SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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/X/ Definitive Proxy Statement
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/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
INHALE THERAPEUTIC SYSTEMS
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INHALE THERAPEUTIC SYSTEMS
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 23, 1998
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TO THE SHAREHOLDERS OF INHALE THERAPEUTICS SYSTEMS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Inhale
Therapeutic Systems, a California corporation (the "Company"), will be held on
Tuesday, June 23, 1998 at 10:00 A.M. local time at the Company's executive
office located at 150 Industrial Road, San Carlos, California 94070 for the
following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To approve the reincorporation of the Company in the State of Delaware.
3. To approve the Company's 1994 Equity Incentive Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 775,000 shares, from 3,900,000 shares to
4,675,000 shares.
4. To ratify the selection of Ernst & Young LLP as independent auditors of
the Company for its fiscal year ending December 31, 1998.
5. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on April 27, 1998 as
the record date for the determination of shareholders entitled to notice of and
to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors
[LOGO]
Mark P. Tanoury
SECRETARY
San Carlos, California
May 16, 1998
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO
ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS
POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT
PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON
IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE
HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT
THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR
NAME.
INHALE THERAPEUTIC SYSTEMS
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
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PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
JUNE 23, 1998
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INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Inhale Therapeutic Systems, a California corporation (the "Company"), for use at
the Annual Meeting of Shareholders to be held on June 23, 1998, at 10:00 A.M.
local time (the "Annual Meeting"), or at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting. The Annual Meeting will be held at the Company's executive
office located at 150 Industrial Road, San Carlos, California 94070. The Company
intends to mail this proxy statement and accompanying proxy card on or about May
16, 1998, to all shareholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to shareholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on April 27,
1998 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on April 27, 1998 the Company had outstanding and entitled to
vote 15,614,701 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum but are not counted for any purpose in determining whether a
matter is approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's executive office, 150 Industrial Road,
San Carlos, California 94070, a written notice of revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a proxy.
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the Company's
1999 Annual Meeting of Shareholders must be received by the Company no later
than January 16, 1999 in order to be included in the proxy statement and proxy
relating to that Annual Meeting. Shareholders are also advised to review the
Company's Bylaws, which contain additional requirements with respect to advance
notice of shareholder proposals and director nominations.
PROPOSAL ONE
ELECTION OF DIRECTORS
There are seven nominees for the seven Board positions presently authorized
in the Company's Bylaws. Each director to be elected will hold office until the
next annual meeting of shareholders and until his successor is elected and has
qualified, or until such director's earlier death, resignation or removal. Each
nominee listed below is currently a director of the Company. Except for Mr.
Gill, who was appointed to the Board in April 1998, each nominee listed below
was elected by the shareholders.
Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the seven nominees named below. In the
event that any nominee should be unavailable for election as a result of an
unexpected occurrence, such shares will be voted for the election of such
substitute nominee as management may propose. Each person nominated for election
has agreed to serve if elected and management has no reason to believe that any
nominee will be unable to serve.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
The names of the nominees and certain information about them are set forth
below.
NAME AGE POSITION
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Robert B. Chess............ 41 President and Chief Executive Officer
Ajit S. Gill............... 50 Chief Operating Officer
John S. Patton, Ph.D....... 51 Vice President, Research
Terry L. Opdendyk.......... 50 Chairman; General Partner, ONSET Ventures
Mark J. Gabrielson......... 42 General Partner, Prince Ventures
James B. Glavin............ 62 Chairman of the Board, The Immune Response Corporation
Melvin Perelman, Ph.D...... 67 Former Executive Vice President, Eli Lilly and Company
ROBERT B. CHESS has served as President of the Company since December 1991
and as Chief Executive Officer since May 1992. Mr. Chess was also elected a
Director of the Company in May 1992. From September 1990 until October 1991, he
was an Associate Deputy Director in the White House Office of Policy
Development. In March 1987, Mr. Chess co-founded Penederm Incorporated
("Penederm"), a topical dermatological drug delivery company, and served as its
President until February 1989. He left the company in October 1989. Prior to
co-founding Penederm, Mr. Chess held management positions at Intel Corp., a
semiconductor manufacturer, and Metaphor, a computer software company (acquired
by International Business Machines). Mr. Chess holds a B.S. in Engineering from
the California Institute of Technology and a M.B.A. from the Harvard Business
School.
AJIT S. GILL has served as Chief Operating Officer since October 1996 and as
a Director since April 1998. Mr. Gill also served as the Company's Chief
Financial Officer from January 1993 until October 1996. Before joining Inhale,
Mr. Gill was Vice President and General Manager of Kodak's
2
Interactive Systems divisions. Mr. Gill has served as Chief Financial Officer
for TRW-Fujitsu, Director of Business Development for Visicorp, and as a
start-up President for three high technology companies. He completed a BTech at
the Indian Institute of Technology, an MS in Electrical Engineering from the
University of Nebraska, and holds an M.B.A. from the University of Western
Ontario.
JOHN S. PATTON, PH.D., a co-founder of Inhale, has been Vice President of
Research since December 1991 and a Director of the Company since July 1990. He
served as President of the Company from its incorporation in July 1990 to
December 1991. From 1985 to 1990, Dr. Patton was a Project Team Leader with
Genentech, Inc., a biotechnology company, where he headed their non-invasive
drug delivery activities. Dr. Patton was on the faculty of the Marine Science
and Microbiology Departments at the University of Georgia from 1979 through
1985, where he was granted tenure in 1984. Dr. Patton received a B.S. in Zoology
and Biochemistry from Pennsylvania State University, an M.S. from the University
of Rhode Island, a Ph.D. in Biology from the University of California, San Diego
and received post doctorate fellowships from Harvard Medical School and the
University of Lund, Sweden, both in biomedicine.
TERRY L. OPDENDYK has been the Chairman of the Board of Directors of the
Company since August 1991. He served as acting Chief Executive Officer of the
Company between August 1991 and May 1992. Mr. Opdendyk has been a general
partner of the general partner of ONSET, a California Limited Partnership, a
venture capital limited partnership, since 1984; a general partner of the
general partner of ONSET Enterprise Associates, L.P., a venture capital limited
partnership, since 1989; a general partner of the general partner of ONSET
Enterprise Associates II, L.P, a venture capital partnership, since 1994; a
special limited partner of the general partner of New Enterprise Associates V,
Limited Partnership, a venture capital limited partnership, since 1990; and a
special limited partner of the general partner of New Enterprise Associates VI,
Limited Partnership, a venture capital limited partnership, since 1993. From
1980 to 1984, he served as president of VisiCorp, a computer software company.
Prior to 1980, Mr. Opdendyk held management positions with Intel Corp., a
semiconductor manufacturer, and Hewlett-Packard Co., a computer and peripherals
manufacturer. Mr. Opdendyk is a director of Penederm and a director of several
private companies.
MARK J. GABRIELSON has been a Director of the Company since May 1992. Since
January 1991 he has been a general partner of Prince Ventures, L.P., a venture
capital management firm that serves as the general partner of Prince Venture
Partners III, L.P. ("Prince"). In addition, Mr. Gabrielson is the Chairman of
Ontyx, Inc. Prior to joining Prince, Mr. Gabrielson served in a variety of
marketing and business positions with SmithKline Beecham plc since July 1978.
Mr. Gabrielson is a director of Penederm.
JAMES B. GLAVIN has been a Director of the Company since May 1993. Mr.
Glavin is Chairman of the Board of The Immune Response Corporation, a
biotechnology company. He was President and Chief Executive Officer of The
Immune Response Corporation from 1987 until September 1994. From 1987 to 1990,
Mr. Glavin served as Chairman of the Board of Smith Laboratories, Inc. and was
President and Chief Executive Officer from 1985 to 1989. From 1985 to 1987, he
was a partner in CH Ventures, a venture capital firm. From 1983 to 1985, he
served as Chairman of the Board of Genetic Systems Corporation, a biotechnology
firm, and as its President and Chief Executive Officer from 1981 to 1983. Mr.
Glavin is a director of The Meridian Fund and Gish Biomedical, Inc.
MELVIN PERELMAN, PH.D. has been a Director of the Company since January
1996. Dr. Perelman spent 36 years at Eli Lilly and Company, most recently as
Executive Vice-President and President of Lilly Research Laboratories, a
position which he held from 1986 until his retirement in 1993. Dr. Perelman
served as President of Lilly International from 1976 until 1986. He was a member
of the Board of Directors of Eli Lilly and Company from 1976 until 1993. Dr.
Perelman is a member of the Board of Directors of Cinergy, Inc., DataChem, Inc.,
Immusol, Inc. and of The Immune Response Corporation.
3
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1997 the Board of Directors held
six meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is composed of two non-employee
directors: Messrs. Gabrielson and Glavin. It met once during the fiscal year
ended December 31, 1997.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation and otherwise determines compensation levels and performs
such other functions regarding compensation as the Board may delegate. The
Compensation Committee is composed of two non-employee directors: Messrs.
Gabrielson and Glavin. It met once during the fiscal year ended December 31,
1997.
During the fiscal year ended December 31, 1997, each director attended 75%
or more of the aggregate of the meetings of the Board and of the committees on
which he then served, except for Dr. Patton who attended 66% of such meetings.
PROPOSAL TWO
REINCORPORATION OF THE COMPANY IN DELAWARE
AND RELATED CHANGES TO THE RIGHTS OF SHAREHOLDERS
GENERAL
The Board of Directors has unanimously approved a proposal to change the
Company's state of incorporation from California to Delaware. The Board of
Directors believes the change in domicile to be in the best interests of the
Company and its shareholders for several reasons. Principally, the Board of
Directors believes that reincorporation will enhance the Company's ability to
attract and retain qualified members of the Company's Board of Directors as well
as encourage directors to continue to make independent decisions in good faith
on behalf of the Company. To date, the Company has not experienced difficulty in
retaining directors. The Company believes that the more favorable corporate
environment afforded by Delaware will enable it to compete more effectively with
other public companies, most of which are incorporated in Delaware, to attract
new directors and to retain its current directors. Reincorporation in Delaware
will allow the Company the increased flexibility and predictability afforded by
Delaware law. Concurrent with the reincorporation, the Company proposes to adopt
or maintain certain measures designed to make hostile takeovers of the Company
more difficult. The Board believes that adoption of these measures will enable
the Board to consider fully any proposed takeover attempt and to negotiate terms
that maximize the benefit to the Company and its shareholders.
In recent years, a number of major public companies have obtained the
approval of their shareholders to reincorporate in Delaware. For the reasons
explained below, the Company believes it is beneficial and important that the
Company likewise avail itself of Delaware law.
For many years Delaware has followed a policy of encouraging incorporation
in that state. In furtherance of that policy, Delaware has adopted comprehensive
corporate laws which are revised regularly to meet changing business
circumstances. The Delaware Legislature is particularly sensitive to issues
regarding corporate law and is especially responsive to developments in modern
corporate law. The Delaware courts have developed considerable expertise in
dealing with corporate issues as well as a substantial body of case law
construing Delaware's corporate law. As a result of these factors, it is
anticipated that Delaware law will provide greater predictability in the
Company's legal affairs than is presently available under California law.
4
In 1986, Delaware amended its corporate law to allow corporations to limit
the personal monetary liability of its directors for their conduct as directors
under certain circumstances. The directors have elected to adopt such a
provision in the Delaware Certificate of Incorporation (the "Delaware
Certificate") and Bylaws (the "Delaware Bylaws"). It should be noted that
Delaware law does not permit a Delaware corporation to limit or eliminate the
liability of its directors for intentional misconduct, bad faith conduct or any
transaction from which the director derives an improper personal benefit or for
violations of federal laws such as the federal securities laws. The Board
believes that Delaware incorporation will enhance the Company's ability to
recruit and retain directors in the future; however, the shareholders should be
aware that such a provision inures to the benefit of the directors, and the
interest of the Board in recommending the reincorporation may therefore be in
conflict with the interests of the shareholders.
In 1987, California amended its corporate law in a manner similar to
Delaware to permit a California corporation to limit the personal monetary
liability of its directors for their conduct as directors under certain
circumstances. The Company's current Amended and Restated Articles of
Incorporation (the "California Articles") and Bylaws (the "California Bylaws")
take advantage of these changes in California law. Nonetheless, the Board of
Directors believes that the protection from liability for directors is somewhat
greater under the Delaware law than under the California law and therefore that
the Company's objectives in adopting this type of provision can be better
achieved by reincorporation in Delaware. The Board of Directors has included
such a provision in the Delaware Certificate and Delaware Bylaws. Shareholders
should be aware that, because such provision inures to the benefit of the
directors, there is a potential conflict in the Board's support of such a
provision. See "Indemnification and Limitation of Liability" for a more complete
discussion of these issues.
The interests of the Board of Directors of the Company, management and
affiliated shareholders in voting on the reincorporation proposal may not be the
same as those of unaffiliated shareholders. Delaware law does not afford
minority shareholders some of the rights and protections available under
California law. Reincorporation of the Company in Delaware may make it more
difficult for minority shareholders to elect directors and influence Company
policies. A discussion of the principal differences between California and
Delaware law as they affect shareholders begins on page seven of this Proxy
Statement.
In addition, although the reincorporation proposal contains only a limited
number of changes to the California Articles and California Bylaws, portions of
the reincorporation proposal may have the effect of deterring hostile takeover
attempts. A hostile takeover attempt may have a positive or a negative effect on
the Company and its shareholders, depending on the circumstances surrounding a
particular takeover attempt. Takeover attempts that have not been negotiated or
approved by the board of directors of a corporation can seriously disrupt the
business and management of a corporation and generally present to the
shareholders the risk of terms which may be less favorable to all of the
shareholders than would be available in a board-approved transaction.
Board-approved transactions may be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the corporation and all of
its shareholders with due consideration to matters such as the recognition or
postponement of gain or loss for tax purposes, the management and business of
the acquiring corporation and maximum strategic deployment of corporate assets.
The Board of Directors recognizes that hostile takeover attempts do not
always have the unfavorable consequences or effects described above and may
frequently be beneficial to the shareholders, providing all of the shareholders
with considerable value for their shares. However, the Board of Directors
believes that the potential disadvantages of unapproved takeover attempts are
sufficiently great such that prudent steps to reduce the likelihood of such
takeover attempts are in the best interests of the Company and its shareholders.
Accordingly, the reincorporation plan includes certain proposals that may have
the effect of discouraging or deterring hostile takeover attempts.
5
Notwithstanding the belief of the Board as to the benefits to shareholders
of the changes, shareholders should recognize that one of the effects of such
changes may be to discourage a future attempt to acquire control of the Company
which is not presented to and approved by the Board of Directors, but which a
substantial number and perhaps even a majority of the Company's shareholders
might believe to be in their best interests or in which shareholders might
receive a substantial premium for their shares over the current market prices.
As a result, shareholders who might desire to participate in such a transaction
may not have an opportunity to do so.
The California Articles and California Bylaws already include a number of
provisions available to certain public companies under California law that deter
hostile takeover attempts, such as elimination of cumulative voting, elimination
of action by written consent of shareholders and advance notice requirement for
shareholder proposals. These provisions will also be included in the Company's
new charter documents following the reincorporation. In addition, the Delaware
Certificate and Delaware Bylaws will contain, among other things, provisions
classifying the Board into three classes, each elected for three-year terms,
limiting the ability of the shareholders to remove any director without cause,
requiring a supermajority vote for amendment of the Delaware Bylaws and certain
provisions of the Delaware Certificate and requiring a vacancy on the board
resulting from an increase in the number of directors to be filled by the
majority vote of the directors.
In considering the proposals, shareholders should be aware that the overall
effect of certain of the proposed changes is to make it more difficult for
holders of a majority of the outstanding shares of Common Stock to change the
composition of the Board of Directors and to remove existing management in
circumstances where a majority of the shareholders may be dissatisfied with the
performance of the incumbent directors or otherwise desire to make changes. In
particular, the vote of at least 66 2/3% of the outstanding shares of Common
Stock will be required to elect a majority of the Board of Directors in less
than two years.
The new provisions in the Company's charter documents could make a proxy
contest a less effective means of removing or replacing existing directors or
could make it more difficult to make a change in control of the Company which is
opposed by the Board of Directors. This strengthened tenure and authority of the
Board of Directors could enable the Board of Directors to resist change and
otherwise thwart the desires of a majority of the shareholders. Because this
provision may have the effect of continuing the tenure of the current Board of
Directors, the Board has recognized that the individual directors have a
personal interest in this provision that may differ from those of the
shareholders. However, the Board believes that these provisions' primary purpose
is to ensure that the Board will have sufficient time to consider fully any
proposed takeover attempt in light of the short and long-term benefits and other
opportunities available to the Company and, to the extent the Board determines
to proceed with the takeover, to effectively negotiate terms that would maximize
the benefits to the Company and its shareholders.
The Board of Directors has considered the potential disadvantages and
believes that the potential benefits of the provisions included in the proposed
charter documents outweigh the possible disadvantages. In particular, the Board
believes that the benefits associated with attracting and retaining skilled and
experienced outside directors and with enabling the Board to fully consider and
negotiate proposed takeover attempts, as well as the greater sophistication,
breadth and certainty of Delaware law, make the proposed reincorporation
beneficial to the Company, its management and its shareholders.
The proposal to include these anti-takeover provisions in the proposed
reincorporation does not reflect knowledge on the part of the Board of Directors
or management of any proposed takeover or other attempt to acquire control of
the Company. Management may in the future propose other measures designed to
discourage takeovers apart from those proposed in this Proxy Statement, if
warranted from time to time in the judgment of the Board of Directors.
6
The proposed reincorporation would be accomplished by merging the Company
into a newly formed Delaware corporation which, just before the merger, will be
a wholly owned subsidiary of the Company (the "Delaware Company"), pursuant to
an Agreement and Plan of Merger (the "Merger Agreement"), a copy of which is
attached as Exhibit A to this Proxy Statement. Upon the effective date of the
merger, the Delaware Company's name will be Inhale Therapeutic Systems, Inc. The
reincorporation will not result in any change in the Company's business, assets
or liabilities, will not cause its corporate headquarters to be moved and will
not result in any relocation of management or other employees.
Following the effectiveness of the proposed reincorporation, each
outstanding share of Common Stock of the Company will automatically convert into
one share of Common Stock of the Delaware Company, and shareholders of the
Company will automatically become shareholders of the Delaware Company. On the
effective date of the reincorporation, the number of outstanding shares of
Common Stock of the Delaware Company will be equal to the number of shares of
Common Stock of the Company outstanding immediately prior to the effective date
of the reincorporation. In addition, each outstanding option or right to acquire
shares of Common Stock of the Company will be converted into an option or right
to acquire an equal number of shares of Common Stock of the Delaware Company,
under the same terms and conditions as the original options or rights. All of
the Company's employee benefit plans, including the 1994 Equity Incentive Plan,
the 1994 Non-Employee Directors' Stock Option Plan and the Employee Stock
Purchase Plan will be continued by the Delaware Company following the
reincorporation. Shareholders should recognize that approval of the proposed
reincorporation will constitute approval of the adoption and assumption of those
plans by the Delaware Company.
No action need be taken by shareholders to exchange their stock certificates
now; this will be accomplished at the time of the next transfer by the
shareholder. Certificates for shares in the Company will automatically represent
an equal number of shares in the Delaware Company upon completion of the merger.
The affirmative vote of at least a majority of the outstanding shares of the
Company's voting stock is required for approval of the reincorporation. If
approved by the shareholders, it is anticipated that the reincorporation would
be completed as soon thereafter as practicable. The reincorporation may be
abandoned or the Merger Agreement may be amended (with certain exceptions),
either before or after shareholder approval has been obtained, if in the opinion
of the Board of Directors, circumstances arise that make such action advisable;
provided, that any amendment that would effect a material change from the
charter provisions discussed in this Proxy Statement would require further
approval by the holders of a majority of the outstanding voting shares.
SIGNIFICANT CHANGES CAUSED BY REINCORPORATION
In general, the Company's corporate affairs are governed at present by the
corporate law of California, the Company's state of incorporation, and by the
California Articles and the California Bylaws, which have been adopted pursuant
to California law. The California Articles and California Bylaws are available
for inspection during business hours at the principal executive office of the
Company. In addition, copies may be obtained by writing to Inhale Therapeutic
Systems, 150 Industrial Road, San Carlos, CA 94070, Attention: Corporate
Secretary.
If the reincorporation proposal is adopted, the Company will merge into, and
its business will be continued by, the Delaware Company. Following the merger,
issues of corporate governance and control would be controlled by Delaware law,
rather than California law (however, see "Application of California Law After
Reincorporation"). The California Articles and California Bylaws, will, in
effect, be replaced by the Delaware Certificate and the Delaware Bylaws, copies
of which are attached as Exhibits B and C, respectively, to this Proxy
Statement. Accordingly, the differences among these documents and between
Delaware and California law are relevant to your decision whether to approve the
reincorporation proposal.
7
A number of differences between California and Delaware law and among the
various charter documents are summarized in the chart below. Shareholders are
requested to read the following chart in conjunction with the discussion
following the chart and the Merger Agreement, the Delaware Certificate and the
Delaware Bylaws attached to this Proxy Statement. For each item summarized in
the chart, there is a reference to a page of this Proxy Statement on which a
more detailed discussion appears.
ISSUE DELAWARE CALIFORNIA
- ---------------------- -------------------------------------------- --------------------------------------------
Limitation of Delaware law permits the limitation of California law contains additional
Liability of liability of directors and officers to the exceptions to the liability limitations of
Directors and Company except in connection with (i) directors and officers. See "Indemnification
Officers breaches of the duty of loyalty; (ii) acts and Limitation of Liability."
(see page 10). or omissions not in good faith or involving
intentional misconduct or knowing violations
of law; (iii) the payment of unlawful
dividends or unlawful stock repurchases or
redemptions; or (iv) transactions in which a
director received an improper personal
benefit.
Indemnification of Delaware law permits somewhat broader California Law permits indemnification under
Directors and indemnification and could result in certain circumstances, subject to certain
Officers indemnification of directors and officers in limitations. See "Indemnification and
(see page 10). circumstances where California law would not Limitation of Liability."
permit indemnification. See "Indemnification
and Limitation of Liability."
Cumulative Voting for Cumulative voting not available under California law permits Nasdaq National
Directors Delaware law because not provided in the Market corporations with over 800 equity
(See page 11). Delaware Certificate. security holders to eliminate cumulative
voting; the California Articles have
eliminated cumulative voting.
Number of Directors Determined solely by resolution of the Determined by Board within range set in the
(see page 12). Board. California Bylaws. Changes in the authorized
range must be approved by the shareholders.
Classified Board The Delaware Certificate presently The California Company presently has a Board
(see page 12). designates three classes of directors. consisting of a single class of directors.
Removal of Directors Removal for cause by affirmative vote of a Removal with or without cause by affirmative
by Shareholders majority of the outstanding voting stock vote of a majority of the outstanding voting
(see page 13). entitled to vote at an election of stock, provided that shares voting against
directors. Directors may not be removed removal could not elect such director under
without cause. cumulative voting.
8
ISSUE DELAWARE CALIFORNIA
- ---------------------- -------------------------------------------- --------------------------------------------
Who May Call Special The Board, the Chairman of the Board, the The Board, the Chairman of the Board, the
Shareholder Meeting Chief Executive Officer or holders of 10% of President or holders of 10% of the shares
(see page 14). the shares entitled to vote at the special entitled to vote at the special meeting.
meeting.
Action by Written Action by written consent not permitted by Actions by written consent not permitted by
Consent of Delaware Certificate. All stockholder action California Articles. All shareholder actions
Shareholders in Lieu must take place by a stockholder vote at a must take place by a shareholder vote at a
of a Shareholder meeting of stockholders. meeting of shareholders.
Vote at Shareholder
Meeting
(see page 15).
Tender Offer Statute; Restricts hostile two-step takeovers; the No comparable state law; the California
Fair Price Provision Delaware Certificate does not contain a fair Articles do not contain a fair price
(see page 15). price provision. provision.
Amendment of Amendments to provisions relating to Amendments to the California Articles
Certificate director indemnification, management of the require approval by a majority of the
(see page 17). Delaware Company and certain other outstanding voting stock of the Company.
provisions of the Delaware Certificate
require approval by 66 2/3% of the
outstanding voting stock.
Amendment of Bylaws By the Board or the holders of 66 2/3% of By the Board or the holders of a majority of
(see page 17). the outstanding voting stock. the outstanding voting stock.
Loans to Officers and Board may authorize if expected to benefit Loans must be approved or ratified by a
Directors the Company. majority of the outstanding stock.
(see page 17).
Class Vote for Generally not required unless a A reorganization transaction must generally
Reorganizations reorganization adversely affects a specific be approved by a majority vote of each class
(see page 17). class of stock. of stock outstanding.
Right of Shareholders Permitted for any purpose reasonably related Permitted for any purpose reasonably related
to Inspect to such shareholder's interest as a to such shareholder's interest as a
Shareholder List shareholder. shareholder. Also, an absolute right to 5%
(see page 18). shareholders and certain 1% shareholders.
Appraisal Rights Generally available if shareholders receive Available in certain circumstances if the
(see page 18). cash in exchange for the shares and in holders of 5% of the class assert such
certain other circumstances. rights.
9
ISSUE DELAWARE CALIFORNIA
- ---------------------- -------------------------------------------- --------------------------------------------
Dividends Paid from surplus (including paid-in and Generally limited to the greater of (i)
(see page 18). earned surplus or net profits). retained earnings or (ii) an amount which
would leave the Company with assets of 125%
of liabilities and current assets of 100% of
current liabilities.
Other Responsive legislature and larger body of
corporate case law in Delaware provides more
predictable corporate legal environment in
Delaware.
INDEMNIFICATION AND LIMITATION OF LIABILITY
California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit corporations to adopt a provision in their articles of
incorporation eliminating the liability of a director to the corporation or its
shareholders for monetary damage for breach of the director's fiduciary duty of
care. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
The California Articles eliminate the liability of directors to the
corporation to the fullest extent permissible under California law. California
law does not permit the elimination of monetary liability where such liability
is based on: (a) intentional misconduct or knowing and culpable violation of
law; (b) acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, or that involve the absence of
good faith on the part of the director; (c) receipt of an improper personal
benefit; (d) acts or omissions that show reckless disregard for the director's
duty to the corporation or its shareholders, where the director in the ordinary
course of performing a director's duties should be aware of a risk of serious
injury to the corporation or its shareholders; (e) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the corporation and its shareholders; (f) interested
transactions between the corporation and a director in which a director has a
material financial interest; and (g) liability for improper distributions, loans
or guarantees.
The Delaware Certificate also eliminates the liability of directors to the
fullest extent permissible under Delaware law, as such law exists currently or
as it may be amended in the future. Under Delaware law, such provision may not
eliminate or limit director monetary liability for: (a) breaches of the
director's duty of loyalty to the corporation or its shareholders; (b) acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law; (c) the payment of unlawful dividends or unlawful stock
repurchases or redemptions; or (d) transactions in which the director received
an improper personal benefit. Such limitation of liability provision also may
not limit a director's liability for violation of, or otherwise relieve the
Delaware Company or its directors from the necessity of complying with, federal
or state securities laws or affect the availability of non-monetary remedies
such as injunctive relief or rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (a) no
indemnification may be made without court approval when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines such person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that such court shall determine, and (b) no indemnification
may be made under California law without court approval in respect of amounts
paid or expenses incurred in settling or otherwise disposing of a threatened or
pending action or amounts incurred
10
in defending a pending action which is settled or otherwise disposed of without
court approval. Delaware allows indemnification of such expenses without court
approval.
Indemnification is permitted by both California and Delaware law providing
the requisite standard of conduct is met, as determined by a majority vote of a
disinterested quorum of the directors, independent legal counsel (if a quorum of
independent directors is not obtainable), a majority vote of a quorum of the
shareholders (excluding shares owned by the indemnified party) or the court
handling the action.
California law requires indemnification when the individual has successfully
defended the action on the merits (as opposed to Delaware law which requires
indemnification relating to a successful defense on the merits or otherwise).
Delaware law generally permits indemnification of expenses incurred in the
defense or settlement of a derivative or third-party action, provided there is a
determination by a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the shareholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to California law) not opposed to the best interests of
the corporation. Without court approval, however, no indemnification may be made
in respect of any derivative action in which such person is adjudged liable for
negligence or misconduct in the performance of his or her duty to the
corporation. Delaware law requires indemnification of expenses when the
individual being indemnified has successfully defended the action on the merits
or otherwise.
The indemnification and limitation of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of the California Company made prior to the proposed reincorporation.
Nevertheless, the Board has recognized in considering this reincorporation
proposal that the individual directors have a personal interest in obtaining the
application of Delaware law to such indemnity and limitation of liability issues
affecting them and the Company in the event they arise from a potential future
case, and that the application of Delaware law, to the extent that any director
or officer is actually indemnified in circumstances where indemnification would
not be available under California law, would result in expense to the Company
which the Company would not incur if the Company were not reincorporated. The
Board believes, however, that the overall effect of reincorporation is to
provide a corporate legal environment that enhances the Company's ability to
attract and retain high quality outside directors and thus benefits the
interests of the Company and its shareholders.
CUMULATIVE VOTING FOR DIRECTORS
Cumulative voting permits the holder of each share of stock entitled to vote
in the election of directors to cast that number of votes which equal the number
of directors to be elected. The holder may allocate all votes represented by a
share to a single candidate or may allocate those votes among as many candidates
as he chooses. Thus, a shareholder with a significant minority percentage of the
outstanding shares may be able to elect one or more directors if voting is
cumulative.
Under California law cumulative voting in the election of directors is
mandatory upon notice given by a shareholder at a shareholders' meeting at which
directors are to be elected. In order to cumulate votes a shareholder must give
notice at the meeting, prior to the voting, of the shareholder's intention to
vote cumulatively. If any one shareholder gives such a notice, all shareholders
may cumulate their votes. However, California law permits a company to eliminate
cumulative voting when the Company's shares are listed on a national stock
exchange or traded on the Nasdaq National Market and are held by at least 800
equity security holders. On the basis of the foregoing exception, cumulative
voting was eliminated under the California Articles.
Cumulative voting is not available under Delaware law unless so provided in
the corporation's certificate of incorporation. The Delaware Certificate does
not provide for cumulative voting.
11
OTHER MATTERS RELATING TO DIRECTORS
NUMBER OF DIRECTORS. California law allows the number of persons
constituting the board of directors of a corporation to be fixed by the bylaws
or the articles of incorporation, or permits the bylaws to provide that the
number of directors may vary within a specified range, the exact number to be
determined by the Board of Directors. California law further provides that, in
the case of a variable board, the maximum number of directors may not exceed two
times the minimum number minus one. The California Articles and Bylaws provide
for a board of directors that may vary between five and nine members, inclusive,
and the Board of Directors has fixed the exact number of directors at seven.
California law also requires that any change in a fixed number of directors and
any change in the range of a variable Board of Directors specified in the
articles and bylaws must be approved by a majority in interest of the
outstanding shares entitled to vote (or such greater proportion of the
outstanding shares as may be required by the articles of incorporation).
Delaware law permits a board of directors to change the authorized number of
directors by amendment to the bylaws unless the number of directors is fixed in
the certificate of incorporation or the manner of fixing the number of directors
is set forth in the certificate of incorporation, in which case the number of
directors may be changed only by amendment of the certificate of incorporation
or consistent with the manner specified in the certificate of incorporation, as
the case may be. The Delaware Certificate provides that the exact number of
directors shall be fixed from time to time exclusively by the Board of Directors
by resolution.
ELECTIONS; CLASSIFIED BOARD OF DIRECTORS. California law generally requires
that directors be elected annually but does permit a "classified" Board of
Directors if (i) a corporation is listed on a national stock exchange or (ii)
the corporation's shares are traded on the Nasdaq National Market and are held
by at least 800 shareholders. California law also allows the election of one or
more directors by the holders of a particular class or series of shares. The
California Articles currently do not provide for a classified board of
directors. The directors of the California Company, who will also be the
directors of the Delaware Company if the reincorporation proposal is approved,
are set forth in Proposal One.
Delaware law permits, but does not require, the adoption of a classified
board of directors with staggered terms. A maximum of three classes of directors
is permitted by Delaware law, with members of one class to be elected each year
for a maximum term of three years. Classification of the Board of Directors
might make it more difficult for a person acquiring shares to take immediate
control of the Board of Directors. The Delaware Certificate and the Delaware
Bylaws provide for a classified Board of Directors with three classes of
directors (the "Classified Board Provision").
Under the Classified Board Provision, the Board of Directors would be
divided into three classes, designated Class I, Class II and Class III. All
directors in Class I would hold office until the first annual meeting of
stockholders following the implementation of the Classified Board Provision upon
the filing of the Certificate of Incorporation; all directors in Class II would
hold office until the second annual meeting of stockholders following such
implementation of the Classified Board Provision; and all directors in Class III
would hold office until the third annual meeting of the stockholders following
such implementation of the Classified Board Provision and, in each case, until
their successors are duly elected and qualified or until their earlier
resignation, removal from office or death. As a result, only one class of
directors will be elected at each annual meeting of stockholders, with the
remaining classes continuing their respective two-year and three year terms
until the successors are duly elected and qualified or until earlier
resignation, removal from office or death.
12
If the reincorporation proposal is adopted, the directors of the Delaware
Company, who are also the current directors of the Company, will be divided into
classes as follows:
NAME CLASS
- ------------------------ ---------
Ajit S. Gill I
Melvin Perelman I
Robert B. Chess II
Mark J. Gabrielson II
James B. Glavin II
John S. Patton III
Terry L. Opdendyk III
By approving Proposal Two, shareholders will be approving the Classified
Board Provision, the election of the same directors as would be elected to the
Board of Directors of the Company in the event Proposal One is approved by the
shareholders, and the initial classification of directors set forth above.
Classification of directors is likely to provide the Board of Directors with
greater continuity and experience, since normally at least one member of the
Board of Directors would be in such member's second year of service and at least
one member of the Board of Directors would be in such member's third year of
service. Although the Board of Directors is not aware of any problems
experienced by the Company in the past with respect to continuity and stability
of leadership and policy, the Board of Directors believes that a classified
Board of Directors could decrease the likelihood of such problems arising in the
future.
Adoption of the Classified Board Provision may significantly extend the time
required to elect a new majority to the Board of Directors. Presently, the
California Articles allows a change in control of the Board of Directors by a
majority of the Company's shareholders at a single annual meeting or special
meeting of shareholders. With the Classified Board Provision, unless directors
are removed, it will require at least two annual meetings of shareholders for a
majority of shareholders that is less than a two-thirds majority to make a
change in control of the Board of Directors, since only a minority of the
directors will be elected at each meeting. A significant effect of a classified
Board of Directors may be to deter hostile takeover attempts because an acquirer
would experience delay in replacing a majority of the directors. However, a
classified Board of Directors will also make it more difficult for shareholders
to effect a change in control of the Board of Directors, even if such a change
in control is sought due to dissatisfaction with the performance of the
Company's directors.
The existence of a classified Board may deter so-called "creeping
acquisitions" in which a person or group seeks to acquire: (i) a controlling
position without paying a normal control premium to the selling shareholders;
(ii) a position sufficient to exert control over the Company through a proxy
contest or otherwise; or (iii) a block of stock with a view toward attempting to
promote a sale or liquidation or a repurchase by the Company of the block at a
premium, or an exchange of the block for assets of the Company. Faced with a
classified Board of Directors, such a person or group would have to assess
carefully its ability to control or influence the Company. If free of the
necessity to act in response to an immediately threatened change in control, the
Board of Directors can act in a more careful and deliberative manner to make and
implement appropriate business judgments in response to a creeping acquisition.
REMOVAL OF DIRECTORS. Under California law, a director may be removed with
or without cause by the affirmative vote of a majority of the outstanding
shares, provided that the shares voted against removal would not be sufficient
to elect the director by cumulative voting. The Delaware Certificate provides
that the Company's directors can be removed for cause by the affirmative vote of
the holders of a majority of the combined voting power of the then outstanding
shares of capital stock of the Company entitled to vote generally in the
election of directors (the "Voting Stock") voting as a single class. The term
"cause" with respect to the removal of directors is not defined in the Delaware
General Corporation Law and its meaning has not been precisely delineated by the
Delaware courts. The Delaware Certificate provides that the Company's directors
may not be removed without cause.
13
CAPITALIZATION; BLANK CHECK PREFERRED
The Company's capital stock consists of 30,000,000 authorized shares of
Common Stock, no par value, of which 15,614,701 shares were issued and
outstanding as of April 27, 1998, and (b) 10,000,000 authorized shares of
Preferred Stock, no par value, of which none were issued and outstanding as of
April 27, 1998.
The Board has increased the Company's authorized number of shares of Common
Stock for the Delaware Company. The capitalization of the Delaware Company has
authorized capital stock of 50,000,000 shares of Common Stock, $.0001 par value,
and 10,000,000 shares of Preferred Stock, $.0001 par value, consistent with
maintaining adequate capitalization for the current needs of the Company. The
Delaware Company's authorized but unissued shares of Preferred Stock will be
available for future issuance.
The additional shares of Common Stock that would become available for
issuance if this proposal were adopted could also be used by the Delaware
Company to oppose a hostile takeover attempt or delay or prevent changes in
control or management of the Delaware Company. For example, without further
stockholder approval, the Board could (i) adopt a "poison pill" which would,
under certain circumstances related to an acquisition not approved by the Board
of Directors, give certain holders the right to acquire additional shares of
Common Stock at a low price, or (ii) sell shares of Common Stock in a private
transaction to purchasers who would oppose a takeover or favor the current
Board. Although this proposal to increase the authorized Common Stock has been
prompted by business and financial considerations and not by the threat of any
known or threatened hostile takeover attempt, shareholders should be aware that
approval of this proposal could facilitate future efforts by the Delaware
Company to deter or prevent changes in control of the Delaware Company,
including transactions in which the shareholders might otherwise receive a
premium for their shares over then current market prices.
Under the Delaware Certificate, as under the California Articles, the Board
of Directors has the authority to determine or alter the rights, preferences,
privileges and restrictions to be granted to or imposed upon any wholly unissued
series of Preferred Stock and to fix the number of shares constituting any such
series and to determine the designation thereof. See "Anti-Takeover Measures."
The Board may authorize the issuance of Preferred Stock in connection with
various corporate transactions, including corporate partnering arrangements. The
Board may also authorize the issuance of Preferred Stock for the purpose of
adopting a shareholder rights plan. IF THE REINCORPORATION IS APPROVED, IT IS
NOT THE PRESENT INTENTION OF THE BOARD OF DIRECTORS TO SEEK SHAREHOLDER APPROVAL
PRIOR TO ANY ISSUANCE OF PREFERRED STOCK, EXCEPT AS REQUIRED BY LAW OR
REGULATION.
SHAREHOLDER POWER TO CALL SPECIAL SHAREHOLDERS' MEETING
Under California law, a special meeting of shareholders may be called by the
Board of Directors, the Chairman of the Board of Directors, the President or the
holders of shares entitled to cast not less than 10% of the votes at such
meeting and such persons as are authorized by the articles of incorporation or
bylaws. Under Delaware law, a special meeting of shareholders may be called by
the Board of Directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. The Delaware Certificate and
Delaware Bylaws provide that such a meeting may be called by the Board of
Directors, the Chairman of the Board of Directors, the Chief Executive Officer
or holders of 10% or more of the outstanding voting stock. Pursuant to the
Delaware Certificate and Delaware Bylaws, if the meeting is called by a person
or persons other than the Board of Directors, (i.e., by the Chairman or the
Board of the Chief Executive Officer or holders of 10% or more of the
outstanding stock) the Board of Directors shall determine the time and the place
of such meeting which shall be from 35 to 120 days after the receipt of the
request of the meeting.
14
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
Under California and Delaware law, shareholders may execute an action by
written consent in lieu of a shareholder meeting. Both California and Delaware
law permit a corporation to eliminate such actions by written consent in its
charter. The California Articles have eliminated the ability of shareholders to
act by written consent. The Delaware Certificate also eliminates actions by
written consent of shareholders.
ADVANCE NOTICE REQUIREMENT FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
There is no specific statutory requirement under either California or
Delaware law with regard to advance notice of director nominations and
shareholder proposals. Absent a bylaw restriction, director nominations and
shareholder proposals may be made without advance notice at the annual meeting.
However, federal securities laws generally provide that shareholder proposals
that the proponent wishes to include in the Company's proxy materials must be
received not less than 120 days in advance of the date of the proxy statement
released in connection with the previous year's annual meeting.
Both the California Bylaws and the Delaware Bylaws provide that in order for
director nominations or shareholder proposals to be properly brought before the
meeting, the shareholder must have delivered timely notice to the Secretary of
the corporation. To be timely, notice must have been delivered not less than 120
days prior to the anniversary of the mailing date for the previous year's annual
meeting under the California Bylaws, and not less than 60 nor more than 90 days
prior to the mailing date for the previous year's annual meeting under the
Delaware Bylaws. If no annual meeting was held in the previous year or the date
of the annual meeting has been changed by more than 30 days from the date
contemplated at the time of the previous year's proxy statement, the California
Bylaws provide that notice must be provided a reasonable time before the
solicitation is made and the Delaware Bylaws will provide that notice must be
given not more than 90 days nor less than 60 days prior to the annual meeting.
Proper notice under the federal securities laws for a proposal to be included in
the Company's proxy materials will constitute proper notice under the Delaware
Bylaws. These notice requirements help ensure that shareholders are aware of all
proposals to be voted on at the meeting and have the opportunity to consider
each proposal in advance of the meeting.
ANTI-TAKEOVER MEASURES
Delaware law has been widely viewed to permit a corporation greater
flexibility in governing its internal affairs and its relationships with
stockholders and other parties than do the laws of many other states, including
California. In particular, Delaware law permits a corporation to adopt a number
of measures designed to reduce a corporation's vulnerability to hostile takeover
attempts. Such measures are either not currently permitted or are more narrowly
drawn under California law. Among these measures is the establishment of a
classified board of directors, which is described above. In addition, certain
types of "poison pill" defenses (such as shareholder rights plans) have been
upheld by Delaware courts, while California courts have yet to decide on the
validity of such defenses, thus rendering their effectiveness in California less
certain.
As discussed herein, certain provisions of the Delaware Certificate could be
considered to be anti-takeover measures. Although the Board of Directors does
not have knowledge that any attempt to gain control of the Company is being
contemplated, numerous differences between California and Delaware law,
effective without additional action by the Delaware Company, could have a
bearing on unapproved takeover attempts.
One such difference is the existence of a Delaware statute regulating tender
offers, which statute is intended to limit coercive takeovers of companies
incorporated in that state. California has no comparable statute. The Delaware
law provides that a corporation may not engage in any business combination with
any interested shareholder for a period of three years following the date that
such shareholder became an interested shareholder, unless (i) prior to the date
the shareholder became an interested shareholder the
15
Board of Directors approved the business combination or the transaction which
resulted in the shareholder becoming an interested shareholder, or (ii) upon
consummation of the transaction which resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of the
Voting Stock, or (iii) the business combination is approved by the Board of
Directors and authorized by 66 2/3% of the outstanding Voting Stock which is not
owned by the interested shareholder. An interested shareholder means any person
that is the owner of 15% or more of the outstanding Voting Stock, however, the
statute provides for certain exceptions to parties who otherwise would be
designated interested shareholders. Any corporation may decide to opt out of the
statute in its original certificate of incorporation or, at any time, by action
of its shareholders. The Company has no present intention of opting out of the
statute.
There can be no assurance that the Board of Directors would not adopt any
further anti-takeover measures available under Delaware law (some of which may
not require shareholder approval). Moreover, the availability of such measures
under Delaware law, whether or not implemented, may have the effect of
discouraging a future takeover attempt which a majority of the Delaware
Company's shareholders may deem to be in their best interests or in which
shareholders may receive a premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such
transactions may not have the opportunity to do so. Shareholders should
recognize that, if adopted, the effect of such measures, along with the
possibility of discouraging takeover attempts, may be to limit in certain
respects the rights of shareholders of the Delaware Company compared with the
rights of shareholders of the Company.
In addition to the various anti-takeover measures that would be available to
the Delaware Company after the reincorporation due to the application of
Delaware law, the Delaware Company would retain the rights currently available
to the Company under California law to issue shares of its authorized but
unissued capital stock. Following the effectiveness of the proposed
reincorporation, shares of authorized and unissued Common Stock and Preferred
Stock of the Delaware Company could (within the limits imposed by applicable
law) be issued in one or more transactions, or Preferred Stock could be issued
with terms, provisions and rights which would make more difficult and,
therefore, less likely, a takeover of the Delaware Company. Any such issuance of
additional stock could have the effect of diluting the earnings per share and
book value per share of existing shares of Common Stock and Preferred Stock, and
such additional shares could be used to dilute the stock ownership of persons
seeking to obtain control of the Delaware Company.
It should be noted that the voting rights to be accorded to any unissued
series of Preferred Stock of the Delaware Company ("Delaware Preferred Stock")
remain to be fixed by the Board of Directors of the Delaware Company (the
"Delaware Board"). Accordingly, if the Delaware Board so authorizes, the holders
of Delaware Preferred Stock may be entitled to vote separately as a class in
connection with approval of certain extraordinary corporate transactions in
circumstances where Delaware law does not ordinarily require such a class vote,
or might be given a disproportionately large number of votes. Such Delaware
Preferred Stock could also be convertible into a large number of shares of
Common Stock of the Delaware Company under certain circumstances or have other
terms which might make acquisition of a controlling interest in the Delaware
Company more difficult or more costly, including the right to elect additional
directors to the Delaware Board. Potentially, the Delaware Preferred Stock could
be used to create voting impediments or to frustrate persons seeking to effect a
merger or otherwise to gain control of the Delaware Company. Also, the Delaware
Preferred Stock could be privately placed with purchasers who might side with
the management of the Delaware Company in opposing a hostile tender offer or
other attempt to obtain control.
The Board may also authorize the issuance of Preferred Stock in connection
with various corporate transactions, including corporate partnering
arrangements. The Board may also authorize the issuance of Preferred Stock for
the purpose of adopting a shareholder rights plan. However, future issuances of
Delaware Preferred Stock as an anti-takeover device might preclude shareholders
from taking advantage
16
of a situation which might otherwise be favorable to their interests. In
addition (subject to the considerations referred to above as to applicable law),
the Delaware Board could authorize issuance of shares of Common Stock of the
Delaware Company ("Delaware Common Stock") or Delaware Preferred Stock to a
holder who might thereby obtain sufficient voting power to ensure that any
proposal to alter, amend or repeal provisions of the Delaware Certificate
unfavorable to a suitor would not receive the necessary vote of 66 2/3% of the
Voting Stock required for certain of the proposed amendments (as described
below).
IF THE REINCORPORATION IS APPROVED IT IS NOT THE PRESENT INTENTION OF THE
BOARD OF DIRECTORS TO SEEK SHAREHOLDER APPROVAL PRIOR TO ANY ISSUANCE OF THE
DELAWARE PREFERRED STOCK OR DELAWARE COMMON STOCK, EXCEPT AS REQUIRED BY LAW OR
REGULATION. Frequently, opportunities arise that require prompt action, and it
is the belief of the Board of Directors that the delay necessary for shareholder
approval of a specific issuance would be a detriment to the Delaware Company and
its shareholders. The Board of Directors does not intend to issue any Preferred
Stock except on terms which the Board of Directors deems to be in the best
interests of the Delaware Company and its then existing shareholders.
AMENDMENT OF CERTIFICATE
The California Articles may be amended by the approval of a majority of the
members of the Board of Directors and by a majority of the outstanding shares.
The Delaware Certificate provides that the provisions relating to: (i)
indemnification of officers and directors; (ii) the number, election and removal
of directors; (iii) the amendment of the Delaware Bylaws; and (iv) certain other
provisions can only be amended by the affirmative vote of the holders of at
least 66 2/3% of the voting power of the outstanding voting stock of the
Delaware Company.
AMENDMENT OF BYLAWS
The California Bylaws may be amended or repealed either by the Board of
Directors or by the holders of a majority in interest of the outstanding stock
of the Company. Upon the effectiveness of the proposed reincorporation, the
Delaware Board will be able to adopt, amend or repeal any of the Delaware
Bylaws. The Delaware Bylaws may also be adopted, amended or repealed by the
holders of at least 66 2/3% of the voting power of the outstanding capital stock
of the Delaware Company.
LOANS TO OFFICERS, DIRECTORS AND EMPLOYEES
California law provides that any loan or guaranty (other than loans to
permit the purchase of shares under certain stock purchase plans) for the
benefit of any officer or director, or any employee benefit plan authorizing
such loan or guaranty (except certain employee stock purchase plans), must be
approved by the shareholders of a California corporation.
Under Delaware law, a corporation may make loans to, or guarantee the
obligations of, officers or other employees when, in the judgment of the board
of directors, the loan or guaranty may reasonably be expected to benefit the
corporation. Both California law and Delaware law permit such loans or
guaranties to be unsecured and without interest.
CLASS VOTE FOR CERTAIN REORGANIZATIONS
With certain exceptions, California law requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding. Delaware law generally does
not require class voting for such transactions, except in certain situations
involving an amendment to the certificate of incorporation which adversely
affects a specific class of shares.
California law also requires that holders of a California corporation's
Common Stock receive nonredeemable Common Stock in a merger of the corporation
with the holder (or an affiliate of the holder) of more than 50% but less than
90% of its Common Stock, unless all of the holders of its Common
17
Stock consent to the merger or the merger has been approved by the California
Commissioner of Corporations at a "fairness" hearing. This provision of
California law may have the effect of making a cash "freezeout" merger by a
majority shareholder more difficult to accomplish. A cash freezeout merger is a
transaction whereby a minority shareholder is forced to relinquish his share
ownership in a corporation in exchange for cash, subject in certain instances to
dissenters rights. Delaware law has no comparable provision.
INSPECTION OF SHAREHOLDER LISTS
California law provides for an absolute right of inspection of the
shareholder list for shareholders holding 5% or more of a corporation's
outstanding voting shares or shareholders holding 1% or more of such shares who
have filed a Schedule 14B with the Securities and Exchange Commission (the
"SEC"). Delaware law provides no such absolute right of shareholder inspection.
However, both California and Delaware law permit any shareholder of record to
inspect the shareholder list for any purpose reasonably related to that person's
interest as a shareholder.
APPRAISAL RIGHTS
Under both California law and Delaware law, a shareholder of a corporation
participating in certain mergers and reorganizations may be entitled to receive
cash in the amount of the "fair value" (Delaware) or "fair market value"
(California) of his shares, as determined by a court, in lieu of the
consideration he would otherwise receive in the transaction. The limitations on
such dissenters' appraisal rights are somewhat different in California and
Delaware.
Shareholders of a California corporation, the shares of which are listed on
a national securities exchange or on the OTC margin stock list, generally do not
have appraisal rights unless the holders of at least 5% of the class of
outstanding shares assert the appraisal right. In any reorganization in which
one corporation or the shareholders of one corporation own more than 5/6 of the
voting power of the surviving or acquiring corporation, shareholders are denied
dissenters' rights under California law. For this reason, appraisal rights will
not be available to shareholders in connection with the reincorporation
proposal.
Under Delaware law appraisal rights are not available to shareholders with
respect to a merger or consolidation by a corporation, the shares of which are
either listed on a national securities exchange or designated as a national
market system security or an interdealer quotation system security by the
National Association of Securities Dealers, Inc., or are held of record by more
than 2,000 holders if the shareholders receive shares of the surviving
corporation or shares of any other corporation which are similarly listed or
dispersed, and the shareholders do not receive any other property in exchange
for their shares except cash for fractional shares. Appraisal rights are also
unavailable under Delaware law to shareholders of a corporation surviving a
merger if no vote of those shareholders is required to approve the merger
because, among other things, the number of shares to be issued in the merger
does not exceed 20% of the shares of the surviving corporation outstanding
immediately before the merger and certain other conditions are met.
VOTING AND APPRAISAL RIGHTS IN CERTAIN TRANSACTIONS
Delaware law does not provide shareholders with voting or appraisal rights
when a corporation acquires another business through the issuance of its stock
in exchange for assets or stock or in a merger with a subsidiary. California law
treats these kinds of acquisitions in the same manner as a merger of the
corporation directly with the business to be acquired and provides appraisal
rights in the circumstances described in the preceding section.
DIVIDENDS
Under California law, any dividends or other distributions to shareholders,
such as redemptions, are limited to the greater of (i) retained earnings or (ii)
an amount which would leave the corporation with
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assets (excluding certain intangible assets) equal to at least 125% of its
liabilities (excluding certain deferred items) and current assets equal to at
least 100% (or, in certain circumstances, 125%) of its current liabilities.
Delaware law allows the payment of dividends and redemption of stock out of
surplus (including paid-in and earned surplus) or out of net profits for the
current and immediately preceding fiscal years. The Company has never paid cash
dividends and has no present plans to do so.
DISSOLUTION
Under California law, shareholders holding 50% or more of the outstanding
voting power may dissolve the corporation without the approval of the Board of
Directors. Under Delaware law, dissolution requires either the approval of the
Board of Directors and a majority of the outstanding shares, or unanimous
approval of the stockholders.
APPLICATION OF CALIFORNIA LAW AFTER REINCORPORATION
California law provides that if (i) the average of certain property, payroll
and sales factors results in a finding that more than 50% of the Delaware
Company's business is conducted in California, and in a particular fiscal year
more than 50% of the Delaware Company's outstanding voting securities are held
of record by persons having addresses in California, and (ii) the Company's
shares are not traded (A) on the New York Stock Exchange, (B) the American Stock
Exchange or (C) on the Nasdaq National Market and the Company's stock was held
by fewer than 800 equity security holders, as of the record date of its most
recent annual meeting of shareholders, then the Delaware Company would become
subject to certain provisions of California law regardless of its state of
incorporation.
Because the Company's Common Stock is traded in the Nasdaq National Market
and the Company's shares were held by at least 800 equity security holders, as
of the record date of its most recent annual meeting of shareholders, California
law will not initially apply to the Delaware Company if the reincorporation is
approved. The Company would not be subject to California law as long as it
continued to meet both of these requirements.
If the Delaware Company were to become subject to the provisions of
California law referred to above, and such provisions were enforced by
California courts in a particular case, many of the Delaware laws described in
this Proxy Statement would not apply to the Delaware Company. Instead, the
Delaware Company could be governed by certain California laws, including those
regarding liability of directors for breaches of the duty of care,
indemnification of directors, dissenters' rights of appraisal, removal of
directors as well as certain other provisions discussed above, to the exclusion
of Delaware law. The effects of applying both Delaware and California laws to a
Delaware corporation whose principal operations are based in California have not
yet been determined.
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
The reincorporation provided for in the Merger Agreement is intended to be a
tax free reorganization under the Internal Revenue Code of 1986, as amended.
Assuming the reincorporation qualifies as a reorganization, no gain or loss will
be recognized to the holders of capital stock of the Company as a result of
consummation of the reincorporation, and no gain or loss will be recognized by
the Company or the Delaware Company. Each former holder of capital stock of the
Company will have the same basis in the capital stock of the Delaware Company
received by such holder pursuant to the reincorporation as such holder has in
the capital stock of the Company held by such holder at the time of consummation
of the reincorporation. Each shareholder's holding period with respect to the
Delaware Company's capital stock will include the period during which such
holder held the corresponding Company capital stock, provided the latter was
held by such holder as a capital asset at the time of consummation of the
reincorporation. The Company has not obtained a ruling from the Internal Revenue
Service or an opinion of legal or tax counsel with respect to the consequences
of the reincorporation.
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The foregoing is only a summary of certain federal income tax consequences.
Shareholders should consult their own tax advisers regarding the specific tax
consequences to them of the merger, including the applicability of the laws of
any state or other jurisdiction.
BOARD RECOMMENDATION
The foregoing discussion is an attempt to summarize the more important
differences in the corporation laws of Delaware and California and does not
purport to be an exhaustive discussion of all of the differences. Such
differences can be determined in full by reference to the California
Corporations Code and to the Delaware General Corporation Law. In addition, both
California and Delaware law provide that some of the statutory provisions as
they affect various rights of holders of shares may be modified by provisions in
the charter or bylaws of the corporation.
A vote FOR the reincorporation proposal will constitute approval of the
merger, the Delaware Certificate, the Delaware Bylaws, the adoption and
assumption by the Delaware Company of each of the Company's stock option, stock
purchase and employee benefit plans and all other aspects of this Proposal Two.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL TWO.
PROPOSAL THREE
APPROVAL OF THE 1994 EQUITY INCENTIVE PLAN, AS AMENDED
In February 1994, the Board of Directors adopted, and the shareholders
subsequently approved, the Company's 1994 Equity Incentive Plan (the "Equity
Incentive Plan"). The Equity Incentive Plan was an amendment and restatement of
the Company's 1992 Stock Option Plan. In March 1996, the Board approved, and the
shareholders subsequently approved, an increase in the number of shares reserved
for issuance under the Equity Incentive Plan. A total of 3,900,000 shares of
Common Stock currently have been reserved for issuance under the Equity
Incentive Plan.
At March 31, 1998, options (net of canceled or expired options) covering an
aggregate of 2,493,000 shares of the Company's Common Stock had been granted
under the Equity Incentive Plan, and 764,000 shares (plus any shares that might
in the future be returned to the Equity Incentive Plan as a result of
cancellations or expiration of options) remained available for future grant
under the Equity Incentive Plan. During the last fiscal year, under the Equity
Incentive Plan, the Company granted to all current executive officers as a group
options to purchase 114,000 shares at exercise prices ranging from $16.125 per
share to $19.00 per share and to all employees, contractors and consultants
(excluding executive officers) as a group options to purchase 733,000 shares at
exercise prices ranging from $0.01 to $35.25 per share.
In April 1998, the Board of Directors amended the Equity Incentive Plan,
subject to shareholder approval, to increase the number of shares of Common
Stock authorized for issuance under the Equity Incentive Plan by 775,000,
bringing the total number of shares authorized for issuance thereunder to
4,675,000. The Board adopted these amendments to ensure that the Company could
continue to grant stock options to employees at levels determined appropriate by
the Board and the Compensation Committee. The Board also adopted other
amendments to the Equity Incentive Plan to bring it into compliance with new
regulatory requirements and prevalent plan design terms.
Shareholders are requested in this Proposal Three to approve the Equity
Incentive Plan, as amended. If the shareholders fail to approve this Proposal
Three, the number of shares authorized for issuance under the Equity Incentive
Plan will remain at 3,900,000 shares. The affirmative vote of the holders of a
majority of the shares present in person or represented by proxy and entitled to
vote at the Annual Meeting will be required to amend the Equity Incentive Plan.
Abstentions will be counted toward the tabulation of votes cast on proposals
presented to the shareholders and will have the same effect as negative votes.
Broker
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non-votes are counted towards a quorum, but are not counted for any purpose in
determining whether this matter has been approved.
The essential features of the Equity Incentive Plan are outlined below:
GENERAL
The Equity Incentive Plan provides for the grant or issuance of incentive
stock options to employees and nonstatutory stock options, restricted stock
purchase awards, stock bonuses and stock appreciation rights to consultants,
employees, officers and directors. To date only incentive stock options and
nonstatutory stock options have been awarded under the Equity Incentive Plan.
Incentive stock options granted under the Equity Incentive Plan are intended to
qualify as "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Nonstatutory stock
options granted under the Equity Incentive Plan are intended not to qualify as
incentive stock options under the Code. See "Federal Income Tax Information" for
a discussion of the tax treatment of the various awards included in the Equity
Incentive Plan.
PURPOSE
The Equity Incentive Plan was adopted to provide a means by which selected
officers, employees and directors of and consultants to the Company and its
affiliates could be given an opportunity to purchase stock in the Company, to
assist in retaining the services of employees holding key positions, to secure
and retain the services of persons capable of filling such positions and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
ADMINISTRATION
The Equity Incentive Plan is administered by the Board of Directors of the
Company. The Board has the power to construe and interpret the Equity Incentive
Plan and, subject to the provisions of the Equity Incentive Plan, to determine
the persons to whom and the dates on which awards will be granted, whether an
award granted will be an incentive stock option, a nonstatutory stock option, a
stock bonus, a right to purchase restricted stock, a stock appreciation right,
or a combination of the foregoing, the number of shares to be subject to each
award, the time or times during the term of each award within which all or a
portion of such award may be exercised, the exercise price, the type of
consideration and other terms of the award. The Board of Directors is authorized
to delegate administration of the Equity Incentive Plan to a committee composed
of not fewer than two members of the Board. The Board has delegated
administration of the Equity Incentive Plan to the Compensation Committee of the
Board. As used herein with respect to the Equity Incentive Plan, the "Board"
refers to the Compensation Committee as well as to the Board of Directors
itself.
The Company currently limits the directors who may serve as members of the
Compensation Committee to those who are "outside directors." This limitation
excludes from the Compensation Committee (i) current employees of the Company,
(ii) former employees of the Company receiving compensation for past services
(other than benefits under a tax-qualified pension plan), (iii) current and
former officers of the Company, and (iv) directors currently receiving direct or
indirect compensation from the Company in any capacity (other than as a
director), unless any such person is otherwise considered an "outside director"
under applicable Internal Revenue Service regulations.
ELIGIBILITY
Incentive stock options may be granted under the Equity Incentive Plan only
to selected key employees (including officers) of the Company and its
affiliates. Consultants, selected key employees (including officers) and
directors are eligible to receive awards other than incentive stock options
under the Equity Incentive Plan.
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No incentive stock option may be granted under the Equity Incentive Plan to
any person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the option exercise price is at least 110%
of the fair market value of the stock subject to the option on the date of
grant, and the term of the option does not exceed five years from the date of
grant. For incentive stock options granted under the Equity Incentive Plan, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which such options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000.
No employee may be granted options and stock appreciation rights covering
more than 400,000 shares of the Common Stock within a calendar year. The purpose
of this limitation is to ensure that the Company generally will continue to be
able to deduct for tax purposes the compensation attributable to the exercise of
options granted under the Equity Incentive Plan with an exercise price at or
above the fair market value of the Company's common stock on the date of grant.
To date, the Company has not granted to any employee in any calendar year awards
to purchase a number of shares equal to the limitation and does not currently
have any intention of granting such number of awards to any employee. There can
be no assurance, however, that the Compensation Committee will not determine in
some future circumstances that it would be in the best interests of the Company
and its shareholders to grant awards to purchase such number of shares to a
single employee during a calendar year.
STOCK SUBJECT TO THE EQUITY INCENTIVE PLAN
If awards granted under the Equity Incentive Plan expire or otherwise
terminate without being exercised, the Common Stock not purchased pursuant to
such awards again becomes available for issuance under the Equity Incentive
Plan.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under the
Equity Incentive Plan. Individual option grants may be more restrictive as to
any or all of the permissible terms described below.
EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options
under the Equity Incentive Plan may not be less than the fair market value of
the Common Stock subject to the option on the date of the option grant, and in
some cases (see "Eligibility" above), may not be less than 110% of such fair
market value. The exercise price of nonstatutory options under the Equity
Incentive Plan may not be less than 85% of the fair market value of the
Company's common stock. (However, if options are granted with exercise prices
below market value, deductions for compensation attributable to the exercise of
such options could be limited by Section 162(m) of the Code. See "Federal Income
Tax Information.") At April 27, 1998, the closing price of the Common Stock as
reported on the Nasdaq National Market was $25.00 per share.
In the event of a decline in the value of the Company's Common Stock, the
Board has the authority to offer employees the opportunity to replace
outstanding higher priced options, whether incentive or nonstatutory, with new
lower priced options. To the extent required by Section 162(m) of the Code, an
option canceled or repriced under the Equity Incentive Plan is deemed to be
canceled and a new option granted. Both the option deemed to be canceled and the
new option deemed to be granted will be counted against the 400,000 share
per-employee limitation. The Board also has the authority to include as part of
an option agreement a provision entitling the optionee to a further option in
the event that the optionee exercises his or her option by surrendering other
shares of Common Stock as payment of the exercise price.
The exercise price of options granted under the Equity Incentive Plan must
be paid either: (a) in cash at the time the option is exercised; (b) at the
discretion of the Board, (i) by delivery of the Common Stock
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of the Company, or (ii) pursuant to a deferred payment arrangement; or (c) in
any other form of legal consideration acceptable to the Board.
OPTION EXERCISE. Options granted under the Equity Incentive Plan may become
exercisable in cumulative increments ("vest") as determined by the Board.
Options generally vest in monthly installments beginning one year from the date
of grant, with the effect that such shares are fully vested after five years
from the date of grant. Shares covered by options granted in the future under
the Equity Incentive Plan may be subject to different vesting terms. The Board
has the power to accelerate the time during which an option may be exercised. In
addition, options granted under the Equity Incentive Plan may permit exercise
prior to vesting, but in such event the optionee may be required to enter into
an early exercise stock purchase agreement that allows the Company to repurchase
shares not yet vested at their exercise price should the optionee leave the
employ of the Company before vesting. To the extent provided by the terms of an
option, an optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such option by a cash payment upon
exercise, by authorizing the Company to withhold a portion of the stock
otherwise issuable to the optionee, by delivering already-owned stock of the
Company or by a combination of these means.
TERM. The maximum term of options under the Equity Incentive Plan is ten
years, except that in certain cases (see "Eligibility") the maximum term is five
years. Options under the Equity Incentive Plan terminate three months after
termination of the optionee's employment or relationship as a consultant or
director of the Company or any affiliate of the Company, unless (a) such
termination is due to such person's permanent and total disability (as defined
in the Code), in which case the option may, but need not, provide that it may be
exercised at any time within one year of such termination; (b) the optionee dies
while employed by or serving a consultant or director of the Company or any
affiliate of the Company, or within three months after termination of such
relationship, in which case the option may, but need not, provide that it may be
exercised (to the extent the option was exercisable at the time of the
optionee's death) within eighteen months of the optionee's death by the person
or persons to whom the rights to such option pass by will or by the laws of
descent and distribution; or (c) the option by its terms specifically provides
otherwise. Individual options by their terms may provide for exercise within a
longer period of time following termination of employment or the consulting
relationship. The option term may also be extended in the event that exercise of
the option within these periods is prohibited for specified reasons.
TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
PURCHASE PRICE; PAYMENT. The purchase price under each stock purchase
agreement will be determined by the Board, but in any event may be no less than
85% of the fair market value of the Company's common stock on the date of grant.
The purchase price of stock pursuant to a stock purchase agreement must be paid
either: (i) in cash at the time of purchase; (ii) at the discretion of the
Board, according to a deferred payment or other arrangement with the person to
whom the Common Stock is sold; or (iii) in any other form of legal consideration
that may be acceptable to the Board in its discretion. Eligible participants may
also be awarded stock pursuant to a stock bonus agreement in consideration of
past services actually rendered to the Company or for its benefit.
REPURCHASE. Shares of the Common Stock sold or awarded under the Equity
Incentive Plan may, but need not, be subject to a repurchase option in favor of
the Company in accordance with a vesting schedule determined by the Board. In
the event a person ceases to be an employee of or ceases to serve as a director
of or consultant to the Company or an affiliate of the Company, the Company may
repurchase or otherwise reacquire any or all of the shares of the Common Stock
held by that person that have not vested as of the date of termination under the
terms of the stock bonus or restricted stock purchase agreement between the
Company and such person.
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STOCK APPRECIATION RIGHTS
The Board may grant stock appreciation rights to employees or directors of,
or consultants to, the Company or its affiliates. The Equity Incentive Plan
authorizes three types of stock appreciation rights.
TANDEM STOCK APPRECIATION RIGHTS. Tandem stock appreciation rights are tied
to an underlying option and require the holder to elect whether to exercise the
underlying option or to surrender the option for an appreciation distribution
equal to the market price of the vested shares purchasable under the surrendered
option less the aggregate exercise price payable for such shares. Appreciation
distributions payable upon exercise of tandem stock appreciation rights must be
made in cash.
CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent stock appreciation rights
are tied to an underlying option and are exercised automatically at the same
time the underlying option is exercised. The holder receives an appreciation
distribution equal to the market price of the vested shares purchased under the
option less the aggregate exercise price payable for such shares. Appreciation
distributions payable upon exercise of concurrent stock appreciation rights must
be made in cash.
INDEPENDENT STOCK APPRECIATION RIGHTS. Independent stock appreciation
rights are granted independently of any option and entitle the holder to receive
upon exercise an appreciation distribution equal to the market price of a number
of shares equal to the number of share equivalents to which the holder is vested
under the independent stock appreciation right less than fair market value of
such number of shares of stock on the date of grant of the independent stock
appreciation rights. Appreciation distributions payable upon exercise of
independent stock appreciation rights may, at the Board's discretion, be made in
cash, in shares of the Common Stock or a combination thereof.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Equity Incentive Plan or
subject to any award granted under the Equity Incentive Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Equity Incentive Plan and awards outstanding thereunder will be appropriately
adjusted as to the type of security and the maximum number of shares subject to
such plan and the type of security, the maximum number of shares which may be
granted to an employee during a calendar year, and the type of security, number
of shares and price per share of stock subject to such outstanding awards.
EFFECT OF CERTAIN CORPORATE EVENTS
The Equity Incentive Plan provides that, in the event of a dissolution or
liquidation of the Company, specified type of merger or other corporate
reorganization, or acquisition of majority ownership of the Company to the
extent permitted by law, any acquirer or successor will be required to either
assume awards outstanding under the Equity Incentive Plan or substitute similar
awards for those outstanding under such plan, or such outstanding awards will
continue in full force and effect. In the event that any acquirer declines to
assume or continue awards outstanding under the Equity Incentive Plan, or to
substitute similar awards, then the time during which such awards may be
exercised will be accelerated and the awards terminated if not exercised during
such time. The acceleration of an award in the event of an acquisition or
similar corporate event may be viewed as an anti-takeover provision, which may
have the effect of discouraging a proposal to acquire or otherwise obtain
control of the Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Equity Incentive Plan without
shareholder approval or ratification at any time or from time to time. Unless
sooner terminated, the Equity Incentive Plan will terminate in February 2004.
The Board may also amend the Equity Incentive Plan at any time or from time
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to time. However, no amendment will be effective unless approved by the
shareholders of the Company if the amendment would: (a) modify the requirements
as to eligibility for participation (to the extent such modification requires
shareholder approval in order for the Plan to satisfy Section 422 of the Code,
if applicable, or Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of
1934, as amended (the "Exchange Act")); (b) increase the number of shares
reserved for issuance upon exercise of options; or (c) change any other
provision of the Plan in any other way if such modification requires shareholder
approval under applicable law or regulations.
RESTRICTIONS ON TRANSFER
Under the Equity Incentive Plan, an incentive stock option may not be
transferred by the optionee otherwise than by will or by the laws of descent and
distribution. A nonstatutory stock option may be transferred to the extent
permitted in the individual optionee's agreement. During the lifetime of an
optionee, an option may be exercised only by the optionee. No rights under a
stock bonus or restricted stock purchase agreement are transferable except where
required by law or expressly authorized by the terms of the applicable stock
bonus or restricted stock purchase agreement. In addition, shares subject to
repurchase by the Company under an early exercise stock purchase agreement may
be subject to restrictions on transfer that the Board deems appropriate.
FEDERAL INCOME TAX INFORMATION
INCENTIVE STOCK OPTIONS. Incentive stock options under the Equity Incentive
Plan are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be a capital gain or loss. Generally, if the optionee disposes of the
stock before the expiration of either of these holding periods (a "disqualifying
disposition"), at the time of disposition, the optionee will realize taxable
ordinary income equal to the lesser of (a) the excess of the stock's fair market
value on the date of exercise over the exercise price, or (b) the optionee's
actual gain, if any, on the purchase and sale. The optionee's additional gain,
or any loss, upon the disqualifying disposition will be a capital gain or loss,
which will be long-term, mid-term or short-term depending on the length of time
that the stock was held. Capital gains currently are generally subject to lower
tax rates than ordinary income. The maximum long-term capital gains rate for
federal income tax purposes is currently 20% and the maximum mid-term rate is
28% while the maximum ordinary income rate is effectively 39.6% at the present
time. Slightly different rules may apply to optionees who acquire stock subject
to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options granted under the
Equity Incentive Plan generally have the following federal income tax
consequences:
There are no tax consequences to the optionee or the Company by reason of
the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary income equal to
the excess of the stock's fair market value on the date of
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exercise over the option exercise price. Generally, with respect to employees,
the Company is required to withhold from regular wages or supplemental wage
payments an amount based on the ordinary income recognized. Subject to the
requirement of reasonableness, the provisions of Section 162(m) of the Code and
the satisfaction of any tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionee. Upon disposition of the stock, the optionee will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any amount recognized
as ordinary income upon exercise of the option. Such gain or loss will be
long-term, mid-term or short-term depending on the length of time the stock was
held. Slightly different rules may apply to optionees who acquire stock subject
to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
RESTRICTED STOCK AND STOCK BONUSES. Restricted stock and stock bonuses
granted under the Equity Incentive Plan generally have the following federal
income tax consequences:
Upon acquisition of stock under a restricted stock or stock bonus award, the
recipient normally will recognize taxable ordinary income equal to the excess of
the stock's fair market value over the purchase price, if any. However, to the
extent the stock is subject to certain types of vesting restrictions, the
taxable event will be delayed until the vesting restrictions lapse unless the
recipient elects to be taxed on receipt of the stock. Generally, with respect to
employees, the Company is required to withhold from regular wages or
supplemental wage payments an amount based on the ordinary income recognized.
Subject to the requirement of reasonableness, Section 162(m) of the Code and the
satisfaction of any tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the recipient. Upon disposition of the stock, the recipient will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock, if any, plus any amount
recognized as ordinary income upon acquisition (or vesting) of the stock. Such
gain or loss will be long-term, mid-term or short-term depending on the length
of time the stock was held. Slightly different rules may apply to persons who
acquire stock subject to forfeiture under Section 16(b) of the Exchange Act.
STOCK APPRECIATION RIGHTS. No taxable income is realized upon the receipt
of a stock appreciation right, but upon exercise of the stock appreciation right
the fair market value of the shares (or cash in lieu of shares) received must be
treated as compensation taxable as ordinary income to the recipient in the year
of such exercise. Generally, with respect to employees, the Company is required
to withhold from the payment made on exercise of the stock appreciation right or
from regular wages or supplemental wage payments an amount based on the ordinary
income recognized. Subject to the requirement of reasonableness, Section 162(m)
of the Code and the satisfaction of any withholding obligation, the Company will
be entitled to a business expense deduction equal to the taxable ordinary income
recognized by the recipient.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. As part of the Omnibus Budget
Reconciliation Act of 1993, the U.S. Congress amended the Code to add Section
162(m) which denies a deduction to any publicly held corporation for
compensation paid to certain employees in a taxable year to the extent that
compensation exceeds $1 million for a covered employee. It is possible that
compensation attributable to awards under the Equity Incentive Plan, when
combined with all other types of compensation received by a covered employee
from the Company, may cause this limitation to be exceeded in any particular
year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m) of the Code,
compensation attributable to stock options and stock appreciation rights will
qualify as performance-based compensation, provided that: (i) the stock award
plan contains a per-employee limitation on the number of shares for which stock
options and stock appreciation rights may be granted during a specified period;
(ii) the per-employee limitation is approved by the shareholders; (iii) the
award is granted by a compensation committee comprised solely of "outside
directors"; and (iv) the exercise price of the award is no less than the fair
market value of the stock on the date of grant. Restricted
26
stock and stock bonuses qualify as performance-based compensation under these
Treasury regulations only if: (i) the award is granted by a compensation
committee comprised solely of "outside directors"; (ii) the award is granted (or
exercisable) only upon the achievement of an objective performance goal
established in writing by the compensation committee while the outcome is
substantially uncertain; (iii) the compensation committee certifies in writing
prior to the granting (or exercisability) of the award that the performance goal
has been satisfied; and (iv) prior to the granting (or exercisability) of the
award, shareholders have approved the material terms of the award (including the
class of employees eligible for such award, the business criteria on which the
performance goal is based, and the maximum amount (or formula used to calculate
the amount) payable upon attainment of the performance goal. The Company has
taken steps to ensure that options granted at fair market value qualify as
performance-based compensation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL THREE.
PROPOSAL FOUR
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998 and has
further directed that management submit the selection of independent auditors
for ratification by the shareholders at the Annual Meeting. Ernst & Young LLP
has audited the Company's financial statements since its inception in 1990.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
Shareholder ratification of the selection of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Ernst & Young LLP
to the shareholders for ratification as a matter of good corporate practice. If
the shareholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of the Company
and its shareholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the Annual Meeting will be required
to ratify the selection of Ernst & Young LLP.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL FOUR.
27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 31, 1998 by: (i) each nominee for
director; (ii) each of the Named Executive Officers; (iii) all executive
officers and directors of the Company as a group; and (iv) all those known by
the Company to be beneficial owners of more than 5% of its Common Stock.
BENEFICIAL OWNER(1)
------------------------------------
PERCENT OF
BENEFICIAL OWNERSHIP(1) NUMBER OF SHARES TOTAL(2)
- ---------------------------------------------------------------------------- ----------------- -----------------
Baxter Healthcare Corporation............................................... 1,335,897 8.6%
One Baxter Parkway
Deerfield, IL 60015
Mark J. Gabrielson(3)....................................................... 624,844 4.0%
John S. Patton(4)........................................................... 435,720 2.8%
Robert B. Chess(5).......................................................... 383,084 2.4%
Ajit S. Gill(6)............................................................. 174,088 1.1%
Terry L. Opdendyk(7)........................................................ 137,122 *
James B. Glavin(8).......................................................... 55,799 *
Stephen L. Hurst(9)......................................................... 37,836 *
Melvin Perelman(10)......................................................... 16,800 *
Judi R. Lum(11)............................................................. 15,062 *
All directors and executive officers
as a group (9 persons)(12)................................................ 2,208,865 13.7%
- ------------------------
* Less than 1%
(1) This table is based upon information supplied by officers, directors and
principal shareholders. Unless otherwise indicated in the footnotes to this
table and subject to the community property laws where applicable, the
Company believes that each of the shareholders named in this table has sole
voting and investment power with respect to the shares shown as
beneficially owned.
(2) Applicable percentages are based on 15,592,699 shares of Common Stock
outstanding as of March 31, 1998, adjusted as required by rules promulgated
by the SEC.
(3) Includes 595,044 shares held by Prince. Mr. Gabrielson is a general partner
of the general partner of Prince. Mr. Gabrielson disclaims beneficial
ownership of such shares except to the extent of his pro rata interest
therein. Also includes 28,800 shares issuable upon the exercise of options
exercisable within 60 days of March 31, 1998.
(4) Includes 68,720 shares issuable upon exercise of options exercisable within
60 days of March 31, 1998.
(5) Includes 94,329 shares issuable upon exercise of options exercisable within
60 days of March 31, 1998.
(6) Includes 123,413 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1998.
(7) Includes 28,800 shares issuable upon exercise of options exercisable within
60 days of March 31, 1998.
(8) Includes 49,800 shares issuable upon exercise of options exercisable within
60 days of March 31, 1998.
(9) Includes 4,230 shares issuable upon exercise of options exercisable within
60 days of March 31, 1998.
(10) All shares issuable upon exercise of options exercisable within 60 days of
March 31, 1998.
(11) Includes 4,979 shares issuable upon exercise of options exercisable within
60 days of March 31, 1998.
28
(12) Includes 595,044 shares held by Prince (Mark Gabrielson) as described in
footnote 3. Also includes 475,459 shares issuable upon exercise of
outstanding options exercisable within 60 days of March 31, 1998. See
footnotes 3 through 10.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
For the fiscal year ended December 31, 1997, each non-employee director of
the Company received $10,000 of cash compensation from the Company payable
quarterly. The members of the Board of Directors are also eligible for
reimbursement for their expenses incurred in connection with attendance at Board
meetings in accordance with Company policy.
On June 1 of every other year (or the next business day should such date be
a legal holiday), commencing June 1, 1996, each member of the Company's Board of
Directors who is not an employee of the Company is automatically granted under
the Company's 1994 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"), without further action by the Company, the Board of Directors or the
shareholders of the Company, an option to purchase 14,400 shares of Common Stock
of the Company. The exercise price of options granted under the Directors' Plan
is 100% of the fair market value of the Common Stock subject to the option on
the date of the option grant. Options granted under the Directors' Plan vest
over 24 months from the date of grant. Option grants under the Directors' Plan
are non-discretionary. The term of options granted under the Directors' Plan is
ten years. In the event of a merger of the Company with or into another
corporation or a consolidation, acquisition of assets or other change-in-control
transaction involving the Company, the vesting of each option will accelerate
and the option will terminate if not exercised prior to the consummation of the
transaction. Options to purchase 130,200 shares of Common Stock have been
granted under the Directors' Plan, 6,000 of which have been exercised.
29
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1997, 1996
and 1995, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at December 31, 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------------------------------- --------- ---------- ---------- ----------- ----------------
1997 $ 195,666 $ 136,763 15,900 $ 510
Robert B. Chess.................................... 1996 183,936 72,986 28,000 330
President and Chief Executive Officer 1995 172,521 55,000 55,800 330
1997 194,155 51,757 54,600 870
Ajit S. Gill....................................... 1996 170,012 53,061 33,000 870
Chief Operating Officer 1995 158,283 37,000 21,400 40,870
1997 150,119 32,344 7,500 1,440
John S. Patton..................................... 1996 138,020 39,158 29,000 1,367
Vice President, Research 1995 128,721 27,000 15,800 770
1997 156,682 27,098 25,400 510
Stephen L. Hurst................................... 1996 146,529 33,264 9,000 510
Vice President, Intellectual Property and Licensing 1995 137,093 27,000 24,000 480
Judi R. Lum(2)..................................... 1997 145,142 18,875 5,400 330
Former Vice President, Finance and 1996 28,211 30,000 35,000 83
Administration and Chief Financial Officer
- ------------------------
(1) Except for the $40,000 paid to Mr. Gill in 1995 pursuant to an agreement
with the Company to cover expenses incurred by Mr. Gill in connection with
his relocation upon joining the Company, amounts represent life insurance
premiums paid by the Company.
(2) Ms. Lum joined the Company in October 1996 and resigned in February 1998.
30
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1994 Equity
Incentive Plan (the "Equity Incentive Plan"). As of March 31, 1998, options to
purchase a total of 2,493,000 shares were outstanding under the Equity Incentive
Plan and options to purchase 764,000 shares remained available for grant
thereunder. The basic terms of the Equity Incentive Plan are described above
under Proposal Two.
The following tables show for the fiscal year ended December 31, 1997,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------- POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE OR TERM(2)
OPTIONS FISCAL BASE PRICE EXPIRATION ------------------------
NAME GRANTED YEAR(1) ($/SHARE) DATE 5% 10%
- -------------------------------------- ------------ ------------- ----------- ----------- ---------- ------------
Robert B. Chess....................... 500(3) 0.06% $ 16.125 01/07/07 $ 5,070 $ 12,850
15,400(4) 1.81 18.625 01/28/07 180,383 457,125
Ajit S. Gill.......................... 500(3) 0.06 16.125 01/07/07 5,070 12,850
45,000(5) 5.28 16.125 01/07/07 456,342 1,156,459
9,100(6) 1.07 18.125 01/28/07 103,728 262,868
John S. Patton........................ 500(3) 0.06 16.125 01/07/07 5,070 12,850
7,000(7) 0.82 18.625 01/28/07 81,992 207,784
Stephen L. Hurst...................... 500(3) 0.06 16.125 01/07/07 5,070 12,850
20,000(8) 2.35 18.625 01/28/07 234,263 593,669
4,900(9) 0.58 18.625 01/28/07 57,394 145,449
Judi R. Lum........................... 500(3) 0.06 16.125 01/07/07 5,070 12,850
4,900(10) 0.58 18.625 01/28/07 57,394 145,449
- ------------------------
(1) Based on an aggregate of 852,070 options granted to employees and
consultants to the Company in 1997, including the Named Executive Officers.
(2) The potential realizable value is based on the term of the option at the
time of grant (ten years). Assumed stock price appreciation of 5% and 10%
is used pursuant to rules promulgated by the SEC. The potential realizable
value is calculated by assuming that the market price on the date of grant
appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day
of its term at the appreciated price.
(3) This option vests monthly over 1 year commencing in January 1997.
(4) This option vests monthly over 5 years commencing in November 2002.
(5) This option vests monthly over 5 years commencing in February 2002.
(6) This option vests monthly over 1 year commencing in May 2002.
(7) This option vests monthly over 1 year commencing in October 2002.
(8) This option vests 20% in February 2002 and the remainder vests monthly
thereafter over 2 years.
(9) This option vests monthly over 1 year commencing in March 2002.
(10) This option vests monthly over 1 year commencing in October 2002.
31
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND DECEMBER 31, 1997 OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE- MONEY OPTIONS AT
SHARES 1997(2) DECEMBER 31, 1997(3)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ----------- ----------- ------------- ------------ -------------
Robert B. Chess.................. -- -- 71,009 129,490 $ 1,389,960 $ 2,175,473
Ajit S. Gill..................... -- -- 106,848 114,629 2,375,667 1,671,645
John S. Patton................... -- -- 59,704 51,073 1,216,213 812,287
Stephen L. Hurst................. 28,418 $ 475,431 4,396 60,585 79,401 800,438
Judi R. Lum...................... -- -- 15,062 25,338 157,839 250,737
- ------------------------
(1) Based on the fair market value of the Company's Common Stock on the exercise
date, minus the exercise price, multiplied by the number of shares
exercised.
(2) On January 18, 1995, the Board amended the provisions of the options held by
the Named Executive Officers to provide that upon a change-in control of the
Company the vesting of all outstanding options held by such persons would be
accelerated by two years.
(3) Based on the fair market value of the Company's Common Stock as of December
31, 1997 ($26.00 per share), minus the exercise price, multiplied by the
number of shares underlying the options.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION(1)
The Board of Directors of the Company (the "Board") has delegated to the
Compensation Committee of the Board (the "Committee") the authority to establish
and administer the Company's compensation programs. The Compensation Committee
is comprised of two non-employee directors: Messrs. Gabrielson and Glavin. The
Committee is responsible for: (i) determining the most effective total executive
compensation strategy, based upon the business needs of the Company and
consistent with shareholders' interests; (ii) administering the Company's
executive compensation plans, programs and policies; (iii) monitoring corporate
performance and its relationship to compensation of executive offers; and (iv)
making appropriate recommendations concerning matters of executive compensation.
COMPENSATION PHILOSOPHY
The primary goals of the compensation program are to align compensation with
the attainment of key business objectives and to enable the Company to attract,
retain and reward capable executives who can contribute to the continued success
of the Company. Equity participation and a strong alignment to shareholders'
interests are key elements of the Company's compensation philosophy. Four key
goals form the basis for compensation decisions for all employees of the
Company:
1. To attract and retain the most highly qualified management and employee
team;
2. To emphasize sustained performance by aligning rewards with shareholder
interests, especially through the use of equity participation programs;
- ------------------------
(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended (the
"Act") or the Exchange Act, whether made before or after the date hereof and
irrespective of any general incorporation language contained in any such
filing.
32
3. To pay competitively compared to similar drug delivery and
biopharmaceutical companies and to provide appropriate reward opportunities for
achieving high levels of performance compared to similar organizations in the
marketplace; and
4. To motivate executives and employees to achieve the Company's annual and
long-term business goals and encourage behavior toward the fulfillment of those
objectives.
To meet these goals, the Committee has adopted a mix among the compensation
elements of salary, stock options and bonuses with a bias towards stock options.
BASE SALARY
The Committee recognizes the importance of maintaining compensation
practices and levels of compensation competitive with drug delivery and
biopharmaceutical companies in comparable stages of development. Base salary
represents the fixed component of the executive compensation program. The
Company's philosophy regarding base salaries is conservative, maintaining
salaries below the competitive industry median. Base salary levels are
established on an annual review of marketplace competitiveness with similar
pharmaceutical and drug delivery companies and on the basis of individual
performance. Periodic increases in base salary are the result of individual
contributions evaluated against established performance objectives, relative
success toward achieving the Company's annual and long-term business goals,
length of service with the Company and an annual salary survey of comparable
companies in Inhale's industry. Base salaries for executives were increased for
fiscal 1997 but remain below the industry median. In 1997, the Company continued
the variable compensation program implemented in 1996 for all employees,
including all executive officers, which provides that a portion of base salary
is variable based on certain qualitative and quantitative criteria for both the
Company and each employee.
STOCK OPTIONS
The option plans offered by the Company have been established to provide all
executive officers of the Company with an opportunity to share, along with the
shareholders of the Company, in the long-term performance of the Company. The
Committee strongly believes that a goal of the compensation program should be to
provide key employees who have significant responsibility for the management,
growth and future success of the Company with an opportunity to increase their
ownership of the Company and potentially gain financially from Company stock
price increases. The interests of shareholders, executives and employees should
thereby be closely aligned. Executives and employees are eligible to receive
stock options generally not more often than once a year, giving them the right
to purchase shares of Common Stock of the Company in the future at a price equal
to fair market value at the date of grant. All grants must be exercised
according to the provisions of the Company's stock option plans. All outstanding
options expire ten years from the date of grant.
As the base salaries for executive officers of the Company are in the lower
range for comparable companies, the Company has used stock options as the
primary incentive to attract and retain its executive officers. Option amounts
are based on salary grade within the Company and overall Company and individual
performance. After considering the criteria relating to awarding stock options,
the Committee determined that all executive officers, including the CEO, would
receive option grants in fiscal 1997. The options granted to executive officers
in fiscal 1997 include options with standard five-year vesting commencing upon
the date of grant, as well as "evergreen" options, which typically vest over a
twelve month period commencing upon the date previously granted options become
fully vested.
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code. The Committee believes that at the present time it is unlikely that the
compensation paid to any Named Executive Officer in a taxable year which is
subject to the deduction limit will exceed
33
$1 million. However, the Committee has determined that stock awards granted
under the Equity Incentive Plan with an exercise price at least equal to the
fair market value of the Company's Common Stock on the date of grant shall be
treated as "performance-based compensation."
BONUSES
Bonus awards are another component of the compensation program. Bonuses, if
any, are both linked to the achievement of specified corporate goals and
personal performance which is determined at the discretion of the Compensation
Committee. Corporate performance goals on which 1997 bonuses were based were:
the successful signing of new collaborative partners and convening existing
collaborative partners with feasibility agreements to long-term development
agreements; advancing the delivery system technology by improving the
performance and efficiency of the inhalation device, the powder processing and
the powder filling; and improving the Company's liquidity by obtaining funding
from corporate partners and from the sale of securities. In January 1998, the
Committee reviewed the Company's 1997 corporate performance goals and determined
that most of the goals had been achieved. Based on such achievement, the
Committee awarded bonuses for 1997 for all executive officers.
CEO COMPENSATION
The total cash compensation paid to Mr. Chess in 1997 is below the average
for chief executive officers in the Company's industry comparative group. Under
the Company's executive compensation program, the total compensation mix for
senior executives emphasizes longer-term rewards in the form of stock options.
In 1997, Mr. Chess received option grants to purchase 15,900 shares of the
Company's Common Stock at the fair market value of the Common Stock on the date
of grant. This grant was based on the same factors used in making grants to
other executive officers. This grant was made to enhance retention and the
overall competitiveness of Mr. Chess's compensation package and to strengthen
the alignment of Mr. Chess's interests with those of the shareholders. For 1997,
the Committee set a bonus of approximately 39% of salary for Mr. Chess's bonus
based upon the achievement of virtually all of the corporate goals discussed
above.
SUMMARY
The Committee believes that the compensation of executives by the Company is
appropriate and competitive with the compensation programs provided by other
drug delivery and biopharmaceutical companies with which the Company competes
for executives and employees. The Committee believes its compensation strategy,
principles and practices result in a compensation program fled to shareholder
returns and linked to the achievement of annual and longer-term financial and
operational results of the Company on behalf of the Company's shareholders.
COMPENSATION COMMITTEE
Mark J. Gabrielson
James B. Glavin
34
COMPARISON OF SHAREHOLDER RETURN(1)
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the CRSP Total
Return Index for the Nasdaq Stock Market (U.S. Companies) and the CRSP Total
Return Index for the Nasdaq Pharmaceutical Stocks(2) for the period commencing
on May 4, 1994, and ending on December 31, 1997.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CUMULATIVE TOTAL RETURN
From May 2, 1994(3) Through December 31, 1997(4)
Inhale Therapeutic Systems
Inhale Therapeutic Systems NASDAQ US NASDAQ Pharmaceutical
5/2/94 100 100 100
6/30/94 73 96 90
9/30/94 130 104 101
12/31/94 123 102 95
3/31/95 103 114 103
6/30/95 107 131 119
9/30/95 160 146 149
12/31/95 130 148 174
3/31/96 203 155 181
6/30/96 247 168 176
9/30/96 172 174 180
12/31/96 202 182 174
3/31/97 255 172 129
6/30/97 330 204 136
9/30/97 418 239 151
12/31/97 347 224 133
- ------------------------
(1) The material in this report is not "soliciting material" and is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the company under the Act or the Exchange Act, whether made before
or after the date hereof and irrespective of any general incorporation
language contained in any such filing.
(2) The CRSP Total Return Index for the Nasdaq Stock Market and for the Nasdaq
Stock Market Pharmaceutical Stocks are calculated by the Center for Research
in Securities Prices (CRSP).
(3) For purposes of this presentation, the Company has assumed that its initial
offering price of $7.50 per share would have been the closing sales price on
May 2, 1994, the day prior to commencement of trading. The Company's initial
public offering commenced on May 3, 1994 and the Company's 1997 fiscal year
ended December 31, 1997.
(4) Assumes that $100.00 was invested on May 2, 1994, in the Company's Common
Stock at the Company's initial offering price of $7.50 per share and at the
closing sales price for each index on that date and that all dividends were
reinvested. No cash dividends have been declared on the Company's Common
Stock. Shareholder returns over the indicated period should not be
considered indicative of future shareholder returns.
CERTAIN TRANSACTIONS
The Company's Bylaws provide that the Company will indemnify its directors
and may indemnify its officers, employees and other agents to the fullest extent
permitted by California law. The Company is also empowered under its Bylaws to
enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person whom it is required or permitted to
indemnify.
35
In addition, the Company's Amended and Restated Articles of Incorporation
provide that the liability of the directors for monetary damages shall be
eliminated to the fullest extent permissible under California law. Pursuant to
California law, the Company's directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company and its
shareholders. However, this provision does not eliminate the duty of care, and
in appropriate circumstances, equitable remedies such as injunctive or other
forms of nonmonetary relief will remain available under California law. In
addition, each director will continue to be subject to liability for (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) acts or omissions that a director believes to be contrary
to the best interests of the Company or its shareholders or that involve the
absence of good faith on the part of the director, (iii) any transaction form
which a director derived an improper personal benefit, (iv) acts or omissions
that show a reckless disregard for the director's duty to the Company or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the Company or its shareholders, (v) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Company of its shareholders, (vi) any transaction
that constitutes an illegal distribution or dividend under California law, and
(vii) any transaction involving an unlawful conflict of interest between the
director and the Company under California law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
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 intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
[LOGO]
Mark P. Tanoury
SECRETARY
May 16, 1998
36
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (hereinafter called the "Merger
Agreement") is made as of , 1998, by and between INHALE THERAPEUTIC
SYSTEMS, a California corporation ("Inhale California"), and INHALE THERAPEUTIC
SYSTEMS (DELAWARE), INC., a Delaware corporation ("Inhale Delaware"). Inhale
California and Inhale Delaware are sometimes referred to as the "Constituent
Corporations."
The authorized capital stock of Inhale California consists of thirty-million
(30,000,000) shares of Common Stock, no par value, and ten million (10,000,000)
shares of Preferred Stock, no par value. The authorized capital stock of Inhale
Delaware, upon effectuation of the transactions set forth in this Merger
Agreement, will consist of fifty million (50,000,000) shares of Common Stock,
each having a par value of one-hundredth of one cent (.0001), and ten million
(10,000,000) shares of Preferred Stock, each having a par value of one-hundredth
of one cent (.0001).
The directors of the Constituent Corporations deem it advisable and to the
advantage of the Constituent Corporations that Inhale California merge into
Inhale Delaware upon the terms and conditions herein provided.
NOW, THEREFORE, the parties do hereby adopt the plan of reorganization
encompassed by this Merger Agreement and do hereby agree that Inhale California
shall merge into Inhale Delaware on the following terms, conditions and other
provisions:
1. TERMS AND CONDITIONS.
1.1 MERGER. Inhale California shall be merged with and into Inhale
Delaware (the "Merger"), and Inhale Delaware shall be the surviving corporation
(the "Surviving Corporation") effective upon the date when this Merger Agreement
is filed with the Secretary of State of Delaware (the "Effective Date").
1.2 NAME CHANGE. On the Effective Date, the name of Inhale Delaware shall
be Inhale Therapeutic Systems, Inc.
1.3 SUCCESSION. On the Effective Date, Inhale Delaware shall continue its
corporate existence under the laws of the State of Delaware, and the separate
existence and corporate organization of Inhale California, except insofar as it
may be continued by operation of law, shall be terminated and cease.
1.4 TRANSFER OF ASSETS AND LIABILITIES. On the Effective Date, the rights,
privileges, powers and franchises, both of a public as well as of a private
nature, of each of the Constituent Corporations shall be vested in and possessed
by the Surviving Corporation, subject to all of the disabilities, duties and
restrictions of or upon each of the Constituent Corporations; and all and
singular rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property, real, personal and mixed, of each of the
Constituent Corporations, and all debts due to each of the Constituent
Corporations on whatever account, and all things in action or belonging to each
of the Constituent Corporations shall be transferred to and vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest, shall be thereafter the property
of the Surviving Corporation as they were of the Constituent Corporations, and
the title to any real estate vested by deed or otherwise in either of the
Constituent Corporations shall not revert or be in any way impaired by reason of
the Merger; provided, however, that the liabilities of the Constituent
Corporations and of their shareholders, directors and officers shall not be
affected and all rights of creditors and all liens upon any property of either
of the Constituent Corporations shall be preserved unimpaired, and any claim
existing or action or proceeding pending by or against either of the Constituent
Corporations may be prosecuted to judgment as if the Merger had not taken place
except as they may be modified with the consent of such creditors and all debts,
liabilities and duties of or upon each of the Constituent Corporations shall
attach to the Surviving
1
Corporation, and may be enforced against it to the same extent as if such debts,
liabilities and duties had been incurred or contracted by it.
1.5 COMMON STOCK OF INHALE CALIFORNIA AND INHALE DELAWARE. On the
Effective Date, by virtue of the Merger and without any further action on the
part of the Constituent Corporations or their shareholders, each share of Common
Stock of Inhale California issued and outstanding immediately prior thereto
shall be converted into one (1) fully paid and nonassessable share of the Common
Stock of Inhale Delaware and each share of Common Stock of Inhale Delaware
issued and outstanding immediately prior thereto shall be canceled and returned
to the status of authorized but unissued shares.
1.6 STOCK CERTIFICATES. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of the
Common Stock or of the Preferred Stock of Inhale California shall be deemed for
all purposes to evidence ownership of and to represent the shares of Inhale
Delaware into which the shares of Inhale California represented by such
certificates have been converted as herein provided and shall be so registered
on the books and records of the Surviving Corporation or its transfer agents.
The registered owner of any such outstanding stock certificate shall, until such
certificate shall have been surrendered for transfer or conversion or otherwise
accounted for to the Surviving Corporation or its transfer agent, have and be
entitled to exercise any voting and other rights with respect to and to receive
any dividend and other distributions upon the shares of Inhale Delaware
evidenced by such outstanding certificate as above provided.
1.7 OPTIONS. On the Effective Date, the Surviving Corporation will assume
and continue Inhale California's 1994 Non-Employee Directors' Stock Option Plan,
Employee Stock Purchase Plan, and 1994 Equity Incentive Plan and any and all
other stock option plans of Inhale California and the outstanding and
unexercised portions of all options to purchase Common Stock of Inhale
California, including without limitation all options outstanding under such
stock plans and any other outstanding options, shall be converted into options
of Inhale Delaware, such that an option for one (1) share of Inhale California
shall be converted into an option for one (1) share of Inhale Delaware, with no
change in the exercise price of the Inhale Delaware option. No other changes in
the terms and conditions of such options will occur. Effective on the Effective
Date, Inhale Delaware hereby assumes the outstanding and unexercised portions of
such options and the obligations of Inhale California with respect thereto.
1.8 EMPLOYEE BENEFIT PLANS. On the Effective Date, the Surviving
Corporation shall assume all obligations of Inhale California under any and all
of Inhale California's employee benefit plans, including the Employee Stock
Purchase Plan, in effect as of such date. On the Effective Date, the Surviving
Corporation shall adopt and continue in effect all such employee benefit plans
upon the same terms and conditions as were in effect immediately prior to the
Merger and shall reserve that number of shares of Inhale Delaware Common Stock
with respect to each such employee benefit plan as is proportional to the number
of shares of Inhale California Common Stock (if any) so reserved on the
Effective Date.
2. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS.
2.1 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation and Bylaws of Inhale Delaware in effect on the Effective Date
shall continue to be the Certificate of Incorporation and Bylaws of the
Surviving Corporation, except that Article I of the Certificate of Incorporation
and Bylaws of the Surviving Corporation shall, effective upon the filing of this
Merger Agreement with the Secretary of State of the State of Delaware, be
amended to read in its entirety as follows: "The name of this corporation is
Inhale Therapeutic Systems, Inc."
2.2 DIRECTORS. The directors of Inhale California immediately preceding
the Effective Date shall become the directors of the Surviving Corporation on
and after the Effective Date to serve until the expiration of their terms and
until their successors are elected and qualified.
2
2.3 OFFICERS. The officers of Inhale California immediately preceding the
Effective Date shall become the officers of the Surviving Corporation on and
after the Effective Date to serve at the pleasure of its Board of Directors.
3. MISCELLANEOUS.
3.1 FURTHER ASSURANCES. From time to time, and when required by the
Surviving Corporation or by its successors and assigns, there shall be executed
and delivered on behalf of Inhale California such deeds and other instruments,
and there shall be taken or caused to be taken by it such further and other
action, as shall be appropriate or necessary in order to vest or perfect in or
to conform of record or otherwise, in the Surviving Corporation the title to and
possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Inhale California and otherwise
to carry out the purposes of this Merger Agreement, and the officers and
directors of the Surviving Corporation are fully authorized in the name and on
behalf of Inhale California or otherwise to take any and all such action and to
execute and deliver any and all such deeds and other instruments.
3.2 AMENDMENT. At any time before or after approval by the shareholders of
Inhale California, this Merger Agreement may be amended in any manner (except
that, after the approval of the Merger Agreement by the shareholders of Inhale
California, the principal terms may not be amended without the further approval
of the shareholders of Inhale California) as may be determined in the judgment
of the respective Board of Directors of Inhale Delaware and Inhale California to
be necessary, desirable, or expedient in order to clarify the intention of the
parties hereto or to effect or facilitate the purpose and intent of this Merger
Agreement.
3.3 CONDITIONS TO MERGER. The obligations of the Constituent Corporations
to effect the transactions contemplated hereby is subject to satisfaction of the
following conditions (any or all of which may be waived by either of the
Constituent Corporations in its sole discretion to the extent permitted by law):
(a) the Merger shall have been approved by the shareholders of Inhale
California in accordance with applicable provisions of the General
Corporation Law of the State of California; and
(b) Inhale California, as sole stockholder of Inhale Delaware, shall
have approved the Merger in accordance with the General Corporation Law of
the State of Delaware; and
(c) any and all consents, permits, authorizations, approvals, and orders
deemed in the sole discretion of Inhale California to be material to
consummation of the Merger shall have been obtained.
3.4 ABANDONMENT OR DEFERRAL. At any time before the Effective Date, this
Merger Agreement may be terminated and the Merger may be abandoned by the Board
of Directors of either Inhale California or Inhale Delaware or both,
notwithstanding the approval of this Merger Agreement by the shareholders of
Inhale California or Inhale Delaware, or the consummation of the Merger may be
deferred for a reasonable period of time if, in the opinion of the Boards of
Directors of Inhale California and Inhale Delaware, such action would be in the
best interest of such corporations. In the event of termination of this Merger
Agreement, this Merger Agreement shall become void and of no effect and there
shall be no liability on the part of either Constituent Corporation or its Board
of Directors or shareholders with respect thereto, except that Inhale California
shall pay all expenses incurred in connection with the Merger or in respect of
this Merger Agreement or relating thereto.
3.5 COUNTERPARTS. In order to facilitate the filing and recording of this
Merger Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original.
3
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by the Board of Directors of Inhale California and Inhale Delaware, is hereby
executed on behalf of each said corporation and attested by their respective
officers thereunto duly authorized.
INHALE THERAPEUTIC SYSTEMS
a California corporation
By ___________________________________
Robert B. Chess
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
ATTEST:
______________________________________
Mark P. Tanoury
SECRETARY
INHALE THERAPEUTIC SYSTEMS (DELAWARE),
INC.
a Delaware corporation
By ___________________________________
Robert B. Chess
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
ATTEST:
______________________________________
Mark P. Tanoury
SECRETARY
4
EXHIBIT B
CERTIFICATE OF INCORPORATION
OF
INHALE THERAPEUTIC SYSTEMS (DELAWARE), INC.
The undersigned, a natural person (the "Sole Incorporator"), for the purpose
of organizing a corporation to conduct the business and promote the purposes
hereinafter stated, under the provisions and subject to the requirements of the
laws of the State of Delaware hereby certifies that:
I.
The name of this corporation is Inhale Therapeutic Systems (Delaware), Inc.
II.
The address of the registered office of the corporation in the State of
Delaware is 1209 Orange St., City of Wilmington, County of New Castle, and the
name of the registered agent of the corporation in the State Delaware at such
address is CT Corporation.
III.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is sixty million
(60,000,000) shares. Fifty million (50,000,000) shares shall be Common Stock,
each
having a par value of one-hundredth of one cent ($.0001). Ten million
(10,000,000) shares shall be Preferred Stock, each having a par value of
one-hundredth of one cent ($.0001).
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
V.
For the management of the business and for the conduct of the affairs of the
corporation, and in further definition, limitation and regulation of the powers
of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
1
2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, the
directors shall be divided into three classes designated as Class I, Class
II and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the
adoption and filing of this Certificate of Incorporation, the term of office
of the Class I directors shall expire and Class I directors shall be elected
for a full term of three years. At the second annual meeting of stockholders
following the adoption and filing of this Certificate of Incorporation, the
term of office of the Class II directors shall expire and Class II directors
shall be elected for a full term of three years. At the third annual meeting
of stockholders following the adoption and filing of this Certificate of
Incorporation, the term of office of the Class III directors shall expire
and Class III directors shall be elected for a full term of three years. At
each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose
terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. Subject to the rights of the holders of any series of Preferred
Stock, no director shall be removed without cause. Subject to limitations
imposed by law, the Board of Directors or any individual director may be
removed from office at any time with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares
of voting stock of the corporation, entitled to vote at an election of
directors (the "Voting Stock").
4. Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the
stockholders, except as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, even though
less than a quorum of the Board of Directors, and not by the stockholders.
Any director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the director for which the
vacancy was created or occurred and until such director's successor shall
have been elected and qualified.
B.
1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may
be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66 2/3%) of the voting power of all
of the then-outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by written
ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of stockholders called in accordance
with the Bylaws.
4. Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board of Directors for adoption), or (iv) by the holders of the
2
shares entitled to cast not less than ten percent (10%) of the votes at the
meeting, and shall be held at such place, on such date, and at such time as
the Board of Directors shall fix.
5. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting
of the stockholders of the corporation shall be given in the manner provided
in the Bylaws of the corporation.
VI.
A. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in paragraph B of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
VIII.
The name and the mailing address of the Sole Incorporator is as follows:
NAME MAILING ADDRESS
- --------------------------------------------- ---------------------------------------------
Mark P. Tanoury Cooley Godward LLP
3000 Sand Hill Road, Building 3, Suite 230
Menlo Park, CA 94025
IN WITNESS WHEREOF, this Certificate has been subscribed this day of
, 1998 by the undersigned who affirms that the statements made herein are
true and correct.
______________________________________
Mark P. Tanoury
SOLE INCORPORATOR
3
EXHIBIT C
BYLAWS
OF
INHALE THERAPEUTIC SYSTEMS (DELAWARE), INC.
(A DELAWARE CORPORATION)
TABLE OF CONTENTS
PAGE
ARTICLE I OFFICES............................................................... 1
Section 1. Registered Office..................................................... 1
Section 2. Other Offices......................................................... 1
ARTICLE II CORPORATE SEAL........................................................ 1
Section 3. Corporate Seal........................................................ 1
ARTICLE III STOCKHOLDERS' MEETINGS................................................ 1
Section 4. Place Of Meetings..................................................... 1
Section 5. Annual Meetings....................................................... 1
Section 6. Special Meetings...................................................... 3
Section 7. Notice Of Meetings.................................................... 3
Section 8. Quorum................................................................ 3
Section 9. Adjournment And Notice Of Adjourned Meetings.......................... 4
Section 10. Voting Rights......................................................... 4
Section 11. Joint Owners Of Stock................................................. 4
Section 12. List Of Stockholders.................................................. 4
Section 13. Action Without Meeting................................................ 4
Section 14. Organization.......................................................... 5
ARTICLE IV DIRECTORS............................................................. 5
Section 15. Number And Term Of Office............................................. 5
Section 16. Powers................................................................ 5
Section 17. Classes Of Directors.................................................. 5
Section 18. Vacancies............................................................. 6
Section 19. Resignation........................................................... 6
Section 20. Removal............................................................... 6
Section 21. Meetings.............................................................. 6
(a) Annual Meetings....................................................... 6
(b) Regular Meetings...................................................... 6
(c) Special Meetings...................................................... 6
(d) Telephone Meetings.................................................... 6
(e) Notice Of Meetings.................................................... 6
(f) Waiver Of Notice...................................................... 7
Section 22. Quorum And Voting..................................................... 7
Section 23. Action Without Meeting................................................ 7
Section 24. Fees And Compensation................................................. 7
Section 25. Committees............................................................ 7
(a) Executive Committee................................................... 7
(b) Other Committees...................................................... 7
(c) Term.................................................................. 8
(d) Meetings.............................................................. 8
Section 26. Organization.......................................................... 8
i
TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE V OFFICERS.............................................................. 8
Section 27. Officers Designated................................................... 8
Section 28. Tenure And Duties Of Officers......................................... 9
(a) General............................................................... 9
(b) Duties Of Chairman Of The Board Of Directors.......................... 9
(c) Duties Of President................................................... 9
(d) Duties Of Vice Presidents............................................. 9
(e) Duties Of Secretary................................................... 9
(f) Duties Of Chief Financial Officer..................................... 9
Section 29. Delegation Of Authority............................................... 10
Section 30. Resignations.......................................................... 10
Section 31. Removal............................................................... 10
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY
THE CORPORATION...................................................... 10
Section 32. Execution Of Corporate Instruments.................................... 10
Section 33. Voting Of Securities Owned By The Corporation......................... 10
ARTICLE VII SHARES OF STOCK....................................................... 10
Section 34. Form And Execution Of Certificates.................................... 10
Section 35. Lost Certificates..................................................... 11
Section 36. Transfers............................................................. 11
Section 37. Fixing Record Dates................................................... 11
Section 38. Registered Stockholders............................................... 12
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION................................... 12
Section 39. Execution Of Other Securities......................................... 12
ARTICLE IX DIVIDENDS............................................................. 12
Section 40. Declaration Of Dividends.............................................. 12
Section 41. Dividend Reserve...................................................... 12
ARTICLE X FISCAL YEAR........................................................... 12
Section 42. Fiscal Year........................................................... 12
ARTICLE XI INDEMNIFICATION....................................................... 13
Section 43. Indemnification Of Directors, Executive Officers, Other Officers,
Employees And Other Agents........................................... 13
(a) Directors And Executive Officers...................................... 13
(b) Other Officers Employees and Other Agents............................. 13
(c) Expenses.............................................................. 13
(d) Enforcement........................................................... 13
(e) Non-Exclusivity Of Rights............................................. 14
(f) Survival Of Rights.................................................... 14
(g) Insurance............................................................. 14
(h) Amendments............................................................ 14
(i) Saving Clause......................................................... 14
(j) Certain Definitions................................................... 14
ii
TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE XII NOTICES............................................................... 15
Section 44. Notices............................................................... 15
(a) Notice To Stockholders................................................ 15
(b) Notice To Directors................................................... 15
(c) Affidavit Of Mailing.................................................. 15
(d) Time Notices Deemed Given............................................. 15
(e) Methods Of Notice..................................................... 15
(f) Failure To Receive Notice............................................. 15
(g) Notice To Person With Whom Communication Is Unlawful.................. 15
(h) Notice To Person With Undeliverable Address........................... 16
ARTICLE XIII AMENDMENTS............................................................ 16
Section 45. Amendments............................................................ 16
ARTICLE XIV LOANS TO OFFICERS..................................................... 16
Section 46. Loans To Officers..................................................... 16
iii
BYLAWS
OF
INHALE THERAPEUTIC SYSTEMS (DELAWARE), INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be in the City of Wilmington, County of New Castle.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETINGS.
(a) The annual meeting of the stockholders of the corporation, for the
purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be: (A) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; PROVIDED, HOWEVER, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy
1
statement, notice by the stockholder to be timely must be so received not
earlier than the close of business on the ninetieth (90th) day prior to such
annual meeting and not later than the close of business on the later of the
sixtieth (60th) day prior to such annual meeting or, in the event public
announcement of the date of such annual meeting is first made by the corporation
fewer than seventy (70) days prior to the date of such annual meeting, the close
of business on the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made by the corporation. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) any other information that is required to
be provided by the stockholder pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a
proponent to a stockholder proposal. Notwithstanding the foregoing, in order to
include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.
(c) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (c) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 5. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
director if elected); and (ii) as to such stockholder giving notice, the
information required to be provided pursuant to paragraph (b) of this Section 5.
At the request of the Board of Directors, any person nominated by a stockholder
for election as a director shall furnish to the Secretary of the corporation
that information required to be set forth in the stockholder's notice of
nomination which pertains to the nominee. No person shall be eligible for
election as a director of the corporation unless nominated in accordance with
the procedures set forth in this paragraph (c). The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.
(d) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a
2
document publicly filed by the corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be called,
for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii)
the Chief Executive Officer, (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption), or (iv) by the holders of the shares entitled to cast not less than
ten percent (10%) of the votes at the meeting, and shall be held at such place,
on such date, and at such time as the Board of Directors, shall fix.
(b) If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within sixty
(60) days after the receipt of the request, the person or persons requesting the
meeting may set the time and place of the meeting and give the notice. Nothing
contained in this paragraph (b) shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the Board
of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise
provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; PROVIDED, HOWEVER, that directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. Where a
separate vote by a class or classes or series is required, except where
otherwise provided by the statute or by the Certificate of Incorporation or
these Bylaws, a majority of the outstanding shares of such class or classes or
series, present in person or
3
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and, except where otherwise provided by the
statute or by the Certificate of Incorporation or these Bylaws, the affirmative
vote of the majority (plurality, in the case of the election of directors) of
the votes cast, including abstentions, by the holders of shares of such class or
classes or series shall be the act of such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meetinG.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) No action shall be taken by the stockholders except at an annual or
special meeting of stockholders called in accordance with these Bylaws, and no
action shall be taken by the stockholders by written consent.
4
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to make such
rules or regulations for the conduct of meetings of stockholders as it shall
deem necessary, appropriate or convenient. Subject to such rules and regulations
of the Board of Directors, if any, the chairman of the meeting shall have the
right and authority to prescribe such rules, regulations and procedures and to
do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors
of the corporation shall be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of
any series of Preferred Stock to elect additional directors under specified
circumstances, the directors shall be divided into three classes as provided in
the Company's Certificate of Incorporation, as amended from time to time.
SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A vacancy
in the Board of Directors shall be deemed to exist under this Bylaw in the case
of the death, removal or resignation of any director.
SECTION 19. RESIGNATION. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be
5
deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
SECTION 20. REMOVAL. Subject to the rights of the holders of any series of
Preferred Stock, no director shall be removed without cause. Subject to any
limitations imposed by law, the Board of Directors or any individual director
may be removed from office at any time with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock").
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be
held immediately before or after the annual meeting of stockholders and at the
place where such meeting is held. No notice of an annual meeting of the Board of
Directors shall be necessary and such meeting shall be held for the purpose of
electing officers and transacting such other business as may lawfully come
before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular
meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of
Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any
committee thereof, may participate in a meeting by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting by such means
shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, facsimile, telegraph or telex, or by electronic
mail or other electronic means, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any meeting of the
Board of Directors, or any committee thereof, however called or noticed, or
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater number and
except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
6
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in accordance
with the Certificate of Incorporation; PROVIDED, HOWEVER, at any meeting whether
a quorum be present or otherwise, a majority of the directors present may
adjourn from time to time until the time fixed for the next regular meeting of
the Board of Directors, without notice other than by announcement at the
meeting.
(b) At each meeting of the Board of Directors at which a quorum is present,
all questions and business shall be determined by the affirmative vote of a
majority of the directors present, unless a different vote be required by law,
the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to (i) approving or adopting, or recommending to
the stockholders, any action or matter expressly required by Delaware the
General Corporation Law to be submitted to stockholders for approval, or (ii)
adopting, amending or repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, from time to time,
appoint such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall any such committee have the powers denied to the Executive
Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors shall serve
a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to the provisions of subsections (a)
or (b) of this Bylaw may at any time increase or decrease the number of members
of a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another
7
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman
of the Board of Directors, or, if a Chairman has not been appointed or is
absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the officers
of the corporation shall be fixed by or in the manner designated by the Board of
Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the Board of
Directors and until their successors shall have been duly elected and qualified,
unless sooner removed. Any officer elected or appointed by the Board of
Directors may be removed at any time by the Board of Directors. If the office of
any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
of Directors, when present, shall preside at all meetings of the stockholders
and the Board of Directors. The Chairman of the Board of Directors shall perform
other duties commonly incident to his office and shall also perform such other
duties and have such other powers as the Board of Directors shall designate from
time to time. If there is no President, then the Chairman of the Board of
Directors shall also serve as the Chief Executive Officer of the corporation and
shall have the powers and duties prescribed in paragraph (c) of this Section 28.
8
(c) DUTIES OF PRESIDENT. The President shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors, unless the Chairman
of the Board of Directors has been appointed and is present. Unless some other
officer has been elected Chief Executive Officer of the corporation, the
President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform
the duties of the President in the absence or disability of the President or
whenever the office of President is vacant. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the
stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep or cause to be kept the books of account of the corporation in a thorough
and proper manner and shall render statements of the financial affairs of the
corporation in such form and as often as required by the Board of Directors or
the President. The Chief Financial Officer, subject to the order of the Board of
Directors, shall have the custody of all funds and securities of the
corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant Treasurer,
or the Controller or any Assistant Controller to assume and perform the duties
of the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly incident
to his office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
9
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the
10
registered owner thereof a written notice containing the information required to
be set forth or stated on certificates pursuant to this section or otherwise
required by law or with respect to this section a statement that the corporation
will furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation shall be made
only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
the Board of Directors may fix, in advance, a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of such meeting. If no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of
Directors may fix a new record date for the adjourned meeting.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted
11
thereon and attested by the signature of the Secretary or an Assistant
Secretary, or the Chief Financial Officer or Treasurer or an Assistant
Treasurer; PROVIDED, HOWEVER, that where any such bond, debenture or other
corporate security shall be authenticated by the manual signature, or where
permissible facsimile signature, of a trustee under an indenture pursuant to
which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors pursuant to law at any regular
or special meeting. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its
directors and executive officers (for the purposes of this Article XI,
"executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; PROVIDED, HOWEVER, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, PROVIDED, FURTHER, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in the
corporation
12
under the Delaware General Corporation Law or (iv) such indemnification is
required to be made under subsection (d).
(b) OTHER OFFICERS EMPLOYEES AND OTHER AGENTS. The corporation shall have
power to indemnify its other officers, employees and other agents as set forth
in the Delaware General Corporation Law.
(c) EXPENSES. The corporation shall advance to any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct.
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(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this
Bylaw shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw
shall continue as to a person who has ceased to be a director, officer, employee
or other agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware General
Corporation Law, the corporation, upon approval by the Board of Directors, may
purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall only be
prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each director and executive officer to the full extent
not prohibited by any applicable portion of this Bylaw that shall not have been
invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following
definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investigation, preparation, prosecution, defense,
settlement, arbitration and appeal of, and the giving of testimony in, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall include,
without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of
any nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority
to indemnify its directors, officers, and employees or agents, so that any
person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Bylaw with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had continued.
(4) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation
as, respectively, a director, executive officer, officer, employee, trustee
or agent of another corporation, partnership, joint venture, trust or other
enterprise.
(5) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving
at the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with
respect to an employee benefit plan, its participants, or beneficiaries; and
a person who acted in good faith and in a manner he reasonably believed to
be in the interest of
14
the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws,
notice is required to be given to any stockholder, it shall be given in writing,
timely and duly deposited in the United States mail, postage prepaid, and
addressed to his last known post office address as shown by the stock record of
the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any director
may be given by the method stated in subsection (a), or by facsimile, telex or
telegram, except that such notice other than one which is delivered personally
shall be sent to such address as such director shall have filed in writing with
the Secretary, or, in the absence of such filing, to the last known post office
address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same method of
giving notice be employed in respect of all directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within
which any stockholder may exercise any option or right, or enjoy any privilege
or benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice sent him in the
manner above provided, shall not be affected or extended in any manner by the
failure of such stockholder or such director to receive such notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice
is required to be given, under any provision of law or of the Certificate of
Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to
15
such person shall not be required. Any action or meeting which shall be taken or
held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all of the then-outstanding shares of the Voting Stock. The
Board of Directors shall also have the power to adopt, amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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INHALE THERAPEUTIC SYSTEMS
1994 EQUITY INCENTIVE PLAN
ADOPTED FEBRUARY 10, 1994
APPROVED BY SHAREHOLDERS FEBRUARY 18, 1994
TERMINATION DATE: FEBRUARY 9, 2004
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock
Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock appreciation rights, (iv) stock bonuses and (v) rights to
acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the
services of the group of persons eligible to receive Stock Awards, to secure and
retain the services of new members of this group and to provide incentives for
such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation of
the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance with
subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means Inhale Therapeutic Systems, a California corporation.
(g) "CONSULTANT" means any person, including an advisor, (1) engaged by the
Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (2) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors of the Company who are not compensated by the Company for their
services as Directors or Directors of the Company who are merely paid a
director's fee by the Company for their services as Directors.
(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director of the
Company will not constitute an interruption of Continuous Service. The Board or
the chief executive officer of the Company, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case
of any leave of absence approved by that party, including sick leave, military
leave or any other personal leave.
1
(i) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person within
the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
traded on the Nasdaq National Market System or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the
greatest volume of trading in the Common Stock) on the last market trading
day prior to the day of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "NON-EMPLOYEE DIRECTOR" means a Director of the Company who either (i)
is not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly) from the
Company or its parent or a subsidiary for services rendered as a consultant or
in any capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K promulgated
pursuant to the Securities Act ("Regulation S-K")), does not possess an interest
in any other transaction as to which disclosure would be required under Item
404(a) of Regulation S-K and is not engaged in a business relationship as to
which disclosure would be required under Item 404(b) of Regulation S-K; or (ii)
is otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(r) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option
granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company and an
Optionholder evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(u) "OPTIONHOLDER" or "OPTIONEE" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.
(v) "OUTSIDE DIRECTOR" means a Director of the Company who either (i) is not
a current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation"
2
receiving compensation for prior services (other than benefits under a tax
qualified pension plan), was not an officer of the Company or an "affiliated
corporation" at any time and is not currently receiving direct or indirect
remuneration from the Company or an "affiliated corporation" for services in any
capacity other than as a Director or (ii) is otherwise considered an "outside
director" for purposes of Section 162(m) of the Code.
(w) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.
(x) "PLAN" means this Inhale Therapeutic Systems 1994 Equity Incentive Plan.
(y) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or any
successor to Rule 16b-3, as in effect from time to time.
(z) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(aa) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock appreciation right, a stock bonus and a right to acquire
restricted stock.
(bb) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(cc) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board will administer the Plan unless and
until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) POWERS OF BOARD. The board shall have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall
be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive stock pursuant to a Stock Award; and the number of shares with
respect to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as the
Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan to a
Committee or Committees of one or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee,
3
the Committee shall have, in connection with the administration of the Plan,
the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee any of the administrative powers the Committee is
authorized to exercise (and references in this Plan to the Board shall
thereafter be to the Committee or subcommittee), subject, however, to such
resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee
at any time and revest in the Board the administration of the Plan.
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of
such authority, the Board or the Committee may (i) delegate to a committee
of one or more members of the Board who are not Outside Directors, the
authority to grant Stock Awards to eligible persons who are either (a) not
then Covered Employees and are not expected to be Covered Employees at the
time of recognition of income resulting from such Stock Award or (b) not
persons with respect to whom the Company wishes to comply with Section
162(m) of the Code and/or (ii) delegate to a committee of one or more
members of the Board who are not Non-Employee Directors the authority to
grant Stock Awards to eligible persons who are not then subject to Section
16 of the Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Stock Awards shall not exceed in the aggregate four million six hundred
seventy-five thousand (4,675,000) shares of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full (or vested in the case of Restricted Stock), the stock
not acquired under such Stock Award shall revert to and again become available
for issuance under the Plan. Shares subject to stock appreciation rights
exercised in accordance with the Plan shall not be available for subsequent
issuance under the Plan. If any Common Stock acquired pursuant to the exercise
of an Option shall for any reason be repurchased by the Company under an
unvested share repurchase option provided under the Plan, the stock repurchased
by the Company under such repurchase option shall not revert to and again become
available for issuance under the Plan.
(c) SOURCE OF SHARES. The stock subject to the Plan may be unissued shares
or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.
(b) TEN PERCENT STOCKHOLDERS. No Ten Percent Stockholder shall be eligible
for the grant of an Incentive Stock Option unless the exercise price of such
Option is at least one hundred ten percent (110%) of the Fair Market Value of
the Common Stock at the date of grant and the Option is not exercisable after
the expiration of five (5) years from the date of grant.
(c) SECTION 162(M) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in stock, no employee shall be eligible to
be granted Options covering more than four hundred thousand (400,000) shares of
the Common Stock during any calendar year.
4
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and a separate certificate or certificates will be issued for shares
purchased on exercise of each type of Option. The provisions of separate Options
need not be identical, but each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of each
of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions
of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of
each Incentive Stock Option shall be not less than one hundred percent (100%) of
the Fair Market Value of the stock subject to the Option on the date the Option
is granted. Notwithstanding the foregoing, an Incentive Stock Option may be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the stock subject to the Option on the date the
Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option
may be granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(d) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) by delivery to the
Company of other Common Stock, according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock) with the Participant or in any other
form of legal consideration that may be acceptable to the Board; provided,
however, that at any time that the Company is incorporated in Delaware, payment
of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option
shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing provisions of this
subsection 6(e), the Optionholder may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option shall be transferable to the extent provided in the Option Agreement. If
the Nonstatutory Stock Option does not provide for transferability, then the
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of
the Optionholder only by the Optionholder. Notwithstanding the foregoing
provisions of this subsection 6(f), the Optionholder may, by
5
delivering written notice to the Company, in a form satisfactory to the Company,
designate a third party who, in the event of the death of the Optionholder,
shall thereafter be entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock subject
to an Option may, but need not, vest and therefore become exercisable in
periodic installments which may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares as to which an Option may be exercised.
(h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionholder's Continuous Service (or
such longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination, the Optionholder does not exercise his or her Option within
the time specified in the Option Agreement, the Option shall terminate.
(i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionholder's Continuous Service (other than upon the Optionholder's death or
Disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in subsection 6(a) or (ii) the expiration of a period of
three (3) months after the termination of the Optionholder's Continuous Service
during which the exercise of the Option would not be in violation of such
registration requirements.
(j) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's Continuous
Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement) or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, after termination, the Optionholder does not
exercise his or her Option within the time specified herein, the Option shall
terminate.
(k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise the Option as of the date of death) by the
Optionholder's estate, by a person who acquired the right to exercise the Option
by bequest or inheritance or by a person designated to exercise the option upon
the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within
the period ending on the earlier of (1) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement) or (2) the expiration of the term of such Option as set forth in the
Option Agreement. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate.
(l) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares subject to the Option prior to the full vesting of the Option. Any
unvested shares so purchased may be subject to an unvested share repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate.
6
(m) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board
to make or not to make grants of Options hereunder, the Board shall have the
authority (but not an obligation) to include as part of any Option Agreement a
provision entitling the Optionholder to a further Option (a "Re-Load Option") in
the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares equal to the
number of shares surrendered as part or all of the exercise price of such
Option; (ii) have an expiration date which is the same as the expiration date of
the Option the exercise of which gave rise to such Re-Load Option; and (iii)
have an exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option
shall be subject to the same exercise price and term provisions heretofore
described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Board may designate at the time of the grant of the
original Option; provided, however, that the designation of any Re-Load Option
as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares under subsection 4(a) and
the "Section 162(m) Limitation" on the grants of Options under subsection 5(c)
and shall be subject to such other terms and conditions as the Board may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:
(i) CONSIDERATION. A stock bonus shall be awarded in consideration for
past services actually rendered to the Company for its benefit.
(ii) VESTING. Shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to a share repurchase option in
favor of the Company in accordance with a vesting schedule to be determined
by the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a
Participant's Continuous Service terminates, the Company may reacquire any
or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.
(iv) TRANSFERABILITY. Rights to acquire shares under the stock bonus
agreement shall be transferable by the Participant only upon such terms and
conditions as are set forth in the stock bonus agreement, as the Board shall
determine in its discretion, so long as stock awarded under the stock bonus
agreement remains subject to the terms of the stock bonus agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall
be in such form and shall contain such terms and conditions as the Board shall
deem appropriate. The terms and conditions of the restricted stock purchase
agreements may change from time to time, and the terms and conditions of
separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase
7
agreement shall include (through incorporation of provisions hereof by reference
in the agreement or otherwise) the substance of each of the following
provisions:
(i) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. The purchase price
shall not be less than eighty-five percent (85%) of the stock's Fair Market
Value on the date such award is made or at the time the purchase is
consummated.
(ii) CONSIDERATION. The purchase price of stock acquired pursuant to
the restricted stock purchase agreement shall be paid either: (i) in cash at
the time of purchase; (ii) at the discretion of the Board, according to a
deferred payment or other arrangement with the Participant; or (iii) in any
other form of legal consideration that may be acceptable to the Board in its
discretion; provided, however, that at any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by
deferred payment.
(iii) VESTING. Shares of Common Stock acquired under the restricted
stock purchase agreement may, but need not, be subject to a share repurchase
option in favor of the Company in accordance with a vesting schedule to be
determined by the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a
Participant's Continuous Service terminates, the Company may repurchase or
otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the
terms of the restricted stock purchase agreement.
(v) TRANSFERABILITY. Rights to acquire shares under the restricted
stock purchase agreement shall be transferable by the Participant only upon
such terms and conditions as are set forth in the restricted stock purchase
agreement, as the Board shall determine in its discretion, so long as stock
awarded under the restricted stock purchase agreement remains subject to the
terms of the restricted stock purchase agreement.
(c) STOCK APPRECIATION RIGHTS.
(i) AUTHORIZED RIGHTS. The following three types of stock appreciation
rights shall be authorized for issuance under the Plan:
(1) TANDEM RIGHTS. A "Tandem Right" means a stock appreciation right
granted appurtenant to an Option which is subject to the same terms and
conditions applicable to the particular Option grant to which it pertains
with the following exceptions: The Tandem Right shall require the holder
to elect between the exercise of the underlying Option for shares of
Common Stock and the surrender, in whole or in part, of such Option for
an appreciation distribution. The appreciation distribution payable on
the exercised the Tandem Right shall be in cash (or, if so provided, in
an equivalent number of shares of Common Stock based on Fair Market Value
on the date of the Option surrender) in an amount up to the excess of (A)
the Fair Market Value (on the date of the Option surrender) of the number
of shares of Common Stock covered by that portion of the surrendered
Option in which the Optionholder is vested over (B) the aggregate
exercise price payable for such vested shares.
(2) CONCURRENT RIGHTS. A "Concurrent Right" means a stock
appreciation right granted appurtenant to an Option which applies to all
or a portion of the shares of Common Stock subject to the underlying
Option and which is subject to the same terms and conditions applicable
to the particular Option grant to which it pertains with the following
exceptions: A Concurrent Right shall be exercised automatically at the
same time the underlying Option is exercised with respect to the
particular shares of Common Stock to which the Concurrent Right pertains.
The appreciation distribution payable on an exercised Concurrent Right
shall be in cash (or, if so
8
provided, in an equivalent number of shares of Common Stock based on Fair
Market Value on the date of the exercise of the Concurrent Right) in an
amount equal to such portion as determined by the Board at the time of
the grant of the excess of (A) the aggregate Fair Market Value (on the
date of the exercise of the Concurrent Right) of the vested shares of
Common Stock purchased under the underlying Option which have Concurrent
Rights appurtenant to them over (B) the aggregate exercise price paid for
such shares.
(3) INDEPENDENT RIGHTS. An "Independent Right" means a stock
appreciation right granted independently of any Option but which is
subject to the same terms and conditions applicable to a Nonstatutory
Stock Option with the following exceptions: An Independent Right shall be
denominated in share equivalents. The appreciation distribution payable
on the exercised Independent Right shall be not greater than an amount
equal to the excess of (a) the aggregate Fair Market Value (on the date
of the exercise of the Independent Right) of a number of shares of
Company stock equal to the number of share equivalents in which the
holder is vested under such Independent Right, and with respect to which
the holder is exercising the Independent Right on such date, over (b) the
aggregate Fair Market Value (on the date of the grant of the Independent
Right) of such number of shares of Company stock. The appreciation
distribution payable on the exercised Independent Right shall be in cash
or, if so provided, in an equivalent number of shares of Common Stock
based on Fair Market Value on the date of the exercise of the Independent
Right.
(ii) RELATIONSHIP TO OPTIONS. Stock appreciation rights appurtenant to
Incentive Stock Options may be granted only to Employees. The "Section
162(m) Limitation" provided in subsection 5(c) and any authority to reprice
Options shall apply as well to the grant of stock appreciation rights.
(iii) EXERCISE. To exercise any outstanding stock appreciation right,
the holder shall provide written notice of exercise to the Company in
compliance with the provisions of the Stock Award Agreement evidencing such
right. Except as provided in subsection 5(c) regarding the "Section 162(m)
Limitation," no limitation shall exist on the aggregate amount of cash
payments that the Company may make under the Plan in connection with the
exercise of a stock appreciation right.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Stock Awards and to issue and sell shares of Common
Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any stock issued or issuable pursuant to any such
Stock Award. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for failure to issue and
sell stock upon exercise of such Stock Awards unless and until such authority is
obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
9
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder of,
or to have any of the rights of a holder with respect to, any shares subject to
such Stock Award unless and until such Participant has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant or other holder of Stock Awards any right to continue to serve
the Company or an Affiliate in the capacity in effect at the time the Stock
Award was granted or shall affect the right of the Company or an Affiliate to
terminate (i) the employment of an Employee with or without notice and with or
without cause, (ii) the service of a Consultant pursuant to the terms of such
Consultant's agreement with the Company or an Affiliate or (iii) the service of
a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring stock under any Stock Award, (i) to give
written assurances satisfactory to the Company as to the Participant's knowledge
and experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (ii) to give written assurances
satisfactory to the Company stating that the Participant is acquiring the stock
subject to the Stock Award for the Participant's own account and not with any
present intention of selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (iii) the issuance of the shares upon the exercise or acquisition
of stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act or (iv) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock
Award Agreement, the Participant may satisfy any federal, state or local tax
withholding obligation relating to the exercise or acquisition of stock under a
Stock Award by any of the following means (in addition to the Company's right to
withhold from any compensation paid to the Participant by the Company) or by a
combination of such means: (i) tendering a cash payment; (ii) authorizing the
Company to withhold shares from the shares of the Common Stock otherwise
issuable to the participant as a result of the exercise or acquisition of stock
under the Stock Award; or (iii) delivering to the Company owned and unencumbered
shares of the Common Stock.
10
(g) CANCELLATION AND RE-GRANT OF OPTIONS.
(i) The Board shall have the authority to effect, at any time and from
time to time, (i) the repricing of any outstanding Options under the Plan
and/or (ii) with the consent of any adversely affected holders of Options,
the cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of Common Stock. The exercise price per share
shall be not less than that specified under the Plan for newly granted Stock
Awards. Notwithstanding the foregoing, the Board may grant an Option with an
exercise price lower than that set forth above if such Option is granted as
part of a transaction to which Section 424(a) of the Code applies.
(ii) Shares subject to an Option which is amended or canceled in order
to set a lower exercise price per share shall continue to be counted against
the maximum award of Options permitted to be granted pursuant to subsection
5(c). The repricing of an Option under this subsection 10(g) resulting in a
reduction of the exercise price shall be deemed to be a cancellation of the
original Option and the grant of a substitute Option; in the event of such
repricing, both the original and the substituted Options shall be counted
against the maximum awards of Options permitted to be granted pursuant to
subsection 5(c). The provisions of this subsection 10(g)(ii) shall be
applicable only to the extent required by Section 162(m) of the Code.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock subject
to the Plan, or subject to any Stock Award, without the receipt of consideration
by the Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of securities subject to the Plan pursuant to
subsection 4(a) and the maximum number of securities subject to award to any
person pursuant to subsection 5(c), and the outstanding Stock Awards will be
appropriately adjusted in the class(es) and number of securities and price per
share of stock subject to such outstanding Stock Awards. Such adjustments shall
be made by the Board, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a transaction "without receipt of consideration" by the
Company.)
(b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then such Stock Awards shall be
terminated if not exercised (if applicable) prior to such event.
(c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (1) a sale of substantially all of the assets of the
Company, (2) a merger or consolidation in which the Company is not the surviving
corporation or (3) a reverse merger in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, then any surviving corporation or
acquiring corporation shall assume any Stock Awards outstanding under the Plan
or shall substitute similar stock awards (including an award to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 11(c) for those outstanding under the Plan. In the event any
surviving corporation or acquiring corporation refuses to assume such Stock
Awards or to substitute similar stock awards for those outstanding under the
Plan, then with respect to Stock Awards held by Participants whose Continuous
Service has not terminated, the vesting of such Stock Awards (and, if
applicable, the time during which such Stock Awards may be exercised) shall be
accelerated in full, and the Stock Awards shall terminate if not exercised (if
applicable) at or prior to such event. With respect to
11
any other Stock Awards outstanding under the Plan, such Stock Awards shall
terminate if not exercised (if applicable) prior to such event.
(d) CHANGE IN CONTROL--SECURITIES ACQUISITION. In the event of an
acquisition by any person, entity or group within the meaning of Section 13(d)
or 14(d) of the Exchange Act, or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or an Affiliate) of the beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors, then with
respect to Stock Awards held by Participants whose Continuous Service has not
terminated, the vesting of such Stock Awards (and, if applicable, the time
during which such Stock Awards may be exercised) shall be accelerated in full.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit any
other amendment to the Plan for stockholder approval, including, but not limited
to, amendments to the Plan intended to satisfy the requirements of Section
162(m) of the Code and the regulations thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Rights and obligations under any Stock Award
granted while the Plan is in effect shall not be impaired by suspension or
termination of the Plan, except with the written consent of the Participant.
12
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the stockholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.
13
INHALE THERAPEUTIC SYSTEMS
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 23, 1998
The undersigned hereby appoints ROBERT B. CHESS and AJIT S. GILL, and each
of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Inhale Therapeutic
Systems which the undersigned may be entitled to vote at the Annual Meeting
of Shareholders of Inhale Therapeutic Systems to be held at the Company's
executive offices, 150 Industrial Road, San Carlos, California on Tuesday,
June 23, 1998 at 10:00 a.m. local time, and at any and all postponements,
continuations and adjournments thereof, with all powers that the undersigned
would possess if personally present, upon and in respect of the following
matters and in accordance with the following instructions, with discretionary
authority as to any and all other matters that may properly come before the
meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSAL 2, 3, AND 4, AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
PROPOSAL 1: To elect directors to hold office until the next Annual Meeting
of shareholders and until their successors are elected.
/ / FOR all nominees listed below / / WITHHOLD AUTHORITY
(except as marked to the contrary to vote for all nominees
below). listed below.
Nominees: Robert B. Chess, Ajit S. Gill, John S. Patton, Ph.D.,
Terry L. Opdendyk, Mark J. Gabrielson, James B. Glavin
and Melvin Perelman, Ph.D.
(Continued on other side)
(Continued from other side)
To withhold authority to vote for any nominee(s), write such nominee(s)'
name(s) below:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 2.
PROPOSAL 2: To approve the reincorporation of the Company in the State of
Delaware.
/ / FOR / / AGAINST / / ABSTAIN
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 3.
PROPOSAL 3: To approve the Company's 1994 Equity Incentive Plan, as amended,
to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 775,000 shares, from
3,900,000 shares to 4,675,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 4.
PROPOSAL 4: To ratify selection of Ernst & Young LLP as independent auditors
of the Company for its fiscal year ending December 31, 1998.
/ / FOR / / AGAINST / / ABSTAIN
(Continued on other side)
(Continued from other side)
DATED_______________ _______________________________________________________
_______________________________________________________
SIGNATURE(S)
Please sign exactly as your name appears hereon. If
the stock is registered in the names of two or more
persons, each should sign. Executors, administrators,
trustees, guardians and attorneys-in-fact should add
their titles. If signer is a corporation, please give
full corporate name and have a duly authorized officer
sign, stating title. If signer is a partnership,
please sign in partnership name by authorized
person.
Please vote, date and promptly return this proxy in the enclosed return
envelope which is postage prepaid if mailed in the United States.
