SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2001
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission file number 000-26422
DISCOVERY LABORATORIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3171943
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
350 South Main Street, Suite 307
Doylestown, Pennsylvania 18901
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (215) 340-4699
As of August 6, 2001, 21,187,810 shares of Common Stock, par value $.001 per
share, were outstanding.
Transitional Small Business Disclosure Format: |_| Yes |X| No
Page 1
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS --
As of June 30, 2001 (unaudited) and December 31, 2000 ........ Page 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) --
For the Three Months Ended June 30, 2001 and 2000; for
the Six Months Ended June 30, 2001 and 2000; and for the
Period from May 18, 1993 (Inception) through June 30, 2001 ... Page 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) --
For the Six Months Ended June 30, 2001 and 2000 and for
the Period from May 18, 1993 (Inception) through June 30, 2001 Page 5
Notes to Condensed Consolidated Financial Statements
- June 30, 2001 (unaudited) .................................. Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... Page 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................. Page 9
Item 2. Changes in Securities ......................................... Page 9
Item 3. Defaults Upon Senior Securities ............................... Page 9
Item 4. Submission of Matters to a Vote of Security Holders ........... Page 9
Item 5. Other Information ............................................. Page 9
Item 6. Exhibits and Reports on Form 8-K .............................. Page 9
Signatures ............................................................ Page 10
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Balance Sheets
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,772,000 $ 7,281,000
Available-for-sale marketable securities 9,901,000 11,587,000
Prepaid expenses and other current assets 326,000 149,000
------------ ------------
Total current assets 13,999,000 19,017,000
Property and equipment, net of depreciation 673,000 697,000
Security deposits 3,000 3,000
------------ ------------
$ 14,675,000 $ 19,717,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,072,000 $ 2,382,000
Capitalized lease -- current 18,000 17,000
------------ ------------
Total current liabilities 1,090,000 2,399,000
------------ ------------
Deferred revenue 456,000 851,000
Capitalized lease 21,000 31,000
------------ ------------
Total liabilities 1,567,000 3,281,000
------------ ------------
Stockholders' Equity:
Common stock, $.001 par value; 35,000,000 authorized; 21,181,888 and 21,000 21,000
20,871,112 shares issued and outstanding at June 30, 2001 and
December 31, 2000 respectively
Additional paid-in capital 62,175,000 60,891,000
Unearned portion of compensatory stock options (319,000) (347,000)
Deficit accumulated during the development stage (48,404,000) (43,989,000)
Treasury stock (at cost; 26,743 shares of common stock) (213,000) (213,000)
Accumulated other comprehensive (loss) income (152,000) 73,000
------------ ------------
Total stockholders' equity 13,108,000 16,436,000
------------ ------------
$ 14,675,000 $ 19,717,000
============ ============
See notes to condensed consolidated financial statements
Page 3
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Statements of Operations
(Unaudited)
May 18, 1993
Three Months Ended Six Months Ended (Inception)
June 30, June 30, Through
---------------------------- ---------------------------- June 30,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
Revenues:
Interest, dividends, and realized gains $ 417,000 $ 296,000 $ 719,000 $ 318,000 $ 3,229,000
Research and development collaborative contracts 262,000 718,000 19,000 1,664,000
------------ ------------ ------------ ------------ ------------
679,000 296,000 1,437,000 337,000 4,893,000
------------ ------------ ------------ ------------ ------------
Expenses:
Write-off of acquired in-process research and
development and supplies 13,508,000
Research and development 1,828,000 1,259,000 3,492,000 2,033,000 23,717,000
General and administrative 976,000 620,000 2,056,000 1,355,000 12,437,000
Compensatory stock options 229,000 634,000 302,000 1,447,000 2,959,000
Interest 1,000 1,000 2,000 3,000 20,000
------------ ------------ ------------ ------------ ------------
Total expenses 3,034,000 2,514,000 5,852,000 4,838,000 52,641,000
------------ ------------ ------------ ------------ ------------
(2,355,000) (2,218,000) (4,415,000) (4,501,000) (47,748,000)
Minority interest in net loss of subsidiary 26,000
------------ ------------ ------------ ------------ ------------
Net loss $ (2,355,000) $ (2,218,000) $ (4,415,000) $ (4,501,000) $(47,722,000)
============ ============ ============ ============ ============
Net loss per common share -
basic and diluted $(0.11) $(0.11) $(0.21) $(0.27)
====== ====== ====== ======
Weighted average number of common
shares outstanding -
basic and diluted 21,075,000 20,800,000 20,973,000 16,734,000
============ ============ ============ ============
See notes to condensed consolidated financial statements
Page 4
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
May 18, 1993
(Inception)
Six Months Ended through
June 30, June 30,
2001 2000 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (4,415,000) $ (4,501,000) $(47,722,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write-off of acquired in-process research and development -- -- 13,508,000
and supplies
Write-off of licenses -- -- 683,000
Depreciation and amortization 91,000 53,000 430,000
Compensatory stock options 302,000 1,447,000 2,959,000
Expenses paid using treasury stock and common stock 8,000 40,000 170,000
Loss on sale of property -- -- 4,000
Changes in:
Prepaid expenses, inventory and other current assets (177,000) (167,000) 280,000
Accounts payable and accrued expenses (1,310,000) 253,000 939,000
Other assets -- (51,000) (3,000)
Proceeds from research and development collaborative
agreements -- -- 1,641,000
Amortization of deferred revenue (395,000) -- (1,185,000)
Expenses paid on behalf of company -- -- 18,000
Employee stock compensation -- -- 42,000
Reduction of research and development supplies -- -- (161,000)
------------ ------------ ------------
Net cash used in operating activities (5,896,000) (2,926,000) (28,397,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (67,000) (156,000) (1,561,000)
Proceeds from sale of property and equipment -- -- 575,000
Acquisition of licenses -- -- (711,000)
Purchase of marketable securities (3,462,000) (10,082,000) (36,721,000)
Proceeds from sale or maturity of marketable securities 4,923,000 -- 27,073,000
Net cash payments on merger -- -- (1,670,000)
------------ ------------ ------------
Net cash used in investing activities 1,394,000 (10,238,000) (13,015,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of securities, net of expenses 1,002,000 21,438,000 45,313,000
Purchase of treasury stock -- -- (95,000)
Principal payments under capital lease obligation (9,000) (8,000) (34,000)
------------ ------------ ------------
Net cash provided by financing activities 993,000 21,430,000 45,184,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (3,509,000) 8,266,000 3,772,000
Cash and cash equivalents - beginning of period 7,281,000 3,547,000 --
------------ ------------ ------------
Cash and cash equivalents - end of period $ 3,772,000 $ 11,813,000 $ 3,772,000
============ ============ ============
Supplementary disclosure of cash flows information:
Interest Paid: $ 2,000 3,000 20,000
Noncash transactions:
Accrued dividends on Series C preferred stock $ -- $ 36,000 $ 682,000
Series C preferred stock dividends paid using common stock -- -- 204,000
Preferred Stock issued for inventory -- -- 575,000
Equipment acquired through capitalized lease -- -- 73,000
Unrealized loss on marketable securities (225,000) (44,000) (152,000)
See notes to condensed consolidated financial statements
Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
Discovery Laboratories, Inc. (the "Company") was formed to license and develop
pharmaceutical products to treat a variety of human diseases. The accompanying
financial statements include the accounts of the Company and its wholly owned
subsidiary, Acute Therapeutics, Inc. ("ATI"). ATI is presently inactive, and all
intercompany balances and transactions have been eliminated.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information in accordance with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normally recurring accruals)
considered for fair presentation have been included. Operating results for the
six-month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's 2000 Annual Report on Form 10-KSB.
The Company's activities since incorporation have primarily consisted of
conducting research and development, performing business and financial planning
and raising capital. Accordingly, the Company is considered to be in the
development stage, and expects to incur increasing losses and require additional
financial resources to achieve commercialization of its products.
The Company also depends on third parties to conduct research on the Company's
behalf through various research agreements. All of the Company's current
products under development are subject to license agreements that will require
the payment of future royalties.
NOTE 2 - NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of common
shares outstanding for the periods. Common shares issuable upon the exercise of
options and warrants and the conversion of convertible securities are not
included in the calculation of the net loss per share as their effect would be
antidilutive.
NOTE 3 - COMPREHENSIVE LOSS
Total comprehensive loss was $2,628,000 and $4,640,000 for the three and six
months ended June 30, 2001 and $2,262,000 and $4,545,000 for the three and six
months ended June 30, 2000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Plan of Operations
Since its inception, the Company has concentrated its efforts and resources on
the development and commercialization of pharmaceutical products and
technologies. The Company has been unprofitable since its inception and has
incurred a cumulative net loss of approximately $47.7 million as of June 30,
2001. The Company expects to incur increasing operating losses over the next
several years, primarily due to the expansion of its research and development
programs, including clinical trials for some or all of its existing products and
technologies and other products and technologies that it may acquire or develop.
The Company's ability to achieve profitability depends upon, among other things,
its ability to discover and develop products, obtain regulatory approval for its
proposed products and enter into agreements for product development,
manufacturing and commercialization. None of the Company's products currently
generate revenue and the Company does not expect to achieve product revenues for
the foreseeable future. Moreover, there can be no assurance that the Company
will ever achieve significant revenues or profitable operations from the sale of
any of its products or technologies.
Page 6
The Company is a development stage pharmaceutical company that is focused on
developing compounds intended for use primarily in critical care hospital
settings. The Company is developing its lead product candidate, Surfaxin(R)
(lucinactant), for the treatment of various critical care respiratory
conditions.
The Company anticipates that during the next 12 months it will conduct
substantial research and development on its products. The primary focus will be
on conducting the clinical trials for the Surfaxin(R) indications noted below
and on preclinical research related to using various formulations of Surfaxin(R)
as an aerosol therapeutic, as well as a platform respiratory drug delivery
technology. The Company anticipates the near term acquisition of approximately
$600,000 of equipment in order to optimize the manufacturing process for
Surfaxin(R) and to scale up the manufacturing process to meet expanded clinical
and commercial needs. Since January 1, 2001, the Company has hired six
additional personnel due to the expansion of its clinical development efforts
regarding Surfaxin(R).
SURFAXIN(R) (lucinactant)
Idiopathic Respiratory Distress Syndrome (IRDS) in premature infants
The Company has recently initiated two Phase 3 multinational clinical trials
evaluating Surfaxin(R) for the prevention and treatment of IRDS. The Company
considers one of these a landmark Phase 3 trial that is designed to demonstrate
the superiority of Surfaxin(R), the Company's humanized, synthesized,
peptide-containing surfactant, over currently available surfactant therapies.
Approximately 1,500 patients in North and South America as well as Europe will
be enrolled in this Phase 3 trial. This pivotal trial is intended, if
successful, to provide the basis for marketing authorization applications for
Surfaxin(R) with the United States Food and Drug Administration (the "FDA") and
worldwide regulatory authorities. The second Phase 3 trial is designed as a
supportive trial and compares Surfaxin(R) to another approved animal-derived
product. The Company expects to complete recruitment for these trials in
mid-2002. Conditioned upon the successful outcome of such trials, the Company
has committed to provide Surfaxin(R) to certain, but limited, Latin American
regions that participate in the studies at a significantly reduced cost for a
period of up to 10 years following commercialization. The Company has previously
been granted Orphan Drug Status for Surfaxin(R) from the FDA for IRDS.
Meconium Aspiration Syndrome (MAS) in full-term infants
The Company commenced enrollment of a pivotal Phase 3 trial in MAS in May of
2000. The Phase 3 trial is intended to enroll up to 200 MAS patients. Results of
a Phase 2 clinical trial in MAS in full-term newborns showed an improvement in
oxygenation parameters and a savings of approximately three days on mechanical
ventilation with the use of Surfaxin(R) as compared to controls. An Orphan
Products Development Grant awarded to the Company by the FDA's Office of Orphan
Products Development is expected to contribute towards the cost of this Phase 3
trial. The Company has also received Fast Track designation for Surfaxin(R) from
the FDA for MAS. The Company has previously been granted Orphan Drug Status for
Surfaxin(R) from the FDA for MAS. In addition, Surfaxin(R) has recently been
granted orphan product designation by the European Agency for the Evaluation of
Medicinal Products (EMEA). Given the Company's belief in the importance of IRDS
to the Company's present development plan, resources have been and may continue
to be reallocated from the MAS program to the IRDS program, which could
effectively delay the completion of this trial. Given the current circumstances,
patient recruitment is expected to be completed in fourth quarter 2002.
Acute Respiratory Distress Syndrome/ Acute Lung Injury (ARDS/ALI)
In November 2000, the Company initiated a Phase 2B clinical trial for the
treatment of ARDS. This Phase 2B trial is designed in two parts -- Part A is a
dose ranging study and Part B will consist of select doses identified in Part A
compared to standard of care. The Company has received Fast Track designation
for Surfaxin(R) from the FDA for ARDS. The Company has previously been granted
Orphan Drug Status for Surfaxin(R) from the FDA for ARDS.
SUPERVENT(TM) (tyloxapol)
Cystic Fibrosis (CF)
The Company began a Phase 2A clinical trial of SuperVent(TM) for the treatment
of CF on August 4, 1999. Analysis of the data from this randomized,
double-blind, placebo-controlled trial show that SuperVent(TM) significantly
decreased the amount of Interleukin 8 (IL-8) in the sputum of treated patients
as compared to controls. IL-8 is an important body chemical that causes the
migration of inflammatory cells to the site of release. The Phase 2A clinical
trial involved eight patients. An additional Phase 2 trial will likely be
required prior to commencement of a Phase 3 trial. Previously, the Company
completed a Phase 1 trial in 20 normal healthy volunteers and determined a dose
(1.25% tyloxapol concentration) that did not produce significant adverse
effects. In addition,
Page 7
the Company is establishing a development strategy for SuperVent(TM) to treat
certain inflammatory respiratory diseases such as chronic bronchitis.
Results of Operations
The Company's expenses increased from $4,838,000 in the six months ended June
30, 2000, to $5,852,000 in the six months ended June 30, 2001. The increase was
primarily due to an increase in the Company's research and development
activities. The Company's total comprehensive net loss slightly increased from
$4,545,000 in the six months ended June 30, 2000, to $4,640,000 in the six
months ended June 30, 2001. In addition, primarily due to the increase in the
weighted average common shares outstanding during the first six months of 2001,
the Company's net loss per share decreased from $0.27 in 2000 to $0.21 in 2001.
Liquidity
At June 30, 2001, the Company had working capital of approximately $12.9
million. The Company believes its current working capital is sufficient to meet
its planned research and development activities through the third quarter of
2002.
The Company will be required to raise additional capital in order to meet its
overall business objectives, and there can be no assurance that it will be
successful in doing so or, in general, that the Company will be able to achieve
its business objectives.
The Company's working capital requirements will depend upon numerous factors,
including, without limitation, progress of the Company's research and
development programs, preclinical and clinical testing, timing and cost of
obtaining regulatory approvals, levels of resources that the Company devotes to
the development of manufacturing and marketing capabilities, technological
advances, status of competitors and the ability of the Company to establish
collaborative arrangements with other organizations.
Safe Harbor Statement Under the Private Securities Litigation Act of 1996
Certain statements set forth in this report, including, without limitation,
statements concerning the Company's research and development programs and
clinical trials, the possibility of submitting regulatory filings for the
Company's products under development, the seeking of collaboration arrangements
with pharmaceutical companies or others to develop, manufacture and market
products, the research and development of particular compounds and technologies
and the period of time for which the Company's existing resources will enable
the Company to fund its operations, are forward-looking statements. All such
statements involve significant risks and uncertainties. Actual results may
differ materially from those contemplated in the forward looking statements as a
result of risks and uncertainties, including but not limited to the following:
the Company's ability to obtain substantial additional funds; the uncertainties
inherent in the process of developing products of the kind being developed by
the Company; the Company's ability to establish additional collaborative and
licensing arrangements and the degree of success of the Company's collaboration
partners; the Company's ability to obtain and maintain all necessary patents or
licenses; the Company's ability to demonstrate the safety and efficacy of
product candidates and to receive required regulatory approvals; the Company's
ability to meet obligations and required milestones under its license agreement;
the Company's ability to compete successfully against other products and to
market products in a profitable manner; and other risks and uncertainties set
forth in the Company's filings with the Securities and Exchange Commission.
Page 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES.
In April 2001, the Company received approximately $1 million in proceeds in a
private placement sale of 296,560 shares of common stock to a limited
partnership. This partnership may be deemed to be a related party, in that one
of the partners is a member of the Company's board of directors. Such shares of
common stock have not been registered under the Securities Act of 1933 (the
"Act") and may not be offered or sold in the United States absent registration
or an applicable exemption from the registration requirements of the Act. The
investor is entitled to certain registration rights with respect to the resale
of the shares of Common Stock issued in the offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At an annual meeting of the stockholders of the Company, held on June 15, 2001,
the following matters were voted on by the stockholders: (i) the election of
seven directors; (ii) the approval of Ernst and Young LLP as the Company's
independent auditors for the fiscal year ended December 31, 2001; and (iii)
consideration and approval of an amendment to the 1998 Amended and Restated
Stock Incentive Plan (the "Plan") to increase the number of shares of Common
Stock available for issuance under the Plan from 3,000,000 to 4,150,000 shares.
(i) Election of Directors
For Withheld
--- --------
Robert J. Capetola, Ph.D. 12,736,888 160,094
Max Link, Ph.D. 12,840,361 56,621
Herbert H. McDade, Jr. 12,840,261 56,721
Richard G. Power 12,840,461 56,521
Mark C. Rogers, MD 12,839,711 57,271
Marvin E. Rosenthale, Ph.D. 12,839,161 57,821
Mark S. Siegel 12,839,561 57,421
(ii) Approval of Independent Auditors
For Against Abstain
--- ------- -------
12,844,417 5,666 46,899
(iii) Amendment to the 1998 Amended and Restated Stock Incentive Plan
For Against Abstain Not Voted
--- ------- ------- ---------
6,240,067 751,335 41,017 5,864,563
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Amended and Restated 1998 Stock Incentive Plan
Page 9
(b) Reports on Form 8-K:
1. A Form 8-K was filed with the Commission on May 7, 2001,
reporting the appointment of Mark S. Siegel to the Board of
Directors of the Company and the private placement sale of
296,560 shares of common stock to a limited partnership.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Discovery Laboratories, Inc.
(Registrant)
Date: August 13, 2001 /s/ Robert J. Capetola, Ph.D.
------------------------------------------
Robert J. Capetola, Ph.D.
President/Chief Executive Officer
Date: August 13, 2001 /s/ Deni M. Zodda, Ph.D.
------------------------------------------
Deni M. Zodda, Ph.D.
Sr. Vice President, Business Development
(Principal Financial Officer)
Date: August 13, 2001 /s/ Cynthia Davis
------------------------------------------
Cynthia Davis
Controller
(Principal Accounting Officer)
Page 10
Exhibit 10.1
DISCOVERY LABORATORIES, INC.
AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
June 15, 2001
DISCOVERY LABORATORIES, INC.
AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This Amended and Restated 1998 Stock Incentive Plan (the "Plan") is
intended to promote the interests of Discovery Laboratories, Inc., a Delaware
corporation, by providing eligible persons with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in the service of the
Corporation.
The Plan amends and restates the Corporation's 1998 Stock Incentive Plan
and shall serve as the successor to the Corporation's 1995 Stock Option Plan and
1993 Stock Option Plan (the "Predecessor Plans"). No further option grants shall
be made under the Predecessor Plans after the Initial Approval Date. All options
outstanding under the Predecessor Plans on the Initial Approval Date are
incorporated into the Plan and shall be treated as outstanding options under the
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of the Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary), and
(iii) the Automatic Option Grant Program under which eligible
non-employee board members shall automatically receive option grants at
periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. The Board shall have authority to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 Insiders but may
delegate such authority to the Primary Committee. Administration of the
Discretionary Option Grant and Stock Issuance Programs with respect to all other
persons eligible to participate in those programs may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee, or the
Board may retain the power to administer those programs with respect to all such
persons.
B. Members of the Primary Committee or any Secondary Committee shall serve
for such period of time as the Board may determine and may be removed by the
Board at any time. The Board may also at any time terminate the functions of any
Secondary Committee and reassume all powers and authority previously delegated
to such committee.
C. Each Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority (subject to the
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan
1
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority to determine, (i) with respect
to the option grants under the Discretionary Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
D. Only non-employee members of the Board shall be eligible to participate
in the Automatic Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
reserved for issuance over the term of the Plan shall not exceed 4,150,000,000
shares. Such authorized share reserve is comprised of (i) the number of shares
which remained available for issuance under the Predecessor Plans as of the
Initial Approval Date, comprised of the shares subject to the outstanding
options incorporated into the 1998 Stock Incentive Plan upon its initial
approval by the stockholders of the Corporation and outstanding options issued
subsequent to the Initial Approval Date, but not in excess of the additional
shares which were otherwise available for future grant under the Predecessor
Plans as of the Initial Approval Date (403,162 shares in the aggregate), plus
(ii) an additional 1,022,566 shares which became issuable under the 1998 Stock
Incentive Plan on the Initial Approval Date plus (iii) an additional increase of
775,231 shares authorized by the Board on December 7, 1998, and approved by the
Corporation's stockholders at the 1999 Annual Meeting, plus (iv) an additional
increase of 799,041 shares authorized by the Board on March 17, 2000, and
approved by the Corporation's shareholders at the 2000 Annual Meeting; plus (v)
an additional increase of 1,150,000 shares authorized by the Board on March 16,
2001 and approved by the Corporation's shareholders at the 2001 Annual Meeting.
B. No one person participating in the Plan may receive options, separately
exercisable stock appreciation rights and direct stock issuances for more than
250,000 shares of Common Stock in the aggregate per calendar year, beginning
with the 1998 calendar year.
C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent those
2
options expire or terminate for any reason prior to exercise in full. Unvested
shares issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.
D. If any change is made to the Common Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall be made to
(i) the maximum number and/or class of securities issuable under the Plan, (ii)
the number and/or class of securities for which any one person may be granted
options, separately exercisable stock appreciation rights and direct stock
issuances under this Plan per calendar year, (iii) the number and/or class of
securities for which grants are subsequently to be made under the Automatic
Option Grant Program to new and continuing non-employee Board members, (iv) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option under the Plan and (v) the number and/or class of
securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
3
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Five and
the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date,
or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions to
(a) a Corporation-designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required
to be withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at such
time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
4
(vi) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of
vested shares of Common Stock for which such option is exercisable at the
time of the Optionee's cessation of Service but also with respect to one
or more additional installments in which the Optionee would have vested
had the Optionee continued in Service.
D. Stockholder Rights. The holder of an option shall have no stockholder
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion to
grant options which are exercisable for unvested shares of Common Stock. Should
the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any or
all of those unvested shares. The terms upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.
F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Five shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is granted
is a 10% Stockholder, then the exercise price per share shall not be less than
one hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date, and the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may
5
be exercised for any or all of those shares as fully-vested shares of Common
Stock. However, an outstanding option shall not so accelerate if and to the
extent: (i) such option is, in connection with the Corporate Transaction, either
to be assumed by the successor corporation (or parent thereof) or to be replaced
with a comparable option to purchase shares of the capital stock of the
successor corporation (or parent thereof), (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing on the unvested option shares at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those option shares or (iii) the acceleration of
such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant. The determination of option comparability under
clause (i) above shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. The Plan Administrator shall have the discretion, exercisable either at
the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options upon the occurrence of a Corporate Transaction, whether or
not those options are to be assumed or replaced in the Corporate Transaction.
D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments to reflect such Corporate Transaction shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.
E. Notwithstanding Section III.A. of this Article Two, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed or replaced in the
Corporate Transaction. In addition, the Plan Administrator may provide that one
or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Corporate Transaction shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full, even in the event the options are to be
assumed.
F. The Plan Administrator shall have full power and authority exercisable,
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program in the event
the Optionee's Service terminates by reason of an Involuntary Termination within
a designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those options are assumed or replaced
and do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights
6
with respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.
G. The Plan Administrator shall have full power and authority, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program upon (i) a
Change in Control or (ii) the termination of the Optionee's Service by reason of
an Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of such Change in Control. Each option
so accelerated shall remain exercisable for fully-vested shares until the
earlier of (i) the expiration of the option term or (ii) the expiration of the
one (1)-year period measured from the effective date of the Optionee's cessation
of Service. In addition, the Plan Administrator may provide that one or more of
the Corporation's outstanding repurchase rights with respect to shares held by
the Optionee at the time of such Change in Control or Involuntary Termination
shall immediately terminate, and the shares subject to those terminated
repurchase rights shall accordingly vest in full.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution therefor new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.
B. The following terms shall govern the grant and exercise of tandem stock
appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price payable
for such shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time
prior to the later of (a) five (5) business days after the receipt of the
rejection notice or (b) the last day on which the option is otherwise
exercisable in accordance with the terms of the documents evidencing such
option, but in no event may such rights be exercised more than ten (10)
years after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from
the Corporation in an amount equal to the excess of (A) the Take-Over
Price of the shares of Common Stock which are at the time vested under
each surrendered option (or surrendered portion thereof) over (B) the
aggregate exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the option surrender date.
(iii) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents evidencing
such option.
7
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Five, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with respect
to any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the Stock
Issuance Program shall terminate automatically, and all the shares of Common
Stock subject to those terminated rights shall immediately vest in full, in the
event of any Corporate Transaction, except to the extent (i) those repurchase
rights are to be
8
assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretion, exercisable either at
the time the unvested shares are issued or at any time while the Corporation's
repurchase right remains outstanding, to provide for the automatic termination
of one or more of those outstanding rights and the immediate vesting of the
shares of Common Stock subject to such rights upon the occurrence of a Corporate
Transaction.
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should terminate by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of any Corporate Transaction
in which those repurchase rights are assigned to the successor corporation (or
parent thereof).
D. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest upon (i) a Change in Control or (ii) the termination of the
Participant's Service by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of such Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
9
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified below:
1. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Plan Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been a director of or in the employ of the
Corporation or any Parent or Subsidiary.
2. On the date of the 1998 Annual Meeting (the Stockholder Approval
Date) and on the date of each Annual Stockholders Meeting held after such date,
each individual who is to continue to serve as an Eligible Director, whether or
not that individual is standing for re-election to the Board at that particular
Annual Meeting, shall automatically be granted a Non-Statutory Option to
purchase 10,000 shares of Common Stock, provided that such amount shall be
increased to 20,000 shares for grants on or after the date of the 2000 Annual
Meeting, with respect to each Annual Stockholders Meeting, such individual has
served as a non-employee board member for at least six (6) months. There shall
be no limit on the number of such 10,000 or 20,000-share option grants any one
Eligible Director may receive over his or her period of Board Service, and
non-employee board members who have previously been a director of or in the
employ of the Corporation (or any Parent or Subsidiary) shall be eligible to
receive one or more such annual option grants over their period of continued
Board Service.
B. Exercise Price.
1. The exercise price per share shall be equal to sixty percent
(60%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years measured
from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board Service
prior to vesting in those shares. With respect to options granted on or after
the date of the 1998 annual stockholders' meeting, each option shall vest, and
the Corporation's repurchase right shall lapse, on the first anniversary of the
date of grant.
E. Termination of Board Service. The following provisions shall govern the
exercise of any options held by the Optionee at the time the Optionee ceases to
serve as a Board member:
(i) The Optionee (or, in the event of the Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution) shall have a
twelve (12)-month period following the date of such cessation of Board
Service in which to exercise each such option.
(ii) During the twelve (12)-month post-service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board Service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board Service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve
(12)-month post-service exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's
cessation of Board Service for any reason other than death or Permanent
Disability, terminate and cease to be outstanding to the extent the option
is not otherwise at that time exercisable for vested shares.
10
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Immediately following the consummation of the Corporate
Transaction, each automatic option grant shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common Stock at
the time subject to each outstanding option but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Change in Control, become fully exercisable for all of
the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.
E. The grant of options under the Automatic Option Grant Program shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
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ARTICLE FIVE
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon the
exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan Effective
Date. Options may be granted under the Discretionary Option Grant or Automatic
Option Grant Program at any time on or after the Plan Effective Date. However,
no options granted under the Plan may be exercised, and no shares shall be
issued under the Plan, until the Stockholder Approval Date. If the Stockholder
Approval Date does not occur within twelve (12) months after the Plan Effective
Date, then all options previously granted under this Plan shall terminate and
cease to be outstanding, and no further options shall be granted and no shares
shall be issued under the Plan.
B. One or more provisions of the Plan, including (without limitation) the
option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan on the Stockholder Approval Date which do not otherwise contain such
provisions.
C. The Plan shall terminate upon the earliest of (i) March 24, 2008 (ii)
the date on which all shares available for issuance under the Plan shall have
been issued as fully-vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. Upon such plan termination,
all outstanding option grants and unvested stock issuances shall thereafter
continue to have force and effect in accordance with the provisions of the
documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
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unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant Programs and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option under
the Plan and the issuance of any shares of Common Stock (i) upon the exercise of
any granted option or (ii) under the Stock Issuance Program shall be subject to
the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or delivered
under the Plan unless and until there shall have been compliance with all
applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant any
right to continue in Service or Board Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining such person) or
of the Optionee or the Participant, which rights are hereby expressly reserved
by each, to terminate such person's Service or Board Service at any time for any
reason, with or without cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
B. Board shall mean the Corporation's Board of Directors.
C. Board Service shall mean the performance of services for the
Corporation by a person in the capacity of a non-employee member of the board of
directors.
D. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board does
not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
E. Code shall mean the Internal Revenue Code of 1986, as amended.
F. Common Stock shall mean the Corporation's common stock.
G. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
H. Corporation shall mean Discovery Laboratories, Inc., a Delaware
corporation, and its successors.
I. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.
J. Eligible Director shall mean a non-employee Board member who is not a
10% Stockholder.
K. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance. L. Exercise Date shall mean the date on which the
Corporation shall have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
SmallCap Market or Nasdaq National Market, then the Fair Market Value
shall be deemed equal to the closing selling price per share of Common
Stock on the date in question, as such price is reported on such market or
any successor
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system. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
N. Hostile Take-Over shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.
P. Initial Approval Date shall mean June 16, 1998, the date on which the
Corporation's 1998 Stock Incentive Plan was initially approved by the
stockholders of the Corporation.
Q. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change
in Optionee's position with the Corporation (or Parent or Subsidiary
employing Optionee) which materially reduces Optionee's duties and
responsibilities or the level of management to which Optionee reports, (B)
a reduction in Optionee's level of compensation (including base salary,
fringe benefits and target bonus under any corporate performance-based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of Optionee's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Corporation without Optionee's consent.
R. Misconduct shall mean, unless otherwise determined by the Plan
Administrator and recorded in the agreements evidencing the option grant or
stock issuance, the commission of any act of fraud, embezzlement or dishonesty
by the Optionee or Participant, any unauthorized use or disclosure by such
person of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by such person
adversely affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).
S. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
T. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
U. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.
V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
W. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.
X. Permanent Disability or Permanently Disabled shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However,
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solely for purposes of the Automatic Option Grant Program, Permanent Disability
or Permanently Disabled shall mean the inability of the non-employee Board
member to perform his or her usual duties as a Board member by reason of any
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more.
Y. Plan shall mean the Corporation's Amended and Restated 1998 Stock
Incentive Plan, as set forth in this document.
Z. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
AA. Plan Effective Date shall mean March 24, 1998, the date on which the
Plan was adopted by the Board.
BB. Predecessor Plans shall mean the Corporation's 1995 Stock Option Plan
and 1993 Stock Option Plan as in effect immediately prior to the Plan Effective
Date hereunder.
CC. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
DD. Secondary Committee shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
EE. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
HH. Stockholder Approval Date shall mean the date on which the Plan is
approved by the Corporation's stockholders.
II Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
JJ. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.
KK. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
LL. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
MM. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
NN. 10% Stockholder shall mean the owner of stock (as determined under
Code).
Section 424(d) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
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