<PAGE>
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:
[_] 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 Section 240.14a-11(c) or Section 240.14a-12
Summit Medical Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] 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 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
SUMMIT MEDICAL
SYSTEMS, INC.
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343-9106
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of
Shareholders of Summit Medical Systems, Inc. (the "Company") to be held at the
Company's offices, 10900 Red Circle Drive, Minnetonka, Minnesota, on May 21,
1998, at 3:00 p.m. (Minneapolis time).
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. Following the formal business
portion of the Annual Meeting, there will be a report on the operations of the
Company and shareholders will be given the opportunity to ask questions. At your
earliest convenience, please mark, sign and return the accompanying proxy card
in the enclosed postage pre-paid envelope. We hope you will be able to attend
the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please complete,
sign, date and mail the enclosed proxy card promptly. If you attend the Annual
Meeting, you may revoke such proxy and vote in person if you wish, even if you
have previously returned your proxy card. If you do not attend the Annual
Meeting, you may still revoke such proxy at any time prior to the Annual Meeting
by providing written notice of such revocation to Paul Johnson, Secretary and
Chief Financial Officer of the Company. YOUR PROMPT COOPERATION WILL BE GREATLY
APPRECIATED.
Sincerely,
/s/ Barbara A. Cannon
Barbara A. Cannon
President and Chief Executive Officer
Minnetonka, Minnesota
April 17, 1998
[LOGO]
<PAGE>
SUMMIT MEDICAL
SYSTEMS, INC.
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343-9106
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 21, 1998
TO THE SHAREHOLDERS OF SUMMIT MEDICAL SYSTEMS, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of
Summit Medical Systems, Inc., a Minnesota corporation (the "Company"), will be
held at the Company's offices, 10900 Red Circle Drive, Minnetonka, Minnesota, on
May 21, 1998, 3:00 p.m., (Minneapolis time).
The Annual Meeting is being held for the following purposes:
1. To elect six directors, each to serve for a one-year term or
until his or her respective successor is duly elected and
qualified.
2. To ratify the selection of the Company's independent public
accountants for the fiscal year ending December 31, 1998.
3. To transact such other business as may properly come before
the meeting or any adjournment thereof.
ONLY SHAREHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON MARCH 31, 1998,
WILL BE ENTITLED TO NOTICE OF AND TO VOTE AT THE MEETING AND ANY ADJOURNMENT
THEREOF. WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE ANNUAL MEETING, PLEASE
SIGN AND RETURN THE ACCOMPANYING FORM OF PROXY IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE AT YOUR EARLIEST CONVENIENCE. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY
REVOKE SUCH PROXY AND VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY CARD. IF YOU DO NOT ATTEND THE ANNUAL MEETING, YOU MAY STILL
REVOKE SUCH PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING BY PROVIDING WRITTEN
NOTICE OF SUCH REVOCATION TO PAUL JOHNSON, SECRETARY AND CHIEF FINANCIAL OFFICER
OF THE COMPANY. YOUR PROMPT COOPERATION WILL BE GREATLY APPRECIATED.
BY ORDER OF THE
BOARD OF DIRECTORS,
/s/ Barbara A. Cannon
Barbara A. Cannon
President and Chief Executive Officer
Minnetonka, Minnesota
April 17, 1998
[LOGO]
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343-9106
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 21, 1998
-----------
SOLICITATION OF PROXIES
This Proxy Statement is furnished to shareholders of Summit Medical
Systems, Inc. (the "Company"), in connection with the solicitation of proxies
for use at the Annual Meeting of Shareholders (or any adjournment thereof) to be
held at the Company's principal executive offices, 10900 Red Circle Drive,
Minnetonka, Minnesota, at 3:00 p.m. (Minnesota time), on May 21, 1998 (the
"Annual Meeting"), for the purposes set forth in the accompanying Notice of
Annual Meeting. The accompanying proxy is being solicited by the Board of
Directors of the Company. This Proxy Statement and the accompanying form of
proxy are being mailed to shareholders commencing on or about April 17, 1998.
The cost of preparing, assembling and mailing the Notice of Annual
Meeting, this Proxy Statement and the form of proxy, including the reimbursement
of banks, brokers and other nominees for forwarding proxy materials to
beneficial owners, will be borne by the Company. Proxies may also be solicited
personally or by telephone by directors, officers and employees of the Company
who will receive no additional compensation.
VOTING, EXECUTION AND REVOCATION OF PROXIES
Only shareholders of record at the close of business on March 31, 1998,
the record date, will be entitled to notice of and to vote at the Annual
Meeting. On March 31, 1998, the Company had 9,617,429 shares of common stock,
$.01 par value (the "Common Stock"), outstanding and entitled to vote at the
Annual Meeting. Each share of Common Stock entitles the holder to one vote on
all matters to come before the Annual Meeting. There is no cumulative voting.
Shares represented by a proxy will be voted in the manner directed by
the shareholder. If no direction is made, the proxy will be voted (i) for the
election of the nominees for director named in this Proxy Statement, (ii) to
ratify the selection of the Company's independent public accountants for the
fiscal year ending
<PAGE>
December 31, 1998, and (iii) in accordance with the judgment of the persons
named in the proxy as to such other matters as may properly come before the
Annual Meeting. If a shareholder returns a proxy and abstains from voting on any
matter, or, in the case of the election of directors withholds authority to vote
with respect to any or all nominees, the shares represented by such proxy will
be considered present for purposes of determining the presence of a quorum at
the Annual Meeting and as unvoted, although present and entitled to vote, for
purposes of determining the approval of each matter as to which the shareholder
has abstained or withheld authority. If a broker submits a proxy which indicates
that the broker does not have discretionary authority as to certain shares to
vote on one or more matters, those shares will be counted as shares that are
present for purposes of determining the presence of a quorum at the Annual
Meeting, but will not be considered as present and entitled to vote with respect
to such matters.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD PROMPTLY. IF YOU ATTEND THE ANNUAL
MEETING, YOU MAY REVOKE SUCH PROXY AND VOTE IN PERSON IF YOU WISH, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. IF YOU DO NOT ATTEND THE ANNUAL
MEETING, YOU MAY STILL REVOKE SUCH PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING
BY PROVIDING WRITTEN NOTICE OF SUCH REVOCATION TO THE COMPANY. ANY SUCH WRITTEN
NOTICE OF REVOCATION OR SUBSEQUENTLY DATED PROXY SHOULD BE MAILED OR DELIVERED
TO PAUL JOHNSON, SECRETARY AND CHIEF FINANCIAL OFFICER, SUMMIT MEDICAL SYSTEMS,
INC., 10900 RED CIRCLE DRIVE, MINNETONKA, MINNESOTA 55343-9106. YOUR PROMPT
CONSIDERATION WILL BE GREATLY APPRECIATED.
A COPY OF THE COMPANY'S 1997 ANNUAL REPORT TO SHAREHOLDERS, WHICH
INCLUDES THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") FOR THE YEAR ENDED DECEMBER 31, 1997,
ACCOMPANIES THIS PROXY STATEMENT.
PROPOSAL 1:
ELECTION OF DIRECTORS
The Board of Directors recommends that the number of directors to be
elected for the coming year be set at six and that shareholders elect the
nominees named below as directors of the Company for the ensuing year and until
their respective successors are elected and qualified. Unless authority to vote
for one or more nominees is withheld as specified in the proxy card, the persons
named in the enclosed form of proxy intend to vote FOR the election of the six
nominees listed below. All of the nominees are members of the present Board of
Directors. Each of the nominees has consented to serve as director, if elected.
If for any reason any nominee shall be unavailable for election to the Board of
Directors, votes will be cast pursuant to authority granted by the enclosed
proxy for such other candidate or
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<PAGE>
candidates as may be nominated by the Board of Directors. The Board of Directors
has no reason to believe that any of the nominees listed below will be unable to
serve if elected to office. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF
THE NOMINEES. The affirmative vote of a majority of the shares of Common Stock
entitled to vote and present in person or by proxy at the Annual Meeting is
required for election of each nominee.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
Certain biographical information regarding the nominees for election as
directors, including the nominee's name, age, principal occupation, business
experience and period of service as a director of the Company is set forth
below.
BARBARA A. CANNON (age 46) - Ms. Cannon has served as a director and President
and Chief Executive Officer since joining the Company in October 1997. Prior to
joining the Company, Ms. Cannon was a consultant from September 1996 to
September 1997. She also served as acting President of Integrated Neuroscience
Consortium, a specialty site management organization start-up, from January 1997
to September 1997. From September 1990 to September 1996, Ms. Cannon was
employed at ClinTrials Research, Inc., a contract research organization formed
in 1990 by Ms. Cannon and others. From January 1993 to September 1996, she
served as Executive Vice President at ClinTrials, where she was responsible for
pharmaceutical, device and biotechnology business development. Prior to that,
she served as Chief Operating Officer of ClinTrial's Nashville operations from
September 1990 to December 1992.
W. HUDSON CONNERY, JR. (age 48) - Mr. Connery has served as a director of the
Company since October 1996. From March 1997 to July 1997, he served as interim
Chairman of the Board. Since June 1995, Mr. Connery has been the Chairman of the
Board, President and Chief Executive Officer of Arcon Healthcare Inc. From
August 1991 to April 1995, Mr. Connery was Senior Vice President and Chief
Operating Officer and a director of Health Trust, the Hospital Company.
RICHARD B. FONTAINE (age 54) - Mr. Fontaine has served as a director of the
Company since April 1998. From March to October 1997, Mr. Fontaine was a
consultant to the Company. Since 1992, Mr. Fontaine has been an adjunct
professor at Westminster College, Salt Lake City, Utah. From June 1995 to
September 1995, he served as interim Chief Executive Officer of Health
Advantage, Inc., a diabetes management subsidiary of VIVRA Specialty Partners,
Inc. In 1993, he served as interim Chief Executive Officer of Vivocell Therapy,
Inc.
PETER T. GARAHAN (age 51) - Mr. Garahan has served as a director of the Company
since April 1998. Since 1997, he has been a Principal of The Ryegate Group, a
consulting firm. From 1992 to 1996, Mr. Garahan was President of Mitchell
Medical
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<PAGE>
(formerly, Medical Decision Systems, Inc.), an information technology provider
of automated medical utilization review products and services to the insurance
industry and since 1994, a division of Mitchell International. From 1994 to
1996, he served as Executive Vice President - Sales and Marketing of Mitchell
International. Mr. Garahan also serves a director of Condor Technology
Solutions, Inc. and National Medical Advisory Services, Inc.
JOHN M. NEHRA (age 49) - Mr. Nehra has served as Chairman of the Board since
July 1997 and a director of the Company since November 1992. Since 1989, Mr.
Nehra has been the managing general partner of Catalyst Ventures, Limited
Partnership ("Catalyst"), a venture capital limited partnership. Since December
1993, Mr. Nehra has also been a general partner of the general partner of New
Enterprise Associates VI, Limited Partnership ("NEA VI"), a venture capital
limited partnership. Mr. Nehra also serves as a director of Iridex Corporation,
a medical instrumentation company.
KENT J. THIRY (age 42) - Mr. Thiry has served as a director of the Company since
May 1994. Since June 1997, Mr. Thiry has served as President, Chief Executive
Officer and a director of VSP Holdings, Inc. From September 1992 to June 1997,
Mr. Thiry served as President, Chief Executive Officer and a director of VIVRA
Incorporated ("VIVRA"). From April 1992 to August 1992, Mr. Thiry served as
President and Co-Chief Executive Officer of VIVRA, and from September 1991 to
March 1992, Mr. Thiry served as President and Chief Operating Officer of VIVRA.
CERTAIN INFORMATION REGARDING THE BOARD OF DIRECTORS
The Board of Directors has established Audit and Compensation
Committees. The Company does not have a nominating committee.
The Audit Committee supervises and reviews the Company's accounting and
financial practices, makes recommendations to the Board of Directors as to the
nomination of independent auditors, confers with the independent and internal
auditors regarding the scope of their proposed audits and their audit findings,
reports and recommendations, reviews the Company's financial controls,
procedures and practices, and approves all non-audit services by independent
auditors. The current members of the Company's Audit Committee are Messrs.
Connery, Nehra and Thiry. The Audit Committee met four times during the year
ended December 31, 1997.
The Compensation Committee determines the compensation for the
President, Chairman of the Board and other executive officers of the Company,
and the incentive compensation for all employees of the Company, subject to
ratification by the Board of Directors. The Compensation Committee also
administers the Company's Stock Option Plan of 1993 (the "1993 Stock Option
Plan"), the 1995
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<PAGE>
Employee Stock Purchase Plan, the 1995 Non-Employee Director Stock Option Plan
(the "1995 Director Plan") and any other stock option plans implemented by the
Company. The current members of the Company's Compensation Committee are Messrs.
Connery, Nehra and Thiry. The Compensation Committee met three times during the
year ended December 31, 1997.
During the year ended December 31, 1997, the Board of Directors of the
Company held six regular meetings and four special meetings. No director
attended fewer than 75 percent of the meetings of the Board of Directors and
committees upon which such director served during the year ended December 31,
1997. The Board of Directors and committees also acted from time to time by
written consent in lieu of meetings.
DIRECTOR COMPENSATION
Non-employee directors receive an annual retainer of $24,000 for
membership on the Board of Directors, which amount includes compensation for
membership on committees of the Board. Directors employed by the Company receive
no fees solely for their service to the Company as director. Under the 1995
Director Plan, upon first being elected to the Board of Directors, all new
directors who are not full-time employees receive an option to purchase 6,666
shares of Common Stock, and each then-current non-employee director
automatically receives an option to purchase an additional 2,000 shares of
Common Stock on the day after each annual meeting of the Company's shareholders.
Stock options are granted under the 1995 Director Plan with an exercise price
equal to the fair market value of the Common Stock at the grant date, vest over
a one-year period and expire after ten years. In addition, the Company
reimburses reasonable travel, lodging and other incidental expenses incurred by
the directors in attending meetings of the Board of Directors and committees.
For his service as interim Chairman of the Board from March 1997 to July 1997,
including overseeing the restatement of the Company's financial statements in
1997 and related filings with the Commission, Mr. Connery received $45,484. For
his services on behalf of the Board of Directors to provide additional Board
oversight of the Company during the transition between chief executive officers,
including directing the search for a new Chief Executive Officer, and his
appointment as Chairman of the Board, on September 30, 1997, Mr. Nehra was
granted an option to purchase 25,000 shares of Common Stock at an exercise price
of $2.3125 per share, which is exercisable for the entire amount of shares on
the first anniversary of the date of grant.
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<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICY
The Compensation Committee sets the compensation policies for all
executive officers of the Company, sets the actual compensation for the
President and Chief Executive Officer and reviews the recommendations of the
President and Chief Executive Officer regarding compensation for other employees
and determines the incentive compensation for all employees of the Company. The
Compensation Committee's goal is to establish compensation policies and programs
that will attract and retain highly qualified executives and that closely align
the financial interests of these executives with long-term shareholder
interests. The Compensation Committee is composed solely of directors who
constitute "non-employee directors" as defined in Rule 16b-3 promulgated under
the Securities Exchange Act of 1934. All decisions of the Compensation
Committee, including the grant of stock options, are submitted to and approved
by the full Board of Directors.
The Compensation Committee intends to make the Company's executive
compensation package competitive with the marketplace, with an emphasis on
compensation in the form of equity ownership, the value of which is contingent
on the long-term market performance of the Company's Common Stock. The
Compensation Committee also seeks to control the Company's fixed salary costs
and to enhance the Company's annual performance by providing executive officers
with opportunities to earn annual cash bonuses for achieving Company and
individual performance goals. In establishing the Company's compensation
policies, the Compensation Committee also considers information regarding
compensation levels and practices at other companies in the medical and software
industries, which the Compensation Committee regards as comparable to the
Company. Although the Compensation Committee does not establish specific targets
for compensation of the Company's executive officers relative to executive
officers at comparable companies, the Compensation Committee believes that the
compensation for the Company's executive officers generally falls in the median
range of executive compensation for such comparable companies.
EXECUTIVE OFFICER COMPENSATION
The annual compensation package of executive officers of the Company
provides for base salaries, as well as for the opportunity to receive annual
bonuses that are related, among other factors, to Company performance and
individual performance. The Company also provides long-term equity based
compensation generally through participation in the 1993 Stock Option Plan. This
assures that key management employees have a meaningful stake in the Company,
the ultimate value of which is dependent on the Company's long-term stock price
appreciation,
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<PAGE>
and that the interests of executive officers are aligned with those of the
Company's shareholders.
Base Salary. The Company competes for talented executives with a wide
variety of companies. Executive officers' base salaries reflect their positions
and experience, as well as the compensation package required to attract them to
the Company in light of relevant market factors. Annual base salary increases
for executive officers are established as a result of the Compensation
Committee's analysis of each executive's individual performance during the prior
year, the overall performance of the Company during the prior year and his or
her level of responsibility, prior experience and breadth of knowledge. The
Company believes that current executive officer salaries are competitive with
comparable companies.
Annual Bonus. To control fixed salary costs and reward annual
performance, the Company pays annual bonuses to executive officers for achieving
Company and individual performance goals. In setting annual bonus awards, the
Compensation Committee considers, among other factors, the Company's revenue
growth, the development and expansion of its business, improvement of management
structures and general management objectives. Actual awards are determined by
the Compensation Committee based on its assessment of each executive's
individual performance and responsibility for the Company's financial and
business condition.
For 1997, the Board of Directors established a bonus program payable in
the event that Company achieved specified goals for revenue growth and
profitability. Under the plan, eligible persons, including executive officers,
are entitled to receive cash bonus payments equal to a certain percentage of
such persons' annual base salary. The bonus percentage would be determined by
the Compensation Committee for executive officers or by senior management of the
Company for other employees based on such persons' contribution to the
attainment of certain Company performance goals including, among others,
Crescendo! orders, registry revenues, Crescendo! installations, total revenues,
cost containment and net operating results for the Company.
Due to the Company's failure to achieve the specified revenue growth
and goals in 1997, the Board of Directors did not award any bonuses for 1997
under this program. All employees of the Company, including the executive
officers, were awarded a bonus of $1,000 for 1997. The Company has reserved for
1998 funds which were accrued for bonuses in 1997 and the Compensation Committee
will consider individuals performance in 1997 when evaluating bonuses for 1998.
Stock Options. The 1993 Stock Option Plan permits grants of incentive
stock options and non-qualified stock options. The incentive stock options are
granted with an exercise price at the fair market value on the grant date, vest
over a four or
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<PAGE>
five year period depending on the date of issuance, and expire after ten years.
Non-qualified stock options are granted with an exercise price established by
the Board of Directors, vest from immediately after the date of grant to five
years after the date of grant and expire after ten years. Accordingly, stock
options have value only if the stock price appreciates from the date such
options are granted. This component of executive compensation focuses executives
on long-term creation of shareholder value and encourages equity ownership in
the Company. In determining the actual size of stock option awards under the
1993 Stock Option Plan, the Compensation Committee considers the value of the
stock on the date of grant, competitive practices, the executive's stock
holdings, the amount of options previously granted to the executive, individual
performance and the Company's performance. In December 1997, the Board of
Directors, on the recommendation of the Chief Executive Officer, granted options
to all employees, including executive officers. Each employee received an option
to purchase 1,000 shares of Common Stock at an exercise price of $1.75, the fair
market value of Common Stock on December 15, 1997.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Barbara A. Cannon. Ms. Cannon became the President and Chief Executive
Officer of the Company on October 6, 1997. Ms. Cannon and the Company entered
into an employment agreement, dated October 6, 1997, which is described under
the heading, "EXECUTIVE COMPENSATION--Employment Contracts and Termination of
Employment Arrangements."
The Compensation Committee and the Board of Directors approved a total
compensation package that was designed to be competitive with compensation
provided to chief executive officers at companies of comparable size to the
Company as well as provide a compensation level and structure necessary to
obtain an executive with Ms. Cannon's experience and credentials. Ms. Cannon's
employment agreement provides for an initial annual salary of $195,000 and a
bonus in an amount of up to 50% of her base salary upon achievement of certain
performance targets established by the Board of Directors, after consultation
with Ms. Cannon, prior to each fiscal year. Except for a bonus of $1,000 paid to
all employees of the Company, Ms. Cannon did not receive a bonus in 1997.
In addition, Ms. Cannon received an option to purchase 400,000 shares
of Common Stock under the 1993 Stock Option Plan. Under her Stock Option
Agreement, dated October 6, 1997, the option becomes exercisable as to 36,363
shares on the first anniversary of the agreement. After January 1, 1999, the
option is exercisable in twenty-four equal installments of 3,030 shares on the
last business day of each calendar month. Along with all employees of the
Company, Ms. Cannon received an option to purchase 1,000 shares of Common Stock
of the Company on December 15, 1997 at an exercise price of $1.75.
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<PAGE>
In connection with her employment, Ms. Cannon agreed to purchase
109,091 shares of Common Stock, payment for which was in the form of a
promissory note in favor of the Company in principal amount of $200,000 (the
"Promissory Note") and $100,000 cash. Under the terms of the Promissory Note,
the unpaid principal amount and all accrued interest is due and payable on
October 8, 2001. However, the principal amount due will be reduced by $50,000 on
October 8, 1998 and all interest accrued on that date will be forgiven if Ms.
Cannon is still employed by the Company. From that date, the principal amount
due will be reduced each calendar month that Ms. Cannon is employed by the
Company in an amount of $4,166.66 and all interest accrued through such date
will be forgiven. The Promissory Note is secured by a security interest in
72,727 shares of the Common Stock purchase by Ms. Cannon.
Richard J. Willemin. Mr. Willemin served as interim Chief Executive
Officer of the Company from July 1997 to October 1997 following the resignation
of Kevin Green, the former President and Chief Executive Officer of the Company
on July 28, 1997. For his services, Mr. Willemin received an annual salary of
$175,000 and temporary living expenses through December 31, 1997. The Board also
granted Mr. Willemin an option to purchase an additional 25,000 shares of Common
Stock, which vested immediately upon the start date of employment of the new
Chief Executive Officer, Ms. Cannon. Such option has a term of three years
following termination of Mr. Willemin's employment with the Company. In
addition, the Board modified the vesting schedule of an option to purchase
25,000 shares of Common Stock previously granted to Mr. Willemin, so that such
option vested immediately upon termination without cause of Mr. Willemin's
employment and such option is exercisable for three years following termination
of Mr. Willemin's employment with the Company.
Kevin Green. Mr. Green resigned as President, Chief Executive Officer
and director of the Company effective July 28, 1997. Mr. Green's annual salary
at that time was $175,600. Mr. Green did not receive a cash bonus during the
1997 fiscal year. At the time of his resignation, Mr. Green held options to
purchase 347,500 shares of Common Stock, which have been canceled. He did not
receive any options to purchase shares of Common Stock during the 1997 fiscal
year. In connection with Mr. Green's resignation, the Company entered into a
Separation Agreement with Mr. Green which is described under the heading,
"EXECUTIVE COMPENSATION--Employment Contracts and Termination of Employment
Agreements."
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the tax deduction of $1 million per year for compensation paid
to
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executive officers named in the "Summary Compensation Table" unless certain
requirements are met. Section 162(m) did not affect the deductibility of
compensation paid to the Company's executive officers in 1997. The Compensation
Committee, along with the Company, will continue to evaluate the Company's
compensation plans and programs in view of the Section 162(m) limitation.
This report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such acts.
W. HUDSON CONNERY, JR.
JOHN M. NEHRA
KENT J. THIRY
The Members of the Compensation Committee
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EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for
each of the Company's last three fiscal years ended December 31, 1997, 1996 and
1995 awarded to or earned by the Chief Executive Officer of the Company and the
four highest paid executive officers of the Company whose salary and bonus
earned in 1997 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------- ------------------
COMMISSIONS OTHER ANNUAL SECURITIES UNDER- ALL OTHER
SALARY AND COMPENSATION -LYING OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUSES ($)(1) (#) ($)(2)
- ------------------------------ ---- ------ ----------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Barbara A. Cannon(3)........... 1997 45,000 1,000 -- 401,000 13
President and Chief 1996 -- -- -- -- --
Executive Officer 1995 -- -- -- -- --
Kevin R. Green(4).............. 1997 175,600 -- -- (347,500)(6) 156
Former President and Chief 1996 168,816 -- 62,981(5) 347,500 (7) 156
Executive Officer 1995 -- -- -- -- --
Donald F. Fortin, M.D.......... 1997 135,577 1,000 -- 301,000 (8) 156
Vice President and 1996 74,997 -- -- -- --
Chief Scientific Officer 1995 -- -- -- -- --
Charles L. McIntosh,
M.D., Ph.D................... 1997 188,237 1,000 -- 71,000 (9) 156
Vice President, and 1996 -- -- -- -- --
President of C.L. McIntosh 1995 -- -- -- -- --
& Associates, Inc. ("CLMA")
Lisa K. Olson, Ph.D............ 1997 130,000 1,000 15,633 71,000 156
Vice President, and 1996 99,239 55,000 -- 18,750 (10) 156
Chief Operating Officer of 1995 66,960 -- -- 16,666 120
CLMA
Richard J. Willemin(11)........ 1997 136,942 -- -- 201,000 (12) 104
Former Vice President and 1996 -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- --
</TABLE>
- ------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal
benefits has been omitted in those cases where the aggregate amount of
such perquisites and other personal benefits constituted less than the
lesser of $50,000 or 10% of the total annual salary and bonus for the
applicable Named Executive Officer for such year.
(2) Represents the dollar value of premiums paid by the Company for life
insurance policies for the benefit of the applicable Named Executive
Officer.
-11-
<PAGE>
(3) Effective October 7, 1997, Ms. Cannon was named President, Chief
Executive Officer and Director of the Company.
(4) Effective July 29, 1997, Mr. Green resigned as President, Chief
Executive Officer and Director of the Company.
(5) Includes moving expenses incurred by the Company relating to Mr.
Green's relocation and costs incurred by the Company to provide Mr.
Green with temporary lodging in connection with such relocation.
(6) Options to purchase 347,500 shares of Common Stock previously granted
Mr. Green were canceled upon his resignation from the Company in July
1997. See "--Employment Contracts and Termination of Employment
Arrangements."
(7) In December 1996, options previously granted were canceled and
replacement options to purchase 347,500 shares of Common Stock were
repriced and issued to Mr. Green. See "--Report on Option Repricing."
(8) In July 1997, options previously granted were canceled and replacement
options to purchase 300,000 shares of Common Stock were repriced and
issued to Dr. Fortin. See "--Report on Option Repricing."
(9) In June 1997, options previously granted were canceled and replacement
options to purchase 70,000 shares of Common Stock were repriced and
issued to Dr. McIntosh. See "--Report on Option Repricing."
(10) In December 1996, options previously granted were canceled and
replacement options to purchase 18,750 shares of Common Stock were
repriced and issued to each of three officers, including Dr. Olson. See
"--Report on Option Repricing."
(11) Effective March 31, 1998, Mr. Willemin resigned as Vice President and
Chief Financial Officer of the Company.
(12) The options to purchase 101,000 of such shares were unvested on March
31, 1998, the date of Mr. Willemin's resignation from the Company, and
are therefore unexercisable.
The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts during the
fiscal year ended December 31, 1997.
-12-
<PAGE>
STOCK OPTIONS, AWARDS, EXERCISES AND HOLDINGS
The following table sets forth certain information in connection with
stock option grants during the year ended December 31, 1997 to each of the Named
Executive Officers.
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS EXERCISE OR STOCK PRICE
UNDERLYING GRANTED TO BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION OPTION TERM (2)
NAME GRANTED FISCAL YEAR (%) ($)(1) DATE 5%($) 10%($)
- ---- ---------------- --------------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Barbara A. Cannon.......... 400,000 24.88 2.75 10/06/07 691,784 1,753,117
1,000 0.06 1.75 12/15/07 1,101 2,789
Kevin R. Green............. -- -- -- -- -- --
Donald F. Fortin, M.D...... 300,000 18.66 2.50(3) 12/31/06 471,671 1,195,307
1,000 0.06 1.75 12/15/07 1,101 2,789
Charles L. McIntosh,
M.D., Ph.D............... 70,000 4.35 2.75(4) 12/31/06 121,062 306,795
1,000 0.06 1.75 12/15/07 1,101 2,789
Lisa K. Olson, Ph.D........ 70,000 4.35 2.69 05/30/07 118,311 299,823
1,000 0.06 1.75 12/15/07 1,101 2,789
Richard J. Willemin........ 50,000 3.11 3.44 3/17/07 108,170 274,124
125,000(5) 7.78 2.69 5/31/07 211,466 535,896
25,000 1.56 2.5 8/5/07 39,306 99,609
1,000(6) 0.06 1.75 12/15/07 1,101 2,789
</TABLE>
- --------------------
(1) All options granted under the 1993 Stock Option Plan during the fiscal
year ended December 31, 1996 were granted at an exercise price equal to
the fair market value of the Common Stock on the date of grant.
(2) The 5% and 10% assumed annual compound rates of stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
(3) On July 31, 1997, pursuant to an agreement between the Company and Dr.
Fortin and other parties, the Company canceled options to purchase
300,000 shares of Common Stock at an exercise price of $7.50 previously
issued to Dr. Fortin and regranted to Dr. Fortin options to purchase
300,000 shares of Common Stock at an exercise price of $2.50, which
represented the closing price of the Common Stock as reported on the
Nasdaq National Market on July 31, 1997. See "--Report on Option
Repricing."
(4) On June 11, 1997, pursuant to an agreement between the Company and Dr.
McIntosh and Gail J. Greenberg, the Company canceled options to
purchase 70,000 shares of Common Stock at an exercise price of $7.25
previously issued to Dr. McIntosh and regranted to Dr. McIntosh options
to purchase 70,000 shares of Common Stock at an exercise price of
$2.75, which represented the closing price of the Common Stock as
reported on the Nasdaq National Market on June 11, 1997. See "--Report
on Option Repricing."
(5) The option to purchase 100,000 of such shares was unvested on March 31,
1998, the date of Mr. Willemin's resignation from the Company, and is
therefore unexercisable.
(6) The option to purchase such shares was unvested on March 31, 1998, the
date of Mr. Willemin's resignation from the Company, and is therefore
unexercisable.
-13-
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides information concerning the exercise of
options by the Named Executive Officers during the fiscal year ended December
31, 1997 and unexercised options held by the Named Executive Officers as of the
end of the fiscal year ended December 31, 1997.
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($)(1)
SHARES ACQUIRED ON VALUE ------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barbara A. Cannon -- -- -- 401,000 -- 0
Kevin R. Green -- -- -- -- -- --
Donald F. Fortin, M.D. -- -- 85,000 216,000 0 0
Charles L. McIntosh, M.D., Ph.D. -- -- 14,000 57,000 0 0
Lisa K. Olson, Ph.D -- -- 10,416 96,000 0 0
Richard J. Willemin -- -- 100,000 101,000 (2) 0 0
</TABLE>
- -----------
(1) The value of unexercised in-the-money options represents the aggregate
difference between the market value on December 31, 1997, based on the
closing price of the Common Stock as reported on the Nasdaq National Market
and the applicable exercise prices for such options.
(2) The options to purchase such shares were unvested on March 31, 1998, the
date of Mr. Willemin's resignation from the Company, and are therefore
unexercisable.
REPORT ON OPTION REPRICING
In May 1997, after a significant decrease in the price of the Common
Stock, the Compensation Committee determined that options to purchase an
aggregate of 211,000 shares of Common Stock granted to non-officer employees
pursuant to the 1993 Stock Option Plan, between December 5, 1996 and March 1,
1997, no longer provided a perceived meaningful incentive to employees as
initially intended. In light of the Company's financial performance in 1997 and
the Compensation Committee's desire to provide meaningful incentives to
employees, on May 30, 1997, the options to purchase 211,000 shares of Common
Stock granted to non-officer employees, were canceled and regranted to the same
individuals in an amount equal to the same amount of shares previously held by
such employees, at an exercise price based on the Common Stock's closing price
on the Nasdaq National Market on May 30, 1997 of $2.69 per share.
On June 11, 1997, pursuant to an agreement between the Company and Dr.
McIntosh and Gail J. Greenberg, an officer of CLMA, options to purchase 100,000
shares of Common Stock previously granted to Dr. McIntosh and Ms. Greenberg
under the 1993 Stock Option Plan with an exercise price of $7.25 per share were
canceled and options to purchase 100,000 shares of Common Stock were regranted
to
-14-
<PAGE>
Dr. McIntosh and Ms. Greenberg, at an exercise price based on the Common Stock's
closing price on the Nasdaq National Market on June 11, 1997 of $2.75 per share
in exchange for a release of certain claims. See "ARRANGEMENTS AND TRANSACTIONS
WITH RELATED PARTIES."
On July 31, 1997, pursuant to an agreement between the Company, Dr.
Fortin and other parties, options to purchase 300,000 shares of Common Stock
previously granted to Dr. Fortin under the 1993 Stock Option Plan with an
exercise price of $7.50 per share were canceled and options to purchase 300,000
shares of Common Stock were regranted to Dr. Fortin at an exercise price based
on the Common Stock's closing price on the Nasdaq National Market on July 31,
1997 of $2.50 in exchange for a release of certain claims. See "ARRANGEMENTS AND
TRANSACTIONS WITH RELATED PARTIES."
The following table provides information concerning the repricings on
December 24, 1996, June 11, 1997, and July 31, 1997 of options held by executive
officers.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF MARKET PRICE LENGTH OF
SECURITIES OF COMMON EXERCISE ORIGINAL
UNDERLYING STOCK AT PRICE AT TIME OPTION TERM
OPTIONS TIME OF OF REPRICING NEW REMAINING AT
REPRICED OR REPRICING OR OR EXERCISE DATE OF
DATE OF AMENDED AMENDMENT AMENDMENT PRICE REPRICING OR
NAME AND POSITION REPRICING (#) ($) ($) ($) AMENDMENT
- ----------------------- ------------- --------- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Barbara A. Cannon.................... -- -- -- -- -- --
President and Chief
Executive Officer
Kevin R. Green....................... December 24, 1996 40,000 6.75 15.50 6.75 46 months
President and Chief December 24, 1996 307,500 6.75 17.00 6.75 49 months
Executive Officer
Donald F. Fortin, M.D................ July 31, 1997 300,000 2.50 7.50 2.50 113 months
Vice President and Chief
Scientific Officer
Charles L. McIntosh, M.D., Ph.D.,.... June 11,1997 70,000 2.75 7.25 2.75 115 months
Vice President, and
President of CLMA
Lisa K. Olson, Ph.D.................. December 24, 1996 18,750 6.75 17.00 6.75 49 months
Vice President and COO
of CLMA
Richard J. Willemin.................. -- -- -- -- -- --
Vice President and
Chief Financial Officer
</TABLE>
W. HUDSON CONNERY, JR.
JOHN M. NEHRA
KENT J. THIRY
The Members of the Compensation Committee
-15-
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Ms. Cannon. In October 1997, the Company entered into an employment
agreement with Ms. Cannon, as the Company's President and Chief Executive
Officer, pursuant to which she agreed to provide services to the Company for an
annual salary of $195,000. Ms. Cannon is also eligible to receive a bonus in an
amount of up to 50% of her base salary upon achievement of certain performance
targets. The employment agreement provides for a two-year term with an automatic
renewal unless either party gives written notice of its intent not to renew the
agreement. The employment agreement may be terminated (i) upon the death or
disability of Ms. Cannon, (ii) by the Board of Directors for "Cause" or without
"Cause," or (iii) by Ms. Cannon for "Good Reason" or without "Good Reason." If
Ms. Cannon's termination is without "Cause" or for "Good Reason," the Company
will continue to provide to Ms. Cannon her base salary and health insurance
benefits for a period of eighteen months following the date of such termination.
If, within twelve months after a "Change in Control" of the Company, the Company
terminates Ms. Cannon's employment, except for "Cause," or Ms. Cannon terminates
her employment for "Good Reason," the Company will pay to Ms. Cannon an amount
in cash equal to two times her annual base salary in effect immediately prior to
the "Change in Control."
In connection with the employment agreement, the Company also granted
Ms. Cannon an option to purchase up to 400,000 shares of Common Stock at an
exercise price of $2.75. The option becomes exercisable as to 36,363 shares on
the first anniversary of the agreement. After January 1, 1999, the option is
exercisable in twenty-four equal installments of 3,030 shares on the last
business day of each calendar month. Ms. Cannon is also subject to a
confidentiality provision, non-solicitation provision and a two-year
noncompetition provision, each of which is included in the agreement. In
connection with her employment, Ms. Cannon agreed to purchase 109,091 shares of
Common Stock, payment for which was in the form of a promissory note in favor of
the Company in principal amount of $200,000 (the "Promissory Note") and $100,000
cash. Under the terms of the Promissory Note, the unpaid principal amount and
all accrued interest is due and payable on October 8, 2001. However, the
principal amount due will be reduced by $50,000 on October 8, 1998 and all
interest accrued on that date will be forgiven if Ms. Cannon is still employed
by the Company. From that date, the principal amount due will be reduced each
calendar month that Ms. Cannon is employed by the Company in an amount of
$4,166.66 and all interest accrued through such date is forgiven. The Promissory
Note is secured by a security interest in 72,727 shares of the Common Stock
purchase by Ms. Cannon.
Dr. Fortin. In December 1996, the Company entered into an employment
agreement with Dr. Fortin. Dr. Fortin agreed to provide services to the Company
for an initial annual salary of $150,000 for a four-year term and a signing
bonus of
-16-
<PAGE>
$129,371. Effective January 1, 1998, Dr. Fortin's annual salary was increased to
$156,750. The Company also granted Dr. Fortin an option to purchase 300,000
shares of Common Stock at an exercise price of $7.50, such option vests over a
three-year period. On July 31, 1997, such option was canceled and reissued at a
exercise price of $2.50. See "EXECUTIVE COMPENSATION--Report on Option
Repricing" and "ARRANGEMENTS AND TRANSACTION WITH CERTAIN PARTIES." Under the
agreement, Dr. Fortin has agreed that the Company has rights to all inventions,
including intellectual property, conceived or produced by Dr. Fortin during the
period of his employment. Dr. Fortin is also subject to a confidentiality
provision, a nonsolicitation provision and a eighteen-month noncompetition
provision, each of which is included in the agreement.
Dr. McIntosh. In December 1996, the Company entered into an employment
agreement with Dr. McIntosh. Dr. McIntosh agreed to serve as President of C.L.
Mcintosh & Associates, Inc. ("CLMA") and Vice President of the Company for an
initial annual salary of $175,000 for a three-year term. Effective January 1,
1998, Dr. McIntosh's annual salary was increased to $182,000. The Company also
granted Dr. McIntosh an option to purchase 70,000 shares of Common Stock at an
exercise price of $7.25, such option vests over a five-year period, subject to
certain acceleration provisions based on the achievement of certain goals by
CLMA. On June 11, 1997, such option was canceled and reissued at an exercise
price of $2.75. See "EXECUTIVE COMPENSATION--Report on Option Repricing" and
"ARRANGEMENTS AND TRANSACTION WITH CERTAIN PARTIES. Under the agreement, Dr.
McIntosh has agreed that the Company has rights to all inventions, including
intellectual property, conceived or produced by Dr. McIntosh during the period
of his employment. Dr. McIntosh is also subject to a confidentiality provision,
a nonsolicitation provision and a one-year noncompetition provision, each of
which is included in the agreement.
Dr. Olson. In February 1995, the Company entered into an employment
agreement with Dr. Olson, as Vice President, Professional Client Services. Dr.
Olson agreed to provide services to the Company for an annual salary of $80,000,
a $10,000 bonus payable upon the start of her employment, and stock options to
purchase a total of 50,000 shares, of which 25,000 were granted at the start of
her employment and 25,000 were to be granted upon the first anniversary of her
employment. The number of shares exercisable under such options were reduced as
part of the reverse stock split on June 15, 1995 and option repricing on
December 24, 1996. See "EXECUTIVE COMPENSATION--Report on Option Repricing." In
addition, under her employment agreement, Dr. Olson is eligible for additional
executive bonuses. In connection with her employment, Dr. Olson signed a
confidentiality agreement and a one-year noncompetition agreement.
Mr. Willemin. Pursuant to a letter, dated March 26, 1997, Mr. Willemin
was named interim Vice President of Finance and Chief Financial Officer,
effective
-17-
<PAGE>
March 17, 1997. Under the letter, Mr. Willemin provided services to the Company
in exchange for an annual salary of $175,000, a relocation allowance not to
exceed $60,000 and continued reimbursement for temporary living accommodations
and return home travel expenses prior to his relocation. In addition, Mr.
Willemin received an option to purchase up to 50,000 shares of Common Stock,
10,000 of which vested at the start of his employment, and the remaining 40,000
of which vested 10,000 each month. In connection with his employment, Mr.
Willemin entered into a confidentiality and a noncompetition agreement. Under
its terms, the employment letter is not an employment agreement and Mr.
Willemin's employment was at-will.
Pursuant to a letter, dated May 8, 1997, Mr. Willemin was named Vice
President and Chief Financial Officer. In exchange for his services, Mr.
Willemin received an annual salary of $130,000 and was granted an employee stock
option to purchase 125,000 shares of Common Stock (the "Initial Option"), 25,000
of which were to vest at the end of each of the next five fiscal years. Mr.
Willemin's employment was at-will.
On August 5, 1997, Mr. Willemin agreed to serve as Interim Chief
Executive Officer of the Company until the Company hired a new Chief Executive
Officer (the "New CEO"). In exchange for his additional duties, Mr. Willemin
received a salary increase of $45,000 and an additional option to purchase
25,000 shares, of which all 25,000 shares vest on the date the New CEO would
begin employment. Such options must be exercised within three years of
termination of Mr. Willemin's employment with the Company. In addition, the
25,000 shares of the Initial Option which vested on December 31, 1997 are
exercisable within three years of termination of Mr. Willemin's employment with
the Company. In October 1997, Ms. Cannon was named Chief Executive Officer and
Mr. Willemin returned to his position of Vice President and Chief Financial
Officer. His annual salary was reduced to $150,000 effective January 15, 1998.
Mr. Willemin resigned from his position effective March 31, 1998.
Mr. Green. In October 1997, the Company and Mr. Green entered into a
separation agreement effecting the termination of Mr. Green's employment as
President and Chief Executive Officer of the Company. Under the separation
agreement, in accordance with the terms of his original employment letter, Mr.
Green will receive his annual base salary and health and dental insurance for a
period of eighteen months from the date of his resignation, July 28, 1997. In
addition, the Company will reimburse Mr. Green for out-of-pocket expenses
incurred in connection with Mr. Green's employment search or related to the
continuation of employment-associated benefits during the transition to new
employment, up to an aggregate amount equal to $35,000. Mr. Green also waived
and released all stock options previously granted to him by the Company. Under
the agreement, the Company and Mr. Green agreed to release the other party from
-18-
<PAGE>
any claims as a result of his employment, except as rendered ineffective or
prohibited by law. Mr. Green is also subject to a confidentiality provision.
STOCK PRICE PERFORMANCE GRAPH AND TABLE
The following graph and table compare the cumulative total shareholder
return on the Company's Common Stock with the cumulative total return on each of
the Standard & Poor's 500 Stock Index and the Standard & Poor's Healthcare Index
over the same period since the Company's initial public offering of Common Stock
on August 4, 1995. The comparison assumes $100 was invested on August 4, 1995 in
the Company's Common Stock and in each of the foregoing indices and assumes
reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE
AUGUST 4, 1995 AMONG
SUMMIT MEDICAL SYSTEMS, INC.,
S&P 500 STOCK INDEX AND S&P HEALTHCARE INDEX
[GRAPH]
INDEXED RETURNS
YEARS ENDING
BASE
PERIOD
COMPANY/INDEX 4-AUG-95 DEC 95 DEC 96 DEC 97
- --------------------------- -------- ------ ------ ------
SUMMIT MEDICAL SYSTEMS INC. 100 159.26 56.46 11.11
HEALTH CARE-500 100 124.32 150.12 215.75
S & P 500 COMP INDEX 100 111.08 138.58 162.15
-19-
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of March 31, 1998 (unless otherwise
indicated), information regarding the beneficial ownership of the Company's
Common Stock by (i) each person known by the Company to beneficially own 5% or
more of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's Named Executive Officers and (iv) all
directors and executive officers as a group. Except as otherwise indicated, all
persons listed below have sole voting and investment powers with respect to the
shares indicated:
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1)
- ------------------------------------ ------ ----------
Barbara A. Cannon................................... 109,091 1.1%
Summit Medical Systems, Inc.
10900 Red Circle Drive
Minnetonka, MN 55343
Kevin R. Green ..................................... 10,000 *
6529 Chasewood Dr.
Eden Prairie, MN 55344
Donald F. Fortin, M.D.(2) .......................... 92,500 *
Summit Medical Systems, Inc.
6330 Quadrangle Drive, Suite 300
Chapel Hill, NC 27514
Charles L. McIntosh, M.D., Ph.D.(3)................. 759,739 7.9
C.L. McIntosh & Associates, Inc.
12300 Twinbrook Parkway, Suite 625
Rockville, MD 20852
Lisa K. Olson(4) ................................... 38,486 *
C.L. McIntosh & Ass., Inc.
12300 Twinbrook Parkway, Suite 625
Rockville, MD 20852
Richard J. Willemin(5) ............................. 100,000 1.0
Summit Medical Systems, Inc.
10900 Red Circle Drive
Minnetonka, MN 55343
John M. Nehra(6)(7) ................................ 1,116,424 11.5
1119 S. Paul Street
Baltimore, MD 21202
Kent J. Thiry (8)(9) ............................... 232,000 2.4
1850 Gateway Drive
Suite 500
San Mateo, CA 94404
-20-
<PAGE>
W. Hudson Connery, Jr.(10) ......................... 10,666 *
545 Mainstream Dr.
Suite 330
Nashville, TN 37228
Richard B. Fontaine(11)............................. 32,000 *
155 Webster Crt.
Park City, UT 84060
Peter T. Garahan.................................... 2,000 *
10200 Akhpamar Dr.
Great Falls, VA 22066
Edward F. Sweeney(12)............................... 788,646 8.2
27101 N. Agva Verde Dr.
Rio Verde, AZ 85263
Catalyst Ventures, Limited Partnership
and New Enterprise Associates VI,
Limited Partnership(13)........................ 1,065,414 11.1
1119 St. Paul Street
Baltimore, MD 21202
Oxford Partners(14) ................................ 501,000 5.2
126 Attawa Ave. NW
Grand Rapids, MI 49503
Dimensional Fund Advisors........................... 757,100 7.9
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Smith Barney Inc., Smith Barney
Holdings Inc. and Travelers Group, Inc. (15)... 1,011,595 10.5
388 Greenwich Street
New York, NY 10013
All executive officers and directors as a
group (16)..................................... 2,498,906 25.1
- -------------------
*Represents beneficial ownership of less than 1%.
(1) Shares of Common Stock subject to options exercisable on or before May
31, 1998 ("Currently Exercisable Options") are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person.
(2) Includes 85,000 shares issuable pursuant to Currently Exercisable
Options.
(3) Includes 14,000 shares issuable pursuant to Currently Exercisable
Options.
(4) Includes 27,749 shares issuable pursuant to Currently Exercisable
Options.
(5) Includes 100,000 shares issuable pursuant to Currently Exercisable
Options.
(6) Includes 49,332 shares issuable pursuant to Currently Exercisable
Options.
-21-
<PAGE>
(7) Includes shares owned by Catalyst and NEA VI. Mr. Nehra, a director of
the Company, is managing general partner of Catalyst. He is also a
general partner of the general partner of NEA VI. By virtue of these
positions, Mr. Nehra may be deemed to share voting and investment
control over the shares owned by Catalyst and NEA VI. Therefore, Mr.
Nehra may be deemed a beneficial owner of those shares. Mr. Nehra
disclaims any beneficial ownership of such shares.
(8) Includes 12,000 shares issuable pursuant to Currently Exercisable
Options.
(9) Mr. Thiry, a director of the Company, is President, Chief Executive
Officer and a director of VSP Holdings, Inc. By virtue of these
positions, Mr. Thiry may be deemed to share voting and investment
control over the 220,000 shares owned by VSP Holdings, Inc. Therefore,
Mr. Thiry may be deemed a beneficial owner of those shares. Mr. Thiry
disclaims any beneficial ownership of such shares.
(10) Includes 6,666 shares issuable pursuant to Currently Exercisable
Options.
(11) Includes 32,000 shares issuable pursuant to Currently Exercisable
Options.
(12) Includes 43,749 shares issuable pursuant to Currently Exercisable
Options.
(13) Based on a Schedule 13G, dated February 10, 1998, Catalyst is record
holder of 412,081 shares and NEA VI is record holder of 653,333 shares.
By virtue of their relationship as affiliated partnerships, Catalyst
and NEA VI may be deemed to share voting and investment control over
such shares. Therefore, each of Catalyst and NEA VI may be deemed to
beneficially own all of such shares. Each of Catalyst and NEA VI
disclaims beneficial ownership of any shares which it does not hold of
record.
(14) Oxford Partners is record holder of 155,000 shares and Cook Golf, Inc.
is record holder of 346,000 shares. By virtue of their relationship as
affiliated entities Oxford and Cook may be deemed to share voting and
investment control over such shares. Therefore, each of Oxford and Cook
may be deemed to beneficially own all of such shares.
(15) Based on a Schedule 13G, dated January 26, 1998, Smith Barney, Inc.
("SB") holds shared voting power to 1,011,595 shares. Salomon Smith
Barney Holdings, Inc. ("SSB Holdings"), as the sole common shareholder
of SB, holds shared voting power to the shares owned by SB. Travelers
Group ("TRV"), as the sole common shareholder of SSB Holdings, holds
shared voting power to the shares owned by SB and SSB Holdings.
(16) Includes 326,747 shares issuable pursuant to Currently Exercisable
Options.
PROPOSAL 2
RATIFICATION OF INDEPENDENT AUDITORS
Arthur Andersen LLP ("Arthur Andersen") served as the Company's
independent auditors for the year ended December 31, 1997. Ernst & Young L.L.P.
("Ernst & Young") served as the Company's independent auditors for the years
ended December 31, 1994, 1995 and 1996. On June 2, 1997, the Company advised
Ernst & Young that the Company was discontinuing Ernst & Young's services as the
Company's independent accountants. The Company subsequently engaged Arthur
Andersen as the Company's independent public accountants on June 10, 1997. The
decisions to discontinue Ernst & Young and to engage Arthur Andersen were
unanimously approved by the Board of Directors of the Company.
-22-
<PAGE>
As previously announced by the Company, the Company's management, Ernst
& Young and outside legal counsel began an investigation of the Company's
accounting practices in March 1997. The outside legal counsel to the Company
also retained Arthur Andersen to assist in the investigation. As a result of the
investigation, the Company disclosed restatements of previously reported
financial positions and results of operations for the years 1994 and 1995 and
the nine months ended September 30, 1996 as part of its Annual Report on Form
10-K for the fiscal year ended December 31, 1996, filed with the Securities and
Exchange Commission on April 4, 1997.
Ernst & Young's reports on the financial statements of the Company for
the fiscal years ended December 31, 1994, 1995 and 1996 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. To the knowledge of the
present executive management and the Board of Directors of the Company, in
connection with the audits of the Company's financial statements for each of the
three fiscal years ended December 31, 1994, 1995 and 1996, there were no
disagreements with Ernst & Young on any matters of accounting principles or
practices, financial statement disclosure or auditing scope and procedure which,
if not resolved to the satisfaction of Ernst & Young, would have caused Ernst &
Young to make reference to the matter in its reports.
The Board of Directors has appointed Arthur Andersen as the Company's
independent auditors for the year ending December 31, 1998 and recommends that
the shareholders ratify that appointment. Arthur Andersen has no relationship
with the Company other than that arising from its employment as independent
auditors. Representatives of Arthur Andersen will be present at the Annual
Meeting. They will have an opportunity to make a statement if they desire to do
so and will be available to respond to appropriate questions from shareholders.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF
COMMON STOCK REPRESENTED AT THE MEETING IS REQUIRED TO RATIFY THIS APPOINTMENT.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFYING THIS APPOINTMENT.
ARRANGEMENTS AND TRANSACTIONS WITH RELATED PARTIES
Under her employment agreement, Ms. Cannon agreed to purchase 109,091
shares of Common Stock at a price of $2.75, the closing price on the Nasdaq
Market on the date of the agreement. Consideration for the shares was in the
form of a $200,000 promissory note in favor of the Company and $100,000 cash.
See "EXECUTIVE COMPENSATION--Employment Contracts and Termination of
Employment Agreements."
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Pursuant to an agreement, dated June 11, 1997 and amended August 14,
1997, between the Company, Dr. McIntosh and Gail J. Greenberg, an officer of
CLMA, the Company paid Dr. McIntosh and Ms. Greenberg $1.8 million and issued to
Dr. McIntosh 62,222 shares of Common Stock and to Ms. Greenberg 26,666 shares of
Common Stock in exchange for the release of certain claims. See "EXECUTIVE
COMPENSATION--Report on Option Repricing."
Pursuant to an agreement, dated July 31, 1997, between the Company,
Duke University ("Duke"), Dr. Ware LLC, Dr. Fortin, Robert M. Califf, M.D. and
Harry Phillips, III, M.D., the Company canceled two warrants to purchase Common
Stock previously issued to Duke and nonstatutory stock option agreements with
Dr. Fortin, Dr. Califf and Dr. Phillips and issued (i) to Duke two new warrants
to purchase 150,000 and 50,000 shares of Common Stock at an exercise price of
$2.50 per share and (ii) to Drs. Fortin, Califf and Phillips options to purchase
300,000 shares, 150,000 shares and 150,000 shares of Common Stock, respectively,
at an exercise price of $2.50 in exchange for a release of certain claims. See
"EXECUTIVE COMPENSATION--Report on Option Repricing."
In exchange for consulting services to the Company from March 1997 to
October 1997, Mr. Fontaine received $84,309 in compensation and an option to
purchase 32,000 shares of Common Stock exercisable on the date of grant.
SHAREHOLDER PROPOSALS FOR THE
1998 ANNUAL MEETING OF SHAREHOLDERS
Any shareholder who wishes to present a proposal for action at the next
annual meeting of shareholders and who wishes to have it set forth in the Proxy
Statement and identified in the form of proxy prepared by the Company must
notify the Company at the Company's principal executive offices, 10900 Red
Circle Drive, Minnetonka, Minnesota 55343-9106, in such manner so that such
notice is received by the Company by December 20, 1998. Any such proposal must
be in the form required under the rules and regulations promulgated by the
Commission.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under federal securities laws, the Company's directors and officers,
and any beneficial owner of more than 10% of a class of equity securities of the
Company, are required to report their ownership of the Company's equity
securities and any changes in such ownership to the Commission. Specific due
dates for these reports have been established by the Commission, and the Company
is required to disclose in this Proxy Statement any delinquent filing of such
reports and any failure to file such reports during the fiscal year ended
December 31, 1997. The Company believes that all Section 16(a) filing
requirements applicable to its executive officers, directors and 10%
shareholders were satisfied, with the exception of a failure by Dr. McIntosh
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<PAGE>
to report before September 30, 1997 the 62,222 shares of Common Stock issued to
him on August 14, 1997. Such shares were reported on a Form 4 filed with the
Commission on October 10, 1997.
OTHER MATTERS
The Board of Directors of the Company knows of no other matters that
are intended to be brought before the Annual Meeting. If other matters, of which
the Board of Directors is not aware, are presented for action, it is the
intention of the persons named in the enclosed form of proxy to vote on such
matters in their sole discretion.
By Order of the Board of Directors,
/s/ Barbara A. Cannon
Barbara A. Cannon
April 17, 1998 President and Chief Executive Officer
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<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Barbara A. Cannon and John M. Nehra as
proxies, each with the power to appoint a substitute, and hereby authorizes
them to present and to vote, as designated below, all shares of capital stock
of Summit Medical Systems, Inc. (the "Company") the undersigned is entitled to
vote at the Annual Meeting of Shareholders of the Company, to be held on May
21, 1998, and at all adjournments thereof:
1. Election of Directors
[_] FOR all nominees listed below (except as marked to the contrary below)
[_] WITHHOLD AUTHORITY to vote for all nominees listed below
To withhold authority to vote for any nominee, strike a line through the name
in the list below:
Barbara A. Cannon
W. Hudson Connery, Jr.
Richard B. Fontaine
Peter T. Garahan
John M. Nehra
Kent J. Thiry
2. Proposal to ratify the selection of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year ending December 31, 1998.
[_] FOR [_] AGAINST [_] ABSTAIN
(continued, and to be dated and signed, on other side)
P
R
O
X
Y
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ALL OF THE ABOVE ITEMS.
------------------------------------
Signature
------------------------------------
Please print name
------------------------------------
Signature if held jointly
------------------------------------
Please print name
Dated: _______________________, 1998
INSTRUCTIONS: Please sign exactly
as your name appears on the label
affixed hereto. When shares are
held by joint tenants, both should
sign. When signing as attorney, ex-
ecutor, administrator, trustee or
guardian, please give full title as
such. If a corporation, please sign
in the full corporate name by an
authorized officer. If a partner-
ship, please sign in partnership
name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY. A RETURN ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE.
