-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PuSoTg2R9g4o5qXuvmWxywgEJew5wqVInpXFOqWJHGN/QicKED+d1H3xTLPkjoZc CPROZ3FSxpUyNSI+Cw8UBg== 0000927356-98-000564.txt : 19980410 0000927356-98-000564.hdr.sgml : 19980410 ACCESSION NUMBER: 0000927356-98-000564 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980520 FILED AS OF DATE: 19980409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NPS PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000890465 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 870439579 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 000-23272 FILM NUMBER: 98590984 BUSINESS ADDRESS: STREET 1: 420 CHIPETA WAY SUITE 240 CITY: SALT LAKE CITY STATE: UT ZIP: 84108-1256 BUSINESS PHONE: 8015834939 DEF 14A 1 DEFINITIVE PROXY STATEMENT SCHEDULE 14A (Rule 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [X] Definitive Proxy Statement [_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [_] Definitive Additional Materials [_] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12 NPS PHARMACEUTICALS, INC. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: Not Applicable ------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: Not Applicable ------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the filing fee is calculated and state how it was determined): Not Applicable ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: Not Applicable ------------------------------------------------------------------------- (5) Total fee paid: Not Applicable ------------------------------------------------------------------------- [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: Not Applicable ------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: Not Applicable ------------------------------------------------------------------------- (3) Filing Party: Not Applicable ------------------------------------------------------------------------- (4) Date Filed: Not Applicable ------------------------------------------------------------------------- NPS PHARMACEUTICALS, INC. 420 CHIPETA WAY SALT LAKE CITY, UTAH 84108-1256 --------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS MAY 20, 1998 AT 3:00 P.M. (LOCAL TIME) AT THE UNIVERSITY PARK HOTEL 500 SOUTH WAKARA WAY SALT LAKE CITY, UTAH 84108-1256 --------------------- TO THE STOCKHOLDERS OF NPS PHARMACEUTICALS, INC.: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of NPS Pharmaceuticals, Inc., a Delaware corporation (the "Company"), will be held on Wednesday, May 20, 1998, at 3:00 p.m., local time, at the University Park Hotel, 500 South Wakara Way, Salt Lake City, Utah for the following purposes: 1. To elect eight members to the Board of Directors. 2. To approve the Company's 1998 Stock Option Plan and the issuance of 1,000,000 shares of the Company's Common Stock thereunder. 3. To ratify the selection of KPMG Peat Marwick LLP as independent auditors of the Company for its fiscal year ending December 31, 1998. 4. To transact such other business as may properly come before the meeting or any adjournment thereof. The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. The Board of Directors has fixed the close of business on April 2, 1998, as the record date for the determination of stockholders entitled to notice of and to vote at this Annual Meeting of Stockholders and at any adjournment thereof. By Order of the Board of Directors James U. Jensen Secretary Salt Lake City, Utah April 9, 1998 ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN, AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK, OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME. NPS PHARMACEUTICALS, INC. 420 CHIPETA WAY SALT LAKE CITY, UTAH 84108-1256 --------------------- PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS (MAY 20, 1998) --------------------- INFORMATION CONCERNING SOLICITATION AND VOTING GENERAL The enclosed proxy is solicited on behalf of the Board of Directors (the "Board of Directors" or the "Board") of NPS Pharmaceuticals, Inc., a Delaware corporation ("NPS" or the "Company"), for use at the Annual Meeting of Stockholders to be held on May 20, 1998, at 3:00 p.m., local time and at any adjournment thereof (the "Annual Meeting" or the "Meeting"), for the purposes set forth herein and in the accompanying Notice of Annual Meeting. The Annual Meeting will be held at the University Park Hotel, 500 South Wakara Way, Salt Lake City, Utah. SOLICITATION The Company will bear the entire cost of solicitation of proxies including preparation, assembly, printing, and mailing of this Proxy Statement, the proxy card, and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries, and custodians holding in their names shares of the Company's common stock, par value $.001 (the "Common Stock") beneficially owned by others to forward to such beneficial owners. The Company may reimburse persons representing beneficial owners of Common Stock for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegram, or personal solicitation by directors, officers, or other regular employees of the Company. No additional compensation will be paid to directors, officers, or other regular employees for such services. The Company intends to mail this Proxy Statement and accompanying proxy card on or about April 9, 1998, to all stockholders entitled to vote at the Annual Meeting. VOTING RIGHTS AND OUTSTANDING SHARES April 2, 1998 is the record date (the "Record Date") for determining those stockholders of Common Stock of the Company entitled to notice of and to vote at the Annual Meeting. On the Record Date, the Company had outstanding and entitled to vote 12,266,850 shares of Common Stock. Stockholders will be entitled to one vote for each share held on all matters to be voted upon at the Annual Meeting. All votes will be tabulated by the Inspector of Elections appointed for the Meeting, who will separately tabulate affirmative and negative votes, abstentions, and broker non-votes. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders, and will have the same effect as negative votes. Broker non-votes are counted toward a quorum, but are not counted for any purpose in determining whether a matter has been approved. 1 REVOCABILITY OF PROXIES Any stockholder giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by filing with the Secretary of the Company, at the Company's principal executive office, 420 Chipeta Way, Salt Lake City, Utah 84108-1256, a written notice of revocation or a duly executed proxy bearing a later date, or it may be revoked by attending the Meeting and voting in person. Attendance at the Meeting will not, by itself, revoke a proxy. STOCKHOLDER PROPOSALS FOR 1998 Proposals of stockholders that are intended to be presented at the Company's 1999 annual meeting of stockholders must be received by the Company not later than December 10, 1998 in order to be included in the proxy statement relating to that meeting. PROPOSAL 1 ELECTION OF DIRECTORS The Company's Amended and Restated Certificate of Incorporation ("Certificate of Incorporation") and the Amended and Restated Bylaws ("Bylaws") provide that directors are to be elected at the Annual Meeting to serve for a term of one year and until their respective successors are duly elected and qualified or until their respective death, resignation, or removal. Vacancies on the Board resulting from death, resignation, disqualification, removal, or other causes and any newly created directorships resulting from any increase in the number of directors shall be filled by the affirmative vote of a majority of the directors then in office, unless the Board of Directors determines by resolution that any such vacancy shall be filled by the stockholders. A director elected by the Board to fill a vacancy (including a vacancy created by an increase in the Board of Directors) shall serve for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor is elected and qualified. Directors are elected by a plurality of the votes present in person or represented by proxy and entitled to vote at the Meeting. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the eight nominees below. In the event that any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as the Board may propose. On April 2, 1998, the Board of Directors adopted a resolution to increase the size of the Board from seven members to eight. As permitted by the Company's Bylaws, the Board appointed Joseph "Skip" Klein, III to fill the vacant seat on the Board and to serve until his successor is duly elected and qualified. Each nominee is currently a director of the Company, and each nominee agrees to serve if elected. The Board has no reason to believe that any nominee will be unable to serve. If and when elected at the Annual Meeting, each of the nominees will be elected to serve until the 1999 annual meeting and until such elected nominee's successor is duly elected and qualified, or until such elected nominee's earlier death, resignation, or removal. Set forth below, in alphabetical order, is biographical information for each person nominated to serve on the Company's Board of Directors. NOMINEES FOR ELECTION SANTO J. COSTA, J.D. Mr. Costa, 52, has served as a director since January 1995 and as a member of the Compensation Committee since 1996. Mr. Costa has served as President, Chief Operating Officer, and a director of Quintiles Transnational 2 Corporation, a publicly held global contract research organization, since April 1994. From July 1993 to April 1994, he ran his own consulting firm, Santo J. Costa and Associates. From 1986 to 1993, he was employed by Glaxo, Inc., a worldwide pharmaceutical company, where he served as Senior Vice President, Administration and General Counsel and was a member of that company's Board of Directors. From 1977 to 1986 he was employed by Merrell Dow Pharmaceuticals (now Hoechst Marion Roussel) where he served as U.S. Area Counsel, and from 1971 to 1977 as Food & Drug Counsel for Norwich/Eaton Pharmaceuticals. Mr. Costa received his B.S. in Pharmacy and his J.D. from St. John's University. JAMES G. GRONINGER, M.B.A. Mr. Groninger, 53, has served as a director since 1988 and as a member of the Audit and Compensation Committees since 1994. Mr. Groninger founded in January 1995 and is President of The Bay South Company, a Richmond, Virginia- based provider of financial advisory and investment banking services. From 1988 through 1994, he served as a Managing Director, Investment Banking Division, of PaineWebber Incorporated. Currently he serves on the Board of Directors of Designs, Inc., a specialty retailer, Layton Bioscience, a privately-owned biotechnology company, and Cygne Designs, Inc., a manufacturer of apparel. Mr. Groninger received a B.S. in Industrial Administration from Yale University and an M.B.A. from Harvard Business School. HUNTER JACKSON, PH.D. Dr. Jackson, 47, has been Chief Executive Officer and Chairman of the Board since founding the Company in 1986 and a member of the Nominating Committee since 1997. He was appointed to the additional position of President in January 1994. Prior to founding the Company, he was an Associate Professor in the Department of Anatomy at the University of Utah School of Medicine. Dr. Jackson received a B.A. in English from the University of Illinois and a Ph.D. in Psychobiology from Yale University. He received postdoctoral training in the Department of Neurosurgery, University of Virginia Medical School. JAMES U. JENSEN, J.D., M.B.A. Mr. Jensen, 53, has been Vice President, Corporate Development and Legal Affairs, since August 1991. He has been Secretary and a director of the Company since 1987. From 1986 to July 1991 he was a partner in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C. (or its predecessor firm) concentrating on technology transfer and licensing and corporate finance. From July 1985 until October 1986, he served as Chief Financial Officer of Cericor, a software company, and from 1983 to July 1985, as its outside general counsel. From 1980 to 1983 he served as General Counsel and Secretary of Dictaphone Corporation, a subsidiary of Pitney Bowes Inc. He serves as a director of Wasatch Funds, Inc., a registered investment company, and of InterWest Home Medical, Inc., a public home use medical equipment distributor. Mr. Jensen received a B.A. in English/Linguistics from the University of Utah and a J.D. and an M.B.A. from Columbia University. JOSEPH "SKIP" KLEIN, III, M.B.A. Mr. Klein, 37, was appointed to the Board of Directors of the Company in April, 1998. Currently, Mr. Klein is the Managing Director of Millienium.HEW, LLC, an advisory firm focusing on investments in health, education, and the WorldWide Web. From December 1995 to February 1998, Mr. Klein was a Portfolio Manager and Chairman of the Investment Advisory Committee of T. Rowe Price Health Sciences Fund, Inc. From April 1990 to December 1995, Mr. Klein was Vice President and Health Care Investment Analyst for T. Rowe Price Associates, Inc., an investment management firm. Mr. Klein received an M.B.A. with a concentration on finance and investments from Stanford Graduate School of Business and a B.A. in economics from Yale University. DONALD E. KUHLA, PH.D. Dr. Kuhla, 55, has been a director of the Company since 1991 and as a member of the Audit Committee since 1996 and the Nominating Committee since 1997. Dr. Kuhla also serves as a scientific consultant to NPS. Since 1994, he has been Vice President of Plexus Ventures, Inc., a biotechnology investment and consulting firm. 3 From 1990 to 1994 Dr. Kuhla held a senior management position with a venture capital backed, medical device start-up company, Enzymatics, Inc. His early career was spent in research and development and operations management positions with Pfizer Inc. and Rorer Group, Inc., his last position at Rorer being Senior Vice President of Operations. Dr. Kuhla received a B.A. in Chemistry from New York University and a Ph.D. in Organic Chemistry from Ohio State University. THOMAS N. PARKS, PH.D. Dr. Parks, 47, has been a director of the Company since its founding in 1986 and a member of the Audit Committee since 1996 and the Nominating Committee since 1997. Dr. Parks also serves as a scientific consultant to NPS. He is currently the George and Lorna Winder Professor of Neuroscience and Chairman of the Department of Neurobiology and Anatomy at the University of Utah Medical School. Dr. Parks joined the faculty at the University of Utah Medical School in 1978 as an assistant professor. Dr. Parks received a B.S. in Biology from the University of California at Irvine and a Ph.D. in Psychobiology from Yale University. He was a postdoctoral fellow in Development Neurology at the University of Virginia Medical School. TIMOTHY J. RINK, M.D., SC.D. Dr. Rink, 53, has been a director of the Company since 1991 and a member of the Compensation Committee since 1994. Dr. Rink also serves as a scientific consultant to the Company. Since February 1996 Dr. Rink has been Chairman, Chief Executive Officer and President of Aurora Biosciences Corporation, a biotechnology company focused on ultra high throughput drug screening. From 1990 through 1995 he was President, Chief Technical Officer and director of Amylin Pharmaceuticals, Inc., a pharmaceutical company. From 1984 to January 1990 he served as Vice President, Research at SmithKline Beecham, plc. and from 1988 to 1990, he was a founding member of the Emerging Technologies Committee of the Prime Minister's Advisory Council on Science and Technology in the United Kingdom. Dr. Rink is also a director of CoCensys, Inc., a publicly held biotechnology company. Dr. Rink received an M.D. and an Sc.D. from the University of Cambridge. THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE BOARD COMMITTEES AND MEETINGS The Board has standing Audit, Compensation, and Nominating Committees. The Audit Committee's functions include: meeting with the Company's independent auditors at least annually to review the results of the annual audit and discuss the financial results for the year as reported in the Company's financial statements; recommending to the Board of Directors the independent auditors to be retained for the ensuing year; and receiving and considering the auditors' comments as to controls, adequacy of staff and management performance and procedures in connection with audit and financial controls. Currently, the Audit Committee is composed of three non-employee directors, Mr. Groninger, Dr. Kuhla and Dr. Parks. The Audit Committee met two times during the fiscal year ended December 31, 1997. The Compensation Committee's functions include: establishing, reviewing, and overseeing salaries, incentive compensation, and other forms of compensation paid to officers and employees of the Company; administering the Company's incentive compensation and benefit plans, including the 1998 Stock Option Plan, 1994 Employee Stock Purchase Plan, the 1994 Equity Incentive Plan and the 1987 Stock Option Plan; and performing such other functions regarding compensation as the Board of Directors may delegate. Currently, the Compensation Committee is composed of three non-employee directors, Mr. Costa, Mr. Groninger and Dr. Rink. The Compensation Committee met two times during the fiscal year ended December 31, 1997. The Nominating Committee's functions include: evaluating Director performance on at least an annual basis; providing information and materials relating to the nomination of directors; interviewing, nominating, and recommending individuals for membership on the Company's Board of Directors and its committees; and 4 performing such other functions as the Board of Directors may delegate. The Nominating Committee will consider nominees for directors nominated by stockholders upon submission in writing to the Secretary of the Company of the names of such nominees, together with their qualifications for service as a director of the Company. In order for any nominees for directors nominated by stockholders to be considered by the Nominating Committee, such nominations must be submitted no later than December 1st of the year preceding the Annual Meeting. The Nominating Committee met one time during the fiscal year ended December 31, 1997. Currently, the members of the Nominating Committee are Dr. Kuhla, Dr. Jackson and Dr. Parks. During the fiscal year ended December 31, 1997, the Board of Directors held five meetings. Each Board member attended 75% or more of the aggregate of the meetings held by the Board and by the respective committees on which such Board member served during the period for which he was a director or a member of such committee. PROPOSAL 2 APPROVAL OF THE COMPANY'S 1998 STOCK OPTION PLAN In March 1998, the Board of Directors adopted, subject to stockholder approval, the NPS Pharmaceuticals, Inc. 1998 Stock Option Plan (the "1998 Option Plan") and authorized and reserved 1,000,000 shares of the Company's Common Stock for issuance under the 1998 Option Plan. The 1998 Option Plan provides for the grant of incentive and nonstatutory stock options. The Board adopted the 1998 Option Plan as a means to retain the services of persons who are current employees, directors, and consultants to the Company, to secure and retain the services of new employees, directors, and consultants for the Company, and to provide incentives for such persons to exert maximum efforts on behalf of the Company. As of April 9, 1998, no options to purchase shares of Common Stock had been granted under the 1998 Option Plan. Stockholders are requested in this Proposal 2 to approve the 1998 Option Plan and the setting aside of 1,000,000 shares of Common stock for issuance under the 1998 Option Plan. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting will be required to approve this Proposal 2. THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2 The terms and essential features of the Company's other stock plans remain in effect, unaltered by the adoption of the 1998 Option Plan. The principal features of the 1998 Option Plan are outlined below. GENERAL The 1998 Option Plan provides for the grant of incentive stock options ("ISOs") and nonstatutory stock options ("NSOs"). To date, no options have been granted under the 1998 Option Plan. ISOs granted under the 1998 Option Plan are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). NSOs granted under the 1998 Option Plan are intended not to qualify as incentive stock options under the Code. See "Federal Income Tax Information" for a discussion of the tax treatment of the various awards included in the 1998 Option Plan. PURPOSE The 1998 Option Plan was adopted to provide a means by which employees (including officers), directors, and consultants to the Company and its affiliates may be given an opportunity to benefit from increases in the value of the stock of the Company, to secure and retain the services of persons holding or capable of filling such positions, and to provide incentives for such persons to exert maximum efforts on behalf of the Company and thereby promote the long-term interest of the Company, including the growth in value of the Company's equity and enhancement of long-term stockholder value. 5 ADMINISTRATION The 1998 Option Plan is administered by the Board. The Board has the power to construe and interpret the 1998 Option Plan and, subject to the provisions of the 1998 Option Plan, to determine the persons to whom and the dates on which options will be granted, what type of option will be granted, the number of shares to be subject to each option, the time or times during the term of each option within which all or a portion of such option may be exercised, the exercise price, the type of consideration, and other terms of the option. The Board is authorized to delegate administration of the 1998 Option Plan to a committee or committees composed of one or more members of the Board and has delegated such administration to the Compensation Committee (the "Committee"). The Committee has the powers to administer the 1998 Option Plan subject to such limitations as the Board provides. As used herein with respect to the 1998 Option Plan, where appropriate, the term "Board" refers to the Compensation Committee. In order to maximize the Company's ability to recognize a business expense deduction under Section 162(m) of the Code in connection with compensation recognized by "covered employees" (defined in Section 162(m) as the chief executive officer and other four most highly compensated officers), the regulations under Section 162(m) require that the directors who serve as members of the Committee responsible for administering the 1998 Option Plan with respect to these covered employees must be "outside directors." The 1998 Option Plan provides that in the discretion of the Board, a committee may consist solely of two or more "outside directors," in accordance with Code Section 162(m), or solely of two or more "non-employee directors," in accordance with Rule 16b-3. The Committee composition as described above currently consists of three outside, non-employee directors. ELIGIBILITY ISOs may be granted under the 1998 Option Plan to employees (including officers) of the Company and any affiliates. Employees (including officers), directors, and consultants of the Company are all eligible to receive NSO awards under the 1998 Option Plan. ISOs granted to a 10% shareholder (i.e. an employee who, at the time of the grant, owns or is deemed to own, stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company) must have an exercise price at least 110% of the fair market value of the stock subject to the option on the date of grant, and the term of the option does not exceed five years from the date of grant. For ISOs granted under the 1998 Option Plan, the aggregate fair market value determined at the time of grant of the shares of Common Stock with respect to which such options are exercisable for the first time by an optionee during any calendar year (under all such plans of the Company and its affiliates), may not exceed $100,000. In order to ensure that the Company will be able to deduct for tax purposes the compensation attributable to the exercise of options granted under the 1998 Option Plan, the Company has included in the 1998 Option Plan a provision limiting the maximum number of shares of Common Stock that may be covered by stock options issued under the 1998 Option Plan to one individual for any consecutive three calendar years to 750,000. STOCK SUBJECT TO THE PLAN The maximum number of shares of Common Stock that may be issued pursuant to options granted under the 1998 Option Plan is 1,000,000 shares. Any shares of stock granted under the 1998 Option Plan that are forfeited because of the failure to meet an option grant contingency or condition shall again be available for delivery pursuant to new grants. To the extent any shares of stock covered by a grant are not delivered to an optionee because the award is forfeited or canceled, or the shares of stock are not delivered because the award is settled in cash, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of stock available for delivery under the 1998 Option Plan. If the exercise price of any option granted under the 1998 Option Plan is satisfied by tendering shares of stock of the Company, only the number of 6 shares of stock issued net of the shares of stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of stock available for delivery under the 1998 Option Plan. Shares of stock delivered under the 1998 Option Plan in settlement, assumption, or substitution of outstanding awards (or obligations to grant future awards) under the plans or arrangements of another entity shall not reduce the maximum number of shares of stock available for delivery under the 1998 Option Plan, to the extent that such settlement, assumption, or substitution is a result of the Company or an affiliate acquiring another entity (or an interest in another entity). TERMS OF THE OPTIONS The following is a description of the permissible terms of options under the 1998 Option Plan. Individual option grants may be more restrictive as to any or all of the permissible terms described below. Exercise Price, Payment. The exercise price of ISOs and NSOs under the 1998 Option Plan may not be less than the fair market value of the Common Stock subject to the option on the date of the option grant, and in some cases with respect to ISOs (see "Eligibility" above) may not be less than 110% of such fair market value. The exercise price of options granted under the 1998 Option Plan may be paid either: (1) in cash at the time the option is exercised; (2) by delivery of other Common Stock of the Company or a combination of cash and already owned Common Stock; (3) through surrender of shares of Common Stock available for exercise under the Option; (4) pursuant to a deferred payment arrangement; (5) pursuant to a broker-assisted exercise same-day sales program; or (6) in any other form of legal consideration acceptable to the Board; or (7) any combination of the above. Exercise Price, No Repricing. Except for certain adjustments due to corporate transactions (see "Adjustment Provisions" and "Effect of Certain Corporate Events" below), the exercise price for any stock option (ISOs and NSOs) under the 1998 Option Plan may not be decreased after the grant of such stock option, and a stock option may not be surrendered as consideration in exchange for the grant of a new stock option with a lower exercise price. Option Exercise. Options granted under the 1998 Option Plan may become exercisable ("vest") in cumulative increments as determined by the Board. The Board has the power to accelerate the time during which an option may be exercised, and options granted may contain provisions for accelerated vesting upon specified events or conditions. In addition, options granted under the 1998 Option Plan may permit exercise prior to vesting, but in such event, the optionee may be required to enter into an early exercise stock purchase agreement that allows the Company to repurchase shares not yet vested at their exercise price should the optionee leave the employ of the Company before vesting. Term. The maximum term of ISOs and NSOs under the 1998 Option Plan is ten years, except that in certain cases (see "Eligibility") the maximum term of ISOs is five years. ISO status terminates three months after termination of the optionee's employment with the Company or association as director or affiliate of the Company, unless (a) such termination is due to such person's permanent and total disability (as defined in the Code), in which case the option may, but need not, provide that it may be exercised at any time within one year of such termination; (b) the optionee dies while serving, or within in a three-month period of having served the Company or any affiliate of the Company, in which case the option may, but need not, be exercisable (to the extent that the option was exercisable at the time of the optionee's death) within twelve months of the optionee's death by the person or persons to whom the rights to such option pass by will or by the laws of descent and distribution; or (c) the option by its terms specifically provide otherwise. Individual options by their terms may 7 provide for exercise within a longer period of time following termination of employment or the consulting relationship. Adjustment Provisions. If there is any change in the Common Stock subject to the 1998 Option Plan or subject to any award granted under the 1998 Option Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the 1998 Option Plan and awards outstanding thereunder may be appropriately adjusted as to the type of security and the maximum number of shares subject to such plan, the maximum number of shares which may be granted to an employee during any calendar year, and the type of security, number of shares and price per share of stock subject to such outstanding awards in order to preserve (or prevent enlargement of) the benefits or potential benefits intended at the time of the grant. Effect of Certain Corporate Events. The 1998 Option Plan provides that, in the event of a dissolution or liquidation of the Company, specified type of merger or other corporate reorganization, to the extent permitted by law, any surviving corporation will be required to either assume awards outstanding under the 1998 Option Plan or substitute similar awards for those outstanding under the 1998 Option Plan, or such outstanding awards will continue in full force and effect. In the event that any surviving corporation declines to assume or continue awards outstanding under the 1998 Option Plan, or to substitute similar awards, then the time during which such awards may be exercised may be accelerated and the awards terminated if not exercised during such time. The acceleration of an award in the event of an acquisition or similar corporate event may be viewed as an anti-takeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of the Company. Duration, Amendment, and Termination. The Board may suspend or terminate the 1998 Option Plan without stockholder approval or ratification at any time or from time to time. The Board may also amend the 1998 Option Plan at any time or from time to time. However, no such amendment will be effective unless approved by the stockholders of the Company, to the extent stockholder approval of such amendment is necessary in order for the Plan to satisfy or continue to satisfy Sections 422 and/or 162(m) of the Code, if applicable, Rule 16b-3, and/or Nasdaq or other securities exchange listing requirements, or if such amendment would increase the number of shares issuable under the 1998 Option Plan or decrease the minimum stock option exercise price set forth in the 1998 Option Plan or permit repricing outstanding options. The Board may submit any other amendment to the 1998 Option Plan for stockholder approval, including, but not limited to, amendments intended to satisfy the requirements of Section 162(m) of the Code regarding the exclusion of performance-based compensation from the limitation on the deductibility of compensation paid to certain employees. Restrictions on Transfer. Except as otherwise provided by the Board, awards under the 1998 Option Plan are not transferable other than as designated by the participant by will or by the laws of descent and distribution. In general, ISOs may not be transferred by the optionee otherwise than by will or by the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by the optionee. NSOs may not be transferred except when transfer to a family member or related trust or partnership is authorized by express provision of the option grant agreement, by will or by the laws of descent and distribution or pursuant to a domestic relations order satisfying the requirements of Rule 16b-3 and, during the lifetime of the optionee, may be exercised only by the optionee, a valid family member, or a transferee pursuant to a domestic relations order. FEDERAL INCOME TAX INFORMATION Incentive Stock Options. ISOs under the 1998 Option Plan are intended to be eligible for the favorable federal income tax treatment accorded "incentive stock options" under the Code. There generally are no federal income tax consequences to the optionee or the Company by reason of the grant or exercise of an ISO. However, the exercise of an ISO may increase the optionee's alternative minimum tax liability, if any. 8 If an optionee holds stock acquired through exercise of an ISO for at least two years from the date on which the option is granted and at least one year from the date of exercise of the option, any gain or loss on a disposition of such stock will be long-term capital gain or loss. Generally, if the optionee disposes of the stock before the expiration of either of these holding periods (a "disqualifying disposition"), at the time of disposition, the optionee will realize taxable ordinary income equal to the lesser of (a) the excess of the stock's fair market value on the date of exercise over the exercise price, or (b) the optionee's actual gain, if any, on the purchase and sale. The optionee's additional gain or any loss upon the disqualifying disposition will be a capital gain or loss which will be long-term or short-term depending on whether the stock was held for more than one year. Long-term capital gains currently are generally subject to lower tax rates than ordinary income. The capital gains rate for capital assets held for eighteen months or more for federal income tax purposes is currently 20% while the maximum rate for capital assets held for one year and less than eighteen months is 28%. The maximum ordinary income rate is effectively 39.6% at the present time. Slightly different rules may apply to optionees who acquire stock subject to certain repurchase options or who are subject to Section 16(b) of the Exchange Act. To the extent the optionee recognizes ordinary income by reason of a disqualifying disposition, the Company will generally be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs. Nonstatutory Stock Options. NSOs granted under the 1998 Option Plan generally have the following federal income tax consequences: There are no tax consequences to the optionee or the Company by reason of the grant of a NSO. Upon exercise of an NSO, the optionee normally will recognize taxable ordinary income equal to the excess of the stock's fair market value on the date of exercise over the option exercise price. Generally, with respect to employees, the Company is required to withhold from regular wages or supplemental wages an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation, the Company will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the optionee. Upon disposition of the stock, the optionee will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon exercise of the option. Such gain or loss will be long or short-term depending on whether the stock was held for more than one year. Slightly different rules may apply to optionees who acquire stock subject to certain repurchase options or who are subject to Section 16(b) of the Exchange Act. Potential Limitation on Company Deductions. Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain employees in a taxable year to the extent that compensation exceeds $1,000,000 for a covered employee. It is possible that compensation attributable to awards under the 1998 Option Plan, when combined with all other types of compensation received by a covered employee from the Company, may cause this limitation to be exceeded in any particular year. Certain kinds of compensation, including qualified "performance-based compensation," are disregarded for purposes of the deduction limitation. In accordance with Treasury regulations issued under Section 162(m) of the Code, compensation attributable to stock options will qualify as performance-based compensation, provided that: (a) the stock award plan contains a per-employee limitation on the number of shares for which stock options may be granted during a specified period; (b) the per-employee limitation is approved by the stockholders; (c) the award is granted by a compensation committee comprised solely of "outside directors"; and (d) the exercise price of the award is no less than the fair market value of the stock on the date of grant. PLAN BENEFITS No stock option grants have yet been made under the 1998 Option Plan. 9 PROPOSAL 3 RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS The Board of Directors has selected KPMG Peat Marwick LLP ("KPMG") as the Company's independent auditors for the fiscal year ending December 31, 1998, and has further directed that management submit the selection of independent public auditors for ratification by the stockholders at the Annual Meeting. KPMG has audited the Company's financial statements since the Company's inception in 1986. Representatives of KPMG are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire, and will be available to respond to appropriate questions. Stockholder ratification of the selection of KPMG as the Company's independent auditors is not required by the Company's Bylaws or otherwise. However, the Board is submitting the selection of KPMG to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Board will reconsider whether or not to retain that firm. Even if the selection is ratified, the Board in its discretion may direct the appointment of a different independent accounting firm at any time if the Board determines that such a change would be in the best interests of the Company and its stockholders. THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3 10 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Stock as of March 31, 1998 by: (a) all those known by the Company to be beneficial owners of more than five percent of the Company's Common Stock; (b) each director and nominee for director; (c) each of the executive officers named in the Summary Compensation Table; and (d) all executive officers and directors of the Company as a group.
AMOUNT OF BENEFICIAL PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP TOTAL - ------------------------------------ -------------------- ---------- (UNLESS OTHERWISE NOTED) T. Rowe Price Associates, Inc(1)............... 1,455,200 11.3% 100 E. Pratt Street Baltimore, MD 21202 BVF Partners, L.P.(2).......................... 1,361,800 10.5% 333 West Wacker Drive, Suite 1600 Chicago, IL 60606 Wellington Management Company, LLP(3).......... 1,041,400 8.1% 75 State Street Boston, MA 02109 Amgen Inc...................................... 1,000,000 7.7% 1840 DeHavilland Drive Thousand Oaks, CA 91320 SmithKline Beecham Corporation(4).............. 877,601 6.8% One Franklin Plaza Philadelphia, PA 19101 S. R. One, Limited(5).......................... 877,601 6.8% 565 East Swedesford Road, Suite 315 Wayne, PA 08542 Dimensional Fund Advisors Inc.(6).............. 820,600 6.3% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 Hunter Jackson, Ph.D.(7)....................... 574,600 4.4% Thomas N. Parks, Ph.D.(8)...................... 360,160 2.8% Edward F. Nemeth, Ph.D.(9)..................... 191,406 1.5% James U. Jensen, J.D.(10)...................... 111,443 * Thomas B. Marriott, Ph.D.(11).................. 104,269 * Douglas Reed, M.D.(12)......................... 62,012 * Donald E. Kuhla, Ph.D.(13)..................... 51,160 * Timothy J. Rink, M.D., Sc.D.(14)............... 48,760 * James G. Groninger, M.B.A.(15)................. 43,372 * Santo J. Costa, J.D.(16)....................... 7,860 * Skip Klein, M.B.A.(17)......................... 0 * All directors and executive officers as a group (includes 13 people)(18)...................... 1,642,557 12.7%
11 - -------- * Less than 1%. (1) These securities are owned by various individual and institutional investors including T. Rowe Price New Horizons Fund, Inc. which owns 900,000 shares, representing 7.34% of the shares outstanding, of which T. Rowe Price Associates, Inc. ("Price Associates") serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. (2) BVF Partners, L.P. shares voting and dispositive power with BVF, Inc. with respect to all of these shares and with Biotechnology Value Fund, L.P. with respect to 569,900 of the shares. (3) Wellington Management Company, LLP ("WMC"), a registered investment adviser, is deemed to have beneficial ownership of 1,041,400 shares of NPS common stock. Such shares are owned of record by clients of WMC. WMC shares voting power with respect to 957,500 of such shares and dispositive power with respect to all of such shares. (4) Includes 717,601 shares held by S. R. One, Ltd. a wholly owned affiliate SmithKline Beecham has sole voting and dispositive power with respect to 160,000 of these shares. (5) Includes 160,000 shares held by SmithKline Beecham. Also includes 5,700 shares subject to options held by Dr. Douglas Reed pursuant to an agreement between S. R. One and Dr. Reed. Dr. Reed was a Vice President of S. R. One before becoming a full time employee of the Company on April 15, 1996. Upon exercise, such shares will be transferred to and held by S. R. One. S. R. One has sole voting and dispositive power with respect to 717,601 of the shares. (6) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, is deemed to have beneficial ownership of 820,600 shares of NPS common stock, all of which shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimensional Fund Advisors Inc. serves as investment manager. Dimensional disclaims beneficial ownership of all such shares. (7) Includes 84,500 shares held in a trust and two shares held by Dr. Jackson's children, of which he disclaims beneficial ownership. Also includes 174,900 shares subject to options exercisable within 60 days of March 31, 1998. (8) Includes 12,660 shares subject to options exercisable within 60 days of March 31, 1998. (9) Includes 159,450 shares subject to options exercisable within 60 days of March 31, 1998. (10) Includes 500 shares held by children. Also includes 30,500 shares subject to options exercisable within 60 days of March 31, 1998. Mr. Jensen disclaims beneficial ownership of the 500 shares held by an adult child. (11) Includes 241 shares held by spouse, 321 shares held by children, and 84,500 shares subject to options exercisable within 60 days of March 31, 1998. (12) Includes 45,370 shares subject to options exercisable within 60 days of March 31, 1998. (13) Includes 29,160 shares subject to options exercisable within 60 days of March 31, 1998. (14) Includes 44,160 shares subject to options exercisable within 60 days of March 31, 1998. (15) Includes 17,450 shares held in trust, of which he disclaims beneficial ownership. Also includes 3,840 shares subject to options exercisable within 60 days of March 31, 1998. (16) Includes 3,660 shares subject to options exercisable within 60 days of March 31, 1998. (17) On April 2, 1998, Mr. Klein was granted an option to purchase 15,000 shares of Common Stock under the Directors' Plan. No shares subject to options are exercisable within 60 days of March 31, 1998. Mr. Klein disclaims any beneficial ownership of any shares held by T. Rowe Price Associates. 12 (18) Includes an aggregate of 668,150 shares subject to options exercisable within 60 days of March 31, 1998. The above table is based upon information supplied by officers, directors, and principal stockholders and Schedules 13D and 13G filed with the Commission. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnotes and subject to community property laws, where applicable, the persons named above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Beneficial ownership also includes shares of stock subject to options and warrants exercisable or convertible within 60 days. Applicable percentages are based on 12,935,000 shares of Common Stock outstanding on March 31, 1998, adjusted as required by rules promulgated by the Commission. Except as set forth herein, the address of the persons set forth above is the address of the Company appearing elsewhere in this Proxy Statement. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities (collectively the "Reporting Persons"), to file with the Commission reports of ownership and changes in ownership of Common Stock and other equity securities of the Company. Officers, directors, and greater than 10% stockholders are required by the Commission to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company or written representations that no other reports were required, during the fiscal year ended December 31, 1997, the Company believes that apart from Hunter Jackson and Thomas Marriott who reported late through amended Form 5s with respect to gifts of shares of common stock for the benefit of respective family members by each of them in December 1997, all Reporting Persons complied with all applicable Section 16(a) filing requirements. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS The Company's directors do not currently receive any cash compensation for service on the Board or any Committee thereof. Outside Directors are reimbursed for certain expenses in connection with attendance at Board and Committee meetings. Directors are eligible to receive stock options and stock bonuses under the stock plans described below. In January 1994, the Board adopted, and the stockholders subsequently approved, the 1994 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). An amendment to increase from 90,000 to 160,000 the number of shares available for grant under the Directors' Plan was approved by the stockholders in July 1996. Under the Directors' Plan, non-employee directors of the Company are eligible to receive options. Options granted under the Directors' Plan are automatic and non-discretionary and do not qualify as ISOs under the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the terms of the Directors' Plan, each person who is elected for the first time to be an outside director of the Company and who is not otherwise employed by the Company or an affiliate of the Company (a "Non-Employee Director") will automatically be granted an option to purchase 15,000 shares of Common Stock (subject to adjustment as provided in the Directors' Plan) upon the date of his or her election to the Board. On December 1 of each year, each person who is then a Non-Employee Director and has been a Non-Employee Director for at least three months will automatically be granted an option to purchase 3,000 shares of Common Stock (subject to adjustment as provided in the Directors' Plan) pursuant to the Directors' Plan. 13 No option granted under the Directors' Plan may be exercised after the expiration of ten years from the date such option was granted. Options granted under the Directors' Plan vest at a rate of 28% of the shares subject to the option one year after date of grant and 3% of the shares become exercisable each month thereafter, so long as the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director. If the optionee's service as a non-employee director terminates for any reason other than death, the option will remain exercisable for twelve months after the date of termination, or until the option's expiration date, if earlier. If the optionee dies, the option will remain exercisable for eighteen months following the date of death or until the expiration date of the option, whichever is earlier. The exercise price of options granted under the Directors' Plan is 100% of the fair market value of the Common Stock on the date of grant. Options granted under the Directors' Plan are generally non- transferable. Unless otherwise terminated by the Board, the Directors' Plan automatically terminates in January 2004. As of December 31, 1997, options to purchase a total of 84,000 shares of Common Stock had been granted under the Directors' Plan at exercise prices from $3.00 to $10.25 per share, and a weighted average exercise price of $6.82 per share. As of that date, options for 9,290 shares had been exercised since the inception of the Directors' Plan. Prior to the adoption of the Directors' Plan, the Company granted options to directors under the 1987 Stock Option Plan. In December 1994, the Board adopted the Non-Employee Directors' Stock Bonus Program under the 1994 Equity Incentive Plan (the "Stock Bonus Program"). Under the Stock Bonus Program, non-employee directors are eligible to receive grants of shares of Common Stock for attendance at Board and Committee meetings. The Stock Bonus Program provides each Non-Employee Director of the Company with a non-discretionary award of 200 shares of Common Stock for each Board meeting attended and 200 shares of Common Stock per year for serving on a Board Committee. A total of 7,400 shares was granted under the Stock Bonus Program for meetings attended in 1997. The right to receive awards under the Stock Bonus Program is generally non- transferable. The stock awards are made at the end of each calendar year. Non- Employee Directors entitled to stock bonus awards shall not possess any rights of a stockholder of the Company until such shares are delivered to the Non- Employee Director. Unless otherwise terminated by the Board, the Stock Bonus Program terminates in January 2004. 14 COMPENSATION OF EXECUTIVE OFFICERS The following table shows for the fiscal years ended December 31, 1997, December 31, 1996 and December 31, 1995, certain compensation awarded, paid to, or earned by, the Company's Chief Executive Officer and its other four most highly compensated executive officers (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ----------------------- LONG-TERM COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) STOCK OPTIONS GRANTED(#) - ---------------------------- ---- --------- -------- ------------------------ Hunter Jackson, Ph.D.......... 1997 235,846 40,000 Chief Executive Officer, President and 1996 214,884 22,659 45,000 Chairman of the Board 1995 189,033 45,000 James U. Jensen, J.D.......... 1997 167,783 20,000 Vice President, Corporate Development 1996 152,592 17,624 25,000 and Legal Affairs and Secretary 1995 147,072 25,000 Thomas B. Marriott, Ph.D...... 1997 177,868 20,000 Vice President, Development Research 1996 165,758 18,883 25,000 1995 157,629 25,000 Edward F. Nemeth, Ph.D........ 1997 159,832 20,000 Vice President, and Chief Scientific Officer 1996 150,038 16,365 30,000 1995 136,603 30,000 Douglas Reed, M.D.(1)......... 1997 169,882 25,000 Vice President, Business Development 1996 139,718 70,000
- -------- (1) Dr. Reed was appointed as a Vice President of the Company in April 1996. Dr. Reed was paid $32,900 in 1996 as "other" compensation for moving expenses incurred in connection with commencing employment. Upon commencement of employment with the Company, Dr. Reed was granted an option to acquire 40,000 shares of Common Stock of the Company. He was also granted 6,000 shares of NPS Common Stock (valued at $79,500 on the date of grant) of which 2,000 shares vested immediately. The remaining 4,000 shares are restricted and are subject to vesting based upon Dr. Reed's continued employment with the Company at the following rate: 2,000 shares upon completion of the first year of employment (April 15, 1997) and the remaining 2,000 shares upon completion of the second year of employment (April 15, 1998). All shares are eligible for dividends on the same basis as all other outstanding shares of Common Stock. As of December 31, 1997, Dr. Reed held 2,000 restricted shares with an aggregate value on that date of $15,500. 1987 STOCK OPTION PLAN The 1987 Stock Option Plan (the "1987 Plan") was adopted in June 1987. The purposes of the 1987 Plan were to attract and retain qualified personnel, to provide additional incentives to employees, officers, advisors, directors, and consultants of the Company, and to promote the success of the Company's business. No options have been granted under the 1987 Plan since December 1993, and the Company will not make any future grants under the 1987 Plan. As of December 31, 1997, options to purchase a total of 821,332 shares of Common Stock had been exercised for cash and services under the 1987 Plan at a weighted average exercise price of $0.79 per share. As of December 31, 1997, options to purchase a total of 488,660 shares of Common Stock were outstanding, with exercise prices ranging from $0.34 to $4.00 per share and a weighted average exercise price per share of $1.43. Options granted under the 1987 Plan generally became exercisable at a rate of one-third of the shares subject to the option on the first anniversary of the option grant and one-third of the remaining shares subject to the 15 option on each of the second and third anniversary of the option grant. The maximum term of a stock option under the 1987 Plan was ten years; however, if the optionee at the time of grant had voting power over more than ten percent of the Company's outstanding capital stock (a "10% Holder"), the maximum term of any ISO granted under the 1987 Plan was five years. The aggregate fair market value of the stock with respect to which ISOs are exercisable for the first time by an optionee in any calendar year may not exceed $100,000. The exercise prices of ISOs granted under the 1987 Plan were at least equal to 100%, 110% with respect to 10% Holders, of the fair market value of the stock subject to the option on the date of grant. Although no minimum exercise price of NSOs was required under the 1987 Plan, the exercise price of NSOs previously granted under the 1987 Plan generally has been at least equal to the fair market value of the stock subject to the option on the date of the grant. Any option that is exercisable at the time of grant and which expires no sooner than three years from the grant date is subject to an option exercise price equal to the fair market value of the option on the grant date. 1994 EQUITY INCENTIVE PLAN In January 1994, the Board adopted the 1994 Equity Incentive Plan (the "1994 Plan"), which was subsequently approved by the stockholders in February 1994. 1,702,503 shares have been authorized for issuance under the 1994 Plan. The purposes of the 1994 Plan are to attract and retain qualified personnel, to provide additional incentives to employees, officers, directors, and consultants of the Company and its affiliates and to promote the success of the Company's business. Under the 1994 Plan, the Company may grant NSOs to employees, officers, directors, and consultants to the Company and its affiliates and may grant ISOs to employees of the Company and its affiliates. As of December 31, 1997, options to purchase a total of 126,869 shares of Common Stock had been exercised for cash and services under the 1994 Plan at a weighted average exercise price of $6.23 per share. As of December 31, 1997, options to purchase 1,498,936 shares of Common Stock with exercise prices ranging from $3.00 to $16.63 per share, and a weighted average exercise price per share of $8.85 were outstanding. Options granted under the 1994 Plan prior to December 1, 1997, generally become exercisable at a rate of 28% of the shares subject to the option at the end of the first year and 3% of the shares subject to the option at the end of each calendar month thereafter. Options granted under the 1994 Plan after December 1, 1997 generally become exercisable at a rate of 28% of the shares subject to the option at the end of the first year and 2% of the shares subject to the options at the end of each calendar month thereafter. The maximum term of a stock option under the 1994 Plan is ten years; however, if the optionee who is granted an ISO at the time of grant is a 10% Holder, the maximum term of any ISO granted under the 1994 Plan is five years. If an optionee terminates his or her service to the Company, the optionee may exercise only those option shares vested as of the date of termination and must effect such exercise within three months of termination of service for any reason other than death or disability, one year after termination due to disability, and eighteen months after termination due to death. The aggregate fair market value with respect to which ISOs are exercisable for the first time by an optionee in any calendar year may not exceed $100,000. The exercise price of ISOs granted under the 1994 Plan must be at least 100%, 110% with respect to 10% Holders, of the fair market value of the Common Stock of the Company on the date of grant. Upon completion of this Offering, no employee will be a 10% Holder. The exercise price of NSOs granted under the 1994 Plan is the fair market value of the Company's Common Stock on the date of grant or such other exercise price as is set by the Board at the date of grant. Payment of the exercise price may be made in cash or by shares of the Company's Common Stock valued at the fair market value of such shares on the date of exercise or in any other form acceptable to the Board. The 1994 Plan also allows the Company to grant stock bonuses, reload options, rights to purchase restricted stock, and stock appreciation rights. The 1994 Plan may be amended at any time by the Board, although certain amendments require stockholder approval. The 1994 Plan will terminate in January 2004, unless earlier terminated by the Board. 16 The following table sets forth each grant of options to purchase Common Stock made during the year ended December 31, 1997 to each of the Named Executive Officers. Grants of options to each of the Named Executive Officers were made under the 1994 Plan: OPTION GRANTS IN 1997
POTENTIAL REALIZABLE UNDERLYING % OF TOTAL VALUE AT ASSUMED ANNUAL SECURITIES OPTIONS EXERCISE RATES OF STOCK PRICE OPTIONS GRANTED IN OR BASE PRICE EXPIRATION APPRECIATION FOR NAME GRANTED(#)(1) FISCAL YEAR(2) PER SHARE DATE(3) OPTION TERM($)(4) - ---- ------------- -------------- ------------- ---------- ------------------------ 5% 10% ----------- ------------ Hunter Jackson.......... 40,000 8.43% $9.75 12/01/07 $245,569 $621,560 James U. Jensen......... 20,000 4.21 9.75 12/01/07 122,634 310,780 Thomas B. Marriott...... 20,000 4.21 9.75 12/01/07 122,634 310,780 Edward F. Nemeth........ 20,000 4.21 9.75 12/01/07 122,634 310,780 Douglas Reed............ 25,000 5.27 9.75 12/01/07 153,293 388,475
- -------- (1) Options granted under the 1994 Plan prior to December 1, 1997 generally become exercisable at the rate of 28% of the shares subject to the option one year after the date of grant and 3% of the shares subject to the option each month thereafter. Options granted after December 1, 1997 become exercisable at the rate of 28% of the shares subject to the option one year after the date of the grant, and 2% of the shares subject to the option each month thereafter. (2) Based on an aggregate of 474,750 options granted under the 1994 Plan to employees of the Company, including the Named Executive Officers. (3) These options have a ten-year term, subject to earlier termination upon death, disability, or termination of employment. (4) The potential realizable value is calculated based on the term of the option at its time of grant (ten years). It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. The following table sets forth information with respect to (a) the exercise of stock options by the Named Executive Officers during the fiscal year ended December 31, 1997; (b) the number of unexercised options held by the Named Executive Officers as of December 31, 1997; and (c) the value as of December 31, 1997 of unexercised in-the-money options. OPTION EXERCISES IN 1997 AND YEAR-END VALUE TABLE
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES VALUE OPTIONS(#) OPTIONS($)(2) ACQUIRED ON REALIZED ------------------------- ------------------------- NAME EXERCISE(#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ----------- -------- ------------------------- ------------------------- Hunter Jackson.......... 37,000 $279,905 161,400/88,600 $645,000/$0 James U. Jensen......... 12,300 70,575 25,700/47,000 12,825/ 0 Thomas B. Marriott...... 25,397 222,364 77,000/47,000 288,060/ 0 Edward F. Nemeth........ -- -- 151,200/48,800 716,700/ 0 Douglas Reed............ -- -- 40,120/66,880 48,750/ 0
- -------- (1) Value realized is based on the fair market value of the Company's Common Stock on the date of exercise (the closing sales price reported on the Nasdaq National Market on such date) minus the exercise price, and does not necessarily indicate that the optionee sold such stock. (2) Represents the difference between the option exercise price and the closing price of the Company's Common Stock as reported on the Nasdaq National Market on December 31, 1997 ($7.75) times the corresponding number of shares. 17 EMPLOYMENT AGREEMENTS The Company has no employment agreements with any of its executive officers. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Dr. Kuhla, a director of the Company since 1991, is Vice President of Plexus Ventures, Inc. ("Plexus"). The Company had a consulting agreement with Plexus through December 31, 1995, whereunder Plexus assisted the Company with its effort to establish a collaboration for the Company's hyperparathyroidism program including NPS proprietary compound, NPS R-568. During the years ended December 31, 1994, 1995 and 1996, the Company paid fees to Plexus totaling $34,000, $84,500, and $400,000, respectively. No fees were paid to Plexus in 1997. Plexus may earn an additional $400,000 in fees as payments are received from Amgen, Inc. ("Amgen"). The Company also granted Plexus an option to purchase 20,000 shares of NPS Common Stock at $10.50 per share with vesting contingent upon milestone payments from Amgen. The Company has also entered into a Consultant Services Agreement with Dr. Kuhla, effective November 1, 1996, whereunder Dr. Kuhla will provide scientific consulting services to the Company. In return for such services, Dr. Kuhla will receive from the approximately 1,800 shares based on attendance at various company meetings. In fiscal year 1997, Dr. Kuhla received 1,800 shares of NPS Common Stock for services rendered as a consultant. The Company's policy is to enter into agreements with each of its directors and executive officers providing for the indemnification of such persons to the fullest extent permitted by law for any liability they may incur by reason of their service as officers and/or directors to the Company. The Company has entered into indemnity agreements with each of its directors and executive officers. The Company entered into a development and license agreement with Amgen effective December 1995 which granted Amgen the exclusive right to develop and commercialize drugs for the treatment of HPT (and other indications other than osteoporosis) worldwide excluding Japan, China (including Hong Kong), North and South Korea, and Taiwan. Under the terms of the agreement with Amgen, NPS may receive from Amgen up to an aggregate of $43.5 million in license fees, equity purchases, and milestone payments plus royalties from any future product sales. Amgen paid NPS a license fee of $10.0 million and purchased one million shares of Common Stock for an aggregate purchase price of $7.5 million. NPS has the option to participate with Amgen, under the direction of Amgen, in the clinical development of a drug for primary HPT. Amgen is required to reimburse NPS for such participation, limited to a total cost of $400,000 per year for a maximum time period of five years. In November 1993, NPS entered into a three-year collaborative research and license agreement with SmithKline Beecham Corporation ("SmithKline Beecham") to collaborate on the discovery, development, and marketing of drugs to treat osteoporosis and other bone metabolism disorders. In 1992, S. R. One, Ltd. an affiliate of SmithKline Beecham, purchased $2.0 million of the Company's Preferred Stock. In 1993, at the time NPS entered into the agreement with SmithKline Beecham, S. R. One purchased an additional $7.0 million in equity of the Company and it acquired $495,000 of Common Stock in the Company's initial public offering. All of the Preferred Stock was converted into Common Stock upon the closing of the Company's initial public offering. Under the terms of the agreement with SmithKline Beecham, in addition to the $7.0 million equity purchase, SmithKline Beecham paid the Company a $6.0 million license fee and agreed to make additional payments to the Company upon the achievement of specific milestones. A $3.0 million milestone payment was made in January 1996. In July 1995, the Company began receiving payments from SmithKline Beecham to support the Company's research efforts and has recognized revenue of $6.2 million through 1997. In November 1997, the research term of the agreement was extended for an additional period of up to three years. Concurrently with the execution of the extension agreement, SmithKline Beecham purchased 160,000 shares of Common Stock of the Company and agreed to purchase an additional 453,000 shares of the Company's Common Stock over the next two years if the agreement is not terminated earlier. Research support payments are expected to be approximately $437,500 per quarter through October 2000 unless terminated earlier by SmithKline Beecham. NPS is entitled to royalties on sales of products for osteoporosis and other bone metabolism disorders developed by SmithKline Beecham under the agreement and a share of the profits from any copromotion of such products. 18 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Costa, Mr. Groninger and Dr. Rink served on the Compensation Committee for fiscal year 1997. No officer or employee of the Company sits on the Compensation Committee. No member of the Compensation Committee has at any time been an officer or employee of the Company. Mr. Groninger is a brother- in-law of Dr. Jackson, the Company's Chief Executive Officer, President and Chairman of the Board. Mr. Groninger abstains from participating in the determination of the proper compensation package for Dr. Jackson. REPORT OF THE COMPENSATION COMMITTEE COMPENSATION PHILOSOPHY The Company's compensation policies and programs seek to achieve three fundamental goals: (1) to enhance stockholder value by aligning compensation of executive officers and employees with the Company's progress toward achievement of its business objectives and performance, (2) to reward executive officers and employees with compensation incentives adequate to retain them in the future in the face of considerable competition for talent within the pharmaceutical industry and their disciplines, and (3) to attract and successfully recruit qualified, talented personnel essential to the Company's achievement of its business objectives. COMPENSATION COMMITTEE To ensure clear and centralized focus on all aspects of compensation, the Compensation Committee was formed by the Board of Directors in January 1994. For 1997, the Compensation Committee was composed of Mr. Costa, Mr. Groninger and Dr. Rink. The Compensation Committee operates under a Charter adopted by the Board of Directors. Among other things, the Charter authorizes and directs the Compensation Committee to establish and review annually the general compensation policies applicable specifically to the Company's executive officers and generally to the Company's employees (including the relationship of Company performance to compensation) and the basis for the Chief Executive Officer's compensation in particular. The Compensation Committee is also authorized to review and approve the level of compensation paid to the Chief Executive Officer and the Company's other executive officers during each fiscal year. Finally, the Compensation Committee reviews and approves awards made under the Company's incentive compensation and benefit plans, including the 1994 Employee Stock Purchase Plan, the 1994 Equity Incentive Plan and the 1987 Stock Option Plan. The Committee is instructed to bring to the full Board its recommendations for any changes. No member of the Compensation Committee during fiscal year 1997 was a former or current officer or employee of the Company. COMPENSATION COMPONENTS In order to link compensation of executive officers with the enhancement of stockholder value, the Board has adopted a compensation package for each of the Company's executive officers which consists of a base salary and long-term incentive compensation in the form of stock option grants. In the past, during the first part of December of each year, the Company's management has proposed to the Compensation Committee specific compensation proposals, including salary and long-term incentives, for each of the Company's officers and employees. These proposals are based on, among other things, experience, achievements, responsibilities, outside compensation surveys of other biopharmaceutical companies, geographical economic indicators, and advice of outside consultants. The Committee's deliberations in 1997 used this information provided by management. SALARY Base salaries represent the fixed component of the Company's executive compensation package. Generally, salary compensation is determined by evaluating the compensation of executives in similar positions in other 19 similar pharmaceutical companies, the experience of the particular executive officer and the executive officer's specific responsibilities. The Compensation Committee also evaluates the achievement of Company objectives in determining base salaries for the executive officers. For use in part by the Compensation Committee, in 1997 the Company engaged the assistance of outside consultants to advise it with respect to compensation programs and evaluations. The base salaries for executive officers were then set at levels believed by the Committee to be competitive and supportive of the Company's compensation philosophy. LONG-TERM INCENTIVES The purpose of long-term incentive compensation is to encourage employees to remain in the long-term employ of the Company and to reward employees for maximizing shareholder value. Long-term compensation awards are discretionary and are primarily based on individual performance as well as Company achievement of goals and objectives. In general, the performance factors utilized by the Compensation Committee to evaluate the grant of stock options to Company executive officers during the 1997 fiscal year were subjective and included, but were not limited to, the following: progress in clinical trials and regulatory matters; the planning of appropriate collaborative arrangements and the procurement and performance of ongoing collaboration arrangements with pharmaceutical and biotechnology companies; the officer's overall individual performance in his or her position and relative contribution during the year; and the Board of Directors' desire to retain the executive officer in face of considerable competition for executive talent within his/her discipline and in the industry. The Compensation Committee may modify the foregoing criteria or select other performance factors with respect to other executive bonus awards during a given fiscal year. SUMMARY The Compensation Committee believes that the Company's executive officers are committed to achieving positive long-term performance and enhanced stockholder value, and that the compensation policies and programs discussed in this report have motivated the Company's executive officers to work toward these goals. CEO COMPENSATION The Chief Executive Officer was a founder of the Company in 1986 and has served in such capacity since that time. The Chief Executive Officer's compensation package has traditionally been based below that of other chief executive officers in comparable companies in the industry. In order to determine the appropriate salary increase and stock option grant for the Chief Executive Officer, the Compensation Committee considered the salaries of other chief executive officers in the biotechnology industry and more specifically the following accomplishments in 1997: commencement of a Phase I clinical trial of NPS 1506; managing the Company's relationships with key strategic partners including Amgen, SmithKline Beecham, and Kirin; the progress in research and development which resulted in the receipt of a $2 million milestone payment from Kirin for the commencement of Phase II clinical trials; the extension of the SmithKline Beecham agreement for up to an additional three years and the related sale to SmithKline Beecham of NPS common stock; the Company's receipt of the "Utah Best Practices Award" for 1997 in the category of "Motivating and Retaining Employees;" Dr. Jackson's leadership of the Company's one-year and five-year planning; the initiation of good corporate governance, training and practices; Dr. Jackson's continued management responsibilities as President and Chief Executive Officer of a public company with over 110 employees; and Dr. Jackson's overall performance as President and Chief Executive Officer. POLICY REGARDING DEDUCTIBILITY The Company is required to disclose its policy regarding qualifying executive compensation for deductibility under Section 162(m) of the Code which provides that, for purposes of the regular income tax and the alternative minimum tax, the otherwise allowable deduction for compensation paid or accrued with respect to a covered employee of a publicly-held corporation is limited to no more than $1 million per year. The 20 Company does not anticipate that compensation payable to any executive officer will exceed $1 million for fiscal 1997. The Committee will continue to evaluate the advisability of qualifying the deductibility of such compensation in the future. Compensation Committee for fiscal year 1997 Santo J. Costa, Chairman James G. Groninger Timothy J. Rink March 1998 21 [PERFORMANCE GRAPH APPEARS HERE] - -------------------------------------------------------------------------------- NPS NASDAQ NASDAQ PHARMACEUTICALS, INC. STOCK MARKET-US PHARMACEUTICALS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5/26/94 100 100 100 - -------------------------------------------------------------------------------- JUN-94 82 96 93 - -------------------------------------------------------------------------------- DEC-94 68 103 98 - -------------------------------------------------------------------------------- JUN-95 86 128 123 - -------------------------------------------------------------------------------- DEC-95 314 146 179 - -------------------------------------------------------------------------------- JUN-96 241 165 181 - -------------------------------------------------------------------------------- DEC-96 200 180 179 - -------------------------------------------------------------------------------- JUN-97 175 201 183 - -------------------------------------------------------------------------------- DEC-97 141 220 185 - -------------------------------------------------------------------------------- 22 OTHER MATTERS The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment. By Order of the Board of Directors James U. Jensen, Secretary April 9, 1998 A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO: NPS PHARMACEUTICALS, INC. ATTN: INVESTOR RELATIONS 420 CHIPETA WAY SALT LAKE CITY, UTAH 84108 23 NPS PHARMACEUTICALS, INC. 1998 STOCK OPTION PLAN 1. GENERAL. 1.1 Purpose. The 1998 Stock Option Plan has been established by the ------- Company to provide a means by which employees, directors, and consultants of the Company and its Affiliates may be given the opportunity to benefit from increases in value of NPS stock through the granting of Options. NPS seeks to (a) retain the services of present employees, directors, and consultants; (b) secure and retain the services of new employees, directors, and consultants; and (c) provide incentives for such persons to exert maximum efforts for the success of the Company and thereby promote the long-term interest of the Company, including the growth in value of the Company's equity and enhancement of long-term stockholder return. 1.2 Types of Options. The Company intends that the Options issued under ---------------- the Plan shall, in the discretion of the Board or any Board Committee (see paragraph 3.2), be either Incentive Stock Options or Nonstatutory Stock Options (defined below). 1.3 Definitions. Unless otherwise defined, capitalized terms shall have ----------- the meaning set forth in Section 2. 2. DEFINITIONS. 2.1 Affiliate means any parent corporation or subsidiary corporation of --------- the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. 2.2 Board means the Board of Directors of the Company. ----- 2.3 Code means the Internal Revenue Code of 1986, as amended. ---- 2.4 Committee means a Committee appointed by the Board in accordance with --------- paragraph 3.2 herein. 2.5 Company means NPS Pharmaceuticals, Inc., a Delaware corporation. ------- 2.6 Consultant means any person (including an advisor) engaged by the ---------- Company or an Affiliate to render consulting services under arrangements intended to compensate such person for such services. The term "Consultant" shall not include a Director who is paid only a director's fee by the Company or who is not compensated by the Company for services as a Director. 2.7 Continuous Status as an Employee, Director, or Consultant means the --------------------------------------------------------- employment or relationship as an Employee, Director, or Consultant is not interrupted or terminated by the Company or any Affiliate. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director, or Consultant shall be considered interrupted in the case of: 1 2.7.1 any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, any such leave may not exceed 90 days unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; or 2.7.2 transfers between locations of the Company or between the Company, Affiliates or its successor. 2.8 Day of Determination means the date of the occurrence of an event that -------------------- requires the determination of the Fair Market Value of an award made hereunder. 2.9 Director means a member of the Board. -------- 2.10 Disability means total and permanent disability as defined in Section ---------- 22(e)(3) of the Code. 2.11 Employee means any person, including Officers and Directors, employed -------- by the Company or any Affiliate. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. 2.12 Exchange Act means the Securities Exchange Act of 1934, as amended. ------------ 2.13 Fair Market Value means, as of any date, the value of the common stock ----------------- of the Company as determined as follows: 2.13.1 If the common stock is listed on any established stock exchange or a national market system, including without limitation, the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, the Fair Market Value of a share of common stock shall be the closing price for such stock on the Day of Determination as quoted on such system as reported in the Wall Street Journal or such other source as the Board deems reliable. In the event the Day of Determination falls on a date that the Nasdaq system is closed, then the Fair Market Value shall be the closing sales price for such stock on the last market trading day prior to the Day of Determination as quoted on such system as reported in the Wall Street Journal or such other source as the Board deems reliable. 2.13.2 If the common stock is quoted on Nasdaq (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; 2.13.3 In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. 2.14 Incentive Stock Option (or "ISO") means an Option intended to qualify --------------------------------- as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. 2 2.15 Non-Employee Director means a Director who is considered to be a "Non- --------------------- Employee Director" in accordance with Rule 16b-3(b)(3), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. 2.16 Nonstatutory Stock Option (or "NSO") means an Option not intended to ------------------------------------ qualify or not eligible to qualify as an ISO or an ISO which, subsequent to its date of grant, no longer qualifies as an ISO under Section 422 of the Code. 2.17 Officer means a person who is an officer of the Company within the ------- meaning of Section 16a-1(f) of the Exchange Act and the rules and regulations promulgated thereunder. 2.18 Option means a stock option granted pursuant to the Plan. ------ 2.19 Option Agreement means a written agreement between the Company and an ---------------- Optionee evidencing the terms and conditions of an individual Option grant. 2.20 Optionee means an Employee, Director, or Consultant who holds an -------- outstanding Option. 2.21 Outside Director means a Director who is considered to be an "Outside ---------------- Director" in accordance with Section 162(m) of the Code, or any other applicable Code sections, regulations, or interpretations of the IRS. 2.22 Plan means this 1998 Stock Option Plan. ---- 2.23 Rule 16b-3 means Rule 16b-3 of the Exchange Act or any successor to ---------- Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. 2.24 Securities Act means the Securities Act of 1933, as amended. -------------- 3. ADMINISTRATION. 3.1 Powers and Authority. The Plan shall be administered by or under the -------------------- direction of the Board unless and until the Board delegates administration to a Committee, as provided in paragraph 3.2. The Board shall have the power subject to and within the limitations of the express provisions of the Plan: 3.1.1 To determine from time to time: (a) which of the persons eligible under the Plan shall be granted Options; (b) when and how Options shall be granted; (c) whether an Option shall be intended to qualify as an ISO; (d) the provisions of each Option granted (which need not be identical) including the time or times when a person shall be permitted to receive stock pursuant to the exercise of such Option; (e) whether a person shall be permitted to exercise such Option; and (f) the number of shares with respect to which Options shall be granted to each such person. 3.1.2 To construe and interpret the Plan and Options granted under it, and to establish, amend, and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission, or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. 3 3.1.3 To amend the Plan as provided in Section 12. 3.1.4 Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. 3.2 Delegation. The Board may delegate administration of the Plan to a ---------- Board committee composed of not fewer than two members (the "Committee"). All members of the Committee shall be Outside Directors or Non-Employee Directors, to the extent necessary to comply with the applicable provisions of Rule 16b-3 and Section 162(m). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall in such event, be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3.3 Director Status. Any requirement that an administrator of the Plan be --------------- a Non-Employee Director or an Outside Director shall not apply if the Board or the Committee expressly declares that such requirement shall not apply. 4. SHARES SUBJECT TO THE PLAN. 4.1 Available Shares. Subject to the provisions of Section 11, the number ---------------- of shares that may be issued pursuant to Options granted hereunder shall not exceed in the aggregate 1,000,000 shares of the Company's common stock. 4.2 Forfeited or Canceled Shares. Any shares of stock for which an Option ---------------------------- has been granted under the Plan that are forfeited because of the failure to meet an Option grant contingency or condition shall again be available for delivery pursuant to new grants under the Plan. To the extent any shares of stock covered by an Option are not delivered to an Optionee or beneficiary because the award is forfeited or canceled, or the shares of stock are not delivered because the award is settled in cash, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of stock available for delivery under the Plan. 4.3 Payment with Shares. If the exercise price of any Option granted under ------------------- the Plan is satisfied by tendering shares of stock to the Company (by either actual delivery or by attestation), only the number of shares of stock issued net of the shares of stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of stock available for delivery under the Plan. 4.4 Plan Limits. Shares of stock delivered under the Plan in settlement, ----------- assumption, or substitution of outstanding awards (or obligations to grant future awards) under the plans or arrangements of another entity shall not reduce the maximum number of shares of stock available for delivery under the Plan, to the extent that such settlement, assumption, or substitution is a result of the Company or Affiliate acquiring another entity (or an interest in another entity). Subject to the provisions of Section 11, the maximum number of shares that may be covered by grants to any one individual shall be 750,000 shares during any three consecutive calendar years. 5. ELIGIBILITY. 4 5.1 Option Type. ISOs may be granted only to Employees. NSOs may be ----------- granted to Employees, Directors, or Consultants. 5.2 Section 16 Compliance. No Officer or Director shall be eligible for --------------------- the benefits of the Plan unless at the time discretion is exercised in the selection of an Officer or Director as a person to whom Options may be granted, or in the determination of the number of shares which may be covered by Options granted to the Officer or Director, the Plan otherwise complies with the requirements of Rule 16b-3. This paragraph 5.2 shall not apply if the Board or Committee expressly declares that it shall not apply. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: 6.1 Term. No Option shall be exercisable after the expiration of ten years ---- from the date it was granted. 6.2 Price. The exercise price of each Option shall be not less than 100% ----- of the Fair Market Value of the stock subject to the Option on the date the Option is granted. 6.3 Consideration. The purchase price of stock acquired pursuant to an ------------- Option shall be paid, to the extent permitted by applicable statutes and regulations: 6.3.1 in cash; or 6.3.2 by delivery of already-owned shares of common stock of the Company or a combination of cash and already-owned shares of common stock of the Company; or 6.3.3 through surrender of shares of common stock available for exercise under the Option, valued at their Fair Market Value on the date of exercise and owned free and clear of any liens, claims, encumbrances, or security interests; or 6.3.4 according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to paragraph 6.4; or 6.3.5 pursuant to a broker assisted exercise same-day sales program; or 6.3.6 as required in the discretion of the Board or the Committee, either at the time of the grant or exercise of the Option; or 6.3.7 any combination of 6.3.1 through 6.3.6 above. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. 5 6.4 Transferability. --------------- 6.4.1 Incentive Stock Options. In order for an Option to qualify for treatment as an ISO, it may not be transferable except by will or by the laws of descent and distribution. In the event an Optionee transfers such Option, such transfer shall constitute a disqualifying event and the Option shall no longer qualify as an ISO but shall be considered a NSO under the terms of this Plan. 6.4.2 Nonstatutory Stock Option. The Board or Committee may, in its discretion, authorize all or a portion of the NSOs to be granted to an Optionee to be on terms that permit transfer by such Optionee to (a) the spouse, children, or grandchildren of the Optionee ("Immediate Family Members"), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (c) a partnership in which such Immediate Family Members are the only partners, provided that (i) there may be no consideration for any such transfer, (ii) the Option Agreement pursuant to which such Options are granted must expressly provide for transferability in a manner consistent with this Section, (iii) subsequent transfers of transferred Options shall be prohibited except those occurring by will or the laws of descent and distribution, and (iv) the Options shall continue to be subject to all the terms and conditions that applied prior to transfer in the same manner and to the same extent as non-transferred Options, including paragraphs 6.5 through 6.9. The Options shall be exercisable by the transferee only to the extent, and for the periods specified in such sections. The Company expressly disclaims any obligation to provide notice to a transferee of the termination of the Option. 6.4.3 Unless transfer by an Optionee is specifically provided for in an Option Agreement, a NSO shall not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder (a "QDRO"), and shall be exercisable during the lifetime of the person to whom the NSO is granted only by such person or any transferee pursuant to a QDRO. 6.5 Vesting. The total number of shares of stock subject to an Option may, ------- but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance criteria) as the Board may deem appropriate. The provisions of this paragraph 6.5 are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. 6.6 Securities Law Compliance. The Company may require any Optionee, or ------------------------- any person to whom an Option is transferred under paragraph 6.4, as a condition of exercising any such Option, (a) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, 6 alone or together with the purchaser representative, the merits and risks of exercising the Option; and (b) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. 6.7 Termination of Employment or Relationship as an Employee, Director, or ---------------------------------------------------------------------- Consultant. In the event an Optionee's Continuous Status as an ---------- Employee, Director, or Consultant terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within such period of time as is determined by the Board, and only to the extent that the Optionee was entitled to exercise at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the case of an ISO, the Board shall determine such period of time (in no event to exceed three months from the date of termination) when the Option is granted. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to the Plan. 6.8 Disability of Optionee. In the event an Optionee's Continuous Status ---------------------- as an Employee, Director, or Consultant terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option, but only within twelve months from the date of such termination (or such shorter period specified in the Option Agreement), and only to the extent that the Optionee was entitled to exercise at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to the Plan. 6.9 Death of Optionee. In the event of the death of an Optionee, the ----------------- Option may be exercised, at any time within eighteen months following the date of death (or such shorter period specified in the Option Agreement, but in no event later than the expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance, or by assignment as provided herein, does not exercise the Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to the Plan. 7 6.10 Early Exercise. The Option Agreement may, but need not, include a -------------- provision whereby the Optionee may elect at any time while an Employee, Director, or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any nonvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. 6.11 Withholding. To the extent provided by the terms of an Option ----------- Agreement, the Optionee may satisfy any federal, state, or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: 6.11.1 cash payment; or 6.11.2 authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise of the Option; or 6.11.3 delivering to the Company owned and unencumbered shares of the common stock of the Company. 7. NO REPRICING, CANCELLATION, OR RE-GRANT OF OPTIONS. Except for certain adjustments due to corporate transactions described in Section 11, the exercise price for any outstanding Option granted under the Plan may not be decreased after the Day of Determination for such Option grant nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration in exchange for the grant of a new Option with a lower exercise price. 8. COVENANTS OF THE COMPANY. 8.1 Stock Availability. During the terms of the Option granted under the ------------------ Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such grants up to the number of shares of stock authorized under the Plan. 8.2 Authority. The Company shall seek to obtain from each regulatory --------- commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock acquired under the grants, provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency, the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock under such Options unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the exercise of Options under the Plan shall constitute general funds of the Company. 10. MISCELLANEOUS. 10.1 Acceleration. The Board or the Committee shall have the power to ------------ accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest, notwithstanding the provisions in the Option Agreement stating the time at which it may first be exercised or the time during which it will vest. 8 10.2 Ownership Rights. Neither an Optionee nor any person to whom an Option ---------------- is transferred under paragraph 6.4 shall be deemed to be the holder of, or to have any of the rights of a holder with respect to any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. 10.3 Employment Rights. Nothing in the Plan or any instrument executed ----------------- pursuant thereto shall confer upon any Employee, Director, Consultant, Optionee, or other holder of Options any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment or relationship as a Director or Consultant of any Employee, Director, Consultant, or Optionee with or without cause. 10.4 ISO Value Limit. To the extent that the aggregate Fair Market Value --------------- (determined at the time of grant) of stock with respect to which ISOs granted after 1998 are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds $100,000, the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as NSOs. 11. ADJUSTMENTS UPON CHANGES IN STOCK AND CORPORATE TRANSACTIONS. 11.1 Stock Adjustments. If any change is made in the stock subject to the ----------------- Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding Options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding Options. 11.2 Corporate Transactions. In the event of: (a) a dissolution or ---------------------- liquidation or sale of all or substantially all of the assets of the Company; (b) a merger or consolidation in which the Company is not the surviving corporation; or (c) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, then, the Board in its sole discretion and to the extent permitted by applicable law may direct as to all or any of the Option(s) outstanding under the Plan that: (i) any surviving corporation shall assume such Options or shall substitute similar Options; (ii) such Options shall continue in full force and effect; or (iii) the duration of time during which such Options become vested or may be exercised shall be accelerated and any outstanding unexercised rights under any such Options terminated, if not exercised prior to such event. 12. AMENDMENT OF THE PLAN. 12.1 Amendments. The Board at any time, and from time to time, may amend ---------- the Plan. However, as provided in Section 11, no amendment shall be effective unless approved by the stockholders of the Company within twelve months before or after the adoption of the amendment, where the amendment will: 12.1.1 Increase the number of shares reserved for Options under the Plan; 9 12.1.2 Modify the requirements as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Sections 162(m) and 422 of the Code; 12.1.3 Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3 or Nasdaq or other applicable securities exchange listing requirements; 12.1.4 Decrease the minimum exercise price set forth in paragraph 6.2; or 12.1.5 Remove the limitation provided in Section 7. 12.2 Compliance. It is expressly contemplated that the Board may amend the ---------- Plan in any respect the Board deems necessary or advisable to provide under the provisions of the Code and the regulations promulgated thereunder relating to ISOs and/or to bring the Plan and/or ISOs granted under it into compliance therewith. 12.3 Consent. Rights and obligations under any Option granted before ------- amendment of the Plan shall not be altered or impaired by any amendment of the Plan unless (a) the Company requests the consent of the person to whom the Option was granted and (b) such person consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. 13.1 Termination. The Board may suspend or terminate the Plan at any time. ----------- Unless sooner terminated, the Plan shall terminate on midnight, May 31, 2008. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. 13.2 Rights and Obligations. Any Options granted while the Plan is in ---------------------- effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the holder of the Options. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercisable unless and until the Plan has been approved by the stockholders of the Company. 10 NPS PHARMACEUTICALS, INC. ANNUAL MEETING OF STOCKHOLDERS MAY 20, 1998 PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned constitutes and appoints Hunter Jackson and James U. Jensen and each of them (acting jointly or, if one be present, then by that one alone), his attorneys and proxies, with full power of substitution and revocation to each, for and in the name, place and stead of the undersigned, to vote, and act with respect to all shares of Common Stock, par value $.001 per share of NPS Pharmaceuticals, Inc. (the "Company") standing in the name of the undersigned or with respect to which the undersigned is entitled to vote and to act at the Annual Meeting of Stockholders to be held at the University Park Hotel located at 500 South Wakara Way, Salt Lake City, Utah on May 20, 1998 at 3:00 p.m. Mountain Time, and at any adjournment(s) thereof, and especially to vote as follows: 1. In the election of eight (8) directors as set forth in the Proxy Statement: [_] FOR all nominees listed below [_] WITHHOLD AUTHORITY (except as indicated to the contrary to vote for all below) nominees listed below Santo J. Costa, James G. Groninger, Hunter Jackson, James U. Jensen, Skip Klein, Donald E. Kuhla, Thomas N. Parks, Timothy J. Rink (INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name on the space provided below) ----------------------------------------------------------------------------- 2. With respect to the approval of the 1998 Stock Option Plan covering the issuance of up to 1,000,000 shares of the Company's Common Stock thereunder: [_] FOR [_] AGAINST [_] ABSTAIN 3. With respect to the appointment of KPMG Peat Marwick LLP as independent auditors for the Company for the 1998 fiscal year: [_] FOR [_] AGAINST [_] ABSTAIN 4. In their discretion in any other matters as may properly come before the meeting or any adjournment(s) hereof. LOGO THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED ABOVE. IF NO DIRECTION IS INDICATED, IT WILL BE VOTED FOR THE ELECTION OF THE EIGHT (8) DIRECTORS; FOR THE APPROVAL OF THE 1998 STOCK OPTION PLAN ALONG WITH THE ISSUANCE OF 1,000,000 SHARES OF COMMON STOCK THEREUNDER AS SET FORTH IN THE PROXY STATEMENT; AND, TO RATIFY THE BOARD'S APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE 1998 FISCAL YEAR. Dated ______________________________ ____________________________________ ____________________________________ PLEASE SIGN HERE Do you plan to attend the Annual Meeting? [_] Yes [_] No PLEASE DATE THIS PROXY AND SIGN YOUR NAME EXACTLY AS IT APPEARS HEREON. WHEN THERE IS MORE THAN ONE OWNER, EACH SHOULD SIGN. WHEN SIGN- ING AS AN AGENT, ATTORNEY, ADMINIS- TRATOR, EXECUTOR, GUARDIAN, OR TRUSTEE, PLEASE INDICATE YOUR TITLE AS SUCH. IF EXECUTED BY A CORPORA- TION, THE PROXY SHOULD BE SIGNED IN THE CORPORATE NAME BY A DULY AUTHO- RIZED OFFICER WHO SHOULD INDICATE HIS TITLE. PLEASE DATE, SIGN, AND MAIL THIS PROXY CARD IN THE EN- CLOSED ENVELOPE. -----END PRIVACY-ENHANCED MESSAGE-----