<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
ENDOSONICS CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
Endosonics Logo
TO THE STOCKHOLDERS OF ENDOSONICS CORPORATION
You are cordially invited to attend the Annual Meeting of Stockholders of
EndoSonics Corporation ("EndoSonics" or the "Company") on June 4, 1998 at 10:00
a.m., California time. The Annual Meeting will be held at EndoSonics
Corporation, 2870 Kilgore Road, Rancho Cordova, California.
At the meeting, you will be asked to consider and vote upon the following
proposals: (i) the approval of the adoption of the 1998 Employee Stock Purchase
Plan of EndoSonics Corporation; (ii) the adoption of the 1998 Stock Option Plan
of EndoSonics Corporation and the reservation of 750,000 shares of the Company's
Common Stock for issuance thereunder; (iii) the election of six (6) individuals
to serve as the Company's Board of Directors; and (iv) the ratification of Ernst
& Young LLP as the Company's independent auditors for the current fiscal year.
Whether or not you plan to attend the Annual Meeting, please mark, sign,
date and return the enclosed proxy card promptly in the accompanying
postage-paid reply envelope. By returning the proxy, you can help EndoSonics
avoid the expense of duplicate proxy solicitations and possibly having to
reschedule the Annual Meeting if a quorum of the outstanding shares is not
present or represented by proxy. If you decide to attend the Annual Meeting and
wish to change your proxy vote, you may do so simply by voting in person at the
Annual Meeting.
REINHARD WARNKING
President and Chief Executive Officer
April 30, 1998
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ENDOSONICS
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OF ENDOSONICS CORPORATION
------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
EndoSonics Corporation, a Delaware corporation ("EndoSonics" or the "Company"),
will be held on June 4, 1998 at 10:00 a.m. at EndoSonics Corporation, 2870
Kilgore Road, Rancho Cordova, California, for the following purposes:
1. To approve the adoption of the 1998 Employee Stock Purchase Plan (the
"1998 Purchase Plan") of EndoSonics Corporation.
2. To approve the adoption of the 1998 Stock Option Plan (the "1998 Option
Plan") of EndoSonics Corporation and the reservation of 750,000 shares
of Common Stock for issuance thereunder.
3. To elect a six (6) member Board of Directors for EndoSonics from the
following nominees: Roger Salquist, Julie A. Brooks, Thomas J. Cable,
Edward M. Leonard, Reinhard J. Warnking and W. Michael Wright.
4. To ratify the selection of Ernst & Young LLP as EndoSonics' independent
auditors for the current fiscal year ending December 31, 1998.
5. To transact such other business as may properly come before the meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on April 17, 1998 as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting and at any continuation or adjournment thereof.
By Order of the Board of Directors
MICHAEL W. HALL
Secretary
Rancho Cordova, California
April 30, 1998
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU EXPECT TO
ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN
YOUR PROXY, YOU MAY VOTE IN PERSON IF YOU ATTEND THE MEETING.
<PAGE> 4
ENDOSONICS
------------------------
PROXY STATEMENT
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
EndoSonics Corporation ("EndoSonics" or the "Company") for use at the Annual
Meeting of Stockholders (the "Annual Meeting") to be held on June 4, 1998 at
10:00 a.m., at which time stockholders of record on April 17, 1998 will be
entitled to vote. On April 17, 1998, EndoSonics had outstanding 16,187,830
shares of Common Stock. Stockholders of record on such date are entitled to one
vote for each share of Common Stock held on all matters to be voted upon at the
meeting.
EndoSonics intends to mail this proxy statement and the accompanying proxy
card on or about May 1, 1998 to all stockholders entitled to vote at the Annual
Meeting. EndoSonics' principal executive offices are located at 2870 Kilgore
Road, Rancho Cordova, California 95670. The telephone number at that address is
(916) 638-8008.
VOTING
Pursuant to Delaware law, directors are elected by a plurality of the votes
cast. The other matters submitted for stockholder approval at the Annual Meeting
will be decided by the affirmative vote of a majority of shares present in
person or represented by proxy at the Annual Meeting and entitled to vote on
each matter. With regard to the election of directors, votes may be cast in
favor of or withheld from each nominee; votes that are withheld will be excluded
entirely from the vote and will have no effect. With respect to each of the
other proposals described in the Notice of Annual Meeting of Stockholders and in
this Proxy Statement, if a choice as to that proposal has been specified by a
stockholder on the Proxy, the shares will be voted accordingly. If no choice is
specified, the shares will be voted IN FAVOR OF the approval of the proposal.
Abstentions and broker non-votes (i.e., the submission of a Proxy by a broker or
nominee specifically indicating the lack of discretionary authority to vote on
the proposal) are counted for purposes of determining the presence or absence of
a quorum for the transaction of business. Abstentions will be counted towards
the tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative notes, whereas broker non-votes will not be
counted for purposes of determining whether a proposal has been approved or not.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by the holder of
record by filing with the Secretary of EndoSonics at the Company's principal
executive office, a written notice of revocation or a new duly executed proxy
bearing a date later than the date indicated on the previous proxy, or it may be
revoked by the holder of record attending the meeting and voting in person.
Attendance at the meeting will not, by itself, revoke a proxy.
SOLICITATION
EndoSonics will bear the entire cost of proxy solicitation, including costs
of preparing, assembling, printing and mailing this proxy statement, the proxy
card and any additional material furnished to stockholders. Copies of the
solicitation materials will be furnished to brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others, to forward to such beneficial owners. EndoSonics may reimburse persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular
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employees of EndoSonics. No additional compensation will be paid to directors,
officers or other regular employees for such services.
PROPOSAL NO. 1
APPROVAL OF 1998 EMPLOYEE STOCK PURCHASE PLAN
OF ENDOSONICS CORPORATION
(SINGLE PERIOD ESP PLAN)
At the Annual Meeting, the Company's stockholders are being asked to
approve the adoption of the Company's 1998 Employee Stock Purchase Plan (the
"1998 Purchase Plan") and the reservation of 250,000 shares of Common Stock for
issuance thereunder. The following is a summary of principal features of the
1998 Purchase Plan. This summary, however, does not purport to be a complete
description of all the provisions of the 1998 Purchase Plan. Any stockholder of
the Company who wishes to obtain a copy of the actual plan document may do so
upon written request to the Vice President of Human Resources and Administration
at the Company's principal office located at 2870 Kilgore Road, Rancho Cordova,
CA, 95670.
GENERAL
The 1998 Purchase Plan was adopted by the Board of Directors in February
1998. In connection with the 1998 Purchase Plan, the Board of Directors has
reserved a total of 250,000 shares of Common Stock for issuance thereunder. The
Board of Directors believes that, in order to attract qualified employees to the
Company and to provide incentives to its current employees, it is necessary to
grant its employees the right to purchase Common Stock of the Company pursuant
to the 1998 Purchase Plan. Accordingly, the stockholders are being asked to
approve the 1998 Purchase Plan.
The 1998 Purchase Plan will be implemented by two six-month offering
periods each year commencing on February 1 and August 1 of each year, or at such
other time or times as may be determined by the Board of Directors. The first
offering period commences on July 1, 1998 and ends on January 31, 1999. The
Purchase Plan is intended to qualify under Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code"). The 1998 Purchase Plan is further deemed
to contain, and options granted thereunder shall contain, and the shares issued
upon exercise thereof shall be subject to, any additional conditions and
restrictions as may be required by Rule 16b-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act") to qualify for the maximum exemption from
Section 16 of the Exchange Act with respect to the 1998 Purchase Plan
transactions. The 1998 Purchase Plan is not a qualified deferred compensation
plan under Section 401(a) of the Code, and is not subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended.
Participation in the 1998 Purchase Plan is entirely voluntary, with certain
limits on eligibility as described below. Accordingly, the actual benefits, if
any, to participants in the 1998 Purchase Plan are not prospectively
determinable with respect to any individual participant or class of participants
prior to exercise of the options issued thereunder as the value, if any, of
purchase rights issued under the 1998 Purchase Plan to their holders is
represented by the difference between the market price of a share of the
Company's Common Stock on the date of exercise and the exercise price of a
holder's option, as set forth below.
PURPOSE
The purpose of the 1998 Purchase Plan is to provide employees (including
officers and employee directors) of the Company with an opportunity to purchase
Common Stock of the Company through payroll deductions.
ADMINISTRATION
The 1998 Purchase Plan is to be administered by the Board of Directors of
the Company or a committee appointed by the Board (the "Administrator"). At the
present time, the 1998 Purchase Plan is administered
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by the Compensation Committee. All questions of interpretation or application of
the 1998 Purchase Plan are determined by the Administrator.
ELIGIBILITY AND PARTICIPATION
Employees (including officers and employee directors) who are employed for
at least 20 hours per week and more than five months in any calendar year and
who are employed by the Company as of the first business day of each offering
period of the 1998 Purchase Plan (the "Offering Date") are eligible to
participate in an offering under the 1998 Purchase Plan, subject to certain
limitations imposed by Section 423(b) of the Code and limitations on stock
ownership as set forth in the 1998 Purchase Plan. No employee shall be granted
an option under the 1998 Purchase Plan if (i) immediately after the grant such
employee would own stock and/or hold outstanding options to purchase stock
possessing five percent (5%) or more of the total voting power or value of all
classes of stock of the Company or its subsidiaries, or (ii) such option would
permit such employee to purchase stock under all employee stock purchase plans
of the Company and its subsidiaries to accrue at a rate which exceeds $25,000 of
fair market value of such stock for each calendar year in which such option is
outstanding at any time.
Eligible employees become participants in the 1998 Purchase Plan by filing
with the payroll office of the Company a subscription agreement authorizing
payroll deductions prior to the applicable Offering Date, unless a later time
for filing the subscription agreement has been set by the Administrator. Payroll
deductions shall commence on the first payroll following the Offering Date and
shall end on the last payroll paid on or prior to the last day (the "Purchase
Date") of the offering period to which the subscription agreement is applicable,
unless sooner terminated by the participant.
GRANT AND EXERCISE OF OPTION
At the beginning of an offering period each participant is granted an
option to purchase up to that number of shares determined by dividing such
employee's payroll deductions accumulated prior to the end of the offering
period and retained in the participant's account as of the end of the offering
period by the lower of (i) eighty-five percent (85%) of the fair market value of
a share of the Company's Common Stock at the beginning of the offering period or
(ii) eight-five percent (85%) of the fair market value of a share of the
Company's Common Stock on the last day of the offering period; provided that in
no event shall a participant be permitted to purchase during each offering
period more than a number of shares determined by dividing $12,500 by the fair
market value of a share of the Company's Common Stock at the beginning of the
offering period, and provided further that such purchases shall be subject to
the limitations set forth below. The Company may make a pro rata reduction in
the number of shares subject to options if the total number of shares which
would otherwise be subject to options granted at the beginning of an offering
period exceeds the number of remaining available shares in the 1998 Purchase
Plan. Unless an employee withdraws his or her participation in the 1998 Purchase
Plan by giving written notice to the Company of his or her election to withdraw
all accumulated payroll deductions prior to the end of an offering period, the
employee's option for the purchase of shares will be exercised automatically at
the end of the offering period, and the maximum number of full shares subject to
option which are purchasable with the accumulated payroll deductions in his or
her account will be purchased at the applicable purchase price determined as
provided below.
During his or her lifetime, a participant's option to purchase shares under
the 1998 Purchase Plan is exercisable only by him or her. However, a participant
may file a written designation of a beneficiary who is (i) to receive any shares
and cash, if any, from the participant's account under the 1998 Purchase Plan in
the event of such participant's death subsequent to the end of an Offering
Period but prior to delivery to him or her of such shares and cash, and (ii) to
receive any cash from the participant's account under the 1998 Purchase Plan in
the event of such participant's death prior to the Purchase Date of the Offering
Period. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
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PURCHASE PRICE
The purchase price per share at which shares are sold to participating
employees under the 1998 Purchase Plan is the lower of (i) 85% of the fair
market value per share of the Common Stock at the time the option is granted at
the commencement of the offering period, and (ii) 85% of the fair market value
per share of the Common Stock at the time the option is exercised on the
applicable Purchase Date. The fair market value of the Common Stock on a given
date shall be determined by the Board of Directors and will generally be based
upon the last reported sales price of the Common Stock on the Nasdaq National
Market.
PAYROLL DEDUCTIONS
The purchase price of the shares to be acquired under the 1998 Purchase
Plan is accumulated by payroll deductions during the offering period. The
deductions may not be less than 1% or more than 20% of a participant's aggregate
compensation during the offering period. A participant may discontinue his or
her participation in the 1998 Purchase Plan or, on one occasion only during an
offering period, may increase or decrease his or her rate of payroll deductions.
Payroll deductions for a participant shall commence on the first payroll
following the Offering Date and shall continue until his or her participation is
terminated as provided in the 1998 Purchase Plan.
TERMINATION OF EMPLOYMENT
Termination of a participant's employment, for any reason, including
retirement or death, or the failure of the participant to remain in the
continuous employ of the Company for at least 20 hours per week during the
applicable Offering Period, cancels his or her option and his or her
participation in the 1998 Purchase Plan immediately. In such event, the payroll
deductions credited to the participant's account will be returned to him or her
or, in the case of death, to the person or persons entitled thereto as provided
in the 1998 Purchase Plan.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event any change is made in the Company's capitalization in the
middle of an offering period, such as a stock split, stock dividend, combination
or reclassification, that results in an increase or decrease in the number of
shares of Common Stock outstanding without receipt of consideration by the
Company, appropriate adjustment shall be made in the purchase price and in the
number of shares subject to options under the 1998 Purchase Plan.
In the event of a 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 Administrator. 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
1998 Purchase Plan shall be assumed or an equivalent substitute option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Administrator elects to shorten the Offering
Period then in progress by setting a new Purchase Date and notifying the
optionees of the change in their Purchase Date.
AMENDMENT AND TERMINATION OF THE PLAN
The Board of Directors may at any time amend or terminate the 1998 Purchase
Plan without the approval of the stockholders, except that such termination
cannot affect options previously granted nor may an amendment make any change in
an option granted prior thereto which adversely affects the rights of any
participant. No amendment may be made to the 1998 Purchase Plan without approval
of the stockholders of the Company if such amendment would increase the number
of shares reserved under the 1998 Purchase Plan, change the standards of
eligibility for participation in the 1998 Purchase Plan, or materially increase
the benefits accruing to participants in the 1998 Purchase Plan.
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The 1998 Purchase Plan shall expire in 20 years unless sooner terminated by
the Administrator, provided that any options then outstanding under the 1998
Purchase Plan shall remain outstanding until they expire by their terms.
TAX INFORMATION
The 1998 Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no income will be taxable to a participant
until the shares purchased under the Plan are sold or otherwise disposed of.
Upon sale or other disposition of the shares, the participant will generally be
subject to tax and the amount of the tax will depend upon how long the shares
have been held by the participant. If the shares are sold or otherwise disposed
of more than two years from the first day of the offering period or more than
one year after the Purchase Date, the participant will recognize ordinary income
measured as the lesser of (a) the excess of the fair market value of the shares
at the time of such sale or disposition over the purchase price, or (b) an
amount equal to 15% of the fair market value of the shares as of the first day
of the offering period. Any additional gain will be treated as long-term capital
gain, taxed at a rate of 28% if the shares are held for more than one year, but
not more than 18 months after the Purchase Date, and at a rate of 20% if the
shares are held for more than 18 months after the Purchase Date. If the shares
are sold or otherwise disposed of before the expiration of these holding
periods, the participant will recognize ordinary income generally measured as
the excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
the holding period. The Company is not entitled to a deduction for amounts taxed
as ordinary income or capital gain to a participant except to the extent of
ordinary income recognized by participants upon a sale or disposition of shares
prior to the expiration of the holding period(s) described above.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and the Company with respect to the shares purchased under
the 1998 Purchase Plan. Reference should be made to the applicable provisions of
the Code. In addition, the summary does not discuss the tax consequences of a
participant's death or the income tax laws of any state or foreign country in
which the participant may reside.
REQUIRED VOTE
The ratification of the adoption of the 1998 Purchase Plan and the
reservation of 250,000 shares of Common Stock for issuance thereunder requires
the affirmative vote of the holders of a majority of the shares of the Company's
capital stock entitled to vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL
OF THE 1998 PURCHASE PLAN AND THE RESERVATION OF
250,000 SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER.
PROPOSAL NO. 2
ADOPTION OF THE 1998 STOCK OPTION PLAN
OF ENDOSONICS CORPORATION
The stockholders are being asked to approve the adoption of the Company's
1998 Stock Option Plan (the "1998 Option Plan") and the reservation of 750,000
shares of Common Stock issuable under the Plan.
The Board of Directors believes that, in order to attract and retain
qualified employees, officers, consultants and directors to the Company and to
provide them with incentives to remain with the Company and work for its
long-term success, it is necessary to grant options to purchase Common Stock to
such persons to ensure that they have a proprietary interest in the Company. The
Board of Directors is terminating the Company's 1988 Stock Option Plan (the "Old
Plan"), as it will no longer be possible to issue incentive stock options under
such plan as of March 1998. As of March 18, 1998, only approximately 225,000
shares of Common Stock remain available for issuance under the Old Plan. The
depletion of shares in the Old Plan was
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in part due to the Company's issuance of options to purchase 287,250 shares of
Common Stock to employees transferred to the Company as a result of the
Company's acquisition of Cardiometrics, Inc. Approval of the 1998 Option Plan,
and the reservation of 750,000 shares of Common Stock for issuance thereunder at
the 1998 Annual Meeting of Stockholders, is expected to provide sufficient
options to continue the Company's policy of equity ownership by employees and
consultants as an incentive to contribute to the Company's success.
The 1998 Option Plan is not a qualified deferred compensation plan under
Section 401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
The terms and provisions of the 1998 Option Plan are described more fully
below. The description, however, is not intended to be a complete exposition of
all the terms of the Plan. A copy of the 1998 Option Plan will be furnished by
the Company to any stockholder upon written request to the Secretary of the
Company at the Company's principal office located at 2870 Kilgore Road, Rancho
Cordova, CA, 95670.
PLAN STRUCTURE
The 1998 Option Plan is divided into two separate components:
Discretionary Option Grant Program. Officers, employees, nonemployee Board
members and independent consultants may, at the discretion of the plan
administrator, be granted options to purchase shares of Common Stock of the
Company. The options granted under this Discretionary Option Grant Program may
be either incentive stock options that are designed to meet the requirements of
Section 422 of the Internal Revenue Code, as amended (the "Code"), or
non-statutory stock options not intended to satisfy such requirements.
Automatic Option Grant Program. Nonemployee Board members will
automatically receive option grants at designated intervals over their period of
Board service under the 1998 Option Plan's Automatic Option Grant Program. Each
grant will be for a fixed number of shares with an exercise price equal to the
fair market value of the option shares on the grant date.
ADMINISTRATION
If permitted by Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and by the legal requirements relating to the
administration of incentive stock option plans, if any, of applicable securities
laws and the Code (collectively, the "Applicable Laws"), grants under the
Discretionary Option Grant Program of 1998 Option Plan may (but need not) be
made by different administrative bodies with respect to employees or consultants
who are also officers or directors and employees who are neither directors nor
officers.
With respect to grants of options to employees or consultants who are also
officers or directors of the Company, grants under the Discretionary Option
Grant Program shall be made by (A) the Board of Directors, if the Board of
Directors may make grants under the 1998 Option Plan in compliance with Rule
16b-3 of the Exchange Act and Section 162(m) of the Code as the latter applies
so as to qualify grants of options to "covered employees" as performance-based
compensation, or (B) a committee designated by the Board of Directors to make
grants under the 1998 Option Plan, which committee shall be constituted in such
a manner as to permit such grants to comply with Rule 16b-3, to qualify grants
of options to "covered employees" as performance-based compensation under
Section 162(m) of the Code and otherwise so as to satisfy the Applicable Laws.
With respect to grants of options to employees or consultants who are
neither directors nor officers of the Company, the Discretionary Option Grant
Program will be administered by (A) the Board of Directors or (B) a committee
designated by the Board of Directors, which committee will be constituted in
such a manner so as to satisfy the Applicable Laws. The Board of Directors or
the committee designated by the Board of Directors to administer the
Discretionary Option Grant Program is referred to in this Proxy Statement as the
"Administrator." The Administrator receives no additional compensation for its
services in connection with the administration of the 1998 Option Plan.
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The Automatic Option Grant Program provides for the grant of nonstatutory
stock options to nonemployee directors of the Company. It is designed to work
automatically and not to require administration; however, to the extent
administration is necessary, it will be provided by the Board of Directors.
SHARE RESERVE
The maximum number of shares of Common Stock issuable under the 1998 Option
Plan may not exceed 750,000 shares. Should an option be terminated or canceled
for any reason prior to exercise or surrender in full, the shares subject to the
portion of the option not so exercised or surrendered will be available for
subsequent grant. In no event may any one participant in the Plan be granted
stock options for more than 550,000 shares in the aggregate in any calendar
year, subject to adjustment as provided for in the 1998 Option Plan.
ELIGIBILITY
The persons eligible to participate in the 1998 Option Plan are limited to
(i) employees (including officers), (ii) the nonemployee Board members, and
(iii) independent consultants in the service of the Company or its parent or
subsidiary corporations (whether now existing or subsequently established). As
of March 18, 1998 approximately 300 employees (including 10 officers of the
Company and 7 nonemployee Board members) were eligible to participate in the
1998 Option Plan.
DISCRETIONARY OPTION GRANT PROGRAM
The terms of options granted under the Discretionary Option Grant Program
are determined by the Administrator. Each option is evidenced by a stock option
agreement between the Company and the optionee and is subject to the following
additional terms and conditions:
(a) Exercise of the Option. The optionee must earn the right to
exercise the option by continuing to work for the Company. The
Administrator determines when options are exercisable. An option is
exercised by giving written notice of exercise to the Company specifying
the number of full shares of Common Stock to be purchased, and by tendering
payment of the purchase price to the Company. The method of payment of the
exercise price of the shares purchased upon exercise of an option may be
cash or a number of other methods, including use of a promissory note, as
determined by the Administrator.
The vesting schedule for each granted option will be determined by the
Administrator and will be set forth in the instrument evidencing such
grant. The granted option may be (i) immediately exercisable for vested
shares, (ii) immediately exercisable for unvested shares subject to the
Company's repurchase rights, or (iii) exercisable in installments for
vested shares over the optionee's period of service.
(b) Exercise Price. The exercise price of options granted under the
Discretionary Option Grant Program is determined by the Administrator, and
must be at least equal to the fair market value of the shares on the date
of grant, as determined by the Administrator, based upon the closing price
on the Nasdaq National Market on the date of grant. Incentive stock options
granted to stockholders owning more than 10% of the total combined voting
power of all classes of the Company's stock (such holders are referred to
as "10% Stockholders") are subject to the additional restriction that the
exercise price on such options must be at least 110% of the fair market
value on the date of the grant.
(c) Termination of Employment. If the optionee's employment or
consulting relationship with the Company is terminated for any reason other
than death or total and permanent disability, options under the
Discretionary Option Grant Program may be exercised not later than three
months (or such other period after, not exceeding three months in the case
of incentive stock options or six months in the case of nonstatutory stock
options, as is determined by the Administrator) after the date of such
termination to the extent the option was exercisable on the date of such
termination. In no event may an option be exercised by any person after the
expiration of its term.
(d) Disability. If an optionee is unable to continue his or her
employment or consulting relationship with the Company as a result of his
or her total and permanent disability, options may be exercised
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within six months (or such other period of time not exceeding twelve months
in the case of incentive stock options as is determined by the
Administrator) after the date of termination and may be exercised only to
the extent the option was exercisable on the date of termination, but in no
event may the option be exercised after its termination date.
(e) Death. If an optionee should die while employed or retained by the
Company, and such optionee has been continuously employed or retained by
the Company since the date of grant of the option, the option may be
exercised within six months after the date of death (or such other period
of time, not exceeding twelve months, as is determined by the
Administrator) by the optionee's estate or by a person who acquired the
right to exercise the option by bequest or inheritance to the extent the
optionee would have been entitled to exercise the option had the optionee
continued living and remained employed or retained by the Company for three
months after the date of death, but in no event may the option be exercised
after its termination date.
If an optionee should die within 30 days (or such other period of time
not exceeding three months as is determined by the Administrator) after the
optionee has ceased to be continuously employed or retained by the Company,
the option may be exercised within six months after the date of death by
the optionee's estate or by a person who acquired the right to exercise the
option by bequest or inheritance to the extent that the optionee was
entitled to exercise the option at the date of termination, but in no event
may the option be exercised after its termination date.
(f) Option Termination Date. Incentive stock options granted under the
1998 Option Plan expire ten years from the date of grant unless a shorter
period is provided in the option agreement. Incentive stock options granted
to 10% Stockholders may not have a term of more than five years.
(g) Nontransferability of Options. Incentive stock options are not
transferable by the optionee, other than by will or the laws of descent and
distribution, and are exercisable only by the optionee during his or her
lifetime or, in the event of death, by a person who acquires the right to
exercise the option by bequest or inheritance or by reason of the death of
the optionee. In the case of nonstatutory stock options, the Administrator
may at its discretion in certain circumstances allow the transferability of
such options.
(h) Acceleration of Option. In the event of a merger of the Company
with or into another corporation or sale of substantially all of the
Company's assets the exercisability of all options will be accelerated in
full unless the successor corporation assumes or substitutes the options in
connection with such transaction. The Administrator has full power and
authority, exercisable either at the time the option is granted or at any
time while the option remains outstanding, to provide for the automatic
acceleration of one or more outstanding options under the Discretionary
Option Grant Program in the event of certain change in control transactions
(generally the acquisition by any person of more than 25% of the total
outstanding securities of the Company or a change in composition of the
Board of Directors such that the incumbent directors no longer constitute a
majority) so that each such option will, immediately prior to such change
in control, become exercisable for all the shares of Common Stock at that
time subject to that option and may be exercised for all or any portion of
those shares as fully-vested shares.
The acceleration of options in the event of a merger or sale of the
Company or in a change in control may be seen as an anti-takeover provision
and may have the effect of discouraging a merger proposal, a takeover
attempt or other efforts to gain control of the Company.
(i) Other Provisions. The option agreement may contain such other
terms, provisions and conditions not inconsistent with the 1998 Plan as may
be determined by the Administrator.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, each nonemployee Board member
will automatically be granted, upon his or her initial election or appointment
to the Board, a stock option to purchase 10,000 shares of Common Stock. In
addition, on the date of each Annual Stockholders' Meeting, each individual who
is to continue to serve as a nonemployee Board member will automatically be
granted a stock option to purchase
8
<PAGE> 12
5,000 shares of Common Stock, provided such individual has served on the Board
for at least six (6) months. Stockholder approval of this Proposal will also
constitute pre-approval of each option granted on or after the date of the
Annual Meeting pursuant to the provisions of the Automatic Option Grant Program
summarized below and the subsequent exercise of that option in accordance with
those provisions.
The option exercise price per share for each automatic grant will be equal
to the fair market value per share of Common Stock on the grant date and will be
payable in cash or shares of Common Stock. The options may also be exercised
through a same-day sale program, pursuant to which a designated brokerage firm
effects the immediate sale of the shares purchased under the option and pays
over to the Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the exercise price for the purchase shares.
Each option will have a maximum term of 10 years measured from the grant
date and will become exercisable in a series of four successive equal annual
installments over the optionee's period of Board service, with the first such
installment to become exercisable upon optionee's completion of one year of
Board service measured from the grant date. However, the option will immediately
become exercisable for all the option shares upon the optionee's death or
permanent disability while serving as a Board member or upon the occurrence of
certain merger or change in control transactions.
All automatic option grants held by the nonemployee Board member at the
time of his or her cessation of Board service will remain exercisable for a
period of six months for any or all shares for which those options are
exercisable at the time of such cessation of Board service. However, should the
optionee die while holding one or more options, then those options will remain
exercisable for a 12-month period following the date of the optionee's death and
may be exercised for any or all shares for which those options are exercisable
at the time of the optionee's cessation of Board service, by the personal
representative of the optionee's estate or by the persons to whom the options
are transferred by the optionee's will or by the laws of inheritance. In no
event may any such option be exercised after the expiration date of the 10-year
option term.
LIMITED STOCK APPRECIATION RIGHTS
In addition to stock options, certain tandem limited stock appreciation
rights providing for the cancellation of options subject to such rights upon the
occurrence of a hostile takeover of the Company in exchange for a cash
distribution from the Company within five days of the consummation of such
hostile takeover may be granted under the 1998 Option Plan. The amount of the
cash distribution to which an optionee would be entitled upon a hostile takeover
would be equal to the excess of (a) the greater of (i) the fair market value of
the stock on the date of cancellation or (ii) the highest reported per share
price paid in effecting such hostile takeover over (b) the aggregate exercise
price for such shares. (In the case of an incentive stock option, the relevant
per share price would be the fair market value on the date of cancellation.)
Under the Discretionary Option Grant Program, the Administrator may, in its sole
discretion at the time of grant, provide for such limited stock appreciation
rights with respect to any option granted to any officer subject to the
short-swing profit restrictions of Section 16 of the Exchange Act. Limited stock
appreciation rights are automatically granted in connection with options issued
under the Automatic Option Grant Program. These limited stock appreciation
rights could be seen as an anti-takeover provision and may have the effect of
discouraging a merger proposal, a takeover attempt or other efforts to gain
control of the Company.
GENERAL PLAN PROVISIONS
Valuation. For purposes of establishing the option exercise price and for
all other valuation purposes under the Plan, the fair market value per share of
Common Stock on any relevant date will be the closing selling price per share as
reported on the Nasdaq National Market. As of April 17, 1998 the fair market
value per share of the Common Stock was $6.63 per share, as reported on the
Nasdaq National Market.
Changes in Capitalization. In the event any change is made to the Common
Stock issuable under the Plan (by reason of any stock dividend, stock split,
combination of shares, recapitalization, or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration), appropriate adjustments will be made to (i) the maximum number
and/or class of securities available for
9
<PAGE> 13
issuance under the Plan, (ii) the maximum number and class of securities for
which any one participant may be granted stock options in the aggregate under
the Plan, (iii) the number and/or class of securities for which automatic option
grants are subsequently to be made to each newly-elected or continuing
non-employee Board member and (iv) the number and/or class of securities and the
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. In the event of the proposed
dissolution or liquidation of the Company, each option will terminate unless
otherwise provided by the Administrator.
Amendment and Termination of the Plan. The Board may amend or modify the
Plan in any or all respects whatsoever, subject to any required stockholder
approval under applicable law or regulation. The Board may terminate the Plan at
any time, but in all events the Plan will terminate upon the earlier of May 2008
or the date all shares available for issuance under the Plan are issued as
vested shares or canceled pursuant to the exercise or surrender of options
granted under the Plan. Any options outstanding at the time of the termination
of the Plan will remain in force in accordance with the provisions of the
instruments evidencing those grants.
UNITED STATES FEDERAL INCOME TAX INFORMATION
The following is a brief summary of the U.S. federal income tax
consequences of transactions under the 1998 Option Plan based on federal income
tax laws in effect on the date of this Proxy Statement. This summary is not
intended to be exhaustive and does not address all matters which may be relevant
to a particular optionee based on his or her specific circumstances. The summary
addresses only current U.S. federal income tax law and expressly does not
discuss the income tax laws of any state, municipality, non-U.S. taxing
jurisdiction or gift, estate or other tax laws other than federal income tax
law. The Company advises all optionees to consult their own tax advisor
concerning the tax implications of option grants and exercises and the
disposition of stock acquired upon such exercises, under the 1998 Option Plan.
Incentive Stock Options. Options granted under the Discretionary Option
Grant Program may be either incentive stock options, which are intended to
qualify for the special tax treatment provided by Section 422 of the Code, or
nonstatutory stock options, which will not qualify. If an option granted under
the Discretionary Option Grant Program is an incentive stock option, the
optionee will recognize no income upon grant of the incentive stock option and
will incur no tax liability due to the exercise, except to the extent that such
exercise causes the optionee to incur alternative minimum tax. (See discussion
below.) The Company will not be allowed a deduction for federal income tax
purposes as a result of the exercise of an incentive stock option regardless of
the applicability of the alternative minimum tax. Upon the sale or exchange of
the shares more than two years after grant of the option and one year after
exercise of the option by the optionee, any gain will be treated as a long-term
capital gain. If both of these holding periods are not satisfied, the optionee
will recognize ordinary income equal to the difference between the exercise
price and the lower of the fair market value of the Common Stock on the date of
the option exercise or the sale price of the Common Stock. The Company will be
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee. Any gain or loss recognized on a disposition of the shares prior
to completion of both of the above holding periods in excess of the amount
treated as ordinary income will be characterized as long-term capital gain if
the sale occurs more than one year after exercise of the option or as short-term
capital gain if the sale is made earlier. For individual taxpayers, the current
U.S. federal income tax rate on long-term capital gains is alternatively 28% (in
the case of shares held more than one year but less than 18 months after
exercise) and 20% (in the case of shares held more than 18 months after
exercise), whereas the maximum rate on other income is 39.6%. Capital losses for
individual taxpayers are allowed in full against capital gains plus $3,000 of
other income.
Nonstatutory Stock Options. All other options granted under the
Discretionary Option Grant Program which do not qualify as incentive stock
options and all options granted under the Automatic Option Grant Program are
referred to as nonstatutory stock options. An optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory stock option.
However, upon its exercise, the optionee will recognize ordinary income for tax
purposes measured by the excess of the fair market value of the shares over the
exercise price. The income recognized by an optionee who is also an employee of
the Company will be
10
<PAGE> 14
subject to income and employment tax withholding by the Company by payment in
cash by the optionee or out of the optionee's current earnings. Upon the sale of
such shares by the optionee, any difference between the sale price and the fair
market value of the shares as of the date of exercise of the option will be
treated as capital gain or loss, and will qualify for long-term capital gain or
loss treatment if the shares have been held for more than one year from date of
exercise.
Alternative Minimum Tax. The exercise of an incentive stock option may
subject the optionee to the alternative minimum tax under Section 55 of the
Code. The alternative minimum tax is calculated by applying a tax rate of 26% to
alternative minimum taxable income of joint filers up to $175,000 ($87,500 for
married taxpayers filing separately) and 28% to alternative minimum taxable
income above that amount. Alternative minimum taxable income is equal to (i)
taxable income adjusted for certain items, plus (ii) items of tax preference
less (iii) an exemption amount of $45,000 for joint returns, $33,750 for
unmarried individual returns and $22,500 in the case of married taxpayers filing
separately (which exemption amounts are phased out for upper income taxpayers).
Alternative minimum tax will be due if the tax determined under the foregoing
formula exceeds the regular tax of the taxpayer for the year.
In computing alternative minimum taxable income, shares purchased upon
exercise of an incentive stock option are treated as if they had been acquired
by the optionee pursuant to exercise of a nonstatutory stock option. As a
result, the optionee recognizes alternative minimum taxable income equal to the
excess of the fair market value of the Common Stock on the date of exercise over
the option exercise price. Because the alternative minimum tax calculation may
be complex, optionees should consult their own tax advisors prior to exercising
incentive stock options. In particular, optionees who choose to exercise their
incentive stock options before such options are fully vested are strongly urged
to consult their tax advisors prior to such exercise to make sure that the
alternative minimum tax consequences of exercise are understood.
If an optionee pays alternative minimum tax, the amount of such tax may be
carried forward as a credit against any subsequent year's regular tax in excess
of the alternative minimum tax for such year.
Deductibility of Executive Compensation. The Company anticipates that any
compensation deemed paid by it in connection with disqualifying dispositions of
incentive stock option shares or exercises of non-statutory options granted with
an exercise price equal to the fair market value of the option shares will
quality as performance-based compensation for purposes of Code Section 162(m)
and will not have to be taken into account for purposes of the $1 million
limitation per covered individual on the deductibility of the compensation paid
to certain executives of the Company.
PLAN BENEFITS
The actual benefits, if any, to participants in the 1998 Option Plan are
not determinable prospectively with respect to any individual participant or
class of participants prior to exercise of the options issued under the 1998
Option Plan as the value, if any, of such options to the optionees is
represented by the difference between the market price of a share of the
Company's Common Stock on the date of exercise and the exercise price of the
option. The Administrator has full discretion as to the recipients of awards
under the Discretionary Option Grant Program and the amounts of such awards.
With respect to the Automatic Option Grant Program, Julie A. Brooks will receive
an option to purchase 10,000 shares of Common Stock on the date of the Company's
Annual Meeting of Stockholders (assuming her election at the Meeting), and the
following nonemployee incumbent directors will each receive an option to
purchase 5,000 shares of Common Stock on the date of the Company's Annual
Meeting of Stockholders (assuming election of all such persons at the Meeting):
Thomas J. Cable, Edward M. Leonard, Roger Salquist, and W. Michael Wright.
ACCOUNTING TREATMENT
Option grants made to employees and Board members with an exercise price
less than the fair market value of the shares on the grant date will result in
compensation expense to the Company's earnings equal to the difference between
the exercise price and the fair market value of the shares on the grant date.
Such charge will be expensed by the Company over the period benefited (usually
the vesting period of the option). Option grants with an exercise price not less
than the fair market value of the shares on the grant date will
11
<PAGE> 15
generally not result in any direct charge to the Company's earnings. However,
the estimated fair market value of those options is required to be disclosed in
the notes to the Company's financial statements, and the Company must also
disclose, in pro forma disclosures in the Company's financial statements, the
impact those options would have upon the Company's reported earnings were the
estimated fair market value of those options at the time of grant treated as
compensation expense. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's diluted
earnings per share.
Option grants made to individuals who are not employees at the Company or
Board members will result in compensation expense to the Company's earnings
equal to the fair market value of the granted options determined as of the grant
date. Such charge is also expensed over the period benefited (usually the
vesting period for options).
REQUIRED VOTE
The approval of the adoption of the 1998 Option Plan and the reservation of
750,000 shares for issuance thereunder requires the affirmative vote of the
holders of a majority of the shares of the Company's Common Stock present at the
Annual Meeting in person or by proxy and entitled to vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF
THE APPROVAL OF THE ADOPTION OF THE 1998 OPTION PLAN.
PROPOSAL NO. 3
ELECTION OF DIRECTORS
Six (6) directors will be elected at the Annual Meeting by the holders of
EndoSonics Common Stock to serve until the next Annual Meeting and until their
successors are elected and qualified, or until their earlier death, resignation
or removal. The Board of Directors will vote all proxies received by them FOR
the nominees listed below unless otherwise instructed in writing on such proxy.
The six (6) candidates receiving the highest number of affirmative votes of
shares entitled to vote at the Annual Meeting will be elected directors of
EndoSonics. Stockholders of EndoSonics are not entitled to cumulative voting
rights. In the event any nominee is unable to or declines to serve as a director
at the time of the Annual Meeting, the proxies will be voted for an additional
nominee who shall be designated by the annual current Board of Directors to fill
the vacancy. As of the date of this Proxy Statement, the Board of Directors is
not aware of any nominee who is unable or will decline to serve as director.
William G. Davis, Michael R. Henson and Dr. Menahem Nassi, three members of
the Board of Directors, have declined to stand for re-election. The Company
extends its gratitude for their invaluable contributions to the past and future
success of the Company. The Board of Directors has amended the Company's Bylaws
to decrease the number of directors from eight to six effective immediately
prior to the Annual Meeting.
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<PAGE> 16
INFORMATION WITH RESPECT TO NOMINEES
Set forth below, as of February 28, 1998, for each nominee for director of
EndoSonics, is information regarding their age, position(s) with EndoSonics, the
period they have served as a director, any family relationship with any other
director or executive officer of EndoSonics, and the directorships currently
held by them in corporations whose shares are publicly registered.
<TABLE>
<CAPTION>
NOMINEE, AGE AND PRINCIPAL OCCUPATION AND
FIRST YEAR AS DIRECTOR BUSINESS EXPERIENCE
---------------------- ------------------------
<S> <C>
Julie A. Brooks, 52, (new)............. Ms. Julie A. Brooks has been Senior Vice President, Legal
& External Affairs, General Counsel and Secretary of
Access Health, Inc. since 1996. Prior to her role at
Access Health, Ms. Brooks founded and managed The General
Counsel, Inc., a Seattle-based legal services company,
from 1992 to 1996. She served as Vice President, General
Counsel and Secretary for Westmark International, Inc., a
manufacturer of diagnostic ultrasound, patient monitor-
ing equipment and clinical information systems, from the
time of its spin-off from Squibb Corporation in 1986 until
its reorganization in 1992. Ms. Brooks served as Vice
President and Secretary of Thousand Trails, Inc. from 1981
to 1986, and practiced corporate, tax, antitrust and
securities law for Lane, Powell, Moss and Miller in
Seattle from 1976 to 1981. She began her legal career as
an international antitrust attorney in Washington, D.C.,
with the U.S. Department of Justice Honor Law Graduate
Program.
Thomas J. Cable, 58, 1984.............. Mr. Cable founded and has been a general partner of Cable
& Howse Ventures, a venture capital firm since 1976. Mr.
Cable is also a director of Fischer Imaging Corporation,
and Ostex International.
Edward M. Leonard, 56, 1992............ Mr. Leonard has been a Managing Director at Broadview
Associates LLC, a technology mergers and acquisitions
investment bank, since September 1997. From 1977 through
August 1997, he was a partner in the law firm of Brobeck,
Phleger and Harrison, which was EndoSonics' general
counsel from inception through September 1997. Mr. Leonard
is also a director of CardioVascular Dynamics, Inc.
Roger Salquist, 56, 1996............... Mr. Salquist was appointed Chairman of the Board in
November of 1996. Since March 1997, Mr. Salquist has been
a partner in Bay City Capital, a life sciences merchant
banking firm. Mr. Salquist served as Chairman and Chief
Executive Officer of Calgene, Inc., a Davis,
California-based agribusiness biotechnology company, from
1984 through August 1996. He also served on the Board of
Directors of Collagen Corporation from 1988 through
October 1997 and on the Board of Celtrix Pharmaceuticals,
Inc. from 1990 through 1996, serving as its Chairman from
1993 through 1995. Mr. Salquist serves on the Advisory
Council of the Stanford University Graduate School of
Business and is a member of the Board of Trustees of the
University of San Francisco.
Reinhard J. Warnking, 49, 1993......... Mr. Warnking joined EndoSonics in 1993 as a director,
President and Chief Operating Officer. Mr. Warnking was
appointed Chief Executive Officer on February 1, 1995. Mr.
Warnking was the President and Chief Executive Officer of
Acoustic Imaging Technology Corporation, a manufacturer of
ultrasound and transducer systems from August 1991 to
March 1993. From February 1989 to September 1990, he
founded and operated Warnking Medizintechnik GmbH, which
was acquired by Dornier Medizintechnik GmbH in September
1990. After the acquisition, Mr. Warnking founded and
managed the ultrasound division of Dornier Medizintechnik.
From August 1985 to February 1989, he held positions as
Technical Director, General Manager and Vice President
International for Squibb Medical Systems and Advanced
Technology Laboratories (ATL).
</TABLE>
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<PAGE> 17
<TABLE>
<CAPTION>
NOMINEE, AGE AND PRINCIPAL OCCUPATION AND
FIRST YEAR AS DIRECTOR BUSINESS EXPERIENCE
---------------------- ------------------------
<S> <C>
W. Michael Wright, 50, 1997............ Mr. Wright has been President and Chief Executive Officer
of MicroHeart, Inc. since September 1997. MicroHeart, Inc.
is a developer and manufacturer of bio-surgical products
for use in the treatment of cardiovascular disease. From
January 1996 until June 1997, Mr. Wright served as the
President and Chief Executive Officer of TomTec Imaging
Systems, Inc., a firm engaged in the development and
manufacture of ultrasound imaging products. From January
1995 until October 1995, Mr. Wright was engaged by
Medtronic to manage the transfer of the HEMOPUMP(R)
Cardiac Assist Systems business to Medtronic from Johnson
& Johnson. From 1968 until 1995, Mr. Wright worked for
Johnson & Johnson where he managed various divisions
developing leading edge cardiovascular and healthcare re-
lated products. During his 27-year tenure with Johnson &
Johnson, Mr. Wright spent much of his time managing
acquired technologies and businesses, overseeing
turnarounds and divestitures and folding smaller companies
into the Johnson & Johnson Family of Companies.
</TABLE>
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors met nine (9) times during the year ended December
31, 1997. Each incumbent nominee for Director attended at least 85% of the
aggregate of (1) the total number of meetings of the Board of Directors and (2)
the total number of meetings held by all Committees of the Board on which such
Director served.
EndoSonics has a standing Audit Committee composed of Messrs. Thomas J.
Cable, Paul R. Norris (through May 28, 1997) and Menahem Nassi, Ph.D. (through
June 4, 1998). The Audit Committee is primarily responsible for approving the
services performed by the Company's independent public accountants and for
reviewing and evaluating the Company's accounting principles and reporting
practices and its system of internal accounting controls. The Audit Committee
met one (1) time during the year ended December 31, 1997.
EndoSonics has a standing Compensation Committee which met five (5) times
during the year ended December 31, 1997. For the 1997 fiscal year, this
Committee consisted of Messrs. Roger Salquist and William G. Davis. The
Committee administers the Restated 1988 Option Plan, the 1998 Employee Stock
Purchase Plan and the 1998 Stock Option Plan, and reviews and acts on matters
relating to compensation levels and benefit plans for key executives of
EndoSonics. The Compensation Committee has the exclusive power and authority to
make stock option grants under the 1988 Option Plan and the 1998 Stock Option
Plan to the Company's officers.
REMUNERATION
The following directors were paid fees in connection with their Board
service for the 1997 fiscal year:
<TABLE>
<S> <C> <C>
Roger Salquist (Chairman)............... $38,333
Thomas J. Cable......................... 1,500
William G. Davis........................ 6,000
Michael R. Henson....................... 1,500
Edward M. Leonard....................... 1,500
Menahem Nassi, Ph.D..................... 1,500 (for service beginning August 4, 1997)
Paul R. Norris.......................... 5,000 (for service through May 28, 1997)
David H. Rammler, Ph.D.................. 3,500 (for service through May 28, 1997)
W. Michael Wright....................... 1,000 (accrued service beginning November
1997, paid in January 1998)
</TABLE>
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<PAGE> 18
At the February 5, 1998 Board of Directors Meeting, a new Directors'
Compensation policy was approved to begin January 1, 1998, as follows:
<TABLE>
<CAPTION>
COMPENSATION* SERVICE
- ------------- -------
<C> <S>
$1,000.00 Per quarter retainer.
$500.00 Per in-person board meeting, or for committee meeting (not
held in conjunction with Board of Directors meeting.)
$250.00 For telephonic board or committee meeting, or for in-person
committee meeting (held in conjunction with Board of
Directors meeting.)
$100.00 Monthly retainer for Chairmen of Compensation and Audit
Committees.
</TABLE>
- ---------------
* for non-officer directors, other than the Chairman
Each non-employee Board member has received an automatic option grant for
10,000 shares of Common Stock under the Company's 1988 Stock Option Plan (the
"Plan") on the date of his or her initial election or appointment to the Board.
In addition, on the date of each Annual Stockholders Meeting, each individual
re-elected as a non-employee Board member will receive an automatic option grant
for an additional 5,000 shares of Common Stock, provided such individual has
served as a Board member for at least six months. Each automatic option grant
will become exercisable for one-fourth of the shares upon the optionee's
completion of each year of Board service over the four-year period measured from
the grant date. However, the option will become immediately exercisable for all
of the option shares if the optionee dies or becomes disabled during his or her
period of Board service or if the Company is acquired by merger or asset sale,
or if there should occur a hostile take-over of the Company through a successful
tender offer for more than 25% of the Company's outstanding Common Stock or a
change in the majority of the Board effected through one or more contested
elections for Board membership. Each automatic option grant will have a maximum
term of 10 years, subject to earlier termination upon the optionee's cessation
of Board service.
Upon the successful completion of a hostile tender offer for more than 50%
of the Company's outstanding Common Stock, each automatic option grant will be
canceled, and the non-employee Board member will be entitled to a cash
distribution from the Company based upon the tender-offer price.
At the 1997 Annual Stockholders Meeting held on May 28, 1997, Messrs.
Cable, Davis, Henson, Leonard, and Salquist each received an automatic stock
option grant under the Automatic Option Grant Program of the 1988 Option Plan
for 5,000 shares of Common Stock in connection with their re-election as
non-employee Board members. Each of those options has an exercise price of
$10.875 per share, the fair market value per share of Common Stock on the grant
date.
At the 1996 Annual Stockholders Meeting held on May 24, 1996, Messrs.
Cable, Davis and Leonard each received an automatic stock option grant under the
Automatic Option Grant Program of the Plan for 5,000 shares of Common Stock in
connection with their re-election as non-employee Board members. Each of those
options has an exercise price of $16.00 per share, the fair market value per
share of Common Stock on the grant date.
Mr. Salquist received an automatic option grant for 10,000 shares upon his
appointment to the Board on November 5, 1996 with an exercise price of $12.75.
Mr. Salquist also received three additional option grants in connection with his
commencement of Board service. The first two of those additional grants were
made on November 5, 1996 at the time he joined the Board. One grant is for 5,000
shares and was made pursuant to the Discretionary Option Grant Program in effect
under the Plan and the second grant is for 25,000 shares and was made to Mr.
Salquist as a special incentive for him to join the Board. Both grants have an
exercise price of $12.75 per share. The final grant to Mr. Salquist covers
10,000 shares and was made to him under the Discretionary Option Grant Program
on December 6, 1996. The remaining terms and provisions of each of these option
grants are basically the same as those in effect for his 10,000-share option
grant under the Automatic Option Grant Program.
Mr. Leonard, a member of the Company's Board of Directors, was a partner at
Brobeck, Phleger & Harrison LLP, and served as General Counsel to the Company
through November 4, 1997.
15
<PAGE> 19
All directors hold office until the next Annual Meeting of Stockholders and
until their successors have been elected. Officers are appointed to serve, at
the discretion of the Board of Directors, until their successors are appointed.
There are no family relationships among executive officers or directors of
EndoSonics. There are no arrangements or understandings involving any director
or any nominee regarding such person's status as a director or nominee.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL SIX NOMINEES
NAMED ABOVE.
PROPOSAL NO. 4
RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP served as independent auditors for EndoSonics
for the fiscal year ended December 31, 1997. The Board of Directors, on the
recommendation of EndoSonics' management, has selected that firm to continue in
this capacity for the current fiscal year. EndoSonics is asking the stockholders
to ratify the selection by the Board of Directors of Ernst & Young LLP, as
independent auditors to audit the consolidated financial statements of
EndoSonics for the fiscal year ending December 31, 1998 and to perform other
appropriate services. A representative of Ernst & Young LLP is expected to be
present at the Annual Meeting to respond to stockholders' questions, and that
representative will be given an opportunity to make a brief presentation to the
stockholders if he or she so desires and will be available to respond to
appropriate questions. In the event that a majority of the shares voted at the
Annual Meeting do not vote for ratification of the selection of Ernst & Young
LLP, the Board of Directors will reconsider such selection. Under all
circumstances, the Board retains the corporate authority to change the auditors
at a later date.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
16
<PAGE> 20
GENERAL
SECURITY OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to EndoSonics
regarding the ownership of EndoSonics' Common Stock as of April 17, 1998 by (i)
each stockholder known to EndoSonics to be a beneficial owner of more than five
percent (5%) of EndoSonics' Common Stock, (ii) each director and nominee for
director, (iii) the Named Officers (as such term is defined under the caption
"Executive Compensation and Related Information -- Summary of Cash and Certain
Other Compensation") and (iv) all current directors and executive officers of
EndoSonics as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (#)
-------------------------
APPROXIMATE
NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES CLASS
---------------- ---------- ------------
<S> <C> <C>
Chancellor LGT Asset Management, Inc.(1).................... 3,085,900 19.06%
1166 Avenue of the Americas
New York, New York 10036
Warburg, Pincus Counsellors, Inc.(2)........................ 1,055,580 6.52%
466 Lexington Avenue
New York, NY 10017
Dresdner Bank AG(3)......................................... 895,000 5.53%
Jurgen-Ponto-Platz 1
60301 Frankfurt, Germany
HLM Management Company(4)................................... 767,000 4.74%
222 Berkley Street
Boston, MA 02116
Thomas J. Cable(5).......................................... 425,806 2.63%
William G. Davis(6)......................................... 38,769 *
Michael R. Henson(7)........................................ 87,243 *
Edward M Leonard(8)......................................... 30,519 *
Roger Salquist(9)........................................... 20,831 *
Reinhard J. Warnking(10).................................... 221,331 1.37%
Menahem Nassi, Ph.D.(11).................................... 46,751 *
Dr. Hans P. de Weerd(12).................................... 130,259 *
Michael J. Eberle(13)....................................... 121,079 *
Donald V. Fraley(14)........................................ 85,413 *
Michael J. Sorna(15)........................................ 69,685 *
All directors and executive officers as a group (17
persons).................................................. 1,540,900 9.52%
</TABLE>
- ---------------
* Less than 1%.
(#) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. Shares of
Common Stock subject to options and warrants which are currently
exercisable or convertible or which will become exercisable or convertible
within sixty (60) days after April 17, 1998 are deemed outstanding for
computing the beneficial ownership of the person holding such option but
are not deemed outstanding for computing the beneficial ownership of any
other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(1) Pursuant to a Schedule 13G filed with the Securities and Exchange
Commission on April 9, 1998, Chancellor LGT Asset Management, Inc. reported
that as of March 31, 1998 it had sole voting power and investment power
over 3,085,900 shares.
17
<PAGE> 21
(2) Pursuant to a Schedule 13G filed with the Securities and Exchange
Commission on January 9, 1997, Warburg, Pincus Counsellors, Inc. reported
that as of December 31, 1996 it had shared investment power over 1,055,580
shares, sole voting power over 230,200 of such shares and shared voting
power over 464,717 of such shares.
(3) Pursuant to a Schedule 13G filed with the Securities and Exchange
Commission on February 7, 1997, Dresdner Bank AG reported that as of
December 31, 1996 it had sole voting power and investment power over
895,000 shares.
(4) Pursuant to a Schedule 13G filed with the Securities and Exchange
Commission on February 10, 1997, HLM Managements Co. Inc. reported that as
of December 31, 1996 it had sole voting power and investment power over
767,000 shares.
(5) Includes 395,287 shares held by CH Partners III L.P. of which Mr. Cable is
a general partner. Mr. Cable disclaims beneficial ownership of these shares
other than to the extent of his individual partnership interest. Also
includes 30,519 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(6) Includes 36,769 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(7) Includes 50,443 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(8) Includes 25,000 shares held in a retirement savings plan pursuant to which
Mr. Leonard exercises voting and investment power, 5,000 shares held by Mr.
Leonard's wife (as to which he disclaims beneficial ownership) and 30,519
shares obtainable upon exercise of options that are currently exercisable
or will become exercisable within 60 days after April 17, 1998.
(9) Mr. Salquist was appointed Chairman of the Company's Board of Directors on
November 5, 1996, at which time he was granted options to purchase an
aggregate of 40,000 shares of the Company's Common Stock. On December 6,
1996, he was granted an additional option to purchase 10,000 shares of the
Company's Common Stock. Includes 20,831 shares obtainable upon exercise of
options that are currently exercisable or will become exercisable within 60
days after April 17, 1998.
(10) Includes 204,331 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(11) Includes zero (0) shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(12) Includes 109,821 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(13) Includes 102,954 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(14) Includes 85,413 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
(15) Includes 69,685 shares obtainable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after April
17, 1998.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION COMMITTEE REPORT
It is the responsibility of the Compensation Committee of the EndoSonics
Board of Directors to make recommendations to the Board with respect to the base
salary and bonuses to be paid to the Company's executive officers each fiscal
year. In addition, the Compensation Committee has the exclusive authority to
administer the EndoSonics 1988 Stock Option Plan and, if approved by the
stockholders, the 1998 Employee Stock Purchase Plan and the 1998 Stock Option
Plan with respect to the grants made thereunder to such
18
<PAGE> 22
officers and other key employees. The following is a summary of the policies of
the Compensation Committee which affect the compensation paid to executive
officers, as reflected in the tables and text set forth elsewhere in this Proxy
Statement.
General Compensation Policy. Under the supervision of the Compensation
Committee, EndoSonics has developed a compensation policy which is designed to
attract and retain qualified key executives critical to the Company's success
and to provide such executives with performance-based incentives tied to the
financial success of EndoSonics. One of the Committee's primary objectives is to
have a substantial portion of each officer's compensation contingent upon the
Company's performance as well as upon the individual's contribution to the
success of EndoSonics as measured by his personal performance. Accordingly, each
executive officer's compensation package is fundamentally comprised of three
elements: (i) base salary which reflects individual performance and expertise
and is designed to be competitive with salary levels in the industry, (ii)
variable performance awards payable in cash and tied to the Company's
achievement of certain financial goals; and (iii) long-term stock-based
incentive awards which strengthen the mutuality of interests between the
executive officers and the EndoSonics stockholders.
Factors. The principal factors which were considered in establishing the
components of each executive officer's compensation package for the 1997 fiscal
year are summarized below. However, the Committee may in its discretion apply
different factors, particularly different measures of financial performance, in
setting executive compensation for future fiscal years.
- Base Salary. The base salary levels for the executive officers were
established for the 1997 fiscal year on the basis of the following factors:
personal performance, the estimated salary levels in effect for similar
positions as a select group of companies with which the Company competes for
executive talent, and internal comparability considerations. The Committee,
however, did not rely upon any specific compensation surveys for considerations.
Instead, the Committee made its decisions as to the appropriate market level of
base salary for each executive officer on the basis of its understanding of the
salary levels in effect for similar positions at those companies with which the
Company competes for executive talent. Base salaries will be reviewed on an
annual basis, and adjustments will be made in accordance with the factors
indicated above.
- Annual Incentive Compensation. EndoSonics has adopted an Employee Bonus
Plan pursuant to which the Board of Directors has discretionary authority to
award cash bonuses to executive officers and employees in accordance with
recommendations made by the Committee based upon the extent to which certain
financial and performance targets established semi-annually by the Committee are
met and the contribution of each such officer and employee to the attainment of
such targets. For fiscal year 1997, the performance targets for each of the
Named Officers included gross sales, cash flow, engineering product goals and
regulatory submission goals. The weight given to each factor varied from
individual to individual.
- Long-Term Incentive Compensation. EndoSonics has also adopted the 1988
Option Plan and the 1998 Option Plan. Each grant under these plans are designed
to align the interests of the executive officer with those of the stockholders
and provide each individual with a significant incentive to manage EndoSonics
from the perspective of an owner with an equity stake in the business. The
number of shares subject to each option grant is based upon the officer's
tenure, level of responsibility and relative position in EndoSonics. The
Committee has established certain general guidelines in making option grants to
the executive officers in an attempt to target a fixed number of unvested option
shares based upon the individual's position with the Company and his or her
existing holdings of unvested options. However, the Committee does not adhere
strictly to these guidelines and will vary the size of the option grant made to
each executive officer as it feels the circumstances warrant. Each grant allows
the officer to acquire shares of EndoSonics Common Stock at a fixed price per
share (the market price on the grant date) over a specified period of time (up
to 10 years). The option normally vests in periodic installments over a
four-year period, contingent upon the executive officer's continued employment
with the Company. Accordingly, the option will provide a return to the executive
officer only if he or she remains in the Company's employ and the market price
of the Company's Common Stock appreciates over the option term.
- CEO Compensation. In setting the base salary for Mr. Reinhard J.
Warnking, the Company's Chief Executive Officer, for the 1997 fiscal year, the
Committee sought to provide him with a level of salary which is
19
<PAGE> 23
at the median of the salaries paid to chief executive officers of
similarly-sized companies in the industry. There was no intent on the
Committee's part to have this particular component of Mr. Warnking's
compensation affected to any significant degree by Company performance.
Mr. Warnking's incentive cash compensation for the 1997 fiscal year was
based on an overall assessment of his achievement in implementing certain
internal practices to strengthen the management team and further the Company's
business development.
The long-term incentive component of Mr. Warnking's compensation for the
1997 fiscal year consisted of a stock option grant on May 14, 1997 to purchase
50,000 shares. As previously indicated, this grant was designed to provide a
special incentive to Mr. Warnking to contribute to the Company's financial
success.
- Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code, enacted in 1993, generally disallows a tax deduction
to publicly held corporations for compensation exceeding $1 million paid to
certain of the corporation's executive officers. The limitation applies only to
compensation which is not considered to be performance-based. The
non-performance based compensation to be paid to the Company's executive
officers for the 1997 fiscal year did not exceed the $1 million limit per
officer, no is it expected that the non-performance based compensation to be
paid to the Company's executive officers for fiscal year 1998 will exceed that
limit. The Company's 1988 Option Plan and 1998 Option Plan are structured so
that any compensation deemed paid to an executive officer in connection with the
exercise of option grants made under such plans will qualify as
performance-based compensation which will not be subject to the $1 million
limitation. Because it is very unlikely that the cash compensation payable to
any of the Company's executive officers in the foreseeable future will approach
the $1 million limit, the Committee has decided at this time not to take any
other action to limit or restructure the elements of cash compensation payable
to the Company's executive officers. The Committee will reconsider this decision
should the individual cash compensation of any executive officer ever approach
the $1 million level.
COMPENSATION COMMITTEE
William G. Davis
Roger Salquist
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors for the 1997 fiscal year were William G. Davis, David H. Rammler,
Ph.D., (through May 1997) and Roger Salquist. No member of the Compensation
Committee was at any time during the 1997 fiscal year or at any other time an
officer or employee of EndoSonics.
No executive officer of EndoSonics served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
20
<PAGE> 24
STOCK PERFORMANCE GRAPH
The graph depicted below shown EndoSonics' stock price as an index assuming
$100 invested on March 4, 1992 (the date of EndoSonics' initial public
offering), along with the composite prices of companies listed on the CRSP Total
Return Index for National Association of Securities Dealers Automated Quotation
("Nasdaq") Stock Market and the Hambrecht & Quist Incorporated Total Return
Index for Healthcare Technology Companies (excluding Biotechnology). This
information has been provided to EndoSonics by Hambrecht & Quist Incorporated.
PERFORMANCE GRAPH FOR ENDOSONICS CORPORATION
INDEXED COMPARISON OF CUMULATIVE TOTAL RETURN
CRSP TOTAL RETURN INDEX FOR NASDAQ STOCK MARKET AND
THE HAMBRECHT AND QUIST TOTAL RETURN INDEX FOR HEALTHCARE TECHNOLOGY COMPANIES
(EXCLUDING BIOTECHNOLOGY)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ STOCK H&O HEALTHCARE
(FISCAL YEAR COVERED) ENDOSONICS CORP. MARKET-U.S. EXCL. BIOTECH
<S> <C> <C> <C>
DEC-92 100 100 100
MAR-93 66.36 101.88 74.49
JUN-93 49.09 103.83 67.24
SEP-93 43.64 112.58 64.06
DEC-93 43.64 114.8 71.62
MAR-94 54.55 109.97 66.09
JUN-94 40 104.83 64
SEP-94 50.91 113.51 76.48
DEC-94 50 112.21 76.1
MAR-95 58.18 122.33 88.89
JUN-95 80.91 139.93 91.31
SEP-95 96.36 156.79 114.23
DEC-95 110 158.7 126.71
MAR-96 130 166.1 135.55
JUN-96 130 179.66 127.4
SEP-96 101.82 186.05 139.81
DEC-96 110.91 195.19 140.67
MAR-97 69.09 184.61 133.62
JUN-97 79.09 218.45 159.97
SEP-97 106.81 255.4 167.67
DEC-97 79.18 239.53 167.64
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 which might incorporate future filings, including this Proxy Statement,
the preceding Compensation Committee Report on Executive Compensation and the
Company Stock Performance Graph will not be incorporated by reference into any
of those prior filings, nor will such report or graph be incorporated by
reference into any future filings made by the Company under those statutes.
21
<PAGE> 25
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer, Mr. Warnking, who has served in such capacity since
February 1, 1995, and the other most highly-compensated executive officers whose
compensation for the 1997 fiscal year was in excess of $100,000 for services
rendered in all capacities to the Company for each of the last three fiscal
years. No other executive officer who would have otherwise been includable in
such table on the basis of salary and bonus earned for the 1997 fiscal year
resigned or terminated employment during that fiscal year. All the individuals
named in the table will hereinafter be referred to as the "Named Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION NUMBER OF
----------------------------------------- SECURITIES
SALARY BONUS OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($)1 COMPENSATION(1) OPTIONS(#) COMPENSATION(3)
--------------------------- ---- ------- ------ --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Reinhard J. Warnking.......... 1997 208,146 65,205 198,936 50,000
Chief Executive Officer 1996 200,905 70,317 22,267 75,000
and President(4) 1995 175,000 60,885 60,000
Dr. Hans P. de Weerd.......... 1997 121,443 21,353 52,500 20,000 27,226
Senior Vice President, 1996 130,344 21,012 25,000 23,478
European Operations(5) 1995 126,506 22,469 25,000 22,845
Michael J. Eberle............. 1997 146,757 24,990 49,875 20,000
Senior Vice President, 1996 141,867 22,699 25,000
Chief Technical Officer 1995 137,800 27,212 35,000
Donald V. Fraley.............. 1997 130,549 47,791 48,125 20,000
Vice President, 1996 126,058 46,472 13,100 30,000
Sales and Marketing(6) 1995 113,909 36,165 55,000 100,000
Michael J. Sorna.............. 1997 119,466 81,050 365,434 25,000
Vice President, 1996 N/A N/A N/A
Sales and Marketing, 1995 N/A N/A N/A
European Operations(7)
</TABLE>
- ---------------
(1) Except as otherwise indicated, the amounts shown under the Bonus column are
cash bonuses earned for the indicated fiscal years under the Employee Bonus
Plan.
(2) Except as otherwise indicated, Other Annual Compensation includes moving and
relocation expenses and compensation related to the distribution of CCVD or
Cardiometrics stock based on outstanding options.
(3) The amounts shown represent annual contributions of $27,226, $23,478 and
$22,845 by the Company to fund future retirement benefits payable to Dr. de
Weerd under the individual pension program in which he participates in the
Netherlands.
(4) Mr. Warnking first became employed by the Company on April 19, 1993 and was
elected Chief Executive Officer of the Company on February 1, 1995.
(5) Dr. de Weerd first became employed by the Company in August 1994. Dr. de
Weerd's annualized rates of base salary for the 1996 and 1997 fiscal years
were 226,800 NLG and 245,190 NLG, respectively, converted at exchange rates
of 1.74 NLG's and 2.019 NLG's, respectively.
(6) Mr. Fraley first became employed by the Company in February 1995 and was
appointed Vice President of Sales and Marketing of the Company in March
1995.
(7) Mr. Sorna became employed by the Company on July 24, 1997. He was previously
employed by Cardiometrics, Inc. Other annual compensation includes $203,746
of merger consideration based on Mr. Sorna's outstanding stock options on
the effective date of the Cardiometrics acquisition.
22
<PAGE> 26
STOCK OPTIONS
The following table provides information with respect to the stock option
grants made during the 1997 fiscal year under EndoSonics 1988 Option Plan to the
Named Officers. Except for the limited stock appreciation rights described in
Footnote (1) below, no stock appreciation rights were granted during such fiscal
year to the Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE(2) EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5%($)(3) 10%($)(3)
---- ----------- ------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reinhard J.
Warnking............ 50,000 5% 9.375 05/14/07 294,794 747,066
Dr. Hans P. de
Weerd............... 20,000 2% 9.375 05/14/07 187,500 298,900
Michael J. Eberle..... 20,000 2% 9.375 05/14/07 187,500 298,900
Donald V. Fraley...... 20,000 2% 9.375 05/14/07 187,500 298,900
Michael J. Sorna...... 75,000 7% 12.50 12/31/07 589,588 1,494,134
</TABLE>
- ---------------
(1) Options were granted on April 18, May 14, July 23, December 19 and December
31, 1997.
The shares subject to each option will immediately vest in the event the
Company is acquired by a merger or asset sale, unless the options are
assumed by the acquiring entity. The Plan Administrator also has the
discretionary authority to provide for accelerated vesting of the option
shares upon the termination of the optionee's employment following a hostile
change in control of the Company, whether by tender offer for more than 25%
of the Company's outstanding voting stock or change in the majority of the
Board effected through one or more proxy contests. Each option has a maximum
term of 10 years, subject to earlier termination in the event of the
optionee's cessation of service with the Company.
Each option also includes a limited stock appreciation right pursuant to
which the underlying option will automatically be canceled upon the
successful completion of a hostile tender offer for more than 50% of the
outstanding Common Stock and the optionee will become entitled to a cash
distribution from the Company in an amount per canceled option share
(whether or not the option is otherwise at the time exercisable for all the
option shares) equal to the tender-offer price paid per share of Common
Stock less the option exercise price payable per share.
(2) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares and the
federal and state income or employment tax liability incurred by the
optionee in connection with such exercise. The optionee may be permitted,
subject to the approval of the Plan Administrator, to apply a portion of the
shares purchased under the option (or to deliver existing shares of Common
Stock) in satisfaction of such tax liability.
(3) There is no assurance provided to any executive officer or any other holder
of EndoSonics securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% or 10% annual rates of
compounded stock price appreciation or at any other defined level. Unless
the market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants made to the executive
officers.
23
<PAGE> 27
OPTION EXERCISES AND HOLDINGS
The table below sets forth information concerning the exercise of options
during the 1997 fiscal year and unexercised options held by the Named Officers
as of the end of such year. No stock appreciation rights were exercised by the
Named Officers during such fiscal year, and except for the limited stock
appreciation rights described in Footnote (1) to the Option Grant table above,
no stock appreciation rights were held by such individuals at the end of such
fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ON AGGREGATE OPTIONS AT FY-END(#) AT FY-END($)(2)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Reinhard J. Warnking........ 0 0 167,666 139,483 560,656 189,549
Dr. Hans P. de Weerd........ 0 0 88,125 61,875 436,875 135,625
Michael J. Eberle........... 0 0 88,789 53,711 263,280 78,220
Donald V. Fraley............ 0 0 63,748 73,752 143,151 107,474
Michael J. Sorna............ 0 0 69,685 25,000 187,970 -
</TABLE>
- ---------------
(1) Based upon the market price of the purchased shares on the exercise date
less the option exercise price paid for such shares.
(2) Based upon the market price of $10.75 per share, which was the closing
selling price per share of Common Stock on the Nasdaq National Market on the
last day of the 1997 fiscal year, less the option exercise price payable per
share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
None of the Named Officers other than Hans de Weerd have employment
agreements with EndoSonics. The employment of each of those Named Officers may
be terminated at any time at the discretion of the Board of Directors. However,
Dr. de Weerd has an employment agreement with the Company terminable by either
party upon 3 months advance notice.
The Compensation Committee of the Board of Directors has the authority as
administrator of the Company's 1988 Option Plan and the 1998 Option Plan to
provide for the accelerated vesting of the shares of Common Stock subject to any
outstanding options held by the Chief Executive Officer and the Company's other
executive officers and any unvested shares actually held by those individuals
under such plans, in the event their employment were to be terminated (whether
involuntarily or through a forced resignation) following a hostile take-over of
the Company effected through a successful tender for more than 25% of the
Company's outstanding Common Stock or through a change in the majority of the
Board as a result of one or more contested elections for Board membership.
The Board of Directors has authorized the Company to enter into Change of
Control Agreements with its executive officers. The terms of such Change of
Control Agreements will provide that each executive officer would be entitled to
certain benefits if terminated within a specified period of time after certain
change of control transactions involving the Company (generally, a merger or
acquisition of the Company, including a hostile takeover). Specifically, if an
executive officer were to be terminated within 12 months following a change of
control transaction, the Change of Control Agreement would entitle him or her to
continuation of his or her base salary at the time of termination for a period
of 18 months after termination, bonus payments equal to the bonus accrued within
the 12-month period, full vesting of all stock options, continuation of benefits
under the Company's health and other benefit plans and, with respect to certain
persons who have relocated to Europe on behalf of the Company, relocation
expenses to return to the United States. If an
24
<PAGE> 28
executive officer were to be terminated more than 12 but less than 18 months
after a change of control transaction, such offer would be entitled to the same
benefits as described above, except that salary continuation would continue only
for 12 months and the bonus payments would equal the bonus accrued during the
additional months of time until termination. In the case of an officer being
terminated following a hostile takeover of the Company, such officer would be
entitled to a lump sum payment of the benefits described above rather than
payment over a 12- or 18-month period.
OFFICER LOAN
On August 4, 1993, the Company extended a loan in the amount of $100,000 to
Mr. Warnking, the Chief Executive Officer and President of the Company, for
purposes of assisting Mr. Warnking in the purchase of a residence. The loan is
secured by a deed of trust on such residence and will become due and payable
upon sale of the property secured by such deed of trust. Interest on the loan
accrues at the rate of 3.95% per annum, compounded annually and is payable
annually. As of December 31, 1997, the outstanding balance on the loan was
$116,398 including accrued interest. The loan was repaid on March 20, 1998.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The members of the Board of Directors, the executive officers of EndoSonics
and persons who hold more than 10% of the Company's outstanding Common Stock are
subject to the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934 which require them to file reports with respect to their
ownership of the Common Stock and their transactions in such Common Stock. Based
upon (i) the copies of Section 16(a) reports which EndoSonics received from such
persons for their 1997 fiscal year transactions in the Common Stock and their
Common Stock holdings and (ii) the written representations received from one or
more of such persons that no annual Form 5 reports were required to be filed by
them for the 1997 fiscal year, EndoSonics believes that all reporting
requirements under Section 16(a) for such fiscal year were met in a timely
manner by its executive officers, Board members and greater than ten-percent
stockholders.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Under the present rules of the Commission, the deadline for stockholders to
submit proposals to be considered for inclusion in EndoSonics' Proxy Statement
for next year's Annual Meeting of Stockholders is December 31, 1998. Such
proposals may be included in next year's Proxy Statement if they comply with
certain rules and regulations promulgated by the Commission.
OTHER BUSINESS
The Board of Directors is not aware of any other matter which may be
presented for action at the Annual Meeting. Should any other matter requiring a
vote of the stockholders arise, it is intended that the proxy holders will vote
on such matters in accordance with their best judgment.
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ENDOSONICS CORPORATION
1998 STOCK OPTION PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. GENERAL
A. PURPOSES OF PLAN. This 1998 Stock Option Plan (the "Plan") is intended
to promote the interests of Endosonics Corporation, a Delaware corporation (the
"Company"), by providing a method whereby eligible individuals may be offered
incentives and rewards which will encourage them to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Company and
continue to render services to the Company (or any Parent or Subsidiary
corporation (as defined below)).
B. DEFINITIONS. For purposes of the Plan, the following definitions shall
apply:
(i) "Administrator" shall mean the Board or any of its Committees
appointed pursuant to Section III of Article One of the Plan.
(ii) "Affiliate" shall mean an entity other than a Subsidiary in which
the Company owns an equity interest.
(iii) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(iv) "Common Stock" shall mean the Common Stock of the Company.
(v) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any Director of the Company whether
compensated for such services or not.
(vi) "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. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute a termination of employment.
(vii) "Director" shall mean a member of the Company's Board of
Directors.
(viii) "Employee" shall mean any person (including any Named
Executive, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the
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Company. The payment by the Company of a director's fee to a Director shall not
be sufficient to constitute "employment" of such Director by the Company.
(ix) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(x) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(a) 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 sales
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing bid on that day shall be
used), as such price is reported in The Wall Street Journal or such other source
as the Administrator deems reliable;
(b) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the bid and asked prices for the Common Stock or;
(c) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(xi) "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
Exchange Act.
(xii) "Officer" shall mean a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(xiii) "Outside Director" shall mean a Director who is not an
Employee.
(xiv) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(xv) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
Act as the same may be amended from time to time, or any successor provision.
(xvi) "Subsidiary" shall mean a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
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II. STRUCTURE OF THE PLAN
A. OPTION PROGRAMS. The Plan shall be divided into two separate
components: the Discretionary Option Grant Program described in Article Two and
the Automatic Option Grant Program described in Article Three. Under the
Discretionary Option Grant Program, eligible individuals may, at the discretion
of the Administrator, be granted options to purchase shares of Common Stock in
accordance with the provisions of Article Two. Under the Automatic Option Grant
Program, each eligible member of the Company's Board of Directors (the "Board")
will automatically receive an option grant to purchase shares of Common Stock in
accordance with the provisions of Article Three.
B. GENERAL PROVISIONS. Unless the context clearly indicates otherwise,
the provisions of Articles One and Four of the Plan shall apply to both the
Discretionary Option Grant Program and the Automatic Option Grant Program and
shall accordingly govern the interests of all individuals under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered in accordance with the following
standards:
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3, and
by the legal requirements relating to the administration of incentive stock
option plans, if any, of applicable securities laws and the Code (collectively,
the "Applicable Laws"), grants under the Plan may (but need not) be made by
different administrative bodies with respect to Directors, Officers who are not
Directors, and Employees who are neither Directors nor Officers.
(ii) DISCRETIONARY OPTION GRANT PROGRAM ADMINISTRATION.
(a) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With
respect to grants of options pursuant to the Discretionary Option Grant Program
to Employees or Consultants who are also Officers or Directors of the Company,
grants under the Plan shall be made by (A) the Company's Board of Directors (the
"Board), if the Board may make grants under the Plan in compliance with Rule
16b-3 and Section 162(m) of the Code as it applies so as to qualify grants of
options to Named Executives as performance-based compensation, or (B) a
committee designated by the Board (the "Committee") to make grants under the
Plan, which Committee shall be constituted in such a manner as to permit grants
under the Plan to comply with Rule 16b-3, to qualify grants of options to Named
Executives as performance-based compensation under Section 162(m) of the Code
and otherwise so as to satisfy the Applicable Laws.
(b) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With respect
to grants of options pursuant to the Discretionary Option Grant Program 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 in such a manner as to satisfy
the Applicable Laws.
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(c) GENERAL. If a Committee has been appointed pursuant to
subsection (ii) of this Section III.A., 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 any Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies (however caused) and remove all members
of a Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws and, in the case of a Committee appointed under
subsection (ii), to the extent permitted by Rule 16b-3, and to the extent
required under Section 162(m) of the Code to qualify grants of Options to Named
Executives as performance-based compensation.
(iii) AUTOMATIC OPTION GRANT PROGRAM ADMINISTRATION. Administration of
the Automatic Option Grant Program shall be self-executing in accordance with
the terms and conditions of Article Three, provided however that to the extent
required, the Automatic Option Grant Program shall be administered by the Board.
B. The Administrator shall have full power and authority (subject to the
express provisions of the Plan) to establish such rules and regulations as it
may deem appropriate for the proper administration of the Plan functions within
the scope of its administrative authority and to make any and all determinations
with respect to those functions which it may deem necessary or advisable, all as
further provided in Section I of Article Two and Section II of Article Three.
All decisions of the Administrator within the scope of its administrative
authority under the Plan shall be final and binding on all parties who have an
interest in the Plan or any outstanding option granted pursuant to such
authority.
IV. ELIGIBILITY FOR OPTION GRANTS
A. The persons eligible to participate in the Option Grant Program under
Article Two of the Plan shall be limited to the following:
(i) Officers and other key Employees of the Company (or its Parent or
Subsidiary corporations) who render services which contribute to the management,
growth and financial success of the Company (or its Parent or Subsidiary
corporations);
(ii) those Consultants (including Outside Directors) who provide
valuable services to the Company (or its Parent or Subsidiary corporations).
B. Outside Directors shall also be eligible to receive automatic option
grants pursuant to the provisions of Article Three.
C. The Administrator shall have full authority to make discretionary
option grants under the Plan to the eligible individuals within the scope of its
administrative functions under the Plan and to determine the number of shares to
be covered by each such grant, whether the granted option is to be an incentive
stock option ("Incentive Stock Option") which satisfies the requirements of
Section 422 of the Code or a nonstatutory option not intended to meet such
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<PAGE> 33
requirements ("Nonstatutory Stock Option"), the time or times at which each such
option is to become exercisable, and the maximum term for which the option is to
remain outstanding.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of the Company's
authorized but unissued or reacquired Common Stock. The aggregate number of
shares which may be issued under the Plan shall not exceed 750,000 shares. The
total number of shares issuable under the Plan shall be subject to adjustment
from time to time in accordance with the provisions of this Section V of Article
One.
B. In no event may the maximum number of shares of Common Stock for which
any one individual participating in the Plan may be granted stock options exceed
550,000 shares in any calendar year. Such limitation shall be subject to
periodic adjustment in accordance with the provisions of this Section V.
C. Should an outstanding option expire or terminate for any reason prior
to exercise in full, the shares subject to the portion of the option not so
exercised shall be available for subsequent option 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
under 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. Should the exercise price of an option under the Plan be
paid with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Company in satisfaction of the
withholding taxes incurred in connection with the exercise of an option or the
vesting of a stock issuance under the Plan, then the number of shares of Common
Stock available for issuance under the Plan shall be reduced by the gross number
of shares for which the option is exercised or which vest under the stock
issuance, and not by the net number of shares of Common Stock issued to the
holder of such option or stock issuance.
D. If any change is made to the outstanding Common Stock by reason of any
stock split, reverse stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Company's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one individual may be granted stock options, (iii) the
number and/or class of securities and price per share in effect under each
outstanding option under the Plan, and (iv) the number and/or class of
securities to be made the subject of each subsequent automatic grant; provided
however that the conversion of convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustments to the outstanding options shall preclude the enlargement or
dilution of rights and benefits under such options. Such adjustment shall be
made by the Administrator, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided
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<PAGE> 34
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 stock subject to an option. In the event of a dissolution or
liquidation of the Company, each outstanding option shall expire on a date
specified in a written notice given by the Administrator to an optionee
specifying the terms and conditions of such termination (which date shall be at
least fifteen (15) days after the date the Administrator gives the written
notice).
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<PAGE> 35
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. ADMINISTRATION AND ELIGIBILITY
A. ADMINISTRATION OF OPTIONS. Options granted pursuant to this Article
Two shall be authorized by action of the Administrator and may, at the
Administrator's discretion, be either Incentive Stock Options or Nonstatutory
Stock Options, in either case as designated in the applicable written option
agreement. Each option granted shall be evidenced by one or more instruments in
the form approved by the Administrator. Each such instrument shall, however,
comply with the terms and conditions specified below. Subject to the provisions
of the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(a) to determine the Fair Market Value of the Common Stock, in
accordance with Section I.C.(x) of Article One of the Plan;
(b) to select the Employees and Consultants to whom options may
from time to time be granted hereunder;
(c) to determine whether and to what extent options are granted
hereunder;
(d) to determine the number of shares of common stock to be
covered by each such award granted hereunder;
(e) to approve forms of agreement for use under the Plan;
(f) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any option and/or
the shares of common stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion); and
(g) to reduce the exercise price of any option to the then
current Fair Market Value if the Fair Market Value of the common stock covered
by such option shall have declined since the date the option was granted.
B. RECIPIENTS OF GRANTS. Incentive Stock Options may be granted only to
Employees, provided, however, that Employees of an Affiliate shall not be
eligible to receive Incentive Stock Options. Nonstatutory Stock Options may be
granted to Employees and Consultants. An Employee or Consultant who has been
granted an option may, if he or she is otherwise eligible, be granted an
additional option or options.
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<PAGE> 36
C. TYPE OF OPTION. Each option shall be designated in the written option
agreement 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 with respect to which Incentive Stock Options are
exercisable for the first time by an optionee 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 I.C., 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 the Option with respect to such shares is granted.
II. TERMS AND CONDITIONS OF OPTIONS GRANTED UNDER ARTICLE TWO
A. OPTION EXERCISE PRICE AND CONSIDERATION.
(i) EXERCISE PRICE. 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 Administrator, but shall be subject to the following:
(a) In the case of an Incentive Stock Option
(1) 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; or
(2) granted to any other Employee, the per share exercise
price shall be no less than 100% of the Fair Market Value per share on the date
of grant.
(b) In the case of a Nonstatutory Stock Option
(1) granted to a person who, at the time of the grant of
such option, is a Named Executive of the Company, the per share exercise price
shall be no less than 100% of the Fair Market Value on the date of grant; or
(2) granted to any person other than a Named Executive, the
per share exercise price shall be no less than 85% of the Fair Market Value per
share on the date of grant.
(c) Notwithstanding anything to the contrary in Sections
II.A.(i)(a) or (b) above, 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.
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(ii) PERMISSIBLE 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 Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash, (2) check, (3) other shares that (x) in the case of shares acquired
upon exercise of an option either have been owned by the optionee for more than
six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, 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, (4) authorization from the Company to retain from the
total number of shares as to which the option is exercised that number of shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of shares as to which the option is exercised, (5) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the exercise price, (6) a combination of any of the foregoing
methods of payment, (7) a combination of any of the foregoing methods of payment
at least equal in value to the stated capital represented by the shares to be
issued, plus a promissory note for the balance of the exercise price, or (8)
such other consideration and method of payment for the issuance of shares to the
extent permitted under Applicable Laws. 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.
B. TERM OF OPTIONS. The term of each option granted under this Article
Two shall be the term stated in the written option agreement; provided, however,
that in the case of an Incentive Stock Option, the term shall be no more than
ten (10) years from the date of grant thereof or such shorter term as may be
provided in the written option agreement. However, in the case of an Incentive
Stock Option granted to an optionee who, at the time the Incentive Stock 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 Incentive Stock Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the written option
agreement.
C. EXERCISE OF OPTIONS.
(i) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, 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
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<PAGE> 38
Administrator, consist of any consideration and method of payment allowable
under Section II.A.(ii) of this Article Two. 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. 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 V.D. of Article One of the
Plan.
(ii) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the event
of termination of an optionee's Continuous Status as an Employee or Consultant,
such optionee may, but only within three (3) months (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 written option agreement), exercise his or her
option to the extent that he or she was entitled to exercise it at the date of
such termination. To the extent that the optionee was not entitled to exercise
the option at the date of such termination, or if the optionee does not exercise
such option (which he or she was entitled to exercise) within the time specified
herein, the option shall terminate.
(iii) DISABILITY OF OPTIONEE. Notwithstanding Section C.(ii) above, in
the event of termination of an optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, 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 at 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 written option agreement), exercise his or her
option to the extent he or she was entitled to exercise it at the date of such
termination. To the extent that he or she 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.
(iv) DEATH OF OPTIONEE. In the event of the death of an optionee:
(a) 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 (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 at the time of grant of the option) 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 written option
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<PAGE> 39
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
three (3) months (or such other period of time as is determined by the
Administrator as provided above) after the date of death, subject to the
limitation set forth in Section I.C. of Article Two; or
(b) 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 written 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.
(v) EARLY EXERCISE. The Administrator shall have complete
discretion, exercisable either at the time the option is granted or at any time
while the option remains outstanding, to permit one or more options held by the
optionee under this Article Two to be exercised, during the limited period of
exercisability provided under Sections C.(ii), C.(iii) and C.(iv) above, not
only with respect to the number of shares for which each such option is
exercisable at the time of the optionee's termination of Continuous Status as an
Employee or Consultant but also with respect to one or more subsequent
installments of purchasable shares for which the option would otherwise have
become exercisable had such termination not occurred.
(vi) EXTENSION OF EXERCISE PERIOD. The Administrator shall have full
power and authority, within the scope of its administrative functions under the
Plan, to extend the period of time for which any option granted under this
Article Two is to remain exercisable following the optionee's termination of
Continuous Status as an Employee or Consultant or death from the limited period
in effect under Section I.C. of this Article Two to such greater period of time
as the Administrator shall deem appropriate; provided, however, that in no event
shall such option be exercisable after the specified expiration date of the
option term.
(vii) RULE 16B-3. Options granted to persons subject to Section 16(b)
of the Exchange Act must comply with Rule 16b-3 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.
D. REPURCHASE RIGHTS. The shares of Common Stock acquired upon the
exercise of options granted under the Plan may be subject to one or more
repurchase rights of the Company in accordance with the following provisions:
1. The Administrator may in its discretion determine that it shall
be a term and condition of one or more options exercised under the Plan that the
Company (or its assignees) shall have the right, exercisable upon the optionee's
termination of Continuous Status
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<PAGE> 40
as an Employee or Consultant, to repurchase at the option price any or all of
the unvested shares of Common Stock at the time held by the optionee. Any such
repurchase right shall be exercisable by the Company (or its assignees) upon
such terms and conditions (including the establishment of the appropriate
vesting schedule and other provision for the expiration of such right in one or
more installments over the optionee's period of Continuous Status as an Employee
or Consultant) as the Administrator may specify in the instrument evidencing
such right.
2. The Administrator may assign the Company's repurchase rights
under subparagraph E.1 above to any person or entity selected by the
Administrator, including one or more stockholders of the Company.
3. All of the Company's outstanding repurchase rights shall
automatically terminate, and all shares subject to such terminated rights shall
immediately vest in full, upon the occurrence of any Corporate Transaction under
Section III of this Article Two, except to the extent (i) the Company's
outstanding repurchase rights are to be assigned to the successor corporation
(or parent thereof) in connection with the Corporate Transaction or (ii) such
termination of repurchase rights and acceleration of vesting are precluded by
other limitations imposed by the Plan Administrator at the time of the option
grant.
E. LIMITED 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; provided that the
Administrator may in its discretion grant transferable Nonstatutory Stock
Options pursuant to option agreements specifying (i) the manner in which such
Nonstatutory Stock Options are transferable and (ii) that any such transfer
shall be subject to the Applicable Laws. The designation of a beneficiary by an
optionee will not constitute a transfer. An option may be exercised, during the
lifetime of the optionee, only by the optionee or a transferee permitted by this
subparagraph E.
F. TIME OF GRANTING OPTIONS. The date of grant of an option under this
Article Two shall, for all purposes, be the date on which the Administrator
makes the determination granting such option or such other date as is determined
by the Administrator; provided however that in the case of any Incentive Stock
Option, the grant date shall be the later of the date on which the Administrator
makes the determination granting such Incentive Stock Option or the date of
commencement of the optionee's employment relationship with the Company. 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.
III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
A. In the event of any of the following stockholder-approved transactions
(a "Corporate Transaction"):
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Company's incorporation,
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(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company, or
(iii) any reverse merger in which the Company is the surviving entity
but in which fifty percent (50%) or more of the Company's outstanding voting
stock is transferred to holders different from those who held the stock
immediately prior to such merger, the exercisability of each option outstanding
under this Article Two shall automatically accelerate so that each such option
shall, immediately prior to the specified effective date for the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for all
or any portion of such shares. However, an outstanding option under this Article
Two shall not so accelerate if and to the extent: (i) such option is, in
connection with the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof, (ii) such option is to be replaced with a cash incentive program of the
successor corporation based on the option spread at the time of the Corporate
Transaction, or (iii) the acceleration of such option is subject to other
limitations imposed by the Administrator at the time of grant. The determination
of option comparability under clause (i) above shall be made by the Committee,
and its determination shall be final, binding and conclusive.
For purposes of this Section III an Option shall be considered "assumed,"
without limitation, if, at the time of issuance of the stock or other
consideration upon such merger or sale of assets, each optionee would be
entitled to receive upon exercise of an option the same number and kind of
shares of stock or the same amount of property, cash or securities as the
optionee would have been entitled to receive upon the occurrence of such
transaction if the optionee had been, immediately prior to such transaction, the
holder of the number of shares of Common Stock covered by the option at such
time (after giving effect to any adjustments in the number of shares covered by
the option as provided for in Section V.D. of Article One).
B. Immediately following the consummation of the Corporate Transaction,
all outstanding options under this Article Two shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation or its
parent company.
C. Each outstanding option under this Article Two which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of securities which would have been
issuable, in consummation of such Corporate Transaction, to an actual holder of
the same number of shares of Common Stock as are subject to such option
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to the option price payable per share, provided the aggregate
option price payable for such securities shall remain the same. In addition, the
class and number of securities available for issuance under the Plan on both an
aggregate and per participant basis following the consummation of the Corporate
Transaction shall be appropriately adjusted.
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D. The options outstanding under this Article Two shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
E. The Administrator shall have the discretionary authority, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options under this Article Two upon the occurrence of a Change in
Control (as defined below). The Administrator shall also have full power and
authority to condition any such option acceleration upon the subsequent
termination of the optionee's Continuous Status as an Employee or a Consultant
within a specified period following the Change in Control.
F. For purposes of this Section III, a "Change in Control" shall be
deemed to occur in the event:
(i) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) directly or indirectly acquires beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than twenty-five percent (25%) of the total combined voting
power of the Company's outstanding securities pursuant to a tender or exchange
offer made directly to the Company's stockholders which the Board does not
recommend such stockholders to accept; or
(ii) there is a change in the composition of the Board over a period
of twenty-four (24) consecutive months or less such that a majority of the Board
members (rounded up to the next whole number) cease, by reason of one or more
proxy contests for the election of Board members, to be comprised of individuals
who either (A) have been Board members continuously since the beginning of such
period or (B) have been elected or nominated for election as Board members
during such period by at least two-thirds of the Board members described in
clause (A) who were still in office at the time such election or nomination was
approved by the Board.
G. Any options accelerated in connection with the Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.
H. The exercisability as Incentive Stock Options under the federal tax
laws of any options accelerated under this Section III in connection with a
Corporate Transaction or Change in Control shall remain subject to the dollar
limitation of Section I.C. of this Article Two.
IV. LIMITED STOCK APPRECIATION RIGHTS
A. Each officer of the Company subject to the short-swing profit
restrictions of the Exchange Act may, in the Administrator's sole discretion, be
granted limited stock appreciation rights in tandem with his or her outstanding
options under this Article Two. Upon the occurrence of a Hostile Take-Over (as
defined below) effected at any time after the Company's
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outstanding Common Stock is registered under Section 12(g) of the Exchange Act,
each outstanding option with such a limited stock appreciation right shall
automatically be cancelled and the optionee shall in return be entitled to a
cash distribution from the Company in an amount equal to the excess of (i) the
Take-Over Price (as defined below) of the shares of Common Stock at the time
subject to the cancelled option (whether or not the option is otherwise at the
time exercisable for such shares) over (ii) the aggregate exercise price payable
for such shares. The cash distribution payable upon such cancellation shall be
made within five (5) days following the consummation of the Hostile Take-Over.
The Administrator shall pre-approve, at the time the limited stock appreciation
right is granted, the subsequent exercise of that right in accordance with the
terms of the grant and the provisions of this Section IV.A. No additional
approval of the Administrator or the Board shall be required at the time of the
actual option cancellation and cash distribution.
B. For purposes of Section IV.A, the following definitions shall be in
effect:
(i) A "Hostile Take-Over" shall be deemed to occur in the event any
person or related group of persons (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Company) directly or indirectly acquires beneficial ownership (within
the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made directly to
the Company's stockholders which the Board does not recommend such stockholders
to accept.
(ii) The "Take-Over Price" per share shall be deemed to be equal to
the greater of (a) the Fair Market Value per share on the date of cancellation,
or (b) the highest reported price per share paid in effecting such Hostile
Take-Over. However, if the cancelled option is an Incentive Stock Option, the
Take-Over Price shall not exceed the clause (a) price per share.
V. LOANS OR INSTALLMENT PAYMENT
The Administrator may assist any optionee (including any officer) in the
exercise of one or more outstanding options under this Article Two by (a)
authorizing the extension of a loan to such optionee from the Company or (b)
permitting the optionee to pay the option price for the purchased Common Stock
in installments over a period of years. The terms of any loan or installment
method of payment (including the interest rate and terms of repayment) will be
established by the Administrator in its sole discretion. Loans and installment
payments may be granted without security or collateral, but the maximum credit
available to the optionee shall not exceed the sum of (i) the aggregate option
price of the purchased shares (less the par value) plus (ii) any federal and
state income and employment tax liability incurred by the optionee in connection
with the exercise of the option.
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ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
A. ELIGIBLE OPTIONEES. The individuals eligible to receive automatic
option grants pursuant to the provisions of this Article Three shall be limited
to the following:
(i) each Outside Director serving on the Board on the date of
adoption of this Plan; and
(ii) each Outside Director who is first appointed or elected as a
Board member at any time after the date of adoption of this Plan.
Options may be granted under this Article Three only to Outside Directors.
All options shall be automatically granted in accordance with the terms set
forth in Section II below. An Outside Director who has been granted an option
may, if he or she is otherwise eligible, be granted an additional option or
options in accordance with such provisions.
II. 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. All grants of options hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(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 who becomes an Outside Director after the
effective date of this Plan (a "New Outside Director") shall be automatically
granted an option to purchase 10,000 shares (the "First Option") on the date on
which such person first becomes an Outside Director, whether through election by
the stockholders of the Company or appointment by the Board of Directors to fill
a vacancy.
(iii) Each Outside Director (including New Outside Directors after
such persons have been granted the First Option) shall be automatically granted
an option to purchase 5,000 Shares (a "Subsequent Option") on the date of each
Annual Meeting of the Company's stockholders immediately following which such
Outside Director is serving on the Board, provided that, on such date, he or she
shall have served on the Board for at least six (6) months prior to the date of
such Annual Meeting.
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(iv) Notwithstanding the provisions of Section II.B.(ii) and (iii)
hereof, in the event that a grant would cause the number of shares subject to
outstanding options plus the number of shares previously purchased upon exercise
of options to exceed the maximum aggregate number of shares of common stock
which may be optioned and sold under the Plan, then each such automatic grant
shall be for that number of shares determined by dividing the total number of
shares remaining available for grant by the number of Outside Directors
receiving an option on such date on the automatic grant date. Any further grants
shall then be deferred 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.
(v) Notwithstanding the provisions of Section II.B.(ii) and (iii)
hereof, any grant of an option made before the Company has obtained stockholder
approval of the Plan in accordance with Section II of Article Four hereof shall
be conditioned upon obtaining such stockholder approval of the Plan in
accordance with Section.
(vi) The terms of each option granted under this Article Three shall
be as follows:
(a) the option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Section
III.B. hereof;
(b) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the option; and
(c) the option shall become exercisable in installments
cumulatively as to 25% of the shares subject to the option on each of the first,
second, third and fourth anniversaries of the date of grant of the option.
(v) Should optionee die or become permanently disabled (as defined in
Section 22(e)(3) of the Code) while serving as a Director, then the option shall
accelerate in full and become exercisable for all of the shares of Common Stock
at the time subject to the option.
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
the Fair Market Value of the Common Stock; (ii) to determine the exercise price
per share of options to be granted, which exercise price shall be determined in
accordance with Section III.A. of this Article Three; (iii) to interpret the
Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the
Plan; (v) 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 (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
D. SUSPENSION OR TERMINATION OF OPTION. If the President or his or her
designee reasonably believes that an optionee has committed an act of
misconduct, the President may suspend the optionee's right to exercise any
option pending a determination by the Board of
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Directors (excluding the Outside Director accused of such misconduct). If the
Board of Directors (excluding the Outside Director accused of such misconduct)
determines an optionee has committed an act of embezzlement, fraud, dishonesty,
nonpayment of an obligation owed to the Company, breach of fiduciary duty or
deliberate disregard of the Company rules resulting in loss, damage or injury to
the Company, or if an optionee makes an unauthorized disclosure of any Company
trade secret or confidential information, engages in any conduct constituting
unfair competition, induces any Company customer to breach a contract with the
Company or induces any principal for whom the Company acts as agent to terminate
such agency relationship, neither the optionee nor his or her estate shall be
entitled to exercise any option whatsoever. In making such determination, the
Board of Directors (excluding the Outside Director accused of such misconduct)
shall act fairly and shall give the optionee an opportunity to appear and
present evidence on optionee's behalf at a hearing before the Board or a
committee of the Board.
III. TERMS AND CONDITIONS OF OPTION GRANTS UNDER ARTICLE THREE
A. EXERCISE PRICE AND CONSIDERATION.
(i) EXERCISE PRICE. The per share exercise price for the shares to be
issued pursuant to exercise of an option shall be 100% of the Fair Market Value
per share on the date of grant of the option.
(ii) FORM OF CONSIDERATION. The consideration to be paid for the
shares to be issued upon exercise of an option shall consist entirely of cash,
check, other shares of Common Stock having 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 (which, if acquired from the Company, shall have been
held for at least six (6) months), delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price, or any combination of such methods of payment and/or any other
consideration or method of payment as shall be permitted under applicable
corporate law.
B. EXERCISE OF OPTION.
(i) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any option
granted hereunder shall be exercisable at such times as are set forth in Section
II.B.(vi)(c) hereof; provided, however, that no options shall be exercisable
prior to stockholder approval of the Plan in accordance with Section II of
Article Four 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 III.A. of this Article Three. Until the issuance
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(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 V.D. of Article One.
(ii) TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director
ceases to serve as a Director for any reason (except death), he or she may, but
only within six (6) months after the date he or she ceases to be a Director of
the Company, exercise his or her option to the extent that he or she was
entitled to exercise it at the date of such termination. To the extent that such
Outside Director was not entitled to exercise an option at the date of such
termination, or does not exercise such option (which he or she was entitled to
exercise) within the time specified herein, the option shall terminate.
(iii) EXERCISE UPON DEATH OF OPTIONEE. Should the optionee die while
serving as a Board member or during the six (6)-month period following his or
her cessation of Board service, then the option may subsequently be exercised,
for any or all of the shares of Common Stock for which the option is exercisable
at the time of the optionee's cessation of Board membership, by the personal
representative of the optionee's estate or by the person or persons to whom the
option is transferred pursuant to the optionee's will or in accordance with the
laws of descent and distribution. Any such exercise must, however, occur within
twelve (12) months after the date of the optionee's death. However, each such
option shall immediately terminate and cease to be outstanding, at the time of
the optionee's cessation of Board service, with respect to any shares for which
the option is not otherwise at that time exercisable.
(v). TERMINATION OF OPTION. In no event shall any automatic grant
under this Article Three remain exercisable after the expiration of the option
term specified in Section III.C. below. Upon the expiration of the applicable
exercise period in accordance with subparagraphs (ii) and (iii) above or (if
earlier) upon the expiration of option term specified in Section III.C., the
automatic grant shall terminate and cease to be outstanding for all shares for
which such option was exercisable at the time of the optionee's cessation of
Board service but for which that option was not subsequently exercised.
C. OPTION TERM. Each automatic grant under this Article Three shall have
a maximum term of ten (10) years measured from the automatic grant date.
D. NONTRANSFERABILITY 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 or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an optionee does not constitute a transfer. An
option may be exercised during the lifetime of an optionee only by the optionee
or a transferee permitted by this Section III.D.
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E. TIME OF GRANTING OPTIONS. The date of grant of an option shall, for
all purposes, be the date determined in accordance with Section II.B. of this
Article Three. 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.
IV. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of a Corporate Transaction (as such term is defined in
Section III of Article Two), then the exercisability of each automatic option
grant outstanding under this Article Three shall automatically accelerate so
that each such option shall, immediately prior to the specified effective date
for the Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of those shares. Immediately following
the consummation of the Corporate Transaction, all automatic option grants under
this Article Three shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation or its parent company.
B. In connection with any Change in Control (as such term is defined in
Section III of Article Two), the exercisability of each automatic option grant
at the time outstanding under this Article Three shall automatically accelerate
so that each such option shall, immediately prior to the specified effective
date for the Change in Control, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares.
C. The automatic option grants outstanding under this Article Three shall
in no way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
V. LIMITED STOCK APPRECIATION RIGHTS
Upon the occurrence of a Hostile Take-Over (as such terms is defined in
Section IV.A. of Article Two above), each outstanding automatic option grant
under this Article Three shall automatically be cancelled in return for a cash
distribution from the Company in an amount equal to the excess of (i) the
Take-Over Price (as such term is defined below) of the shares of Common Stock at
the time subject to the cancelled option (whether or not the option is otherwise
at the time exercisable for such shares) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such cancellation
shall be made within five (5) days following the consummation of the Hostile
Take-Over. Stockholder approval of 1998 Stock Option Plan shall constitute
pre-approval of each option subsequently granted with such an automatic
cancellation provision and the subsequent cancellation of that option in
accordance with the provisions of this Section V. No additional approval of the
Administrator or the Board shall be required at the time of the actual option
cancellation and cash distribution. The Take-Over Price per share shall be
deemed to be equal to the greater of (a) the Fair Market Value per
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share on the date of cancellation, or (b) the highest reported price per share
paid in effecting such Hostile Take-Over.
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ARTICLE FOUR
MISCELLANEOUS
I. AMENDMENT OF THE PLAN
A. AMENDMENT OF THE PLAN. The Board may amend or terminate the Plan from
time to time in such respects as the Board may deem advisable; provided that,
the following revisions or amendments shall require approval of the stockholders
of the Company in the manner described in Section II of Article Four of the
Plan:
(i) any increase in the number of Shares subject to the Plan, other
than an adjustment under Section V.D. of Article One of the Plan;
(ii) any change in the designation of the class of persons eligible to
be granted options;
(iii) any change in the limitation on grants to employees as described
in Section V.D. of Article One or other changes which would require stockholder
approval to qualify options granted hereunder as performance-based compensation
under Section 162(m) of the Code; or
(iv) any change which requires stockholder approval to comply with
Rule 16b-3 under the Exchange Act or any other Applicable Law.
Notwithstanding the foregoing, the provisions set forth in Section II.B. of
Article Three (and any other Sections of the Plan that affect the formula award
terms to be specified in this Plan by Rule 16b-3) shall not be amended more than
once every six (6) months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rule
thereunder.
B. EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination
of the Plan that would impair the rights of any optionee shall not affect
options already granted to such optionee 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.
II. STOCKHOLDER APPROVAL OF PLAN
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. Such stockholder approval shall be obtained in the manner
and to the degree required under applicable federal and state law and the rules
of any stock exchange upon which the shares are listed.
B. 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
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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.
III. WITHHOLDING TAXES AND TAX WITHHOLDING
A. WITHHOLDING TAXES. As a condition to the exercise of options granted
hereunder, the optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such option. The Company shall not be required to issue any shares
under the Plan until such obligations are satisfied.
B. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, optionees may satisfy withholding obligations
as provided in this paragraph. When an optionee incurs tax liability in
connection with an option which tax liability is subject to tax withholding
under applicable tax laws, and the optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company shares that (i) in the case of shares previously
acquired from the Company, have been owned by the optionee for more than six (6)
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than the applicable taxes, or (d) by electing to
have the Company withhold from the shares to be issued upon exercise of the
option that number of shares having a fair market value equal to the amount
required to be withheld. For this purpose, the fair market value of the shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "Tax Date").
Any surrender by an Officer or Director of previously owned shares to
satisfy tax withholding obligations arising upon exercise of this option must
comply with the applicable provisions of Rule 16b-3.
All elections by an optionee to have shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
shares of the option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have shares withheld is made by an
optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under
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Section 83(b) of the Code, the optionee shall receive the full number of shares
with respect to which the option is exercised but such optionee shall be
unconditionally obligated to tender back to the Company the proper number of
shares on the Tax Date.
IV. EFFECTIVE DATE AND 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 II of this Article Four of the Plan. It shall continue in effect for a
term of ten (10) years unless sooner terminated under Section I of this Article
Four.
V. USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares pursuant
to options granted under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
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.
VI. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Company in establishing the Plan, nor any action
taken by the Plan Administrator hereunder, nor any provision of the Plan shall
be construed so as to grant any individual the right to remain in the employ or
service of the Company (or any Parent or Subsidiary corporation) for any period
of specific duration, and the Company (or any Parent or Subsidiary corporation
retaining the services of such individual) may terminate such individual's
employment or service at any time and for any reason, with or without cause.
VII. OPTION AGREEMENTS
Options issued under Article Two and Article Three of the Plan shall be
evidenced by written option agreements in such form as the Board shall from time
to time approve.
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VIII. 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.
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ENDOSONICS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock Purchase
Plan.
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. 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 shall, accordingly, 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 Endosonics Corporation, a Delaware
corporation.
(e) "Compensation" shall mean all regular straight time gross
earnings, excluding payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses, commissions and other compensation.
(f) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, 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.
(g) "Contributions" shall mean all amounts credited to the account of
a participant pursuant to the Plan.
(h) "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.
(i) "Employee" shall mean any person, including an Officer, who is
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
<PAGE> 55
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Purchase Date" shall mean the last day of each Offering Period
of the Plan.
(l) "Offering Date" shall mean the first business day of each
Offering Period of the Plan, except that in the case of an individual who
becomes an eligible Employee after the first business day of an Offering Period
but prior to the first business day of the last calendar quarter of such
Offering Period, the term "Offering Date" shall mean the first business day of
the calendar quarter coinciding with or next succeeding the day on which that
individual becomes an eligible Employee.
Options granted after the first business day of an Offering
Period will be subject to the same terms as the options granted on the first
business day of such Offering Period except that they will have a different
grant date (thus, potentially, a different exercise price) and, because they
expire at the same time as the options granted on the first business day of such
Offering Period, a shorter term.
(m) "Offering Period" shall mean a period of six (6) months except
for the first offering period as set forth in Section 4.
(n) "Officer" shall mean a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(o) "Plan" shall mean this Employee Stock Purchase Plan.
(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.
3. ELIGIBILITY.
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, provided that such person was not eligible to participate in such
Offering Period as of any prior Offering Date, and further, subject to the
requirements of Section 5(a) and the limitations imposed by Section 423(b) of
the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, 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 stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any Subsidiary of the Company, or (ii) if such option would permit
his or her
-2-
<PAGE> 56
rights to purchase stock under all employee stock purchase plans (described in
Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate
which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of
such stock (determined at the time such option is granted) for each calendar
year in which such option is outstanding at any time.
4. OFFERING PERIODS. The Plan shall be implemented by a series of
Offering Periods, with new Offering Periods commencing on or about February 1
and August 1 of each year (or at such other time or times as may be determined
by the Board of Directors). The first Offering Period shall commence on July 1,
1998 and continue until January 31, 1999. The Plan shall continue until
terminated in accordance with Section 19 hereof. The Board of Directors of the
Company shall have the power to change the duration and/or the frequency of
Offering Periods 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.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
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. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which shall be not less than one percent (1%) and not more than
twenty percent (20%)) to be paid as Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the
Purchase Date of the offering to which the subscription agreement is applicable,
unless sooner terminated by the participant as provided in Section 10.
6. METHOD OF PAYMENT OF CONTRIBUTIONS.
(a) The participant shall elect to have payroll deductions made on
each payday during the Offering Period in an amount not less than one percent
(1%) and not more than twenty percent (20%) of such participant's Compensation
on each such payday. All payroll deductions made by a participant shall be
credited to his or her account under the Plan. A participant may not make any
additional payments into such account.
(b) A participant may discontinue his or her participation in the
Plan as provided in Section 10, or, on one occasion only during the Offering
Period, may decrease the rate of his or her Contributions during the Offering
Period by completing and filing with the Company a new subscription agreement.
The change in rate shall be effective as of the beginning of the calendar
quarter following the date of filing of the new subscription agreement.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased to 0% at such time during any Offering
Period which is scheduled to end during the
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<PAGE> 57
current calendar year that the aggregate of all payroll deductions accumulated
with respect to such Offering Period and any other Offering Period ending within
the same calendar year equal $21,250. Payroll deductions shall re-commence 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.
7. GRANT OF OPTION.
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on the Purchase Date a number of shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the lower of (i) eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date, or (ii) eighty-five
percent (85%) of the fair market value of a share of the Company's Common Stock
on the Purchase Date; provided, however, that the maximum number of shares an
Employee may purchase during each Offering Period shall be determined at the
Offering Date by dividing $12,500 by the fair market value of a share of the
Company's Common Stock on the Offering Date, and provided further that such
purchase shall be subject to the limitations set forth in Sections 3(b) and 12.
The fair market value of a share of the Company's Common Stock shall be
determined as provided in Section 7(b).
(b) The option price per share of the shares offered in a given
Offering Period shall be the lower of: (i) 85% of the fair market value of a
share of the Common Stock of the Company on the Offering Date; or (ii) 85% of
the fair market value of a share of the Common Stock of the Company on the
Purchase Date. The fair market value of the Company's Common Stock on a given
date shall be determined by the Board in its discretion based on the closing
price of the Common Stock for such date (or, in the event that the Common Stock
is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(Nasdaq) National Market or, if such price is not reported, the mean of the bid
and asked prices per share of the Common Stock as reported by Nasdaq or, in the
event the Common Stock is listed on a stock exchange, the fair market value per
share shall be the closing price on such exchange on such date (or, in the event
that the Common Stock is not traded on such date, on the immediately preceding
trading date), as reported in The Wall Street Journal.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as
provided in paragraph 10, his or her option for the purchase of shares will be
exercised automatically on the Purchase Date of the Offering Period, and the
maximum number of full shares subject to the option will be purchased at the
applicable option price with the accumulated Contributions in his or her
account. The shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Purchase Date. During his or
her lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
-4-
<PAGE> 58
9. DELIVERY. As promptly as practicable after the Purchase Date of each
Offering Period, 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. Any cash remaining to the credit of a participant's account
under the Plan after a purchase by him or her of shares at the termination of
each Offering Period, or which is insufficient to purchase a full share of
Common Stock of the Company, shall be carried over to the next Offering Period
if the Employee continues to participate in the Plan, or if the Employee does
not continue to participate, shall be returned to said participant.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
the Purchase Date of the Offering Period by giving written notice to the
Company. All of the participant's Contributions credited to his or her account
will be paid to him or her promptly after receipt of his or her notice of
withdrawal and his or her option for the current period will be automatically
terminated, and no further Contributions for the purchase of shares will be made
during the Offering Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of the Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
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 Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. INTEREST. No interest shall accrue on the Contributions of a
participant in the Plan.
12. 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 Two Hundred Fifty
Thousand (250,000) shares, subject to adjustment upon changes in capitalization
of the Company as provided in Section 18. If the total number of shares which
would otherwise be subject to options granted pursuant to Section 7(a) on the
Offering Date of an Offering Period exceeds the number of shares then available
under the Plan (after deduction of all shares for which options have been
exercised or are then outstanding), the Company shall make a pro rata allocation
of the shares remaining
-5-
<PAGE> 59
available for option grant in as uniform a manner as shall be practicable and as
it shall determine to be equitable. In such event, the Company shall give
written notice of such reduction of the number of shares subject to the option
to each Employee affected thereby and shall similarly reduce the rate of
Contributions, if necessary.
(b) The participant will have no interest or voting right in shares
covered by his or her 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.
13. ADMINISTRATION. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. The composition of the committee shall be in accordance with the
requirements to obtain or retain any available exemption from the operation of
Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder.
14. 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 the end of the
Offering Period but prior to delivery to him or her 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 the Purchase Date of the Offering Period.
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
(and his or her spouse, if any) 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 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.
15. TRANSFERABILITY. Neither Contributions 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 14) 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 in
accordance with Section 10.
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<PAGE> 60
16. USE OF FUNDS. All Contributions 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 Contributions.
17. REPORTS. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to participating Employees
promptly following the Purchase Date, which statements will set forth the
amounts of Contributions, the per share purchase price, the number of shares
purchased and the remaining cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the stockholders of
the Company, the number of shares of Common Stock covered by each option under
the Plan which has not yet been exercised and the number of shares of Common
Stock which have been authorized for issuance under the Plan but have not yet
been placed under option (collectively, 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 issue
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) CORPORATE TRANSACTIONS. 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. 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 shorten the
Offering Period then in progress by setting a new Purchase Date (the "New
Purchase Date"). 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) days prior
to the New Purchase Date, that the Purchase Date for his or her option has been
changed to the New Purchase Date and that his or her option will be exercised
automatically on the New Purchase Date, unless prior to such date he or she has
withdrawn from the Offering Period as provided in Section 10. 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,
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<PAGE> 61
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
consideration 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 that
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.
19. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time terminate
or amend the Plan. Except as provided in Section 18, no such termination may
affect options previously granted, nor may an amendment make any change in any
option theretofore granted which adversely affects the rights of any
participant. In addition, to the extent necessary to comply with Rule 16b-3
under the Exchange Act, or under Section 423 of the Code (or any successor rule
or provision or any applicable law or regulation), the Company shall obtain
stockholder approval in such a manner and to such a degree as so 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 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.
20. 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.
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<PAGE> 62
21. 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.
22. TERM OF PLAN; EFFECTIVE DATE. 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
twenty (20) years unless sooner terminated under Section 19.
23. 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> 63
ENDOSONICS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election ________
Change of Election ________
1. I, ________________________, hereby elect to participate in the
Endosonics Corporation 1998 Employee Stock Purchase Plan (the "Plan") for the
Offering Period ______________, 19__ to _______________, 19__, and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during
the Offering Period at the rate stated in Item 2 of this Subscription Agreement.
I understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of the Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the
Purchase Date my participation in the Plan as provided in Section 10 of the
Plan. I also understand that I can decrease the rate of my Contributions on one
occasion only during any Offering Period by completing and filing a new
Subscription Agreement with such decrease taking effect as of the beginning of
the calendar quarter following the date of filing of the new Subscription
Agreement. Further, I may change the rate of deductions for future Offering
Periods by filing a new Subscription Agreement, and any such change will be
effective as of the beginning of the next Offering Period. In addition, I
acknowledge that, unless I discontinue my participation in the Plan as provided
in Section 10 of the Plan, my election will continue to be effective for each
successive Offering Period.
5. I have received a copy of the Company's most recent description
of the Plan and a copy of the complete "Endosonics Corporation 1998 Employee
Stock Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.
<PAGE> 64
6. Shares purchased for me under the Plan should be issued in the
name(s) of (name of employee or employee and spouse only):
----------------------------------------
----------------------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) ----------------------------------------
(First) (Middle) (Last)
- -------------------- ----------------------------------------
(Relationship) (Address)
----------------------------------------
8. I understand that if I dispose of any shares received by me
pursuant to the Plan within 2 years after the Offering Date (the first day of
the Offering Period during which I purchased such shares) or within 1 year after
the Purchase Date (the last day of the Offering Period), I will be treated for
federal income tax purposes as having received ordinary compensation income at
the time of such disposition in an amount equal to the excess of the fair market
value of the shares on the Purchase Date over the price which I paid for the
shares, regardless of whether I disposed of the shares at a price less than
their fair market value at the Purchase Date. The remainder of the gain or loss,
if any, recognized on such disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days
after the date of any such disposition, and I will make adequate provision for
federal, state or other tax withholding obligations, if any, which arise upon
the disposition of the Common Stock. The Company may, but will not be obligated
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the
2-year and 1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received compensation income only to the
extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase price
which I paid for the shares under the option, or (2) 15% of the fair market
value of the shares on the Offering Date. The remainder of the gain or loss, if
any, recognized on such disposition will be treated as capital gain or loss.
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<PAGE> 65
I understand that this tax summary is only a summary and is subject
to change. I further understand that I should consult a tax advisor concerning
the tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.
SIGNATURE:
-----------------------------
SOCIAL SECURITY #:
---------------------
DATE:
----------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- ----------------------------------------
(Signature)
- ----------------------------------------
(Print name)
-3-
<PAGE> 66
ENDOSONICS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my
participation in the Endosonics Corporation 1998 Employee Stock Purchase Plan
(the "Plan") for the Offering Period _________. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be
paid to me within ten (10) business days of receipt by the Company of this
Notice of Withdrawal and that my option for the current period will
automatically terminate, and that no further Contributions for the purchase of
shares can be made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall
be eligible to participate in succeeding offering periods only by delivering to
the Company a new Subscription Agreement.
Dated:
------------------ ----------------------------------------
Signature of Employee
----------------------------------------
Social Security Number
<PAGE> 67
PROXY
ENDOSONICS CORPORATION
ANNUAL MEETING OF STOCKHOLDERS, JUNE 4, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the notice
of annual meeting of stockholders to be held on June 4, 1998 and the proxy
statement and appoints Roger Salquist and Michael W. Hall, or either of them,
the proxy of the undersigned, with full power of substitution, to vote all
shares of Common Stock of EndoSonics Corporation which the undersigned is
entitled to vote, either on his or her own behalf or on behalf of an entity or
entities, at the Annual Meeting of Stockholders of EndoSonics to be held at
EndoSonics Corporation, 2870 Kilgore Road, Rancho Cordova, California, on
Thursday, June 4, 1998 at 10:00 a.m., and any adjournment or postponement
thereof, and to vote in their discretion on such other business as may properly
come before the Annual Meeting and any postponement or adjournment thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 68
PLEASE MARK YOUR
VOTE AS INDICATED
IN THIS EXAMPLE. [X]
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
1. To approve the adoption of the
1998 Employee Stock Purchase Plan
(the "1998 Purchase Plan") of
EndoSonics Corporation. [ ] [ ] [ ]
2. The adoption of the 1998 Stock
Option Plan of EndoSonics Corporation
and the reservation of 750,000 shares
of the Company's Common Stock for
issuance thereunder. [ ] [ ] [ ]
</TABLE>
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
all nominees to vote
listed below: for all nominees EXCEPTIONS
------------- ---------------- ----------
<S> <C> <C> <C>
3. Election of Directors
INSTRUCTION: To withhold authority
for any individual nominee,
mark the "EXCEPTIONS" box, and
strike a line through the nominee's
name in the list below:
Julie A. Brooks Roger Salquist
Thomas J. Cable Reinhard J. Warnking
Edward M. Leonard W. Michael Wright
</TABLE>
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
4. Ratification of Ernst & Young LLP
as independent auditors for fiscal
year 1998. [ ] [ ] [ ]
</TABLE>
The Board of Directors recommends a vote FOR each of the director nominees
listed above and for the other proposals set forth above. This Proxy, when
properly executed, will be voted as specified above. This Proxy will be voted
FOR Proposals Nos. 1, 2, and 4, and FOR each of the nominees listed under
Proposal No. 3 if no specification is made. This Proxy will also be voted at the
discretion of the proxy holders on such matters other than the four specific
items as may come before the meeting.
Please print the name(s) appearing on each share certiciate(s) over which you
have voting authority:
Dated:
- ------------------------------------ ------------------------------------
[Print name(s) as it (they) appear on certificate(s)]
PLEASE RETURN YOUR EXECUTED PROXY TO ENDOSONICS' TRANSFER AGENT IN THE ENCLOSED
ENVELOPE, OR, IF NECESSARY, DELIVER IT TO ENDOSONICS, 2870 KILGORE ROAD, RANCHO
CORDOVA, CA, ATTENTION: SECRETARY.
Signature(s) DATE:
------------------------------- ----------------------------
Please sign exactly as your name(s) is (are) shown on the share certificate to
which the Proxy applies. When shares are held by joint tenants, both should
sign. When signing as an attorney, executor, administrator, trustee or guardian,
please give full title, as such. If a corporation, please sign in full corporate
name by the President or another authorized officer. If a partnership, please
sign in the partnership name by an authorized person.
- --------------------------------------------------------------------------------
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