 17,500 shares issuable upon exercise of outstanding
options.
(18) Includes 3,369 shares issuable upon exercise of outstanding
options.
(19) Includes 818,438 shares issuable upon exercise of
outstanding options; 438,931 of such shares are not subject
to repurchase on or after June 26, 1998.
Executive Compensation
The following table sets forth the total compensation for
the fiscal years ended December 31, 1995, 1996 and 1997 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.
Summary Compensation Table
Annual Annual Long-Term
Compen- Compen- Compen- Other
sation sation sation Compen-
Name and Fiscal Salary Bonus Options sation
Principal Position Year ($) ($) (#) (1)
- -------------------------- ------ -------- ------- ---------- ------
Lloyd H. Malchow 1997 217,300 38,027 - 3,200
President, Chief Executive 1996 204,555 50,222 155,000 4,492
Officer and Director 1995 195,000 21,840 22,000 4,493
John W. Quigley, Jr., Ph.D. 1997 174,506 24,758 - 3,200
Vice President, 1996 167,349 16,334 49,500 4,492
Research and Development 1995 161,340 11,697 9,000 4,493
Edward Ebbers 1997 135,830 11,885 - 2,720
Vice President, 1996 127,109 18,565 37,000 3,812
Sales and Marketing 1995 112,000 6,272 6,625 3,356
William Gutshall 1997 122,950 27,290 - 2,460
Vice President, 1996 115,664 15,910 27,000 2,314
Operations 1995 109,419 7,440 21,000 2,184
Michael A. Bates (2) 1997 102,198 16,288 30,000 2,040
Chief Financial Officer, 1996 85,800 2,983 14,750 2,561
Vice President, Finance 1995 70,000 2,000 8,500 1,797
and Administration
_______________
(1) This column includes the value of the shares of Common Stock
contributed by the Company to each executive officer's
401(k) account under the Penederm Incorporated 401(k) Plan.
The shares are contributed effective as of the last trading
day of the year and the number of shares contributed was
based on the closing price of the Common Stock on that date.
(2) Mr. Bates was appointed Vice President, Finance and
Administration as of October 13, 1997.
The following table sets forth certain information regarding
grants of stock options made during the fiscal year ended
December 31, 1997 to the executive officers named in the Summary
Compensation Table. Since inception, the Company has not granted
any stock appreciation rights.
<TABLE>
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------ Potential
Realizable
% of Value at assumed
Total Annual Rates
Options Of Stock Price
Granted to Appreciation For
Employees Exer- 10 Year Option
Options in Fiscal cise Term (4)
Granted Year Price Expiration ------------------
Name (#)(1) (2) ($/sh) Date(3) 5%($) 10%($)
- -------------------------- ------- ---------- ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lloyd H. Malchow -- -- -- -- -- --
John W. Quigley, Jr., Ph.D -- -- -- -- -- --
Edward Ebbers -- -- -- -- -- --
William Gutshall -- -- -- -- -- --
Michael A. Bates 30,000 29.8% $12.25 11/10/2007 $231,119 $585,700
_______________
(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 1997 was 100,800.
(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.
</TABLE>
The following table sets forth certain information regarding
exercises of stock options during the fiscal year ended December
31,1997 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 $10.00 per
share on December 31, 1997.
<TABLE>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year Fiscal Year
End (#) End($)
Shares
Acquired Value Exercisable/ Exercisable/
On Exercise Realized Unexercisable Unexercisable
Name (#) ($) (1)
- -------------------------- ------------- -------- ------------- --------------
<S> <C> <C> <C> <C>
Lloyd H. Malchow -- -- 302,000/0 1,075,750/0
John W. Quigley, Jr., Ph.D -- -- 120,944/0 584,096/0
Edward Ebbers -- -- 49,375/0 54,109/0
William Gutshall 3,000 $29,200 55,000/0 145,925/0
Michael A. Bates -- -- 53,250/0 19,903/0
_______________
(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, 1997, the number of
In-the-Money shares subject to repurchase under these
options and their value were as follows: Mr. Malchow --
61,167 shares having a value of $241,960; Dr. Quigley --
22,168 shares having a value of $86,721; Mr. Ebbers --
13,334 shares having a value of $40,168; Mr. Gutshall --
17,167 shares having a value of $78,028; and Mr. Bates --
5,250 shares having a value of $11,670.
</TABLE>
The Company did not make any awards during the fiscal year
ended December 31, 1997 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 stockholders' 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 stockholders' 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 stockholder 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 70
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 stockholders, 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 computed
based on a designated percentage of salary, achievement of the
Company's targeted objectives and achievement of the individual
executive's targeted objectives, and are paid in cash or stock at
the discretion of the Compensation Committee.
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.
1997 Compensation for the Chief Executive Officer
In 1997, Lloyd Malchow was paid a salary of $217,300. Mr.
Malchow was granted a performance share award in early 1997,
which was paid in cash during the first quarter of 1998, 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 1997 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 stockholder returns and linked to
the achievement of annual and longer-term financial and
operational results of the Company on behalf of the Company's
stockholders.
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 stockholders 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, 1997, there has been no failure by any of its
officers, directors or ten percent stockholders to file on a
timely basis any reports required by Section 16(a) of the
Exchange Act.
Stock Price Performance Graph
The following graph illustrates a comparison of the
cumulative total stockholder 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 50-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.
<TABLE>
[EDGAR REPRESENTATION OF DATA POINTS ON STOCK PRICE PERFORMANCE
GRAPH]
10/29/93
11/3/93 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C> <C>
Penederm Incorporated 100 100 57 103 112 91
Nasdaq Composite Index 100 100 97 138 170 208
Nasdaq Pharmaceutical Index 100 100 75 137 137 142
</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
Approval of Amendment to the Penederm Incorporated
1994 Nonemployee Directors Stock Option Plan
Background
The Board has approved, subject to stockholder approval,
amendment to the Directors Plan as described below.
Description of the Proposal
Currently, the total number of shares of Common Stock
reserved and available for issuance pursuant to options under the
Directors Plan is 200,000 shares. The proposed amendment to the
Directors Plan increases the number of shares of Common Stock
reserved for issuance thereunder by 150,000 to 350,000.
Description of the 1994 Nonemployee Directors Stock Option Plan
Only nonemployee directors of the Company are eligible to
participate in the Directors Plan. The Directors Plan is
designed to work automatically. However, to the extent
administration is necessary, it is provided by the Board or the
Board may delegate its authority to a committee of the Board.
Option grants to nonemployee directors are made on a formula
basis and not on a discretionary basis. As currently in effect,
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 a non-qualified stock option (an "NQO")
to purchase 10,000 shares of Common Stock. The Directors Plan
further provides that on the first meeting of the Board
immediately following the annual meeting of stockholders, the
Company shall grant to each nonemployee director then in office
an option to purchase 10,000 shares, or an option to purchase
15,000 shares if such nonemployee director is the Chairman of the
Board of the Company.
Options granted under the Directors Plan vest over one year
from the date of grant and are fully exercisable on the first
anniversary of option grant. The Company currently has seven
nonemployee directors who are eligible to participate in the
Directors Plan, all of whom have been nominated for election at
the Annual Meeting. If the Directors Plan is amended as
proposed, the number of shares of Common Stock reserved under the
Directors Plan will increase by 150,000 shares.
The consideration payable in connection with any option
(including any related taxes) may be paid by promissory note of
the nonemployee director or by delivery of shares of Common Stock
of the Company. Options granted under the Directors Plan have a
term of ten years. Options generally terminate three months
after a nonemployee director ceases to be, for any reason, a
director of the Company, but if a nonemployee director ceases to
be a director due to death, disability or retirement, the Option
may be exercised for two years after the termination. Options
are not transferable, except by gift to a family member or a
partnership or trust for a family member or by will or the laws
of descent and distribution.
The Board may amend, alter or discontinue the Directors Plan
or any option at any time, except that the consent of a
participant is required if the participant's existing rights
under an outstanding option would be impaired. In addition, to
the extent required under applicable tax and securities laws and
regulations, the stockholders of the Company must approve any
amendment, alteration, or discontinuance of the Directors Plan
that would increase the total number of shares reserved under the
Directors Plan and in certain other circumstances as the Board
may deem advisable to comply with such laws and regulations. In
addition, the provisions of the Directors Plan governing who is
granted options, the number of shares covered by each option, the
exercise price, and the period of exercisability and the timing
of option grants may not be amended more than once every six
months, other than for changes to comport with the Internal
Revenue Code of 1986, as amended (the "Code") or the Employee
Retirement Income Security Act of 1974.
In the event of a "change in control" of the Company, as
defined in the Directors Plan, the vesting of options will
automatically accelerate. 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, and
certain mergers or reorganizations or other changes in ownership
of the Company's assets or stock.
The following table shows, based on the current composition
of the Board and assuming approval of the amendments, the number
of options which will be granted to the listed groups under the
Directors Plan in 1998 and in each year thereafter until there
are no longer shares reserved for issuance or until plan
termination.
Number of Options (1)
---------------------
1998 Thereafter
------ -----------
All executive officers as a group 0 0
All directors who are not executive officers 85,000 75,000
as a group
All employees (other than executive officers) 0 0
as a group
________________
(1) All options granted at fair market value as of the date of
grant.
The Company believes that in order to attract and retain
highly qualified candidates to serve as directors, it is
important that directors have meaningful equity ownership in the
Company. Initially, the reason for creating a nondiscretionary
option plan for nonemployee directors was to permit the
nonemployee directors to act as "disinterested" administrators
for the Company's other equity benefit plans under rules of the
Securities and Exchange Commission (the "Commission"), while
still allowing equity participation by the nonemployee directors.
Although subsequent rule changes by the Commission have
eliminated such "disinterested" administration requirements, the
Company believes that the automatic and non-discretionary nature
of the Directors Plan best serves the interests of the Company.
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.
Award; Exercise. The recipient of an Option (the
"Optionee") is generally not taxable upon the award of an NQO.
The Optionee will have ordinary income at the time of exercise
measured by the excess of the fair market value of the shares
purchased upon exercise over the exercise price of the option
(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
will begin on that date.
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
optionee'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 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 taxable to the optionee and
are treated as newly acquired with a basis equal to their fair
market value on the exercise date.
Special Federal Income Tax Consideration Due to Short Swing
Profit Rule. The potential liability of a person subject to
Section 16 of the Securities Exchange Act of 1934 to repay short-
swing profits from the resale of shares acquired under a Company
plan constitutes a "substantial risk of forfeiture," which is
treated as lapsing at such time as the potential liability under
Section 16 lapses. If the shares are subject to a substantial
risk of forfeiture and the Optionee files an election under
Section 83(b) of the Code ("Section 83(b) Election") with respect
to the shares, the Optionee will have ordinary income at the time
of exercise as described above. 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. 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
Stockholders are being asked to approve the amendment to the
Directors 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 Directors 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
1998 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.
STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended
to be presented at the Company's 1999 meeting of stockholders
must be received by the Secretary of the Company no later than
January 11, 1999 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 11, 1998
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 Stockholders
to be held on June 24, 1998, 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., Joseph E. Smith 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 an amendment to the Penederm Incorporated
1994 Nonemployee Directors Stock Option Plan to increase by
150,000 the number of shares of Common Stock reserved for
issuance thereunder.
[ ] 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.. 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: _______________, 1998
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND MAIL IT PROMPTLY IN
THE ENCLOSED ENVELOPE TO ASSURE REPRESENTATION OF YOUR SHARES.
APPENDIX A
PENEDERM INCORPORATED
1994 NONEMPLOYEE DIRECTORS
STOCK OPTION PLAN
1. Purpose.
The purpose of this Plan is to offer Nonemployee
Directors of Penederm Incorporated an opportunity to acquire a
proprietary interest in the success of the Company, or to
increase such interest, by purchasing shares of the Company's
Common Stock. This Plan provides for the grant of Options to
purchase Shares. Options granted hereunder shall be
"Nonstatutory Options," and shall not include "incentive stock
options" intended to qualify for treatment under Sections 421 and
422 of the Internal Revenue Code of 1986, as amended.
2. Definitions.
As used herein, the following definitions shall apply:
(a) "Administrator" shall mean the entity, either the
Board or the committee of the Board, responsible for
administering this Plan, as provided in Section 3.
(b) "Affiliate" means a parent or subsidiary
corporation as defined in the applicable provisions (currently,
Sections 424(e) and (f), respectively) of the Code.
(c) "Board" shall mean the Board of Directors of the
Company, as constituted from time to time.
(d) "Change in Control" shall mean 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, 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, or any merger or reorganization of
the Company, whether or not another entity is the survivor, or
other 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.
(e) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time, and any successor statute.
(f) "Company" shall mean Penederm Incorporated, a
California corporation.
(g) "Common Stock" shall mean the Common Stock of the
Company.
(h) "Disability" means permanent and total disability
as determined by the Administrator in accordance with the
standards set forth in Section 22(e)(3) of the Code.
(i) "Exchange Act" means the Securities Exchange Act
of 1934, as amended from time to time, and any successor statute.
(j) "Expiration Date" shall mean the last day of the
term of an Option established under Section 6(c).
(k) "Fair Market Value" means as of any given date
(a) the closing price of the Common Stock on the Nasdaq National
Market as reported in the Wall Street Journal; or (b) if the
Common Stock is no longer quoted on the Nasdaq National Market
but is listed on an established stock exchange or quoted on any
other established interdealer quotation system, the closing price
for the Common Stock on such exchange or system, as reported in
the Wall Street Journal.
(l) "Nonemployee Director" shall mean any person who
is a member of the Board but is not an employee of the Company or
any Affiliate of the Company and has not been an employee of the
Company or any Affiliate of the Company at any time during the
preceding twelve months. Service as a director does not in
itself constitute employment for purposes of this definition.
(m) "Option" shall mean a stock option granted
pursuant to this Plan. Each Option shall be a nonstatutory
option not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code.
(n) "Option Agreement" shall mean the written
agreement described in Section 6 evidencing the grant of an
Option to a Nonemployee Director and containing the terms,
conditions and restrictions pertaining to such Option.
(o) "Optionee" shall mean a Nonemployee Director who
holds an Option.
(p) "Plan" shall mean this Penederm Incorporated 1994
Nonemployee Directors Stock Option Plan, as it may be amended
from time to time.
(q) "Section" unless the context clearly indicates
otherwise, shall refer to a Section of this Plan.
(r) "Shares" shall mean the shares of Common Stock
subject to an Option granted under this Plan.
(s) "Tax Date" means the date defined in Section 7(c).
(t) "Termination" means, for purposes of the Plan,
with respect to an Optionee, that the Optionee has ceased to be,
for any reason, a director of the Company.
(u) "Window Period" means any 10-day period beginning
on the third business day following the date of release for
publication of the Company's quarterly or annual summary
statements of earnings or such other period as is specified in
Rule 16b-3(e) under the Exchange Act, as such rule may be amended
from time to time, or any successor to such rule.
3. Administration.
(a) Administrator. The Plan shall be administered by
the Board or, upon delegation by the Board, by a committee
consisting of not less than two directors (in either case, the
"Administrator"). The Administrator shall have no authority,
discretion or power to select the Nonemployee Directors who will
receive Options hereunder or to set the number of shares to be
covered by each Option granted hereunder, the exercise price of
such Option, the timing of the grant of such Option or the period
within which such Option may be exercised. In connection with
the administration of the Plan, the Administrator shall have the
powers possessed by the Board. The Administrator may act only by
a majority of its members. The Administrator may delegate
administrative duties to such employees of the Company as it
deems proper, so long as such delegation is not otherwise
prohibited by Rule 16b-3 under the Exchange Act. The Board at
any time may terminate the authority delegated to any committee
of the Board pursuant to this Section 3(a) and revest in the
Board the administration of the Plan.
(b) Administrator Determinations Binding. Subject to
the limitations set forth in Section 3(a), the Administrator 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 Option and any Option Agreement and may otherwise supervise
the administration of the Plan. All decisions made by the
Administrator under the Plan shall be binding on all persons,
including the Company and Optionees. No member of the
Administrator shall be liable for any action that he or she has
in good faith taken or failed to take with respect to this Plan
or any Option.
4. Eligibility.
Only Nonemployee Directors may receive Options under
this Plan.
5. Shares Subject to Plan.
(a) Aggregate Number. Subject to Section 9, the total
number of shares of Common Stock reserved and available for
issuance pursuant to Options under this Plan shall be 350,000
shares. Such shares may consist, in whole or in part, of
authorized and unissued shares or shares reacquired in private
transactions or open market purchases, but all shares issued
under the Plan regardless of source shall be counted against the
350,000 share limitation. If any Option terminates or expires
without being exercised in full, the shares issuable under such
Option shall again be available for issuance in connection with
other Options. If shares of Common Stock issued pursuant to an
Option are repurchased by the Company, such Common Stock shall
not again be available for issuance in connection with Options.
To the extent the number of shares of Common Stock issued
pursuant to an Option is reduced to satisfy withholding tax
obligations, the number of shares withheld to satisfy the
withholding tax obligations shall not be available for later
grant under the Plan.
(b) No Rights as a Shareholder. An Optionee shall
have no rights as a shareholder with respect to any Shares
covered by his or her Option until the issuance (as evidenced by
the appropriate entry on the books of the Company or its duly
authorized transfer agent) of a stock certificate evidencing such
Shares. Subject to Section 9, no adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities
or other property), distributions, or other rights for which the
record date is prior to the date the certificate is issued.
6. Grant of Options.
(a) Mandatory Initial Option Grants. Subject to the
terms and conditions of this Plan, if any person who is not, and
has not been in the preceding twelve months, an officer or
employee of the Company and who has not previously been a member
of the Board is elected or appointed as a member of the Board,
then on the effective date of such appointment or election the
Company shall grant to such new Nonemployee Director an Option to
purchase at an exercise price equal to the Fair Market Value of
such Shares on the date of such option grant (i) 5,000 shares, if
such person was elected or appointed to the Board on or prior to
March 4, 1996, or (ii) 7,500 shares if such person was elected or
appointed to the Board after March 4, 1996, or (iii) 10,000
shares if such person was elected or appointed to the Board on or
after June 16, 1997.
(b) Mandatory Annual Option Grants. Subject to the
terms and conditions of this Plan, (i) on the date of the first
meeting of the Board immediately following the annual meeting of
shareholders of the Company (even if held on the same day as the
meeting of shareholders) commencing with the annual meeting of
shareholders held in 1994 and ending on March 4, 1996, the
Company shall grant to each such Nonemployee Director then in
office (other than a Nonemployee director who received a Grant
under Section 6(a) in the previous six months) an Option to
purchase 5,000 Shares at an exercise price equal to the Fair
Market Value of such Shares on the date of such option grant,
(ii) on the date of the first meeting of the Board immediately
following the annual meeting of stockholders of the Company (even
if held on the same day as the meeting of shareholders)
commencing with the annual meeting of shareholders held in 1996
and ending prior to the annual meeting of shareholders held in
1997, the Company shall grant to each such Nonemployee Director
then in office (other than a Nonemployee Director who received a
Grant under Section 6(a) on or after the record date for such
annual meeting) an Option to purchase at an exercise price equal
to the Fair Market Value of such shares on the date of such
option grant: (A) 7,500 shares unless clause (B) below applies,
or (B) 12,500 shares if such Grant is being made at the 1996
annual meeting of shareholders and the Nonemployee Director did
not receive a grant under Section 6(a) or Section 6(b) since the
record date of the 1995 annual meeting of shareholders and (iii)
on the date of the first meeting of the Board immediately
following the annual meeting of shareholders of the Company (even
if held on the same day as the meeting of shareholders)
commencing with the annual meeting of shareholders held in 1997,
the Company shall grant to each such Nonemployee Director then in
office (other than a Nonemployee Director who received a Grant
under Section 6(a) on or after the record date for such annual
meeting) an option to purchase at an exercise price equal to the
Fair Market Value of such shares on the date of such option
grant: (x) 10,000 shares unless clause (y) below applies, or (y)
15,000 shares if such Nonemployee Director is the Chairman of the
Board of the Company.
(c) Terms; Vesting. Subject to the other provisions
of this Plan, each Option granted pursuant to this Plan shall be
for a term of ten years. Each Option granted under Section 6(a)
and Section 6(b) shall become exercisable with respect to 1/365th
of the number of Shares covered by such Option for each day which
elapses after the date of grant, so that such Option shall be
fully exercisable on the first anniversary of the date such
Option was granted.
(d) Limitation on Other Grants. The Administrator
shall have no discretion to grant Options under this Plan other
than as set forth in Sections 6(a) and 6(b).
(e) Option Agreement. As soon as practicable after
the grant of an Option, the Optionee and the Company shall enter
into a written Option Agreement which specifies the date of
grant, the number of Shares, the option price, and the other
terms and conditions applicable to the Option.
(f) Assignment or Transfer.
(i) All or any portion of any Option may be
transferred by an Optionee to (i) the spouse, children or
grandchildren of the Optionee ("Immediate Family Members"), (ii)
a partnership in which such Immediate Family Members are the only
partners, or (iii) a trust or trusts for the exclusive benefit of
such Immediate Family Members, provided that (x) there may be no
consideration for such transfer, (y) the agreement pursuant to
which such Options are transferred must be in a form consistent
with this Plan, and must expressly provide for transferability in
a manner consistent with this Section 6(f), and (z) subsequent
transfers of transferred Options shall be prohibited except those
in accordance with Section 6(f)(ii). Following transfer, any
such Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer. The
events of termination of Section 6(i) shall continue to be
applied with respect to the original Optionee, following which
the Options shall be exercisable by the transferee only to the
extent, and for the periods specified in Section 6(i). Neither
the Company nor the Administrator shall have any obligation to
provide the transferee with notice of termination of an Optionee.
(ii) Options shall be transferable only in
accordance with Section 6(f)(i) or by will or the laws of descent
and distribution.
(g) Limits on Exercise. Subject to the other
provisions of this Plan, an Option shall be exercisable in such
amounts as are specified in the Option Agreement.
(h) Exercise Procedures. 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, and other applicable amounts, as provided in Section 7.
(i) Termination. In the event of Termination, Options
held at the date of Termination (and only to the extent then
exercisable) may be exercised in whole or in part at any time
within three months after the date of Termination (but in no
event after the Expiration Date), but not thereafter.
Notwithstanding the foregoing, if Termination is due to
retirement or to death or Disability, Options held at the date of
Termination (and only to the extent then exercisable) may be
exercised in whole or in part by the Optionee in the case of
retirement or Disability, by the participant's guardian or legal
representative or by the person to whom the Option is transferred
by will or the laws of descent and distribution, at any time
within two years from the date of Termination (but in no event
after the Expiration Date).
7. Payment and Taxes upon Exercise of Options.
(a) Purchase Price. The purchase price of Shares
issued under this Plan shall be paid in full at the time an
Option is exercised.
(b) Delivery of Purchase Price. Optionees may make
all or any portion of any payment due to the Company
(i) upon exercise of an Option, or
(ii) with respect to federal, state, local or
foreign tax payable in connection with the exercise of an Option,
by delivery of (x) cash, (y) check, or (z) a promissory note of
the Optionee or shares of Common Stock so long as, if applicable,
such property constitutes valid consideration for the Common
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.
Exercise of an Option may be made pursuant to a "cashless
exercise/sale" procedure pursuant to which funds to pay for
exercise of the Option are delivered to the Company by a broker
upon receipt of stock certificates from the Company, or pursuant
to which Optionees obtain margin loans from brokers to fund the
exercise of the Option.
(c) Tax Withholding. The Optionee shall pay to the
Company in cash, promptly upon exercise of an Option or, if
later, the date that the amount of such obligations becomes
determinable (in either case, the "Tax Date"), all applicable
federal, state, local and foreign withholding taxes that the
Administrator, in its discretion, determines to result upon
exercise of an Option or from a transfer or other disposition of
shares of Common Stock acquired upon exercise of an Option or
otherwise related to an Option or shares of Common Stock acquired
in connection with an Option.
A person who has exercised an Option may make an
election (i) to deliver to the Company a promissory note of the
Optionee on the terms set forth in Section 7(b), (ii) to tender
to the Company previously-owned shares of Common Stock held for
at least six months, or (iii) to have shares of Common Stock to
be obtained upon exercise of the Option withheld by the Company
on behalf of the Optionee, to pay the amount of tax that the
Administrator, in its discretion, determines to be required to be
withheld by the Company. Any election pursuant to clause (iii)
above by a Optionee subject to Section 16 of the Exchange Act
shall be subject to the following limitations: (1) such election
must be made at least six months before the Tax Date and shall be
irrevocable; or (2) such election must be made in (or made
earlier to take effect in) any Window Period (and the withholding
of the shares of Common Stock shall take place during such Window
Period) and shall be subject to approval by the Board, which
approval may be given any time after such election has been made,
and the Option must be held at least six months prior to the Tax
Date; provided, that, the election referenced in clause (2) above
may not be made unless (A) such election is consistent with Rule
16b-3(c)(2)(ii) under the Exchange Act, and (B) the Company has
been subject to the reporting requirements of Section 13(a) of
the Exchange Act for at least one year and has filed all reports
and statements required to be filed pursuant to that section for
that year. The right to so withhold shares of Common Stock shall
relate separately to each Option.
Any shares tendered to or withheld by the Company will be
valued at Fair Market Value on such date. The value of the
shares of Common Stock tendered or withheld may not exceed the
required federal, state, local and foreign withholding tax
obligations as computed by the Company.
8. Use of Proceeds.
Proceeds from the sale of Shares pursuant to this Plan
shall be used for general corporate purposes.
9. Adjustment of Shares.
In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split or
other change in corporate structure affecting the Common Stock,
appropriate adjustments shall be made by the Administrator in the
aggregate number and kind of shares of Stock reserved for
issuance under the Plan and in the number, kind and exercise
price of shares subject to outstanding Options; provided,
however, that the number of shares subject to any Option shall
always be a whole number.
10. Effect of Change in Control.
In the event of a "Change in Control," 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.
11. No Right to Directorship.
Neither this Plan nor any Option granted hereunder
shall confer upon any Optionee any right with respect to
continuation of the Optionee's membership on the Board or shall
interfere in any way with provisions in the Company's Articles of
Incorporation and By-Laws relating to the election, appointment,
terms of office, and removal of members of the Board.
12. Legal Requirements.
The Company shall not be obligated to offer or sell any
Shares upon exercise of any Option unless the Shares are at that
time effectively registered or exempt from registration under the
federal securities laws and the offer and sale of the Shares are
otherwise in compliance with all applicable securities laws and
the regulations of any stock exchange on which the Company's
securities may then be listed. The Company shall have no
obligation to register the securities covered by this Plan under
the federal securities laws or take any other steps as may be
necessary to enable the securities covered by this Plan to be
offered and sold under federal or other securities laws. Upon
exercising all or any portion of an Option, an Optionee may be
required to furnish representations or undertakings deemed
appropriate by the Company to enable the offer and sale of the
Shares or subsequent transfers of any interest in the Shares to
comply with applicable securities laws. Certificates evidencing
Shares acquired upon exercise of Options shall bear any legend
required by, or useful for purposes of compliance with,
applicable securities laws, this Plan or the Option Agreements.
13. Duration and Amendments.
(a) Duration. This Plan shall become effective upon
adoption by the Board provided, however, that no Option shall be
exercisable unless and until written consent of the shareholders
of the Company, or approval of shareholders of the Company voting
at a validly called shareholders' meeting, is obtained within 12
months after adoption by the Board. If such shareholder approval
is not obtained within such time, Options granted hereunder shall
terminate and be of no force and effect from and after expiration
of such 12-month period.
(b) Amendment and Termination. The Board may amend,
alter or discontinue the Plan or any Option, but no amendment,
alteration or discontinuance shall be made which would impair the
rights of an Optionee under an outstanding Option without the
Optionee's consent. In addition, the Board may not amend or
alter the Plan without the approval of shareholders of the
Company entitled to vote at a duly held shareholders' meeting or
by an action by written consent and, if at a meeting, a quorum of
the voting power of the Company is represented in person or by
proxy, where such amendment or alteration would, except as
expressly provided in the Plan, increase the total number of
shares reserved for issuance pursuant to Options under the Plan
or in such other circumstances as the Board deems appropriate to
comply with Rule 16b-3 under the Exchange Act or otherwise.
Notwithstanding any other provision of this Section 12(b), the
provisions of the Plan governing (A) who is granted Options,
(B) the number of Shares to be covered by each Option, (C) the
exercise price of each Option, (D) the timing of the grant of
each Option, or (E) the period within which each Option may be
exercised, shall not be amended more than once every six months,
other than to comport with changes in the Code or the rules
thereunder or the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
(c) Effect of Amendment or Termination. No Shares
shall be issued or sold under this Plan after the termination
hereof, except upon exercise of an Option granted before
termination. Termination or amendment of this Plan shall not
affect any Shares previously issued and sold or any Option
previously granted under this Plan.
14. Rule 16b-3.
With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply
with the applicable conditions of Rule 16b-3 under the Exchange
Act. To the extent any provision of this Plan or action by the
Administrator fails to so comply, it shall be adjusted to comply
with Rule 16b-3, to the extent permitted by law and deemed
advisable by the Administrator. It shall be the responsibility
of persons subject to Section 16 of the Exchange Act, not of the
Company or the Administrator, to comply with the requirements of
Section 16 of the Exchange Act; and neither the Company nor the
Administrator shall be liable if this Plan or any transaction
under this Plan fails to comply with the applicable conditions of
Rule 16b-3, or if any such person incurs any liability under
Section 16 of the Exchange Act.
As amended through April 23, 1998.
