<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Axys Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
AXYS PHARMACEUTICALS, INC.
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CALIFORNIA 94080
Dear Stockholders,
I am pleased to invite you to attend our annual meeting of stockholders to
be held at 11:30 a.m. on Wednesday, May 26, 1999, at Axys' headquarters located
at 180 Kimball Way, South San Francisco, California.
Legal documents are often times confusing, so this year we decided to write
a jargon-free "plain English" proxy notice and proxy statement. With this letter
we are including the notice for our annual meeting, the proxy statement, the
proxy card and the 1998 annual report. We hope you find its simplified format
helpful and we welcome your comments.
Your vote is important to us and I look forward to seeing you on May 26.
Whether you plan to attend the annual meeting in person or not, I hope you will
vote as soon as possible.
Sincerely,
John P. Walker
Chairman and Chief Executive Officer
<PAGE> 3
AXYS PHARMACEUTICALS, INC.
180 KIMBALL WAY
SOUTH SAN FRANCISCO, CA 94080
(650) 829-1000
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, MAY 26, 1999
<TABLE>
<S> <C>
TIME: 11:30 a.m.
PLACE: Axys Pharmaceuticals' Headquarters
180 Kimball Way
South San Francisco, California
MATTERS TO BE (1) To elect the Board of Directors
VOTED ON: (2) To ratify the appointment of Ernst & Young LLP as the
company's independent auditors
(3) To approve a 500,000 share increase in the number of
shares issuable under Axys' Employee Stock Purchase
Plan
(4) To transact any other business properly coming before
the meeting
RECORD DATE: You may vote at the meeting if you were a stockholder at the
close of business on Friday, April 9, 1999, the record date.
If on April 9, 1999, your shares were held of record in your
brokerage firm or another similar organization, you may vote
at the annual meeting if you obtain a valid proxy card from
them issued in your name.
VOTING BY PROXY: Please return your proxy as soon as possible so that your
shares can be voted at the meeting in accordance with your
instructions. For more instructions, please see the
Questions and Answers beginning on page 3 of this proxy
statement and the instructions on the proxy card.
</TABLE>
By Order of the Board of Directors
William J. Newell
Vice President, General Counsel and
Secretary
April 23, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers about this Proxy Material and the
Annual Meeting............................................ 3
Compliance with the Reporting Requirements of Section 16.... 6
Proposals to be Voted Upon.................................. 6
Nominees for Directors...................................... 6
Board Committees............................................ 8
Compensation of Non-Employee Directors...................... 8
Axys Stock Ownership of Beneficial Owners, Directors and
Management................................................ 9
Compensation of Executive Officers.......................... 11
Employment Agreements and Change-in-Control Arrangements.... 13
Report of the Compensation Committee........................ 15
Report on Option Repricing.................................. 17
Relationships and Transactions You Should Know About........ 19
General Description of the Employee Stock Purchase Plan..... 19
Performance Graph........................................... 23
Other Matters............................................... 23
Directions to Axys.......................................... 24
</TABLE>
2
<PAGE> 5
QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL
AND THE ANNUAL MEETING
WHY AM I RECEIVING THESE MATERIALS?
The Board of Directors (the "Board") of Axys Pharmaceuticals, Inc.
(sometimes referred to as the "company" or "Axys") is providing these proxy
materials for you in connection with Axys' annual meeting of stockholders which
will take place on May 26, 1999. You are invited to attend the meeting and are
requested to vote on the proposals described in this proxy statement. The
Company intends to mail this proxy statement and accompanying proxy card on or
about April 23, 1999, to all stockholders entitled to vote at the annual
meeting.
WHO MAY ATTEND THE MEETING?
All Axys stockholders are invited to attend, including stockholders whose
shares are held by their brokerage firm or another similar organization.
WHAT INFORMATION IS CONTAINED IN THESE MATERIALS?
The information included in this proxy statement relates to the proposals
to be voted on at the annual meeting, the voting process, the compensation of
directors and our most highly paid officers, and certain other required
information. Our 1998 Annual Report is also enclosed.
WHO IS PAYING FOR THIS PROXY SOLICITATION PROCESS?
The enclosed proxy is solicited on behalf of the Board and Axys is paying
for the entire cost of the proxy voting process. Copies of this material will be
given to banks, brokerage houses and other institutions which hold Axys common
stock that is beneficially owned by others. Axys will reimburse these banks,
brokerage houses and other institutions for their reasonable out of pocket
expenses in forwarding these proxy materials to stockholders who are beneficial
owners. Original solicitation of proxies by mail may be supplemented by
telephone, telegram, or personal solicitation by directors, officers, or other
employees of the Company and by MacKenzie Partners. No additional compensation
will be paid to directors, officers or other Axys employees for soliciting
proxies, but, if hired by the company, MacKenzie Partners may be paid its
customary fee of approximately $5,000 plus expenses.
WHAT AM I VOTING ON?
There are three known matters to be voted on at the annual meeting:
- The election of the Board
- The ratification of Ernst & Young LLP as the company's independent
auditors for 1999
- A 500,000 share increase in the number of shares of Common Stock
authorized to be issued under Axys' Employee Stock Purchase Plan
WHAT ARE THE BOARD'S VOTING RECOMMENDATIONS?
Our Board of Directors recommends that you vote your shares "FOR" each of
the Board's nominees to the Board of Directors and "FOR" each of the other
proposals.
WHO CAN VOTE AT THE ANNUAL MEETING?
Stockholders of record at the close of business on April 9, 1999 (the
"Record Date"). Also, if on April 9, 1999 your shares were held in the name of
your brokerage firm, you may vote at the annual meeting if you obtain a valid
proxy from them in your name.
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<PAGE> 6
WHAT IS THE DIFFERENCE BETWEEN HOLDING SHARES AS A STOCKHOLDER OF RECORD AND AS
A BENEFICIAL OWNER?
Most Axys stockholders hold their shares in an account at a brokerage firm,
bank or other nominee holder, rather than holding share certificates directly in
the stockholder's own name. As summarized below, there are some distinctions
between shares held of record and those owned beneficially.
STOCKHOLDER OF RECORD
If on April 9, 1999 your shares were registered directly in your name with
Axys' Transfer Agent, ChaseMellon, you are a stockholder of record who may vote
at the annual meeting and these proxy materials are being sent directly to you
by Axys. As the stockholder of record, you have the right to direct the voting
of your shares by returning the enclosed proxy card to Axys or to vote in person
at the meeting. Whether or not you plan to attend the meeting, please complete,
date and sign the enclosed proxy card to ensure that your vote is counted. Each
share is entitled to one vote for each item to be voted on.
BENEFICIAL OWNER
If on April 9, 1999 your shares were held in an account at a brokerage firm
or at a bank or other nominee holder, you are considered the beneficial owner of
shares held "in street name" and these proxy materials are being forwarded to
you by your broker or nominee who is considered the stockholder of record for
the purposes of voting at the annual meeting. As the beneficial owner, you have
the right to direct your broker on how to vote your shares and are also invited
to attend the annual meeting. However, since you are not the stockholder of
record, you may not vote these shares in person at the annual meeting unless you
request to receive a valid proxy from your brokerage firm, bank or other nominee
holder. If you do not make this request, you can still vote by a voting
instruction card enclosed for you to use.
HOW MANY VOTES MUST THE BOARD NOMINEES RECEIVE TO BE ELECTED?
The seven nominees receiving the highest number of yes votes will be
elected as directors. This number is called a plurality.
WHAT HAPPENS IF A BOARD NOMINEE IS UNABLE TO STAND FOR RE-ELECTION?
The Board may, by vote, decide on reducing the size of the Board or name a
substitute nominee. If a substitute is named, shares represented by proxies may
be voted for a substitute nominee.
HOW MANY VOTES MUST THE RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
RECEIVE IN ORDER TO BE APPROVED?
The ratification of the appointment of Ernst & Young LLP as the company's
auditors for the fiscal year ending December 31, 1999 must receive a yes vote
from a majority of the shares present in person or represented by valid proxies
at the meeting.
HOW MANY VOTES MUST THE 500,000 SHARE INCREASE FOR THE EMPLOYEE STOCK PURCHASE
PLAN (ESPP) RECEIVE IN ORDER TO BE APPROVED?
In order to be approved, the proposal to increase the number of shares in
the ESPP must receive a yes vote from a majority of the shares present in person
or represented by valid proxies at the meeting.
HOW ARE THE VOTES COUNTED?
You may vote either "for" each nominee for director or you may "withhold
authority" (abstain) to vote for any nominee you specify. You may vote "for,"
"against," or "abstain" on the ratification of independent auditors and the
share increase for the ESPP. If you abstain, it will have the same effect as a
vote against a proposal and will be counted towards the tabulation of votes cast
on a proposal. A vote "for" any nominee or any proposal is the same as a yes
vote.
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<PAGE> 7
WILL MY SHARES BE VOTED IF I DO NOT SIGN AND RETURN MY PROXY CARD?
If you are a stockholder of record and you do not sign and return your
proxy card, your shares will not be voted. If you are the beneficial owner and
you do not sign and return your proxy card, the stockholder of record may either
vote your shares on routine matters or "non-vote" your shares. These non-voted
shares, known as broker non-votes, are counted for purposes of establishing a
quorum to conduct business at the meeting, but are not counted for purposes of
determining the outcome of any matter voted on.
HOW DO I VOTE?
The simplest way for both beneficial owners and stockholders of record to
vote is to sign and date the enclosed proxy card or voting instruction card and
return it in the enclosed postage-prepaid envelope. The shares represented by a
signed and dated proxy card or a properly completed voting instruction card will
be voted in accordance with the directions given. If you return a signed and
dated proxy card or voting instruction card without marking any selections, your
shares will be voted in favor of the three proposals. If you are a stockholder
of record and return your proxy card, you may revoke your proxy any time before
the meeting by 1) notifying Axys' Secretary (William J. Newell) in writing or 2)
submitting to the company a proxy with a later date. Of course, you also may
revoke your proxy by attending the annual meeting and voting in person. If you
are a beneficial owner, you can vote your shares through your broker or by using
the enclosed proxy card.
WHO WILL COUNT THE VOTE?
Representatives of ChaseMellon, Axys' transfer agent, will perform the
initial vote count and will assist Fred Ruegsegger, Axys' Chief Financial
Officer, who will serve as the inspector of the election and report the final
vote count.
WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY CARD?
It may indicate that your shares are registered under more than one name or
that you have multiple accounts in which you hold your shares. Please sign and
return all proxy cards to ensure that your vote is counted.
WHAT IS A QUORUM AND WHAT CONSTITUTES A QUORUM?
For the annual meeting to begin, a quorum of stockholders must attend the
meeting, either in person or by proxy. A majority of the outstanding shares as
of the Record Date -- present at the annual meeting or represented by valid
proxies -- constitutes a quorum for the annual meeting. If you submit a valid
proxy card or attend the annual meeting, you will be considered part of the
quorum.
However, if there is no quorum, a majority of the shares present and
represented at the annual meeting may adjourn the annual meeting to another
date, time and place.
At the Record Date (April 9, 1999), there were approximately 648
stockholders of record. There were 30,348,628 shares of Axys common stock
outstanding and entitled to vote at the annual meeting.
HOW CAN I FIND OUT THE RESULTS OF THE VOTING AT THE ANNUAL MEETING?
The company will announce preliminary voting results at the annual meeting
and publish final results in our quarterly report on Form 10-Q for the second
quarter of 1999.
WHEN ARE STOCKHOLDER PROPOSALS DUE?
To be eligible for inclusion in next year's proxy statement and proxy,
stockholder proposals must be submitted in writing by December 22, 1999, to
William J. Newell, Secretary, Axys Pharmaceuticals, Inc., 180 Kimball Way, South
San Francisco, CA 94080 (or email him at [email protected]). As stated
in the company's bylaws, stockholder proposals for next year's annual meeting or
nominations for director may be properly raised at next year's annual meeting
even if they are not to be included in next year's
5
<PAGE> 8
proxy statement and proxy. However, to do so, they must be submitted to the
company's Secretary (William J. Newell) between February 25, 2000 and March 27,
2000.
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and holders of more than 10% of Axys' common stock to file
reports with the Securities and Exchange Commission (the "SEC") regarding their
ownership and changes in ownership of Axys' Common Stock. Axys believes that
during 1998, its officers, directors and 10% stockholders complied with all
Section 16(a) filing requirements, with the exception of former director Dr.
Anthony Evnin who inadvertently made a late filing.
PROPOSALS TO BE VOTED UPON
1. ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
The Board of Directors of Axys currently consists of seven directors who
are elected annually. Axys took action in 1999 to reduce the size of the Board
from eight to seven when two directors indicated their intention to retire from
the Board and the Board voted to fill only one of those vacancies. All nominees
listed below are current or former directors of Axys. The Board recommends a
vote FOR these nominees. The term of office for directors elected at the 1999
annual meeting will expire upon the election of the Board at the 2000 annual
meeting. See below for biographical information on the Board nominees.
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
(ITEM 2 ON PROXY CARD)
Stockholders will vote on the ratification of Ernst & Young LLP, certified
public accountants, to audit Axys' books, records and accounts for the year
ending December 31, 1999. Both the Audit Committee and the Board recommend a
vote FOR the adoption of this proposal. Representatives of Ernst & Young LLP
will be present at the annual meeting to answer appropriate questions. If the
stockholders do not ratify this appointment, the Board will reconsider the
selection of the auditors.
3. APPROVAL OF AN INCREASE OF 500,000 SHARES OF COMMON STOCK AUTHORIZED FOR
ISSUANCE UNDER AXYS' EMPLOYEE STOCK PURCHASE PLAN.
(ITEM 3 ON PROXY CARD)
Axys is requesting approval for 500,000 more shares of the company's common
stock to become available for issuance under its Employee Stock Purchase Plan.
The Board recommends a vote FOR the adoption of this proposal. See page 20 for a
detailed description of Axys' Employee Stock Purchase Plan.
4. TO TRANSACT OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE MEETING.
(ITEM 4 ON PROXY CARD)
Stockholders will also vote on any other matters of business that are
properly brought to the annual meeting.
NOMINEES FOR DIRECTORS
JOHN P. WALKER -- DIRECTOR SINCE 1993
Mr. Walker, 50, has been the Chairman of Axys since 1998 and Chief
Executive Officer since 1993. Prior to joining Axys, Mr. Walker was the Chairman
and Chief Executive Officer of Vitaphore Corporation, a medical device company
that was sold to Union Carbide in 1990. Prior to that, he spent 15 years as an
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<PAGE> 9
executive with American Hospital Supply Corporation, most recently serving as
President of the Hospital Company. Mr. Walker also serves as Chairman of Signal
Pharmaceuticals, Inc. and Microcide Corporation and is on the Board of Directors
of Geron Corporation and the Biotechnology Industry Organization.
ANN M. ARVIN, M.D. -- DIRECTOR SINCE 1997
Dr. Arvin, 53, is a Lucile Salter Packard Professor of Pediatrics and
Microbiology/Immunology, at Stanford University School of Medicine, Stanford,
California. Dr. Arvin is also Associate Chair for Academic Affairs, Department
of Pediatrics, and Chief of the Infectious Disease Service of the Lucile Salter
Packard Children's Hospital at Stanford. Since 1978, Dr. Arvin has taught at the
Stanford University School of Medicine. She is also currently a member of the
Scientific Advisory Board of Aviron.
VAUGHN M. KAILIAN -- DIRECTOR SINCE 1995
Mr. Kailian, 54, is President, Chief Executive Officer and a director of
COR Therapeutics, Inc., a biotechnology company. He has served in these
capacities since March 1990. Mr. Kailian also serves as a director of Amylin
Pharmaceuticals, Inc.
DONALD KENNEDY, PH.D. -- DIRECTOR SINCE 1996
Dr. Kennedy, 67, is the Bing Professor of Environmental Science and
President Emeritus at Stanford University where he co-directs the Global
Environmental Forum in the Institute for International Studies. He has served in
these capacities since September 1993. From September 1980 to September 1992,
Dr. Kennedy was the President of Stanford University. He served previously as
Commissioner of the U.S. Food and Drug Administration.
IRWIN LERNER -- DIRECTOR SINCE 1998
Mr. Lerner, 68, was Chairman of the Board of Sequana Therapeutics, Inc.,
from May 1995 until January 1998 when Axys acquired Sequana. Mr. Lerner served
as Chairman of the Board and of the Executive Committee of Hoffmann-La Roche
Inc., a pharmaceutical and health care company, from January 1993 until his
retirement in September 1993. He also served as its President and Chief
Executive Officer from 1980 through 1992. Mr. Lerner also serves on the Boards
of Directors of Public Service Enterprise Group, Humana Inc., Covance Inc., V.I.
Technologies, Inc., several private companies and is Chairman of the Board of
Medarex Inc. He is currently Distinguished Executive-in-Residence at Rutgers
University Graduate School of Management.
ALAN C. MENDELSON, J.D. -- NOMINEE
Mr. Mendelson, 51, has been a partner of Cooley Godward LLP, a private law
firm and counsel to the company, since 1980 and served as the managing partner
of its Palo Alto office from May 1990 to March 1995 and November 1996 to October
1997. Mr. Mendelson served as Secretary of the company from July 1993 through
August 1998, with the exception of several months in 1994. Mr. Mendelson also
served as a director of the company from May 1997 to January 1998, when he
resigned pursuant to the company's acquisition of Sequana. Mr. Mendelson also
served as Acting General Counsel of Cadence Design Systems, Inc., an electronic
design automation software company, from November 1995 to June 1996. Mr.
Mendelson is currently a director of CoCensys, Inc. and Isis Pharmaceuticals,
Inc.
J. LEIGHTON READ, M.D. -- DIRECTOR SINCE 1998
Dr. Read, 48, has been Chairman of the Board and Chief Executive Officer of
Aviron, a biopharmaceutical company founded by Dr. Read, since 1992. From 1991
to 1993, he was a partner in Interhealth Limited, an investment partnership. In
1987, Dr. Read co-founded Affymax N.V. with Dr. Alejandro Zaffaroni, serving
initially as its Executive Vice President and Chief Operating Officer and later
as President of the Pharma Division and as a Managing Director of the parent
company. Dr. Read has served on the boards of a number of private biotechnology
companies and currently serves on the board of CV Therapeutics, Inc. He is also
a member of the Executive Committee of the Biotechnology Industry Organization
Board of Directors and Emerging Companies Section Governing Body.
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<PAGE> 10
BOARD COMMITTEES
Audit Committee: Reviews Axys' auditing, accounting, financial reporting
and internal audit functions and meets with the company's independent auditors
from time to time. Also recommends the selection of independent auditors to the
Board. All members are non-employee directors. The members of the audit
committee are Mr. Lerner and Dr. Read.
Compensation Committee: Reviews and approves the compensation of Axys'
executive officers and is responsible for the company's employee benefit plans
and programs, including their establishment, modification and administration.
All members are non-employee directors. The members of the compensation
committee are Dr. Evnin, who is retiring from the Board after the annual
meeting, and Mr. Kailian.
Option Committee: Reviews and administers the company's 1989 Stock Plan and
1997 Equity Plan for stock option grants to non-executive officer employees. The
Option Committee has the authority to approve the price and terms of these
options, within the limits set by the Board. Mr. Walker is the only member of
this committee.
During 1998, there were six regular meetings of the Board, one meeting of
the Compensation Committee and two meetings of the Audit Committee. Each of the
director-nominees who served on the Board of Axys in 1998 attended at least 75
percent of all Board meetings, except Dr. Kennedy who attended 66 percent of the
Board meetings. Collectively, the Board and committee members attended an
average of 94 percent of all of the Board and applicable committee meetings
held.
The Board does not have a Nominating Committee or a committee serving a
similar function. Nominations of directors are considered by the Board as a
whole.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
COMPENSATION. In 1998, compensation for non-employee directors was $12,000
per year, payable at the rate of $3,000 per quarter, plus reimbursement of
expenses. Director Walker, who is an employee of the company, receives no
compensation for his services as a director.
STOCK OPTIONS. According to the company's Non-Employee Directors' Stock
Option Plan established in 1994, non-employee directors of Axys receive
automatic stock option grants. Options granted under this plan are non-qualified
stock options. The terms of the Non-Employee Directors' Stock Option Plan
provide that each non-employee elected for the first time to Axys' Board will be
granted an option to purchase 30,000 shares of common stock upon the date of his
or her initial election. On the date of each annual meeting subsequent to a
director's election, each non-employee Board member that has served for at least
three months, is automatically granted an option to purchase 5,000 shares of
common stock of the company. No other options may be granted at any time under
this plan. The exercise price of options that are granted under the plan is 100%
of the fair market value of the common stock on the date of the option grant.
Options granted under the plan vest at a rate of 25% per year for four years.
The term of the options that are granted is ten years. In the event of a
change-in-control of Axys, such as a merger with or into another corporation or
a consolidation, the vesting of these options will accelerate and the options
will expire if not exercised prior to the change-in-control.
Each non-employee director of the company who had been serving on the Board
for at least three months prior to the 1998 annual meeting received an automatic
grant of an option to purchase 5,000 shares of common stock under the
Non-Employees Directors' Stock Option Plan, at an exercise price per share of
$7.63. Mr. Lerner and Dr. Read each received an automatic grant of an option to
purchase 30,000 shares of Common Stock at an exercise price of $7.63 per share,
upon their initial election to the Board in 1998. As of February 28, 1999, none
of the options granted under the plan had been exercised.
January 1998 Acceleration of Certain Options. In January 1998, in
connection with the resignations from the Board by Dr. Hans Sievertsson and Mr.
Alan Mendelson pursuant to the acquisition of Sequana Therapeutics, Inc., the
Board accelerated the vesting of all outstanding options to purchase common
stock of the company held by Dr. Sievertsson and Mr. Mendelson and extended the
exercise period for the options to three years following their resignations,
provided that Dr. Sievertsson and Mr. Mendelson remain available during this
period to provide consulting services to the company.
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AXYS STOCK OWNERSHIP OF BENEFICIAL OWNERS,
DIRECTORS AND MANAGEMENT
The following table provides information regarding the ownership of Axys'
common stock as of February 28, 1999. Included in the table are each director
and nominee for director of the company, each executive officer named in the
Executive Compensation table (page 13), all directors and executive officers as
a group, and stockholders that are known to be beneficial owners of more than
five percent of Axys' common stock.
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIAL
OWNERSHIP PERCENT OF
BENEFICIAL OWNER SHARES TOTAL(1)
---------------- ---------- ----------
<S> <C> <C>
Zesiger Capital Group LLC.............................. 1,967,300 6.45%
320 Park Avenue, 30th Floor
New York, New York 10022
John P. Walker(2)...................................... 183,186 *
Daniel H. Petree, J.D.(3).............................. 25,705 *
Timothy J.R. Harris, Ph.D.(4).......................... 87,675 *
Michael C. Venuti, Ph.D.(5)............................ 7,871 *
Natalie J. Warner M.D.(6).............................. 26,840 *
Ann M. Arvin, M.D.(7).................................. 7,500 *
Brook H. Byers(8)...................................... 37,231 *
Anthony B. Evnin, Ph.D.(9)............................. 48,425 *
Vaughn M. Kailian(10).................................. 17,824 *
Donald Kennedy, Ph.D.(11).............................. 8,750 *
Irwin Lerner(12)....................................... 79,808 *
Alan C. Mendelson(13).................................. 51,329 *
J. Leighton Read, M.D.(14)............................. 10,500 *
All directors and executive officers as a group
(15 persons)(15)..................................... 609,913 2.00%
</TABLE>
- ---------------
* Less than 1 percent
(1) Percentage of beneficial ownership is based on 30,513,653 shares of common
stock outstanding as of February 28, 1999 and includes shares which certain
executive officers, directors and principal stockholders of the company
have the right to acquire within 60 days after February 28, 1999 pursuant
to outstanding options and warrants.
(2) Includes 3,542 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999, 4,110 shares held in the
Walker Living Trust, 1,431 shares held in the Axys Pharmaceuticals, Inc.
401(k) Plan Trust and 8,574 shares beneficially owned by Mr. Walker's wife
as trustee of educational trusts for his children.
(3) Includes 16,875 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999, 2,425 shares held by
Daniel H. Petree and Susan M. Toeniskoetter, Trustees u/a/d 7/25/97, 2
shares held by Mr. Petree's children and 1,431 shares held in the Axys
Pharmaceuticals, Inc. 401(k) plan.
(4) Includes 12,800 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999.
(5) Includes 1,167 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999.
(6) Includes 15,914 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999 and 1,431 shares held in
the Axys Pharmaceuticals, Inc. 401(k) Plan Trust.
(7) Includes 7,500 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999.
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<PAGE> 12
(8) Includes 4,375 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999. Also includes 670 shares
issuable upon the exercise of a warrant held by Kleiner Perkins Caufield &
Byers VI ("Kleiner Perkins") exercisable within 60 days of February 28,
1999 and 88 shares issuable upon the exercise of a warrant held by KPCB VI
Founders Fund ("KPCB") exercisable within 60 days of February 28, 1999. Mr.
Byers is a general partner of Kleiner Perkins. Mr. Byers disclaims
beneficial ownership of the shares held by Kleiner Perkins except to the
extent of his pro rata interest therein.
(9) Includes 4,375 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999.
(10) Includes 17,824 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999.
(11) Includes 8,750 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999.
(12) Includes 12,083 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999 and 1,350 shares
beneficially owned by Mr. Lerner's wife.
(13) Includes 30,000 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999, 13,500 shares held in the
CGCH&T Trust FBO Mr. Mendelson and 5,000 shares held by Cooley Godward LLP,
of which Mr. Mendelson disclaims beneficial ownership except to the extent
of his pecuniary interest therein.
(14) Includes 7,500 shares issuable upon the exercise of outstanding options
exercisable within 60 days of February 28, 1999.
(15) Includes an aggregate of 150,294 shares issuable upon exercise of
outstanding options and 758 shares issuable upon exercise of warrants
exercisable within 60 days of February 28, 1999. See footnotes 2 through
15.
10
<PAGE> 13
COMPENSATION OF EXECUTIVE OFFICERS
COMPENSATION. The following table shows the compensation of the company's
Chairman and Chief Executive Officer and the four other most highly paid
executive officers of Axys as of December 31, 1998, for the three years ending
December 31, 1998. These executive officers are referred to as the Named
Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
--------------------------------------- COMPENSATION AWARDS
OTHER -------------------------
ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS(#) ($)(2)
--------------------------- ---- ------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John P. Walker...................... 1998 390,000 135,000 261,252(3) 435,000(1) 21,083
Chairman and Chief Executive Officer 1997 361,250 127,300 128,382(3) 100,000 696
1996 310,000 100,500 -- 90,000 720
Daniel H. Petree, J.D. ............. 1998 250,000 65,625 27,945(4) 300,000(1) 5,406
President, Chief Operating Officer 1997 204,500 41,105 15,551(3) 55,000 408
1996 188,000 36,480 14,333(4) 45,000 720
Timothy J.R. Harris, Ph.D.(5)....... 1998 234,570 216,493(6) -- 160,000(1) 1,170
Senior Vice President, 1997 -- -- -- -- --
Research 1996 -- -- -- -- --
Natalie J. Warner, M.D.............. 1998 235,000 50,016 -- 130,000(1) 6,150
Vice President, Medical Affairs 1997 228,000 38,190 -- -- 624
1996 216,000 146,988(7) -- 30,000 720
Michael C. Venuti, Ph.D. ........... 1998 235,000 47,000 -- 197,000(1) 696
Senior Vice President, 1997 210,383 35,510 -- 10,000 425
Research, Preclinical Development 1996 182,500 32,075 -- 30,000 576
and Chief Technical Officer
</TABLE>
- ---------------
(1) Includes stock options which were canceled and regranted in connection with
the company's stock option repricing in 1998, as follows: Mr. Walker,
375,000 shares; Mr. Petree, 200,000 shares; Dr. Harris, 80,000 shares; Dr.
Warner, 80,000 shares; and Dr. Venuti, 147,000 shares. See "Report On
Repricing."
(2) Consists of company matching contributions under the company's 401(k)
retirement plan and life insurance premiums.
(3) Consists of indebtedness forgiven including the interest rate reduction on
one promissory note. See "Employment Agreements and Change-in-Control
Arrangements."
(4) Consists of relocation expenses.
(5) Dr. Harris joined the company in connection with the acquisition of Sequana
Therapeutics, Inc. in January 1998.
(6) Includes a $176,250 one-time lump-sum bonus pursuant to an agreement with
the company entered into in connection with the Sequana Therapeutics, Inc.
acquisition.
(7) Includes a $108,000 one-time lump-sum bonus pursuant to an agreement with
the company entered into in connection with the acquisition of Khepri
Pharmaceuticals, Inc. in December 1995.
11
<PAGE> 14
STOCK OPTION GRANTS AND EXERCISES. The company grants stock options to the
Named Executive Officers under its 1989 Stock Plan and its 1997 Equity Incentive
Plan. The following tables show information regarding options granted to and
exercised by the Named Executive Officers for the year ended December 31, 1998.
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE OR APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN BASE PRICE TERM(1)
OPTIONS GRANTED FISCAL YEAR ($/SH) EXPIRATION -----------------------
NAME (#) (2) (3) DATE 5% ($) 10% ($)
---- --------------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John P. Walker................ 60,000(4) 0.87% 8.375 01/08/08 316,575 798,975
375,000(6) 5.44% 5.00 10/15/08 1,181,250 2,981,250
Daniel H. Petree, J.D......... 100,000(5) 1.45% 8.375 01/08/08 527,625 1,331,625
200,000(6) 2.90% 5.00 10/15/08 630,000 1,590,000
Timothy J.R. Harris, Ph.D..... 80,000(4)(5) 1.16% 8.375 01/08/08 422,100 1,065,300
80,000(6) 1.16% 5.00 10/15/08 252,000 636,000
Natalie J. Warner, M.D........ 50,000(4) 0.73% 8.375 01/08/08 263,812 665,812
80,000(6) 1.16% 5.00 10/15/08 252,000 636,000
Michael C. Venuti, Ph.D....... 50,000(4) 0.73% 8.375 01/08/08 263,812 665,812
147,000(6) 2.13% 5.00 10/15/08 463,050 1,168,650
</TABLE>
- ---------------
(1) Potential realizable value is based on the assumption that the common stock
of the company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the ten-year option term. The
5% and 10% assumed rates of appreciation are mandated by the rules of the
SEC and do not reflect the company's estimate or projection of the future
common stock price.
(2) Based on options to purchase 6,891,918 shares of common stock granted in
1998, 3,643,387 of which represent canceled and repriced options.
(3) Repriced options were granted to the Named Executive Officers and other
executive officers at an exercise price equal to $1.25 over the fair market
value of the company's common stock on the day of the repricing. All other
options were granted at an exercise price equal to $.25 above fair market
value of the company's common stock on the date of grant. Fair market value
is determined by reference to the closing sale price of the common stock on
the Nasdaq National Market.
(4) Vests at the rate of 15% of the shares subject to the option upon the first
anniversary of the grant date and an additional 20%, 25% and 40%,
respectively, on successive one-year anniversaries of the grant date with
respect to the following grants: Mr. Walker, 60,000 shares; Dr. Harris,
40,000 shares; Dr. Warner, 50,000 shares; and Dr. Venuti, 50,000 shares. All
of these options were subsequently cancelled. See footnote 6 below.
(5) Vests in equal monthly installments over four years from the date of the
grant with respect to Mr. Petree's grant and 40,000 of the shares subject to
Dr. Harris' grant.
(6) Represents stock options which were canceled and regranted in connection
with the company's stock option repricing in 1998. See "Report on
Repricing." All options are subject to vesting over a five year period in
equal monthly installments from the date of grant, with the exception of the
following grants: Mr. Walker, 60,000 shares; Dr. Harris, 40,000 shares; Dr.
Warner, 50,000 shares; and Dr. Venuti, 50,000 shares, all of which vest at
the rate of 12% of the shares subject to the option upon the first
anniversary of the grant date and an additional 15%, 18%, 25% and 30%,
respectively, on successive one-year anniversaries of the grant date.
12
<PAGE> 15
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS AT OPTIONS AT
SHARES VALUE FY-END(#) FY-END($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- -------- -------------- ----------------
<S> <C> <C> <C> <C>
John P. Walker........................ -- -- 0/375,000 0/328,125
Daniel H. Petree, J.D................. -- -- 15,000/199,996 3,204/174,996
Timothy J. R. Harris, Ph.D............ -- -- 0/80,000 0/70,000
Natalie J. Warner, M.D................ -- -- 15,405/80,891 55,792/73,586
Michael C. Venuti, Ph.D............... -- -- 0/147,000 0/128,625
</TABLE>
- ---------------
(1) Based on the fair market value of the common stock as of December 31, 1998
($5.875), minus the exercise price, multiplied by the number of shares
underlying the option.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
John Walker's Employment Agreement. Effective February 26, 1999, the
company and Mr. Walker agreed to a two-year extension of his 1997 employment
agreement with the company to serve as the company's Chairman and Chief
Executive Officer. The extension agreement was implemented through a revised
employment agreement (the "1999 employment agreement") which is substantially
identical to Mr. Walker's 1997 employment agreement, except for a 5% increase in
Mr. Walker's base salary over his 1998 base salary; an adjustment in the
interest rate applicable to his outstanding indebtedness to the company to the
then-current applicable federal rate; a two-year extension of the repayment date
for all such indebtedness; and an accompanying extension of the dates on which
the company agrees to forgive such indebtedness upon the condition that Mr.
Walker's employment is continuing on such dates. In brief, Mr. Walker's 1999
employment agreement provides for the following:
- An initial annual base salary of $410,000, retroactive to January 1,
1999.
- An annual bonus of up to fifty percent of Mr. Walker's base salary, if
Mr. Walker achieves certain target goals specified by the Board, and up
to an additional fifty percent for overachievement of those goals.
- A split dollar life insurance policy with a benefit payable to Mr. Walker
of approximately $1.2 million.
- Issuance by Mr. Walker to the company of a new promissory note in the
principal amount of $560,000, with approximately $83,000 in accrued
interest and an interest rate of 4.71%, compounded annually. This new
note is due and payable on January 31, 2003, is full-recourse and is
secured by 130,236 shares of the company's common stock. The new note
replaced a 1997 note from Mr. Walker which pertained to indebtedness owed
to the company in connection with the purchase of his principal
residence.
- On the condition that Mr. Walker continues to provide his services to the
company through January 31, 2003, the entire principal and accrued
interest under the new note will be forgiven by the company, with
$160,000 of principal plus accrued interest being forgiven on February 1,
2000 and the remaining principal and accrued interest being forgiven in
equal amounts each year thereafter, rather than the remaining principal
and accrued interest being forgiven on January 2, 2001 as provided in Mr.
Walker's 1997 employment agreement. Mr. Walker is entitled to a specified
lump-sum tax gross-up payment following each forgiveness date. All
remaining principal and accrued interest under the new promissory note
becomes immediately due and payable upon Mr. Walker's termination of
service for any reason or upon Mr. Walker's breach of a covenant not to
compete with the company.
- The term of the 1999 employment agreement ends on January 31, 2003,
subject to additional one-year extensions unless either the company or
Mr. Walker give notice to the contrary.
13
<PAGE> 16
- Under the 1999 employment agreement, Mr. Walker's employment can be
terminated by Mr. Walker or the company at any time for any reason
whatsoever, with or without "Cause" or advance notice. If the company
terminates Mr. Walker's employment without Cause or if Mr. Walker resigns
for "Good Reason" and Mr. Walker executes an effective release of claims
in favor of the company, he will continue to receive his base salary and
an amount equal to his annual bonus for a period of two years, paid in
installments. In addition, the company will reimburse Mr. Walker for all
costs associated with the continuation of benefits pursuant to COBRA for
the shorter of: (i) two years or (ii) the maximum legal period for which
COBRA would be available to Mr. Walker following his termination. Mr.
Walker will not receive these benefits, or any other benefits under the
1999 employment agreement, if his employment terminates due to his death
or disability, if he is terminated for Cause or if he resigns without
Good Reason.
- Under the 1999 employment agreement, if during or for two years
immediately following Mr. Walker's employment, Mr. Walker, without prior
approval of the company, directly or indirectly engages or prepares to
engage in any activities in competition with the company, or accepts
employment or establishes a business relationship with a business engaged
in or preparing to engage in competition with the company, then (i) a
100,000 share stock option grant originally made to Mr. Walker in August
1997 will, to the extent not previously exercised or terminated pursuant
to its terms, immediately terminate, and (ii) the February 1999 note
issued by Mr. Walker to the company will become immediately due and
payable in full.
- In April 1993, Mr. Walker issued a $200,000 note to the company to
purchase 222,220 shares of the company's Series D Preferred Stock (the
"1993 Loan"). Pursuant to his 1997 employment agreement, Mr. Walker
issued a replacement note for the 1993 Loan in September 1997. In April
1998, pursuant to the terms of Mr. Walker's 1997 employment agreement,
the balance of the 1993 Loan was forgiven. During 1998, the largest
aggregate amount outstanding of principal and interest on Mr. Walker's
indebtedness to the company was $989,248.
Tim Harris' Employment Agreement. The company entered into an employment
agreement with Timothy J.R. Harris, Ph.D., in January 1998, to serve as the
company's Senior Vice President, Research, La Jolla. This agreement provided
for, among other things, (i) a minimum annual base salary of $235,000; (ii) a
bonus of 50% of Dr. Harris' base salary if he remained an employee of the
company for a one-year period from the date of the agreement; and (iii) a bonus
of up to 50% of his base salary on the one year anniversary of the date of the
agreement if certain conditions were met in connection with the success of the
acquisition of Sequana. The agreement also provided for standard benefits and
compensation for Dr. Harris which are comparable with those provided to all of
the company's employees, including participation in the company's stock
incentive and bonus plans.
In January 1999, Dr. Harris resigned from the company. In accordance with
his employment agreement discussed above, the company paid Dr. Harris a lump sum
bonus payment equal to 75% of his base salary, or $176,250, as well as
additional amounts he was entitled to under the company's bonus plan and for
accrued vacation. Dr. Harris received no additional payments upon his departure.
William Newell's Agreement. In June 1998, the company entered into an
agreement with Mr. Newell to serve as Axys' vice president and general counsel.
The agreement provides, among other things, for a starting salary of $225,000
per year and eligibility for a bonus of 25% of his base salary. In addition, Mr.
Newell was granted an option to purchase 75,000 shares of the company's common
stock at a purchase price equal to the fair market value of the stock on the
date of grant. The option will vest over four years at the rate of 12.5% of the
shares after six months from the date of grant and then monthly thereafter. In
the event of a change in control of the company, the vesting on any then
unvested shares will be accelerated, provided that Mr. Newell's services are not
deemed to be critical to an acquirer of the company. In addition, the agreement
provides that Mr. Newell would be recommended for an additional stock option
grant in the first quarter of 1999, as to which Mr. Newell received a grant of
an option to purchase 40,000 shares of the company's common stock at a price
equal to the fair market value of the stock on the date of grant. The option
will vest over four years at a rate of 1/48th per month. The agreement also
provides that the company will pay a portion of Mr. Newell's current life
insurance premiums and that Mr. Newell will receive standard company benefits.
14
<PAGE> 17
REPORT OF THE COMPENSATION COMMITTEE
WHAT IS THIS REPORT?
The SEC requires that public companies disclose all procedures and
mechanisms that are used to establish officer compensation. This report explains
the criteria that the company used to determine the compensation of its officers
in 1998.
WHO SERVES ON THE COMPENSATION COMMITTEE?
The Compensation Committee consists of directors who are not employees of
the company. In January 1998, the Committee was composed of Mr. Byers and Dr.
Evnin. In February 1998, Mr. Kailian replaced Mr. Byers on the Committee. Mr.
Evnin will continue on the Committee until the annual meeting on May 26, 1998,
at which time a successor will be appointed.
WHAT ARE THE COMPENSATION COMMITTEE'S RESPONSIBILITIES?
The Compensation Committee is responsible for establishing and implementing
policies and programs to compensate the company's executives. The Committee met
one time in 1998 to review and recommend compensation levels for all executive
officers for 1998 and one time in January 1999 to determine and recommend
bonuses for 1998 and certain stock grants. The Committee submits its
recommendations to the entire Board for approval. The Board adopted the
Committee's recommendations without modification.
WHAT IS OUR COMPENSATION PHILOSOPHY?
The primary objective of our executive compensation program is to attract,
retain and reward executive officers and other employees who contribute to the
long-term success of the company and to motivate those individuals to enhance
long-term stockholder value. The Compensation Committee accomplishes this by:
1) Establishing salaries competitive with those of leading biotechnology
and pharmaceutical companies with which the company competes for talent.
2) Maintaining incentive opportunities designed to motivate and reward
achievement of the company's and each individual's goals. These
incentives consist of cash bonuses and stock options, and are designed
to bring the total compensation for key employees to competitive levels
within the industry.
3) Providing significant equity-based incentives for executives and other
key employees to ensure that these individuals are motivated over the
long term and respond to challenges and opportunities as owners and not
just as employees.
HOW IS EXECUTIVE BASE COMPENSATION DETERMINED?
SALARY. The base salary for all employees, including executive officers, is
based upon a review of an employee's salary level against the compensation of
employees in similar positions in other biotechnology and pharmaceutical
companies, in accordance with a published survey of the employee compensation of
companies of comparable size to the company and in the same geographical region.
Base salaries are targeted at the third quartile for comparable positions in the
other companies. Salary adjustments for 1998 were based on each individual's
performance ranking. In December 1997, based on this information and on each
individual's performance in 1997, the Compensation Committee recommended 1998
base salary increases of 2.5% to 7.0% over 1997 base salaries for executives
officers, including the Chief Executive Officer. In establishing base salaries
for the company's executive officers, the Compensation Committee carefully
reviewed the progress made in the programs headed by each executive officer in
1997 and the dependence of the company on these executive officers for the
scientific and business development of their respective programs.
15
<PAGE> 18
IS THERE A BONUS PROGRAM?
CASH. A portion of the cash compensation is paid to the company's executive
officers and other senior management personnel in the form of an annual bonus.
Bonus payments for 1998 were based 50% on the attainment of goals established
for the company as a whole, and 50% on the attainment of goals established for
each executive officer, and were limited (except in cases of overachievement) to
a percentage of each executive officer's base salary, which ranged from 25% to
50% of an executive officer's respective base salary. General corporate goals in
1998 included, among other items, the integration of the company with Sequana
Therapeutics, Inc., achievement of the company's financial targets, the progress
of the company's preclinical and clinical programs and the establishment of
agricultural and pharmacogenomics joint ventures. Based on its review of the
degrees of attainment of company and personal goals, the Compensation Committee
recommended and the Board approved individual bonuses ranging from 69% to 87.5%
(applied pro rata where appropriate) of the executive officers' respective
targeted bonus amounts.
STOCK OPTIONS. One of the primary components of Axys' long-term incentive
program are its stock option plans. Through stock option grants that are based
on performance, executives receive significant equity incentives to build
long-term stockholder value. Stock option grants are also used to retain these
officers in light of the increasing demands placed on them due to the company's
growth. The grants typically vest over a four-year period and are generally set
at the fair market value of Axys' common stock on the date of the grant. The
Committee does consider the number of options previously granted to an executive
in determining the size of a new grant. In 1998 all Named Executive Officers
received stock option grants. In February 1999, additional stock options were
granted to Mr. Walker, Mr. Petree and Dr. Venuti, at levels reflecting among
other things their contributions to the achievement of the company's and their
personal 1998 goals.
HOW IS THE CHIEF EXECUTIVE OFFICER COMPENSATED?
Mr. Walker, Axys' Chief Executive Officer, joined the company in February
1993. His initial salary, potential bonus and stock option grants were
determined on the basis of negotiations between the Board and Mr. Walker, while
taking into account his experience, competitive salary information and market
conditions at the time. In 1997, the Company entered into an employment
agreement with Mr. Walker, as discussed earlier in this proxy statement. Based
on the same criteria described above for all executive officers of the company,
the Compensation Committee recommended an increase of 2.5% in Mr. Walker's base
salary for 1998 over his 1997 base salary, which became effective in mid-1997.
Other compensation in the form of forgiveness of indebtedness and the
procurement of certain life insurance was paid in accordance with the terms of
the 1997 employment agreement. Also in accordance with the company's bonus
program outlined above, Mr. Walker was additionally eligible for a targeted
bonus of 50% of his 1998 base salary. In determining Mr. Walker's bonus, the
Compensation Committee took into account the extent to which the company had
achieved its goals in 1998, including the clinical progress being made in the
company's programs, the progress being made in the company's preclinical
programs, the successful leveraging of the company's technologies, the
additional partnering activities of the company, the financial performance of
the company and the integration with Sequana. The Compensation Committee also
gave substantial weight to the 1998 performance of the company's common stock.
Based on the relevant factors, the Compensation Committee recommended, and the
Board approved, a bonus of $135,000 for 1998 for Mr. Walker, reflecting 69% of
Mr. Walker's targeted bonus, and a reduced grant of options to purchase 85,000
shares of the company's common stock under the 1997 Equity Incentive Plan, at
the fair market value of the company's common stock on the grant date.The 85,000
shares subject to the option vest over four years from the grant date at the
rate of 1/48th of the shares subject to the option each month following the
grant date.
HOW HAVE WE RESPONDED TO IRS LIMITS ON DEDUCTIBILITY OF COMPENSATION?
The Compensation Committee has reviewed the company's compensation
structure in light of Section 162(m) of the Internal Revenue Code, which limits
the amount of compensation that the company may deduct in determining its
taxable income for any year to $1,000,000 for any of its five most highly
compensated executive officers. In 1998, no executive officer's compensation
exceeded the limitation set by Section 162(m).
16
<PAGE> 19
REPORT ON OPTION REPRICING
In October 1998, the company agreed to exchange then outstanding employee
options to purchase shares of common stock with exercise prices ranging from
$4.31 to $15.59, for new options to purchase shares with exercise prices of
$4.00 per share, or $0.25 above the then fair market value, for non-executive
officer employees, and $5.00 per share, or $1.25 above the then fair market
value, for executive officer employees. Under this program, options to purchase
3,643,387 shares were exchanged, resulting in a decrease in the aggregate
purchase price for the shares from $34,254,046 to $15,560,548.
The company repriced these employee stock options in an effort to retain
and incent employees, consistent with the objectives of its equity incentive
plans, at a time when a significant percentage of employee stock options had
exercise prices that were well above fair market value. The company believes
that stock options are a valuable tool in motivating and retaining employees and
that its outstanding stock options were not serving these purposes. The
repricing was approved by the Board of Directors, a majority of whom are
independent directors. In addition to the repricing at above market prices and
to repricing executive officer options at an exercise price at least 25%
above the then fair market value, the Board required that repriced options be
given an additional year of vesting, which converted the vesting period for all
repriced options from four to five years. Moreover, a one year moratorium on the
exercise of repriced options was also imposed by the Board, except in certain
limited circumstances.
17
<PAGE> 20
Other than as described above, the company has not repriced stock options
in the past ten years. The following table sets forth certain information
concerning the repricing of the options of the Named Executive Officers during
the last ten fiscal years:
TEN YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER MARKET
OF PRICE OF EXERCISE
SHARES STOCK AT PRICE AT NEW LENGTH OF ORIGINAL
UNDERLYING TIME OF TIME OF EXERCISE OPTION TERM
OPTIONS REPRICING REPRICING PRICE REMAINING AT DATE
NAME DATE REPRICED(#) ($) ($) ($)(1) OF REPRICING
---- -------- ----------- --------- --------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
John Walker.................... 10/16/98 25,000 3.75 7.00 5.00 5 years 52 days
Chairman and Chief 10/16/98 50,000 3.75 6.20 5.00 6 years 89 days
Executive Officer 10/16/98 40,000 3.75 14.93 5.00 7 years 134 days
10/16/98 40,000 3.75 14.09 5.00 8 years 58 days
10/16/98 100,000 3.75 13.18 5.00 8 years 317 days
10/16/98 60,000 3.75 8.38 5.00 9 years 85 days
10/16/98 50,000 3.75 8.06 5.00 5 years 234 days
Daniel H. Petree, J.D. ........ 10/16/98 25,000 3.75 6.90 5.00 6 years 163 days
President, Chief Operating 10/16/98 20,000 3.75 14.93 5.00 7 years 134 days
Officer 10/16/98 20,000 3.75 15.36 5.00 7 years 232 days
10/16/98 15,000 3.75 14.09 5.00 8 years 58 days
10/16/98 100,000 3.75 8.38 5.00 9 years 85 days
10/16/98 20,000 3.75 8.06 5.00 6 years 234 days
Timothy J.R. Harris, Ph.D. .... 10/16/98 40,000 3.75 8.38 5.00 9 years 85 days
Senior Vice President, 10/16/98 40,000 3.75 8.38 5.00 9 years 85 days
Research
Natalie J. Warner, M.D. ....... 10/16/98 10,000 3.75 11.30 5.00 7 years 76 days
Vice President, 10/16/98 10,000 3.75 14.93 5.00 7 years 134 days
Medical Affairs 10/16/98 10,000 3.75 14.09 5.00 8 years 58 days
10/16/98 50,000 3.75 8.38 5.00 9 years 85 days
Michael C. Venuti, Ph.D. ...... 10/16/98 15,000 3.75 6.90 5.00 6 years 163 days
Senior Vice President, 10/16/98 15,000 3.75 9.21 5.00 6 years 258 days
Research, Preclinical 10/16/98 10,000 3.75 14.93 5.00 8 years 58 days
Development 10/16/98 10,000 3.75 14.04 5.00 8 years 113 days
and Chief Technical 10/16/98 50,000 3.75 8.38 5.00 9 years 85 days
Officer 10/16/98 10,000 3.75 8.06 5.00 6 years 234 days
</TABLE>
- ---------------
(1) The repricing program provided for a new exercise price equal to the fair
market value of a share of common stock on October 16, 1998 plus $1.25, or
$5.00 per share, for executive officer employees.
The Report of the Compensation Committee and the Report on
Repricing are submitted by the Compensation Committee.
Compensation Committee
Anthony B. Evnin, Ph.D.
Vaughn Kailian
18
<PAGE> 21
RELATIONSHIPS AND TRANSACTIONS YOU SHOULD KNOW ABOUT
Kevin Kinsella's Severance Agreement. Kevin J. Kinsella was the president
and chief executive officer of Sequana Therapeutics, Inc. when Axys acquired
Sequana in January 1998. According to Mr. Kinsella's employment agreement with
Sequana and following the acquisition, certain shares held by Mr. Kinsella were
released from a repurchase option in favor of Sequana. In addition, Sequana and
Mr. Kinsella were parties to a severance agreement. The severance agreement
provided that following an acquisition, if Mr. Kinsella's employment was
terminated voluntarily or involuntarily, Mr. Kinsella was entitled to receive
his then-current base salary and benefits for a period of two years. Axys paid
Mr. Kinsella $520,179 according to this agreement. Furthermore, the severance
agreement provided that upon the closing of the acquisition of Sequana, Sequana
would forgive all principal and outstanding interest owed by Mr. Kinsella to
Sequana pursuant to a promissory note in the principal amount of $187,500. The
total amount forgiven on this loan was $228,775.
Irwin Lerner's Consulting Agreement. In April 1998, the company entered
into a consulting agreement with Irwin Lerner, a director of the company,
pursuant to which Mr. Lerner agreed to provide guidance to the company in
strategic scientific and business areas and to serve on the board of directors
of Genos Biosciences, Inc., a joint venture between the company and Memorial
Sloan-Kettering Cancer Center. Mr. Irwin's compensation pursuant to the
agreement is $2,500 per month. Pursuant to the agreement, Mr. Irwin also
received a stock option grant of 20,000 shares of the company's common stock on
May 27, 1998 under the company's 1989 Stock Option Plan, at a purchase price of
$7.625 per share, the fair market value of the company's common stock on the
grant date. The agreement may be terminated by either party upon 30 days written
notice. The stock option grant is subject to vesting over four years at the rate
of 1/48th of the shares subject to the option each month from the grant date.
Indemnification Agreements. The company's Bylaws provide that Axys will
indemnify its directors and executive officers and may indemnify its other
officers, employees and other agents to the fullest extent permitted by Delaware
law. The company is also empowered under its Bylaws to enter into reimbursement
contracts with its directors and officers and to purchase insurance on behalf of
any person it is required or permitted to indemnify. The company has entered
into indemnity agreements with each of its directors and officers. See
"Executive Compensation -- Employment Agreements and Change-in-Control
Arrangements."
GENERAL DESCRIPTION OF THE EMPLOYEE STOCK PURCHASE PLAN
In October 1993, the Board of Directors adopted, and the stockholders later
approved, the Employee Stock Purchase Plan (ESPP) and authorized the issuance of
150,000 shares of the company's common stock under the ESPP. In 1996, the Board
and the stockholders approved an additional 100,000 shares of the company's
common stock for issuance under the ESPP. In 1998, the Board and the
stockholders approved 400,000 more shares issuable in the ESPP. At February 1,
1999, a total of 508,751 shares had been issued under the plan and only 141,249
shares remained for the grant of future rights under the plan. During 1998,
189,145 shares were purchased under the ESPP at a weighted average price of
$5.77 per share. Of this amount, shares were purchased in the amounts and at the
weighted average price per share as follows: John Walker 2,612 shares ($6.02),
Daniel Petree 3,891 shares ($5.94), Timothy Harris 2,391 shares ($5.31), Natalie
Warner 3,535 shares ($6.08), Michael Venuti 1,887 shares ($5.97); all executive
officers as a group 15,950 shares ($5.90), and all employees (excluding
executive officers) as a group 173,195 ($5.76).
WHY DOES AXYS OFFER THE ESPP? The purpose of the ESPP is to provide a means
by which employees of the company (and any parent or subsidiary of the company
designated by the Board of Directors) may be given an opportunity to purchase
common stock of the company through payroll deductions. Axys established the
ESPP to encourage employees to become stockholders of the company, to assist the
company in retaining the services of its employees, to secure and retain the
services of new employees, and to provide incentives for employees to work hard
for the success of the company. All of the company's full-time employees who
have been employed by the company for three months are eligible to participate
in the ESPP.
WHO IS IN CHARGE OF THE ESPP? The ESPP is administered by the Board of
Directors, which has the authority to explain and interpret the ESPP. The Board
has the power, subject to the provisions of the ESPP,
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<PAGE> 22
to determine when and how rights to purchase common stock of the company will be
granted, the provisions of each offering of such rights (which do not have to be
identical), and whether any parent or subsidiary of the company will be eligible
to participate in the plan. The Board of Directors can delegate administration
of the ESPP to a committee and has delegated this authority to the Compensation
Committee.
WHAT IS THE OFFERING PERIOD? Under the ESPP, from time to time the Board
may institute offering periods during which all eligible employees may
periodically purchase common stock of the company. Each offering may last no
more than 27 months. The Board determines the duration of each offering period
and establishes one or more purchase dates during the offering on which shares
will be purchased by participating employees. Currently, the Board has approved
an offering period of 24 months. If on a purchase date during an offering period
the price of the company's common stock is lower than it was at the start of the
offering period, then that offering period will automatically terminate on the
purchase date and a new offering period will begin on the following day.
Currently, the Board has established purchase dates which occur every six
months, on each July 31 and January 31.
WHO IS ELIGIBLE TO PARTICIPATE IN THE ESPP? Generally, any employee who is
regularly scheduled to work at least 20 hours per week and for five months per
calendar year for the company (or for any parent or subsidiary of the company)
on the first day of the offering period is eligible to participate in that
offering, as long as the employee has been employed continuously for a minimum
period of time established by the Board (which period may not exceed two years).
Currently, a continuous period of employment of three months is required for
otherwise eligible employees to participate in the ESPP. In addition, the Board
may allow newly eligible employees to begin participating in the ESPP during an
ongoing offering on dates established by the Board.
No employee may be granted rights under the ESPP that would cause the
employee to own, directly or indirectly, stock possessing 5% or more of the
total combined voting power of the company. Also, no employee may be granted
rights that would permit the purchase of more than $25,000 worth of common stock
(determined by using the fair market value of the shares at the time such rights
are granted) under all employee stock purchase plans of the company for each
calendar year in which the rights are outstanding. Under current and prior
offerings, the Board has limited the amount of common stock that any participant
could purchase to 5,000 shares per offering. Effective with the next offering
under the ESPP, which is scheduled to begin on August 1, 1999, a participant may
purchase on each purchase date during an offering no more than the number of
shares of common stock determined by dividing $12,500 by the fair market value
of the common stock on the first day of the offering.
HOW DOES AN EMPLOYEE PARTICIPATE IN THE ESPP? Eligible employees become
participants in the plan by delivering to the company, prior to the date
selected by the Board, an agreement authorizing payroll deductions from their
total compensation during the offering. The ESPP permits payroll deductions of
up to 15%, but under the offerings made to date the Board has limited payroll
deductions to no more than 10% of an employee's total compensation.
HOW IS THE PURCHASE PRICE DETERMINED? The purchase price per share at which
common stock is sold in an offering under the ESPP is the lower of (a) 85% of
the fair market value of a share of common stock on the date of commencement of
the offering, or (b) 85% of the fair market value of a share of common stock on
the applicable purchase date for the purchase of such common stock.
HOW IS THE ACTUAL PURCHASE MADE? The purchase price of the common stock is
accumulated by payroll deductions over the period of the offering. Payroll
deductions of a participant begin on the date specified in the offering and may
be increased or reduced on the date or dates specified in the offering. All
payroll deductions made for a participant are credited to the participant's
account under the plan and are deposited with the general funds of the company.
A participant may not make any additional payments into the account unless
permitted under the terms of an offering.
By executing an agreement to participate in an offering under the ESPP, the
employee becomes entitled to purchase shares under the offering. In connection
with offerings made under the plan, the Board specifies a maximum number of
shares any participant may be granted the right to purchase and the maximum
number
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<PAGE> 23
of shares that may be purchased by all participants. If the total number of
shares to be purchased upon exercise of rights granted in the offering would
exceed the maximum total number, the Board would make a pro rata allocation of
shares available in a uniform and equitable manner. Unless the participant's
participation is discontinued, the right to purchase shares is exercised
automatically on each purchase date at the applicable price.
HOW DOES AN EMPLOYEE WITHDRAW FROM THE ESPP? A participant may withdraw
from an offering by terminating his or her payroll deductions for the offering
and delivering to the company a notice of withdrawal from the offering. Upon a
participant's withdrawal from an offering, the company will return, without
interest, the participant's accumulated payroll deductions, less any accumulated
deductions previously applied to the purchase of stock on the participant's
behalf. A participant who withdraws from an offering may not again participate
in that offering but may participate in subsequent offerings under the plan.
WHAT HAPPENS IF THE EMPLOYEE IS TERMINATED? Rights granted according to any
offering under the ESPP terminate immediately upon an employee's cessation of
employment for any reason, and the company will distribute to the participant,
without interest, all of the employee's accumulated payroll deductions under the
plan.
ARE THERE RESTRICTIONS ON TRANSFERRING THE ESPP SHARES? Rights granted
under the plan are not transferable and may be exercised only by the person to
whom the rights are granted.
WHAT IS THE DURATION OF THE ESPP AND CAN IT BE AMENDED OR TERMINATED? The
Board may suspend or terminate the plan at any time. Unless terminated earlier,
the plan will terminate on December 31, 2002. The Board may amend the plan at
any time. To be effective any amendment of the plan must be approved by the
stockholders within 12 months of its adoption by the Board if the amendment
would (a) increase the number of shares of common stock reserved for issuance
under the plan, (b) modify the requirements relating to eligibility for
participation in the plan, or (c) modify any other provision of the plan in a
manner that would materially increase the benefits accruing to participants
under the plan, if such approval is required in order to comply with the
requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as
amended, or Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code").
Rights granted before amendment or termination of the plan will not be
altered or impaired by any amendment or termination of such plan without the
consent of the employee to whom such rights were granted.
WHAT HAPPENS IF THERE IS A CHANGE IN CONTROL OF AXYS? In the event there is
a change in control in the company, then, as determined by the Board in its sole
discretion, the surviving corporation either will assume the rights under the
plan or substitute similar rights, or the purchase date under any ongoing
offering will be accelerated such that the outstanding rights may be exercised
immediately prior to any such event.
WHAT ARE THE TAX IMPLICATIONS OF PARTICIPATING IN THE ESPP? Rights granted
under the plan are intended to qualify for the favorable federal income tax
treatment afforded rights granted under an employee stock purchase plan that
qualifies under Section 423 of the Code. A participant will be taxed on amounts
withheld for the purchase of shares as if such amounts were actually received.
Other than this, no income will be taxable to a participant until the
participant disposes of the shares acquired under the ESPP. The tax payable upon
such a disposition will depend upon the holding period of the purchased shares.
If the shares are sold at least two years after the beginning of the offering
period during which they were purchased and at least one year after the stock is
transferred to the participant, then the lesser of (a) the excess of the fair
market value of the stock at the time of such disposition over the purchase
price or (b) the excess of the fair market value of the stock as of the
beginning of the offering period over the exercise price will be treated as
ordinary income. Any further gain or any loss will be taxed as a long-term
capital gain or loss. Capital gains currently are generally subject to lower tax
rates than ordinary income. The maximum capital gains rate for federal income
tax purposes is 28% while the maximum ordinary rate is effectively 39.6% at the
present time.
If the stock is sold before the expiration of either of the holding periods
described above, then the excess of the fair market value of the stock on the
purchase date over the purchase price will be treated as ordinary income at the
time of such disposition, and the company may, in the future, be required to
withhold income
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<PAGE> 24
taxes relating to such ordinary income from other payments made to the
participant. The balance of any gain will be treated as capital gain. Even if
the stock is later disposed of for less than its fair market value on the
purchase date, the same amount of ordinary income is attributed to the
participant, and a capital loss is recognized equal to the difference between
the sales price and the fair market value of the stock on such purchase date.
Any capital gain or loss will be long or short-term depending on whether the
stock has been held for more than one year.
There are no federal income tax consequences to the company by reason of
the grant or exercise of rights under the plan. The company is entitled to a
deduction to the extent amounts are taxed as ordinary income to a participant
(subject to the requirement of reasonableness, the provisions of Section 162(m)
of the Code, and the satisfaction of a tax reporting obligation).
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<PAGE> 25
PERFORMANCE GRAPH
The graph below shows a five-year comparison of cumulative total returns
from an initial $100 investment in Axys, the Nasdaq Stock Market-U.S. Index and
the AMEX Biotechnology Index. All values include reinvestment of dividends,
except for Axys' values because Axys has never paid dividends.
<TABLE>
<CAPTION>
AXYS NASDAQ US INDEX AMEX
PHARMACEUTICALS --------------- BIOTECHNOLOGY
INC INDEX
--------------- -------------
<S> <C> <C> <C>
Dec 93 100.00 100.00 100.00
Dec 94 106.12 97.75 70.88
Dec 95 220.41 138.26 115.54
Dec 96 220.41 170.01 124.63
Dec 97 136.73 208.58 140.28
Dec 98 95.92 293.21 159.90
</TABLE>
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the annual meeting. If any other matters are properly brought
before the meeting, it is the Board's intention to vote on the matters in
accordance with the Board's best judgment.
By Order of the Board of Directors
William J. Newell
Vice President, General Counsel and
Secretary
April 23, 1999
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<PAGE> 26
DIRECTIONS TO AXYS
FROM THE NORTH (SAN FRANCISCO):
- Take 101 South to the Grand Avenue exit.
- At the first stop light, turn left on Airport Boulevard.
- Turn left at the next stop light onto East Grand Avenue.
- Continue east until you reach Kimball Way (approximately 1 mile).
- Make a right turn on Kimball Way and you will be at 180 Kimball Way, a
two-story gray and blue building.
FROM THE SOUTH (SAN FRANCISCO INTERNATIONAL AIRPORT):
- Take 101 North to South San Francisco Grand Avenue exit (about 3 miles).
- Turn right at the end of the off ramp.
- Continue to follow East Grand Avenue for approximately 1 mile, passing
two stoplights.
- Make a right turn on Kimball Way and you will be at 180 Kimball Way, a
two-story gray and blue building.
24
<PAGE> 27
PROXY
AXYS PHARMACEUTICALS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON MAY 26, 1999
John P. Walker and Frederick J. Ruegsegger, or either of them, each with full
power of substitution, are hereby authorized to represent and vote as designated
on the reverse side all of the shares of the undersigned at the Annual Meeting
of Stockholders of Axys Pharmaceuticals, Inc. to be held on Wednesday, May 26,
1999, at 11:30 a.m. local time, at the company's offices located at 180 Kimball
Way, South San Francisco, California, or at any adjournment or postponement of
the Annual Meeting, with all powers that the undersigned would possess if
personally present with respect to the following matters and with discretionary
authority as to any and all other matters that may properly come before the
meeting.
Shares represented by this proxy will be voted as directed by the stockholders.
If no directions are indicated, the proxies will have authority to vote FOR the
Election of Directors and FOR Proposals 2 and 3.
(Continued on reverse side)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 28
Please mark
your votes as /X/
indicated in
this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
1. ELECTION OF DIRECTORS FOR WITHHOLD
FOR ALL
/ / / /
AUTHORITY TO VOTE FOR ANY NOMINEE MAY BE WITHHELD BY LINING THROUGH SUCH
NOMINEE'S NAME BELOW.
John P. Walker, Ann M. Arvin, M.D.,
Vaughn M. Kailian, Donald Kennedy, Ph.D.,
Irwin Lerner, Alan C. Mendelson, J.D.,
J. Leighton Read, M.D.
2. To ratify the selection of Ernst & Young LLP as independent auditors of Axys
for its fiscal year ending December 31, 1999.
FOR AGAINST ABSTAIN
/ / / / / /
3. Approval of a 500,000 share increase in the number of shares of common stock
authorized for issuance under Axys' Employee Stock Purchase Plan.
FOR AGAINST ABSTAIN
/ / / / / /
4. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
Signature(s) Date
------------------------------------------ ---------------
NOTE: Please sign as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
