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SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
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:
/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 Section 240.14a-11(c) or Section 240.14a-12
UROHEALTH Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
--------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $ 500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/ / 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:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box, if any part of the fee is offset as provided by Exchange Act
Rule 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:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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UROHEALTH SYSTEMS, INC.
5 Civic Plaza, Suite 100
Newport Beach, California 92660
(714) 668-5858
Dear Stockholder:
You are cordially invited to attend the 1996 Annual Meeting of
Stockholders (the "Annual Meeting"), of UROHEALTH Systems, Inc. ("Urohealth" or
the "Company") to be held on July 25, 1996, at the Company's corporate office
located at 5 Civic Plaza, Suite 100, Newport Beach, California 92660, commencing
at 10:00 a.m. local time.
At the Annual Meeting, stockholders will be asked to consider and vote
upon six proposals.
Proposal No. 1 is the election of a Board of Directors to serve until
the next Annual Meeting of Stockholders or until their successors are duly
elected and qualified.
Proposal No. 2 is the ratification of the selection of Ernst & Young
LLP as the independent auditors of the Company for the fiscal year ended March
31, 1997 (the "Accountants Proposal").
Proposal No. 3 is to consider and vote upon a proposal to approve an
amendment to the Company's Certificate of Incorporation to increase the total
number of authorized shares of all classes of stock to 55,000,000, consisting of
50,000,000 shares of Common Stock, par value $.001 per share, and 5,000,000
shares of Preferred Stock, par value $.001 per share (the "Authorized Stock
Proposal").
Proposal No. 4 is to consider and vote upon a proposal to approve an
amendment to the Company's Certificate of Incorporation to entitle the holders
of the Company's 8.75% Convertible Subordinated Debentures due 2006 to vote on
all matters submitted to a vote of the stockholders of the Company, voting
together with the holders of Common Stock (and any other shares of capital stock
of the Company entitled to vote at a meeting of stockholders) as one class (the
"Debenture Voting Rights Proposal").
Proposal No. 5 is to consider and vote upon a proposal to approve an
amendment to the Company's 1994 Stock Incentive Plan to clarify that when
determining the maximum number of shares issuable under the plan, that the
Company's Convertible Subordinated Debentures and other securities that vote
with the holders of Common Stock on an "as converted" basis are included in the
calculation and to provide that the calculation is determined with reference to
the Company's current outstanding securities rather than those outstanding as of
the prior December 31st (the "Stock Plan Proposal").
Proposal No. 6 is to consider and vote upon a proposal to approve the
adoption of the 1996 Directors' Stock Incentive Plan (the "Directors' Plan") to
permit the issuance of
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options to the Company's non-employee directors of options exercisable into an
aggregate of 300,000 shares of Common Stock (the "Directors' Plan Proposal").
After careful consideration, your Board of Directors believes that the
Accountants Proposal, the Authorized Stock Proposal, the Debenture Voting Rights
Proposal, the Stock Plan Proposal and the Directors' Plan Proposal are fair and
reasonable to, and in the best interests of, the Company and its stockholders.
THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSALS SET FORTH ABOVE AND RECOMMENDS
THAT YOU VOTE IN FAVOR OF THESE PROPOSALS AND THE NOMINEES FOR ELECTION TO THE
BOARD OF DIRECTORS AT THE ANNUAL MEETING.
It is important that your shares be voted at the Annual Meeting,
regardless of the number of shares you hold. THEREFORE, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN
TO ATTEND THE ANNUAL MEETING. This will not prevent you from voting your shares
in person if you do attend.
We look forward to seeing you on July 25, 1996.
Sincerely,
Charles A. Laverty
Chairman of the Board and
Chief Executive Officer
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UROHEALTH SYSTEMS, INC.
5 Civic Plaza, Suite 100
Newport Beach, California 92660
(714) 668-5858
To the Stockholders of
UROHEALTH Systems, Inc.:
NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting of Stockholders
(the "Annual Meeting"), of UROHEALTH Systems, Inc. ("Urohealth" or the
"Company") will be held on July 25, 1996, at the Company's corporate offices
located at 5 Civic Plaza, Suite 100, Newport Beach, California 92660, commencing
at 10:00 a.m. local time, for the following purposes:
1. To elect a Board of Directors to serve until the next Annual
Meeting of stockholders or until their successors are duly elected and
qualified.
2. To ratify the selection of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ending March 31, 1997 (the
"Accountants Proposal").
3. To consider and vote upon a proposal to approve an amendment
to the Company's Certificate of Incorporation to increase the total number of
authorized shares of all classes of stock to 55,000,000, consisting of
50,000,000 shares of Common Stock, par value $.001 per share, and 5,000,000
shares of Preferred Stock, par value $.001 per share (the "Authorized Stock
Proposal").
4. To consider and vote upon a proposal to approve an amendment
to the Company's Certificate of Incorporation to entitle the holders of the
Company's 8.75% Convertible Subordinated Debentures due 2006 (the "Convertible
Subordinated Debentures") to vote on all matters submitted to a vote of the
stockholders of the Company, voting together with the holders of Common Stock
(and any other shares of capital stock of the Company entitled to vote at a
meeting of stockholders) as one class (the "Debenture Voting Rights Proposal").
5. Proposal No. 5 is to consider and vote upon a proposal to
approve an amendment to the Company's 1994 Stock Incentive Plan to clarify that
when determining the maximum number of shares issuable under the plan, that the
Company's Convertible Subordinated Debentures and other securities that vote
with the holders of Common Stock on an "as converted" basis are included in the
calculation and to provide that the calculation is determined with reference to
the Company's current outstanding securities rather than those outstanding as of
the prior December 31st (the "Stock Plan Proposal").
6. Proposal No. 6 is to consider and vote upon a proposal to
approve the adoption of the 1996 Directors' Stock Incentive Plan (the "Directors
Plan") to permit the
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issuance of options to the Company's non-employee directors of options
exercisable into an aggregate of 300,000 shares of Common Stock (the "Directors'
Plan Proposal").
7. To transact such other business as may properly come before
the Annual Meeting or any adjournment thereof.
Only those stockholders of record at the close of business on July 5,
1996 will be entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE
ANNUAL MEETING. Proxies are revocable at any time prior to the time they are
voted, and stockholders who are present at the meeting may withdraw their
proxies and vote in person if they so desire.
By Order of the Board of Directors
Kevin M. Higgins
Secretary
Newport Beach, California
July ___, 1996
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UROHEALTH SYSTEMS, INC.
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
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PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of UROHEALTH Systems, Inc. (the "Company")
for use at the Company's Annual Meeting of Stockholders to be held on July 25,
1996 (the "Annual Meeting"), at 10:00 a.m., local time, at the Company's
corporate offices located at 5 Civic Plaza, Suite 100, Newport Beach, California
92660, and at any adjournment thereof. This Proxy Statement and the accompanying
proxy are first being sent to stockholders entitled to vote at the Annual
Meeting on or about July ___, 1996.
THE PROXY
The persons named as proxyholders, Charles A. Laverty, James L. Johnson
and Kevin M. Higgins, were selected by the Board of Directors of the Company and
are executive officers of the Company.
All shares represented by each properly executed, unrevoked proxy
received in time for the Annual Meeting will be voted in the manner specified
therein. If no specification is made on the proxy as to any one or more of the
proposals, the shares represented by the proxy will be voted FOR the election of
those directors named in the attached Proxy Statement, FOR the Accountants
Proposal, FOR the Authorized Stock Proposal, FOR the Debenture Voting Rights
Proposal, FOR the Stock Plan Proposal, FOR the Directors' Plan Proposal and,
with respect to any other matters that may come before the Annual Meeting, at
the discretion of the proxyholders. An executed proxy may be revoked at any time
before its exercise by filing with the Secretary of the Company a written notice
of revocation or a duly executed proxy bearing a later date. The execution of
the enclosed proxy will not affect a stockholder's right to vote in person
should such stockholder find it convenient to attend the Annual Meeting and
desire to vote in person.
VOTING AT THE ANNUAL MEETING
Presently, the only issued and outstanding voting securities of the
Company are (i) its shares of Common Stock, $.001 par value (the "Common
Stock"), of which [14,201,652] shares were outstanding at the close of business
on July 5, 1996 (the "Record Date") and (ii) its shares of Series C Preferred
Stock, $.001 par value (the "Series C Preferred Stock"), of which 10,000 shares
were outstanding at the close of business on the Record Date. The Series C
Preferred Stock votes with the Common Stock on an "as converted" basis, and, as
of the Record Date, the outstanding Series C Preferred Stock had voting rights
equivalent to 4,545,454 shares of Common Stock. The Common Stock and the Series
C Preferred Stock are hereinafter referred to as "Voting Stock" and the total
number of outstanding shares of Voting Stock as of the Record Date was
[18,747,106]. Only holders of record of Voting Stock at the close of business on
the Record Date are entitled to receive notice of and to vote at the Annual
Meeting and any adjournment thereof. Except as described below, the holders of
the Voting Stock of the Company are entitled to one vote per share (or in the
case of the Series C Preferred Stock, 50 votes for each share of Common Stock
issuable upon conversion of the Series C Preferred Stock into Common Stock) on
each matter submitted to a vote of the stockholders.
The holders of a majority of the Company's outstanding Voting Stock,
present in person or by proxy, will constitute a quorum for the transaction of
business at the Annual Meeting or any adjournment thereof. While there is no
definitive statutory or case law authority in Delaware as to the proper
treatment of abstentions (also referred to as withheld votes), the Company
believes that abstentions should be
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counted for purposes of determining if a quorum is present at the Annual Meeting
for the transaction of business. With respect to broker nominee votes, the
Delaware Supreme Court has held that broker nominee votes may be counted as
present or represented for purposes of determining the presence of a quorum.
Abstentions are included in determining the number of shares voted on the
proposals submitted to stockholders (other than the election of directors) and
will have the same effect as a no vote on such proposals, whereas broker
non-votes are not counted.
With respect to the election of the Company directors, cumulative
voting is not permitted. Directors are elected by a plurality of the votes of
the shares of Voting Stock represented and voted at the meeting and abstentions
and broker non-votes will have no effect on the outcome of the election of
directors. The affirmative vote of a majority of the shares of Voting Stock
represented and voted at the Annual Meeting is required to ratify the
Accountants Proposal, the Stock Plan Proposal and the Directors' Plan Proposal.
The affirmative vote of a majority of the outstanding shares of Voting Stock
entitled to vote is necessary to approve the Authorized Stock Proposal and the
Debenture Voting Rights Proposal.
SOLICITATION
The Company will bear the expense of soliciting proxies from its
stockholders. Proxies will be solicited principally through the use of the mail,
but directors, officers and regular employees of the Company may solicit proxies
personally or by telephone or special letter without any additional
compensation. The Company also will reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for any reasonable expenses in forwarding
proxy materials to beneficial owners. The Company may engage Mackenzie Partners
("Mackenzie") to supplement the Company's solicitation efforts, in which case
the Company will pay Mackenzie's customary fee, estimated to be approximately
$6,000.
PROPOSAL ONE - ELECTION OF DIRECTORS
At the Annual Meeting, the Company's stockholders will elect eleven
directors, and the holders of the Series C Preferred Stock will elect two
directors, of the Company to serve until the next Annual Meeting of Stockholders
or until their successors are duly elected and qualified, or until any such
directors' earlier resignation or removal. Vacancies on the Board of Directors
and newly created directorships will generally be filled by vote of a majority
of the directors then in office, except for vacancies relating to directors
elected by the holders of the Series C Preferred Stock, which are filled by a
vote of the remaining director elected by such holders. The Board of Directors
has no reason to believe that any of its nominees will be unable or unwilling to
serve if elected to office and to the knowledge of the Board of Directors, each
of its nominees intends to serve the entire term for which election is sought.
However, should any of the nominees of the Board of Directors become unable or
unwilling to accept nomination or election as a director, the proxies solicited
by the Board of Directors will be voted for such other person as the Board may
determine.
Pursuant to the Employment Agreement between Charles A. Laverty and the
Company, the Company is obligated to use its best efforts to cause Mr. Laverty
to be elected as a voting member of the Company's Board of Directors during the
term of his employment. Pursuant to an agreement between the Company and
FoxMeyer Corporation ("FoxMeyer"), the Company has agreed to use its reasonable
best efforts to maintain the two Board seats currently held by FoxMeyer nominees
as a result of their ownership for the next two years. Messrs. Estrin and Butler
have been nominated by FoxMeyer to serve on the Board of Directors. In
connection with the acquisition of Osbon Medical Systems, Ltd. ("Osbon"), the
Company agreed to nominate three persons designated by the former Osbon
shareholders to the Board of Directors of the Company. Messrs. Julian Osbon,
James Osbon and Francis Tedesco have been nominated by the former Osbon
shareholders to serve on the Board of Directors. Messrs. Blutt and Gross are the
two nominees of the holders of the Series C Preferred Stock. There are no other
arrangements or understandings between any director or executive officer and any
other person pursuant to which such director or executive officer was or is to
be elected as a director or executive officer, as applicable.
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In voting for directors, each stockholder is entitled to cast one vote
for each candidate for each share of Voting Stock. Stockholders are not entitled
to cumulate their votes for members of the Board of Directors. The nominees for
election to the Company's Board of Directors who receive the greatest number of
affirmative votes (or in the case of the holders of the Series C Preferred
Stock, the greatest number of affirmative votes related to the Series C
Preferred Stock) will be elected to the Company's Board of Directors. The Board
of Directors has nominated the individuals listed below for election at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE EACH NOMINEE FOR
ELECTION AS A MEMBER OF THE BOARD OF DIRECTORS.
The nominees for election are:
Charles A. Laverty Lawrence Goelman
Mitchell J. Blutt, M.D. Michael S. Gross
Abbey J. Butler James B. Osbon
John Chamberlin Julian W. Osbon
Robert W. Elkins, M.D. Francis J. Tedesco
Melvyn J. Estrin Gerald W. Timm
C. Sage Givens
NOMINEES FOR DIRECTOR
The following table sets forth the names, ages and positions of all
nominees as of the Record Date. A summary of the background and experience of
each of these individuals is set forth after the table. Information regarding
the Company's executive officers is set forth in Part I of its Annual Report on
Form 10-K under the heading "Corporate Executive Officers."
DIRECTORS
<TABLE>
<CAPTION>
Name Age Position Held Director Since
- - ---- --- ------------- --------------
<S> <C> <C> <C>
Charles A. Laverty (1) 50 Chief Executive 1994
Officer
Mitchell J. Blutt, M.D. 39 Director 1996
Abbey J. Butler (2) 57 Director 1995
John S. Chamberlin 68 Director 1996
Robert W. Elkins, M.D. (3) 51 Director 1995
Melvyn J. Estrin (3) 52 Director 1995
C. Sage Givens 40 Director 1996
Lawrence Goelman (1)(2)(3) 54 Director 1995
Michael S. Gross 35 Director 1996
James B. Osbon 58 Director 1995
Julian W. Osbon (1) 56 Director 1995
Francis J. Tedesco (2) 52 Director 1995
Gerald W. Timm 54 Director 1995
</TABLE>
- - --------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
3
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CHARLES A. LAVERTY became Chief Executive Officer in September 1994,
and Chairman of the Board of Directors in December 1994. Mr. Laverty also served
as President of the Company from September 1994 until December 1995. Mr. Laverty
has spent the last 15 years of his 20 years of management and marketing
experience in the healthcare field and currently serves as a director of
Medication Delivery Devices, a producer of home infusion therapy devices. Prior
to joining the Company, Mr. Laverty was previously employed as Senior Executive
Vice President and was a director of Coram Healthcare Corporation, the second
largest home infusion therapy company in the U.S., which was formed by the
merger of Curaflex Health Services, Inc., HealthInfusion, Inc., Medisys, Inc.,
and T2 Medical, Inc. Mr. Laverty served as the Chairman of the Board, President
and Chief Executive Officer of Curaflex Health Services from February 1989 to
July 1994. Prior to his association with Curaflex, Mr. Laverty served as
President and Chief Executive Officer of InfusionCare, Inc., a home infusion
services company, from October 1988 to February 1989. In addition, he has held
several positions, including Chief Operating Officer, with Foster Medical
Corporation, a durable medical equipment supply company, and worked on both
sales and management for C.R. Bard, a medical device company.
ABBEY J. BUTLER has served as a director of the Company since March
1995. He is Co-Chairman and Co-Chief Executive Officer of FoxMeyer Health
Corporation, a distributor of health care products and information-based
services throughout North America. Mr. Butler became a director of FoxMeyer
Health Corporation in 1990. Mr. Butler also serves as managing partner of
Centaur Partners, L.P., an investment partnership owning substantial holdings in
FoxMeyer Health, as well as president and a director of C.B. Equities Capital
Corp., a New York-based portfolio management firm. Mr. Butler presently serves
on the Board of Directors of FWB Bancorporation, the holding company of FWB Bank
of Maryland, CST Entertainment Imaging, Inc., a company engaged in digital color
enhancement of black and white films, and of Cyclone Fence Corp., the leading
U.S. distributor and installer of chain link fence systems. Mr. Butler is also
Co-Chairman of Ben Franklin Retail Stores, Inc., a retail craft and variety
store chain.
DR. MITCHELL J. BLUTT has served as a director of the Company since
June 1996. Dr. Blutt is the Executive Partner of Chase Capital Partners and an
Adjunct Assistant Professor of Medicine at The New York Hospital-Cornell Medical
Center. He serves as a director of Hanger Orthopedic Group, Collegiate Health
Care, Innotech Corporation, InteCare, Inc., Landec Corporation, Senior
Psychology Services Corporation, General Medical Corporation, UtiliMed, Inc.,
Medical Arts Press, Inc., and ASC Network Corporation. Dr. Blutt received a
B.A. and M.D. from the University of Pennsylvania, and an M.B.A. from the
Wharton School, University of Pennsylvania.
JOHN S. CHAMBERLIN has served as a director of the Company since June
1996. Mr. Chamberlin worked for 22 years in various assignments for General
Electric Company, including sales, product planning, marketing, General Manager
of Radio Receiver Department and Vice President and General Manager of the
Housewares and Audio Business Division. From 1976 to 1983 he was the President
and Chief Executive Officer of Lenox, Inc. and in 1983 joined Avon Products,
Inc. as President and Chief Operating Officer, leaving Avon in 1983. [CURRENT?]
Mr. Chamberlin is presently Chairman of the Board of Life Fitness Company and
WNS, Inc., and he serves on the Boards of Directors of The Scotts Co., Seasons,
Inc., the Robbins Company, Healthsouth Corporation and the Sports Holding
Company. Mr. Chamberlin is a Trustee of the Medical Center of Princeton and the
Woodrow Wilson National Fellowship Foundation.
ROBERT N. ELKINS, M.D. has served as a director of the Company since
March 1995. Dr. Elkins is the founder of Integrated Health Services, Inc., a
provider of post acute and subacute care through more than 25,000 beds in 192
facilities located in 30 states. Dr. Elkins has served as the Chairman and Chief
Executive Officer of Integrated Health Services since 1986. Dr. Elkins, a
graduate of the University of Pennsylvania, received his M.D. degree from the
Upstate Medical Center at the State University of New York and completed his
residency at Harvard University.
MELVYN J. ESTRIN is Co-Chairman and Co-Chief Executive Officer of
FoxMeyer Health Corporation, a distributor of health care products and
information-based services throughout North America. Mr. Estrin became a
director of FoxMeyer Health Corporation in 1990. Mr. Estrin also serves as
Managing Partner of Centaur Partners, L.P., an investment partnership owning
substantial holdings in FoxMeyer Health, as Chairman of Estrin Abod
International, Inc., a privately held company that provides training,
development and technical assistance to governmental and educational
institutions and that pursues real estate development and investments. Mr.
Estrin is also a member of the board of directors of Washington Gas Light
Company.
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C. SAGE GIVENS has served as a director of the Company since June 1996.
Ms. Givens is the founding Managing Partner of Acacia Venture Partners, located
in San Francisco. Acacia Venture Partners was formed to invest exclusively in
all stages of healthcare service companies. Prior to forming Acacia Venture
Partners, Ms. Givens was a General Partner of First Century Partners, a private,
diversified venture capital and buyout fund, where she launched and managed the
partnership's diversification into healthcare. Ms. Givens was also formerly a
Managing Director at Smith Barney and presently holds directorships on
HEALTHSOUTH and Phycor, and serves on the Boards of Directors of several other
private portfolio companies.
LAWRENCE GOELMAN has served as a director of the Company since March
1995. Since 1981, Mr. Goelman has served as the Chairman and Chief Executive of
CostCare, a national healthcare cost management firm covering six million people
and wholly-owned subsidiary of the John Hancock Mutual Life Insurance Company.
Mr. Goelman is the Chief Executive Officer and a member of the Board of
Directors of Pinnacle Micro.
MICHAEL S. GROSS has served as a director of the Company since June
1996. Mr. Gross is one of the founding principals of Apollo Advisors, L.P.
which, together with an affiliate, acts as managing general partner of Apollo
Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P.,
private securities investment funds, and of Lion Advisors, L.P., which acts as
financial advisor to and representative for certain institutional investors with
respect to securities investments. Prior to 1990, Mr. Gross was employed with
Drexel Burnham Lambert, Inc. Mr. Gross is a director of Converse, Inc., The
Florsheim Shoe Company, Inc., Furniture Brands International, Inc. and
Proffitts, Inc. and a member of the Supervisory Board of Directors of
Memorex-Telex NV.
JAMES B. OSBON became a Vice President and a director of the Company in
December 1995. Mr. Osbon was President of Osbon from 1989 until December 1995
when Osbon became a subsidiary of the Company. James Osbon is the brother of
Julian Osbon.
JULIAN W. OSBON became President and Chief Operating Officer and was
elected a director of the Company in December 1995. Mr. Osbon was the founder,
Chairman and Chief Executive Officer of Osbon from 1989 until December 1995 when
Osbon became a subsidiary of the Company. Mr. Osbon held various other
management positions with Osbon from 1984 until 1989. Julian Osbon is the
brother of James Osbon.
FRANCIS J. TEDESCO, M.D. has served as a director of the Company since
December 1995. Dr. Tedesco has served as President of the Medical College of
Georgia since 1988, and prior to that time he held several different positions
at the college, including Professor of Medicine and Chief, Section of
Gastoenterology and Vice President for Clinical Affairs.
GERALD W. TIMM, PH.D. became Vice Chairman of the Board of Directors in
July 1995 and served as Executive Vice President of the Company from July 1995
until April 1996. Dr. Timm was the founder of Dacomed Corporation (which became
a subsidiary of the Company the Company in July 1995) and served as an officer
of Dacomed from its formation in 1980. Dr. Timm served as Chairman of the Board,
President, Chief Executive Officer and Treasurer of Dacomed from April 1992
until its acquisition by the Company in July 1995.
DIRECTORS' FEES
Each director who is not a salaried officer is entitled to receive
$10,000 per year and $1,000 for each directors' and committee meeting attended.
Directors are also entitled to reimbursement of expenses incurred in connection
with the business of the Company. In prior years, each such director who
attended a minimum of 75% of all meetings held by the Board of Directors also
received an annual 2,500 share option grant under the Company's Non-Employee
Directors Stock Option Plan following the announcement of the Company's year-end
financial results for the immediately preceding fiscal year. In the event the
Directors' Plan Proposal is approved, in lieu of the grants under the
Non-Employee Directors Stock Option Plan
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described above, the directors will receive grants of options exercisable for
7,500 shares of Common Stock under the Directors' Plan. See "Directors' Plan
Proposal."
COMMITTEES OF THE BOARD
The Company currently has three committees of the Board of Directors,
the Executive Committee, the Audit Committee and the Compensation Committee.
The Executive Committee, currently consisting of Messrs. Laverty,
Julian Osbon and Goelman, exercises the power of the Board of Directors (except
for certain powers that may only be exercised by the full Board) in monitoring
the management of the business in between meetings of the Board of Directors.
The Audit Committee, currently consisting of Messrs. Goelman, Butler
and Tedesco, recommends the appointment of the independent public accountants of
the Company, reviews and approves the scope of the annual audit and reviews the
results thereof with the Company's independent accountants. The Audit Committee
also assists the Board of Directors in fulfilling fiduciary responsibilities
relating to accounting and reporting policies, practices and procedures, and
reviews the continuing effectiveness of the Company's business ethics and
conflicts of interest policies.
The Compensation Committee, consisting of Messrs. Goelman, Elkins and
Estrin, reviews and establishes the salary, bonus and stock awards received by
the Company's Chief Executive Officer, and, in consultation with the Chief
Executive Officer, reviews the compensation of the other executive officers of
the Company. The Compensation Committee is also responsible for administering
the Company's 1994 Stock Incentive Plan and other stock-based incentive plans.
The Compensation Committee determines the recipients of awards, sets the
exercise price of shares granted and determines the terms, provisions and
conditions of all rights granted.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, the Compensation Committee consisted of Messrs.
Goelman, Elkins and Butler. None of these persons is or has been an officer or
employee of the Company or any of its subsidiaries. In addition, there are no
Board of Directors or Compensation Committee interlocks between the Company and
other entities involving the Company's executive officers and Board members who
serve as executive officers of such entities.
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS
During the fiscal year ended March 31, 1996, the Board of Directors met
13 times. In addition, the Executive Committee met 2 times, the Audit Committee
met 2 times and the Compensation Committee met 4 times. Each director, except
Drs. Elkins and Estrin, attended more than 75% of the aggregate number of
meetings held by the Board of Directors and all committees of the Board on which
such directors served.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires that the Company's executive officers and directors file reports of
beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4
and 5 with the Securities and Exchange Commission ("SEC"). Executive officers
and directors are also required by the SEC rules to furnish the Company with
copies of all Section 16(a) reports which they file. Based solely on its review
of the Forms 3, 4 and 5 provided to or filed on behalf of its executive officers
and directors, as well as written representations from these individuals
regarding Forms 5, the Company believes that, during the fiscal year ended March
31, 1996, all Section 16(a) filing requirements applicable to its executive
officers and directors were complied with pursuant to the SEC rules, except for
Form 5s relating to option grants which were filed late for Messrs.
6
<PAGE> 12
Laverty, Johnson, Dunnigan, Higgins, Goelman and Elkins and Ms. Hoag, and one
Form 4 relating to an option grant to Mr. Laverty that was filed late. The
Company has not received a Form 3 for Messrs. Butler or Estrin.
VOTING SECURITIES
AND
PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding the
beneficial ownership of the Company's Voting Stock as of the Record Date by (i)
each person known by the Company to own more than 5% of such shares, (ii) each
of the Company's directors and persons nominated to be directors, (iii) each of
the Company's Chief Executive Officer and the next four most highly compensated
executive officers other than the Chief Executive Officer whose total annual
salary and bonus for the last fiscal year exceeded $100,000 (collectively, the
"named executive officers"), and (iv) all directors and executive officers as a
group.
SECURITY OWNERSHIP TABLE
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
-----------------------------
NAME NUMBER PERCENT
- - ---- ------ -------
<S> <C> <C>
FoxMeyer Health Corporation(2).............................. 2,464,827 16.16%
Apollo Advisors II, L.P.(3)................................. 2,142,682 13.11%
Chase Venture Capital Associates, L.P. (4).................. 2,142,682 13.11%
Gerald W. Timm (5).......................................... 1,218,480 8.58%
Charles A. Laverty (6)...................................... 640,814 4.32%
Robert N. Elkins, M.D. (7).................................. 78,704 *
Lawrence Goelman (8)........................................ 101,258 *
Melvyn J. Estrin (9)........................................ 2,464,827 16.16%
Abbey J. Butler (9)......................................... 2,464,827 16.16%
Julian W. Osbon............................................. 3,000,000 21.12%
James B. Osbon.............................................. 500,000 3.52%
Francis J. Tedesco.......................................... 0 *
Mitchell J. Blutt, M.D. (10)................................ 2,142,682 13.11%
Michael S. Gross (11)....................................... 2,142,682 13.11%
John Chamberlin (12)........................................ 2,778 *
C. Sage Givens (13)......................................... 2,778 *
James L. Johnson (14)....................................... 122,277 *
Bruce A. Hazuka (15)........................................ 61,111 *
M. Cassandra Hoag (16)...................................... 75,463 *
All current directors and executive officers 12,608,347 60.98%
as a group (20 persons) (17)................................
</TABLE>
- - ---------------
* Less than 1%.
7
<PAGE> 13
(1) Unless otherwise indicated in the following footnotes, each person
named in the table has sole voting and investment power with respect to
all shares shown as beneficially owned, subject to applicable community
property law. Unless otherwise noted in the following notes the address
of each person listed is c/o UROHEALTH Systems, Inc., 5 Civic Plaza,
Suite 100, Newport Beach, California 92660. The foregoing table
presents voting securities which include Common Stock and Series C
Preferred Stock.
(2) Includes 1,414,827 shares of Common Stock and warrants to purchase
1,050,000 shares of Common Stock which are currently exercisable. The
address of FoxMeyer Health Corporation is 1220 Senlac Drive,
Carrollton, Texas 75006.
(3) Represents 4,550 shares of Series C Preferred Stock which vote on an
"as converted" basis and warrants to purchase 74,500 shares of Common
Stock which are currently outstanding. The address for Apollo Advisers
II, L.P. is 1301 Sixth Avenue, New York, New York 10019.
(4) Represents 4,550 shares of Series C Preferred Stock which vote on an
"as converted" basis and warrants to purchase 74,500 shares of Common
Stock which are currently outstanding. The address for Chase Venture
Capital Associates, L.P. is 380 Madison Avenue, New York, New York
10017.
(5) Includes 101,540 shares held by Mr. Timm's spouse, Julia Coleman Timm.
Also includes 194,618 shares held in trusts for the benefit of the four
children of Gerald W. Timm and Julia Coleman Timm.
(6) Includes 640,328 shares subject to options exercisable on or before
September 3, 1996.
(7) Includes 78,704 shares subject to options exercisable on or before
September 3, 1996.
(8) Includes 101,258 shares subject to options exercisable on or before
September 3, 1996.
(9) Represents the 2,464,827 shares of Common Stock and warrants
beneficially owned by FoxMeyer as shown above. Messrs. Estrin and
Butler are Co-Chairmen of the Board of Directors of FoxMeyer.
(10) Represents securities held by Chase Venture Capital Association, L.P.,
of which Dr. Blutt is the Executive Partner. Dr. Blutt disclaims
beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(11) Represents securities held by Apollo Advisers II, L.P., of which Mr.
Gross is a Principal. Mr. Gross disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest herein.
(12) Includes 2,778 shares subject to options exercisable on or before
September 3, 1996.
(13) Includes 2,778 shares subject to options exercisable on or before
September 3, 1996.
(14) Includes 122,277 shares subject to options exercisable on or before
September 3, 1996.
(15) Includes 61,111 shares subject to options exercisable on or before
September 3, 1996.
(16) Includes 75,463 shares subject to options exercisable on or before
September 3, 1996.
(17) Includes 1,142,104 shares subject to options exercisable on or before
September 3, 1996, warrants to purchase 1,199,000 shares of Common
Stock and 9,100 shares of Series C Preferred Stock which vote on an "as
converted" basis.
8
<PAGE> 14
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
AND OTHER INFORMATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth for each of the Company's last three
completed fiscal years the compensation of the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------------------------- ------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS(#)
- - ------------------ ------- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Charles A. Laverty...... 1996 $250,100 $325,900 * 1,138,833
Chairman and 1995 $159,400 $50,000 * 500,000
Chief Executive Officer 1994 -- -- -- --
Julian W. Osbon......... 1996 $101,900 40,000 * 0
President and Chief 1995 -- -- -- --
Operating Officer 1994 -- -- -- --
James L. Johnson........ 1996 $152,000 $51,100 * 336,517
Chief Financial 1995 -- -- -- --
Officer 1994 -- -- -- --
Bruce A. Hazuka......... 1996 $104,700 $52,000 * 200,000
Executive Vice 1995 -- -- -- --
President 1994 -- -- -- --
M. Cassandra Hoag....... 1996 $103,678 $53,000 * 100,000
1995 $780,000 0 * 91,667
1994 -- -- -- --
</TABLE>
- - -----------------
* Other Annual Compensation did not exceed the lesser of $50,000 or 10%
of the total annual salary and bonus.
(1) The information for fiscal 1996 covers a nine month transition period
ending March 31, 1996.
9
<PAGE> 15
SUMMARY OF OPTION GRANTS
The following table sets forth the individual grants of stock options
made by the Company during the fiscal year ended March 31, 1996 to each of the
named executive officers.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
--------------------------------------------------------- ------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/ EMPLOYEES OR BASE
SARS IN FISCAL PRICE EXPIRATION
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- - ---- ---------- ---- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Charles A. Laverty(1) .... 122,167(1) 3.8% $10.50 10/16/05 $806,717 $2,044,378
266,666(2) 8.4% $7.25 01/02/06 $1,215,860 $3,081,228
750,000(2) 23.6% $9.75 02/29/06 $4,598,792 $11,654,242
Julian W. Osbon(1) ....... 0
James L. Johnson(1) ...... 200,000(2) 6.3% $9.00 09/06/05 $1,132,010 $2,868,736
36,517(1) 1.1% $10.50 10/16/05 $241,136 $611,086
100,000(2) 3.1% $7.25 01/02/96 $455,948 $1,155,463
Bruce A. Hazuka(1) ....... 200,000(2) 6.3% $9.1875 09/07/05 $1,155,593 $2,928,502
M. Cassandra Hoag(1) ..... 100,000(2) 3.1% $7.25 01/02/06 $455,948 $1,155,463
</TABLE>
- - ------------------
(1) Options granted on October 16, 1995, were fully vested and exercisable
on such date, and have a ten-year term.
(2) Options granted at various times, vest monthly over 36 months and have
a ten-year term.
10
<PAGE> 16
SUMMARY OF OPTIONS EXERCISED
The following table sets forth information concerning exercise of stock
options during the year ended March 31, 1996 by each of the named executive
officers and the value of unexercised options at March 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FY-END(#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- - ---- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Charles A. Laverty........... -- -- 414,872/1,223,962 $3,862,315/$11,103,768
Julian W. Osbon.............. -- -- -- / -- -- / --
James L Johnson.............. -- -- 75,406/261,111 $723,706/$2,184,721
Bruce A. Hazuka.............. -- -- 33,333/166,667 $306,246/$1,531,253
M. Cassandra Hoag............ -- -- 45,371/146,296 $456,081/$1,214,231
</TABLE>
11
<PAGE> 17
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
In November 1992, the Company adopted the Non-Employee Directors Stock
Option Plan (the "1992 Directors Plan"). Under the terms of the 1992 Directors
Plan, up to 66,667 options may be granted and no more than 7,500 options may be
granted per year per non-employee director. The 1992 Directors Plan was approved
by stockholders in December 1992.
The 1992 Directors Plan is administered by the Board. No option granted
under the 1992 Directors Plan is transferable by the optionee other than by will
or the laws of descent and distribution, and each option is exercisable during
the lifetime of the optionee only by such optionee. The exercise price of
options granted under the 1992 Directors Plan must be equal to the fair market
value of such shares on the date of the grant. The term of each option is five
years, and an option first becomes exercisable one year after the date of the
grant. Under the 1992 Directors Plan, each person serving as a director of the
Company who, during the previous fiscal year, has attended 75% of the total
number of meetings of the Board and committees of the Board on which he or she
served, and who is not employed by the Company, will automatically be granted
options to purchase 7,500 shares of Common Stock.
At July 5, 1996, there were 60,000 options outstanding under the 1992
Directors Plan and no more than 6,667 shares of Common Stock available for grant
under the 1992 Directors Plan. The Board of Directors has approved a new
Directors' Stock Incentive Plan, subject to stockholder approval. See
"Directors' Plan Proposal."
RETIREMENT SAVINGS PLAN
In January 1995, the Company adopted the Company Retirement Savings
Plan (the "401(k) Plan") under Section 401(k) of the Code. The 401(k) Plan
generally covers all full time employees of the Company who are over age 21 and
have completed one year of service with at least 1,000 hours of service.
Employees may elect to defer, in the form of contributions to the 401(k) Plan,
from 1% up to 12% of their annual compensation, subject to the federal maximum
limit. No matching contributions are expected to be made by the Company relating
to fiscal year 1996. Employees are fully vested in contributions made by them to
the 401(k) Plan. Employees become vested in contributions made by the Company
after completion of two years of service.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1995, FoxMeyer purchased from the Company for $1,000,000 a
Convertible Note with a face principal amount of $2,000,000. The note bore
interest at a rate per annum equal to 6.250% with respect to interest payments
made by delivering additional notes. The Convertible Note was convertible into
Common Stock of the Company of $6.00 per share. In July 1995, the Company sold
to FoxMeyer 60,000 shares of Series B Preferred Stock for an aggregate purchase
price of $4,000,000. The Series B Preferred Stock had an aggregate redemption
value and conversion value of $6,000,000. The Series B Preferred Stock was
entitled to dividends at a rate per annum of $0.6250 per share for dividends
paid by issuing additional shares of Series B Preferred Stock. The Series B
Preferred Stock was convertible into Common Stock of the Company at $6.00 per
share. In May 1996, FoxMeyer converted all of the Series B Preferred Stock and
the Convertible Note described above into Common Stock of the Company. In
connection with that transaction, the Company replaced existing warrants to
purchase 800,000 shares of Common Stock of the Company with a new warrant to
purchase 800,000 shares of Common Stock at a blended exercise price of $6.875
per share. In addition, the Company issued FoxMeyer a warrant to purchase
250,000 shares of Common Stock at an exercise price of $10.00 per share. The
Company also agreed to use its reasonable best efforts to maintain the two board
seats currently held by FoxMeyer nominees as a result of their ownership of
Series B Preferred Stock for the next two years.
In April 1995, in connection with the extension of a bank line of
credit by Silicon Valley Bank, Charles A. Laverty, Chairman, President and Chief
Executive Officer of the Company, agreed to personally guarantee a
12
<PAGE> 18
portion of the line of credit. In exchange for agreeing to personally guarantee
a portion of the line of credit and for successfully raising additional capital
for the Company, the exercise price on certain options held by Mr. Laverty
originally exercisable at $4.00 and $4.125 per share was reduced to $2.375.
In October 1995, in connection with an increase in the Silicon Valley
Bank line of credit, Messrs. Laverty, Johnson and Goelman, each an officer
and/or director of UroHealth, each agreed to personally guaranty a portion of
the line of credit. In exchange for agreeing to personally guaranty a portion of
the line of credit, Messrs. Laverty, Johnson and Goelman were granted an
aggregate of 733,000 options, immediately exercisable, to purchase shares of
Common Stock at an exercise price of $3.50 per share.
Gerald W. Timm is a director of the Company. Dr. Timm was the founder
of Dacomed (which was acquired by the Company in July 1995). Dr. Timm served as
Executive Vice President of the Company from July 1995 until April 1996.
In December 1995, the Company acquired Osbon in a transaction pursuant
to which Julian Osbon, James Osbon, Robert Osbon, Anthony Osbon and Carolyn
Heath acquired an aggregate of 5,000,000 shares of Common Stock. In connection
with the transaction, the former Osbon shareholders were granted certain
registration rights with respect to the shares acquired. Julian W. Osbon serves
as a director and President of the Company, and James B. Osbon serves as a
director and Vice President of the Company.
In connection with the consummation of the Osbon merger, the Company
entered into a three-year employment agreement with Julian W. Osbon which
provides for a minimum annual salary of $400,000. The Company also entered into
a three-year employment agreement with James Osbon providing for salary and
bonus comparable to the annual salary, bonus and commissions received by James
Osbon prior to the Osbon merger. Julian W. Osbon has a right of first refusal to
acquire three parcels of real estate currently owned by the Company. Under the
terms of the Osbon Merger Agreement, Urohealth has agreed to continue to engage
Charter Advertising, a company wholly-owned by Julian W. Osbon, to perform
advertising services with respect to the Osbon products for a one-year period
after the Osbon Merger; provided, that the rates charged and services provided
are competitive with rates and services for similar services available from
third parties.
Under the terms of the Osbon Merger Agreement, the Company has agreed
to continue the funding of a non-profit, public benefit corporation established
by Geddings Osbon Sr. Julian W. Osbon serves on the Board of Directors of the
non-profit corporation. The minimum funding obligations of the Company under the
Osbon Merger Agreement are: (i) $500,000 for the first full fiscal year after
the Osbon Merger; and (ii) 2% of pre-tax profits with respect to Osbon
operations for the second, third and fourth fiscal years after the Osbon Merger.
EMPLOYMENT AGREEMENTS
CHARLES A. LAVERTY. The Company entered into an Amended and Restated
Employment Agreement with Mr. Laverty on April 1, 1996 pursuant to which Mr.
Laverty serves as Chief Executive Officer of the Company. The Agreement amends
and restates an employment agreement between Mr. Laverty and the Company dated
as of September 1, 1994. The term of the Agreement is from April 1, 1996 until
April 1, 1999, after which date the agreement automatically renews for
successive three-year terms unless the Company or Mr. Laverty exercises the
option to terminate the agreement. Mr. Laverty's annual salary is $450,000,
adjusted annually, plus bonuses.
Pursuant to the agreement, Mr. Laverty was granted options to purchase
or obtain shares of the Company's Common Stock under the Company's 1992 Employee
Stock Option Plan and 1994 Stock Incentive Plan for (a) 266,667 shares, with the
date of grant being September 1, 1994, with an equal, pro rated number of
options vesting daily, such that all options will be fully vested on September
1, 1997, with an exercise price of $7.125 per share; (b) 66,667 shares, with the
date of grant being September 1, 1994, with an equal, pro rated number of
options vesting monthly on the first day of each month, such that all options
will be fully vested on September 1, 1997, with an exercise price of $7.125 per
share; (c) 166,667
13
<PAGE> 19
shares, with the date of grant being September 1, 1994, with an equal, pro rated
number of options vesting monthly on the first day of each month, such that all
options will be fully vested on September 1, 1997, with an exercise price of
$12.375 per share; (d) 122,167 shares, with the date of grant being October 16,
1995, all options being fully vested on such date, with an exercise price of
$10.50 per share; and (e) 266,666 shares, with the date of grant being January
2, 1996, with an equal, pro rated number of options vesting monthly on the
second day of each month, such that all options will be fully vested on January
2, 1999, with an exercise price of $7.25 per share. In addition to the foregoing
options, the Company granted to Mr. Laverty effective February 15, 1996
nonqualified stock options to purchase 750,000 shares of the Company's Common
Stock, with an exercise price of $9.75 per share. This option vests on a monthly
basis and becomes exercisable with respect to 20,834 shares each month, with the
first installment vesting on February 15, 1996.
The Company may terminate the Agreement for "cause," which term is
defined as (a) Mr. Laverty's final conviction of a felony related to his duties
under the Agreement or (b) Mr. Laverty's willful failure to perform his
reasonable responsibilities and duties under the Agreement after 30 days of
notice from the Board. After the initial three-year term, and each renewal term,
the Company may terminate the agreement on three-months prior notice. Mr.
Laverty may terminate the Agreement (i) without cause at any time upon 30 days
notice to the Company or (ii) upon a material breach by the Company of its
obligations under the Agreement upon 30 days notice to the Company, unless the
Company cures the breach within the 30 days or, in the event the breach cannot
be cured in 30 days, takes reasonable steps to begin to cure the breach and
fully cures the breach within a reasonable period of time. If Mr. Laverty
terminates the Agreement without cause, or if the Company terminates the
Agreement for cause, Mr. Laverty is entitled to that compensation accrued under
the Agreement, but not paid, at the time of such termination, and the Company
will have no further obligation to provide any compensation or benefits;
provided, however, that in the event Mr. Laverty terminates the Agreement
without cause during the second half of any of the Company's fiscal years, all
of Mr. Laverty's options to purchase shares of the Company's stock that
otherwise would have vested from the date of termination to the last day of such
fiscal year will automatically become vested as of the date of termination. If
the Company terminates the Agreement for any reason other than for cause, or if
Mr. Laverty terminates the Agreement due to a material breach by the Company of
its obligations under the Agreement, then the Company will be obligated to (A)
pay to Mr. Laverty severance pay equal to three years of his salary and earned
bonus as of the date of such termination and (B) provide and pay for all
benefits to which Mr. Laverty is entitled under the Agreement, for a period of
three years after termination. In addition, if the Company terminates the
Agreement for any reason other than for cause, or if Mr. Laverty terminates the
Agreement due to a material breach by the Company of its obligations under the
Agreement, all options contemplated by the Agreement or any other agreement
between Mr. Laverty and the Company will become immediately vested and
exercisable.
Mr. Laverty may terminate the Agreement upon 30 days written notice
upon or within one year after a "Change of Control," as such term is defined
below. If Mr. Laverty terminates the Agreement for any reason (including with or
without cause) upon or within one year of a Change of Control, the Company is
obligated to (A) pay to Mr. Laverty severance pay equal to $2,500,000 and (B)
provide and pay for all benefits to which Mr. Laverty is entitled under the
Agreement, for a period of three years after termination. In addition, all
options contemplated by the Agreement or any other agreement between Mr. Laverty
and the Company will become immediately vested and exercisable. If, however, an
event giving rise to a Change of Control is initiated by the Company, then prior
to the Board approving the Change of Control, Mr. Laverty must inform the Board
whether he intends to terminate the Agreement. If Mr. Laverty informs the Board
that he does not intend to terminate the Agreement as a result of the Change of
Control, he will forfeit all termination and payment rights provided in the
Agreement with respect to that particular Change of Control. For purposes of Mr.
Laverty's Agreement, Change of Control means (i) any consolidation or merger of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's Common Stock would be converted
into cash, securities, or other property, other than a merger of the Company in
which the holders of the Company's Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
14
<PAGE> 20
corporation immediately after the merger; (ii) any reverse merger in which the
Company is the continuing or surviving corporation but in which securities
possessing more than 35% of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different from
those who hold such securities immediately prior to the merger; (iii) any sale,
lease, exchange or other transfer (in one transaction or series of related
transactions) of all, or substantially all, of the assets of the Company; (iv)
the stockholders of the Company approve a plan or proposal for the liquidation
or dissolution of the Company; (v) any "person" (as defined in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 20% or more of the Company's
outstanding Common Stock (other than as a result of a stock purchase or
purchases made by such person directly from the Company); or (vi) individuals
who, on the date of the Agreement, constitute the entire Board of Directors of
the Company cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Company's stockholders, of each
new director was approved by Mr. Laverty.
Mr. Laverty agreed that during his employment, and for a period of 18
months after he ceases to be employed by the Company, regardless of the manner
of termination and except as limited by the Agreement, he will not compete with
the Company.
JAMES L. JOHNSON. The Company entered into an Employment Agreement with
Mr. Johnson effective as of September 6, 1995 pursuant to which Mr. Johnson
serves as the Chief Financial Officer of the Company. The period of employment
begins on September 6, 1995 and ends on the earlier of (i) September 6, 1998 and
(ii) the date on which Mr. Johnson's employment is terminated in accordance with
the terms of the Agreement. Mr. Johnson's annual salary is $300,000, adjusted
annually, plus bonuses.
The Company may terminate Mr. Johnson's employment for "cause"
including (a) conviction of a felony or participation in illegal or other
wrongful conduct substantially detrimental to the business or reputation of the
Company, (b) refusal or failure to act in accordance with any reasonable
direction or order of the Board; provided, that the Board has given written
notice of such refusal or failure and Mr. Johnson fails to comply with such
direction or order within 30 days after the date of such notice, or (c)
participation in any fraud, embezzlement, misappropriation or similar conduct
against the Company. The Company may terminate Mr. Johnson's employment without
cause at any time upon 90 days' advance written notice. If Mr. Johnson's
employment is terminated without cause, all outstanding options held by him
immediately vest in full and become fully exercisable. Mr. Johnson may terminate
the Agreement for "Good Reason" upon 30 days' advance written notice to the
Company. For purpose of this termination provision, "Good Reason" includes (i)
an assignment to Mr. Johnson of any duties materially inconsistent with or which
constitute a material change in his position, duties, responsibilities or status
with the Company, (ii) a reduction by the Company in Mr. Johnson's annual
salary, (iii) the Company acts in any way that would adversely affect Mr.
Johnson's participation in or materially reduce his benefits under any benefit
plan of the Company, or (iv) the Company reduces the number of paid vacation
days to which Mr. Johnson is entitled.
Following a "Change of Control" (as such term is defined below), Mr.
Johnson may terminate the Agreement, with or without good reason, upon 30 days'
advance written notice to the Company given at any time during the one-year
period after the Change of Control; provided that, in the case of a Change of
Control transaction approved in advance by the Board, Mr. Johnson has notified
the Board of his intention to so terminate employment prior to the Board's
approval of the transaction constituting the Change of Control. In the event Mr.
Johnson terminates his employment with "Good Reason" (as such term is defined
below) after a Change of Control, or, if during such one-year period his
employment is terminated by the Company without cause, he will be entitled to
receive a lump sum payment of an amount equal to the greater of (a) one times
the total salary and bonus compensation paid to Mr. Johnson by the Company for
the 12 months immediately preceding the Change of Control; and (b) the remaining
amounts payable by the Company under the Agreement through the end of the term
of employment. For purposes of this Agreement, a Change of Control of the
Company is deemed to have occurred if (i) there is consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Company's
Common Stock would be converted into cash,
15
<PAGE> 21
securities or other property, other than a merger of the Company in which the
holders of the Company's Common Stock immediately prior to the merger have the
same proportionate ownership of common stock of the surviving corporation
immediately after the merger, (y) any reverse merger in which the Company is the
continuing or surviving corporation but in which securities possessing more than
50% of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from those who hold such
securities immediately prior to the merger, or (z) any sale, lease, exchange or
other transfer (in one transaction or series of related transactions) of all, or
substantially all, of the assets of the Company, or (ii) the stockholders of the
Company approve a plan or proposal for the liquidation or dissolution of the
Company, or (iii) any "person" (as defined in Sections 13(d) and 14(d) of the
Exchange Act), becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of 20% or more of the Company's
outstanding Common Stock (other than as a result of a stock purchase or
purchases made by such person directly from the Company), or (iv) during any
twelve-month period, individuals who at the beginning of such period constitute
the entire Board of Directors of the Company cease for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
a majority of the directors then still in office who were directors at the
beginning of the period. For purposes of this Change of Control provision, "Good
Reason" exists if (i) the place of business at which Mr. Johnson is principally
employed is relocated to a location more than 50 miles from the location on the
date of the Change of Control or (ii) there is an assignment to Mr. Johnson of
any duties materially inconsistent with or which constitute a material change in
his position, duties, responsibilities or status with the Company or which
assignment involves a substantial diminution in his level of responsibility;
provided, that continuation of his primary responsibilities after a Change of
Control without regard to his level of responsibility in a larger organization
after a Change of Control will not constitute a diminution of his level of
responsibility.
JULIAN W. OSBON. The Company entered into an Employment Agreement with
Mr. Osbon as of December 29, 1995 pursuant to which Mr. Osbon serves as
President and Chief Operating Officer of the Company. The period of employment
begins on December 29, 1995 and ends on the earlier of (i) December 29, 1998 and
(ii) the date on which Mr. Osbon's employment is terminated in accordance with
the terms of the Agreement. Mr. Osbon's annual salary is $400,000, adjusted
annually, plus bonuses. Mr. Osbon's Employment Agreement contains termination
and Change of Control provisions similar to those described above with respect
to Mr. Johnson's Employment Agreement.
JAMES B. OSBON. The Company entered into an Employment Agreement with
Mr. Osbon on December 29, 1995 pursuant to which Mr. Osbon serves as a Vice
President of the Company'. The period of employment begins on December 29, 1995
and ends on the earlier of (i) December 29, 1998 and (ii) the date on which Mr.
Osbon's employment is terminated in accordance with the terms of the Agreement.
Mr. Osbon's annual salary is $175,000, adjusted annually, plus bonuses. Mr.
Osbon's Employment Agreement contains termination and Change of Control
provisions similar to those described above with respect to Mr. Johnson's
Employment Agreement.
BRUCE A. HAZUKA. The Company entered into an Employment Agreement with
Mr. Hazuka on November 30, 1995 pursuant to which Mr. Hazuka serves as a member
of senior management of the Company. The period of employment begins November
30, 1995 and ends on the earlier of (i) November 30, 1996, and (ii) the date the
period of employment is terminated in accordance with the Agreement. Mr.
Hazuka's annual salary is $200,000, adjusted annually, plus bonuses. The Company
may terminate Mr. Hazuka's employment for "cause" including (a) conviction of a
felony or participation in illegal or other wrongful conduct substantially
detrimental to the business or reputation of the Company, (b) refusal or failure
to act in accordance with any reasonable direction or order of the Board;
provided, that the Board has given written notice of such refusal or failure and
Mr. Hazuka fails to comply with such direction or order within 30 days after the
date of such notice, or (c) participation in any fraud, embezzlement,
misappropriation or similar conduct against the Company. The Company may
terminate Mr. Hazuka's employment without cause at any time upon 90 days'
advance written notice. If Mr. Hazuka's employment is terminated without cause,
all outstanding options held by him immediately vest in full and become fully
exercisable. Mr. Hazuka's Employment Agreement contains Change of Control
provisions similar to those described above with respect to Mr. Johnson's
Employment Agreement.
M. CASSANDRA HOAG. The Company entered into an Employment Agreement
with Ms. Hoag on November 30, 1995 pursuant to which Ms. Hoag serves as a member
of senior management of the Company. The period of employment begins November
30, 1995 and ends at the earlier of November 30, 1996 and (ii) the date the
period ofemployment is terminated in accordance with the Agreement. Ms. Hoag's
annual salary is $142,500, adjusted annually, plus bonuses. Ms. Hoag's
Employment Agreement contains termination and Change of Control provisions
similar to those described above with respect to Mr. Hazuka's Employment
Agreement.
Notwithstanding anything to the contrary set forth in the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings, including this proxy statement,
in whole or in part, the following report and Stock Performance Graph which
follows shall not be deemed to be incorporated in any such filings.
16
<PAGE> 22
REPORT OF THE COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION
During the fiscal year ended March 31, 1996, the Compensation
Committee, consisting of Messrs. Goelman, Estrin and Butler, was responsible for
establishing and administering the policies that govern the compensation of the
Company's executive officers, including the named executive officers. The
Compensation Committee has furnished the following report on executive
compensation:
COMPENSATION COMMITTEE REPORT
The Compensation Committee ("Committee") of the Board of Directors is
composed of independent outside directors. The Committee reviews and administers
the Company's various incentive plans, including the cash compensation levels of
members of management, the Company's bonus plan and the Company's stock
incentive plan. Messrs. Estrin and Elkins form the Stock Option Subcommittee of
the Compensation Committee, which reviews and recommends the granting of stock
options to the Chief Executive Officer and other participants in the stock
option plan.
General Compensation Policy. The Committee's fundamental compensation
policy is to make a substantial portion of an executive's total potential
compensation contingent upon the financial performance of the Company.
Accordingly, in addition to each executive's base salary, the Company offers the
opportunity for an annual cash bonus which is tied to the Company's achievement
of financial performance goals, and stock option awards to provide incentives to
the executive officers through an equity interest in the Company. The Committee
believes that the stockholders benefit by aligning the long-term interests of
stockholders and employees.
Base Salary. For the fiscal year 1996, the Committee reviewed the
recommendations of the Chief Executive Officer as to proposed base salaries for
all executives. Since all of the executive officers except Ms. Hoag were hired
during the fiscal year, base salaries generally remained unchanged unless the
individual's responsibilities had increased over the prior fiscal year,
including recognition of efforts relating to the Company's recent acquisitions,
or the individual's performance in the prior fiscal year was determined to be
particularly strong. The Committee's review of each individual's base salary and
performance in fiscal 1996 was based on the individual's overall performance. No
specific quantitative weight was given to any particular performance
measurement. In the future the Committee will perform annual reviews of the base
salary of each of the executive officers with reference to the executive's
performance, level of responsibility and experience to determine whether the
current base salary is appropriate and competitive. The Committee will evaluate
the reasonableness of the base salary based upon the median salary range paid to
executive officers with comparable duties at companies of similar size in the
same geographic area in the same industry. The base salary of executive officers
other than the Chief Executive Officer will ultimately be fixed by the Committee
after consultation with the Chief Executive Officer. The base salary of the
Chief Executive officer will be recommended by the Committee and approved by the
Board.
Cash Bonuses. The Company does not yet have a formal executive bonus
plan. Cash bonuses are targeted for executive officers based upon individual
performance and achievement of financial goals. For fiscal year 1996, bonuses
were based on the individual's overall performance. No specific quantitative
weight was given to any particular performance measurement. Increased bonuses
were generally given to recognize superior performance or efforts relating to
the Company's recent financings and acquisitions. The Committee plans to develop
and adopt a more formal executive bonus plan during the current fiscal year
which will be based, in part, on targeted bonuses as a percentage of the
executives' base salary and the bonuses will be paid based upon achievement of
pre-defined personal objectives and the Company's financial goals.
Stock Option Awards. The Company has granted stock options under its
various stock option plans generally at prices equal to the estimated fair
market value of the Company's common stock at the date of grant. The plans
provide for the grant by the Company of stock options, stock bonuses/purchases
17
<PAGE> 23
and stock appreciation rights to acquire under the current plan up to an
aggregate of not more than the greater of 2,333,333 shares or 20% of outstanding
common stock. Grants to executive officers are based on their responsibilities
and relative positions with the Company, and are considered an integral
component of total compensation. The Committee believes the granting of options
to be beneficial to stockholders because it increases management's interest in
the enhancement of stockholder value. Grants were proposed by the Chief
Executive Officer and reviewed by the Committee based on the individual's
overall performance. No specific quantitative weight was given to any particular
performance measure. The Committee believes that stock option grants are
necessary to retain and motivate key employees of the Company.
Chief Executive Officer Compensation. The terms of Mr. Laverty's
employment are governed by an Employment Agreement entered into by the Company
on September 1, 1995 which restates and amends the prior agreement dated
September 1, 1994. Under the Agreement, Mr. Laverty's salary was increased to
$450,000 per year. In February 1996, Mr. Laverty was granted options to purchase
an aggregate of 750,000 shares of the Company's Common Stock at an exercise
price of $9.75 which was the market value on the date of grant. The options
vest over 36 months. Mr. Laverty also agreed to extend his Employment Agreement
to April 1999. See "Employment Agreements" above. In determining Mr. Laverty's
salary, options and bonus, the Compensation Committee considered the
accomplishments of Mr. Laverty during his brief time as Chief Executive Officer,
including the completion and successful integration of four mergers, the
recruitment of an experienced senior management team, the finding of needed new
sources of capital and the significant revenue growth that has turned the
Company profitable. The Compensation Committee has also attempted to create a
comprehensive compensation package that reflects the rapid growth and change
that is occurring at the Company, as well as the considerable future demands
that will be made on the Chief Executive Officer as the Company continues this
growth. Efforts were made to assure that the Company's performance would be the
primary focus in determining Mr. Laverty's total compensation. The Compensation
Committee also considered Mr. Laverty's compensation in relation to others in
similarly situated, high growth businesses and the desire of the Board of
Directors to have Mr. Laverty's commitment for the crucial years facing the
Company.
Policy Regarding Deductibility of Compensation. Section 162(m) of the Internal
Revenue Code provides that for federal income tax purposes, the otherwise
allowable deduction for compensation paid or accrued to a covered employee of a
publicly held corporation is limited to no more than $1 million per year. The
Company is not presently affected by Section 162(m) because, for the fiscal year
ended March 31, 1996, no executive officer's base salary and bonus compensation
exceeded $1 million, and the Company does not believe that the base salary and
bonus compensation of any executive officer will exceed $1 million for fiscal
1997. Further, the 1994 Stock Incentive Plan includes provisions designed to
qualify compensation paid as a result of stock options and stock appreciation
rights (SARS) as "performance-based compensation," which is not subject to the
$1 million limit of Section 162(m). The amount of compensation realized from an
option or SAR is based on the increase in the value of the Company's stock from
the date the option or SAR is granted to the date it is exercised.
COMPENSATION COMMITTEE
Lawrence Goelman
Robert Elkins
Abbey Butler
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<PAGE> 24
UROHEALTH STOCK PRICE PERFORMANCE
The following performance graph assumes an investment of $100 on August
30, 1991 (the date that the Company became subject to Section 12 of the Exchange
Act) and compares the change to March 31, 1996 in the market price of the Common
Stock with a broad market index (Dow Jones Equity Market Index) and an industry
index (Dow Jones Medical Supplies). The Company paid no dividends during the
periods shown; the performance of the indexes is shown on a total return
(dividend reinvestment) basis. The graph lines merely connect the prices on the
dates indicated and do not reflect fluctuations between those dates.
[GRAPH APPEARS HERE]
COMPARISON OF 55 MONTH CUMULATIVE TOTAL RETURN
AMONG UROHEALTH SYSTEMS, INC., THE DOW JONES EQUITY MARKET INDEX
AND THE DOW JONES MEDICAL SUPPLIES INDEX
<TABLE>
<CAPTION>
Company Name 8/91 6/92 6/93 6/94 6/95 3/96
- - ------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Urohealth Systems, Inc. 100 243 222 109 113 152
Dow Jones Equity 100 106 122 123 155 188
Market Index
Dow Jones Medical 100 106 99 106 160 176
Supplies
</TABLE>
19
<PAGE> 25
PROPOSAL TWO -
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has recommended that the stockholders ratify the
appointment of Ernst & Young LLP to serve as independent auditors for the
Company for the fiscal year ending March 31, 1997.
Ernst & Young LLP has been the principal independent certified public
accounting firm utilized by the Company for its fiscal year ended March 31,
1996. During this time, the auditors have examined the Company's consolidated
financial statements, made limited reviews of the interim financial reports,
reviewed filings with the Securities and Exchange Commission and provided
general advice regarding related accounting matters.
In the event that ratification of this appointment of auditors is not
approved by a majority of the shares of the Company's Voting Stock voting at the
Annual Meeting in person or proxy, the Board of Directors will review its future
selection of auditors. A representative of Ernst & Young LLP is expected to be
present at the Annual Meeting, will have an opportunity to make a statement and
will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THE ADOPTION OF PROPOSAL TWO.
PROPOSAL THREE - APPROVAL OF
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE THE TOTAL NUMBER OF
AUTHORIZED SHARES
The Company's Certificate of Incorporation presently authorizes the
issuance of a total of 20,000,000 shares of Common Stock, par value $.001 per
share, and 5,000,000 shares of Preferred Stock, par value $.001 per share. Of
such 20,000,000 presently authorized shares of Common Stock, [14,155,589] shares
are issued and outstanding.
Due to the limited number of authorized shares of Common Stock
currently available for future issuance, an increase in authorized Common Stock
is essential for use in future transactions. Accordingly, the Board of Directors
has adopted a proposed amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock from 20,000,000 to
50,000,000. The number of authorized shares of preferred stock will remain at
5,000,000 shares.
In May and June 1996, the Company sold $49 million of its 8.75%
Convertible Subordinated Debentures due 2006 (the "Debentures"), which are
convertible into Common Stock of the Company. Because of the limited number of
authorized shares of Common Stock available, it is an event of default under the
Debentures if the Company fails to take actions to increase the authorized
capital stock as described herein before September 30, 1996.
The additional Common Stock, if so authorized, could be issued at the
discretion of the Board of Directors without any further action by the
stockholders, except as required by applicable law or regulation, in connection
with acquisitions, efforts to raise additional capital for the Company, and
other corporate purposes. Shares of the stock will be issued only upon a
determination by the Board of Directors that a proposed issuance is in the best
interests of the Company.
Management believes that the proposed amendment to the Certificate of
Incorporation will provide several long-term advantages to the Company and its
stockholders. The passage of the Authorized Stock Proposal will enable the
Company to satisfy its contractual commitment to the holders of the Debentures
and will enable the Company to pursue acquisitions or enter into transactions
which management believes provide the potential for growth and profit. With the
extremely limited number of shares currently available for such uses, it is
impractical for the Company to evaluate or seek to consummate business
combinations or other transactions which, if they could be accomplished, might
20
<PAGE> 26
enhance stockholder value. Additional authorized shares could be used to raise
cash assets through sales of stock to public and private investors. If
additional shares are available, transactions dependent upon the issuance of
additional shares would be less likely to be undermined by delays and
uncertainties occasioned by the need to obtain stockholder authorization prior
to the consummation of such transactions. The ability to issue shares, as deemed
in the Company's best interests by the Board, will also permit the Company to
avoid the expenses which are incurred in holding certain stockholders' meetings.
The Board has proposed a substantial increase in authorized Common
Stock of the Company. Such an increase is designed to provide flexibility to the
Company's management. However, these additional shares, if issued, will have a
substantial dilutive effect on present stockholders.
The affirmative vote of the holders of record of a majority of the
outstanding shares of Voting Stock entitled to vote thereon is necessary to
adopt the Authorized Stock Proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AUTHORIZED STOCK
PROPOSAL.
If the Authorized Stock Proposal is adopted, the first paragraph of
Article 4 of the Company's Certificate of Incorporation will read as follows:
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Fifty-Five Million (55,000,000),
consisting of Fifty Million (50,000,000) shares of Common Stock with a par value
of one-tenth of one cent ($.001) per share and Five Million (5,000,000) shares
of Preferred Stock with a par value of one-tenth of one cent ($.001) per share.
The Preferred Stock may be issued in one or more series, and the Board of
Directors is expressly authorized (i) to fix the designations, powers,
preferences, rights, including voting rights, qualifications, limitations and
restrictions with respect to any series of Preferred Stock and (ii) to specify
the number of shares of any series of Preferred Stock.
Pursuant to a Stockholders Agreement, dated May 13, 1996, certain
stockholders of the Company beneficially owning 8,683,307 shares of Common Stock
have agreed to vote in favor of the Authorized Stock Proposal.
PROPOSAL FOUR -
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF
INCORPORATION GRANTING VOTING RIGHTS TO
HOLDERS OF CONVERTIBLE SUBORDINATED DEBENTURES
On May 8, 1996, the Board of Directors approved, subject to stockholder
approval, an amendment to the Company's Certificate of Incorporation which would
grant voting rights to the holders of the Debentures. As of July 5, 1996,
Debentures convertible into 4,545,454 shares of Common Stock were outstanding.
This proposed amendment relates to the issuance and sale of the Debentures in
connection with that certain Securities Purchase Agreement, dated May 3, 1996,
between the Company and the investors identified therein (the "Investors"). The
proposed amendment provides that the holders of the Debentures will be entitled
to vote on all matters submitted to a vote of the stockholders of the
Corporation, voting together with the holders of Common Stock (and of any other
shares of capital stock of the Corporation entitled to vote at a meeting of
stockholders) as one class. Each holder of a Debenture will be entitled to a
number of votes equal to the number of votes represented by the Common Stock of
the Corporation that could then be acquired upon conversion of the Debenture
into Common Stock, subject to adjustments as provided in the Debentures. In
addition, the holders of the Debentures will be entitled to the other voting
rights specified in Article XIV of the Indenture, dated May 13, 1996, between
the Corporation and Bankers Trust Company, as trustee. Holders of the Debentures
will be deemed to be stockholders of the Corporation, and the Debentures will be
deemed to be shares of stock for the purpose of any provision of the Delaware
General Corporation Law that requires the vote of stockholders as a prerequisite
to any corporate action.
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<PAGE> 27
Section 221 of the Delaware Corporation Law permits a corporation to
confer upon the holders of debentures the power to vote in respect of the
corporate affairs and management of the corporation to the extent provided in
its certificate of incorporation. Under the present Certificate of Incorporation
of the Company, voting rights are conferred only on the Company's Common Stock
and the Company's Series C Preferred Stock. In the event that the Debenture
Voting Rights Proposal is approved, all of the outstanding Series C Preferred
Stock of the Company held by the holders of the Debentures will be exchanged for
Debentures, and the holders of the Debentures will have voting rights equivalent
to those associated with ownership of the Series C Preferred Stock currently
held by such holders. The Board of Directors of the Company proposes and
recommends that the stockholders approve this amendment to the Certificate of
Incorporation, which would allow the holders of the Debentures to vote, together
with holders of shares of the Company's Common Stock (and of any other class or
series of capital stock which shall similarly be entitled to vote with shares of
Common Stock) as a single class upon all matters upon which holders of Common
Stock are entitled to vote.
The affirmative vote of the holders of record of a majority of the
outstanding shares of Voting Stock entitled to vote thereon is necessary to
adopt the Debenture Voting Rights Proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE DEBENTURE VOTING
RIGHTS PROPOSAL.
If the Debentures Voting Rights Proposal is adopted, the following will
be inserted at the end of Article 4 of the Company's Certificate of
Incorporation:
The holders of the Corporation's 8.75% Convertible Subordinated
Debentures due 2006 (the "Debentures") which may be issued from time to time by
the Corporation, shall be entitled to vote on all matters submitted to a vote of
the stockholders of the Corporation, voting together with the holders of Common
Stock (and of any other shares of capital stock of the Corporation entitled to
vote at a meeting of stockholders) as one class. Each Debenture shall be
entitled to a number of votes equal to the number of votes represented by the
Common Stock of the Corporation that could then be acquired upon conversion of
the Debenture into Common Stock, subject to adjustments as provided in the
Debentures. In addition, the holders of the Debentures shall be entitled to the
other voting rights specified in Article XIV of the Indenture, dated May 13,
1996, between the Corporation and Bankers Trust Company, as trustee. Holders of
the Debentures shall be deemed to be stockholders of the Corporation, and the
Debentures shall be deemed to be shares of stock for the purpose of any
provision of the Delaware General Corporation Law that requires the vote of
stockholders as a prerequisite to any corporate action.
Pursuant to a Stockholders Agreement, dated May 13, 1996, certain
stockholders of the Company beneficially owning 8,683,307 shares of Common Stock
have agreed to vote in favor of the Debenture Voting Rights Proposal.
PROPOSAL FIVE -
AMENDMENT OF UROHEALTH'S
1994 STOCK INCENTIVE PLAN
A proposal to clarify the calculation of the maximum number of shares
issuable under Urohealth's 1994 Stock Incentive Plan ("1994 Plan") will be
presented to stockholders of the Company at the Annual Meeting. The 1994 Plan
currently provides that the maximum number of shares of Common Stock of the
Company subject to awards ("Stock Awards") under the 1994 Plan is equal to the
greater of 2,333,333 or 20% of the outstanding shares of Common Stock as of the
prior December 31st. Because the Company has issued convertible securities to
raise capital that have voting rights equivalent to the voting rights associated
with the underlying Common Stock, the Board of Directors has approved an
amendment to the 1994 Plan (the "1994 Plan Amendment") that would provide "for
purposes of calculating the 20% maximum, the term 'Common Stock' shall include
other securities issued by the Corporation that have
22
<PAGE> 28
voting rights on an 'as converted' basis equivalent to the voting rights
associated with the underlying Common Stock and the calculation shall be
determined with reference to the Company's current outstanding securities." On
June 15, 1996, options to purchase 2,784,858 shares of the Company's Common
Stock were outstanding under the 1994 Plan.
Equity incentives are a fundamental tool used by the Company and its
competitors to recruit and retain key employees, directors and consultants. As
of June 30, 1996, the Company had an aggregate of 480 employees. The Board of
Directors believes that the Company must continue to grant Stock Awards to
enable it to draw from and employ the best available talent in one of the most
competitive labor markets in the United States. Consequently, the Board
considers the 1994 Plan Amendment necessary to ensure the ability of the Company
to continue to grant Stock Awards to attract and retain employees of the
Company.
Approval of the 1994 Plan Amendment requires the affirmative vote of
the holders of record of a majority of the Voting Stock represented and voting,
in person or by proxy, at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ADOPTION OF
THE 1994 PLAN AMENDMENT.
The terms of the 1994 Plan and proposed changes thereto are summarized
below.
PURPOSES OF THE 1994 STOCK INCENTIVE PLAN
The purposes of the 1994 Plan are to (i) provide a means by which
selected employees of and consultants to the Company and any parent corporation
or subsidiary corporation of the Company (an "Affiliate"), as those terms are
defined in the Code, may be given an opportunity to benefit from increases in
the value of the stock of the Company through the granting of Stock Awards, (ii)
assist the Company in retaining the services of such individuals, (iii) secure
and retain the services of persons capable of performing services for the
Company and its Affiliates, and (iv) provide incentives for such persons to
exert maximum efforts for the success of the Company and its Affiliates.
ADMINISTRATION
The 1994 Plan is administered by the Board of Directors of the Company,
unless the Board delegates administration of the Plan to a committee of the
Board of Directors composed of two or more members of the Board (the
"Committee") or such lesser number as permitted by Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
satisfying the other requirements of the 1994 Plan, namely that such Committee
members be "disinterested" for purposes of Rule 16b-3. The 1994 Plan also
provides that, to the extent required by Section 162(m) of the Code, grants of
Stock Awards to any "covered employee," as such term is defined by Section
162(m) (a "Covered Employee"), shall be made only by a subcommittee of the
Committee which, in addition to meeting the other applicable requirements of the
1994 Plan, is composed solely of two or more "outside directors" (the
"Subcommittee") for purposes of Section 162(m). The Stock Option Subcommittee of
the Compensation Committee of the Board of Directors will be the Committee that
administers the 1994 Plan, since all of the members of the Subcommittee are both
disinterested for purposes of Rule 16b-3 and are outside directors for purposes
of Section 162(m) of the Code. As used herein with respect to the 1994 Plan, the
"Board" refers to the Compensation Committee (or subcommittee thereof) as well
as the Board itself.
The Board has the final power to construe and interpret the 1994 Plan
and the Stock Awards granted under it, and, subject to the provisions of the
1994 Plan, to determine the persons to whom Stock Awards will be granted
pursuant to the 1994 Plan; when and how Stock Awards shall be granted; whether a
Stock Award will be an incentive stock option, a nonstatutory stock option, a
stock grant, a restricted stock grant, a right to purchase restricted stock, a
stock appreciation right or a combination of the foregoing; the provisions of
each Stock Award granted (which need not be identical), including the time or
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<PAGE> 29
times when a person shall be permitted to purchase or receive stock pursuant to
a Stock Award; and the number of shares with respect to which Stock Awards shall
be granted to each such person.
DURATION, AMENDMENT AND TERMINATION
The Board may at any time amend or terminate the 1994 Plan, provided,
however, that no amendment or termination shall impair or alter any rights
granted under the 1994 Plan prior to such amendment or termination without the
written consent of the grantee of such rights. Any amendment of the 1994 Plan
must be approved by the stockholders of Urohealth if the amendment would (i)
materially increase the benefits accruing to participants under the 1994 Plan,
(ii) increase the maximum number of shares of Common Stock that may be acquired
in any single calendar year by any individual under the 1994 Plan, (iii)
materially increase the number of shares of Common Stock available under the
1994 Plan or to increase the number of shares of stock available for the grants
of Incentive Stock Options, or (iv) materially modify the eligibility
requirements for participation in the 1994 Plan or the class of employees
eligible to receive options under the 1994 Plan or to change the designation or
class of persons eligible to receive incentive stock options under the 1994
Plan. Unless sooner terminated, the 1994 Plan will terminate on October 7, 2004.
ELIGIBILITY
Incentive stock options may be granted only to employees (including
executive officers) of the Company or any Affiliate. Stock Awards other than
incentive stock options may be granted only to employees (including executive
officers) or independent contractors of, or consultants to, the Company or any
Affiliate.
STOCK SUBJECT TO THE 1994 PLAN
Subject to certain adjustments, the stock that currently may be issued
pursuant to Stock Awards granted under the 1994 Plan shall not exceed in the
aggregate the greater of (a) 2,333,333 shares or (b) 20% of the then outstanding
shares of Common Stock, determined as of December 31st for the ensuing twelve
month period. If approved by stockholders, the 1994 Plan Amendment would provide
that for purposes of calculating the 20% maximum, securities convertible into
Common Stock that were granted voting rights on an "as converted" basis would be
deemed to be "Common Stock" and such calculation would be determined by
reference to the then-current outstanding securities. If Stock Awards granted
under the 1994 Plan expire or otherwise terminate without being exercised, the
Common Stock not issued under such Stock Awards shall again become available for
issuance under the 1994 Plan. The 1994 Plan contains a separate limitation of
the maximum aggregate number of shares available for issuance during the life of
the Plan with respect to the exercise of incentive stock options. This
limitation equals 2,333,333 shares and will not be changed as a result of the
amendment. The closing price of the Common Stock as of July 5, 1996 was
$________ per share, as reported on the American Stock Exchange.
TERMS OF STOCK AWARDS UNDER THE 1994 PLAN
TERMS OF STOCK OPTIONS
The following is a description of the terms and conditions of stock
options permitted by the 1994 Plan. Such terms and conditions may change from
time to time, and the terms and conditions of separate options need not be
identical.
EXERCISE PRICE. The exercise price for any incentive stock option
granted under the 1994 Plan may not be less than the fair market value of the
stock subject to the option on the date of grant. However, no incentive stock
option may be granted to a person who, at the time of the grant, owns stock
constituting more than 10% of the total combined voting power of all classes of
stock entitled to vote of the Company or of an Affiliate ("10% Stockholder"),
unless the exercise price is at least 110% of the fair market value of
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<PAGE> 30
such stock on the date the option is granted and the term of the option does not
exceed five years from the grant date. The exercise price for any nonstatutory
stock option granted under the 1994 Plan may not be less than 85% of the fair
market value of the stock subject to the option on the date the option is
granted; provided, however, that the exercise price of each stock option granted
to a Covered Employee shall not be less than 100% of the fair market value of
the Common Stock subject to the option on the date the option is granted.
In the event of a decline in the value of a share of Common Stock of
the Company, the Board has the authority to offer optionees the opportunity to
replace outstanding higher-priced options with new lower-priced options,
provided, however, that any replaced options still count against the per
employee limit described below on the number of shares of Common Stock that may
be granted to an individual in the form of options in a given calendar year.
CONSIDERATION. The exercise price of options granted under the 1994
Plan must be paid either (i) in cash or by check, bank draft or money order at
the time the option is exercised, (ii) by delivery of shares of Common Stock
(valued at fair market value) owned by optionee or with shares of Common Stock
(valued at fair market value) withheld from the shares otherwise deliverable to
optionee upon exercising the option, (iii) by delivery of an irrevocable
direction to a securities broker to sell shares of Common Stock and deliver the
proceeds to the Company, (iv) by delivery of a promissory note with such terms
as the Committee requires, or (v) in any combination of the foregoing.
OPTION EXERCISE. Options granted under the 1994 Plan may be immediately
exercisable or allotted in periodic installments as determined by the Board. If
the total number of shares subject to an option is allotted in periodic
installments, then during each installment period, the option may become
exercisable with respect to some or all of the shares allotted to that period
and may be exercised with respect to some or all of the shares allotted to that
period and any prior period for which the option was not fully exercised.
TERM. The term of an incentive stock option granted under the 1994 Plan
will not exceed ten years; provided that the term of any incentive stock option
granted to a 10% Stockholder will not exceed five years.
TERMINATION OF OPTION. Although subject to the Board's discretion,
optionees generally earn the right to exercise their options by remaining as
employees, independent contractors or consultants to the Company or an
Affiliate. In addition, generally an option will terminate three months after
the optionee ceases to be employed by the Company or an Affiliate or ceases to
act as an independent contractor or consultant when (i) termination is due to
such person's permanent or total disability (as defined in the Code), in which
case the option may, but need not, provide that it may be exercised at any time
within one year of such termination; or (ii) the optionee dies while employed by
or while serving as a consultant to the Company or an Affiliate, in which case
the option may, but need not, provide that it may be exercised by the person or
persons to whom the rights of such option pass by will or the laws of descent or
distribution within one year of the optionee's death; or (iii) the option by its
terms specifically provides either (A) that it will terminate sooner than three
months after termination of the optionee's employment or relationship as a
consultant or director or (B) that it may be exercised more than three months
after termination of the optionee's relationship with the Company or an
Affiliate.
NONTRANSFERABILITY. To the extent required by Rule 16b-3, an option or
SAR may not be transferred by the holder other than by will or by the laws of
descent and distribution. If Rule 16b-3 is amended to permit broader
transferability of options or SARs, the Board may authorize such broader
transferability, subject to any limitations in the Code and Regulations
applicable to incentive stock options.
LIMITATION. No individual may be granted options or SARs or purchase
restricted stock (if purchased at the fair market value of the stock on the date
of purchase or if vesting is subject to the
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<PAGE> 31
satisfaction of performance goals) under the 1994 Plan representing more than
400,000 shares of Common Stock in any single calendar year.
TERMS OF STOCK PURCHASES AND BONUSES AND STOCK APPRECIATION RIGHTS
GENERAL. The Board shall have the authority to grant Stock Awards under
the 1994 Plan in the form of stock grants, restricted stock grants, through the
sale of restricted stock or through the issuance of SARs. The terms of the stock
grant, restricted stock grant, restricted stock purchase agreement or SAR may
change from time to time and may vary between participants; however, each shall
include the substance of the following provisions:
CONSIDERATION. The purchase price under each restricted stock purchase
agreement shall be such amount as the Board shall determine and designate in
such agreement. Stock grants, restricted stock grants and SARs will be awarded
pursuant to a stock grant, restricted stock grant or SAR agreement. The purchase
price for stock acquired pursuant to a stock purchase agreement shall be paid
either in cash at the time of purchase or, at the discretion of the Board,
according to a deferred or other arrangement, or in any other form of legal
consideration that may be acceptable to the Board.
REPURCHASE OPTION BY UROHEALTH. Stock sold or awarded under the 1994
Plan may, but need not, be subject to a repurchase option in favor of Urohealth
in accordance with a vesting schedule to be determined by the Board. Should a
participant cease to be an employee, independent contractor or consultant of the
Company or an Affiliate, then the Company may, in its discretion, decide to
repurchase or otherwise acquire any stock which has not vested as of the date of
termination.
LIMITATION. In the event of the sale or grant of stock or restricted
stock at less than the fair market value of the stock at the date of sale or
grant, which sale or grant is conditioned on the satisfaction of performance
goals (which may be measured in one year periods or multiple year periods), the
aggregate excess of the fair market value of such stock over the purchase price
thereof may not exceed a per individual aggregate of $500,000.
PERFORMANCE-BASED COMPENSATION. Under the 1994 Plan, the Board is
authorized to grant Stock Awards to Covered Employees consisting of stock grants
or restricted stock grants that qualify as performance-based compensation under
Section 162(m) of the Code, such that the issuance of, or the lapsing of
restrictions on or the vesting of, such Stock Awards is contingent upon
attainment of pre-established, objective performance goals. The 1994 Plan
provides that the performance goals to be used in connection with such Stock
Awards will be revenues and operating profit of the Company, as determined in
the sole discretion of the Board.
ADJUSTMENT PROVISIONS
If any change is made in the stock subject to the 1994 Plan or subject
to any Stock Award granted under the 1994 Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend (in excess of 2%), dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Board shall make appropriate adjustments in the classes and maximum number of
shares subject to the 1994 Plan and the classes, number of shares and price per
share of stock subject to outstanding Stock Awards in order to preserve but not
to increase the benefits of such outstanding Stock Awards.
In the sole discretion of the Board and to the extent permitted by
applicable law, any stock option, SAR, stock bonus or any stock purchase
agreement evidencing any of the above may provide that, in the event of a change
in control of the Company (i) any outstanding options or SARs covered by such an
agreement shall be fully vested, nonforfeitable and exercisable, and (ii) any
restricted stock covered by such an agreement shall be released from
restrictions on transfer and repurchase or forfeiture rights. However, an
outstanding option may not be accelerated by the Board if and to the extent such
option is, in
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<PAGE> 32
connection with the transaction giving rise to the change of control, either
assumed or replaced by the successor. A change in control is defined in the 1994
Plan to include (i) the acquisition of beneficial ownership (as defined in the
Securities Exchange Act of 1934) of 50% or more of the combined voting power of
the Company's then outstanding voting securities; (ii) a change in the
composition of the Board of Directors over a period of 36 months or less such
that the majority of the members cease, by reason of one or more contested
elections for Board membership or by one or more actions by written consent of
stockholders, to be comprised of individuals who have been (A) Board members
continuously since the beginning of such period or (B) have been elected or
nominated for election as Board members during such period by at least a
majority of the Board members described in clause "(A") who were still in office
at the time such election or nomination was approved by the Board; (iii)
approval by the Company's stockholders of a merger or consolidation in which the
Company is not the surviving company, except for a transaction the principal
purpose of which is to change the state in which the Company is incorporated;
(iv) approval by the Company's stockholders of the sale, transfer or other
disposition of the assets of the Company or the complete liquidation or
dissolution thereof; or (v) approval by Company's stockholders of any reverse
merger in which the Company survives as an entity but in which securities
possessing more than 50% of the total combined voting power of the Company's
then outstanding securities are transferred to a person or persons different
from those who held such securities immediately prior to such merger.
If the Board incorporates a change of control provision in any option
or SAR agreement, such agreement shall provide that, in the event of a change in
control as described in clauses (i), (ii) and (v) above, the option or SAR shall
remain exercisable for the remaining term of the option. Further, in the event
of a change in control as described in clauses (iii) or (iv) above, the option
or SAR shall terminate as of the effective date of such change in control. In no
event shall any option or SAR be exercised after the expiration of the term
provided for in the related stock option or SAR agreement. In its discretion,
the Board may provide that in the event of a change of control, any outstanding
option or SAR will be fully vested, nontransferable and become exercisable, and
that any restricted stock shall be released from restrictions on transfer and
repurchase and forfeiture rights.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO STOCK AWARDS GRANTED UNDER THE 1994
PLAN
INCENTIVE STOCK OPTIONS
Incentive stock options under the 1994 Plan are intended to be eligible
for the federal income tax treatment accorded "incentive stock options" under
Section 422 of the Code. Incentive stock options generally have the following
tax consequences:
There are generally no federal income tax consequences to the optionee
or the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock for more than two years from the date on
which the option is granted and more than one year from the date on which the
shares are transferred to the optionee upon exercise of the option, any gain or
loss on a disposition of such stock will be long term capital gain or loss. In
this event, the Company will not be allowed a business expense deduction with
respect to the disposition of shares. However, if the optionee disposes of the
stock before the expiration of either of the above-stated holding periods (a
"disqualifying disposition"), at the time of disposition the optionee will
realize taxable ordinary income equal to the lesser of (i) the excess of the
fair market value on the date of exercise over the exercise price, or (ii) the
optionee's actual gain, if any, on the purchase and sale. The optionee's
additional gain or any loss upon the disqualifying disposition will be a capital
gain or loss which will be long-term or short-term depending on whether the
stock was held for more than one year. Slightly different rules may apply to
optionees who acquire stock subject to certain repurchase options or who are
subject to Section 16(b) of the Exchange Act.
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<PAGE> 33
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will be entitled (subject to the
requirement of reasonableness and perhaps, in the future, the satisfaction of a
withholding obligation) to a corresponding business expense deduction in the tax
year in which the disposition occurs.
NONSTATUTORY STOCK OPTIONS
Nonstatutory Stock Options under the 1994 Plan generally have the
following federal income tax consequences:
There generally are no tax consequences to the optionee or the Company
by reason of the grant of a nonstatutory stock option. Upon exercise of a
nonstatutory stock option, the optionee will recognize taxable ordinary income
equal to the excess of the stock's fair market value on the date of exercise
over the exercise price. Generally, with respect to employees, the Company is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. the Company will be entitled to a
business expense deduction equal to the taxable ordinary income recognized by
the optionee. Upon disposition of stock, the optionee will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon exercise of the option. Such gain or loss will be long or short term
depending on whether the stock was held for more than one year. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
STOCK PURCHASES AND BONUSES AND STOCK APPRECIATION RIGHTS
Stock grants, restricted stock grants, restricted stock purchases and
SARs granted under the 1994 Plan have the following federal income tax
consequences:
Generally, a recipient of stock under the 1994 Plan would recognize
ordinary income equal to the difference between the market value of the stock on
the grant or purchase date and any amount paid or required to be paid for the
stock. If the stock is restricted and subject to vesting, then the recipient of
the stock would recognize ordinary income as the restrictions are removed and
the stock vests. On each vesting date, the recipient would recognize ordinary
income equal to the difference between the fair market value of the shares of
stock that have vested on such date and any amount paid or required to be paid
for the shares of stock. The recipient of the stock would not recognize any
income to the extent the rights to the stock have not vested. A recipient of
stock under the 1994 Plan, however, may make a Section 83(b) election whereby
the recipient elects to be taxed at the grant date at ordinary income rates on
the difference between the fair market value of the stock on the grant or
purchase date (such valuation taking into account the restrictions, if any, on
the stock and the risk of forfeiture thereof) and any amount paid by the
recipient for the stock.
With respect to employees, the Company is required to withhold from
regular wages or supplemental wage payments an amount based on the ordinary
income recognized. Subject to the requirement of reasonableness and the
satisfaction of any withholding obligation, the Company will be entitled to a
business expense deduction equal to the taxable ordinary income realized by the
recipient.
Upon disposition of stock, the recipient will recognize a capital gain
or loss equal to the difference between the selling price and the sum of the
amount paid for such stock plus any amount recognized as ordinary income. Such
gain or loss will be long or short term depending on whether the stock was held
for more than one year.
STOCK APPRECIATION RIGHTS
28
<PAGE> 34
Recipients of stock appreciation rights generally should not recognize
income until such rights are exercised (assuming there is no ceiling on the
value of the right). Upon exercise, the participating individual will normally
recognize ordinary compensation income for federal income tax purposes equal to
the amount of cash and the fair market value of stock, if any, received upon
such exercise. Participating individuals who are employees will be subject to
withholding with respect to income recognized upon exercise of a stock
appreciation right.
The Company will be entitled to a tax deduction to the extent and in
the year that ordinary income is recognized by the participating individual, so
long as the Company withholds the appropriate taxes with respect to such income
and the individual's total compensation is deemed reasonable in amount.
Participating individuals will recognize gain upon the disposition of
any stock received on exercise of a stock appreciation right equal to the excess
of (a) the amount realized on such disposition over (b) the ordinary income
recognized with respect to such stock under the principles set forth above. That
gain will be taxable as long or short term capital gain depending on whether the
stock was held for at least one year. See the discussion of the taxation of
capital gains and losses under "Incentive Stock Options" above.
OTHER TAX CONSEQUENCES
The foregoing discussion is not a complete description of the federal
income tax aspects of Stock Awards granted under the 1994 Plan. In addition,
administrative and judicial interpretations of the application of the federal
income tax laws are subject to change. Furthermore, no information is given with
respect to state or local taxes that may be applicable.
Participants in the 1994 Plan who are residents of or are employed in a
country other than the United States may be subject to taxation in accordance
with the tax laws of that particular country in addition to or in lieu of Untied
States federal income taxes.
NEW PLAN BENEFITS
Because stock awards under the 1994 Plan are discretionary, the
benefits to be received under the plan by any director, officer or employee of
the Company cannot presently be determined.
PROPOSAL SIX -
APPROVAL OF 1996 DIRECTORS' STOCK
INCENTIVE PLAN
A proposal to approve the adoption of Urohealth's 1996 Director's Stock
Incentive Plan (the "Directors' Plan") will be presented to the stockholders of
the Company at the Annual Meeting. Subject to stockholder approval, the Board of
Directors of the Company, on July 2, 1996, approved the Directors' Plan, which
authorizes the issuance of up to 300,000 shares of Common Stock in the form of
stock options (the "Options") to non-employee directors of the Company.
The Board of Directors believes that the Directors' Plan is in the best
interest of the Company, because the existing plan is outdated in light of
changes to applicable law, fails to adequately compensate directors for their
services and has few remaining shares available for grant. The Board of
Directors believes that the Directors' Plan will assist the Company in its
efforts to recruit and retain qualified directors and will more closely align
the Director's interest with those of the stockholders through increased stock
ownership.
Approval of the Directors' Plan requires the affirmative vote of the
holders of record of a majority of the Voting Stock represented and voting, in
person or by proxy, at the Annual Meeting.
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<PAGE> 35
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ADOPTION OF
THE DIRECTORS' PLAN PROPOSAL.
The terms of the Directors' Plan are summarized below.
DESCRIPTION OF THE DIRECTORS' PLAN
Under the Directors' Plan each non-employee director of the Company (a
"Non-Employee Director") will receive a nonqualified option to purchase 7,500
shares of Common Stock (an "Initial Grant") on August 15, 1995, or, if later,
upon his or her first election or appointment to the Board of Directors. In
addition, the Directors' Plan provides that each Non-Employee Director who is a
director immediately prior to an annual meeting of the Company's stockholders
and who continues to be a director after such meeting will be granted an option
to purchase 7,500 shares of Common Stock (a "Subsequent Grant"); provided that
no Subsequent Grant will be made to any Non-Employee Director who has not served
as a director of the Company, as of the time of such annual meeting, for at
least one year. Each Subsequent Grant will be made on the date of the annual
stockholders' meeting in question.
The exercise price per share of each option granted under the
Directors' Plan will be the fair market value of the Company's Common Stock on
the date the option is granted. Payment of the exercise price of any option to
purchase Common Stock granted under the Directors' Plan may be made in whole or
in part in (i) cash, (ii) Common Stock held by the Non-Employee Director or
withholding of shares otherwise deliverable upon exercise, or (iii) by delivery
of an irrevocable direction to a broker to sell shares and deliver all or a
portion of the proceeds to the Company in payment for the Common Stock. The term
of each option will be ten years from the grant date.
Options granted under the Directors' Plan vest on the first anniversary
of the date of grant, subject to earlier vesting upon a change of control or
corporate transaction. Under the plan, a "change of control" occurs upon (i) the
acquisition of more than 50% of the voting power of the Company by any person or
(ii) a change in the composition of the members of the Board over a three year
period to include a majority of persons not serving on the Board at the
beginning of the period or nominated by such persons. Under the plan a
"corporate transaction" consists of (i) a merger or consolidation in which the
Company is not the surviving entity, (ii) the sale of all or substantially all
of the assets of the Company, or (iii) any reverse merger in which the Company
is the surviving entity in which holders of the Company's voting securities
prior to the merger do not own at least 50% of the voting power in the Company
after the merger.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO NONSTATUTORY STOCK OPTIONS GRANTED
UNDER THE DIRECTORS' PLAN
There generally are no tax consequences to the optionee or the Company
by reason of the grant of a nonstatutory stock option. Upon exercise of a
nonstatutory stock option, the optionee will recognize taxable ordinary income
equal to the excess of the stock's fair market value on the date of exercise
over the exercise price. The Company will be entitled to a business expense
deduction equal to the taxable ordinary income recognized by the optionee. Upon
disposition of stock, the optionee will recognize a capital gain or loss equal
to the difference between the selling price and the sum of the amount paid for
such stock plus any amount recognized as ordinary income upon exercise of the
option. Such gain or loss will be long or short term depending on whether the
stock was held for more than one year. Slightly different rules may apply to
optionees who acquire stock subject to certain repurchase options or who are
subject to Section 16(b) of the Exchange Act.
30
<PAGE> 36
NEW PLAN BENEFITS
1996 DIRECTORS' STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE ($) NUMBER OF UNITS
----------------- ---------------- ---------------
<S> <C> <C>
Non-Executive Director Group 0 60,000*
</TABLE>
- - -----------------------
* Reflects grants of options to purchase 7,500 shares of Common Stock to
each Director, except Dr. Blutt and Mr. Gross, on August 15, 1996 upon
approval of the Directors' Plan Proposal. Annual grants thereafter are
not presently determinable. All options have an exercise price equal to
the fair market value of the underlying Common Stock on the date of
grant.
OTHER BUSINESS
The Board of Directors is not aware of any other matters to come before
the Annual Meeting. If any matter not mentioned herein is properly brought
before the meeting, the persons named in the enclosed proxy will have
discretionary authority to vote all proxies with respect thereto in accordance
with their judgment.
STOCKHOLDER PROPOSALS FOR THE
1997 ANNUAL MEETING
Stockholders who may wish to present proposals for inclusion in the
Company's proxy materials and for consideration at the 1997 Annual Meeting of
Stockholders must submit such proposals in writing to the Secretary at the
address shown at the top of page one above not later than January __, 1997.
DIRECTORS' APPROVAL AND CERTIFICATE
The contents and sending of this Proxy Statement have been approved by
the Company's Board of Directors.
A stockholder wishing to be represented by proxy at the meeting or any
adjournment thereof must deposit its duly executed form of proxy with the
Company's transfer agent and registrar, American Stock Transfer and Trust
Company, 40 Wall Street, New York, New York 10005, on or before the close of
business on the last day preceding the day of the meeting or any adjournment
thereof at which the proxy is to be voted, or deliver it to the Chairman of the
Meeting on the day of the meeting or any adjournment thereof prior to the time
of voting.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS AVAILABLE WITHOUT CHARGE UPON WRITTEN
REQUEST TO THE CHIEF FINANCIAL OFFICER, UROHEALTH SYSTEMS, INC., 5 CIVIC PLAZA,
SUITE 100, NEWPORT BEACH, CALIFORNIA 92660.
By Order of the Board of Directors
Newport Beach, California Kevin M. Higgins
July ___, 1996 Secretary
31
<PAGE> 37
APPENDIX 1
UROHEALTH SYSTEMS, INC.
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS OF UROHEALTH SYSTEMS, INC. TO BE HELD ON JULY 25,
1996.
The undersigned hereby appoints Charles A. Laverty, James L. Johnson
and Kevin M. Higgins, each with full power of substitution, as proxy of the
undersigned, to attend the Annual Meeting of Stockholders of UROHEALTH SYSTEMS,
INC. (the "Company") to be held at the corporate offices located at 5 Civic
Plaza, Suite 100, Newport Beach, California 92660 at 10:00 a.m. local time, and
at any and all adjournments thereof, and to vote all Common Stock of the
Company, as designated on the reverse side of this proxy, with all powers the
undersigned would possess if personally present at the meeting.
This proxy will be voted or withheld from being voted in accordance
with the instructions specified. Where no choice is specified, this proxy will
confer discretionary authority and will be voted FOR the nominees listed on the
reverse side hereof and FOR approval of Proposals 2, 3, 4, 5 and 6. This proxy
confers authority for the above named persons to vote in his discretion with
respect to amendments or variations to the matters identified in the notice of
meeting accompanying this proxy and other matters which may properly come before
the meeting. A stockholder has the right to appoint a person, who need not be a
stockholder, to attend and act on his behalf at the meeting, other than the
person designated in this form of proxy, such right may be exercised by
inserting the name of such person in the blank space provided.
SEE REVERSE SIDE
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
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<PAGE> 38
PLEASE MARK
/X/ YOUR VOTES AS
IN THIS EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSALS
AND NOMINEES:
FOR WITHHELD
1. Election of Directors
/ / / /
NOMINEES: Charles A. Laverty, Mitchell J. Blutt,
M.D., Abbey J. Butler, John Chamberlin, Robert W.
Elkins, M.D., Melvyn J. Estrin, C. Sage Givens,
Lawrence Goelman, Michael S. Gross, James B. Osbon,
Julian W. Osbon, Francis J. Tedesco and Gerald W. Timm
For, except vote withheld from the following nominee(s);
- - ---------------------
FOR AGAINST ABSTAIN
2. RATIFICATION of the selection of Ernst & / / / / / /
Young LLP as the independent auditors of the
Company for the fiscal year ended March 31, 1997.
3. APPROVAL of an amendment to the Company's / / / / / /
Certificate of Incorporation to increase the total
number of authorized shares to 55,000,000,
consisting of 50,000,000 shares of Common Stock,
par value $.001 per share and 5,000,000 shares of
Preferred Stock, par value $.001 per share.
4. APPROVAL of amendment to the Company's / / / / / /
Certificate of Incorporation to entitle the holders of
the Company's 8.75% Convertible Subordinated
Debentures due 2006 to vote on all matters
submitted to a vote of the stockholders of the
Company, voting together with the holders of
Common Stock (and any other shares of capital
stock of the Company entitled to vote at a meeting
of stockholders) as one class.
5. APPROVAL of an amendment to the Company's / / / / / /
1994 Stock Incentive Plan to clarify that when
determining the maximum number of shares
issuable under the plan, that the Company's
Convertible Subordinated Debentures and other
securities that vote with the holders of Common
Stock on an "as converted" basis are included in the
calculation.
6. APPROVAL of the adoption of the 1996 / / / / / /
Directors' Stock Incentive Plan to permit the
issuance of options to the Company's non-
employee directors into an aggregate of 300 shares
of Common Stock.
Please sign, date and return the proxy card
promptly in the enclosed envelope.
________________________________________ DATE ___________________________, 1996
Please Sign Here Signature (if held jointly)
NOTE: Please sign exactly as name appears. When signing as executor,
administrator, attorney, trustee or guardian please give your full title as
such. If a corporation, please sign in full corporation name by president or
other authorized officer. If a partnership, please sign in partnership name by
authorized person. If a joint tenancy, please have both tenants sign.
33
<PAGE> 39
Appendix 2
UROHEALTH SYSTEMS, INC.
1996 DIRECTORS' NON-QUALIFIED STOCK INCENTIVE PLAN
1. Establishment and Purpose.
(a) UROHEALTH Systems, Inc., a Delaware corporation (the
"Company"), hereby adopts its 1996 Directors' Stock Incentive Plan. The Plan is
intended to provide a means whereby eligible members of the Board may be given
an opportunity to purchase shares of Stock pursuant to options which are not
intended to qualify as incentive stock options under Section 422 of the Code.
(b) The purpose of the Plan is to enable the Company to
attract qualified individuals to serve as members of the Board, to provide
additional performance incentives to such individuals while serving as
directors, and to encourage their continued service on the Board.
2. Definitions.
As used herein, the following definitions shall apply:
(a) "Affiliate" shall mean any parent or subsidiary
corporations of the Company, as defined in Sections 424(e) and (f) of the Code
(but substituting "the Company" for "employer corporation"), including parents
or subsidiaries of the Company that become such after adoption of the Plan.
(b) "Board" shall mean the Board of Directors of the
Company.
(c) "Change in Control" shall mean a change in ownership
or control of the Company effected through either of the following transactions:
- the direct or indirect acquisition by any
Person or related group of Persons (other than an acquisition from or
by the Company or by a Company-sponsored employee benefit plan or by a
Person or related group of Persons that directly or indirectly
controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of
the Exchange Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities, or
- a change in the composition of the Board
over a period of thirty-six (36) months or less such that a majority of
the Board members (rounded up to the next whole number) ceases, by
reason of one or more contested elections for Board
<PAGE> 40
membership, to be comprised of individuals who either (a) have been
Board members continuously since the beginning of such period or (b)
have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (a) who were still in office at the time such election or
nomination was approved by the Board.
(d) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(e) "Company" shall mean UROHEALTH Systems, Inc., a
Delaware corporation.
(f) "Continuous Status as a Director" shall mean the
absence of any interruption or termination of service as a Director.
(g) "Corporate Transaction" shall mean any of the
following stockholder-approved transactions to which the Company is a party:
- a merger or consolidation in which the
Company is not the surviving entity, except for a transaction the
principal purpose of which is to change the state in which the Company
is incorporated,
- the sale, transfer or other disposition of
all or substantially all of the assets of the Company (including the
capital stock of the Company's subsidiary corporations) in complete
liquidation or dissolution of the Company, or
- any reverse merger in which the Company is
the surviving entity but in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities are transferred to a Person or Persons different
from those who held such securities immediately prior to such merger.
(h) "Director" shall mean a member of the Board.
(i) "Effective Date" shall mean the date this Plan is
adopted by the Board.
(j) "Employee" shall mean any person who is an employee
of the Company, or any Affiliate of the Company, for purposes of tax withholding
under the Code. The payment of a director's fee by the Company shall not be
sufficient to render the recipient of such fee an Employee.
(k) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(l) "Fair Market Value" shall mean the price which the
Board acting in good faith determines through any reasonable valuation method
that a share of Stock might change
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hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or to sell and both having reasonable knowledge of the
relevant facts; provided, however, that where there exists a public market for
the Stock at the time of such determination, the Fair Market Value shall be the
average of the closing bid and asked prices of a share of Stock quoted in the
Over-The-Counter Market Summary or the last reported sale price of a share of
Stock or the closing price of a share of Stock quoted on The American Stock
Exchange, The Nasdaq National Market or on any exchange on which the Stock is
then listed, whichever is applicable, as published in the Western Edition of The
Wall Street Journal on the trading day prior to the date of determination of
Fair Market Value.
(m) "Option" shall mean an option to purchase shares of
Stock granted pursuant to the Plan.
(n) Option Certificate" shall mean the written
certificate setting forth the terms of an Option in the form attached as Exhibit
A hereto.
(o) "Optionee" shall mean an Outside Director who
receives an Option.
(p) "Outside Director" shall mean a Director who is not
an Employee.
(q) "Person" shall mean a natural person, corporation,
partnership, limited liability company, joint venture, trust, or any other
entity and any government or instrumentality of a government.
(r) "Plan" shall mean this UROHEALTH Systems, Inc. 1996
Directors' Stock Incentive Plan.
(s) "Securities Act" shall mean the Securities Act of
1933, as amended.
(t) "Stock" shall mean the Common Stock, $.001 par value
per share, of the Company.
3. Stock Subject to the Plan.
Subject to the provisions of Section 12 of the Plan, the
maximum number of shares of Stock which may be made subject to Options and sold
under the Plan is 300,000 shares of Stock. If an Option expires or becomes
unexercisable for any reason and has not been exercised in full, the Stock
subject to such Option shall be available for future grant under the Plan. If
Stock which was acquired upon exercise of an Option is subsequently repurchased
by the Company, such Stock shall not be available for future grants under the
Plan.
4. Interpretation and Administration of the Plan.
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(a) The Plan shall be administered (the "Adminstrator")
by (i) the Board or (ii) a committee designated by the Board, which committee
shall be constituted in such a manner as to satisfy the applicable laws and to
permit such grants and related transactions under the Plan to be exempt from
Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board.
(b) Subject to applicable laws, the provisions of the
Plan (including any other powers given to the Administrator hereunder) and
except as otherwise provided by the Board, the Administrator shall have the
authority, in its discretion:
to select the directorsd to whom Options may from
time to time be granted hereunder;
to determine whether and to what extent Options are
granted hereunder;
to determine the number of shares of Common Stock to
be covered by each Option granted hereunder;
to approve forms of Option Agreements for use under
the Plan;
to determine the terms and conditions of any Option
granted hereunder;
to amend the terms of any outstanding Option granted
under the Plan including a reduction in the exercise price (or base amount on
which appreciation is measured) of any Award to reflect a reduction in the Fair
Market Value of the Common Stock since the grant date of the Award, provided
that any amendment that would adversely affect the Grantee's rights under an
outstanding Award shall not be made without the Grantee's written consent;
to construe and interpret the terms of the Plan and
Options granted pursuant to the Plan; and
to take such other action, not inconsistent with the
terms of the Plan, as the Administrator deems appropriate.
(c) All decisions, determinations and interpretations of
the Administrator shall be final and binding on the Optionees and any other
holders of Options intended by the Administrator to be affected thereby.
5. Option Grants.
(a) All grants of Options hereunder shall be made in
accordance with the provisions of this Section 5.
(b) An option to purchase 7,500 shares of Stock shall be
granted ("Initial Grant") to each Outside Director, such Initial Grant to be
made (i) to the then existing Outside
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Directors on August 15, 1996, and (ii) to other Outside Directors elected or
appointed to the Board after the Approval Date on the date each such Outside
Director first becomes an Outside Director of the Company. Beginning with the
1997 annual meeting of the Company's stockholders and thereafter at each
subsequent annual meeting of the Company's stockholders, each Outside Director
who continues as an Outside Director immediately following each such annual
meeting shall be granted an option to purchase 7,500 shares of Stock
("Subsequent Grant"); provided that no Subsequent Grant shall be made to any
Outside Director who has not served as an Outside Director of the Company, as of
the time of such annual meeting, for at least one year. Each Subsequent Grant
shall be made on the date of the annual stockholders' meeting in question. If
any Option ceases to be exercisable in whole or in part, the shares which were
subject to such Option, but as to which the Option had not been exercised, shall
continue to be available under the Plan.
6. Terms and Conditions of Options.
(a) Each Option granted pursuant to the Plan shall be
evidenced by an Option Certificate executed by the Company and the Optionee.
(b) The exercise price per share of Options granted under
the Plan shall be 100% of the Fair Market Value per share of Stock on the date
of grant of the Option, subject to adjustment to the extent provided in Section
12 hereof.
(c) Subject to the provisions in the Option Certificate
and Sections 10(e) and 10(f) hereof, each Option shall vest and become
exercisable twelve (12) months after the date of grant.
(d) The term of each Option shall be ten (10) years from
the date of grant, unless a shorter period is required to comply with any
applicable law, in which case such shorter period shall apply.
7. Eligibility.
Options may be granted only to Outside Directors. No Optionee
shall have any rights as a stockholder of the Company as a result of the grant
of an Option under the Plan or his or her exercise of such Option pending the
actual issuance by the Company of the Stock subject to such Option. The Plan
shall not confer upon any Outside Director any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights that the Director or the Company
may have to terminate his or her directorship at any time.
8. Term of Plan; Effective Date.
The Plan shall become effective on the Effective Date, subject
to approval of the Plan by the stockholders of the Company. If the Effective
Date precedes such stockholder approval any Option granted under the Plan prior
to such approval shall be conditioned upon
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approval by stockholders of the Plan. Options may be granted under the Plan at
any time on or before the tenth anniversary of the date of adoption of the Plan.
9. Payment Upon Exercise.
Payment of the exercise price upon exercise of any Option may
be made (i) in cash, (ii) by delivery on a form prescribed by the Board of an
irrevocable direction to a securities broker approved by the Board to sell
shares and deliver all or a portion of the proceeds to the Company in payment
for the Stock; (iii) with shares of Stock owned by the Optionee or withholding
of shares otherwise deliverable to the Optionee upon exercise of the Option; or
(iv) any combination of the foregoing. Any stock used to exercise an Option
shall be valued at its Fair Market Value on the date of the exercise of the
Option.
10. Exercise of Option.
(a) An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option Certificate by the person entitled to exercise the
Option and full payment for the Stock has been received by the Company in
accordance with Section 9 hereof. An Option may not be exercised for a fraction
of a share of Stock.
(b) If an Optionee ceases to serve as a Director (other
than as a result of disability, death or following a Change in Control), he or
she may, but only within three (3) months after the date he or she ceases to be
a Director, exercise his or her then outstanding Options to the extent that he
or she was entitled to exercise them at the date of such termination.
Notwithstanding the foregoing, in no event may any Option be exercised after the
expiration of its term set forth in Section 6. To the extent that the Optionee
was not entitled to exercise an Option at the date of such termination, or does
not exercise such Option (that he or she was entitled to exercise) within the
time specified herein, the Option shall terminate.
(c) Notwithstanding the provisions of Section 9(b) above,
in the event an Optionee is unable to continue his or her service as a Director
as a result of his or her total and permanent disability (as defined in Section
22(e)(3) of the Code), he or she may, within twelve (12) months from the date of
such termination, exercise his or her then outstanding Options to the extent he
or she was entitled to exercise them at the date of such termination.
Notwithstanding the foregoing, in no event may any Option be exercised after the
expiration of its term set forth in Section 6. To the extent that the Optionee
was not entitled to exercise the Option at the date of termination, or if
Optionee does not exercise such Option (that he or she was entitled to exercise)
within the time specified herein, the Option shall terminate.
(d) If during the term of his or her Option, an Optionee
(A) dies and had been in Continuous Status as a Director at the time of his or
her death, or (B) dies within three (3) months after termination of Continuous
Status as a Director, the Option may be exercised at any time within twelve (12)
months following the date of the Optionee's death by the Optionee's personal
representative or by a person who acquired the right to exercise the Option by
bequest
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or intestate succession, but only to the extent the Optionee was entitled to
exercise the Option at the time of his or her termination of Continuous Status
as a Director. Notwithstanding the foregoing, in no event may the Option be
exercised after the expiration of the term set forth in Section 6.
(e) Should any Corporate Transaction occur while an
Optionee remains in Continuous Status as a Director, then each outstanding
Option held by such Optionee shall become fully exercisable, immediately prior
to the specified effective date of such Corporate Transaction, for all or any
portion of the shares at the time represented by such Option and may be
exercised with respect to any or all of such shares represented by the Option
prior to the specified effective date of such Corporate Transaction. Immediately
following the consummation of the Corporate Transaction, each such option shall
terminate unless assumed by the successor company or its parent.
(f) Should a Change in Control occur while an Optionee
remains in Continuous Status as a Director, then each outstanding Option held by
such Optionee shall become fully exercisable, immediately prior to the effective
date of such Change in Control, for all of the shares at the time subject to
such Option and may be exercised with respect to any or all of such shares
represented by the Option. The Option shall remain so exercisable until the
expiration or sooner termination of the Option term.
11. Nontransferability of Options.
Options hereunder shall be transferable to the extent
permitted under the Option Agreement.
12. Adjustment Upon Changes in Capitalization.
In the event that the number of outstanding shares of Stock of
the Company is changed through merger, consolidation, reorganization,
recapitalization, reincorporation, stock split, stock dividend (in excess of two
percent) or other change in the capital structure of the Company without
consideration, the number of shares of Stock available under the Plan, the
number of shares of Stock deliverable in connection with any Option and the
exercise price per share of such Option shall be proportionately adjusted;
provided however, that no certificate or scrip representing fractional shares
shall be issued and any resulting fractions of a share shall be ignored.
13. Amendment and Termination of the Plan.
(a) The Board may amend the Plan from time to time in
such respects as the Board may deem advisable; provided, however, that to the
extent necessary to comply with any other applicable law or regulation, the
Company shall obtain approval by the Company's stockholders to amend the Plan to
the extent and in the manner required by such law or regulation. Notwithstanding
the foregoing, the provisions set forth in Sections 5 and 6 of the Plan shall
not be amended periodically and in no event more than once every six (6) months,
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other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or any applicable rules and regulations
thereunder.
(b) The Board, without further approval of the
stockholders, may at any time terminate or suspend the Plan. Except as otherwise
provided herein, any such termination or suspension of the Plan shall not affect
Options already granted hereunder, and such Options shall remain in full force
and effect as if the Plan had not been terminated or suspended.
(c) Except as otherwise provided herein, rights and
obligations under any outstanding Option shall not be altered or impaired by
amendment, suspension or termination of the Plan, except with the consent of the
person to whom the Option was granted or transferred.
14. Conditions Upon Issuance of Stock.
(a) Stock shall not be issued pursuant to the exercise of
an Option unless the exercise of such Option and the issuance and delivery of
such Stock pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act, the Exchange Act, the rules
and regulations promulgated thereunder, state securities laws, and the
requirements of any stock exchange or national market system upon which the
Stock may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Inability of the Company to obtain authority from any
regulatory body having jurisdictional authority deemed by the Company's counsel
to be necessary for the lawful issuance and sale of any Stock hereunder shall
relieve the Company of any liability for failure to issue or sell such Stock.
15. Reservation of Stock.
The Company, during the term of the Plan, will at all times
reserve and keep available such number of shares of Stock as shall be sufficient
to satisfy the requirements of the Plan.
8
