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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______ to ______.
COMMISSION FILE NUMBER: 0-19801
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TARGET THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3962471
(State of incorporation) (I.R.S. Employer Identification No.)
47201 LAKEVIEW BOULEVARD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-7700
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.0025 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
As of October 25, 1996, there were 14,923,740 shares of Common Stock
outstanding.
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INDEX
--------------------
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1996 and March 31, 1996 .................. 3
Consolidated Statements of Operations for the three and six months ended September 30, 1996
and 1995.......................................................................................... 4
Consolidated Statements of Cash Flows for the three and six months ended September 30, 1996
and 1995.......................................................................................... 5
Notes to Consolidated Financial Statements ......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 16
Item 6. Exhibits and Reports on Form 8-K ........................................................... 17
SIGNATURE .......................................................................................... 18
</TABLE>
2
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TARGET THERAPEUTICS, INC.
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
--------- --------
<S> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments $ 34,583 $ 47,273
Investment in Conceptus, Inc. 12,783 20,493
Accounts receivable 18,954 15,676
Inventories 9,549 6,740
Deferred tax assets 4,214 4,214
Other current assets 1,451 1,235
--------- --------
Total current assets 81,534 95,631
Property and equipment, net 14,820 11,136
Intangibles and other assets 10,525 7,508
--------- --------
$ 106,879 $114,275
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,290 $ 2,062
Accrued compensation 4,058 3,831
Taxes payable 949 --
Other accrued liabilities 8,199 6,698
Deferred tax liabilities 7,245 10,311
--------- --------
Total current liabilities 23,741 22,902
Long-term obligations 422 128
Minority interest 633 407
Commitments and contingencies
Stockholders' equity:
Common stock 38 37
Additional paid-in capital 68,133 50,759
Retained earnings 20,311 27,688
Unrealized gain on available-for-sale securities 7,542 12,265
Accumulated translation adjustments 101 89
--------- --------
96,125 90,838
Treasury stock, at cost (350,000 shares) (14,042) --
--------- --------
Total stockholders' equity 82,083 90,838
--------- --------
$ 106,879 $114,275
========= ========
</TABLE>
See accompanying notes.
3
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TARGET THERAPEUTICS, INC.
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 22,044 $ 15,741 $ 44,093 $ 29,645
-------- -------- -------- --------
Costs and expenses:
Cost of sales 6,725 5,047 13,342 9,392
Research and development 4,766 2,819 9,895 5,655
Acquired in-process research and development -- -- 14,000 --
Selling, general and administrative 6,605 4,632 12,562 8,999
-------- -------- -------- --------
Total costs and expenses 18,096 12,498 49,799 24,046
-------- -------- -------- --------
Income/(loss) from operations 3,948 3,243 (5,706) 5,599
Interest income, net 416 494 791 870
Other income 596 196 871 511
Minority interest (110) (84) (358) (84)
-------- -------- -------- --------
Income/(loss) before income taxes 4,850 3,849 (4,402) 6,896
Provision for income taxes 1,503 1,149 2,975 2,063
-------- -------- -------- --------
Net income/(loss) $ 3,347 $ 2,700 $ (7,377) $ 4,833
======== ======== ======== ========
Net income/(loss) per share $ .22 $ .18 $ (.50) $ .32
======== ======== ======== ========
Shares used in calculation of net income/(loss) per share 15,520 15,168 14,825 15,030
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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TARGET THERAPEUTICS, INC.
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $(7,377) $ 4,833
Adjustments to reconcile net income/(loss) to net cash
provided by operations:
Depreciation and amortization 2,533 1,386
Acquired in-process research and development expense 14,000 --
Gain on sales of Conceptus Inc. stock (1,195) --
Changes in assets and liabilities:
Accounts receivable (2,797) (1,503)
Inventories (1,899) (772)
Other current assets (199) (845)
Accounts payable 908 (870)
Accrued compensation 227 (360)
Taxes payable 951 713
Accrued product replacement costs -- (113)
Other accrued liabilities (1,318) 622
------- -------
Total adjustments 11,211 (1,742)
------- -------
Net cash provided by operating activities 3,834 3,091
------- -------
Cash flows from investing activities:
Capital expenditures, net (5,518) (2,643)
Purchase of securities available-for-sale (23,406) (15,179)
Maturities of securities available-for-sale 32,903 17,938
Net proceeds from sales of Conceptus Inc. stock 1,195 --
Increase in other assets 670 (316)
Net cash acquired from purchase of Interventional
Therapeutics Corporation 87 --
------- -------
Net cash provided by (used in) investing activities 5.931 (200)
------- -------
Cash flows from financing activities:
Issuance of common stock 1,375 1,374
Borrowings from bank -- 625
Purchase of treasury shares (14,042) --
Principal payments under capital leases (10) (26)
Repayment of note payable (202) --
Increase in notes receivable from stockholders -- (32)
------- -------
Net cash provided by (used in) financing activities (12,879) 1,941
------- -------
Net increase(decrease) in cash and cash equivalents (3,114) 4,832
Cash and cash equivalents, beginning of period 13,693 6,839
------- -------
Cash and cash equivalents, end of period $10,579 $11,671
======= =======
</TABLE>
See accompanying notes.
5
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TARGET THERAPEUTICS, INC.
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated balance sheets, consolidated statements of operations and
statements of cash flows reflect all adjustments which are of a normal
recurring nature considered necessary to present a fair statement of the
consolidated financial position at September 30, 1996 and the consolidated
statements of operations and cash flows for the interim six-month periods
ended September 30, 1996 and 1995.
Certain information and footnote disclosures required by generally
accepted accounting principles for complete financial statements have been
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). These financial statements should be read in
conjunction with the audited financial statements and footnotes included
in the Company's 1996 Annual Report to Stockholders and Annual Report on
Form 10-K as filed with the SEC for the fiscal year ended March 31, 1996.
The condensed consolidated balance sheet as of March 31, 1996 was derived
from those audited financial statements.
Results for the interim period ended September 30, 1996 are not
necessarily indicative of the results expected for future interim periods
or for the full year.
Fiscal year. Effective April 1, 1996, the Company changed its fiscal year
end from March 31 to a 52/53 week year ending on the Sunday nearest the
end of March. Fiscal 1997 year will comprise 52 weeks. For purposes of
presentation, the Company has indicated its financial statements as ending
on calendar month ends. The impact on the current year of one less day of
operations is not anticipated to have a material impact.
6
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2. Balance Sheet Information
<TABLE>
<CAPTION>
(In thousands) September 30, March 31,
1996 1996
-------- -------
<S> <C> <C>
Cash, cash equivalents and short-term investments:
Cash and cash equivalents $ 10,579 $13,693
Short-term investments 24,004 33,580
-------- -------
$ 34,583 $47,273
======== =======
Accounts receivable:
Trade receivables $ 19,643 $16,760
Less allowance for doubtful accounts (689) (1,084)
--------- --------
$ 18,954 $15,676
======== =======
Inventories:
Raw materials $ 3,173 $ 1,887
Work-in-process 2,945 1,959
Finished goods 3,431 2,894
-------- -------
$ 9,549 $ 6,740
======== =======
Property and equipment:
Machinery and equipment $ 11,542 $ 8,303
Office equipment 9,438 7,527
Leasehold improvements 2,120 1,644
-------- -------
23,100 17,474
Less accumulated depreciation and amortization (8,280) (6,338)
-------- -------
$ 14,820 $11,136
======== =======
Other assets:
Cost in excess of net assets acquired, net $ 2,659 $ 1,610
Patents and trademarks, net 3,964 2,979
Intangibles acquired upon purchase of ITC, net 2,696 ---
Investments in entities accounted for on the
equity method 582 2,315
Other 624 604
-------- -------
$ 10,525 $ 7,508
======== =======
</TABLE>
3. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Six months ended
(In thousands) September 30,
-----------------
1996 1995
------- ------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 2,775 $1,660
Cash paid during the period for interest 26 4
Other non-cash activity
Common stock issued in connection with ITC acquisition 16,000 --
</TABLE>
4. Net income/(loss) per share and stock split
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding. Net loss per
share is computed using the weighted average number of common shares
outstanding. Common share equivalents are not used in the calculation of
the per share loss since they are antidilutive. On November 8, 1995, the
Company's Board of Directors authorized a two-for-one stock split effected
in the form of a stock dividend on December 18, 1995. All presentations of
shares outstanding, options and amounts per share for prior periods have
been restated to reflect the stock split.
7
<PAGE> 8
5. Acquisition of Interventional Therapeutics, Inc.
On April 29, 1996, the Company signed a definitive agreement with
Interventional Therapeutics Corporation ("ITC") to acquire all the
securities of ITC and its subsidiary, ITC International, in exchange for
shares of Target common stock. The Company completed the closing of the
acquisition of ITC on May 23, 1996, at which time approximately 331,000
shares of Target stock (inclusive of options to purchase such shares) were
exchanged for all of the outstanding shares (and options to purchase
shares) of ITC stock.
ITC is a developer and manufacturer of vascular occlusion devices used in
neurovascular and peripheral embolization. These devices include
detachable and non-detachable silicone balloons and CONTOUR(TM)
embolization particulates designed for selective placement through an
angiographic catheter. As part of Target, ITC will focus on the radiology
market and the combined company plans to offer physicians an increased
range of minimally invasive treatment options for vascular diseases.
The acquisition of ITC, which was accounted for as a purchase, has been
recorded based upon available information and upon certain assumptions
that Target believes were reasonable under the circumstances. Estimated
acquisition costs include approximately $1.4 million of investment
banking, legal and accounting costs and approximately $1.5 million of exit
costs primarily associated with termination of distributor and
international lease arrangements. The purchase price allocated to the
acquired assets and liabilities based on their relative fair values. These
allocations were based on valuations and other studies as of their date of
acquisition.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Purchase price $16,000
Estimated acquisition expenses 2,920
-------
Total estimated acquisition cost $18,920
=======
Historic net book value at May 23, 1996 $ 474
Write-up of inventories 367
Write-off of plant and equipment (76)
Goodwill 1,315
In-process research and development 14,000
Developed technology 2,000
Non-compete agreement 600
Assembled workforce 200
Trademark/tradename 40
-------
Total allocated purchase price $18,920
=======
</TABLE>
In accordance with generally accepted accounting principles, the Company
has allocated $14 million of the purchase price to in-process research and
development (in-process R&D). This amount was recorded as a charge to
operations for the quarter ending June 30, 1996.
The Company's results of operations for the six months ended September 30,
1996, include the results of ITC from May 23, 1996 through September 30,
1996. The unaudited pro forma results of operations of the Company for the
three months ended September 30, 1995 and six months ended September 30,
1996 and 1995, respectively, assuming the acquisition of ITC occurred on
April 1, 1995, on the basis described below with all material intercompany
transactions eliminated, are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ---------------------
1995 1996 1995
------- ------- -------
<S> <C> <C> <C>
(In thousands, except income per share)
Total Revenues $16,401 $44,535 $30,936
Net income 2,769 6,564 4,972
Net income per share 0.18 0.42 0.32
</TABLE>
8
<PAGE> 9
The unaudited pro forma net income and per share amounts above do not
include the charge for in-process R&D of $14 million arising from the
acquisition of ITC. The pro forma results reflect amortization of acquired
goodwill and other intangible assets, which are being amortized over their
estimated useful lives of five to ten years.
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the transaction occurred at the beginning
of the periods indicated, nor should it be used to project the Company's
results of operations for any future dates or periods.
6. Stock Repurchase Program
On May 16, 1996, the Company's Board of Directors authorized a stock
repurchase program in which up to 350,000 shares of its common stock may
be purchased in the open market from time to time. During the three months
ended September 30, 1996, the Company completed the repurchase of the
350,000 shares of its common stock at an overall average acquisition price
of approximately $40. The Company currently plans to keep the repurchased
shares as treasury stock and may use this stock in various Company stock
benefit plans. In addition, in August 1996, the Board of Directors
authorized the repurchase of up to 500,000 additional shares of the
Company's common stock under the repurchase program. Through September 30,
1996, none of the 500,000 shares have been repurchased.
7. Income Taxes
For the three and six months ended September 30, 1996 and 1995, the
Company's income tax provision has been calculated based upon the
estimated annual effective tax rate of 31 percent (excluding the impact of
the acquired in-process research and development charge for which no tax
benefit is available) and 30 percent, respectively. The higher effective
tax rate for the fiscal 1997 is primarily due to anticipated reductions in
the benefit derived from foreign tax credits generated in Japan with
respect to the Company's ownership interest in its Japanese joint venture.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part 1-Item 1 of this
Quarterly Report. In addition, except for the historical statements contained
therein, the following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The
Company wishes to alert readers that the factors set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996, under the
heading "Factors That May Affect Future Results Of Operations", as well as those
factors set forth in the Company's Form 10-Q for the quarter ended June 30,
1996, and in the discussion below and other factors, could in the future affect,
and in the past have affected, the Company's actual results and could cause the
Company's results for future periods to differ materially from those expressed
in any forward-looking statements by or on behalf of the Company.
RESULTS OF OPERATIONS
Overview
The Company develops, manufactures and markets specialized disposable
micro-catheters, guidewires, micro-coils, silicone balloons, embolics and
angioplasty products. These therapeutic devices are used in minimally-invasive
procedures to reach disease sites throughout the body via the circulatory
system. The Company's products allow highly targeted treatment of diseased,
ruptured or blocked vessels of the brain responsible for stroke, as well as
other disease sites in the body that are accessible through small blood vessels.
Products developed by the Company generally require clearance by the U.S. Food
and Drug Administration ("FDA") prior to commercialization in the United States.
The FDA may require clinical investigation as a prerequisite to such market
clearance.
9
<PAGE> 10
The Company's revenues have been derived primarily from the sale of its
micro-catheters, guidewires and micro-coils. Target distributes certain products
manufactured by other companies pursuant to distribution agreements.
On April 29, 1996, the Company signed a definitive agreement with Interventional
Therapeutics Corporation ("ITC") to acquire all the securities of ITC and its
subsidiary, ITC International, in exchange for shares of Target common stock.
The Company completed the closing of the acquisition of ITC on May 23, 1996, at
which time approximately 331,000 shares of Target stock (inclusive of options to
purchase such shares) were exchanged for all of the outstanding shares (and
options to purchase shares) of ITC stock.
ITC is a developer and manufacturer of vascular occlusion devices used in
neurovascular and vascular embolization. These devices include detachable
and non-detachable silicone balloons and CONTOUR(TM) embolization particulates
designed for selective placement through an angiographic catheter. As part of
Target, ITC will focus on the radiology market and the combined company plans to
offer physicians an increased range of minimally invasive treatment options for
vascular diseases.
The acquisition of ITC was accounted for as a purchase. In accordance with
generally accepted accounting principles, the Company allocated $14 million of
the purchase price to in-process R&D. This amount was recorded as a charge to
operations for the quarter ending June 30, 1996.
The following table sets forth certain selected statement of operation
information of the Company as a percentage of product sales for the periods
indicated.
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product sales 100% 100% 100% 100%
Cost of sales 31 32 30 32
Research and development 22 18 22 19
Acquired in-process research and development expense -- -- 32 --
Selling, general and administrative 30 29 28 30
Net income/(loss (1) 15 17 (17) 16
</TABLE>
(1) Includes a $14 million write-off of acquired in-process R&D during the six
months ended September 30, 1996. Exclusive of the write-off, net income as a
percentage of product sales would have been 15%.
Revenues
Product sales for the three months ended September 30, 1996 (second quarter)
were $22.0 million, an increase of $6.3 million, or 40 percent, from $15.7
million for the prior-year period. For the six-month period ended September 30,
1996, product sales were $44.1 million, a 49 percent increase from $29.6 million
for the same period of the prior year. The increases were primarily attributable
to recent product introductions and additional unit sales in each of Target's
product lines resulting from an increased number of treatment sites, training of
additional physicians and the continued acceptance of the Company's products.
In September 1995, the Company obtained clearance by the FDA to market its
Guglielmi Detachable Coil ("GDC") system in the United States. The Company has
launched a training program to facilitate the roll out of the product to
treatment centers in addition to those involved in the clinical trials. In
conjunction with becoming a GDC treatment site, each hospital is required to
purchase a minimum stocking order of the product. The Company's revenues include
approximately $1.0 million and $2.8 million in sales of initial stocking orders
of its GDC system in the three and six months ended September 30, 1996,
respectively. As of September 30, 1996, a portion of the revenue attributable to
initial stocking orders, totaling $220,000, has been deferred into future
periods. Initial stocking order revenue should not be viewed as indicative of
future sales, as repeat orders and future revenue streams will be driven largely
by the number of procedures performed by physicians which cannot accurately be
predicted given the short period during which the GDC system has been
commercially available and which will remain subject to numerous factors outside
the Company's control. During the second quarter, the Company received clearance
from the Ministry
11
<PAGE> 11
of Health and Welfare in Japan to market the first generation of GDC. The
Company has submitted an amended application for clearance to market the most
up-to-date version of GDC, which is now in its third generation. The Company
anticipates marketing the product upon receipt of such approval. There can be no
assurance that the clearance will be obtained or that the marketing will be
successful. As previously announced and further discussed below under "Cost of
Sales," the Company instituted a partial recall of certain lots of its GDC
products during the second quarter, which did not materially affect its results
of operations.
The increase in the Company's product sales is also attributable to the
continued growth in the European and Japanese markets for Target's products.
Export product sales increased to $15.5 million in the second quarter of fiscal
1997 from $11.8 million in the same period of fiscal 1996. Export sales for the
six-month period ended September 30, 1996 were $30.9 million compared to $22.2
million in the prior-year period. Export sales as a percentage of product sales
were 70 percent in both current year periods compared with 75 percent in each of
the prior year periods. The reduction in the percent of export sales as a
percent of total product sales is due primarily to the increased level of
domestic GDC sales as a result of the FDA approval of the GDC in September 1995.
Target sells products in Japan through a joint venture formed with Century
Medical, Inc. ("CMI"). Sales by the Company to CMI accounted for approximately
34 and 40 percent of the Company's product sales in the three and six months
ended September 30, 1996 and 1995, respectively. The decreases are due primarily
to the increased level of domestic GDC sales as a percent of sales. In April
1995, Target implemented a price increase of approximately seven percent to its
distributor in Japan. No other significant price increases were effected during
the balance of fiscal 1996 or fiscal 1997 to date. Revenues for the three and
six months ended September, 1996 include revenues of ITC products from May 23,
1996, the date of acquisition of ITC.
The Company's continued revenue growth is subject to a number of factors,
including new product introductions, the availability of suitable alternative
products manufactured by competitors, the timeliness and availability of
regulatory clearance and the continued expansion of its customer base. Target
continues to research and develop new applications for its products in an effort
to expand its practitioner customer base. As more companies become aware of the
market potential of such products, Target anticipates an increase of competitive
forces which have had and may continue to have an adverse effect on revenues of
the Company. Several companies in the United States have introduced products
that are being used in the interventional neuroradiology market. Target is also
aware of other companies that may pursue commercialization of products which may
compete with the Company's products and may result in future pricing and margin
pressures within this market. Prior to commercialization in the United States,
sales of certain of Target's products are limited to clinical settings pursuant
to Investigational Device Exemptions ("IDE"s) granted by the FDA which limit the
number of patients treatable with such products. Target must obtain clearance
from the FDA to market these products for other than clinical investigation, and
the overall review time of such regulatory process may be lengthy. Regulatory
requirements vary in other countries in which Target markets its products.
Failure to develop new products successfully, to obtain regulatory clearance for
such products in a timely manner or to maintain regulatory clearance may have an
adverse effect on Target's revenues in the future. Target's revenue growth may
also be adversely affected by the limited number of teaching hospitals that
train practitioners in fields in which the Company's products are utilized. The
Company continues to obtain a significant amount of its revenues from CMI in
Japan. Should this customer continue to represent a significant portion of
revenues, significant changes in this customer's ordering rates will likely
cause similar changes in Target's revenues. It is Target's understanding that
physicians use certain devices, products and materials manufactured by other
companies in conjunction with the use of certain of Target's products.
Reductions in the availability or the elimination of such complementary products
have had, and may continue to have, an adverse effect on sales of the Company's
products. Currently, products sold commercially in the United States pursuant to
510(k) clearance received from the FDA may generally be marketed in Europe.
However, political and regulatory changes, particularly in Western Europe in
connection with the evolution of the European Union, as well as the Company's
ability to achieve IS09001 standards, may adversely affect the Company's product
sales in Europe. Similarly, changes in the United States and foreign national
health care policies, including third-party reimbursement issues, may have a
significant adverse effect on revenues of Target. As the Company expands its
direct international sales operations, increased amounts of its revenues will be
subject to the risks of foreign currency fluctuations. Furthermore, the future
rate of Target's revenue growth, if any, may be below that experienced in prior
annual and quarterly periods.
11
<PAGE> 12
Cost of Sales
Cost of sales as a percentage of product sales was 31 percent for the three
months ended September 30, 1996, compared to 32 percent for the same period of
the prior year. For the six-month periods ended September 30, 1996 and 1995,
cost of sales as a percentage of product sales were 30 and 32 percent,
respectively. The Company's increased manufacturing efficiency, primarily due to
increased production volume, contributed to these reductions. These decreases
were partially offset by the impact of reduced margins on ITC products. The
reduced margins on ITC products are due to the application of APB 16 whereby
inventory acquired from ITC is recorded in the Company's books of account at
market value less estimated costs to sell the product. The Company anticipates
that cost of sales will be adversely affected for the next two to three quarters
as the bulk of the ITC inventory is consumed.
Cost of sales as a percentage of product sales was also unfavorably impacted by
a recall of certain lots of the GDC products initiated on July 30, 1996, due to
a problem related to difficulty in the fluoroscopic visualization of the marker
on the delivery wires of these lots of GDC devices. The partial recall was
completed during the quarter ended September 30, 1996 at a cost of approximately
$200,000. Although the Company does not anticipate a recurrence of such a
partial recall, no assurance can be given that similar incidents will not occur
in the future with respect to the GDC system or other Target products.
Generally, there can be no assurance that cost of sales as a percentage of
product sales will remain at current levels or show improvement in future
periods over current or prior periods due to the distribution by Target of
certain products at lower gross margins, fluctuation in manufacturing production
levels due to product mix, potential increases in certain costs associated with
the use of third-party technology, contractual arrangements for minimum purchase
levels and potential pressure on product prices as a result of competition or
governmental regulation. Although no significant supply issues have arisen in
the past, there can be no assurance that current or future suppliers of the
Company's raw materials will be able to continue to meet the quality and
quantity demands of the Company at current suppliers' prices.
Research and Development Expense
Research and development ("R&D") expense, which includes expenditures for
regulatory compliance and quality assurance, increased 69 percent to $4.8
million in the second quarter of fiscal 1997 compared to $2.8 million in the
same period of the prior year. Spending for the first six months of fiscal 1997
was $9.9 million compared to $5.7 million in the prior year, representing a 75
percent increase. Target attributes the increased amounts expended for R&D
primarily to the expenses incurred in collecting clinical data and preparing
regulatory filings for new products and increased headcount associated expenses
with the expansion of its research activities and operation of the pilot
manufacturing line. The pilot manufacturing line was developed to aid in the
transition between the new product development and manufacturing stages of
production. As a percentage of product sales, R&D expense was 22 percent and 18
percent and 22 percent and 19 percent for the three and six months ended
September 30, 1996 and 1995, respectively. The increases in R&D as a percentage
of sales is primarily attributable to increases in the levels of R&D
expenditures, primarily personnel and personnel related costs, at a rate that
exceeds the rate of increase in revenues.
The Company believes that its investments in product development and engineering
and manufacturing processes are essential in its efforts to maintain its
competitive position and continue the development of future products.
Furthermore, the Company believes that its ability to attract qualified
engineers in the future is critical to the continued success of the Company.
Accordingly, Target expects to continue to make substantial expenditures on new
product development and to increase the dollar amount expended for R&D.
Acquired In-Process Research and Development Expense
The charge for acquired in-process R&D of $14 million in the six months ended on
September 30, 1996, was a non-recurring charge related to the acquisition of
ITC. The value attributed to the in-process R&D was determined by an independent
appraisal.
12
<PAGE> 13
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense for the quarter ended
September 30, 1996 increased to $6.6 million from $4.6 million for the quarter
ended September 30, 1995. SG&A expense for the six-month periods ended September
30, 1996 and 1995 was $12.6 million and $9.0 million, respectively. The
increases in fiscal 1997 were primarily due to costs associated with the product
launch of the GDC system including physician training and education programs,
investments in worldwide marketing, sales and training efforts to support
current and anticipated product introductions in addition to the GDC system,
costs incurred to further the Company's expansion of overseas operations and the
improvement of internal information systems. The three months ended September
30, 1996 and six months ended September 30, 1996 also reflect increased expenses
associated with a legal action filed by Target to protect certain of its
proprietary assets compared to prior years. Other increases are attributable to
additional staffing, including sales and management personnel, to expand the
corporate infrastructure to support the growth in Target's product sales. In
addition, the Company incurred increased personnel and personnel related costs
resulting from the May 23, 1996, acquisition of ITC. The Company currently
anticipates that the dollar amount expended for SG&A will continue to increase,
primarily due to expanding international operations, additional expenses
associated with the legal action filed described above and planned increases in
sales and support staff to introduce, market and support anticipated new
products (including the GDC system in Japan) for which increased physician
training and education, clinical field work and sales support will be required.
These expenses may also increase if Target pursues additional operations
overseas, the feasibility of which it is currently investigating. As a
percentage of product sales, SG&A expense was 30 percent and 29 percent in the
second quarters of fiscal 1997 and 1996, respectively. The increase is due
primarily to increased legal costs associated with a legal action filed by
Target to protect certain of its proprietary assets. As a percentage of product
sales SG&A expense was 29 percent and 28 percent for the six months ended
September 30, 1996 and 1995, respectively. The decrease is primarily
attributable to improved economies of scale, as partially offset by the
increased legal costs discussed above.
Income/(loss) from Operations
Income from operations was $3.9 million for the second quarter of fiscal 1997
compared to income from operations of $3.2 million in the prior-year period, a
22 percent increase. The loss from operations for the six months ended September
30, 1996 was $(5.7) million compared to income from operations of $5.6 million
in the prior year period. The loss from operations is due to a $14 million
write-off of in-process R&D related to the Company's acquisition of ITC.
Exclusive of this write-off, income from operations increased 48 percent to $8.3
million in the six months ended September 30, 1996 compared to $5.6 million in
the same period of the prior year. The increase is attributable to increased
sales, as a result of both additional unit sales (including the GDC system and
ITC products) and the pricing considerations described above. These factors were
partially offset by the impact of increased R&D expenditures as a percent of
sales.
Although Target has experienced revenue growth since its inception and has been
profitable on a quarterly basis (exclusive of the non-recurring write-off of
in-process R&D due to the acquisition of ITC on May 23, 1996) since the quarter
ended December 31, 1990, no assurance can be given that revenue growth or
profitability on a quarterly or annual basis will be sustained. The Company's
results of operations have varied significantly from quarter to quarter, and
revenue growth rates have been inconsistent. Future operating results will
depend upon several factors in addition to those discussed above, including the
timing and amount of expenses associated with expanding Target's operations both
domestically and internationally, increased revenues and expenses in conjunction
with Target's direct sales operations in Germany and France, increased costs
associated with product launches, the Company's ability to successfully meet new
product development plans, success in achieving regulatory clearance for new
products in a timely manner, maintaining regulatory clearance, the acceptance of
new product introductions both in the United States and internationally, the mix
between pilot production of new products and full-scale manufacturing of
existing products, the mix between domestic and export sales, the availability
of complementary products and the effects this may have particularly on domestic
sales, possible changes in ordering patterns of its customers due to changes in
the healthcare environment or to potential variations in foreign exchange rates,
Target's ability to continue to attract qualified engineers to further the
development of future products, potential future partnering arrangements,
changes in domestic and foreign health care policies (including third-party
reimbursement issues), increased competitive forces, developments in the
Company's ongoing intellectual property litigation, increased expenses
associated with protecting Target's proprietary assets and the general litigious
nature of the medical device industry. Target also believes that seasonal
patterns, including a reduction in the number of procedures performed by
physicians using the Company's products during summer and holiday periods, may
affect its quarterly revenue stream. In addition, Target cannot predict ordering
rates by distributors, some of which place infrequent stocking orders while
others order at
13
<PAGE> 14
regular intervals. As a result of these and other factors, the Company expects
to continue to experience significant fluctuations in its quarterly operating
results.
The Company's common stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Target's common
stock in any given period. Finally, the Company participates in a highly dynamic
industry, which often results in significant volatility of Target's common stock
price.
Interest and Other Income
Net interest income decreased to $416,000 for the three months ended September
30, 1996 compared to $494,000 in the prior-year period. Net interest income was
$791,000 and $870,000 in the six-month periods ended September 30, 1996 and
1995, respectively. These decreases are primarily attributable to decreased
amounts of funds available for investment during the second quarter due to the
treasury stock repurchase program discussed below.
Other income increased to $596,000 in the second quarter of fiscal 1997
from $196,000 in the same period of the prior year. Other income for the first
half fiscal 1997 was $871,000 compared to $511,000 in the prior-year period.
These increases are primarily due to pre-tax gains of $925,000 and $1,195,000
resulting from the sale of 100,000 and 115,000 shares of Conceptus, Inc. common
stock by the Company during the three and six months ended September 30, 1996,
respectively. In addition, the increase is due to a reduction in equity losses
of $70,000 and $80,000 resulting from investments by Target in its affiliates
to further the development of these companies' products during the three and
six months ended September 30, 1996, respectively. These increases were
partially offset by reduced earnings in the Company's Japanese joint venture of
approximately $580,000 and $715,000 for the three and six month periods ended
September 30, 1996. The decreases are primarily due to reduced margins on
products sold. The reduced margins are primarily the result of increased costs
of product sold, which are sourced in the United States of America, and as a
result of the weakening of the yen against the dollar compared to prior year
periods. In addition, the joint venture experienced reduced selling prices on
certain products in fiscal 1997 compared to fiscal 1996 as a result of price
ceilings being imposed by the Japanese government during the fourth quarter of
fiscal 1996. There can be no assurance that the yen will not weaken further
against the dollar or that further price ceilings will not be imposed by the
Japanese government. The Company anticipates that other income may decrease
during the remainder of the fiscal year due to a reduction of earnings in the
Japanese joint venture and the recognition of further equity losses resulting
from the investments made by Target in its affiliates for which Target's
interest is accounted for on the equity method.
Minority Interest
In June 1995 the Company and its former distributor in France formed a joint
venture to market the Company's products in France. Target holds a 51 percent
interest in the joint venture. The results of the operations in France, net of
the minority interest, are included in the consolidated results of the Company
beginning in the second quarter of fiscal 1996. Minority interest before taxes
is reflected as a separate component of the Company's Consolidated Statements of
Operations for the quarter and six months ended September 30, 1996.
Provision for Income Taxes
For the three and six months ended September 30, 1996 and 1995, the Company's
income tax provision has been calculated based upon the estimated annual
effective tax rate of 31 percent (excluding the impact of the acquired
in-process research and development charge for which no tax benefit is
available) and 30 percent, respectively. The higher effective tax rate for the
fiscal 1997 is primarily due to anticipated reductions in the benefit derived
from foreign tax credits generated in Japan with respect to the Company's
ownership interest in its Japanese joint venture.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of approximately $57.8
million and its principal sources of liquidity consisted of approximately $34.6
million in cash, cash equivalents and short-term investments and $3.0 million
available under a line of credit which expires in October 1998. At September 30,
1996, no amounts were outstanding under this line of credit.
Prior to February 1996, the Company accounted for its greater-than-20 percent
ownership interest in Conceptus, Inc. under the equity method. In February 1996,
Conceptus completed an initial public offering of common stock which
14
<PAGE> 15
reduced the Company's ownership position to approximately 18 percent.
Consequently, the portion of the investment which will be available for sale,
subject to certain market trading restrictions, is accounted for in accordance
with FASB Statement 115. The unrealized gain of $7.6 million at September 30,
1996 is recorded, net of deferred taxes, as a component of stockholders' equity.
The remaining investment is recorded at cost. The estimated fair value of the
entire investment as of September 30, 1996 is approximately $12.8 million.
Conceptus' common stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Conceptus'
common stock in any given period. In addition, Conceptus participates in a
highly dynamic industry, which often results in significant volatility of the
common stock price. Any changes in the Conceptus common stock price could have a
significant impact on the value of the Company's investment, resulting in a
change to the Company's working capital, deferred tax liabilities, stockholders
equity and total assets and liabilities.
Accounts receivable increased to $19.0 million at September 30, 1996 compared to
$15.7 million at March 31, 1996. The increase is due primarily to a greater
proportion of sales occurring in the latter part of the second quarter of fiscal
1997 as compared to the quarter ended March 31, 1996, and due to consolidating
the accounts receivable of ITC at September 30, 1996. Inventories increased to
$9.5 million at September 30, 1996 from $6.7 million at March 31, 1996. The
increase is attributable to increased inventory levels of certain products to
support anticipated increases in sales, particularly of the GDC system in the
United States, and to the consolidation of inventory held by ITC. In addition,
GDC inventory levels increased partially to support anticipated sales that may
result from obtaining regulatory clearance in Japan for the GDC system. If such
approval is not obtained, there can be no assurance that such inventory can be
fully absorbed through alternative sales channels.
Other assets increased to $10.5 million at September 30, 1996 from $7.5 million
at March 31, 1996, primarily due to the intangibles acquired upon the
acquisition of ITC, the net effect of equity accounting for the Company's
Japanese joint venture and affiliate companies and increased investments in
proprietary assets.
Property and equipment, net, increased from $11.1 million at March 31, 1996 to
$14.8 million at September 30, 1996 due primarily to the investment in machinery
and equipment to expand manufacturing lines and research and development
laboratories. In addition, the Company continues to upgrade the Company's
management information systems "MIS" infrastructure which is expected to improve
customer service turnaround times, and allow for better materials planning and
improved management information. There can be no assurance that these upgrades
will be completed successfully or in a timely manner, or that the upgrades will
not result in disruptions in the Company's operations, and it is unlikely that
these improvements will result in materially increased revenues or profits in
the near term, if at all. In addition, in March 1996, the Company expanded its
facilities in Fremont, California by moving into an additional 36,000
square-foot facility. The Company is utilizing this facility for research and
development, manufacturing and corporate administrative purposes.
On May 16, 1996, the Company's Board of Directors authorized a stock repurchase
program in which up to 350,000 shares of its common stock may be purchased in
the open market from time to time. During the three months ended September 30,
1996, the Company completed the repurchase of the 350,000 shares of its common
stock at an overall average acquisition price of approximately $40. The Company
currently plans to keep the repurchased shares as treasury stock and may use
this stock in various Company stock benefit plans. In addition, in August 1996,
the Board of Directors authorized the repurchase of up to 500,000 additional
shares of the Company's common stock under the repurchase program. Through
September 30, 1996, none of the 500,000 shares have been repurchased.
Target believes that available cash, cash equivalents and short-term
investments, as well as funds expected to be generated from operations, will be
sufficient to meet the Company's operating expenses and cash requirements for
the foreseeable future.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1994 the Company filed a lawsuit in the United States District Court
(the "Court") against SciMed Life System, Inc. ("SciMed"), a subsidiary of
Boston Scientific Corporation, and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson, seeking damages and preliminary and permanent
injunctive relief against sales of such companies' products believed to be
infringing the Tracker patent. The defendants responded, challenging the
validity of the Tracker patent, denying infringement, and raising other
defenses. Furthermore, Cordis has filed a countersuit against the Company
claiming that certain of the Company's products infringe Cordis' patents. In May
1996, the Court granted the Company's motion for a preliminary injunction
prohibiting Cordis and SciMed from infringing on the Tracker Patent. Cordis and
SciMed requested a stay on the preliminary injunction during an appeal of that
decision. The Court of Appeals has temporarily stayed the preliminary injunction
pending the outcome of Cordis and SciMed's appeal of the decision.
Notwithstanding the grant of the Company's motion for a preliminary injunction,
there can be no assurance that the Company will be ultimately successful in this
lawsuit.
In addition, from time to time, the Company may be involved in legal actions,
including product liability claims and the protection of the Company's
proprietary assets, arising in the ordinary course of business. While the
outcome of such matters is currently not determinable, it is management's
opinion that these matters, both individually or in the aggregate, will not have
a material adverse effect on the Company's consolidated financial position,
results of its operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held September 4, 1996, six
motions were approved:
1) The following persons were elected directors of the Company: Gary R. Bang,
William G. Davis, Kathleen G. Murray, M.S.N., Howard D. Palefsky, Richard
D. Randall, Charles M. Strother, M.D. and John C. Villforth. The number of
votes cast for and withheld from each director are as follows (in
thousands):
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------
Election of Directors:
Gary R. Bang 13,101 22
William G. Davis 13,116 7
Kathleen G. Murray, M.S.N. 13,116 7
Howard D. Palefsky 13,116 8
Richard D. Randall 13,115 9
Charles M. Strother, M.D. 13,116 8
John C. Villforth 13,116 8
2) The 1988 Stock Option Plan was amended to increase the number of shares of
Common Stock reserved for issuance thereunder by 1,500,000 shares. The
votes on this proposal were cast as follows (in thousands):
Broker
For Against Abstain Non-Vote
----- ------- ------- --------
7,510 4,057 12 1,545
3) The 1991 Director Option Plan was amended to make certain changes to the
formulas pursuant to which options are granted thereunder and to the
provisions regarding adjustments necessitated by changes in the Company's
capital structure. The votes on this proposal were cast as follows (in
thousands):
Broker
For Against Abstain Non-Vote
------ ------- ------- --------
12,082 596 17 428
16
<PAGE> 17
4) The 1991 Employee Stock Purchase Plan was amended to increase the number
of shares of Common Stock reserved for issuance thereunder by 100,000
shares and to make certain other changes to participation standards and
offering periods. The votes on this proposal were cast as follows (in
thousands):
Broker
For Against Abstain Non-Vote
------ ------- ------- --------
11,401 168 10 1,545
5) The Certificate of Incorporation was amended to increase the number of
authorized shares of Common Stock from 25,000,000 to 120,000,000. The
votes on this proposal were cast as follows (in thousands):
Broker
For Against Abstain Non-Vote
----- ------- ------- --------
8,752 4,299 13 58
6) The stockholders ratified the selection of Ernst & Young LLP as
independent auditors of the Company for the current fiscal year. The votes
on this proposal were cast as follows (in thousands):
For Against Abstain
------ ------- -------
13,102 17 5
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Description
------- --------------------------------------------------------------------
3.3 Certificate of Amendment of Restated Certificate of Incorporation
filed October 15, 1996.
10.2 1988 Stock Option Plan, as amended.
10.3 1991 Director Option Plan, as amended.
10.4 1991 Employee Stock Purchase Plan, as amended.
11.1 Calculation of net income/(loss) per share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE> 18
SIGNATURE
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARGET THERAPEUTICS, INC.
Date: November 6, 1996
/s/ Robert E. McNamara
-----------------------------------------
Robert E. McNamara
Vice President, Finance & Administration, Chief
Financial Officer and Assistant Secretary
(Principal Financial Officer and Duly Authorized Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
--------------------
Exhibit
Number Description
- ------- ---------------------------------------------------
3.3 Certificate of Amendment of Restated Certificate of
Incorporation filed October 15, 1996
10.2 1988 Stock Option Plan, as amended.
10.3 1991 Director Option Plan as amended.
10.4 1991 Employee Stock Purchase Plan, as amended.
11.1 Calculation of net income/(loss) per share
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 3.3
TARGET THERAPEUTICS, INC.
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
Target Therapeutics, Inc. (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a meeting duly
convened and held, adopted resolutions proposing and declaring advisable the
following amendment to the Restated Certificate of Incorporation of the
Corporation:
RESOLVED: That Article FOURTH, Sections A and B of the Restated
Certificate of Incorporation of the Corporation be and hereby are amended
in their entirety, but Section C is to remain the same and not to be
affected by this Amendment with its preferred shares to be included in the
total authorized shares:
FOURTH: A. The aggregate number of shares which this
corporation shall have authority to issue is one
hundred twenty-two million (122,000,000) shares
of capital stock with a par value of $.0025 per
share.
B. Of such authorized shares, one hundred twenty
(120,000,000) shares shall be designated "Common
Stock," and have a par value of $.0025 per share.
SECOND: That the stockholders, at a meeting duly convened and held,
adopted the foregoing amendment in accordance with the provisions of the
General Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
<PAGE> 2
IN WITNESS WHEREOF, Target Therapeutics, Inc. has caused this Certificate
to be signed by Gary R. Bang, its President, and attested to by Michael W.
Hall, its Secretary, this 30th day of September, 1996.
TARGET THERAPEUTICS, INC.
By: /s/ Gary R. Bang
----------------------------------
Gary R. Bang
ATTEST:
By: /s/ Michael W. Hall
----------------------------------
Michael W. Hall
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<PAGE> 1
EXHIBIT 10.2
TARGET THERAPEUTICS, INC.
1988 STOCK OPTION PLAN
As amended December 9, 1991
As amended August 17, 1992
As amended May 11, 1994
As amended May 8, 1996
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Administrator and as
reflected in the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean a Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" shall mean the Common Stock of the Company.
(f) "Company" shall mean Target Therapeutics, Inc., a Delaware
corporation.
(g) "Consultant" shall mean any person who is engaged by the Company
or any Parent or Subsidiary to render consulting services and is compensated for
such consulting services, and any director of the Company whether compensated
for such services or not; provided, that the term Consultant shall not include
directors who are not compensated for their services or are paid only a
director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; provided, that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
<PAGE> 2
(i) "Employee" shall mean any person, including Named Executives,
officers and directors, employed by the Company or any Parent or Subsidiary of
the Company. The payment of a director's fee by the Company shall not be
sufficient to constitute "employment" by the Company.
(j) "Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(k) "Named Executive" shall mean any individual who, on the last day
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the Chief Executive Officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Securities Exchange Act of 1934, as amended.
(l) "Nonstatutory Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option.
(m) "Option" shall mean a stock option granted pursuant to the Plan.
(n) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(o) "Optionee" shall mean an Employee or Consultant who receives an
Option.
(p) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(q) "Plan" shall mean this 1988 Stock Option Plan.
(r) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(s) "Subsidiary" shall mean a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
(t) "Subcommittee" shall mean the Committee appointed by the Board
of Directors in accordance with paragraph (c) of Section 4 of the Plan, if one
is appointed.
3. Stock Subject to the Plan. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of shares which may be optioned and
sold under the Plan is 5,900,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Notwithstanding any other provision of the Plan,
shares issued under the Plan and later repurchased by the Company shall not
become available for future grant or sale under the Plan.
-2-
<PAGE> 3
4. Administration of the Plan.
(a) Composition of Administrator.
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or any successor rule thereto, as in effect at the time that discretion is
being exercised with respect to the Plan ("Rule 16b-3") and by the legal
requirements relating to the administration of incentive stock option plans, if
any, of Delaware corporate and securities laws and the Code, as amended,
(collectively, the "Applicable Laws"), the Plan may (but need not) be
administered by different bodies with respect to directors, officers who are not
directors, and Employees who are neither directors nor officers.
(b) Administration With Respect to Directors and Officers Subject to
Section 16(b). With respect to Option grants made to Employees who are also
officers or directors subject to Section 16(b) of the Exchange Act, the Plan
shall be administered by (A) the Board, if the Board may administer the Plan in
compliance with the rules governing a plan intended to qualify as a
discretionary plan under Rule 16b-3, or (B) a Committee designated by the Board
to administer the Plan, which Committee shall be constituted to comply with the
rules governing a plan intended to qualify as a discretionary plan under Rule
16b-3. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by the rules governing
a plan intended to qualify as a discretionary plan under Rule 16b-3.
(c) Administration with Respect to Named Executives. With respect to
grants of Options to Named Executives, the Plan shall be administered by a
Subcommittee of the Committee designated by the Board ("Subcommittee") which, in
addition to meeting the requirements of the Applicable Laws referred to in this
Section 4, shall be comprised solely of two or more outside directors, as
defined by Section 162(m) of the Code and the regulations promulgated
thereunder. If the Committee itself is comprised solely of two or more outside
directors, then no Subcommittee shall be formed and each reference to
Subcommittee hereafter shall mean the Committee.
(d) Administration With Respect to Other Persons. With respect to
Option grants made to Employees or Consultants who are neither directors nor
officers of the Company, the Plan shall be administered by (A) the Board or (B)
a Committee designated by the Board, which Committee shall be constituted to
satisfy Applicable Laws. Once appointed, such Committee shall serve in its
designated capacity until otherwise directed by the Board. The Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by Applicable Laws.
-3-
<PAGE> 4
(e) Powers of the Administrator. Subject to the provisions of the
Plan, the Administrator shall have the authority, in its discretion: (i) to
grant Incentive Stock Options or Nonstatutory Stock Options; (ii) to determine,
upon review of relevant information and in accordance with Section 9(b) of the
Plan, the fair market value of the Common Stock; (iii) to determine the exercise
price per share of Options to be granted, which exercise price shall be
determined in accordance with Section 9(a) of the Plan; (iv) to determine the
Employees or Consultants to whom, and the time or times at which, Options shall
be granted and the number of shares to be represented by each Option, (v) to
interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations
relating to the Plan; (vii) to determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the holder
thereof, modify or amend each Option; (viii) to accelerate or defer (with the
consent of the Optionee) the exercise date of any Option, consistent with the
provisions of Section 5 of the Plan; (ix) to authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
Option previously granted by the Administrator; and (x) to make all other
determinations deemed necessary or advisable for the administration of the Plan.
(f) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options granted under the
Plan.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted only to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) Each Option shall be designated as either an Incentive Stock
Option or a Nonstatutory Stock Option. However, notwithstanding such
designations, to the extent that the aggregate fair market value of Shares
subject to an Optionee's incentive stock options granted by the Company, any
Parent or Subsidiary, which become exercisable for the first time during any
calendar year (under all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5(b), incentive stock options shall be
taken into account in the order in which they were granted, and the fair market
value of the Shares shall be determined as of the time of grant.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the Company's right
to terminate his employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 18 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 of the Plan.
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<PAGE> 5
7. Term of Option. The term of each Option shall be ten (10) years from
the date of grant thereof or such shorter term as may be provided in the Option
Agreement. However, in the case of an Incentive Stock Option granted to an
Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Incentive Stock Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
in this Plan, the maximum number of Shares which may be granted under Options to
any Employee under this Plan for any fiscal year of the Company shall be
500,000.
9. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the fair
market value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the fair market value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option granted to any
person, the per Share exercise price shall be such price as it determined by the
Administrator, except for grants to a person who, at the time of the grant of
such Option is a Named Executive, in which case the per share exercise price
shall be no less than 100% of the fair market value per Share on the date of
grant.
(iii) In the case of an Option granted on or after the effective
date of registration of any class of equity security of the Company pursuant to
Section 12 of the Exchange Act and prior to six months after the termination of
such registration, the per Share exercise price shall be no less than 100% of
the fair market value per Share on the date of grant.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the mean of the bid and
asked prices (or the closing price per share if the Common Stock is listed on
the National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System) of the Common Stock for the date of grant, as reported
in The Wall Street Journal (or, if not so reported, as otherwise reported by the
NASDAQ System) or, in the event the Common Stock is listed on a stock exchange,
the fair market value
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<PAGE> 6
per Share shall be the closing price on such exchange on the date of grant of
the Option, as reported in The Wall Street Journal.
(c) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator and may consist entirely of cash, check, promissory note,
other Shares which (i) in the case of Shares acquired upon exercise of an
option, have been owned by the Optionee for more than six months on the date of
surrender, and (ii) have a fair market value on the date of surrender equal to
the aggregate exercise price of the Shares as to which said Option shall be
exercised, delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price, or any combination of
such methods of payment, or such other consideration and method of payment for
the issuance of Shares to the extent permitted under the Delaware General
Corporation Law. In making its determination as to the type of consideration to
accept, the Administrator shall consider if acceptance of such consideration may
be reasonably expected to benefit the Company, in accordance with the Delaware
Corporation Law.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
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 by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 9(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the event
of termination of an Optionee's Continuous Status as an Employee or Consultant
(as the case may
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<PAGE> 7
be), such Optionee may, but only within thirty (30) days (or such other period
of time, not exceeding three (3) months in the case of an Incentive Stock Option
or six (6) months in the case of a Nonstatutory Stock Option, as is determined
by the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option) after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his Option to the
extent that he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise the Option at the date of such
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 10(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Code), he may, but only within
six (6) months (or such other period of time not exceeding twelve (12) months as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made the time of grant of the Option) from the date
of such termination (but in no event later than the date of expiration of the
term of such Option as set forth in the Option Agreement), exercise his Option
to the extent he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise the Option at the date of
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months following
the date of death (but in no event later than the date of expiration of the term
of such Option as set forth in the Option Agreement), by the Optionee's estate
or by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous Status as
an Employee or consultant twelve (12) months after the date of death, subject to
the limitation set forth in Section 5(b);or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the termination of Continuous Status as an Employee
or Consultant, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of termination.
11. Non-Transferability of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of
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<PAGE> 8
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
12. Adjustments Upon Changes in Capitalization or Merger. Subject to
any required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, the maximum number of Shares of
Common Stock for which Options may be granted to any Employee under Section 8 of
the Plan, and as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, the Option shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
13. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option. Notice of the determination shall be given to each
Employee or Consultant to whom an Option is so granted within a reasonable time
after the date of such grant.
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<PAGE> 9
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable.
(b) Stockholder Approval. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 of the Exchange Act or with Sections 162(m) and 422 of the Code
(or any successor statute or rule or other applicable law, rule or regulation,
including the requirements of any exchange or quotation system on which the
Common Stock is listed or quoted). Such stockholder approval, if required, shall
be obtained in such a manner and to such a degree as is required by the
applicable law, rule or regulation.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
16. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
17. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
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<PAGE> 10
18. Stockholder Approval.
(a) Continuance of the Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months before or after the date
the Plan is adopted. If such stockholder approval is obtained at a duly held
stockholders' meeting, it must be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company, or if such
stockholder approval is obtained by written consent, it must be obtained by the
unanimous written consent of all stockholders of the Company; provided, however,
that approval at a meeting or by written consent may be obtained by a lesser
degree of stockholder approval if the Board determines, in its discretion after
consultation with the Company's legal counsel, that such a lesser degree of
stockholder approval will comply with all applicable laws and will not adversely
affect the qualification of the Plan under Section 422 of the Code.
(b) If and in the event that the Company registers any class of
equity securities pursuant to Section 12 of the Exchange Act, any required
approval of the stockholders of the Company obtained after such registration
shall be solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder.
(c) If any required approval by the stockholders of the Plan itself
or of any amendment thereto is solicited at any time otherwise than in the
manner described in Section l8(b) hereof, then the Company shall, at or prior to
the first annual meeting of stockholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for the
Plan substantially the same information which would be required (if proxies to
be voted with respect to approval or disapproval of the Plan or amendment were
then being solicited) by the rules and regulations in effect under Section 14(a)
of the Exchange Act at the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is first
sent or given to stockholders.
19. Information to Optionees. The Company shall provide to each
Optionee, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all stockholders of the Company. The Company shall not be required
to provide such information if the issuance of Options under the Plan is limited
to key employees whose duties in connection with the Company assure their access
to equivalent information.
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<PAGE> 1
EXHIBIT 10.3
TARGET THERAPEUTICS, INC.
1991 DIRECTOR OPTION PLAN
As amended June 5, 1996
1. Purposes of the Plan. The purposes of this 1991 Director Option Plan
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be "non-statutory stock
options."
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Target Therapeutics, Inc., a Delaware
corporation.
(e) "Continuous Status as a Director" means the absence of any
interruption or termination of service as a Director.
(f) "Director" means a member of the Board.
(g) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in Common Stock) on the date of grant, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market System thereof) or regularly quoted by a recognized
securities dealer but
<PAGE> 2
selling prices are not reported, the Fair Market Value of a Share of Common
Stock shall be the mean between the bid and asked prices for the Common Stock on
the last market trading day prior to the day of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable, or;
(iii) In the absence of an established market for the common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "Option" means a stock option granted pursuant to the Plan.
(k) "Optioned Stock" means the Common Stock subject to an Option.
(l) "Optionee" means an Outside Director who receives an Option.
(m) "Outside Director"" means a Director who is not an Employee.
(n) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1991 Director Option Plan.
(i) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(p) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 200,000 Shares (the "Pool") of Common Stock. The Shares
may be authorized but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) Procedure for Grants. The provisions set forth in this Section
4(b) shall not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder. All grants of Options to Outside Directors
under this Plan shall be automatic and non-discretionary and shall be made
strictly in accordance with the following provisions:
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<PAGE> 3
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 10,000 Shares (the "First Option") on the date on which the
later of the following events occurs: (A) the effective date of this Plan, as
determined in accordance with Section 6 hereof, or (B) the date on which such
person first becomes a Director, whether through election by the stockholders of
the Company or appointment by the Board to fill a vacancy; provided, that
Outside Directors who were directors as of November 30, 1991 shall not receive a
First Option upon the effective date of this Plan.
(iii) After the First Option has been granted to an Outside
Director, such Outside Director shall thereafter be automatically granted an
Option to purchase 3,000 Shares (a "Subsequent Option") on April 1 of each year,
if on such date, he shall have served on the Board for at least six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as
follows:
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 8 hereof.
(C) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the First Option.
(D) the First Option shall become exercisable in
installments cumulatively as to thirty-three and one-third percent (33-1/3%) of
the Shares subject to the First Option on each of the first, second and third
anniversaries of the date of grant of the First Option.
(vi) The terms of a Subsequent Option granted hereunder shall be
as follows:
(A) the term of the Subsequent Option shall be ten (10)
years.
(B) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Section 8 hereof.
(C) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Subsequent Option.
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<PAGE> 4
(D) the Subsequent Option shall become exercisable as to one
hundred percent (100%) of the Shares subject to the Subsequent Option on the
third anniversary of the date of grant of the Subsequent Option.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the stockholders to increase the number of Shares which may be issued
under the Plan or through cancellation or expiration of Options previously
granted hereunder.
(c) Powers of the Board. Subject to the provisions and restrictions
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
2(i) of the Plan, the Fair Market Value of the Common Stock; (ii) to interpret
the Plan; (iii) to prescribe, amend and rescind rules and regulations relating
to the Plan; (iv) to authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option previously granted
hereunder; and (v) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final.
5. Eligibility. Options may be granted only to Outside Directors. All
options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee 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 which the Director or the
Company may have to terminate his or her directorship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Exercise price and Consideration.
(a) Exercise Price. The per Share exercise price for Optioned Stock
shall be 100% of the Fair Market Value per Share on the date of grant of the
Option.
(b) Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Board and may consist entirely of (i) cash, (ii)
check, (iii) promissory note, (iv) other shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee
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<PAGE> 5
for more than six (6) months on the date of surrender, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (v) delivery of a
properly executed exercise notice together with such other documentation as the
Board and the broker, if applicable, shall require to effect an exercise of the
Option and delivery to the Company of the sale or loan proceeds required to pay
the exercise price, (vi) delivery of an irrevocable subscription agreement for
the Shares which irrevocably obligates the optionee to take and pay for the
Shares not more than twelve (12) months after the date of delivery of the
subscription agreement, (vii) any combination of the foregoing methods of
payment, or (viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted under applicable law.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
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 by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7(b) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Rule 16b-3. Options granted to Outside Directors must comply
with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
or any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to Plan transactions.
(c) Termination of Continuous Status as a Director. In the event an
Optionee's Continuous Status as a Director terminates (other than upon the
Optionee's death or total and permanent disability (as defined in Section
22(e)(3) of the Code)), the Optionee may
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<PAGE> 6
exercise his or her Option, but only within three (3) months from the date of
such termination, and only to the extent that the Optionee was entitled to
exercise it at the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option at the date of such termination, and to the
extent that the Optionee does not exercise such Option (to the extent otherwise
so entitled) within the time specified herein, the Option shall terminate.
(d) Disability of Optionee. In the event Optionee's Continuous
Status as a Director terminates as a result of total and permanent disability
(as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or
her Option, but only within six (6) months from the date of such termination,
and only to the extent that the Optionee was entitled to exercise it at the
date of such termination (but in no event later than the expiration of its ten
(10) year term). To the extent that the Optionee was not entitled to exercise
an Option at the date of termination, or if he or she does not exercise such
Option (to the extent otherwise so entitled) within the time specified herein,
the Option shall terminate.
(e) Death of Optionee. In the event of an Optionee's death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option, but only within six (6)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it at the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option at the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger,
Asset Sale or Change of Control.
(a) Changes in Capitalization.
(i) Subject to any required action by the stockholders of the
Company, the number of Shares covered by each outstanding Option and the number
of Shares which have been authorized for issuance under the Plan but as to which
no Options have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per Share covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
Shares effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive.
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Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
(ii) Subject to any required action by the stockholders of the
Company, with respect to Options not yet granted hereunder, the number of Shares
to be subject to each First Option and each Subsequent Option, which amounts are
currently set forth in Sections 4(b)(ii) and 4(b)(iii) above, shall be
proportionately adjusted for any decrease in the number of issued Shares
resulting from a reverse stock split, combination or reclassification of the
Common Stock, or any other decrease in the number of issued Shares effected
without receipt of consideration by the Company (but excluding repurchases of
the Company's Common Stock by the Company or its assignee). Such adjustment
shall be made by the Board, whose determination in that respect shall be final,
binding and conclusive. The provisions of this paragraph shall not apply to
Options outstanding on the date of such reverse stock split, combination or
reclassification.
(iii) Subject to any required action by the stockholders of the
Company, with respect to Options not yet granted hereunder, the number of Shares
to be covered by each First Option and each Subsequent Option, which amounts are
currently set forth in Sections 4(b)(ii) and 4(b)(iii) above, shall be
proportionately adjusted to reflect one-half (1/2) of the effect of any increase
in the number of issued Shares resulting from a stock split, stock dividend or
reclassification of the Common Stock, or any other increase in the number of
issued Shares effected without receipt of consideration by the Company(1);
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration";
and provided, further, that in no event shall the provisions of this paragraph
cause the number of Shares to be granted under any First Option or Subsequent
Option to exceed 15,000 Shares or 5,000 Shares, respectively. Such adjustment
shall be made by the Board, whose determination in that respect shall be final,
binding and conclusive. The provisions of this paragraph shall not apply to
Options outstanding on the date of such stock split, stock dividend or
reclassification.
(iv) Each Outside Director who received a Subsequent Option on
April 1, 1996 in the amount of 2,000 Shares shall be automatically granted, on
the date of and immediately following the Company's first Annual or Special
Meeting of Stockholders after April 1, 1996 at which the amendments to this Plan
are approved by the Company's stockholders, an Option in the amount of 1,000
shares at the applicable exercise price pursuant to Section 7(a) above;
provided, that such Outside Director remains a member of the Company's Board of
Directors immediately following such meeting. The Options granted pursuant to
this paragraph shall bear the same terms and vest on the same date as the
Subsequent Options granted to such Outside Directors on April 1, 1996.
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(1) For example, in the event that the Company conducts a two-for-one forward
stock split pursuant to which each issued and outstanding Share is converted
into two issued and outstanding shares, the number of shares to be granted
pursuant to each Option hereunder would increase by fifty percent, or one-half
of the effect of such stock split on the issued Shares (which effect is a one
hundred percent increase of such Shares).
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<PAGE> 8
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Board and give each Optionee the right to exercise his or her
Option as to all or any part of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company, each outstanding Option shall be assumed or an
equivalent option shall be substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that the successor
corporation does not agree to assume the Option or to substitute an equivalent
option, the Board shall, in lieu of such assumption or substitution, provide for
the Optionee to have the right to exercise the Option as to all of the Optioned
Stock, including Shares as to which it would not otherwise be exercisable. If
the Board makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
the Optionee that the Option shall be fully exercisable for a period of thirty
(30) days from the date of such notice, and the Option will terminate upon the
expiration of such period. For the purposes of this paragraph, the Option shall
be considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase, for each Share of Optioned Stock subject to
the Option immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the merger or
sale of assets by holders of Common Stock for each Share held on the effective
date of the transaction (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger or
sale of assets was not solely common stock of the successor corporation or its
Parent, the Board may, with the consent of the successor corporation and the
participant, provide for the consideration to be received upon the exercise of
the Option, for each Share of Optioned Stock subject to the Option, to be solely
common stock of the successor corporation or its Parent equal in Fair Market
Value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. Except as set forth in Section 4,
the Board may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made which would
impair the rights of any Optionee under any grant theretofore made, without his
or her consent. In addition, to the extent necessary and desirable to comply
with Rule 16b-3 under the Exchange Act (or any other applicable law or
regulation), the Company shall obtain stockholder approval of any Plan amendment
in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
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<PAGE> 9
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company at or prior to the first annual
meeting of stockholders held subsequent to the granting of an Option hereunder.
Such stockholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
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<PAGE> 1
EXHIBIT 10.4
TARGET THERAPEUTICS, INC.
1991 EMPLOYEE STOCK PURCHASE PLAN
As Amended May, 1996
The following constitute the provisions of the 1991 Employee Stock
Purchase Plan of Target Therapeutics, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Target Therapeutics, Inc., a Delaware
corporation.
(e) "Compensation" shall mean all base straight time gross
earnings, including payments for overtime, shift premium, incentive
compensation, incentive payments, commissions and other compensation and
excluding bonuses; provided, however, that Compensation for officers, directors
and other persons subject to Section 16 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") shall include only base straight time gross
earnings exclusive of payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses, commissions and other compensation.
(f) "Designated Subsidiaries" shall mean the Subsidiaries which
have been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an employee of the
Company for purposes of tax withholding under the Code whose customary
employment with the Company or any Designated Subsidiary is at least twenty (20)
hours per week and more than five (5) months in any calendar year. For purposes
of the Plan, the employment relationship shall be treated as continuing intact
while the individual is on sick leave or other leave of absence approved by the
Company. Where the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed either by statute or by contract, the employment
relationship will be deemed to have terminated on the 91st day of such leave.
<PAGE> 2
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sale
price for the Common Stock (or the mean of the closing bid and asked prices, if
no sales were reported), as quoted on such exchange (or the exchange with the
greatest volume of trading in Common Stock) or system on the date of such
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable, or;
(2) If the Common Stock is quoted on the NASDAQ system (but
not on the National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or,
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "Offering Period" shall mean a period of approximately twelve
(12) months, commencing on the first Trading Day in May and November coinciding
with the beginning of the second full pay period in such month and terminating
on the last Trading Day of the first full pay period in the following May and
November, respectively, during which an option granted pursuant to the Plan may
be exercised.
(k) "Plan" shall mean this Employee Stock Purchase Plan.
(l) "Purchase Date" shall mean the last day of each Purchase
Period.
(m) "Purchase Period" shall mean a period of approximately six
months within an Offering Period.
(n) "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Purchase Date, whichever is lower.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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<PAGE> 3
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock
exchanges and the National Association of Securities Dealers Automated Quotation
(NASDAQ) System are open for trading.
3. Eligibility.
(a) Any Employee (as defined in Section 2(g)), who shall be
employed by the Company on a given Enrollment Date shall be eligible to
participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent his or her rights to purchase stock under
all employee stock purchase plans of the Company and its subsidiaries to accrue
at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock
(determined at the fair market value of the shares at the time such option is
granted) for each calendar year in which such option is outstanding at any time.
4. Offering Periods and Purchase Periods.
(a) Offering Periods. The Plan shall be implemented by a series of
consecutive Offering Periods of approximately twelve (12) months duration, with
new Offering Periods commencing on the first Trading Day in May and November
coinciding with the beginning of the second full pay period in each such month,
or on such other date as the Board shall determine, and continuing thereafter
until terminated in accordance with Section 20 hereof. The Board shall have the
power to change the duration of Offering Periods (including the commencement
dates thereof) with respect to future offerings without stockholder approval if
such change is announced at least fifteen (15) days prior to the scheduled
beginning of the first Offering Period to be affected thereafter. Eligible
Employees may not participate in more than one Offering Period at a time.
(b) Purchase Periods. Each Offering Period shall consist of two
(2) consecutive purchase periods of approximately six (6) months duration. The
last day of each Purchase Period shall be the "Purchase Date" for such Purchase
Period. A Purchase Period commencing on the First Trading Day coinciding with
the beginning of the second full pay period in May shall end on the last Trading
Day coinciding with the end of the first full pay period in the next November. A
Purchase Period commencing on the First Trading Day coinciding with the
beginning of the second full pay period in November shall end on the last
Trading Day coinciding with the end of the first full pay period in the next
May. The Board of Directors of the Company shall have the power to change the
duration and/or frequency of Purchase Periods with respect to
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<PAGE> 4
future purchases without shareholder approval if such change is announced at
least fifteen (15) days prior to the scheduled beginning of the first Offering
Period to be effected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office at
least five (5) business days prior to the applicable Enrollment Date, unless a
later time for filing the subscription agreement is set by the Board for all
eligible Employees with respect to a given Offering Period. The subscription
agreement shall set forth the percentage of the participant's Compensation
(which shall be not less than 1% and not more than 12%) to be deducted pursuant
to the Plan. Eligible Employees may not participate in more than one Offering
Period at a time.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll
paid on or prior to the last Purchase Period of the Offering Period to which
such authorization is applicable, unless sooner terminated by the participant as
provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during an Offering Period in an amount not exceeding twelve percent (12%) of the
Compensation which he or she receives on each pay day during an Offering Period,
and the aggregate of such payroll deductions during an Offering Period shall not
exceed twelve percent (12%) of the participant's Compensation during said
Offering Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and will be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during an Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to 0% at such time during any
Offering Period which is scheduled to end during the current calendar year (the
"Current Offering Period") that the aggregate of all payroll deductions
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<PAGE> 5
which were previously used to purchase stock under the Plan in a prior Offering
Period which ended during that calendar year plus all payroll deductions
accumulated with respect to the Current Offering Period equal $21,250. Payroll
deductions shall recommence at the rate provided in such participant's
subscription agreement at the beginning of the first Offering Period which is
scheduled to end in the following calendar year, unless terminated by the
participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but will not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Purchase Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Purchase Date and retained in the Participant's account as of the
Purchase Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than a
number of Shares determined by dividing $25,000 by the Fair Market Value of a
share of the Company's Common Stock on the Enrollment Date, and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 13 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof, and
shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares will
be exercised automatically on each Purchase Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares will be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after a
Purchase Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
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<PAGE> 6
10. Voluntary Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account will be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period will be automatically terminated, and no further payroll
deductions for the purchase of shares will be made during the Offering Period.
If a participant withdraws from an Offering Period, payroll deductions will not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) Upon a participant's ceasing to be an Employee (as defined in
Section 2(g) hereof), for any reason, including by virtue of him or her having
failed to remain an Employee of the Company for at least twenty (20) hours per
week during an Offering Period in which the Employee is a participant, he or she
will be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option will be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option will be automatically
terminated.
(c) A participant's withdrawal from an Offering Period will not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Automatic Withdrawal. If the fair market value of the shares on the
first Purchase Date of an Offering Period is less than the fair market value of
the shares on the Enrollment Date for such Offering Period, then every
participant shall automatically (i) be withdrawn from such Offering Period at
the close of such Purchase Date and after the acquisition of shares for such
Purchase Period, and (ii) be enrolled in the Offering Period commencing on the
first business day subsequent to such Purchase Period.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 300,000 shares,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 19 hereof. If on a given Purchase Date the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
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<PAGE> 7
(b) The participant will have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration.
(a) Administrative Body. The Plan shall be administered by the
Board or a committee of members of the Board appointed by the Board. The Board
or its committee shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
decision and determination made by the Board or its committee shall, to the full
extent permitted by law, be final and binding upon all parties. Members of the
Board who are eligible Employees are permitted to participate in the Plan,
provided that:
(1) Members of the Board who are eligible to participate in
the Plan may not vote on any matter affecting the administration of the Plan or
the grant of any option pursuant to the Plan.
(2) If a Committee is established to administer the Plan, no
member of the Board who is eligible to participate in the Plan may be a member
of the Committee.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Exchange Act, or any successor provision ("Rule 16b-3") provides
specific requirements for the administrators of plans of this type, the Plan
shall be only administered by such a body and in such a manner as shall comply
with the applicable requirements of Rule 16b-3. Unless permitted by Rule 16b-3,
no discretion concerning decisions regarding the Plan shall be afforded to any
committee or person that is not "disinterested" as that term is used in Rule
16b-3.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to a Purchase
Date on which the option is exercised but prior to delivery to such participant
of such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to
exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of
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<PAGE> 8
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees at least annually, which statements will set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves as well as the price per share of
Common Stock covered by each option under the Plan which has not yet been
exercised shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration". Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each option under the Plan shall be assumed or
an equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation, unless the Board determines,
in the exercise of its sole discretion and in lieu of such assumption or
substitution, to
-8-
<PAGE> 9
shorten the Offering Period then in progress by setting a new Purchase Date (the
"New Purchase Date") or to cancel each outstanding right to purchase and refund
all sums collected from participants during the Offering Period then in
progress. If the Board shortens the Offering Period then in progress in lieu of
assumption or substitution in the event of a merger or sale of assets, the Board
shall notify each participant in writing, at least ten (10) business days prior
to the New Purchase Date, that the Purchase Date for his option has been changed
to the New Purchase Date and that his option will be exercised automatically on
the New Purchase Date, unless prior to such date he has withdrawn from the
Offering Period as provided in Section 10 hereof. For purposes of this
paragraph, an option granted under the Plan shall be deemed to be assumed if,
following the sale of assets or merger, the option confers the right to
purchase, for each share of option stock subject to the option immediately prior
to the sale of assets or merger, the consideration (whether stock, cash or other
securities or property) received in the sale of assets or merger by holders of
Common Stock for each share of Common Stock held on the effective date of the
transaction (and if such holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
shares of Common Stock); provided, however, that if such consideration received
in the sale of assets or merger was not solely common stock of the successor
corporation or its parent (as defined in Section 424(e) of the Code), the Board
may, with the consent of the successor corporation and the participant, provide
for the consideration to be received upon exercise of the option to be solely
common stock of the successor corporation or its parent equal in fair market
value to the per share consid eration received by holders of Common Stock and
the sale of assets or merger.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any other
corporation.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Purchase Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts
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<PAGE> 10
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
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<PAGE> 1
TARGET THERAPEUTICS, INC.
----------------------------------------
CALCULATION OF NET INCOME/(LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
EXHIBIT 11.1
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ --------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income/(loss) $ 3,347 $ 2,700 $ (7,377) $ 4,833
======= ======= ======== =======
Weighted average shares outstanding during the period 14,862 14,332 14,825 14,294
Common equivalent shares (1) 658 836 -- 736
------- ------- -------- -------
Shares used in calculation of net income per share 15,520 15,168 14,825 15,030
======= ======= ======== =======
Net income/(loss) per share $ .22 $ .18 $ (.50) $ .32
======= ======= ======== =======
</TABLE>
(1) Common share equivalent shares are not used in the calculation of the per
share (loss) for the six months ended September 30, 1996 since they are
antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,579
<SECURITIES> 36,787
<RECEIVABLES> 19,643
<ALLOWANCES> (689)
<INVENTORY> 9,549
<CURRENT-ASSETS> 81,534
<PP&E> 23,100
<DEPRECIATION> (8,280)
<TOTAL-ASSETS> 106,879
<CURRENT-LIABILITIES> 23,741
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 82,045
<TOTAL-LIABILITY-AND-EQUITY> 106,879
<SALES> 22,044
<TOTAL-REVENUES> 22,044
<CGS> 6,725
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 4,850
<INCOME-TAX> 1,503
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,347
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
