PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
June 10, 2014
Proxies and voting instructions in the form enclosed with this Proxy Statement are solicited by the Board of Directors of Discovery Laboratories, Inc., a Delaware corporation (referred to as “we,” “our,” “us,” and “the Company”), with principal executive offices at 2600 Kelly Road, Suite 100, Warrington, Pennsylvania 18976-3622, for use at the Annual Meeting of Stockholders (the “Annual Meeting”) to be held on June 10, 2014, at 8:00 a.m. at the Homewood Suites, 2650 Kelly Road, Warrington, Pennsylvania 18976, and at any adjournment or postponement thereof. We expect that this Proxy Statement and the form of proxy will be mailed to stockholders on or about April [30], 2014.
What is included in these materials?
These materials include our Proxy Statement for the Annual Meeting and our 2013 Annual Report to Stockholders, which includes our year-end, audited consolidated financial statements.
What matters will be voted on at the Annual Meeting?
The proposals to be taken up at the meeting are the following:
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1.
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To elect five members to our Board of Directors (“Board”) to serve until the next Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified, or until their earlier resignation or removal (Proposal 1);
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2.
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To ratify the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2014 (Proposal 2);
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3.
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To amend our 2011 Long-Term Incentive Plan (the “2011 Plan”) to increase the number of shares of common stock, par value $.001 per share (“Common Stock”) available for issuance under the 2011 Plan by 5.0 million shares from 7.7 million shares to 12.7 million shares (Proposal 3);
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4.
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To amend our Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”) to increase the number of authorized shares of Common Stock available for issuance from 150 million to 250 million (Proposal 4);
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5.
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To approve, on an advisory basis, the compensation of our named executive officers, as disclosed in this Proxy Statement (Proposal 5); and
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To transact such other business as may properly come before the meeting and any adjournments or postponements thereof.
Who may vote at the Annual Meeting?
Only stockholders of record of shares of our Common Stock as of April 14, 2014 (the “Record Date”) may vote at the Annual Meeting (and any adjournments or postponements of the Annual Meeting). As of the Record Date, the number and class of stock outstanding and entitled to vote at the meeting was 85,052,281 shares of Common Stock.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING,
PLEASE VOTE NOW – AND PLEASE VOTE WITH RESPECT TO ALL PROPOSALS
.
If you do not vote your shares, or if you do not vote with respect to all proposals, your shares may not be counted in determining the outcome of proposals that affect our future.
If you plan to attend the Annual Meeting in person
, please bring with you a photo ID and evidence of your stock ownership as of the Record Date. If your shares are not registered directly in your name on our books and are instead held in an account for you by a bank, advisory or brokerage firm or other financial institution, you will need to obtain evidence of your stock ownership as of the Record Date from the entity that holds your account.
What if my shares are held for me in “street name”?
Shares held by banks, advisory or brokerage firms and other financial institutions (collectively referred to in this Proxy Statement as “brokers”) on behalf of beneficial owners of our Common Stock are considered to be held in “street name.” In that case, the brokers are the registered holders on our books (maintained for us by our transfer agent) and are required to vote shares in accordance with their customers’ voting instructions. Accordingly, if your shares are held in “street name,” you vote your shares by providing voting instructions to your broker. If your shares are held in “street name” and you have not received information about the methods available to you to vote your shares, you should request from your broker instructions for voting your shares.
As your vote is
very
important, please be sure to provide voting instructions to your broker
.
What are broker “non-votes”?
If your shares are held in “street name,” a broker “non-vote” occurs when a broker does not vote on one or more proposals because you have not given specific voting instructions with respect to “non-discretionary” proposals. However, if you do not give your broker specific voting instructions with respect to “discretionary” proposals, your broker may nevertheless be permitted to vote your shares. Under the rules of The NASDAQ Stock Market® (“Nasdaq”), the election of directors (Proposal 1), the amendment of the 2011 Plan (Proposal 3), and the advisory vote on executive compensation (Proposal 5) are considered to be “non-discretionary” proposals. The proposal to ratify the appointment of our auditors (Proposal 2) and the proposal to amend our Amended and Restated Certificate of Incorporation (Proposal 4) are considered to be “discretionary” proposals.
Broker non-votes are counted for purposes of determining whether a quorum exists for the transaction of business generally at our Annual Meeting, but they will not be counted for purposes of determining the number of shares represented and voted with respect to “non-discretionary” proposals. If you do
not
give your broker specific voting instructions for each of the non-discretionary proposals, your shares will not be included in the tabulation to determine if we have received the required number of votes needed to approve these very important proposals.
How does the Board recommend that I vote my shares?
The Board recommends that you vote as follows:
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“FOR”
the election of the Board’s nominees for director
(Proposal 1)
;
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“FOR”
the ratification of the
selection of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2014 (Proposal 2);
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“FOR”
the
amendment to the 2011 Plan to increase the number of shares of Common Stock available for issuance under the 2011 Plan by 5.0 million shares from 7.7 million shares to 12.7 million shares (Proposal 3);
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“FOR”
the amendment to our Certificate of Incorporation to increase the number of authorized shares of Common Stock available for issuance from 150 million to 250 million (Proposal 4); and
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“FOR”
the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in this Proxy Statement (Proposal 5).
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How will a quorum be established at the Annual Meeting?
To transact any business at the Annual Meeting, at least a majority of the outstanding shares of our Common Stock entitled to vote at the Annual Meeting must be present in person or by proxy. For purposes of determining the presence or absence of a quorum for the Annual Meeting, the following shares are counted as present:
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Shares represented by stockholders attending the Annual Meeting, whether or not they vote all their shares;
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All shares represented by validly delivered proxies which contain one or more abstentions or which have votes withheld from any nominee for director; and
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Shares represented by validly delivered proxies containing broker “non-votes.”
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How are stockholder votes counted?
All telephone and Internet votes submitted by stockholders whose shares are carried directly on our books before 7:00 p.m. (EDT), June 9, 2014, and all properly executed proxies and broker instructions that are received in time to be counted at the Annual Meeting (and not properly revoked) will be counted. Where a choice has been specified on the proxy with respect to any matter, the shares represented by the proxy will be voted in accordance with those specifications. Where a choice has not been specified on the proxy with respect to any matter, the shares represented by the proxy will be voted in accordance with the Board’s recommendation.
In the election of directors under Proposal 1, you may vote your shares “FOR” each nominee or you may mark your vote “WITHHELD” for any one or more nominees. The nominees for directors are elected by a plurality of the votes cast at the Annual Meeting in person or by proxy. Therefore, the five nominees receiving the highest number of “FOR” votes at the meeting (a plurality of votes cast) will be elected to serve as directors and will constitute our entire Board. Shares represented by proxies received and not so marked or via telephone or Internet and not so indicated will be voted for the election of the nominees in accordance with the Board’s recommendation. Where a stockholder proxy or vote via telephone or Internet indicates withheld authority to vote for a particular nominee or nominees, the shares will not be voted for that particular nominee or nominees.
For each of Proposals 2, 3, 4, and 5, you may determine to vote “FOR,” “AGAINST,” or “ABSTAIN” from voting. Abstentions are counted as present and voting on a proposal; therefore, a vote to “ABSTAIN” will have the same effect as a vote “AGAINST.” Broker “non-votes” are not considered to have been voted for non-discretionary proposals and are not counted as present in determining whether non-discretionary proposals have been approved by a majority of the shares present and entitled to vote on the proposals. It is our understanding that Proposals 2 and 4 will be deemed discretionary proposals and Proposals 1, 3, and 5 will be deemed non-discretionary proposals. Approval of each of Proposals 2, 3, and 5 requires the affirmative vote of a majority of shares voting in person or by proxy on the proposal. Approval of Proposal 4 requires the affirmative vote of a majority of the outstanding shares of our Common Stock entitled to vote at the meeting.
Shares represented by proxies received and not so marked or via telephone or Internet and not so indicated will be voted for a matter in accordance with the Board’s recommendations. If any other matter not discussed in this Proxy Statement is presented at the Annual Meeting and upon which a vote may be properly taken, shares represented by all proxies received by the Board will be voted with respect thereto in accordance with the judgment of the persons named in the proxies.
How may I revoke a vote submitted prior to the Annual Meeting?
You may revoke a vote at any time prior to the Annual Meeting and you may thereafter attend and vote at the Annual Meeting. You may revoke a vote as follows:
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If you voted originally by telephone or via the Internet, enter new instructions on the same voting system before 7:00 p.m. (EDT), June 9, 2014; or
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If you voted by giving your vote to our proxy solicitor, Morrow & Co., LLC (“Morrow”) via telephone, call Morrow at 1-203-658-9400 before 7:00 p.m. (EDT) on June 9, 2014 and advise them that you wish to revoke or change your vote; or
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If your shares are registered in your name on our books,
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send a written notice of revocation to us, attention Corporate Secretary, which must be received prior to the close of voting at the Annual Meeting on June 10, 2014; or
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attend the Annual Meeting and vote in person (or send a personal representative with an appropriate proxy); or
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If you hold your shares in “street name,”
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contact the broker that delivered your Proxy Statement for instructions about how to change your vote; or
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if you wish to change your vote by attending the Annual Meeting, you must contact your broker for documentation – only your broker may change voting instructions with respect to shares held in “street name.”
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COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of our Common Stock (i) unless otherwise noted, as of March 31, 2014, by each current director and each executive officer set forth in the table below (each a “Named Executive Officer”), (ii) as of March 31, 2014, by all directors and executive officers as a group, and (iii) as of the date noted in each related footnote, by the entities known by us to be the beneficial owners of more than five percent of the outstanding shares of our Common Stock.
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Name and Address
of Beneficial Owner
(1)
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Common
Stock
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Common Stock
Equivalents
(2)
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Total Beneficial
Ownership
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Percentage of Class
Beneficially Owned
(1)
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Non-Executive Directors
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John R. Leone
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3,000
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10,000
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13,000
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*
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Joseph M. Mahady
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–
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10,000
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10,000
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*
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Bruce A. Peacock
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–
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22,667
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22,667
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*
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Marvin E. Rosenthale, Ph.D
(3)
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23,333
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33,000
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56,333
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*
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Named Executive Officers
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John G. Cooper
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53,584
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460,667
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514,251
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*
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Thomas F. Miller, Ph.D, MBA
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46,227
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310,000
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356,227
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*
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Russell G. Clayton, D.O.
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29,355
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205,335
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234,690
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*
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Mary B. Templeton, Esq.
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39,822
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156,667
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196,489
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*
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Executive Officers and Directors
as a group (12 persons)
(4)
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327,829
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1,678,004
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2,005,833
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2.31
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%
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5% Security Holders
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FMR LLC with respect to various mutual funds
(5)
82 Devonshire Street
Boston, MA 02109
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12,104,278
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–
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12,104,278
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14.23
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%
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Deerfield Management Company, L.P.
(6)
780 3
rd
Avenue, 37
th
Floor
New York, NY 10017
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3,659,700
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5,368,849
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9,028,549
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9.98
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%
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Broadfin Capital, LLC
(7)
237 Park Avenue, Suite 900
New York, New York 10017
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8,066,000
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–
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8,066,000
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9.48
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%
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DAFNA Capital Management, LLC
(8)
10990 Wilshire Blvd., Ste 1400
Los Angeles, CA 90024
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5,698,739
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275,000
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5,973,739
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7.00
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%
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*
Less than 1%
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(1)
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Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (“Exchange Act”) and includes voting and investment power with respect to shares of Common Stock. Shares of Common Stock, and shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days after March 31, 2014 held by each person or group named above, are deemed outstanding for computing the percentage ownership of the person or group holding any options or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person or group. As of March 31, 2014, 85,052,281 shares of Common Stock were issued and outstanding. The address of each individual person is c/o Discovery Laboratories, Inc., 2600 Kelly Road, Suite 100, Warrington, Pennsylvania 18976-3622.
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(2)
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Common Stock Equivalents include shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days after March 31, 2014 held by each person or group named above.
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(3)
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Total beneficial ownership shown in the table includes 8,333 shares held by or for the benefit of his spouse, as to which Dr. Rosenthale disclaims beneficial ownership.
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(4)
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This information is based on the most recent Form 4s filed with the SEC by the Executives on March 10, 2014.
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(5)
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This information is as of December 31, 2013 and is based on a Schedule 13G/A filed with the SEC on February 14, 2014, by FMR LLC (“FMR”) and Edward C Johnson 3d, Chairman, with respect to (i) Fidelity Management & Research Company, a wholly-owned subsidiary of FMR and an investment adviser registered under the Investment Company Act of 1940 (“1940 Act”), which is the beneficial owner of 6,930,160 shares as a result of acting as investment adviser to various 1940 Act-registered investment companies; (ii) Fidelity SelectCo, LLC, as wholly-owned subsidiary of FMR and a 1940 Act-registered investment adviser that is the beneficial owner of 5,082,804 shares as a result of acting as investment adviser to various 1940 Act-registered investment companies; (iii) and Pyramis Global Advisors Trust Company, an indirect wholly-owned subsidiary of FMR and a bank as defined under §3(a)(6) of the Exchange Act that is the beneficial owner of 91,314 shares as a result of acting as investment manager of institutional accounts owning such shares. The filing indicates that no one person's interest in our Common Stock exceeds five percent of our total outstanding Common Stock.
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(6)
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This information is as of December 31, 2013 and is based on a Schedule 13G filed with the SEC on February 14, 2014, by (i) Deerfield Mgmt, L.P., general partner of the entities identified in clauses (iv) through (vii) with respect to securities beneficially owned by such entities, (ii) Deerfield Management Company, L.P., an investment adviser for the entities identified in clauses (iv) through (vii) with respect to securities beneficially owned by such entities, (iii) James E. Flynn, (iv) Deerfield Special Situations Fund, L.P., (v) Deerfield Special Situations International Master Fund, L.P., (vi) Deerfield Private Design Fund II, L.P., (vii) Deerfield Private Design International II, L.P. The Common Stock Equivalents listed above consist of warrants to purchase 7,265,080 shares of our Common Stock that contain a provision restricting the exercise or conversion of such securities to the extent that, upon exercise or conversion, the number of shares then beneficially owned by the holder and its affiliates and any other person or entities with which such holder would constitute a group under §13(d) of the Exchange Act would exceed 9.985% of the total number of shares of our then outstanding Common Stock (the “Cap”). Accordingly, notwithstanding the number of shares reported, the reporting entities have disclaimed beneficial ownership of the shares underlying such warrants to the extent that the beneficial ownership of all reporting persons in the aggregate would exceed the Cap.
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(7)
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This information is as of December 31, 2013 and is based on a Schedule 13G filed with the SEC on February 14, 2014, by Broadfin Capital, LLC, Broadfin Healthcare Master Fund, Ltd., and Kevin Kotler.
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(8)
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This information is as of December 31, 2013 and is based on a Schedule 13G filed with the SEC on February 14, 2014 by DAFNA Capital Management, LLC, a 1940 Act registered investment adviser to DAFNA LifeScience Ltd., DAFNA LifeScience Market Neutral Ltd., and DAFNA LifeScience Select Ltd., and control persons Nathan Fischel and Fariba Ghodsian. Messrs. Fischel and Ghodsian expressly disclaim beneficial ownership of the securities owned by the funds.
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PROPOSAL 1
ELECTION OF DIRECTORS
At the Annual Meeting, stockholders will be asked to elect five directors. Each director elected will hold office until his successor has been elected and qualified or until his earlier resignation or removal from office.
The Board has nominated for election to the Board the five individuals named below. With the exception of any proxies marked to “withhold” authority to vote for one or more of the nominees, all properly executed proxies received will be voted (unless one or more nominees are unable to serve) “FOR” the election of the nominees named below. The Board knows of no reason why any nominee should be unable or unwilling to serve, but if that should occur, either proxies will be voted for the election of some other person or the size of the Board will be fixed at a lower number.
Nominees for Election to the Board of Directors
The names of the nominees for election to the Board and certain information about the nominees are set forth below. Each of the nominees currently serves as a director. For information concerning the number of shares of Common Stock beneficially owned by each nominee, see “Common Stock Ownership of Certain Beneficial Owners and Management” on page 5. The age of each nominee is as of June 10, 2014, the date of our Annual Meeting of Stockholders.
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Name
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Age
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Position with the Company
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John R. Leone
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66
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Chairman of the Board
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John G. Cooper
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55
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Director, President and Chief Executive Officer
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Joseph M. Mahady
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61
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Director
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Bruce A. Peacock
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62
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Director
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Marvin E. Rosenthale, Ph.D.
|
80
|
Director
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John R. Leone
has served as a member of our Board of Directors since November 2012 and was elected Chairman in January 2013. He serves as Chairman of the Board’s Compensation Committee and is a member of the Nomination and Governance Committee. Mr. Leone has been a Partner at Visium Asset Management, LLC, an investment platform focused on healthcare royalties and related revenues formed by Visium Asset Management LP, a leading multi-strategy investment firm, since May 2013. Prior to joining Visium, Mr. Leone was a Partner at Paul Capital Healthcare, a private equity firm that manages one of the largest dedicated healthcare funds globally (2007 to 2013). Previously, Mr. Leone served as President and Chief Executive Officer at Cambrex Corporation, a publicly-traded life sciences company providing innovative solutions that accelerate the development and commercialization of pharmaceutical products; and Senior Vice President and Chief Operating Officer of U.S. Commercial Operations at Aventis Pharmaceuticals. While at Aventis, he played a key role in spearheading the successful integration of its predecessor companies, Rhone-Poulenc Rorer and Hoechst Marion Roussel, and had responsibility for all commercial business units, including oncology, metabolism, cardiovascular, dermatology, respiratory and anti-infective. Mr. Leone also served on the Board of Directors at ViroPharma Incorporated from until its recent acquisition in March 2014. Mr. Leone received his B.S. degree in Engineering from the U.S. Military Academy at West Point and his M.B.A. from the University of Colorado.
With over 30 years of experience, Mr. Leone has built an outstanding track record in pharmaceutical operations, commercial portfolio management, and financing life science companies. His commercial experience includes both domestic and international executive management roles and direct responsibility for the commercial launch of numerous pharmaceutical products. These are important experiences as we commercialize our initial product and consider strategic plans for our commercial and medical affairs team.
John G. Cooper
has served as a member of our Board and our President and Chief Executive Officer since January 2013. He joined our Company in 2002 and, until March 21, 2014, served as our Chief Financial Officer in the following roles: President and Chief Financial Officer (August 2010 to 2013), Executive Vice President and Chief Financial Officer (2002 to August 2010), and Senior Vice President and Chief Financial Officer (2001 to 2002).
Mr. Cooper has more than 25 years experience managing emerging growth companies in the life sciences industry, including in general management, strategic and corporate development, financings, strategic alliances and acquisitions, as well as investor relations and financial management. Prior to joining us, he served as Senior Vice President and Chief Financial Officer at both DNX Corporation (“DNX”), which at that time was a leader in transgenic biotechnology, and Chrysalis International Corporation (“Chrysalis”), a provider of drug development services that had companies operating in seven countries and over 250 biopharmaceutical clients, which was formed as a result of the merger DNX of and BioClin International. While at DNX, he managed the initial public offering of DNX and the formation of a joint venture with Baxter Health Care focused on genetically engineered organ and blood substitute products, and also successfully negotiated and integrated a number of strategic acquisitions, including the merger that formed Chrysalis.
Mr. Cooper later managed the acquisition of Chrysalis by Phoenix International, Inc., an MDS Pharma company. Previously, Mr. Cooper served in senior financial management roles at ENI Diagnostics, Inc. (“ENI”), a public biotechnology company in AIDS diagnostics, where he served on the executive management committee and played an integral role in the acquisition of ENI by Pharmacia AB. He also held financial management positions at C.R. Bard, a developer of innovative medical devices, and Warner Cosmetics, a joint venture between Warner Communications and Lauren Cosmetics. Mr. Cooper received his B.S. degree in Commerce from Rider University and is a certified public accountant.
Mr. Cooper brings to our Board his extensive experience in the biotechnology industry and a deep knowledge of our Company, our mission and objectives. He has significant financial expertise, including in debt, equity capital and alliance transactions in the life sciences industry. His participation on the Board enhances the dialogue and effectiveness of discourse between our Board and our management team.
Joseph M. Mahady
has served as a member of our Board since January 2013. He is a member of the Board’s Audit and Compensation Committees. Mr. Mahady held significant leadership positions during his 30-year career with Wyeth Corporation, including as President, Wyeth Pharmaceuticals (2008 – 2009); Senior Vice President, Wyeth Corporation (2002 – 2009), with responsibility to direct the worldwide operations of that company's $20 billion global pharmaceutical business; President of Global Business, where he directed all worldwide commercial operations; President of Americas and Global Business, where he introduced a new global operating model that supported the development of several new business units that achieved global strategic reach; President, North America; President of Wyeth-Ayerst, as well as Vice President of Healthcare Systems and Vice President of Marketing and Sales Operations. He retired from Wyeth in 2009. Mr. Mahady serves as a member of the boards of directors of Albemarle Corporation, a leading specialty chemical company, Cortendo AB, a biopharmaceutical public company in Norway focused primarily on metabolic diseases, and KV Pharmaceutical Company, a privately-held specialty pharmaceutical company with a focus on women’s healthcare. Mr. Mahady received his B.S. degree in Pharmacy from St. John's University College of Pharmacy and his M.B.A. in Pharmaceutical Studies from Fairleigh Dickinson University.
Mr. Mahady brings to our Board extensive strategic and operational experience in the biopharmaceutical industry. He has broad international commercial experience, having served in a direct leadership role in more than 30 product launches, and has a successful record of developing profitable businesses based on transformational technologies in both the US and international markets.
Bruce A. Peacock
has served as a member of our Board since September 2010. He also serves as Chairman of the Board’s Audit Committee and is a member of the Compensation and the Nomination and Governance Committees. Mr. Peacock has served as Chief Financial and Business Officer of Ophthotech Corporation since August 2013, having served as Chief Business Officer since September 2010. He has also served as a Venture Partner with SV Life Sciences Advisors, LLC since 2006. Prior to joining Ophthotech, from April 2008 to February 2011, he served as President and Chief Executive Officer and a Director and Co-Chairman of the Board of Alba Therapeutics. Previously, Mr. Peacock served as Chief Executive Officer and director of The Little Clinic, a medical care services company; as President and Chief Executive Officer and a director of Adolor Corporation, a publicly-held biotechnology company; as President, Chief Executive Officer and a director of Orthovita, Inc., a publicly-held orthopaedic biomaterials company; as Executive Vice President, Chief Operating Officer and a director of Cephalon, Inc.; and as Chief Financial Officer of Centocor, Inc. Mr. Peacock previously served as a member of the boards of directors of Pharmacopeia, Inc. (2004-2008), Ligand Pharmaceuticals Incorporated (2008-2009), and NeurogesX, Inc. (2007-2009). Since 2012, he has served as a member of the board of directors of Invisible Sentinel, Inc., a private company. Mr. Peacock earned a bachelor’s degree in Business Administration from Villanova University and is a certified public accountant.
Mr. Peacock brings to our Board extensive biotech and pharmaceutical experience. He has held senior executive positions, including CEO, COO and CFO, in a number of biotechnology, medical device and healthcare service organizations. He has significant financial expertise, including in debt, equity capital and alliance transactions. Mr. Peacock also has significant experience in drug development, having led the effort to gain regulatory approval for several drug candidates in the United States and in other major markets worldwide. Mr. Peacock also has had responsibility for marketing, commercial and manufacturing operations.
Marvin E. Rosenthale, Ph.D.
has served as a member of our Board since 1998. He also serves as Chairman of the Board’s Nomination and Governance Committee and is a member of the Audit Committee. Prior to his retirement in 1999, Dr. Rosenthale served as President and Chief Executive Officer of Allergan Ligand Retinoid Therapeutics, Inc., having joined as Vice President in 1993. Previously, over a period of 16 years, Dr. Rosenthale served in a variety of executive positions at Johnson & Johnson, including Vice President, Drug Discovery Worldwide, at R.W. Johnson Pharmaceutical Research Institute, and director of the divisions of pharmacology and biological research and Executive Director of Drug Discovery Research at Ortho Pharmaceutical. Dr. Rosenthale also served in various positions with Wyeth Laboratories. Dr. Rosenthale has served on the boards of directors of NuRx Pharmaceuticals Inc. (2008-2010) and Radiant Pharmaceuticals Corp. (formerly AMDL, Inc., 2000-2006). Dr. Rosenthale received a Ph.D. in pharmacology from Hahnemann Medical College, a M.Sc. in pharmacology from Philadelphia College of Pharmacy & Science and a B.Sc. in pharmacy from the Philadelphia College of Pharmacy & Science.
Dr. Rosenthale brings to our Board more than 50 years of management and executive experience in the pharmaceutical industry. In addition, since 1998, he has served as a member of the board of directors of nine pharmaceutical companies, which provides him a broad perspective of the customs, practices and strategic priorities of pharmaceutical companies in today’s challenging competitive and financial markets.
Required Vote and Recommendation
The directors are elected by a plurality of the outstanding shares of our Common Stock present in person or represented by proxy and entitled to vote at the Annual Meeting, excluding broker non-votes.
See
“How are stockholder votes counted?” at page 3.
THE BOARD RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES SET FORTH ABOVE.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Meetings of the Board
The Board held four regular meetings and ten special meetings during the fiscal year ended December 31, 2013. All members of the Board attended either in person or by telephone at least 75% of the total number of meetings of the Board and the total number of meetings of standing committees of the Board on which they each served during 2013. We do not have a formal policy regarding director attendance at the 2014 Annual Meeting; however, it is expected that, absent good reason, our directors will be in attendance. All of our directors attended the 2013 Annual Meeting.
Director Independence
The Board presently consists of five members, one of whom also serves as Chief Executive Officer (“CEO”). Presently, Dr. Rosenthale and Messrs. Leone, Mahady and Peacock are “independent” directors within the meaning of the rules of the SEC and the listing requirements of Nasdaq. Each director who serves on a standing committee (comprised of the Compensation Committee, the Nomination and Governance Committee and the Audit Committee) is “independent” within the meaning of the SEC rules and the listing requirements of Nasdaq.
Board Leadership Structure
Our Board is comprised of four independent directors and our CEO. Presently, the Board has the following standing committees: Audit Committee, Compensation Committee, and Nomination and Governance Committee. Each of the standing committees is comprised solely of independent directors. In accordance with Nasdaq listing requirements, our Audit Committee is responsible for overseeing risk management and updates the full Board periodically.
Our Board does not have a policy as to whether the same individual may serve as both Chairman and CEO or if the roles must be separate. The Board believes that it is appropriate to make such determinations in the particular circumstance at any time. Prior to 2013, our Board’s Chairman also served as our CEO. In 2012, the Board appointed a lead independent director, Mr. Peacock, who, among other things, presided over executive sessions of the non-employee directors, led the discussion concerning the compensation and effectiveness of the CEO, and acted as liaison between the independent directors and the Chairman. In January 2013, following the resignation of our former Chairman and CEO, the Board reviewed its leadership structure and elected Mr. Leone to serve as an independent Chairman. Mr. Cooper, our CEO, was also elected to serve as a member of our Board. The Board felt at that time that, with an independent Chairman, a lead independent director was no longer necessary, and Mr. Peacock ceased functioning in that role. Our Board will continue to evaluate its leadership structure in light of changing circumstances and will make changes at such times as it deems appropriate.
Our Board places a high priority on assuring that we are properly managing our business and its attendant risks, including in particular with respect to the areas of finance and financial controls. The Board discusses risks related to, among other things, our strategic plan, capital structure, research and development activities, medical activities, and operations, including manufacturing, supply chain, and marketing and sales, and also relies on its standing committees to provide appropriate oversight of the particular areas they address. The individual directors also make themselves available to management as needed to lend their expertise to discussions about the level of risk that we should consider acceptable to achieving our strategic objectives. These informal exchanges enhance the directors’ understanding of the risks inherent in our activities and the adequacy of our risk management processes. We believe, given our size and the complexity of our business, that our directors provide effective oversight of our risk management function, especially through the work of the Audit Committee.
Our management team is responsible for managing risk arising out of our compensation policies and practices and our Board, directly and through its Compensation Committee, oversees our activities. Although inappropriate risk taking may not be preventable in all circumstances, we believe that our compensation practices and policies do not cause risks that are reasonably likely to have a material adverse effect on our prospects or financial condition. As part of its oversight activities, the Compensation Committee considers the incentives created by our policies and the impact of such incentives on overall risk. We believe that our compensation policies are conservative and that the balance achieved among our fixed base compensation, which provides assurance of income; our annual cash bonus, which provides incentives to achieve our short-term objectives; and our equity incentives, which generally vest over three years and represent incentives to achieve our long-term corporate goals; is generally effective to mitigate compensation risks. In addition, our commercial organization, including our field force, has a compensation program that in addition to rewarding the achievement of sales objectives, also rewards non-revenue objectives related to our long-term goals and objectives, such as completing all activities necessary or appropriate to secure hospital formulary acceptance or completing effective and thorough in-servicing on the administration of SURFAXIN® and other safety-focused initiatives.
Committees of the Board
Audit Committee
The Audit Committee of the Board currently consists of Bruce A. Peacock (Chairman), Joseph M. Mahady, and Marvin E. Rosenthale, Ph.D.
The Board has adopted a written Audit Committee Charter. The composition and responsibilities of the Audit Committee, as reflected in its Charter, are intended to be in accordance with applicable rules of the SEC for corporate audit committees and listing requirements of Nasdaq. All members of the Audit Committee are “independent” as defined in Rule 5605(a)(2) of the Nasdaq Marketplace Rules. The Board of Directors has determined that each of the members of our Audit Committee are “independent” in accordance with Nasdaq listing standards and that Bruce A. Peacock meets the criteria of the SEC for an “audit committee financial expert.”
The primary functions of the Audit Committee include:
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overseeing our financial statements, system of internal controls, auditing, accounting and financial reporting processes;
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providing an independent, direct line of communication between the Board and our independent auditors;
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appointing, compensating, evaluating and, when appropriate, replacing our independent auditors;
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overseeing our tax compliance;
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reviewing with management and our independent auditors the annual audit plan;
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reviewing the Audit Committee Charter;
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reviewing and pre-approving audit and permissible non-audit services; and
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reviewing and approving all related-party transactions.
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The Audit Committee is also responsible for addressing matters of accounting policy with our independent accountants. In discharging its role, the Audit Committee is empowered to investigate any matter brought to its attention and has full access to all of our books, records, facilities and personnel. The Audit Committee also has the power to retain legal, accounting and other advisors as it deems necessary to carry out its duties. The Audit Committee met four times during the fiscal year ended December 31, 2013.
PROPOSAL 3
PROPOSAL TO AMEND THE 2011 LONG-TERM INCENTIVE PLAN
TO INCREASE THE NUMBER OF AUTHORIZED SHARES
RESERVED FOR ISSUANCE UNDER THE PLAN
The Board has adopted, declared advisable and directed to be submitted to our stockholders an amendment (the “Plan Amendment”) to the Discovery Laboratories, Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”) to increase the number of shares of Common Stock authorized for issuance thereunder by 5.0 million shares, from 7.7 million shares to 12.7 million shares. As of March 31, 2014, approximately 1.5 million shares (plus any shares that might in the future be returned to the 2011 Plan as a result of cancellations, expirations and forfeitures) are available for future grant under the 2011 Plan. Capitalized terms used in this Proposal are defined in the 2011 Plan. A description of the 2011 Plan follows this Proposal. A form of the proposed Plan Amendment is attached to this Proxy Statement as Exhibit A.
Our Board believes that equity incentives are a powerful, necessary and desirable means to align the interests of our management and employees with those of our stockholders. The purposes of our long-term incentive plans are to encourage selected employees, directors and consultants to acquire a proprietary interest in our future growth and performance, to generate increased incentives to contribute to our future success and prosperity, thereby enhancing our value for the benefit of our stockholders, and to support and enhance our ability to attract and retain exceptionally qualified executive, scientific and professional personnel upon whom, in large measure, our progress, growth and profitability depend. The Board believes that the Plan Amendment is necessary to ensure that we can continue to grant equity incentives at levels deemed by the Compensation Committee and the Board to be both appropriate and competitive.
Background
The 2011 Plan was approved by stockholders in October 2011 with 3.7 million shares available for issuance thereunder. On September 13, 2012, our stockholders approved an amendment to the 2011 Plan to increase the number of shares authorized for issuance thereunder to 6.2 million, and on June 11, 2013, our stockholders approved another amendment to further increase the number of shares authorized for issuance thereunder to 7.7 million.
Following approval of the 2011 Plan the Compensation Committee recognized that, with very limited exceptions, almost three years had passed without a grant of equity awards to our management team and
decided that it was necessary and appropriate to restore long-term compensation incentives to a level deemed competitive and appropriate to our situation and needs. Rather than make single large awards, the committee decided to execute its plan in a measured and deliberate fashion over time, taking into account our success in achieving our corporate goals, individual performance of our executives, and the compensation practices of life sciences companies that are similarly situated and that compete with us for talent. The committee granted awards to members of management and other key employees totaling approximately 1.7 million shares with an exercise price of $1.83 per share.
In May 2012, following the FDA approval of SURFAXIN,
to recognize their professional dedication and persistence in accomplishing this key milestone, the Compensation Committee granted stock option awards to members of management and other key employees totaling
approximately 1.0 million shares with an exercise price of $2.71 per share. The Board also approved awards of options to our four non-employee directors totaling
240,000 shares with an exercise price of $2.47 per share. In addition, at that time, we began investing in our own specialty respiratory critical care commercial and medical affairs organization to specialize in neonatal critical care indications, beginning with respiratory distress syndrome (RDS). This team is executing the launch of SURFAXIN and, in the future, we expect will support the launch of our other KL
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surfactant products in the United States, beginning with AEROSURF, if approved. To attract the best commercial, medical affairs, marketing and related talent available, our compensation packages necessarily have and are expected to continue to include, new-hire equity incentives.
In March 2013, after conducting an
assessment of members of management, our success in achieving our corporate goals, and information that is publicly available about the compensation practices of comparable life sciences companies,
and consistent with its commitment to restore long-term compensation levels over a period of time, the Compensation Committee granted stock option awards to members of management and other key employees totaling approximately 1.6 million shares
with an exercise price of $2.36 per share.
In addition to initiating our SURFAXIN commercial activities, we are developing our aerosolized KL
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surfactant pipeline development programs and aerosol delivery technologies to support a potentially significant respiratory critical care franchise. Our lead program, AEROSURF, is a drug/device combination product consisting of our KL
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surfactant and our capillary aerosol generator (CAG). We believe that, in the future, we could develop our KL
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surfactant and CAG technologies into a series of pipeline programs that could potentially support a significant respiratory care franchise. We are initially developing AEROSURF to treat premature infants with RDS and are presently conducting phase 2a clinical trials, with initial results expected later this year. To be successful with AEROSURF, we must identify and attract experienced professionals in drug development, device development, and clinical program design and management, to lead and support our AEROSURF development activities. We also must retain our existing business and executive personnel and also attract additional talent to support and advance our expanding activities.
Our Business Plans and Needs
We believe that, with the launch of SURFAXIN and initiation of our clinical program for AEROSURF in 2013, we have given substance to the promise that our synthetic KL
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surfactant and CAG technologies represent, and that these milestones may lead to opportunities to further advance our commercial and development activities and potentially build a significant respiratory care franchise focused initially on the management of RDS and, if we are successful with AEROSURF, potentially on the management of other serious respiratory conditions in a range of patient populations. In that context, recognizing the need for long-term incentives, the Compensation Committee conducted
assessments in 2013 and 2014 of our executive officers’ performance, our success in achieving our corporate goals, as well as the compensation practices of comparable life sciences companies
and, consistent with its intention to restore long-term compensation levels over a period of time, made special discretionary grants to members of management and employees in 2013, followed by annual grants in 2014
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Our business plan includes in the near term a number of milestones, the achievement of which will require committed and experienced management, professional and scientific personnel with varied backgrounds and capabilities. We are continuing our manufacturing development work with DSM Pharmaceuticals, Inc., our contract manufacturing organization (CMO), to manufacture our lyophilized KL
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surfactant for use in a potential AEROSURF phase 3 clinical program and we are working with Battelle Memorial Institute (Battelle) to manufacture a sufficient number of CAG devices to support our planned phase 2b AEROSURF clinical trial. If our phase 2 clinical trials are successful, we will need drug development and device development experts to finalize an AEROSURF drug/device combination product that is suitable for use in our planned AEROSURF phase 3 clinical program and potentially commercial sale.
In addition to experienced and motivated personnel to support our commercial and medical activities and our research and development activities, we require experienced operations, business and financial management to manage and appropriately allocate our resources and assist us in securing the additional capital that we will need to fund our activities. We also continue our efforts to identify strategic partners that have broad experience to assist us in markets outside the U.S. with regulatory and product development expertise, a sharing of development expenses, as well as, if our products are approved, an ability to commercialize our products. We also will consider additional financings and other similar transactions. To conserve our resources, we have closely managed our cash resources and will continue to do so. The use of long-term equity incentives as a component of compensation is an important component of our strategy.
Our 2011 Plan Strategy
Since our cash needs exceed our revenues, we depend and have depended in large part upon equity-based incentives to provide the basis for long-term compensation. It is important that our Compensation Committee have a sufficient number of shares available to ensure that we can continue to grant equity incentives at levels deemed appropriate by the Compensation Committee and the Board, to restore levels of long-term compensation, to provide equity incentives and awards in recognition of goals to be achieved in the future, and to attract and retain the highly qualified executives and professionals and scientific personnel we will require to succeed.
Instead of seeking approval for a large number of shares at any one time, we believe it preferable to seek approval of fewer shares on a more frequent basis. Accordingly, in 2013, we requested a sufficient number of shares to cover our anticipated needs through 2014. Consistent with this thinking, we are again requesting approval for additional shares that we anticipate would be sufficient to meet our requirements for equity incentives to our directors, management, and employees, both existing and anticipated, for approximately two years.
Accordingly, the Board has directed that we seek stockholder approval to increase the number of shares available for issuance under the 2011 Plan
by 5.0 million shares, from 7.7 million shares to 12.7 million shares.
The Plan Amendment
Our Board believes that, if the Plan Amendment is not approved, the shares currently available to provide incentives for current and future employees and consultants will not be sufficient to retain the talent and expertise on which we depend, nor to attract and retain the highly qualified executives and professional and scientific expertise that we will require to accomplish our long-term goals. If we are unable to retain the talent and expertise on which we rely, and attract the new talent, both management and professional, that we require, we may be unable to meet our long term objectives, which would adversely affect our business and cause the market value of our common stock to decline. The Board recommends that our stockholders approve the Plan Amendment.
If the Plan Amendment is not approved by our stockholders, we will continue to use the 2011 Plan. However, given that we likely will have insufficient shares available for issuance to cover our anticipated needs, we may be required to significantly increase the cash component of our compensation programs in order to remain competitive and adequately compensate our employees. Replacing equity awards with cash awards may not only misalign the interests of our management with the interests of our stockholders, it also could accelerate our cash compensation expense and necessitate the use of cash that we could otherwise utilize in our business.
Our Board believes that equity is a powerful incentive and supports the alignment of our management’s and employees’ interests with those of our stockholders. In approving the Plan Amendment and recommending it to our stockholders, the Board also considered the following factors:
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As of March 31, 2014, the outstanding options held by our current directors and executives comprise approximately 2% of our outstanding shares;
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As of March 31, 2014, approximately 1.5 million shares (plus any shares that might in the future be returned to the 2011 Plan as a result of cancellations, expirations and forfeitures), representing 1.8% of our outstanding shares, are available for future grant under the 2011 Plan;
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As of March 31, 2014,
of the total options outstanding, 4,662,581, or approximately 84.9%, are held by current directors, management and employees;
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As of March 31, 2014, there were outstanding to all grantees under the 2011 Plan and all predecessor plans, including present and former directors, management, employees and current and past consultants, options to purchase 6,808,860 shares and 18,936 shares of restricted stock (subject to vesting), collectively representing approximately
8.0
% of our outstanding shares of Common Stock; and
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If the Plan Amendment is approved, the total shares under existing awards and shares available for grant will represent approximately 15.6% of our outstanding shares, of which approximately 8% are issued and outstanding and 7.6% remain available for future grant.
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The Board believes that, in this stage of our development, it is prudent to return to the stockholders for authorization more frequently, rather than seek approval for the maximum number of shares that would likely be acceptable. Based on an evaluation of past practices and our anticipated needs, the increase of 5.0 million shares proposed in this Proposal 3 would support our needs at least for approximately two years.
The 2011 Plan is our sole active plan for providing equity-based incentives to our executives, key employees and consultants. The Board believes that the Plan Amendment is in the best interest of our stockholders and our Company. The 2011 Plan, as amended by the Plan Amendment, would continue to be an important component of our compensation strategy, enhancing our ability to attract, motivate and retain talented executive, scientific and professional personnel as well as experienced non-employee directors, directly connect our compensation with our corporate performance, foster a culture of employee stock ownership and align the interests of all our constituents with our stockholders.
The amounts of individual future grants and the future grantees under the 2011 Plan, as amended by the Plan Amendment, are not determinable at this time as awards under the 2011 Plan will be granted in the sole discretion of the Compensation Committee. We cannot determine either the specific persons who may receive awards or the amount or types of any such awards. We believe that, if the Plan Amendment had been in effect during the fiscal year ended December 31, 2013, no additional awards would have been made.
On March 31, 2014, the closing market price per share of our Common Stock on The NASDAQ Capital Market (symbol: DSCO) was $2.15.
Required Vote and Recommendation
The affirmative vote of a majority of the votes cast with respect to the
shares of our Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote on the Proposal will be required to approve Proposal 3.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE PLAN AMENDMENT.
DESCRIPTION OF THE 2011 PLAN
This section includes a summary of the 2011 Plan, and is qualified in its entirety by the full text of the 2011 Plan, which we filed with the SEC on August 15, 2011 as Appendix II to our 2011 Definitive Proxy Statement on Form DEF 14A. Copies of the 2011 Plan may also be obtained by writing to us at 2600 Kelly Road, Suite 100, Warrington, Pennsylvania 18976, attention Corporate Secretary, Legal Department. The 2011 Plan was adopted by the Board on July 28, 2011, to be effective only upon approval of our stockholders, which occurred at the 2011 Annual Meeting of Stockholders on October 3, 2011 and amended on September 13, 2012 to increase the number of shares authorized for issuance thereunder to 6.2 million, and further amended on June 11, 2013 to increase the number of shares authorized for issuance thereunder to 7.7 million shares.
The purposes of the 2011 Plan are to encourage selected employees, directors and consultants to acquire a proprietary interest in our future growth and performance, to generate an increased incentive to contribute to our future success and prosperity, thus enhancing our value for the benefit of our stockholders, and to enhance our ability to attract and retain exceptionally qualified individuals upon whom, in large measure, our sustained progress, growth and profitability depend.
The 2011 Plan replaced our 2007 Plan. No further awards will be granted under the 2007 Plan, although any shares returnable to the 2007 Plan as a result of cancellations, expirations, forfeitures, settlements in cash or other termination or settlement without delivery of the full number of such shares, shall automatically become available for issuance under the 2011 Plan. On its effective date, the 2007 Plan replaced the 1998 Plan. No further options are issuable under the1998 Plan and shares returnable to the 1998 Plan due to cancellations, expirations and forfeitures are not made available for re-issuance under either the 2007 Plan or the 2011 Plan. Awards outstanding under the 1998 Plan and the 2007 Plan continue to be governed by the terms of the 1998 Plan or 2007 Plan, as appropriate (and the applicable award agreements).
Eligibility
. All of our employees, directors or consultants are eligible to participate in the 2011 Plan. As of March 31, 2014, we had approximately 127 full-time and part-time officers and employees, five directors and an estimated ten consultants that are eligible participants under the 2011 Plan.
Administration
. Under the 2011 Plan, a committee of at least two directors who are both “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act is responsible for the administration of the 2011 Plan. The Board has designated the Compensation Committee (the “Committee”) to be the responsible committee to administer the 2011 Plan. Under the terms of the 2011 Plan, the Committee has the authority to:
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establish rules and guidelines for the administration of the 2011 Plan and amend, suspend or waive any such rules or guidelines;
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select the employees, directors and consultants to whom awards are granted and to make such grants;
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determine the size and types of awards to be granted and the number of shares covered by such awards;
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set the terms and conditions of such awards (including the prices, consideration to be paid, expiration dates and other material conditions upon which such awards may be exercised);
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prescribe award agreements evidencing or setting the terms of such awards (which need not be the same for each participant);
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determine whether, to what extent, and under what circumstances the awards may be settled or exercised in cash, shares, other securities or other awards;
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determine whether, to what extent, and under what circumstances awards may be canceled, forfeited or suspended;
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appoint agents that the Committee deems appropriate for the proper administration of the 2011 Plan and make any determination the Committee deems necessary or desirable for the administration of the Plan; and
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correct any defect, supply any omission or reconcile any inconsistency in the 2011 Plan or any award thereunder in a manner it deems desirable to carry the 2011 Plan into effect.
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The Committee has the sole discretion to administer, make determinations under and interpret the 2011 Plan. The Committee may delegate its authority under the 2011 Plan to one or more members of the Committee or our officers in accordance with the terms and limitations of the 2011 Plan.
Shares Available for Awards
. Shares delivered pursuant to an award may consist of authorized and unissued shares or treasury shares. If any shares covered by an award under either the 2011 Plan or the 2007 Plan are forfeited or otherwise terminated or settled without delivery of shares, then the shares covered by such an award shall again be available for granting awards under the 2011 Plan. In an acquisition, any awards made and any of the shares delivered upon the assumption of or in substitution for outstanding grants made by the acquired company will not be counted against shares available for granting awards under the 2011 Plan.
Stock Options and Stock Appreciation Rights.
The Committee may award stock options in the form of nonqualified stock options or incentive stock options, or stock appreciation rights, each with a maximum term of ten years. The Committee will establish the vesting schedule for stock options and the method of payment for the exercise price, which may include cash, shares, other awards or other property or any combination thereof. The exercise price for an option shall not be less than 100% of the Fair Market Value of one share on the date of grant, subject to certain adjustments described below. The Committee will establish the per-share stock grant price, which shall not be less than 100% of the Fair Market Value of one share on the date of grant, subject to certain adjustments described below. The Committee shall also establish the vesting schedule and the method of settlement of stock appreciation rights, which may include cash, shares or other property, and whether or not a stock appreciation right will be freestanding or in tandem or combination with any other award. A stock appreciation right confers upon the recipient the right to receive, upon exercise of a vested stock appreciation right, the excess of the Fair Market Value of one share on the date of exercise over the per-share grant price.
Restricted Stock and Restricted Stock Units
. The Committee may award restricted stock and restricted stock units and establish the applicable restrictions, including any limitation on voting rights or the receipt of dividends. The Committee may establish the manner and timing under which restrictions may lapse. If employment is terminated during the applicable restriction period, shares of restricted stock and restricted stock units still subject to restriction will be forfeited, except as determined otherwise by the Committee or as provided in the applicable award agreement.
Performance Awards and Other Stock-Based Awards
. The Committee may grant performance awards, which may be denominated in cash, shares, other securities or other awards and payable to, or exercisable by, the participant upon the achievement of performance goals during performance periods, as established by the Committee. Performance criteria are such measures, as determined by the Committee, which are used to measure performance during a performance period. The Committee may designate performance criteria from among the following, either individually, alternatively, or in any combination, applied either to us as a company or to a business unit or related subsidiary, measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to a previous year’s results or to a designated company group:
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achieving specified milestones in the discovery, development, commercialization or manufacturing of one or more of our product candidates;
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obtaining debt or equity financing;
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achieving personal management objectives;
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achieving sales, revenue, net income (before or after taxes), net earnings, earnings per share, return on total capital, return on equity, cash flow, cash flow from operations, operating profit and/or margin rate targets.
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Performance criteria may be subject to adjustment by the Committee to remove the effect of charges for restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence, related to the disposal of a segment or business, or related to a change in accounting principle, or otherwise. The Committee may grant other stock-based awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares, under the terms and conditions as the Committee will determine.
Dividend Equivalents
. The Committee may grant dividend equivalent awards that entitle the participant receiving such award the right to receive payments equivalent to dividends or interest with respect to the number of shares and on the terms as determined by the Committee. The Committee may provide that the amounts (if any) of such awards will be deemed to have been reinvested in additional shares or otherwise reinvested. With respect to dividend equivalents on restricted stock units, unless otherwise determined by the Committee, such dividend equivalents will be either (A) paid with respect to such restricted stock units at the dividend payment date in cash or unrestricted shares having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such restricted stock units, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in restricted stock units, other awards or other investment vehicles having a Fair Market Value equal to the amount of such dividends, as the Committee shall determine or permit a participant to elect, and will be paid when the restricted stock units to which they relate are settled. Unless otherwise determined by the Committee, cash, shares and other property distributed in connection with a stock split or stock dividend, and other property distributed as a dividend shall be subject to restrictions and a risk of forfeiture to the same extent as the restricted stock and restricted stock units with respect to which such shares or other property have been distributed.
Transferability and Per-Person Limitations
. Awards are not transferable other than by will or the laws of descent and distribution unless determined otherwise by the Committee. Awards may not be pledged or otherwise encumbered. The number of shares with respect to which stock options and stock appreciation rights may be granted during any year to an individual participant will not exceed 1.5 million shares, and the number of shares with respect to which restricted stock, restricted stock units, performance awards and other stock-based awards that may be granted in any year to an individual participant will not exceed 750,000 shares, in each case, subject to adjustment as described below. The aggregate number of shares subject to awards intended to qualify as “performance-based compensation” under Section 162(m) of the Code granted in any calendar year to any one individual (taking into account the maximum number payable based on performance exceeding target objectives) shall not exceed three million shares (in the case of awards denominated in shares) or $5 million (in the case of awards settled in cash) per calendar year. In the case of an award with a multi-year performance period, these limits shall apply to each full or partial calendar year in the performance period.
Adjustments
. In the event of certain corporate transactions or events affecting the number or type of our outstanding common shares, including, for example, a dividend or other distribution (whether in cash or stock), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or issuance of warrants, the Committee will make adjustments as it deems appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2011 Plan. These adjustments include changing the number and type of shares to be made the subject of awards under the 2011 Plan and outstanding awards; changing the per-participant limitations on awards and the grant, purchase or exercise price of outstanding awards; other value determinations applicable to outstanding awards and changing the limit on the total amount of restricted stock, restricted stock units, performance awards or other stock-based awards that may be granted. The Committee may also make adjustments in the terms of awards in connection with certain acquisitions, and make adjustments in performance award criteria or in the terms and conditions of other awards in recognition of unusual or nonrecurring events affecting us or our financial statements or of changes in applicable laws, regulations, or accounting principles.
Termination
. Unless otherwise provided in the award agreement, in the event that a participant’s employment or service is terminated for cause, such participant’s unvested or unexercised awards shall immediately be forfeited or terminate, as applicable. On the death or disability of a participant, such participant’s restricted stock awards shall become nonforfeitable, and exercisable unexercised options or stock appreciation rights may, during the term of such award, be exercised within the 12 months after such participant’s death, and within ninety 90 days after termination on account of disability (but in each case, only during the term of such award). On termination for any other reason, the participant’s forfeitable restricted stock awards shall be forfeited, and the participant’s exercisable unexercised options or stock appreciation rights may be exercised during the term of such award not later than three months after such termination. On termination for cause, or in the event a participant breaches post-termination covenants, we may repurchase for a period of one year after such termination for cause or actual discovery by us of the breach, as applicable, at the lesser of the purchase price or Fair Market Value of all or a portion of shares acquired upon exercise of an award or require a participant to repay the amount of profits derived by the participant upon the disposition of shares underlying an award during the previous three years.
Plan Term
. The 2011 Plan will terminate on the date on which no shares remain available for delivery under the 2011 Plan and we have no further rights or obligations under the 2011 Plan with respect to outstanding awards under the 2011 Plan, unless earlier terminated in accordance with the provisions of the 2011 Plan.
Amendments
. The Committee may waive conditions or amend the terms of awards, or otherwise amend or suspend awards already granted subject to certain conditions. Our Board of Directors may amend, alter, suspend, discontinue or terminate the 2011 Plan in whole or in part at any time, except that, without prior stockholder approval:
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no material amendment shall be made for which stockholder approval is required by law, regulation, or stock exchange;
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no amendment may increase the number of shares available for award under the 2011 Plan except through adjustments as described above; and
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no amendment will permit the re-pricing of options, stock appreciation rights or other stock-based awards (whether through replacement, cancellation and re-grant or by lowering the exercise price or grant price of a previously granted award).
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Change in Control
. Except as otherwise provided in a participant’s employment, consulting or other applicable agreement, in the event of a Change in Control (as defined below), the vesting of outstanding options and stock appreciation rights will automatically be accelerated and become immediately exercisable, unless such awards are assumed by the successor corporation, replaced with an equivalent cash incentive program or the acceleration of such awards is subject to other limitations under the applicable award agreement. In the event of a Change in Control, outstanding restrictions on restricted stock awards will terminate automatically, and shares subject to such restrictions will immediately vest in full, except that the following restrictions shall survive: (i) any repurchase rights we have are assigned to the successor corporation or (ii) such awards are subject to other limitations under the applicable award agreement or would trigger additional taxes under Section 409A of the Code.
“Change of Control” has the meaning set forth in a participant’s employment, consulting or other applicable agreement, or if such term is not defined in any such agreement, has the meaning provided in the 2011 Plan, which includes change of control for purposes of Section 409A of the Code.
Federal Income Tax Consequences
. The grant of an option or stock appreciation right will create no tax consequences for the participant or us at the time of the grant. A participant will have no taxable income upon exercise of an incentive stock option except that the alternative minimum tax may apply. Upon exercise of an option other than an incentive stock option, or a stock appreciation right, a participant generally must recognize ordinary income equal to the Fair Market Value of the shares acquired minus the exercise or grant price. Upon a disposition of shares acquired by exercise of an incentive stock option on or before the earlier of the second anniversary of the grant of such incentive stock option or the first anniversary of the exercise of such option, the participant generally must recognize ordinary income equal to the lesser of (1) the Fair Market Value of the shares at the date of exercise minus the exercise price or (2) the amount realized upon the disposition of the incentive stock option shares minus the exercise price. Otherwise, a participant’s disposition of shares acquired upon the exercise of an option (including an incentive stock option for which the incentive stock option holding periods are met) generally will result in only capital gain or loss. Other awards under the 2011 Plan, including restricted stock and restricted stock units will generally result in ordinary income to the participant equal to the value of the award at the later of the time of delivery of cash, shares, or other awards, or the time that either the risk of forfeiture or restriction on transferability lapses on previously delivered shares or other awards.
We are generally entitled to claim a tax deduction with respect to an award granted under the Plan when the participant recognizes ordinary income with respect to the award in an amount equal to the ordinary income that is recognized by the participant. We are not entitled to claim any tax deduction for any amount recognized by a participant as capital gains.
Section 83
. A participant may elect under Section 83(b) of the Code to be taxed at the time of grant of restricted stock or other restricted property on the value of the property at that time rather than to be taxed when restrictions or the risk of forfeiture lapses on the value of the property at that time, and we would have a deduction available at the same time and in the same amount as the participant recognizes income.
However, if the participant subsequently forfeits the shares or property, he or she would not be entitled to any tax deduction, including as a capital loss, for the value of the shares or property on which he or she previously paid tax. Except as discussed below, we generally will be entitled to a tax deduction at the time and equal to the amount recognized as ordinary income by the participant in connection with an option, stock appreciation right, or other award, but will be entitled to no tax deduction relating to amounts that represent a capital gain to a participant. Thus, we will not be entitled to any tax deduction with respect to an incentive stock option if the participant holds the shares for the incentive stock option holding periods.
Section 162(m)
. Section 162(m) of the Code limits the amount of compensation we may deduct with respect to our Chief Executive Officer and each of the other Named Executive Officers (other than a chief financial officer) to $1 million per year. However, this limitation does not apply to certain performance-based compensation. By requesting stockholder approval of the Plan, as amended by the Plan Amendment described in this Proxy Statement, we intend that stock options and stock appreciation rights, and also restricted stock and restricted stock units granted under the 2011 Plan, as amended, that are subject to performance goals will have the potential to qualify as performance-based compensation exempt from the $1 million deductibility cap. A number of requirements must be met in order for particular compensation to qualify as performance-based, including a requirement that the performance measures used are approved by our stockholders. The Committee may, in its discretion, determine to provide awards that are not exempt from the $1 million deductibility cap, and thus there can be no assurance that compensation under the 2011 Plan, as amended, will be fully deductible. In addition, restricted stock and other awards that are not subject to specified performance goals generally will not qualify for the exemption for performance-based compensation, and compensation paid to certain executive officers may not be deductible under all circumstances.
Section 409A
. Some restricted stock units and other awards subject to deferral features (excluding certain exempted short-term deferrals) may be subject to Section 409A of the Code, which regulates deferral arrangements. In such cases, the settlement of the award would have to meet certain restrictions in order for the participant not to be subject to accelerated tax and a tax penalty at the time of vesting rather than at the time of settlement. One significant restriction would be a requirement that the timing of the settlement not be controlled by the participant’s exercise of discretion. If the participant is subject to accelerated tax at the time of vesting (instead of the time of settlement), our deduction would also be accelerated. We intend that awards under the 2011 Plan will generally be structured to meet applicable requirements under Section 409A.
This general tax discussion is intended for the information of stockholders considering how to vote with respect to this proposal and not as tax guidance to participants in the 2011 Plan. Different tax rules may apply to specific participants and transactions under the 2011 Plan, particularly in jurisdictions outside the United States.