<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
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
HYSEQ, INC.
(Name of Registrant as Specified In Its Charter)
HYSEQ, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE> 2
April 14, 1998
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Hyseq, Inc. (the "Company") at 9:00 a.m. Pacific Time on Monday, May 18,
1998, at the Company's new facility at 675 Almanor Avenue, Sunnyvale, California
94086 (telephone number: (408) 524-8100). At this meeting, we will be seeking
your vote on the following proposals: (i) the election of the Company's Class II
directors; (ii) ratification of the selection of the Company's independent
auditors; (iii) approval of the continuation of Company's 1995 Stock Option Plan
(the "1995 Plan") as required by Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), and approval of certain amendments to the 1995
Plan, including an increase in the number of shares of the Company's Common
Stock available for issuance thereunder by 1,000,000 shares; (iv) approval of
certain amendments to the Company's Non-Employee Director Stock Option Plan (the
"Directors' Plan"); (v) approval of the adoption of the Company's Employee Stock
Purchase Plan (the "Stock Purchase Plan"); and (vi) approval of amendments to
accelerate the vesting of options granted under the 1995 Plan and the Directors'
Plan upon a change of control. Each proposal is described in the accompanying
Notice and Proxy Statement. A proxy card on which to indicate your vote is also
enclosed along with a postage-paid return envelope. THE BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE FOR ALL SIX OF THESE PROPOSALS.
We realize not all of you will be able to attend the meeting and vote
your shares in person. HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
WE NEED YOUR VOTE PROMPTLY TO ASSURE A QUORUM AND HELP THE COMPANY AVOID THE
NECESSITY AND EXPENSE OF SENDING FOLLOW-UP SOLICITATIONS. WE URGE YOU TO
COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD NOW SO THAT YOUR SHARES WILL
BE REPRESENTED. If you later decide to attend the meeting, you can always revoke
your proxy at that time and vote your shares in person.
Remember, your vote is important no matter how many or how few shares
you own.
Sincerely,
ROBERT D. WEIST
Chairman of the Board
LEWIS S. GRUBER
President and Chief Executive Officer
<PAGE> 3
HYSEQ, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 18, 1998
The Annual Meeting of Stockholders (the "Meeting") of Hyseq, Inc. (the
"Company") will be held on Monday, May 18, 1998, at 9:00 A.M., Pacific Time, at
the Company's new facility at 675 Almanor Avenue, Sunnyvale, California 94086.
The following matters will be acted upon at that time.
1. The election of two Class II directors to serve until the annual meeting
to be held in 2001, or until their successors shall have been elected
and qualified;
2. The ratification of the selection of the firm of Ernst & Young LLP as
the independent auditors for the Company for fiscal year 1998;
3. The approval of the continuation of the Company's 1995 Stock Option Plan
(the "1995 Plan"), as required by Section 162(m) of the Internal Revenue
Code of 1986, as amended, and the approval of certain amendments to the
1995 Plan, including an increase in the number of shares of the
Company's Common Stock available for issuance thereunder by 1,000,000
shares;
4. The approval of certain amendments to the Non-Employee Director Stock
Option Plan (the "Directors' Plan");
5. The approval of the adoption of the Company's Employee Stock Purchase
Plan;
6. The approval of amendments to accelerate the vesting of options granted
under the 1995 Plan and the Directors' Plan upon a change of control;
and
7. Such other business as may properly come before the meeting and any
adjournments thereof.
Only stockholders of record at the close of business on March 31, 1998 are
entitled to receive notice of, and to vote at, the Meeting or any adjournment
thereof (the "Eligible Holders"). A complete list of Eligible Holders will be
available for inspection at the Company's offices for at least ten days prior to
the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
JAMES N. FLETCHER
SECRETARY
April 14, 1998
670 Almanor Avenue
Sunnyvale, California 94086
YOUR VOTE IS IMPORTANT
STOCKHOLDERS ARE URGED TO DESIGNATE THEIR CHOICES ON EACH OF THE MATTERS
TO BE ACTED UPON AND TO DATE, SIGN, AND RETURN THE ENCLOSED PROXY CARD IN THE
ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
YOUR PROMPT RETURN OF THE PROXY CARD WILL HELP ASSURE A QUORUM AT THE MEETING
AND AVOID THE ADDITIONAL COMPANY EXPENSE OF FURTHER SOLICITATION.
<PAGE> 4
HYSEQ, INC.
670 ALMANOR
SUNNYVALE, CA 94086
408-524-8100
------------------
PROXY STATEMENT
------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by Hyseq, Inc. (the "Company"), a Nevada corporation, for use at the
Annual Meeting of Stockholders of the Company to be held at 9:00 A.M. Pacific
Time on Monday, May 18, 1998, and at any adjournments thereof (the "Meeting").
The close of business on March 31, 1998, has been fixed as the record
date (the "Record Date") for determining the holders of record (the
"Stockholders") of the shares of the Company's Common Stock, par value $.001 per
share (the "Common Stock"), entitled to notice of, and to vote at, the Meeting.
Stockholders at the close of business on the Record Date will be entitled to one
vote per share on all business of the Meeting and any adjournments thereof. As
of the close of business on the Record Date, there were 12,733,963 shares of
Common Stock outstanding.
Where the Stockholder specifies a choice on the proxy card as to how his
or her shares are to be voted on a particular matter, the shares will be voted
accordingly. Executed proxies that are unmarked will be voted: (i) FOR election
of the two Class II nominees to the Board of Directors (the "Board"); (ii) FOR
ratification of the selection of Ernst & Young LLP as the independent auditors
for the Company; (iii) FOR approval of continuation of the 1995 Plan, and
approval of certain amendments to the 1995 Stock Option Plan (the "1995 Plan"),
including an amendment to increase the number of shares of Common Stock
available for grants thereunder by 1,000,000 shares; (iv) FOR approval of
certain amendments to the Non-Employee Director Stock Option Plan (the
"Directors' Plan"); (v) FOR approval of the adoption of the Company's Stock
Purchase Plan; and (vi) FOR approval of amendments to accelerate the vesting of
options granted under the 1995 Plan and the Directors' Plan upon a change of
control. The proxy gives discretionary authority to the persons named in the
proxy to vote the shares in their best judgment if any matters other than these
shown on the proxy are properly brought before the Annual Meeting. Any proxy
given pursuant to this solicitation may be revoked by the person giving it at
any time before its use by delivering to the Company a written notice of
revocation or a duly executed proxy bearing a later date. Any Stockholder who
has executed a proxy but is present at the Meeting, and who wishes to vote in
person, may do so by revoking his or her proxy as described in the preceding
sentence. Shares represented by valid proxies in the form enclosed, received in
time for use at the Meeting and not revoked at or prior to the Meeting, will be
voted at the Meeting. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of the Company's Common Stock, is necessary
to constitute a quorum at the Meeting.
This Proxy Statement and the related proxy form are being mailed to
Stockholders on or about April 14, 1998.
The affirmative vote of a majority of the shares voted affirmatively or
negatively at the Meeting is required to approve each proposal, other than the
election of directors which requires a plurality of the shares voted
affirmatively or negatively at the Meeting. With respect to the tabulation of
votes on any
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matter, abstentions are treated as votes against a proposal, while broker
non-votes have no effect on the vote.
The costs of the Meeting, including the solicitation of proxies, will be
borne by the Company. Persons holding shares as nominees will be reimbursed,
upon request, for their reasonable expenses in sending solicitation materials to
the principals of the accounts. In addition to the solicitation of proxies by
mail, directors, officers, and/or employees of the Company may solicit proxies
in person or by telephone.
The Annual Report to Stockholders for the fiscal year ended December 31,
1997, is being mailed to the Stockholders with this Proxy Statement, but does
not constitute a part hereof.
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (other than exhibits thereto) filed with the Securities and
Exchange Commission (the "Commission"), which provides additional information
about the Company, is available to beneficial owners of the Company's Common
Stock without charge upon written request to Secretary, Hyseq, Inc., 670 Almanor
Avenue, Sunnyvale, CA 94086 (408-524-8100).
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 31, 1998 by: (i) each person known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of Common Stock; (ii) each of the Company's directors; (iii) each
executive officer named in the Summary Compensation Table; and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------
NUMBER OF
NAME AND ADDRESS(2) SHARES PERCENTAGE(3)
-------------------- -------------- ------------
<S> <C> <C>
Robert D. Weist(4)................................................. 223,075 1.7%
Lewis S. Gruber(5)................................................. 856,134 6.6
Christopher R. Wolf(6)............................................. 491,712 3.8
Radoje T. Drmanac(7)............................................... 879,869 6.8
Radomir B. Crkvenjakov(8).......................................... 813,481 6.3
James N. Fletcher(9)............................................... 17,691 *
Raymond F. Baddour(10)............................................. 28,800 *
Greta E. Marshall(11).............................................. 32,640 *
Thomas N. McCarter III(12)......................................... 94,080 *
Kenneth D. Noonan(13).............................................. 17,280 *
Institute of Molecular Genetics and Genetic Engineering(14)........ 708,480 5.6
Vojode Stepe 283
P. O. Box 794
11001 Belgrade Yugoslavia
Ryback Management Corporation(15).................................. 600,000 4.7
7711 Carondolet Avenue
Suite 700
St. Louis, MO 63105
Lindner Growth Fund(15)............................................ 725,000 5.7
7711 Carondolet Avenue
Suite 700
St. Louis, MO 63105
The Perkin-Elmer Corporation(16)................................... 766,921 6.0
761 Main Ave.
Norwalk, CT 06859
All directors and executive officers of the Company, as a group
(10 persons)(17)................................................. 3,454,762 25.6
</TABLE>
- --------------
* Represents beneficial ownership of less than 1% of the Common Stock.
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<PAGE> 6
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, based on factors including voting and investment power with
respect to shares. Shares of Common Stock issuable pursuant to stock
options currently exercisable, or exercisable within 60 days after March
31, 1998, are deemed outstanding for purposes of computing the
percentage owned by the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(2) Unless otherwise indicated, the persons named in the table above have
the sole voting and investment power with respect to all shares
beneficially owned by them, subject to applicable community property
laws. Unless otherwise indicated, the address of each beneficial owner
is: c/o Hyseq, Inc., 670 Almanor Avenue, Sunnyvale, California 94086.
(3) Applicable percentage ownership is based on 12,733,963 shares of Common
Stock outstanding as of March 31, 1998.
(4) Includes 14,400 shares issuable upon exercise of options.
(5) Mr. Gruber holds shares individually, jointly with his wife and through
a corporation and a partnership that they control. Includes 280,562
shares issuable upon exercise of options.
(6) Includes 1,920 shares issuable upon exercise of a warrant and 72,000
shares issuable upon exercise of options. Also includes 76,800 shares
owned by a partnership controlled by Mr. McCarter and of which Mr. Wolf
is a partner.
(7) Includes 111,921 shares issuable upon exercise of options held
individually by Dr. Radoje Drmanac. Also includes 59,468 shares issuable
upon exercise of options held individually by Dr. Radoje Drmanac's
spouse, Dr. Snezana Drmanac. Dr. Radoje Drmanac disclaims beneficial
ownership of any shares owned by, or issuable upon the exercise of
options held by, Dr. Snezana Drmanac.
(8) Includes 105,001 shares issuable upon exercise of options.
(9) Includes 13,151 shares issuable upon exercise of options.
(10) Includes 28,800 shares issuable upon exercise of options.
(11) Includes 28,800 shares issuable upon exercise of options.
(12) Mr. McCarter owns 76,800 shares through a partnership which he controls
and of which Mr. Wolf is a partner. Includes 17,280 shares issuable upon
exercise of options.
(13) Includes 17,280 shares issuable upon exercise of options.
(14) Information based solely on a Schedule 13G filed with the Commission on
February 17, 1998. The 708,480 shares issued to the Institute of
Molecular Genetics and Genetic Engineering are being held by the First
National Bank of Chicago and cannot be voted or disposed of while held
thereby until certain restrictions imposed by the United States
Department of the Treasury are satisfied.
(15) Information based solely on a Schedule 13G filed with the Commission on
January 28, 1998.
(16) Information based solely on a Schedule 13D filed with the Commission on
August 22, 1997.
(17) Includes 750,583 shares issuable upon exercise of options or warrant.
MANAGEMENT
DIRECTORS
The Company's Amended and Restated Articles of Incorporation, as
amended, and By-Laws provide for the Company's business to be managed by or
under the direction of its Board of Directors (the "Board"). The Board is
divided into three classes, each of whose members serve for a staggered
three-year term. The Board comprises two Class I Directors (Messrs. Weist and
Gruber), two Class II Directors (Dr. Baddour and Ms. Marshall) and four Class
III Directors (Drs. Drmanac, Crkvenjakov and Noonan and Mr. McCarter). At each
annual meeting of Stockholders, the appropriate number of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring. The terms of the Class I Directors and Class III
Directors expire upon the due election and qualification of successor directors
at the annual meetings of stockholders held in calendar years 2000 and 1999,
respectively. As the terms of the Class II Directors expire in 1998, the Class
II Directors will be elected at the Annual Meeting to be held on May 18, 1998,
for terms expiring in 2001. The Board met nine times in 1997. No director
attended less than 75% of the meetings.
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<PAGE> 7
The following table sets forth the names, ages and positions of the
directors of the Company as of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- --- -----------------------------------------
<S> <C> <C>
Robert D. Weist(1)(2).......... 58 Chairman of the Board of Directors
Lewis S. Gruber................ 47 President, Chief Executive Officer and
Director
Radoje T. Drmanac, Ph.D........ 40 Co-Senior Vice President for Research and
Director
Radomir B. Crkvenjakov, Ph.D... 51 Co-Senior Vice President for Research and
Director
Raymond F. Baddour, Ph.D.(1)(3) 73 Director
Greta E. Marshall(2)........... 60 Director
Thomas N. McCarter III(3)...... 68 Director
Kenneth D. Noonan, Ph.D.(3).... 50 Director
</TABLE>
- --------------
(1) Member of the Compensation Committee.
(2) Member of the Nominating Committee.
(3) Member of the Audit Committee.
Robert D. Weist has served as Chairman of the Board of Directors of the
Company since March 1994, and served as the President and a director of the
Company from May 1993 until March 1994. Mr. Weist has also been President of
Weist Associates, a management consulting firm, since April 1992. Mr. Weist was
a consultant to and Senior Vice President, Administration, General Counsel and
Secretary of Amgen Inc., a biotechnology company ("Amgen"), from January 1986
through April 1992, and served as its Vice President, General Counsel and
Secretary from May 1982 to January 1986. Mr. Weist also serves as a director of
BioSource International Inc., a biological products supplier. Mr. Weist holds a
B.S. in chemical engineering from Purdue University, a J.D. from New York
University and an M.B.A. from the University of Chicago.
Lewis S. Gruber, a founder of the Company, has been the Chief Executive
Officer, President and a director since joining the Company in June 1994. From
January 1989 until June 1994, Mr. Gruber was a partner with the law firm of
Marshall, O'Toole, Gerstein, Murray & Borun, which has represented the Company
as one of its patent counsel since May 1992. Mr. Gruber holds a B.S. in
sociology, an M.S. in cell biology and genetics from the University of Arizona,
and a J.D. from Arizona State University.
Radoje T. Drmanac, Ph.D. joined the Company in August 1994 and serves as
Co-Senior Vice President for Research and a director. Dr. Drmanac co-invented
SBH technology while at the Institute of Molecular Genetics and Genetics
Engineering in Belgrade, Yugoslavia ("IMGGE"), where he conducted research from
May 1986 until February 1991. Dr. Drmanac served as a Molecular Biologist and
Group Leader at Argonne National Laboratory ("Argonne") from February 1991 until
August 1994. Dr. Drmanac was a member of the Editorial Board of the
International Journal of Genome Research from 1992 to 1994, and has been a
member of the Human Genome Organization ("HUGO") since 1992. Dr. Drmanac
received his Ph.D. from Belgrade University and conducted post-doctoral studies
at the Imperial Cancer Fund Research Laboratories in London.
Radomir B. Crkvenjakov, Ph.D. joined the Company in August 1994 and
serves as Co-Senior Vice President for Research and a director. Dr. Crkvenjakov
was appointed to the Editorial Board of Mutation Research Genomics in January
1997. Dr. Crkvenjakov served as Senior Molecular Biologist and Group Leader at
Argonne from February 1991 until August 1994. Prior to joining Argonne, Dr.
Crkvenjakov was with IMGGE from May 1986 until February 1991, where he
co-invented SBH technology. Dr. Crkvenjakov has performed research projects for
the U.S. National Institutes of Health ("NIH") and has been a member of HUGO
since 1992. Dr. Crkvenjakov received his Ph.D. in biochemistry and
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<PAGE> 8
molecular biology from Harvard University and conducted post-doctoral studies at
the University of Heidelberg.
Raymond F. Baddour, Ph.D. has served as a director of the Company since
December 1993. Since July 1989, Dr. Baddour has served as the Lammot du Pont
Professor of Chemical Engineering, Emeritus, at the Massachusetts Institute of
Technology where he formerly served as the Lammot du Pont Professor of Chemical
Engineering from 1973 to 1989. Dr. Baddour also serves as a director of Ascent
Pediatrics, Inc., a pharmaceutical company, Scully Signal Co., and MatTek
Corporation, a bio-materials company, and was formerly a director of Amgen. Dr.
Baddour holds a B.S. in chemical engineering from Notre Dame University and an
M.S. and Sc.D. from the Massachusetts Institute of Technology.
Greta E. Marshall has served as a director of the Company since July
1994. Ms. Marshall is a principal of The Marshall Plan, an investment management
company, which she founded in 1989. From 1985 until 1989, Ms. Marshall was
Investment Manager of the California Public Employee's Retirement System, a
public pension organization. Ms. Marshall is also a director of EG&G Inc., a
technology and scientific instrument company. Ms. Marshall holds a B.A. in
English and an M.B.A. from the University of Louisville.
Thomas N. McCarter III has served as a director of the Company since
October 1996. Mr. McCarter currently serves as Chairman of the Ramapo Land
Company, a real estate company, and is a general partner of Miles Timber
Properties, a land company which positions he has held for more than the past
five years. Mr. McCarter is a director and was past Chairman of Stillrock
Management, Inc., an investment company, serves as Chairman of Pendragon
Technologies, a diversified technology company, is a director of Parock Group, a
diversified investment company, and a director of other closely-held companies.
Mr. McCarter attended Princeton University from 1948 to 1951 and has been a
Certified Investment Counselor since 1972.
Kenneth D. Noonan, Ph.D. has served as a director of the Company since
October 1996. Dr. Noonan has been a Vice President at Booz-Allen & Hamilton,
Inc., a management consulting firm, since March 1996. From January 1992 until
February 1996, Dr. Noonan was the Managing Director of The Wilkerson Group,
Inc., a management consulting group specializing in medical products. Dr. Noonan
has also held senior positions in the diagnostics industry. Dr. Noonan also
serves as a director of Galenica Pharma. Dr. Noonan holds a Ph.D. in
biochemistry from Princeton University.
There are no family relationships among the directors and executive
officers of the Company. See "Certain Transactions."
BOARD COMMITTEES
Compensation Committee; Compensation Committee Interlocks and Insider
Participation
In April 1994, the Board established a Compensation Committee. The
Compensation Committee reviews and makes recommendations on the Company's
compensation policies, practices and procedures designed to contribute to the
success of the Company, and to assist the Board in carrying out its legal and
fiduciary responsibilities. The Compensation Committee also administers the 1995
Plan and the Directors' Plan. No member of the Compensation Committee was at any
time during the past three fiscal years an officer or employee of the Company or
any subsidiary of the Company. The Compensation Committee, which met one time
during 1997, comprises Dr. Baddour as the chairperson and Mr. Weist. Mr. Weist
served as Acting President of the Company from May 1993 until March 1994. The
Company entered into a consulting agreement with Mr. Weist in May 1993 pursuant
to which he received $125,000 in 1993 for services rendered in connection with
the original structuring of the Company and other
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<PAGE> 9
matters. Mr. Weist purchased 489,763 shares of Common Stock in May 1993 for
$20,000 in cash and delivery of a promissory note in the original principal
amount of $180,000. The promissory note accrued interest at 3.72% per annum and
matured in May 1994. Such promissory note had an outstanding balance of
approximately $55,000 (plus approximately $3,900 of accrued interest) at May 1,
1994 when it was repaid in connection with the Company's exercise of an
outstanding option to repurchase 205,056 of Mr. Weist's shares at his original
purchase price of $0.41 per share.
Audit Committee
In March 1997, the Board established an Audit Committee. The Audit
Committee reviews the Company's annual audit and meets with the Company's
independent auditors to review the Company's internal controls and financial
management practices. The Audit Committee, which met one time during 1997,
comprises Mr. McCarter as the chairperson, Dr. Baddour and Dr. Noonan.
Nominating Committee
In October 1996, the Board established a Nominating Committee. The
Nominating Committee considers and recommends individuals for Board membership
and senior management positions. The Nominating Committee, which met one time
during 1997, comprises Ms. Marshall as the chairperson and Mr. Weist.
DIRECTOR COMPENSATION
From the Company's inception in August 1992 until October 1996, no fees
were paid to directors. Commencing in October 1996, the Company instituted a
policy to pay all non-employee directors a fee of $2,500 for each Board meeting
attended in person or by telephone, subject to an overall cap of $10,000 per
year. Each non-employee director earned $10,000 in 1997. Employees of the
Company who are also directors do not receive any director fees. All directors
are reimbursed for reasonable expenses incurred in attending meetings.
Commencing as of December 1997, directors also began receiving fees of $1,000
for each Committee meeting attended in person, which fees were not subject to
the $10,000 cap. Each member of the Audit Committee earned $1,000 for attendance
at an Audit Committee meeting in 1997. In October 1996, the Stockholders
approved the Directors' Plan. Under the Directors' Plan, each new non-employee
director receives a one-time grant of options to purchase 23,040 shares of
Common Stock, of which options to purchase 11,520 shares become exercisable
immediately, with the balance becoming exercisable in two equal allotments on
the first and second anniversaries of joining the Board. The Directors' Plan
also provides that, commencing in 1997, all non-employee directors automatically
receive options to purchase up to 5,760 shares each year (such that the amount
received under the Directors' Plan when added to all prior options granted to a
director which become exercisable in that year total 5,760) on the date of the
annual meeting of the Stockholders. In accordance with the Directors' Plan, Mr.
Weist, Dr. Baddour and Ms. Marshall each received options to purchase 960 shares
immediately following the annual meeting in 1997 and will receive options to
purchase an additional 960 shares immediately following the annual meeting to be
held on May 18, 1998. As Dr. Noonan and Mr. McCarter joined the Board in 1996,
they are not expected to receive any additional grants of shares under the
Directors' Plan until 1999. A total of 138,240 shares of Common Stock have been
reserved and are available for purchase upon the exercise of options granted
under the Directors' Plan, of which options to purchase 48,960 shares were
issued and outstanding at December 31, 1997. See "Matters to be Considered by
the Stockholders -- Proposal to Continue and Amend the Company's 1995 Stock
Option Plan."
6
<PAGE> 10
STOCK OPTION PLANS AND AGREEMENTS
Stock Option Agreements
The Company has reserved 596,152 shares of Common Stock for issuance
upon exercise of options granted in 1994, to certain executive officers, an
employee, directors and members of the Company's Scientific Advisory Board
("SAB"). See "Certain Transactions."
1995 Plan
For information regarding the 1995 Plan, see "Matters to be Considered
by the Stockholders -- Proposal to Continue and Amend the Company's 1995 Stock
Option Plan."
Non-Employee Director Stock Option Plan
For information regarding the Non-Employee Director Stock Option Plan
see "Matters to be Considered by the Stockholders -- Proposal to Amend the
Company's Non-Employee Director Stock Option Plan."
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names of, and certain information regarding, executive officers and
key employees of the Company who are not also directors, are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- --------------------------------------------
<S> <C>
Christopher R. Wolf............ 43 Executive Vice President and Chief Financial
Officer
James N. Fletcher.............. 45 Senior Vice President of Administration,
General Counsel and Secretary
Robert A. D'Elia............... 44 Senior Director of Facilities Operations
Stephanie C. Diaz.............. 32 Director of Finance
Snezana Drmanac, M.D........... 37 Director of SBH Biochemistry
</TABLE>
Christopher R. Wolf joined the Company as Executive Vice President and
Chief Financial Officer in December 1996. From May 1996 to December 1996, Mr.
Wolf was Senior Vice President, Investment Banking and Group Head of Healthcare
for Fahnestock & Co. Inc., an investment banking firm, and from February 1991
until May 1996, was a partner of the Georgica Group, Inc., a financial
consulting company. From 1989 until February 1991, Mr. Wolf was a partner of
Oppenheimer & Co., Inc., an investment banking firm, and from 1983 until 1988,
was with Kidder Peabody & Co. Incorporated, an investment banking firm. Mr. Wolf
holds a B.A. in political science from Ohio Wesleyan University and an M.P.P.M.
from Yale University School of Management.
James N. Fletcher served as the Company's Vice President of
Administration from September 1994 until March 1998, and has served as its
Secretary since April 1996 and as its General Counsel and Senior Vice President
of Administration since March 1998. Mr. Fletcher was an independent consultant
to the Company from April 1994 until September 1994. Mr. Fletcher served as
general counsel and a consultant to National Business Funding, a
development-stage financial services company, from July 1993 until May 1994 and
as assistant general counsel of ComputerLand Corporation, a computer reseller,
from November 1990 until December 1992 and served as a consultant from December
1992 until May 1993. Mr. Fletcher holds a B.S. in political science from Arizona
State University and a J.D. from the University of Arizona.
7
<PAGE> 11
Robert A. D'Elia joined the Company as Senior Director of Facilities
Operations in January 1998. Prior to joining the Company, Mr. D'Elia spent the
last ten years as biopharmaceutical and medical device operations executive
primarily with Turner Construction and Eichleay Architects and Engineers. Prior
to this, Mr. D'Elia worked for twelve years in biopharmaceutical and medical
device facilities, operations and regulatory compliance with Bayer Laboratories,
Genentech Inc. and Applied Immune Science. Mr. D'Elia holds a B.S. in business
management and an M.B.A. from California Coast University in Santa Ana
California.
Stephanie C. Diaz has served as the Company's Director of Finance since
December 1997. From February 1993 until December 1997, Ms. Diaz was Controller
and most recently, Director of Finance for Martek Biosciences Corporation, a
biotechnology company. Ms. Diaz holds a B.A. in international relations from
Stanford University and an M.B.A. from Georgetown University.
Snezana Drmanac, M.D. joined Hyseq in August 1994 as a Senior Scientist
and became the Director of Sequencing By Hybridization (SBH) Biochemistry
Development in May 1997. Dr. Drmanac earned her M.D. at the University of
Belgrade in 1986, and completed her internship and State Exam in 1987. She has
been working on developing SBH biochemistry since 1988. Dr. Drmanac started as a
Research Associate at the Genome Structure Unit Division in the Center of
Genetic Engineering in Belgrade. From 1989 to 1990, Dr. Drmanac worked as a
Scientific Officer in the Genome Analysis Department in the Imperial Cancer
Research Fund (London), where she continued to work on SBH. She was a Junior
Scientist at Argonne National Laboratory from 1991 to 1994, leading the project
of developing and implementing SBH in DNA library screening.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation earned for the two fiscal years ended December 31, 1997 for the
Company's Chief Executive Officer and, based on actual or annualized salaries,
the four other most highly compensated executive officers (the "Named Executive
Officers"). No other executive officer's compensation exceeded $100,000 for the
fiscal year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Award
------------------- ----------------------
Restricted Securities
Fiscal Stock Underlying All Other
Name and Principal Positions Year Salary Bonus Award Compensation Compensation
- -------------------------------------------------- ------ ------ ----- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Lewis S. Gruber(1) ............................... 1997 $200,000 $ 0 0 $ 0 $ 49,651(1)
President and Chief Executive Officer 1996 200,000 0 0(1) 42,240 0
Christopher R. Wolf(2) ........................... 1997 127,083 25,000 0(2) 0 70,635(2)
Executive Vice President and Chief Financial 1996 10,416 0 0(2) 144,000 30,000(2)
Officer
Radoje T. Drmanac(3) ............................. 1997 146,000 13,680 0 28,215 0
Co-Senior Vice President for Research 1996 146,000 13,680 0 35,476 46,200(3)
Radomir B. Crkvenjakov(3) ........................ 1997 146,000 13,680 0 29,334 0
Co-Senior Vice President for Research 1996 146,000 13,680 0 35,476 46,200(3)
James N. Fletcher ................................ 1997 104,167 0 0 29,354 0
Vice President of Administration 1996 93,167 0 0 11,852 0
</TABLE>
- --------------
(1) In December 1996, Mr. Gruber purchased 48,000 shares at $1.56 per share
and 144,000 shares at $2.90 per share using the proceeds of a loan from
the Company in the amount of $492,000. In March 1997, Mr. Gruber
8
<PAGE> 12
purchased 179,712 shares at $6.51 per share using the proceeds of a loan
from the Company in the amount of $1,170,000. These shares become vested
over a period of two years, in equal allotments of 7,488 shares per
month for so long as Mr. Gruber is employed by the Company. Each of Mr.
Gruber's loans bears interest at a rate of 3% per annum. The value
representing the difference between the applicable federal rates (AFRs)
on the dates of the loans and the 3% interest rates charged on each of
the loans, is included as "Other Compensation."
(2) Mr. Wolf joined the Company in December 1996 and received compensation
based on an annual salary of $125,000. Also in December 1996, Mr. Wolf
purchased 161,280 shares at $4.17 per share using the proceeds of a loan
from the Company in the amount of $672,000. These shares become vested
over a period of two years, in equal allotments of 6,720 shares per
month for so long as Mr. Wolf is employed by the Company. In March 1997,
Mr. Wolf purchased 179,712 shares at $6.51 per share using the proceeds
of a loan from the Company in the amount of $1,170,000. These shares
become vested over a period of two years, in equal allotments of 7,488
shares per month for so long as Mr. Wolf is employed by the Company.
Each of Mr. Wolf's loans bears interest at a rate of 3% per annum. The
value representing the difference between the applicable federal rates
(AFRs) on the dates of the loans and the 3% interest rates charged on
each of the loans, is included as "Other Compensation." Mr. Wolf
received a one-time reimbursement for relocation expenses of $30,000 in
1996, and received $14,650 during 1997 toward mortgage payments on a
out-of-state property which was sold in conjunction with Mr. Wolf's
move.
(3) Pursuant to the terms of employment agreements dated as of August 1,
1994, each of Drs. Drmanac and Crkvenjakov are entitled to annual
bonuses of $13,680 and were entitled to a one-time special bonus of
$91,200 when the Company reached $8.5 million of funding. Although the
funding level was reached in 1995, the special bonuses were not paid
until January 1996. As a condition of payment, Drs. Drmanac and
Crkvenjakov forfeited options to purchase 57,600 shares and 48,000
shares respectively, at an exercise price of $1.56 per share and their
two-year employment agreements were automatically extended to terms of
four years. The amounts paid were offset against loans made in August
1994 by the Company to each of Drs. Drmanac and Crkvenjakov in the
amount of $45,000, such that each of Drs. Drmanac and Crkvenjakov
received a net payment of $46,200 in January 1996.
OPTION GRANTS IN 1997
The following table sets forth certain information with respect to the
grant of options to purchase Common Stock by the Company during 1997 to the
Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL POTENTIAL
SECURITIES OPTIONS REALIZABLE VALUE AT ASSUMED
UNDERLYING GRANTED EXERCISE ANNUAL RATES OF STOCK PRICE
OPTIONS TO EMPLOYEES PRICE EXPIRATION APPRECIATION FOR OPTION
NAME GRANTED(1) IN 1997 (PER SHARE) DATE TERM(3)
---- ---------- ---------- ----------- ---------- ---------------------------
5% 10%
--------- -------
<S> <C> <C> <C> <C> <C> <C>
Lewis S. Gruber(2)...... 0 0 N/A N/A N/A N/A
Christopher R. Wolf(2).. 0 0 N/A N/A N/A N/A
Radoje T. Drmanac....... 9,638 3.3% $6.51 3/12/07 $ 39,459 $ 99,997
18,577 6.4 8.33 4/16/07 97,319 246,626
Radomir B. Crkvenjakov.. 10,757 3.7 6.51 3/12/07 44,040 111,607
18,577 6.4 8.33 4/16/07 97,319 246,626
James N. Fletcher....... 6,186 2.1 6.51 3/12/07 25,326 64,181
23,168 8.0 8.33 4/16/07 121,370 307,575
</TABLE>
- --------------
(1) All options were granted pursuant to the 1995 Plan and become
exercisable in four equal annual installments commencing one year after
the date of grant.
(2) In March 1997 Messrs. Gruber and Wolf each purchased 179,712 shares at
$6.51 per share using the proceeds of loans from the Company to each of
them in the amount of $1,170,000. As a condition of purchase, Messrs.
Gruber and Wolf did not receive grants of any options in 1997. See also
"Certain Transactions."
9
<PAGE> 13
(3) These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on stock option exercises are dependent upon the
future market performance of the Company's Common Stock and the date on
which the options are exercised. The amounts represented in this table
may not necessarily be achieved.
The following table sets forth for each of the Named Executive Officers
certain information with respect to the exercise of options to purchase Common
Stock during the year ended December 31, 1997 and the number of shares subject
to both exercisable and unexercisable stock options as of December 31, 1997.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND DECEMBER 31, 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997 (2)
ACQUIRED ON VALUE ---------------------------- -----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lewis S. Gruber ......... 15,560 $ 124,511 280,562 38,841 $2,216,478 $ 211,877
Christopher R. Wolf ..... -- -- 72,000 72,000 392,760 392,760
Radoje T. Drmanac ....... -- -- 104,868 74,022 822,615 354,068
Radomir B. Crkvenjakov .. -- -- 97,668 72,741 764,549 338,198
James N. Fletcher ....... -- -- 5,813 41,095 31,710 113,319
</TABLE>
- ----------
(1) Based on the fair market value at the date of exercise, as determined by
the Board, prior to the Company's IPO, minus the exercise price.
(2) The value of unexercised in-the-money options at fiscal year end assumes
a fair market value for the Company's Common Stock of $9.625, the
closing sale price per share of the Company's Common Stock as reported
by the Nasdaq National Market on December 31, 1997.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Dr. Drmanac and Dr.
Crkvenjakov, pursuant to which they became employees on August 1, 1994. These
agreements have terms of four years and expire on July 31, 1998. See "Executive
Compensation" and "Principal Stockholders" regarding stock options granted in
connection with their employment. Pursuant to the terms of their employment
agreements, each of Drs. Drmanac and Crkvenjakov are entitled to annual bonuses
of $13,680 and were entitled to a one-time special bonus of $91,200 when the
Company reached an aggregate of $8.5 million of funding. Although the funding
level was reached in 1995, the special bonuses were not paid until January 1996.
As a condition of payment, Drs. Drmanac and Crkvenjakov surrendered options to
purchase 57,600 shares and 48,000 shares respectively, at an exercise price of
$1.56 per share. The amounts paid were offset against loans made in August 1994
by the Company to each of Drs. Drmanac and Crkvenjakov in the amount of $45,000,
such that each of Drs. Drmanac and Crkvenjakov received a net payment in January
1996 of $46,200.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee bases its decisions on the Company's
executive compensation philosophy, which seeks to relate salaries, bonuses and
stock option awards to Hyseq's success in meeting annual and long-term
performance goals, to reward individual achievement and to attract and retain
qualified executives. The Company seeks to set its executive officers' salaries
in the mid-range compared to those with similar management positions in peer
companies consisting primarily of other genomics and biotechnology companies.
The level of salaries paid to executive officers of the Company also takes into
account the technological achievements of the Company during the year, its
success in entering into significant technology agreements with collaborators,
as well as an evaluation of the
10
<PAGE> 14
individual performance and contribution of each executive to the Company's
performance for the year. Particular emphasis is placed on the individual
officer's level of responsibility for and role in meeting the Company's
strategic, technological and financial objectives. Because of the Company's
stage of development, the Committee has not used either the profitability of the
Company or the market value of its stock as a significant factor in
consideration for setting executive officer salaries.
The Company awards bonuses for accomplishments achieved during the past
year. The amount of the bonus is determined by the Compensation Committee, with
advise from Company management, based upon an assessment of the individual's
contributions during the year, compared to (but not restricted to) a list of
goals previously approved by management and the Compensation Committee. In
determining bonuses for the fiscal year ended December 31, 1997, the
Compensation Committee considered, among other accomplishments, the
establishment of new collaborations with other companies; increases in the
Company's rate of gene sequencing; filing of patent applications; completion of
the Company's initial public offering; and completion of two private stock
offerings with collaborators.
Stock options awards are intended to align the interests of executives
with the interests of the Stockholders in the long-term performance of the
Company. Guidelines for executive stock option awards were developed by the
Compensation Committee, in consultation with management, through analysis of
long-term incentive awards based on each individual executive's position,
responsibilities, performance and contribution to the achievement of the
Company's long-term goals and competitive stock option data from other genomics
and biotechnology companies. In addition, the Committee reviews the equity
position of all executive officers on an annual basis and awards stock options
to executive officers periodically.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
The 1997 compensation of Mr. Lewis S. Gruber, the Company's Chief
Executive Officer and President, took into account the above policies and
specific milestones achieved by the Company during the prior year. These
milestones included the successful completion of the Company's 1996 private
financing and positioning the Company for its initial public offering, as well
as the progress toward the Company's gene sequencing capacity to present levels.
The Committee believes that Mr. Gruber's salary was in the low range compared to
CEOs in peer companies consisting primarily of other genomics companies. To
increase Mr. Gruber's equity position and further align his interests with the
Company's Stockholders, the Company allowed Mr. Gruber to purchase 179,712
shares at $6.51 per share in March 1997, using the proceeds of a loan from the
Company.
SECTION 162(m) COMPLIANCE
Section 162(m) of the Internal Revenue Code (the "Code") limits the
Company to a deduction for Federal income tax purposes of no more than
$1,000,000 of compensation paid to certain Named Executive Officers in a taxable
year. Compensation above $1,000,000 may be deducted if it is "performance-based
compensation" within the meaning of the Code. At this time, it is not
anticipated that any Named Executive Officers will receive compensation in
excess of $1,000,000 in 1998.
The Compensation Committee, however, has determined that stock options
granted under the Company's 1995 Plan with an exercise price at least equal to
the fair market value of the Company's Common Stock on the date of grant could
result in compensation paid to certain Named Executive Officers exceeding
$1,000,000. In order to comply with Code Section 162(m), which will result in
such stock options being treated as "performance-based compensation," the
Company's stockholders are being asked to approve an amendment to the 1995 Plan
which would allow any compensation recognized
11
<PAGE> 15
by a Named Executive Officer as a result of the grant of such a stock option to
be deductible by the Company. See "Proposal to Continue and Amend the Company's
1995 Stock Option Plan."
PERFORMANCE GRAPH
The following graph compares the quarterly percentage change in the
Company's cumulative total stockholder return on its Common Stock for the period
from August 7, 1997 (the date of the Company's initial public offering) through
December 31, 1997 (as measured by dividing the difference between the Company's
share price at the end (December 31, 1997) and the beginning (August 7, 1997) of
the measurement period with the cumulative total return of The Nasdaq National
Market and the Hambrecht and Quist Biotechnology Index during such period). The
Company has not paid any dividends on the Common Stock, and no dividends are
included in the representation of the Company's performance. The graph assumes
the investment of $100 in the Company's Common Stock, and the relevant indices
on August 7, 1997. The stock price performance on the graph below is not
necessarily indicative of future price performance.
<TABLE>
<CAPTION>
8/7/97 12/31/97
------ --------
<S> <C> <C>
Hyseq, Inc. $100.00 $69.00
Nasdaq Stock Index 100.00 99.00
(U.S.)
H&Q Biotechnology Index 100.00 98.00
</TABLE>
At December 31, 1997, the closing price of the Company's Common Stock was $9.625
per share. At March 31, 1998, the closing price was $12.50 per share.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and officers, and persons who beneficially own more than 10%
of the Company's Common Stock, to file with the Commission initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Common Stock and other equity securities of the Company. Officers, directors and
greater than 10% beneficial owners are required by Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file. Specific
due dates for these reports have been established by the SEC and the Company is
required to disclose in this Proxy Statement any failure to file by such due
dates during fiscal 1997.
12
<PAGE> 16
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
CERTAIN TRANSACTIONS
In December 1993, Lewis S. Gruber, a director and executive officer of
the Company, received a warrant to purchase 144,000 shares of Common Stock at
$2.90 per share in exchange for the assignment of all right, title and interest
in and to certain patent rights relating to diagnostic applications owned by
him. In connection with Mr. Gruber's employment by the Company in June 1994, Mr.
Gruber was granted a 10-year option to purchase 345,600 shares of Common Stock
at an exercise price of $1.56 per share. In December 1996, Mr. Gruber used the
proceeds of a loan from the Company to exercise the warrant to purchase 144,000
shares of Common Stock at $2.90 per share and to exercise options to purchase
48,000 shares of Common Stock at an exercise price of $1.56 per share. The loan,
in the principal amount of $492,000, is evidenced by a promissory note dated
December 9, 1996, that bears interest at 3% per annum and is due on December 8,
2001. The loan is secured by, and with recourse only to, 118,080 shares of Mr.
Gruber's Common Stock. In March 1997, Mr. Gruber purchased 179,712 shares at
$6.51 per share using the proceeds of an additional $1,170,000 loan, as
evidenced by a promissory note dated March 12, 1997 on the same terms as his
prior loan. As of June 30, 1997, the amounts outstanding under such loans were
$492,000 and $1,170,000, respectively. The 179,712 shares are subject to a right
of repurchase by the Company over a period of two years. This repurchase option
lapses in equal allotments of 7,488 shares per month for so long as Mr. Gruber
is employed by the Company. As a condition of the purchase in March 1997, Mr.
Gruber did not receive any options under the 1995 Plan during 1997. Mr. and Ms.
Gruber, individually and through a corporation that they control, beneficially
own a total of 575,572 shares of Common Stock, including the 179,712 shares of
Common Stock purchased in March 1997, the 144,000 shares of Common Stock issued
upon the exercise, in December 1996, of the 1993 Warrant, the 158,469 shares of
Common Stock purchased in August 1992 and May 1993 at purchase prices of $0.35
and $0.41 respectively, and 82,760 shares of Common Stock issued upon the
exercise of options at $1.56 per share in September 1996, December 1996, March
1997, June 1997, and November 1997 (which shares include the 297,792 shares
pledged as security for the loans referenced above). Mr. and Ms. Gruber also
jointly purchased 6,716 shares of Series A Preferred Stock at $2.90 per share in
November 1993 and 7,317 shares of Series A Preferred Stock at $3.46 per share in
November 1994, which shares converted to 14,033 shares of Common Stock upon
completion of the Company's initial public offering in August 1997.
Until joining the Company, Mr. Gruber was a member of Marshall, O'Toole,
Gerstein, Murray & Borun, which firm has served as one of the Company's patent
counsel since inception in 1992. He also is the spouse of Misty S. Gruber, who
was a director of the Company from inception to June 1994 and is a member of
Sachnoff & Weaver, Ltd., a law firm which has served as general corporate
counsel to Hyseq since June 1996. Ms. Gruber formerly was a member of Shefsky
Froelich & Devine Ltd., which law firm served as general corporate counsel to
the Company from inception to June 1996. Sachnoff & Weaver, Ltd. and certain
members and related persons in addition to Ms. Gruber and certain partners and
related persons of Marshall, O'Toole, Gerstein, Murray & Borun are stockholders
of the Company. See also "Principal Stockholders."
In May 1996, the Company issued to Fahnestock & Co. Inc. a warrant to
purchase 206,822 shares of Common Stock at an exercise price of $4.58 per share,
a portion of which warrant was subsequently transferred to certain officers of
this firm, including a warrant to purchase 1,920 shares to Christopher R.
13
<PAGE> 17
Wolf who was then an officer of the investment bank and is now Executive Vice
President and Chief Financial Officer of the Company. In December 1996, Mr. Wolf
borrowed $672,000 from the Company, as evidenced by a promissory note dated
December 9, 1996, which bears interest at 3% per annum and is due on December 8,
2001. Mr. Wolf used the proceeds of the loan to purchase 161,280 shares of
Common Stock at $4.17 per share in December 1996. The shares vest over a period
of two years, in equal allotments of 6,720 shares per month for so long as Mr.
Wolf is employed by the Company. In March 1997, Mr. Wolf purchased 179,712
shares at $6.51 per share using the proceeds of a $1,170,000 Company loan on the
same terms as the loan to Mr. Gruber in March 1997. As of September 30, 1997,
the amounts outstanding under such loans were $672,000 and $1,170,000,
respectively. As a condition of the purchase, Mr. Wolf did not receive any
options under the 1995 Plan during 1997. The loans are secured by, and with
recourse only to, the shares purchased by Mr. Wolf using proceeds of Company
loans. Mr. Wolf also is a partner in Blue Hill Partners, a partnership
controlled by Thomas N. McCarter III, a director of the Company. Blue Hill
Partners purchased 76,800 shares of Common Stock at $4.17 per share in September
1996.
In January 1997, Sachnoff & Weaver, Ltd. purchased 76,800 shares of
Common Stock at $6.51 per share. Sachnoff & Weaver, Ltd., a member of which is
the spouse of the Company's President and Chief Executive Officer, paid $102,415
in cash and delivered a promissory note to the Company for the balance in the
amount of $397,585 secured by 61,069 shares of Common Stock. The note bears
interest at 8.25% per annum and is due on March 18, 2001. As of December 31,
1997 and March 31, 1998, the note had outstanding principal balances of $154,000
and $76,500, respectively. Sachnoff & Weaver, Ltd. received approximately
$900,000 for legal services performed in 1997.
MATTERS TO BE CONSIDERED BY THE STOCKHOLDERS
ELECTION OF CLASS II DIRECTORS (NOTICE ITEM 1)
The Company has three classes of directors serving staggered, three-year
terms. The 2000 ("Class I") and 1998 ("Class II") classes each presently have
two directors and the 1999 ("Class III") class has four members. The Class II
directors are to be elected at the Meeting for three-year terms expiring on the
date of the Annual Meeting of the Stockholders in 2001 or until each such
director's successor shall have been duly elected or appointed. The Board has
nominated Dr. Raymond F. Baddour and Ms. Greta E. Marshall for re-election as
Class II directors. A Stockholder using the enclosed proxy form can vote for
either or both of the two nominees to the Board or withhold his or her vote from
either or both of such nominees. IF THE PROXY CARD IS PROPERLY EXECUTED BUT
UNMARKED, IT WILL BE VOTED FOR BOTH OF THE NOMINEES. Each of the nominees has
agreed to serve as a director if elected; however, should any nominee become
unable or unwilling to accept nomination or election, the persons named in the
proxy will exercise their voting power in favor of such other person or persons
as the Board may recommend.
The affirmative vote of a majority of the votes cast by Stockholders
present, in person or by proxy, and eligible to vote at the Meeting, a quorum
being present, is required to elect each of Dr. Baddour and Ms. Marshall.
RECOMMENDATION OF THE BOARD: The Board recommends a vote FOR election of
Dr. Baddour and Ms. Marshall.
14
<PAGE> 18
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS (NOTICE ITEM 2)
The selection by the Board of the firm of Ernst & Young LLP ("Ernst &
Young") as the independent auditors for the Company for the year ending December
31, 1998 is to be submitted for ratification by the Stockholders at the Meeting.
The firm of Ernst & Young has served as independent auditors for the Company
since 1993. The independent auditors have advised the Company that they have no
direct or material indirect financial interest in the Company. Representatives
of the firm of Ernst & Young are not expected to be present at this year's
Meeting.
The affirmative vote of a majority of the votes cast by Stockholders
present, in person or by proxy, and eligible to vote at the Meeting, a quorum
being present, is required for ratification of the selection of the independent
accountants.
Stockholder ratification of the selection of Ernst & Young as Hyseq,
Inc.'s independent auditors is not required by the Bylaws of the Company or
otherwise. The Board has elected to seek such ratification as a matter of good
corporate practice. Should the Stockholders fail to ratify the selection of
Ernst & Young as independent auditors, the Board will consider whether to retain
that firm for the year ending December 31, 1998.
RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
vote FOR ratification of the Board's selection of Ernst & Young as independent
auditors for the Company for fiscal year 1998.
PROPOSAL TO CONTINUE AND AMEND THE COMPANY'S 1995 STOCK OPTION PLAN
(NOTICE ITEM 3)
The Board has adopted the 1995 Plan, as amended, subject to Stockholder
approval. If the requested Stockholder approval is received, the 1995 Plan, as
amended, will read as set forth in Annex 1.
GENERAL INFORMATION
At the Company's 1995 annual meeting, the Stockholders approved the 1995
Plan for the purposes of providing incentives to employees and attracting and
retaining executive officers and other key employees. The 1995 Plan permits
grants of incentive and non-qualified stock options, within the meaning of the
Code, that are exercisable at a price equal to, in the case of incentive stock
options, the fair market value of the Common Stock on the date of grant and, in
the case of non-qualified options, at an amount determined by the Compensation
Committee on the date of grant, which amount shall in no event be less than the
par value of the Common Stock.
A total of 1,152,000 shares of Common Stock are reserved for issuance under
the 1995 Plan. At March 31, 1998, options granted under the 1995 Plan to
purchase 716,137 shares were issued and outstanding, including options to
purchase 63,360 shares issued to three non-employee directors and options to
purchase 12,912 shares issued to SAB members. At a meeting of the Board on March
16, 1998, the Board adopted a proposal to amend the 1995 Plan to (i) comply with
the requirements of Section 162(m) of the Code, (ii) increase from 1,152,000 to
2,152,000 the aggregate number of shares of Common Stock of the Company reserved
for issuance under the 1995 Plan, (iii) permit participants to use already owned
shares of the Company's Common Stock to pay for exercise of their options or to
effect a "cashless" exercise through a broker and (iv) allow employees who are
terminated to exercise their options (to the extent then exercisable) within
thirty (30) days of such termination.
15
<PAGE> 19
As of March 31, 1998, the market value of the 2,152,000 shares reserved for
issuance under the 1995 Plan (inclusive of those shares to be added through the
proposed amendment herein) was $26,900,000. Cash payments received by the
Company under the 1995 Plan will be used for general corporate purposes.
REASONS FOR THE AMENDMENT
Section 162(m) of the Code, enacted in 1993, generally disallows a tax
deduction to public companies for compensation over $1 million paid to the
corporation's chief executive officer and four other most highly compensated
executive officers. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. In particular, income
recognized upon the exercise of a stock option is not subject to the deduction
limit if the stock option was issued under a plan approved by stockholders that
provides a limit to the number of shares that may be issued under the plan to
any individual. Accordingly, on April 8, 1998, the Board voted to provide a
limit of 325,000 shares that may be issued to any individual in any one year
under the 1995 Plan and to seek Stockholder approval to meet the statutory
requirements of Code Section 162(m). If the Stockholders do not vote to approve
continuation of the 1995 Plan, as amended, the Company cannot grant any further
options under the 1995 Plan.
As of December 31, 1997, only 440,000 shares remained available for grant
under the 1995 Plan. In April 1997, the Company had approximately 51 employees.
As a result of its successful initial public offering, the Company expanded its
operations significantly, and had more than 150 employees as of December 31,
1997. The Company expects to hire approximately 50 additional employees in 1998.
As of March 31, 1998, approximately 157 employees of the Company were eligible
to participate in the 1995 Plan. Management, the Compensation Committee and the
Board believe that additional options must be available for future years to
continue to reward and provide incentives to employees and to accommodate the
contemplated hiring of additional senior technical employees, particularly in
the highly competitive Silicon Valley environment in which the Company competes
for employees. Management believes that the inherent value created by the
continued ability to grant options under the 1995 Plan will prove to be a highly
successful means of continuing to attract, retain, and motivate highly qualified
scientific, administrative and management talent. Accordingly, the Compensation
Committee, having considered the foregoing, recommended, and the Board approved,
subject to Stockholder approval, a proposal to amend the 1995 Plan to authorize
the Board to increase the number of shares of Common Stock available for grants
under the 1995 Plan by 1,000,000 shares.
The 1995 Plan presently provides that the exercise price of options granted
thereunder must be paid in full in cash. The proposed amendment would authorize
the Compensation Committee to permit payment by delivery of shares of Common
Stock or an unconditional and irrevocable undertaking by a broker to deliver
promptly to the Company sufficient funds to pay the exercise price. The Board
believes this amendment will facilitate exercise of options by employees and
thereby help to further align the employees' interests with Stockholders, which
the Board believes to be in the best interest of the Company.
The 1995 Plan also presently provides that an employee shall have no further
right to exercise any option granted under the 1995 Plan upon termination of
employment, except in the event of termination by death or disability. The
proposed amendment to the 1995 Plan would allow any employee who is terminated
(other than for cause) to exercise such employee's options granted under the
1995 Plan, to the extent then exercisable, within thirty (30) days following
termination. The foregoing notwithstanding, the 1995 Plan shall continue to
provide that, upon a participant's death or disability, outstanding options
shall be exercisable by the participant or his legal representative or
beneficiary, to the extent exercisable
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at the date of the participant's death or disability, and for one year
thereafter, but in no event after the option's expiration date. The Board
believes this amendment will support the Company's effort to attract and retain
highly qualified employees and to bring the Company's option compensation
program into conformity with those of many other public companies.
DESCRIPTION OF AWARDS UNDER THE 1995 PLAN
The 1995 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Code and nonstatutory stock options ("Awards").
Optionees receive the right to purchase a specified number of shares of
Common Stock at an option price and subject to such terms and conditions as are
specified at the time of the grant. Incentive stock options and options that the
Board intends to qualify as performance-based compensation under Section 162(m)
of the Code may not be granted at an exercise price less than the fair market
value of the Common Stock on the date of grant (or less than 110% of the fair
market value in the case of incentive stock options granted to optionees holding
10% or more of the voting stock of the Company). All other options may be
granted at an exercise price that may be less than, equal to or greater than the
fair market value of the Common Stock on the date of grant. The Company believes
that all options granted under the 1995 Plan to date have been granted at fair
market value. The exercise price of options must generally be paid in full at
the time of exercise; however, the Compensation Committee may provide for the
Company to make loans to finance the exercise of any option.
The 1995 Plan is administered by the Board and the Compensation Committee of
the Board, which Compensation Committee shall consist of not less than two
members of the Board. The Compensation Committee shall have the sole and
complete authority to select the regular, full time employees of the Company who
will be granted Awards under the 1995 Plan and to interpret, administer and
correct any defect or omission or reconcile any inconsistency in the 1995 Plan.
At the time an option is awarded, the Committee will specify the date or dates
upon which the option, or portions of the option, becomes exercisable. The
Compensation Committee may amend or modify any outstanding Awards in any manner
consistent with the authority that the Compensation Committee has under the 1995
Plan. No such amendment or modification shall impair the rights of a participant
under the Award without the participant's consent. The Compensation Committee
shall be entitled to make such rules, regulations and determinations as it deems
appropriate under the 1995 Plan in respect of any leave of absence from the
Company granted to a participant. The Plan contains provisions relating to the
disposition or adjustment of Awards in the event of certain mergers,
acquisitions and other extraordinary corporate transactions involving the
Company.
If a participant ceases to be an employee by reason of disability, the
participant's right to exercise any unexercised options granted under the 1995
Plan shall be subject to the condition that, until such option is exercised, the
participant (i) shall not be engaged as an advisor, principal, agent, partner,
officer, director or employee in any business or activity which is competitive
with the Company's business, and (ii) shall be reasonably available for
consultation with the Company. If a participant fails to comply with these
conditions, his rights as to any unexercised options shall be forfeited.
The Board may amend or terminate the 1995 Plan at any time, provided that no
amendment shall, without Stockholder approval, materially increase the number of
shares of Common Stock which may be issued under the 1995 Plan, materially
modify the requirements as to eligibility, materially increase the benefits
accruing to participants under the 1995 Plan or extend the termination date of
the 1995 Plan. No Award may be made under the Plan after May 24, 2005, but
Awards previously granted may extend beyond that date.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to the grant and exercise of
Awards under the 1995 Plan and with respect to the sale of Common Stock acquired
under the 1995 Plan.
Incentive Stock Options. In general, a participant will not recognize
ordinary income upon the grant or exercise of an incentive stock option. If the
participant holds the stock acquired through the exercise of an incentive stock
option for one year from the date of exercise and two years from the date of the
grant, the participant will thereafter recognize a capital gain or loss upon a
subsequent sale of the stock, based upon the difference between the incentive
stock option's exercise price and the sale price. If the participant sells the
stock before the requisite holding period, then the participant will recognize
ordinary income based upon the difference between the exercise price and the
lesser of the sales price or the fair market value upon the date of exercise.
Non-Statutory Options. As in the case of an incentive stock option, a
participant will not recognize ordinary income upon the grant of a non-statutory
option. Unlike the case of an incentive stock option, however, upon exercise of
a non-statutory option a participant generally will recognize ordinary income in
an amount equal to the difference between the exercise price for the option and
the fair market value of the Company's Common Stock on the exercise date. With
respect to any Common Stock acquired upon exercise of a non-statutory option
("NSO Stock"), a participant will have a tax basis equal to the exercise price
plus any income recognized upon the exercise of the option. Upon selling NSO
Stock, a participant generally will recognize capital gain or loss in an amount
equal to the excess of the sale price of the NSO Stock over the participant's
tax basis in the NSO Stock. The capital gain or loss will be long-term, midterm
or short-term gain or loss, depending upon the holding period of the shares.
Tax Consequences to the Company. The grant of an Award under the Plan will
have no tax consequences to the Company. Moreover, in general, neither the
exercise of an incentive stock option acquired under the 1995 Plan nor the sale
of any Common Stock acquired under the 1995 Plan will have any tax consequences
to the Company. The Company generally will be entitled to a business-expense
deduction, however, with respect to any ordinary compensation income recognized
by a participant under the 1995 Plan, provided the Company includes and reports
such amounts on a timely filed Form W-2 or Form 1099 - MISC (or similar such IRS
form filing).
RECOMMENDATION OF THE BOARD: The Board recommends a vote FOR approval of
continuation of the 1995 Plan, as amended.
PROPOSAL TO AMEND THE COMPANY'S NON-EMPLOYEE
DIRECTOR STOCK OPTION PLAN (NOTICE ITEM 4)
The Board has approved certain amendments to the Directors' Plan,
subject to Stockholder approval. If the requested Stockholder approval is
received, the Directors' Plan, as amended, will read as set forth in Annex 2.
GENERAL INFORMATION
At the Company's 1996 annual meeting, the Stockholders approved the
Directors' Plan providing for periodic stock option grants to Company directors
who are not employees of the Company. Management believes that the inherent
value created by the granting of options under the Directors' Plan will prove to
be a successful means of attracting, retaining and motivating highly qualified
individuals for the Company's Board.
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<PAGE> 22
REASONS FOR THE AMENDMENT
The Directors' Plan presently provides that the exercise price of
options granted thereunder may be paid in cash or through the delivery of
already-owned shares of the Company's Common Stock. The Director's Plan also
provides that options issued under the Director's Plan shall be exercisable
until the earlier of (i) the tenth anniversary of the date of grant or (ii) one
month following the date a Director ceases to be a participant. On March 16,
1998, the Compensation Committee, having considered the foregoing, recommended,
and the Board approved, subject to Stockholder approval, a proposal to amend the
Directors' Plan to authorize the Board to issue options that have terms of ten
years, without regard to whether the Director continues to be a participant in
the Directors' Plan (other than upon a Director's termination for cause, in
which event his rights under the Directors' Plan shall be terminated). An
amendment also has been proposed that would authorize the payment of the option
exercise price through a cashless exercise. For a description of this amendment,
which is identical to the same amendment for which approval is being sought
under the 1995 Plan, see "Notice Item 3 -- Reason for the Amendment." The Board
believes such amendments will support its efforts to attract and retain highly
motivated and qualified individuals to serve on the Company's Board. In all
other respects, the Plan would remain as originally adopted.
DESCRIPTION OF THE DIRECTORS' PLAN
Under the Directors' Plan, each new, non-employee director receives a
one-time grant of options to purchase 23,040 shares of Common Stock, of which
options to purchase 11,520 shares become exercisable immediately, with the
balance becoming exercisable in two equal allotments on the first and second
anniversaries of joining the Board. All non-employee directors automatically
receive options to purchase up to 5,760 shares each year (such that the amount
received under the Directors' Plan when added to all prior options granted to a
director which become exercisable in that year total 5,760) on the date of the
annual meeting of the Stockholders, commencing in 1997. The purchase price of
Common Stock under each option shall be not less than the fair market value of
the Common Stock on the date of grant. Mr. Weist, Dr. Baddour and Ms. Marshall
each received options to purchase 960 shares immediately following the annual
meeting in 1997 under the Directors' Plan. A total of 138,240 shares of Common
Stock have been reserved and are available for purchase upon the exercise of
options granted under the Directors' Plan, of which options to purchase 48,960
shares were issued and outstanding at December 31, 1997. As of March 31, 1998,
the market value of the 138,420 shares available for issuance under the
Directors' Plan was $1,730,250. No options may be granted under the Director's
Plan after October 23, 2005.
The Directors' Plan will be administered by the Compensation Committee,
which shall consist of not less than two members of the Board. The Compensation
Committee will have full authority to interpret and administer the Directors'
Plan, and correct any defect or omission or reconcile any inconsistency in the
Directors' Plan, and its decisions will be conclusive and binding upon the
Company and all other persons.
If a participant ceases to be a non-employee director by reason of
disability, the participant's right to exercise any unexercised options granted
under the Directors' Plan shall be subject to the condition that, until such
option is exercised, the participant (i) shall not be engaged as an advisor,
principal, agent, partner, officer, director or employee in any business or
activity which is competitive with the Company's business, and (ii) shall be
reasonably available for consultation with the Company. If a participant fails
to comply with these conditions, his rights as to any unexercised options shall
be forfeited.
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The Board may amend or terminate the Directors' Plan at any time,
provided that no amendment shall, without Stockholder approval, materially
increase the number of shares of Common Stock which may be issued under the
Directors' Plan, materially modify the requirements as to eligibility for
participation, materially increase the benefits accruing to participants under
the Directors' Plan or extend the termination date of the Directors' Plan. The
Compensation Committee may amend or modify any outstanding options in any manner
consistent with the Compensation Committee's authority under the Directors'
Plan. No such amendment or modification shall impair the rights of a participant
under the option without the participant's consent.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences that generally will arise with
respect to the grant and exercise of an option under the Directors' Plan are
similar to those as set forth for Nonstatutory Options under the 1995 Plan. See
"Notice Item 3 -- Federal Income Tax Consequences."
RECOMMENDATION OF THE BOARD: The Board recommends a vote FOR approval of
the amendment to the Directors' Plan.
PROPOSAL TO APPROVE THE HYSEQ, INC. EMPLOYEE STOCK PURCHASE PLAN
(NOTICE ITEM 5)
The Board has adopted, at its meeting of March 16, 1998, the Stock
Purchase Plan, subject to Stockholder approval. If the requested Stockholder
approval is received, the Stock Purchase Plan will read as set forth in Annex 3.
DESCRIPTION OF THE STOCK PURCHASE PLAN
The purpose of the Stock Purchase Plan is to enable eligible employees
of the Company and its affiliates to acquire a proprietary interest in the
Company by purchasing Common Stock through payroll deductions. A total of 50,000
shares of the Company's Common Stock will be made available for purchase by
employees upon the exercise of purchase rights granted under the Stock Purchase
Plan. In the event any purchase right granted under the Stock Purchase Plan
expires or terminates for any reason without having been exercised in full or
ceases for any reason to be exercisable in whole or in part, the unpurchased
shares subject thereto will again be available for purchase by employees upon
the exercise of purchase rights. The maximum number of shares will be subject to
appropriate adjustment in the event of stock dividends, stock splits,
recapitalization, or similar changes affecting the outstanding shares of Common
Stock. As of March 31, 1998, the market value of the 50,000 shares available for
issuance under the Stock Purchase Plan was $625,000. Approximately 155 employees
are eligible to participate in the Stock Purchase Plan. The Board believes that
adoption of the Stock Purchase Plan will promote the interests of the Company
and its Stockholders by assisting the Company in attracting, retaining and
stimulating the performance of employees and by aligning employees' interests,
through their purchases of Common Stock, with the interests of Stockholders.
The Stock Purchase Plan will be administered by a committee (the
"Committee") consisting of not less than two members of the Board of Directors.
The Committee will have full authority to construe and interpret the Stock
Purchase Plan, and correct any defect or omission or reconcile any inconsistency
in the Stock Purchase Plan, and its decisions will be final, conclusive and
binding upon all employees and all persons claiming under or through any
employee.
All employees of the Company and, if designated by the Board of
Directors, its affiliates will be eligible to participate in the Stock Purchase
Plan on the first Offering Date coincident with or next
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following the employee's completion of ninety (90) days of continuous service.
For purposes of the Stock Purchase Plan, an "Offering Date" is defined as the
date on which the Committee grants an eligible employee the right to purchase
shares of common stock. An eligible employee may become a participant in the
Stock Purchase Plan effective the first day of an offering period following the
completion and filing with the Committee of an enrollment form that authorizes
deductions from the employee's paycheck, so long as the enrollment form is
delivered to the Committee no less than fifteen (15) days prior to the first day
of such offering period. If an enrollment form is submitted less than fifteen
(15) days prior to the first day of an offering period, it shall become
effective on the first day of the next succeeding offering period. A participant
may elect to have deductions made from his or her pay on each payday at a whole
number percentage rate of not less than 1% nor greater than 10% of the
compensation that he or she is entitled to receive. A participant may increase
the rate of his payroll deductions effective as of any subsequent Offering Date
by filing a new authorization form with the Committee fifteen (15) or more days
prior to the next Offering Date. A request for a decrease in payroll deductions
shall be effective as soon as practicable after it is filed with the Committee.
The Common Stock to be sold under the Stock Purchase Plan may be (i)
shares acquired on the open market, (ii) treasury shares, and/or (iii) shares
newly issued for such purpose. The purchase price for shares of Common Stock to
be purchased with payroll deductions will be equal to 95% (or such other amount
as the Committee shall authorize, but in no event less than 85%) of the fair
market value of the Common Stock on the date on which a grant of a purchase
right under the Stock Purchase Plan is made or on the date on which the Common
Stock is purchased, whichever is less. The fair market value of the Common Stock
on a given date shall be determined by the Committee based upon the reported
closing sales price of the Common Stock on the Nasdaq National Market on such
date. If the limit on the number of shares of Common Stock available to be
purchased under the Stock Purchase Plan is reached, then the last purchase of
Common Stock shall be allocated among the participants pro rata based upon the
number of shares that would have been purchased under the Stock Purchase Plan
without this limitation.
A participant may elect to withdraw his shares or any cash credited to
his or her account at any time. All of the cash deposits returned to the
participant will be paid to him promptly after receipt of the notice of the
withdrawal, without interest. Shares of Common Stock to be delivered to the
participant will be registered in his name, or if the participant directs in
writing to the Committee, in the name of the participant and the person
designated by the participant, and will be delivered to the participant as soon
as practicable after the request for withdrawal. If the participant wishes to
sell shares of the Common Stock in his account, he may notify the Committee to
sell the same, in which event all commission costs incurred in connection with
the sale of the shares of Common Stock will be paid by the participant.
If a participant terminates his employment or otherwise becomes
ineligible to participate in the Stock Purchase Plan, any unused payroll
deductions will be returned to him without interest. A participant may terminate
payroll deductions at any time by providing written notice to the Committee. A
participant may not then reenter the Stock Purchase Plan until six months have
elapsed from the date his or her cessation became effective. An employee must be
employed by the Company or an affiliate on the date the Common Stock is
purchased in order to participate in the purchase for that offering period.
A participant may not be granted a purchase right under the Stock
Purchase Plan if he owns, immediately after the grant of the purchase right, 5%
or more of the voting power or value of all classes of stock of the Company or
any of its affiliates, or if purchase rights under the Stock Purchase Plan or
any other plans qualified under Section 423 of the Code, would result during any
calendar year in the purchase of shares having an aggregate fair market value of
more than $25,000.
The Board may amend or terminate the Stock Purchase Plan at any time,
provided that no amendment shall, without Stockholder approval, increase the
number of shares of Common Stock
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available for purchase under the Stock Purchase Plan (except upon stock splits
and dividends, combinations and similar events), change the class of affiliates
whose employees are eligible to participate in the Stock Purchase Plan, or
otherwise effect a change inconsistent with Code Section 423.
FEDERAL INCOME TAX CONSEQUENCES
The following provides a general summary of the federal income tax
consequences of the Stock Purchase Plan. In order for transactions pursuant to
the Stock Purchase Plan to qualify for the tax treatment discussed below, the
Plan must be approved by the Stockholders. Although the Company believes the
following statements are correct based on existing provisions of the Code and
the legislative history, and administrative and judicial interpretations
thereof, no assurance can be given that legislative, administrative, or judicial
changes or interpretations will not occur that would modify such statements.
The Stock Purchase Plan is designed to qualify as an employee stock
purchase plan under the provisions of Sections 421 and 423 of the Code. Neither
the grant nor the purchase of Common Stock under the Stock Purchase Plan will
have a tax impact on the participant or the Company. If an employee disposes of
the Common Stock acquired upon the purchase of his rights after at least two
years from the date of grant and one year from the date of purchase, then the
employee must treat as ordinary income the lesser of (i) the amount, if any, by
which the fair market value of the Common Stock at the time of disposition
exceeds the purchase price paid, or (ii) the amount, if any, by which the fair
market value of the Common Stock at the date of grant exceeds the purchase price
paid. Such recognition of compensation income upon disposition shall have the
effect of increasing the basis of the shares in the employee's hands by an
amount equal to the amount of compensation income recognized. Any gain in
addition to this amount will be treated as midterm or long-term capital gain,
depending upon how long the Common Stock was held after the date of exercise. If
an employee holds Common Stock at the time of his death, the holding period
requirements are automatically deemed to have been satisfied and ordinary income
will be realized by the estate, in the amount discussed above, upon the sale or
other disposition of the Common Stock. The Company will not be allowed a
deduction if the holding period requirements are satisfied or deemed satisfied.
If an employee disposes of the Common Stock before the expiration of the
later of two years from the date of grant and one year from the date of
purchase, then the employee must treat as ordinary income the excess of the fair
market value of the Common Stock on the date of purchase over the purchase
price. Any additional gain will be treated as long-term, midterm or short-term
capital gain, depending upon how long the Common Stock was held after the date
of exercise. The Company may deduct an amount equal to the ordinary income
recognized by the employee.
The foregoing is only a summary of the effects of federal income
taxation upon the employee and the Company with respect to the shares purchased
under the Stock Purchase Plan. It does not purport to be complete and does not
discuss the income tax laws of any municipality, state, or foreign country in
which the employee may reside.
RECOMMENDATION OF THE BOARD: The Board recommends a vote FOR approval of
the Stock Purchase Plan.
PROPOSAL TO AMEND THE COMPANY'S 1995 STOCK OPTION PLAN AND THE
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN FOR ACCELERATED VESTING UPON A
CHANGE OF CONTROL (NOTICE ITEM 6)
The Board has approved certain amendments to the 1995 Plan and the
Directors' Plan, subject to Stockholder approval. If the requested Stockholder
approval is received, the 1995 Plan and the Directors' Plan, as amended, will
read as set forth in Annexes 1 and 2, respectively.
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<PAGE> 26
GENERAL INFORMATION
The information with respect to the 1995 Plan and the Directors' Plan as
set forth under the "General Information" heading under "Notice Item 3 --
General Information" and "Notice Item 4 -- General Information" is incorporated
herein by reference. In addition to the proposed amendments set forth in Notice
Item 3, the Board, at a meeting on March 16, 1998, adopted proposals to amend
the 1995 Plan and the Directors' Plan to accelerate the vesting of options
granted under each of the plans upon a change of control.
REASONS FOR THE AMENDMENT
The Board has approved proposals to amend both the 1995 Plan and the
Directors' Plan to provide that, in the event of a change of control, all
options granted under the 1995 Plan and the Directors' Plan, whether or not
exercisable at the time of the change of control, shall become immediately
exercisable. A change of control shall be deemed to occur on the earliest of (a)
the acquisition by any entity, person, or group of beneficial ownership, as that
term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more
than 50% of the outstanding capital stock of the Company entitled to vote for
the election of directors ("Voting Stock"); (b) the commencement by any entity,
person, or group (other than the Company or a subsidiary of the Company) of a
tender offer or an exchange offer for more than 50% of the outstanding Voting
Stock of the Company; (c) the effective time of (1) a merger or consolidation of
the Company with one or more corporations as a result of which the holders of
the outstanding Voting Stock of the Company immediately prior to such merger
hold less than 50% of the Voting Stock of the surviving or resulting
corporation, or (2) a transfer of substantially all of the property or assets of
the Company other than to an entity of which the Company owns at least 80% of
the Voting Stock; and (d) the election to the Board, without the recommendation
or approval of the incumbent Board, of the lesser of (1) three directors, or (2)
directors constituting a majority of the number of directors of the Company then
in office. The Board believes these amendments will further support its efforts
to attract and retain highly qualified employees and to attract and retain
highly motivated and qualified individuals to serve on its Board in an
exceedingly competitive environment.
DESCRIPTIONS OF AWARDS UNDER THE 1995 PLAN AND THE DIRECTORS' PLAN
For a description of the awards under the 1995 Plan and the Directors'
Plan see "Notice Item 3 -- Description of Awards" and "Notice Item 4 --
Description of Awards".
FEDERAL INCOME TAX CONSEQUENCES
For a description of the federal income tax consequences that will
generally arise with respect to the grant and exercise of an option under the
1995 Plan, see "Notice Item 3 -- Federal Income Tax Consequences." The federal
income tax consequences that generally will arise with respect to the grant and
exercise of an option under the Directors' Plan are similar to those as set
forth for Nonstatutory Options under "Notice Item 3 -- Federal Income Tax
Consequences."
RECOMMENDATION OF THE BOARD: The Board recommends a vote FOR approval of
the amendments to the 1995 Plan and the Directors' Plan
In the event that a quorum is not present at the Meeting, the persons
named as proxies may propose one or more adjournments of the Meeting to permit
further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of the shares present, in person or by proxy, at
the session of the meeting adjourned.
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OTHER BUSINESS
As of the date of this Proxy Statement, management of the Company knows
of no other business which may come before the meeting. However, if any
additional matters are properly presented at the meeting, it is intended that
the persons named in the enclosed proxy, or their substitutes, will vote such
proxy in accordance with their judgment on such matters.
GENERAL INFORMATION
As of March 31, 1998, there were 12,733,963 shares of Common Stock
outstanding, each entitled to cast one vote at the meeting. There were options
to purchase 1,356,941 shares of Common Stock at varying exercise prices between
$.78 and $14.25 and warrants to purchase an additional 692,847 shares of Common
Stock outstanding at varying exercise prices between $2.90 and $5.21 per share
(the average exercise price was $3.88 per share for options, $3.81 per share for
warrants and $3.86 per share overall).
A copy of the Annual Report including the financial statements of the
Company for the year ended December 31, 1997, has been mailed to Stockholders
with this Proxy Statement and accordingly, has been mailed on or before the
record date for the determination of the Stockholders who are entitled to be
notified of and to vote at the meeting.
STOCKHOLDER PROPOSALS
No stockholder proposals were received by the Company for inclusion in
this year's proxy statement. If a Stockholder wishes to present a proposal to be
included in the proxy statement for the next Annual Meeting of Stockholders, and
assuming such Annual Meeting of Stockholders is held on or about May 15, 1999,
such proposal must be submitted in writing and received by the Company's
Secretary at its facility in Sunnyvale within ten days after notice of the
meeting is given.
Whether or not you intend to be present at the meeting, you are urged to
fill out, sign, date and return the enclosed proxy at your earliest convenience.
By order of the Board of Directors:
James N. Fletcher
Secretary
April 14, 1998
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ANNEX 1
AMENDMENT NO. 2 TO
HYSEQ, INC. STOCK OPTION PLAN
WHEREAS, the Board of Directors of Hyseq, Inc. has approved that certain
Amendment No. 2 to the Hyseq, Inc. Stock Option Plan (the "Plan"), effective as
of March 16, 1998.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. The maximum number of shares of Common Stock which may be issued for
all purposes under Section 1.5 of the Plan shall be increased from 1,152,000 to
2,152,000.
2. The following sentence shall be added at the end of Section 1.5 of
the Plan:
The foregoing notwithstanding, the aggregate number of shares as
to which Options may be granted in any calendar year to any one
Participant shall not exceed 325,000 (subject to adjustment for
stock splits, stock dividends, and other adjustments described in
Section 3.2 hereof).
3. The second paragraph of Section 2.4 of the Plan shall be amended to
read as follows:
The Committee shall establish procedures governing the
exercise of Options and shall require that written notice of
exercise be given and that the Option Price be paid in full at
the time of exercise. On the date specified in such written
notice, the Company shall accept payment for the Option shares in
cash, by bank or certified check, by wire transfer, or by such
other means as may be approved by the Committee. If approved in
advance by the Committee, payment may also be made (i) by
delivering shares of Common Stock already owned for at least six
(6) months by the Participant and which have a total Fair Market
Value on the date of such delivery equal to the Option Price;
(ii) by authorizing the Company to retain Option shares that
otherwise would be issuable upon exercise of the Option having a
total Fair Market Value on the date of delivery equal to the
Option Price; (iii) by the delivery of cash or the extension of
credit by a broker-dealer to whom the Participant has submitted a
notice of exercise or otherwise indicated an intent to exercise
an Option (in accordance with part 220, Chapter II, Title 12 of
the Code of Federal Regulations, a so-called "cashless"
exercise); or (iv) by any combination of the foregoing. As soon
as practicable after receipt of each notice and full payment, the
Company shall deliver to the Participant a certificate or
certificates representing the acquired shares of Common Stock.
<PAGE> 29
4. Section 2.6 of the Plan shall be amended to read as follows:
In the event of a Participant's death or disability, each
of his outstanding Options shall be exercisable by the
Participant (or his legal representative or designated
beneficiary), to the extent that such Option was then
exercisable, for one year after the Participant's death or
disability, but in no event after its respective expiration date.
A Participant who ceases to be an employee for any reason other
than death, disability or termination for cause, may exercise any
Option granted to such Participant, to the extent that the right
to purchase shares thereunder has become exercisable on the date
of such termination, but only within thirty (30) days after such
date, or, if earlier, within the originally prescribed term of
the Option, and subject to the condition that no Option shall be
exercisable after the expiration of the term of the Option. A
Participant who ceases to be an employee for cause shall, upon
such termination, cease to have any right to exercise any Option.
For purposes of this Plan, "cause" shall be deemed to include
(but shall not be limited to) wrongful appropriation of funds of
the Company, divulging confidential information about the Company
to the public, the commission of a gross misdemeanor or felony,
or the performance of any similar action that the Board or the
Committee, in their sole discretion, may deem to be sufficiently
injurious to the interests of the Company to constitute
substantial cause for termination. The determination of the Board
or the Committee as to the existence of cause shall be conclusive
and binding upon the Participant and the Company.
2
<PAGE> 30
AMENDMENT NO. 3 TO
HYSEQ, INC. STOCK OPTION PLAN
WHEREAS, the Board of Directors of Hyseq, Inc. has approved that certain
Amendment No. 3 to the Hyseq, Inc. Stock Option Plan (the "Plan"), effective as
of March 16, 1998.
NOW, THEREFORE, Section 2.4 of the Plan is hereby amended by adding the
following paragraph at the end of that Section:
In the event of a "change of control," all Options granted
under the Plan, whether or not exercisable at the time of the
change of control, shall become immediately exercisable. A change
of control shall be deemed to occur on the earliest of (a) the
acquisition by any entity, person, or group of beneficial
ownership, as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934, of more than 50% of the
outstanding capital stock of the Company entitled to vote for the
election of directors ("Voting Stock"); (b) the commencement by
any entity, person, or group (other than the Company or a
subsidiary of the Company) of a tender offer or an exchange offer
for more than 50% of the outstanding Voting Stock of the Company;
(c) the effective time of (1) a merger or consolidation of the
Company with one or more corporations as a result of which the
holders of the outstanding Voting Stock of the Company
immediately prior to such merger hold less than 50% of the Voting
Stock of the surviving or resulting corporation, or (2) a
transfer of substantially all of the property or assets of the
Company other than to an entity of which the Company owns at
least 80% of the Voting Stock; and (d) the election to the Board,
without the recommendation or approval of the incumbent Board, of
the lesser of (1) three directors, or (2) directors constituting
a majority of the number of directors of the Company then in
office.
<PAGE> 31
ANNEX 2
AMENDMENT NO. 1 TO
HYSEQ, INC. NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
WHEREAS, the Board of Directors of Hyseq, Inc. has approved that certain
Amendment No. 1 to the Hyseq, Inc. Non-Employee Director Stock Option Plan (the
"Plan"), effective March 16, 1998.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Article II.D.1 shall be amended to read as follows:
1. Options may be exercised by the delivery of written
notice of exercise and payment of the aggregate Option
Price for the shares to be purchased to the Corporate
Secretary of the Corporation. On the date specified in
such written notice, the Company shall accept payment
for the Option shares in cash, by bank or certified
check, by wire transfer, or by such other means as may
be approved by the Committee. If approved in advance by
the Committee, payment may also be made (i) by
delivering shares of Common Stock already owned for at
least six (6) months by the Participant and which have a
total Fair Market Value on the date of such delivery
equal to the Option Price; (ii) by authorizing the
Company to retain Option shares that otherwise would be
issuable upon exercise of the Option having a total Fair
Market Value on the date of delivery equal to the Option
Price; (iii) by the delivery of cash or the extension of
credit by a broker-dealer to whom the Participant has
submitted a notice of exercise or otherwise indicated an
intent to exercise an Option (in accordance with part
220, Chapter II, Title 12 of the Code of Federal
Regulations, a so-called "cashless" exercise); or (iv)
by any combination of the foregoing. As soon as
practicable after receipt of each notice and full
payment, the Company shall deliver to the Participant a
certificate or certificates representing the acquired
shares of Common Stock.
2. Article II.D.3 shall be amended to read as follows:
3. One half of the Participant's Initial Option shall be
exercisable on the date of grant and one fourth of the
Initial Option shall become exercisable on the date of
the Annual Meeting of the Stockholders held in each of
the two years following the year in which the
Participant receives the Initial Option. The Initial
Option shall continue to be exercisable until the tenth
anniversary of the date of grant. Each of a Director's
Subsequent Options shall
<PAGE> 32
become exercisable on the date of grant (the date of
each Annual Meeting) and shall continue to be
exercisable until the tenth anniversary of the date on
which the Subsequent Option(s) was granted.
Notwithstanding the foregoing, in the event a
Participant's status as a non-employee director ceases
as the result of his termination for cause, all of the
Participant's outstanding options shall immediately
terminate.
3. Article III.F shall be amended by adding the following Paragraph 3:
3. The term "cause" as used under the Plan shall be deemed
to include (but shall not be limited to) wrongful
appropriation of funds of the Company, divulging
confidential information about the Company to the
public, the commission of a gross misdemeanor or felony,
or the performance of any similar action that the Board
or the Committee, in their sole discretion, may deem to
be sufficiently injurious to the interests of the
Company to constitute substantial cause for termination.
The determination of the Board or the Committee as to
the existence of cause shall be conclusive and binding
upon the Participant and the Company.
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<PAGE> 33
AMENDMENT NO. 2 TO
HYSEQ, INC. NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
WHEREAS, the Board of Directors of Hyseq, Inc. has approved that certain
Amendment No. 2 to the Hyseq, Inc. Non-Employee Director Stock Option Plan (the
"Plan"), effective March 16, 1998.
NOW, THEREFORE, Article II.D.3 of the Plan is hereby amended by adding
the following paragraph at the end of that section:
The foregoing notwithstanding, in the event of a
"change of control," all Options granted under the Plan,
whether or not exercisable at the time of the change of
control, shall become immediately exercisable. A change of
control shall be deemed to occur on the earliest of (a)
the acquisition by any entity, person, or group of
beneficial ownership, as that term is defined in Rule
13d-3 under the Securities Exchange Act of 1934, of more
than 50% of the outstanding capital stock of the Company
entitled to vote for the election of directors ("Voting
Stock"); (b) the commencement by any entity, person, or
group (other than the Company or a subsidiary of the
Company) of a tender offer or an exchange offer for more
than 50% of the outstanding Voting Stock of the Company;
(c) the effective time of (1) a merger or consolidation of
the Company with one or more corporations as a result of
which the holders of the outstanding Voting Stock of the
Company immediately prior to such merger hold less than
50% of the Voting Stock of the surviving or resulting
corporation, or (2) a transfer of substantially all of the
property or assets of the Company other than to an entity
of which the Company owns at least 80% of the Voting
Stock; and (d) the election to the Board, without the
recommendation or approval of the incumbent Board, of the
lesser of (1) three directors, or (2) directors
constituting a majority of the number of directors of the
Company then in office.
<PAGE> 34
ANNEX 3
HYSEQ, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE
The purpose of the Hyseq, Inc. Employee Stock Purchase Plan is to
provide eligible Employees of Hyseq, Inc. and its Affiliates with an opportunity
to acquire a proprietary interest in the Company through the purchase of Common
Stock of the Company on a payroll deduction basis. It is believed that
participation in the ownership of the Company will be to the mutual benefit of
the eligible Employees and the Company. It is intended that this Plan shall
constitute an "employee stock purchase plan" within the meaning of 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 Code Section 423.
2. DEFINITIONS
Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in this Plan, have the following meanings. Wherever
appropriate, words used in the singular shall be deemed to include the plural
and vice versa, and the masculine gender shall be deemed to include the feminine
gender.
(a) ACCOUNT means the funds accumulated with respect to an Employee
as a result of deductions from his paycheck for the purpose of
purchasing Common Stock under the Plan. The funds allocated to
an Employee's Account shall remain the property of the Employee
at all times prior to the purchase of the Common Stock, but may
be commingled with the assets of the Company and used for
general corporate purposes. No interest shall be paid or accrued
on any funds accumulated in the Accounts of Employees.
(b) AFFILIATE means a corporation, as defined in Section 424(f) of
the Code, that is a parent or subsidiary of the Company, direct
or indirect.
(c) BOARD means the Board of Directors of the Company.
(d) CODE means the Internal Revenue Code of 1986, as amended.
(e) COMMITTEE means the committee to which the Board delegates the
power to act under or pursuant to the provisions of the Plan, or
the Board if no committee is selected.
(f) COMMON STOCK means the shares of common stock of the Company,
$.001 par value.
(g) COMPANY means Hyseq, Inc., a Nevada corporation, and any
corporate successor to all or substantially all of the assets or
voting stock of the Company.
(h) COMPENSATION means the compensation paid to an Employee by the
Company during a payroll period for federal income tax purposes,
as reported on an Employee's Form W-2 (or comparable reporting
form) for income tax withholding purposes.
<PAGE> 35
(i) EFFECTIVE DATE means the date the Plan is adopted by, and made
effective by, the Board, subject to the limitations of Section
16.
(j) EMPLOYEE means any person who is employed by the Company or an
Affiliate on a regular full-time basis. A person shall be
considered employed on a regular full-time basis if he is
customarily employed for more than twenty (20) hours per week.
(k) OFFERING DATE means the date on which the Committee grants
Employees the option to purchase shares of Common Stock.
(l) OFFERING PERIOD means the period between the Offering Date and
the Purchase Date.
(m) PURCHASE DATE means the date on which the Committee purchases
the shares of Common Stock, which date shall be the last day of
an Offering Period.
(n) PARTICIPANT means an Employee who elects to participate in the
Plan.
(o) PLAN means the Hyseq, Inc. Employee Stock Purchase Plan.
3. ELIGIBILITY
All Employees of the Company and, if designated by the Board, any
Affiliate, who are employed by the Company and/or such designated Affiliate
shall be eligible to participate in the Plan on the first Offering Date
coincident with or next following the Employee's completion of ninety (90)
continuous days of employment.
4. ADMINISTRATION
The Plan shall be administered by the Committee, which shall consist of
not less than two (2) members of the Board. Subject to the provisions of the
Plan, the Committee shall be vested with full authority to make, administer, and
interpret such rules and regulations as it deems necessary to administer the
Plan, and any determination, decision, or action of the Committee in connection
with the construction, interpretation, administration, and application of the
Plan shall be final, conclusive, and binding upon all Participants and any and
all persons claiming under or through any Participant. Notwithstanding anything
to the contrary in the Plan, the Committee shall have the discretion to modify
the terms of the Plan with respect to Participants who reside outside of the
United States or who are employed by a subsidiary of the Company that has been
formed under the laws of any foreign country, if such modification is necessary
in order to conform such terms to the requirements of local laws.
5. STOCK
(a) The Common Stock to be sold to Participants under the Plan may, at
the election of the Company, be either treasury shares, shares acquired
on the open market, and/or shares originally issued for such purpose.
The aggregate number of shares of Common Stock that shall be made
available for purchase under the Plan shall not exceed fifty thousand
(50,000) shares, subject to adjustment upon changes in capitalization of
the
2
<PAGE> 36
Company as provided in subparagraph (b) below. In the event any purchase
right granted under the Plan expires or terminates for any reason
without having been exercised in full or ceases for any reason to be
exercisable in whole or in part, the unpurchased shares subject thereto
will again be available for purchase by Employees upon the exercise of
purchase rights. If the total number of shares that otherwise would have
been acquired under the Plan on any Purchase Date exceeds the number of
shares of Common Stock then available under the Plan, the Company shall
make a pro rata allocation of the shares remaining available in as
nearly a uniform manner as shall be practicable and as it shall
determine to be equitable. In such event, the payroll deductions to be
made pursuant to the Participants' authorizations shall be reduced
accordingly, or refunded to the Participants, as the case may be, and
the Company shall give written notice of such reduction or refund to
each affected Participant.
(b) Appropriate adjustments in the aggregate number of shares of Common
Stock that shall be made available for purchase under the Plan shall be
made to give effect to any mergers, consolidations, acquisitions,
reorganizations, stock splits, stock dividends, or other relevant
changes in the capitalization of the Company occurring after the
Effective Date. The establishment of the Plan shall not affect in any
way the right or power of the Company to make adjustments,
reclassifications, reorganizations, or changes in its capital or
business structure or to merge, consolidate, dissolve, liquidate, sell,
or otherwise transfer all or any part of its business or assets.
Adjustments under this Section 5 shall be made in the sole discretion of
the Committee, and its decision shall be binding and conclusive.
(c) A Participant shall not have any interest in shares covered by his
authorized payroll deduction until shares of Common Stock are acquired
for his Account.
6. PARTICIPATION
(a) Each Employee may become a Participant in the Plan by authorizing a
payroll deduction on a form provided by the Committee. Such
authorization shall become effective on the next Offering Date following
the delivery of the authorization form to the Committee; provided, (i)
that the Employee is eligible under Section 3 to participate in the Plan
on such Offering Date and (ii) that if the authorization form is
delivered to the Committee less than fifteen (15) days prior to an
Offering Date, it shall become effective on the first Offering Date that
is fifteen (15) or more days following delivery of the authorization
form to the Committee.
(b) At the time an Employee files his authorization for a payroll
deduction, he shall elect to have deductions made from each paycheck
that he receives, such deductions to continue until the Participant
withdraws from the Plan or otherwise becomes ineligible to participate
in the Plan. Authorized payroll deductions shall be for a minimum of one
percent (1%) and a maximum of ten percent (10%) of the Participant's
Compensation. The deduction rate so authorized shall continue in effect
through the Offering Period and each succeeding Offering Period. A
Participant may increase the rate of his payroll deduction effective as
of any subsequent Offering Date by filing a new authorization form
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<PAGE> 37
with the Company fifteen (15) or more days prior to the next Offering
Date. A Participant may, at any time during any Offering Period, reduce
his rate of payroll deduction by filing a new authorization form with
the Company, which shall become effective as soon as practicable after
it is filed.
(c) All Compensation deductions made for a Participant shall be credited
to his Account. Except as may otherwise be provided by the Committee
under Section 4, a Participant may not make any separate cash payment
into his Account.
7. PURCHASE OF SHARES
(a) On the Offering Date when a Participant's authorization form for a
deduction becomes effective, and on each succeeding Offering Date
thereafter, he shall be deemed to have been granted an option to
purchase as many full shares of Common Stock as he will be able to
purchase with the Compensation deductions credited to his Account during
the payroll periods within the applicable Offering Period for which the
Compensation deductions are made. In addition to the foregoing, any cash
dividends paid on shares of Common Stock held in his Account shall be
added to the Account, and used to purchase Common Stock as otherwise
provided herein.
(b) The purchase price for the shares of Common Stock to be purchased
with payroll deductions from the Participant shall be equal to the
lesser of ninety-five percent (95%) (or such other amount as the
Committee shall authorize, but in no event less than eighty-five percent
(85%)) of (i) the "fair market value" of a share of Common Stock on the
Offering Date or (ii) the "fair market value" of a share on the Purchase
Date. Fair market value shall be defined as the closing bid price of the
Common Stock on the largest national securities exchange on which such
Common Stock is listed at the time the Common Stock is to be valued. If
the Common Stock is not then listed on any such exchange, the fair
market value shall be the closing sales price if such is reported or
otherwise the mean between the closing "Bid" and the closing "Ask"
prices, if any, as reported in the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") for the date of valuation,
or if none, on the most recent trade date thirty (30) days or less prior
to the date of valuation for which such quotations are reported. If the
Common Stock is not then listed on any such exchange or quoted in
NASDAQ, the fair market value shall be the mean between the average of
the "Bid" and the average of the "Ask" prices, if any, as reported in
the National Daily Quotation Service for the date of valuation, or, if
none, for the most recent trade date thirty (30) days or less prior to
the date of valuation for which such quotations are reported. If the
fair market value cannot be determined under the preceding three
sentences, it shall be determined in good faith by the Committee.
8. TIME OF PURCHASE
From time to time, the Committee shall grant to each Participant an
option to purchase shares of Common Stock in an amount equal to the number of
shares of Common Stock that the accumulated payroll deductions to be credited to
his Account during the Offering Period may purchase at the applicable purchase
price. Each Offering Period shall be for a specified period of
4
<PAGE> 38
time to be fixed by the Committee and shall be for no less than one month and no
more than twenty-seven (27) months' duration. Each Participant who elects to
purchase shares of Common Stock hereunder shall be deemed to have exercised his
option automatically on such date of purchase. Administrative and commission
costs on purchases shall be paid by the Company. The Committee shall cause to be
delivered periodically to each Participant a statement showing the aggregate
number of shares of Common Stock in his Account, the number of shares of Common
Stock purchased for him in the preceding Offering Period, his aggregate
Compensation deductions for the preceding Offering Period, the price per share
paid for the shares of Common Stock purchased for him during the preceding
Offering Period, and the amount of cash, if any, remaining in his Account at the
end of the preceding Offering Period.
A Participant may request delivery to him of the cash in his Account or
of the shares of Common Stock held in his Account at any time (subject to any
limitations imposed by Section 16(b) of the Securities Exchange Act of 1934),
and the delivery thereof shall be made at such regular time as the Company or
its transfer agent shall determine. If such delivery is required at a time other
than the normal transfer date set by the Company or its transfer agent, the
Participant requesting such transfer shall pay the costs thereof. All of the
cash deposits in his Account shall be paid to him promptly after receipt of
notice of withdrawal, without interest. Shares of Common Stock to be delivered
to a Participant under the Plan shall be registered in the name of the
Participant or, if the Participant so directs in writing to the Committee, in
the name of the Participant and such person(s) as may be designated by the
Participant, to the extent permitted by applicable law, and delivered to the
Participant as soon as practicable after the request for a withdrawal. If a
Participant wishes to sell the shares of Common Stock in his Account, he may
notify the Committee to sell the same, in lieu of a distribution of such shares,
in which event all commission costs incurred in connection with the sale of the
shares of Common Stock shall be borne by the Participant. The Company shall pay
administrative costs associated therewith other than costs arising from a sale
occurring at a time different from the prearranged dates set by the Company or
its transfer agent for making such sales.
9. CESSATION OF PARTICIPATION
A Participant may cease participation in the Plan at any time by
notifying the Committee in writing of his intent to cease his participation. If
such notice is received by the Committee the Company shall distribute to the
Participant all of his accumulated payroll deductions, without interest. If any
Participant ceases participation in the Plan, no further Compensation deductions
shall be made on his behalf after the effective date of his cessation, except in
accordance with a new authorization form filed with the Committee as provided in
Section 6. Upon ceasing participation in the Plan, a Participant shall not be
permitted to reenter the Plan until six (6) months have elapsed from the date
his cessation becomes effective.
10. INELIGIBILITY
An Employee must be employed by the Company or an Affiliate on the
Purchase Date in order to participate in the purchase for that Offering Period.
If an option expires without first having been exercised, all funds credited to
the Participant's Account shall be refunded without interest. If a Participant
becomes ineligible to participate in the Plan at any time, all
5
<PAGE> 39
Compensation deductions made on behalf of the Participant that have not been
used to purchase shares of Common Stock shall be paid to the Participant within
sixty (60) days after the Committee determines that the Participant is not
eligible to participate in the Plan.
11. DESIGNATION OF BENEFICIARY
A Participant may file a written designation of a beneficiary who shall
receive any shares of Common Stock (or remaining Compensation deductions)
credited to the Participant's Account under the Plan in the event of such
Participant's death prior to delivery to him of the certificates for such shares
(or remaining Compensation deductions). The designation of a beneficiary may be
changed by the Participant at any time by written notice given in accordance
with rules and procedures established by the Committee. Upon the death of a
Participant, and upon receipt by the Company of proof of the identity and
existence, at the Participant's death, of a beneficiary validly designated by
him under the Plan, the Company shall deliver such shares of Common Stock (or
remaining Compensation deductions) to such beneficiary. In the event of the
death of the 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 (or remaining Compensation deductions) to the
executor or administrator of the estate of the Participant, or if no such
executor or administrator has been appointed, the Company, in its sole
discretion, may deliver such shares (or remaining Compensation deductions) to
the Participant's spouse or to any one or more dependents or relatives of the
Participant, or to such other person or persons as the Company may designate on
behalf of the estate of such deceased Participant.
12. TRANSFERABILITY
Neither Compensation deductions nor Plan contributions credited to a
Participant's Account nor any rights with regard to Plan participation or the
right to purchase shares of Common Stock under the Plan may be assigned,
transferred, pledged, or otherwise disposed of in any way by a Participant other
than by will or the laws of descent and distribution; provided, however, that
shares of Common Stock purchased on behalf of a Participant and left in his
Account shall be subject to his absolute control. Any attempted assignment,
transfer, pledge, or other disposition shall be void and without effect.
13. AMENDMENT OR TERMINATION
The Board may, without further action on the part of the stockholders of
the Company, at any time amend the Plan in any respect, or terminate the Plan,
except that it may not:
(a) Permit the sale of more shares of Common Stock than are authorized
under Section 5;
(b) Change the class of Affiliates whose Employees are eligible to
participate in the Plan; or
(c) Effect a change inconsistent with Section 423 of the Code or the
regulations issued thereunder.
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<PAGE> 40
14. NOTICES
All notices or other communications by a Participant under or in
connection with the Plan shall be deemed to have been duly given when received
in writing by the Chief Financial Officer of the Company or when received in the
form specified by the Committee at the location and by the person designated by
the Committee for the receipt thereof.
15. LIMITATIONS
Notwithstanding any other provisions of the Plan:
(a) The Company intends that this Plan shall constitute an employee
stock purchase plan within the meaning of Section 423 of the Code. Any
provisions required to be included in the Plan under said Section, and
under regulations issued thereunder, are hereby included as though set
forth in the Plan at length.
(b) No Employee shall be entitled to participate in the Plan if,
immediately after the grant of an option hereunder, the Employee would
own stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or an
Affiliate. For purposes of this Section 15, stock ownership shall be
determined under the rules of Section 424(d) of the Code and stock that
the Employee may purchase under outstanding options shall be treated as
stock owned by the Employee.
(c) No Employee shall be permitted to purchase Common Stock hereunder if
his right and option to purchase Common Stock under this Plan and under
all other employee stock purchase plans (as defined in Section 423 of
the Code) of the Company or any Affiliates would result in an
entitlement to purchase Common Stock in any one (1) calendar year in
excess of a fair market value of $25,000 (determined at the time of
grant).
(d) All Employees shall have the same rights and privileges under the
Plan, except that the amount of Common Stock that may be purchased
pursuant to the Plan shall bear a uniform relationship to an Employee's
Compensation. All rules and determinations of the Committee shall be
uniformly and consistently applied to all persons in similar
circumstances.
(e) Nothing in the Plan shall confer upon any Employee the right to
continue in the employment of the Company or any Affiliate or affect the
right that the Company or any Affiliate may have to terminate the
employment of such Employee.
(f) No Participant shall have any right as a stockholder unless and
until certificates for shares of Common Stock are issued to him or
allocated to his Account.
(g) If under any provision of the Plan that requires a computation of
the number of shares of Common Stock to be purchased, the number so
computed is not a whole
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<PAGE> 41
number of shares of Common Stock, such number of shares of Common Stock
shall be rounded down to the next whole number.
(h) The Plan is intended to provide shares of Common Stock for
investment and not for resale. The Company does not, however, intend to
restrict or influence any Participant in the conduct of his own affairs.
A Participant, therefore, may sell shares of Common Stock purchased
under the Plan at any time he chooses, subject to compliance with any
applicable federal or state securities laws or any applicable Company
restriction or blackout periods; provided, however, that because of
certain federal tax requirements, each Participant shall agree, by
entering the Plan:
(i) promptly to give the Company notice of any shares of Common
Stock disposed of within two (2) years after the date of grant
of the applicable option, or within one (1) year of the Purchase
Date, and the number of such shares disposed of (a
"disqualifying disposition");
(ii) that the Company may withhold, pursuant to Code Sections
3102, 3301, and 3402, from his wages and other cash compensation
paid to him in all payroll periods following in the same
calendar year, any additional taxes the Company may become
liable for in respect of amounts includable in his income as
additional compensation as a result of a disqualifying
disposition of Common Stock acquired under the Plan, or as a
result of the acquisition of Common Stock under the Plan; and
(iii) that he shall repay the Company any amount of additional
taxes the Company may become liable for in respect of amounts
includable in his income as additional compensation as a result
of a disqualifying disposition of Common Stock acquired under
the Plan, or as a result of the acquisition of Common Stock
under the Plan, that cannot be satisfied by withholding from the
wages and other cash compensation paid to him by the Company.
(i) This Plan is intended to comply in all respects with applicable law
and regulations, including with respect to Participants who are officers
or directors for purposes of Section 16 of the Securities Exchange Act
of 1934, as amended from time to time, Rule 16b-3 of the Securities and
Exchange Commission. In case any one or more provisions of this Plan
shall be held invalid, illegal, or unenforceable in any respect under
applicable law and regulation (including Rule 16b-3), the validity,
legality, and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby and the invalid, illegal, or
unenforceable provision shall be deemed null and void; however, to the
extent permitted by law, any provision that could be deemed null and
void shall first be construed, interpreted, or revised retroactively to
permit this Plan to be construed in compliance with all applicable law
(including Rule 16b-3), so as to further the intent of this Plan.
Notwithstanding anything herein to the contrary, with respect to
Participants who are officers and directors for purposes of Section
16(b) of the Securities Exchange Act of 1934, as amended from time to
time, and if required to comply with the rules promulgated thereunder,
such Participants shall not be permitted to direct the sale of any
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<PAGE> 42
Common Stock purchased hereunder until at least six (6) months have
elapsed from the date of a purchase, unless the Committee determines
that the sale of the Common Stock otherwise satisfies the then current
Rule 16b-3 requirements.
16. EFFECTIVE DATE AND APPROVALS
The Plan shall become effective at a time when:
(a) the Plan has been adopted by the Board; and
(b) a registration statement on Form S-8 under the Securities Act of
1933, as amended, has become effective with respect to the Plan; and
(c) the Committee has notified the eligible Employees that they may
commence participation in the Plan; and
(d) the Plan is approved by the holders of a majority of the outstanding
shares of Common Stock of the Company, which approval must occur within
the period ending twelve (12) months after the date the Plan is adopted
by the Board. In the event such stockholder approval is not obtained,
the Plan shall terminate and have no further force or effect, and all
amounts collected from the Participants during any initial Offering
Period(s) hereunder shall be refunded.
Unless sooner terminated by the Board, or as set forth above, the Plan shall
terminate upon the earlier of (i) the tenth (10th) anniversary of the adoption
of the Plan by the Board, or (ii) the date on which all shares available for
issuance under the Plan shall have been sold under the Plan.
17. APPLICABLE LAW
All questions pertaining to the validity, construction, and administration of
the Plan shall be determined in conformity with the laws of Nevada, to the
extent not inconsistent with Section 423 of the Code and the regulations
thereunder.
Adopted the 16th day of March, 1998.
9
<PAGE> 43
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
HYSEQ, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints Robert D. Weist and Lewis S. Gruber proxies
with power to act without the other and with power of substitution, and hereby
authorizes them to represent and vote all the shares of stock of Hyseq, Inc.
(the "Company") a Nevada corporation standing in the name of the undersigned
with all powers which the undersigned would possess if present at the Annual
Meeting of Stockholders of the Company to be held May 18, 1998 at 9:00 am and at
any adjournment or adjournments thereof, as fully and with the same force and
effect as the undersigned might or could so if personally present thereat, as
follows:
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO SELECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1,2,3,4,5 AND 6.
[ ] I PLAN TO ATTEND THE MEETING
ITEM 1: Election of Class II Directors
Nominees: Dr. Raymond F. Baddour and Ms. Greta E. Marshall
(To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list above.)
VOTE FOR [ ] WITHHOLD AUTHORITY [ ]
all nominees listed to vote for all nominees
(except as marked to the contrary)
ITEM 2: Ratification of Selection of Independent Public Accountants
FOR [ ] AGAINST [ ] ABSTAIN [ ]
ITEM 3: Continuation and Amendment of the Company's 1995 Stock Option
Plan (the "1995 Plan")
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE> 44
ITEM 4: Amendment of the Non-Employee Director Stock
Option Plan (the "DSOP")
FOR [ ] AGAINST [ ] ABSTAIN [ ]
ITEM 5: Approval of the Company's Employee Stock
Purchase Plan
FOR [ ] AGAINST [ ] ABSTAIN [ ]
ITEM 6: Special Amendment of the 1995 Plan and the
DSOP
FOR [ ] AGAINST [ ] ABSTAIN [ ]
ITEM 7: To transact such other business as may
properly come before the meeting and any
adjournments thereof.
PLEASE MARK, DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. IF YOU HAVE ANY QUESTIONS, CALL 408-524-8100.
------------------------
Number of Shares
------------------------
Signature of
Stockholder Date
------------------------
Signature of
Stockholder Date
Please sign exactly as
name appears hereon.
When shares are held by
joint tenants, both
should sign. When
signing as attorney,
executor, administrator,
trustee or guardian,
please give full title
as such. If a
corporation, please sign
in full corporate name
by President or other
authorized officer. If a
partnership, please sign
in full partnership name
by authorized person.
