SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
ORPHAN MEDICAL, INC.
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(Name of Registrant as Specified in Its Charter)
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(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)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[COMPANY LOGO]
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
April 8, 2002
To Our Stockholders:
You are cordially invited to attend the 2002 Annual Meeting of the
Stockholders of Orphan Medical, Inc. (the "Company") which will be held at 3:30
p.m. (Central Standard Time) on Thursday, May 23, 2002 at the Radisson Plaza
Hotel, 35 South 7th Street, Minneapolis, Minnesota 55402.
At the Annual Meeting of the Stockholders you will be asked to: (i)
elect seven directors to the Company's Board of Directors, (ii) approve an
amendment increasing the number of authorized shares issuable under the
Company's 1994 Stock Option Plan and (iii) approve the selection of Ernst &
Young LLP as the Company's independent public accountants for the fiscal year
ending December 31, 2002.
Please read the enclosed Notice of Annual Meeting and Proxy Statement
which describes the business to come before the meeting. Please mark, sign and
return the accompanying Proxy Card promptly in the enclosed postage-paid
envelope, or follow the instructions on the proxy card for voting via telephone
or through the Internet. We hope you will be able to attend the meeting on May
23, 2002.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE MARK, SIGN
AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. FOR ALTERNATIVE VOTING METHODS, PLEASE
REFER TO THE INFORMATION UNDER THE CAPTIONS "VOTE BY PHONE" AND "VOTE BY
INTERNET" ON THE PROXY CARD.
Sincerely,
/s/ John Howell Bullion
-----------------------
JOHN HOWELL BULLION
Chief Executive Officer
[COMPANY LOGO]
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
TELEPHONE (952) 513-6900
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 23, 2002
The Annual Meeting of Stockholders of Orphan Medical, Inc. (the "Company") will
be held at 3:30 p.m. (Central Standard Time) on Thursday, May 23, 2002 at the
Radisson Plaza Hotel, 35 South 7th Street, Minneapolis, Minnesota 55402, for the
following purposes:
1. To elect seven directors to serve until the next Annual Meeting of
Stockholders;
2. To approve an amendment to the Company's 1994 Stock Option Plan
increasing the number of shares authorized for issuance under the plan
from 2,675,000 shares to 3,175,000 shares;
3. To approve the selection of Ernst & Young LLP as the independent public
accountants of the Company for the fiscal year ending December 31,
2002; and
4. To consider and act upon any other business that may properly come
before the meeting or any adjournment thereof.
The Board of Directors of the Company has designated the close of
business on March 27, 2002 as the record date for the determination of
stockholders entitled to notice of and to vote at the meeting or any
adjournments thereof. Only stockholders of record of the Company's Common Stock
and Senior Convertible Preferred Stock at the close of business on that date
will be entitled to vote.
You are cordially invited to attend the meeting. If you do not expect
to be present at the meeting, please fill in, sign, date and mail the enclosed
proxy card as promptly as possible or submit your proxy by voting by telephone
or through the Internet by no later than 12:00 p.m. (Central Standard Time) on
May 22, 2002 (as directed on your proxy card). If you choose to return the proxy
card by mail, we have enclosed an envelope addressed to the Company for which no
postage is required if mailed in the United States.
By Order of the Board of Directors
/s/ John Howell Bullion
-----------------------
John Howell Bullion
Chairman of the Board, Chief Executive
Officer and Secretary
Minnetonka, Minnesota
April 8, 2002
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
MAY 23, 2002
GENERAL
This Proxy Statement is furnished in connection with the solicitation
of the enclosed proxy by the Board of Directors of Orphan Medical, Inc. (the
"Company") for use at the Annual Meeting of Stockholders (the "Annual Meeting")
to be held at 3:30 p.m. (Central Standard Time) on Thursday, May 23, 2002 at the
Radisson Plaza Hotel, 35 South 7th Street, Minneapolis, Minnesota 55402, and at
any adjournments thereof, for the purposes set forth in the Notice of Annual
Meeting of Stockholders. The cost of soliciting proxies, including the cost of
preparing and mailing the Notice of Annual Meeting of Stockholders and this
Proxy Statement, is being paid by the Company. In addition, we will, upon the
request of brokers, dealers, banks, voting trustees and their nominees who are
holders of record of shares of our common stock on the record date specified
below, bear their reasonable expenses for mailing copies of this material to the
beneficial owners of these shares. We have retained Wells Fargo Shareowner
Services to provide consultation and administrative assistance in connection
with the solicitation of proxies for a fee estimated to be $7,000 plus
out-of-pocket expenses. In addition, officers and other regular employees of the
Company may solicit proxies in person, by telephone or by facsimile, but will
receive no extra compensation for these services. This Proxy Statement and the
form of proxy enclosed are being mailed to stockholders with the Company's
Annual Report to Stockholders commencing on or about April 8, 2002.
The only matters the Board of Directors knows will be presented are
those stated in Proposals 1, 2 and 3 of this Proxy Statement. THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF PROPOSALS 1, 2 AND 3.
Should any other matter properly come before the meeting, it is intended that
the persons named in the enclosed proxy will have authority to vote such proxy
in accordance with their judgment on such matter.
VOTING RIGHTS AND PROCEDURES
Common Stock and Senior Convertible Preferred Stock stockholders
(collectively, the "stockholders") of record at the close of business on March
27, 2002 will be entitled to vote at the Annual Meeting or any adjournments
thereof. As of that date, a total of 10,290,405 shares of such Common Stock and
8,706 shares of Senior Convertible Preferred Stock were outstanding
(collectively, the "Voting Stock"), each share of Common Stock being entitled to
one vote and each share of Senior Convertible Preferred Stock being entitled to
voted on an "as converted" basis. On March 27, 2002, the Company's Senior
Convertible Preferred Stock was convertible into an aggregate of 1,069,533
shares of Common Stock, which approximates 122.807 shares of Common Stock for
each share of Senior Convertible Preferred Stock. There is no cumulative voting.
If a stockholder returns a proxy withholding authority to vote the proxy with
respect to a nominee for director, then the shares of the Voting Stock covered
by such proxy shall be deemed present at the Annual Meeting for purposes of
determining a quorum and for purposes of calculating the vote with respect to
such nominee, but shall not be deemed to have been voted for such nominee. If a
stockholder abstains from voting as to any matter, then the shares held by such
stockholder shall be deemed present at the meeting for purposes of determining a
quorum and for purposes of calculating the vote with respect to such matter, but
shall not be deemed to have been voted in favor of such matter. If a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on such
matter, then the shares covered by such non-vote shall be deemed present at the
Annual Meeting for purposes of
determining a quorum, but shall not be deemed to be present and entitled to vote
at the Annual Meeting for purposes of calculating the vote with respect to such
matter.
Stockholders can vote their shares by toll-free telephone call or
through the Internet as an alternative to completing the enclosed proxy card and
mailing it to the Company. The procedures for telephone and Internet voting are
described on the proxy card. The telephone and Internet voting procedures are
designed to verify stockholders' identities, allow stockholders to give voting
instructions and confirm that their instructions have been recorded properly.
Stockholders who vote through the Internet should be aware that they may incur
costs to access the Internet, such as usage charges from telephone companies or
Internet service providers, and that these costs must be borne by the
stockholder. Stockholders who vote by telephone or through the Internet need not
return a proxy card by mail.
Shares of the Company's Common Stock and Senior Convertible Preferred
Stock represented by proxies in the form solicited will be voted in the manner
directed by a stockholder. If no direction is given, the proxy will be voted for
the election of the nominees for director named in this Proxy Statement, for
approval of the amendment increasing the number of authorized shares issuable
under the Company's 1994 Stock Option Plan and for approval of the selection of
Ernst & Young LLP as the Company's independent public accountants. So far as
management of the Company is aware, no matters other than those described in
this Proxy Statement will be acted upon at the Annual Meeting. In the event that
any other matters properly come before the Annual Meeting and call for a vote of
stockholders, the persons named as proxies in the enclosed form of proxy will
vote in accordance with their best judgment on these matters.
Whether a stockholder submits a proxy by mail, telephone or the
Internet, a stockholder may revoke a proxy at any time before it is voted by:
(i) delivering to any officer of the Company a written notice of termination of
the proxy's authority, (ii) filing with an officer of the Company another proxy
bearing a later date or (iii) appearing and voting at the Annual Meeting.
2
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of March 1, 2002, certain information
with respect to the beneficial ownership of the Company's Voting Stock by (i)
each person known to the Company to have been beneficial owner of more than 5%
of such stock, (ii) each director, (iii) each executive officer named in the
"Summary Compensation Table" below, and (iv) all directors and executive
officers of the Company as a group. Unless otherwise noted, the stockholders
listed in the table below have sole voting and investment powers with respect to
the shares owned by them.
Beneficial ownership is determined and presented in the table in
accordance with rules of the Securities and Exchange Commission and includes
general voting power and/or investment power with respect to the securities.
Shares of the Company's common stock subject to options currently exercisable or
exercisable within 60 days of March 1, 2002 are deemed to be outstanding for
purposes of computing the percentage of the person holding such options, but are
not deemed outstanding for computing the percentage of any other person.
Amount and
Nature of Percentage of
Beneficial Common Stock
Name and Address of Beneficial Owner Ownership Outstanding
---------------------------------------------------------------------- --------------- ------------------
Alta Partners II, Inc. (1) 1,212,121 11.78%
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Cannell Capital LLC (2) 624,996 6.07
150 California Street - 5th Floor
San Francisco, CA 94111
OrbiMed Advisors LLC (3) 1,602,302 15.57
767 Third Avenue - 6th Floor
New York, NY 10017-2023
UBS Capital II, LLC (4) 1,146,740 10.09
299 Park Avenue
New York, NY 10171-0026
John Howell Bullion (5) 513,279 4.79
William Houghton M.D. (6) 129,011 1.24
Dayton T. Reardan, Ph.D. (7) 103,352 1.00
Pamela Stahl (8) 12,400 *
Timothy G. McGrath (9) 31,246 *
W. Leigh Thompson, Ph.D., M.D. (10) 37,500 *
William M. Wardell, M.D., Ph.D. (11) 40,500 *
Michael Greene (12) 20,000 *
Julius A. Vida, Ph.D. (13) 20,000 *
Thomas King (14) 5,000 *
Farah Champsi (15) 5,000 *
All directors and executive officers as a group (11 persons) (16) 917,288 8.28
-------------
* Less than 1 percent.
(1) Alta Partners II, Inc. serves as the management advisory company of
various funds which hold shares of the Company's Common Stock in the
ordinary course of business. In this capacity, Alta Partners exercises
sole voting and dispositive power over the accounts of Alta BioPharma
Partners II, L.P., Alta Embarcadero BioPharma Partners II, LLC and Alta
BioPharma Management Partners II, LLC which hold, in the aggregate,
1,212,121 shares of our Common Stock. The number of shares beneficially
owned is based on a Schedule 13D filed by Alta Partners on December 17,
2001.
3
(2) Cannell Capital LLC serves as the investment advisor to various funds and
trusts which hold shares of the Company's Common Stock in the ordinary
course of business. In this capacity, Cannell Capital exercises shared
voting and dispositive power over 624,996 shares of our Common Stock held
by such funds and trusts in separate accounts. The number of shares
beneficially owned is based on a Schedule 13G/A filed by Cannell Capital
on February 14, 2002.
(3) OrbiMed Advisors LLC has shared voting and dispositive power with respect
to 1,602,302 shares of the Company's Common Stock. The number of shares
beneficially owned is based on a Schedule 13G/A filed by OrbiMed Advisors
on February 19, 2002.
(4) UBS Capital II, LLC has sole voting and investment power with respect to:
8,706 shares of Senior Convertible Preferred Stock, which is convertible
into 1,069,533 shares of Common Stock, and 77,207 shares of unregistered
Common Stock. The shares of Senior Preferred Convertible Stock vote on an
as-converted basis. In addition, UBS Capital owns (i) 3,546 shares of
non-voting Series B Convertible Preferred Stock, which is convertible into
545,538 shares of Common Stock, (ii) a warrant to purchase up to 2,050
shares of non-voting Series C Convertible Preferred Stock or 315,385
shares of Series D Non-Voting Convertible Preferred Stock or any
combination thereof up to a maximum aggregate purchase price of $2,050,000
and (iii) a warrant to purchase up to 282,353 shares of Series D
Non-Voting Convertible Preferred Stock.
(5) Includes 417,967 shares issuable upon the exercise of options that are
currently exercisable or will become issuable pursuant to options
exercisable within 60 days after March 1, 2002.
(6) Includes 115,540 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(7) Includes 85,720 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(8) Includes 12,400 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(9) Includes 29,195 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(10) Includes 37,500 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(11) Includes 39,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(12) Includes 20,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(13) Includes 20,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(14) Includes 5,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(15) Includes 5,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable within 60 days after
March 1, 2002.
(16) Includes 787,322 shares that may be acquired within 60 days of March 1,
2002 through the exercise of options by all executive officers and
directors as a group.
4
PROPOSAL 1:
ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AS DIRECTORS
The business and affairs of the Company are managed under the direction
of its Board of Directors, which is presently comprised of seven members. Seven
directors have been nominated for election to the Company's Board of Directors
at the Annual Meeting, to hold office until the next Annual Meeting of
Stockholders or until their successors are duly elected and qualified. In
connection with an equity financing completed in December 2001, the Board of
Directors increased the size of the Board from six to seven members and
appointed Farah H. Champsi to the Board. In addition, Dr. Lawrence C. Weaver
resigned as a director of the Company in February 2002. This resignation created
a vacancy on the Board of Directors that was filled by the remaining directors
with the appointment of Thomas B. King as a director.
The Company's incumbent directors, John Howell Bullion, Michael Greene,
W. Leigh Thompson, Ph.D., M.D., Julius A. Vida, Ph.D. and William M. Wardell,
M.D., Ph.D., have been nominated for election at the Annual Meeting. Under the
Company's bylaws, directors appointed by the Board of Directors must stand for
election at the first annual stockholders' meeting following each such
director's appointment to the Board. Consequently, Ms. Champsi and Mr. King are
also nominees for election at the Annual Meeting. Each of Messrs. Bullion,
Greene, King and Drs. Thompson, Vida, Wardell and Ms. Champsi have indicated a
willingness to serve, but in case any of them is not a candidate at the Annual
Meeting, the persons named as proxies in the enclosed form of proxy may vote for
a substitute nominee in their discretion. Information concerning the director
nominees is set forth below.
JOHN HOWELL BULLION Mr. Bullion, 50, has been Chief Executive Officer
of the Company since June 1994 and Chairman of the
Board of Directors since December 30, 1998. Mr.
Bullion is a co-founder of Chronimed Inc., the
company from which Orphan Medical, Inc. was spun
off in 1994. Prior to joining the Company, Mr.
Bullion served as President of Bluestem Partners,
an investment and consulting company, President of
Dahl & Associates, a soil and ground water
remediation company and President of Concurrent
Knowledge Systems, Inc., a software development
company. Mr. Bullion also served as partner and
Vice President with First Bank System Venture
Capital Company for seven years.
MICHAEL GREENE Mr. Greene, 40, has been a director of the Company
since July 1998. Mr. Greene is a partner at UBS
Capital, LLC and has been with UBS Capital since it
was founded in 1993. Prior to joining UBS Capital,
Mr. Greene was a senior member of the Union Bank of
Switzerland's Leveraged Finance Group from 1990 to
1992. Mr. Greene is a graduate of The College of
Holy Cross with a B.A. in Economics and earned an
M.B.A. from Harvard Business School. Mr. Greene
also serves as a director for Metrocall Inc. and
Desa International.
W. LEIGH THOMPSON, PH.D., Dr. Thompson, 63, has been a director of the
M.D. Company since August 1995. Since 1995, Dr. Thompson
has been President and Chief Executive Officer of
Profound Quality Resources, Ltd., which provides
worldwide consulting services to health
institutions and manufacturers. From 1982 through
1994, Dr. Thompson had responsibility for animal
and human product research at Eli Lilly and
Company, where he held a number of executive
positions, including Chief Scientific Officer.
Prior to Eli Lilly and Company, Dr. Thompson was
Professor of Medicine at Case Western Reserve
University. Dr. Thompson also serves on the boards
of BAS, Inc., DepoMed, Inspire Pharmaceuticals,
LaJolla Pharmaceuticals, Tanabe Research
Laboratory, Medarex, Inc., Conjuchem, Inc. and
Diabetogen, Inc.
5
JULIUS A. VIDA, PH.D. Dr. Vida, 73, has been a director of the Company
since October 1998. Dr. Vida is the President of
Vida International Pharmaceutical Consultants,
which was founded in 1993. Dr. Vida also serves as
a director for Medarex, Inc. Past employment
includes over 15 years experience with Bristol
Myers Squibb Co., last serving as Vice President,
Business Development, Licensing and Strategic
Planning from 1991 to 1993. Dr. Vida earned his
Ph.D. from the Carnegie Institute of Technology and
his M.B.A. from Columbia University.
WILLIAM M. WARDELL, Dr. Wardell, 63, has been a director of the Company
M.D., PH.D. since August 1995. Since June 2000, Dr. Wardell has
been the President of Wardell Associates
International, a pharmaceutical consulting firm.
Dr. Wardell previously served as President of
Wardell Associates International from January 1995
to January 1996. From January 1996 to June 2000,
Dr. Wardell served as Senior Scientific Officer for
Covance, Inc. (formerly Corning-Besselaar), a
contract research organization. Dr. Wardell also
serves as a director for PharMetrics, Inc. and
PhytoCeutica, Inc. Prior to 1995, Dr. Wardell
served as President of Protein Engineering
Corporation, a privately held biotechnology
company. Prior to joining Protein Engineering
Corporation, Dr. Wardell was Senior Vice President
of the Parke-Davis Pharmaceutical Research Division
of Warner Lambert Company. From 1983 to 1991, Dr.
Wardell was Vice President/Medical Director of
Boehringer Ingelheim Pharmaceuticals, Inc. and was
a member of Boehringer Ingelheim's International
Steering and Medical Committees, which had
responsibility for worldwide research, development,
clinical and regulatory programs. Prior to entering
the pharmaceutical industry, Dr. Wardell was
Associate Professor of Pharmacology and Toxiology
and Assistant Professor of Medicine at the
University of Rochester Medical Center. Dr. Wardell
has also been a Commissioner of the Pharmaceutical
Manufacturers Association's Commission on Drugs for
Rare Diseases, and a Vice President and Board
member of the American Society for Clinical
Pharmacology and Therapeutics.
THOMAS B. KING Mr. King, 47, has served as a director of the
Company since February 26, 2002. From 1994 to 2000,
Mr. King was employed by Anesta Corporation, most
recently as its President, CEO, and Director.
During his tenure at Anesta, Mr. King led two
successful follow-on public offerings of equity
which raised $100 million for Anesta, acquired and
relaunched Actiq(R)into the U.S. and international
markets, completed the successful merger of Anesta
with Cephalon, Inc., and was instrumental in
increasing Anesta's market capitalization from $28
million to more than $400 million. From 1990 to
1994, Mr. King held several management positions
with Somatogen, Inc. From 1988 to 1989, Mr. King
held several management positions at Abbott
Laboratories, and from 1982 to 1987, Mr. King held
several positions at Anaquest, a Division of BOC
Health Care. Mr. King's experience includes
strategic planning, business development, and
product management and marketing. Mr. King received
an M.B.A. from the University of Kansas and a B.A.
in Chemistry from McPherson College.
FARAH H. CHAMPSI Ms. Champsi, 40, has been a director of the Company
since December 7, 2001. Ms. Champsi has been
employed by Alta Partners, a venture capital firm
located in San Francisco, California since May,
2000. From May 1987 through December 1999, Ms.
Champsi was an investment banker at Robertson
Stephens & Company, most recently serving as
co-head of the Global Life Sciences Investment
Banking Group. Ms. Champsi's responsibilities
included raising public and private capital and
providing advisory services to leading emerging
growth biotechnology, pharmaceutical and medical
technology companies. Ms. Champsi was elected a
general partner of Robertson Stephens in 1992 and
the head of life sciences investment banking in
1995. Ms. Champsi has helped raise
6
more than $3 billion of capital in more than 50
transactions since 1995. Ms. Champsi is a board
member of the Stanford Business School Trust and
the Advisory Council of the UC Berkeley School of
Public Health, Cytokinetics, Inc., Renovis, Inc.
and Myocor, Inc. She received an M.B.A. from
Stanford University and a B.A. from Smith College.
BOARD RECOMMENDATION AND REQUIRED STOCKHOLDER VOTE
The affirmative vote of a majority of the shares of Voting Stock
present and entitled to vote at the Annual Meeting is necessary to elect the
nominees for director. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION
OF MESSRS. BULLION, GREENE, KING AND DRS. THOMPSON, VIDA, WARDELL AND MS.
CHAMPSI.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $10,000 annually
for serving on the Board of Directors. In addition, directors who are not
employees receive $1,000 for each meeting, $500 for each telephone meeting and
$250 for committee meetings. Directors are also reimbursed for out-of-pocket
expenses incurred in attending Board of Directors' and committee meetings.
In addition, pursuant to the Company's 1994 Stock Option Plan (the
"Stock Plan"), each new non-employee director receives an option to purchase
25,000 shares of Company common stock on the date of such director's initial
election to the Board of Directors. Each option has an exercise price equal to
the fair market value of the Company's Common Stock on the date of grant, with
5,000 shares vesting immediately and the remaining 20,000 shares vesting over a
four-year period in 5,000 share increments. Each option has a term of ten years.
After the option to purchase 25,000 shares has vested, each non-employee
director is entitled to receive an option to purchase 5,000 shares for each
additional year on the Board, which options vest immediately and also have a
term of ten years. In fiscal 2001, directors Drs. Thompson, Wardell and Weaver
each received an option to purchase 10,000 shares of common stock, representing
options earned for service as a non-employee director of the Company in fiscal
2000 and fiscal 2001.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During 2001, the Board of Directors held seven meetings and acted once
by written action. Each director attended at least 75% of the aggregate total of
meetings of the Board of Directors plus the total number of meetings of all
committees of the Board on which he or she served. The Board of Directors has an
Audit Committee, a Compensation Committee and a Regulatory Oversight Committee.
The Board of Directors does not have a standing nominating committee.
The Audit Committee consists of Mr. Greene, Dr. Vida and Ms. Champsi,
each of whom the Board of Directors has determined to be "independent" as
defined by the rules of the National Association of Securities Dealers' listing
standards. Ms. Champsi was appointed to the Audit Committee in January 2002
following the resignation of Dr. Wardell as a member of the committee. The Audit
Committee's function is to review and make recommendations to the Board of
Directors with respect to certain financial and accounting matters. The Audit
Committee met five times during 2001. The Board of Directors approved a written
audit committee charter, a copy of which has previously been filed with the
Securities and Exchange Commission.
The Compensation Committee consists of Dr. Wardell, Mr. King and Ms.
Champsi. Ms. Champsi was appointed to the Compensation Committee in January 2002
following the resignation of Mr. Greene as a member of the committee. Mr. King
was appointed to the committee in February 2002 following the resignation of Dr.
Weaver as a director and member of the committee. The Compensation Committee's
7
function is to review and make certain determinations with respect to matters
concerning the compensation of employees, officers and directors. The
Compensation Committee met twice during 2001.
The Regulatory Oversight Committee consists of Drs. Thompson and
Wardell. The Regulatory Oversight Committee's function is to keep the Board
informed on matters pertaining to regulatory compliance. The Regulatory
Oversight Committee met twice during 2001.
The Board of Directors has also established an Advisory Board
consisting of eight individuals that advise the Company with respect to the
planning or execution of its product acquisition and development programs. Each
of the members of the Advisory Board has development or marketing expertise with
respect to products under development by the Company. Members of the Advisory
Board provide services to the Company on a nonexclusive basis and do not meet on
a formal or regular basis. The Company consults with one or more members of the
Advisory Board from time to time by means of meetings or telephone conference
calls.
8
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION COMMITTEE
Compensation Philosophy
The Compensation Committee determines the policies for and structure
and amount of all compensation for the Board of Directors and the executive
officers of the Company, including the Chief Executive Officer. The Compensation
Committee is composed entirely of directors who are not employees of the
Company. The Compensation Committee's primary objectives are to:
- Provide compensation that will attract, retain and motivate
high-caliber executives;
- Motivate officers to achieve important Company performance
goals; and
- Align the interests of the executive officers with those of
the Company's stockholders.
The Company has a "pay for performance" compensation program designed
to motivate and reward executives for attaining financial and strategic
objectives essential to the Company's success and continued growth while at the
same time allowing the Company to attract, retain and motivate high-caliber
executives. The Company's practice is to work with the Compensation Committee to
establish annual Company financial performance targets and individual
performance goals for each executive officer at the outset of each year, and to
pay bonuses based on performance against these pre-established targets and
goals. Base salaries for the Company's executive officers are generally average
in comparison to executive officer salaries paid by comparable peer companies.
Through the bonus program, the Company's executive officers have an opportunity
to earn above average compensation as compared to comparable peer companies.
An additional aspect of the Company's compensation program is the use
of stock options. Through the use of stock based incentives, the Company
believes that an executive officer's interests will be aligned with the
long-term interests of the Company's stockholders. Executive officers are,
thereby, given an incentive to not only meet their annual performance
objectives, but also to achieve longer term strategic goals.
The following discussion describes the key components of the
compensation program. The Compensation Committee retains the right to consider
factors other than those described below in setting executive compensation
levels for individual officers.
Executive Officer Compensation Program
The key components of the Company's compensation program for its
executive officers are (a) base salary, (b) annual cash bonus compensation and
(c) long-term incentive compensation in the form of stock options.
Base Salary
The Chief Executive Officer annually reviews the base salary of each
executive officer and makes recommendations to the Compensation Committee
regarding the base salaries for the executive officers (other than the Chief
Executive Officer). In determining base salaries, the Compensation Committee
takes into account individual experience and performance, performance during the
preceding 12 months, salary levels for similar positions at comparable peer
companies and other issues particular to the Company. Salaries for the Company's
executive officers are generally average when compared to salaries paid by
comparable peer companies. The Compensation Committee generally approves the
Chief Executive Officer's base salary recommendations.
9
Annual Cash Bonus Compensation
The Compensation Committee awarded cash bonuses to all executive
officers and to other employees in recognition of achieving predetermined
Company financial and operational objectives in fiscal 2001, which generally
included optimization of revenues and gross margins and minimizing operational
losses, and achieving individual performance goals. Executive officers were
entitled to receive a cash bonus for achievement of either the Company's
financial and performance objectives or achievement of personal performance
goals, or a combination of both.
Long Term Incentive Program
Stock options are granted to executive officers under the Company's
1994 Stock Option Plan (the "Stock Plan"). The purposes of the Stock Plan are to
attract, retain and motivate personnel capable of assuring the future success of
the Company by affording them an opportunity to acquire an ownership interest in
the Company and to align executive officer compensation directly with the
creation of stockholder value.
The Stock Plan authorizes the Compensation Committee to grant stock
options to executives and other key employees. When making option grant
determinations, the Compensation Committee considers the recommendation of the
Chief Executive Officer, an individual's performance and the Company's overall
performance, as well as option grants to executives made by comparable peer
companies. When determining the size of an option grant, the Compensation
Committee takes into account a number of factors, including levels of options
granted by comparable peer companies and the number of options already
outstanding or previously granted.
The Compensation Committee's policy is to not grant stock options
annually, but to review each individual's performance and option position on an
annual basis. All of the Company's outstanding stock options were granted at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Options granted under the Stock Plan have a term of ten years for
incentive stock options and 15 years for nonqualified stock options and
generally vest ratably over a four-year period. Executive officers will only
benefit from stock options if, at the time the options are exercised, the price
of the Common Stock has appreciated over its price on the date of the stock
option grant.
In fiscal 2001, Mr. Bullion was granted an option to purchase 26,500
shares at $13.75 per share and an option to purchase 3,333 shares at $9.62 per
share; Dr. Houghton was granted an option to purchase 17,700 shares at $13.75
per share; Ms. Stahl was granted an option to purchase 50,000 shares at $8.20
per share; and Mr. McGrath and Dr. Reardon were each granted an option to
purchase 6,600 shares at $13.75 per share.
The Company is seeking stockholder approval of an amendment to increase
the number of shares authorized for issuance under the Stock Plan from 2,675,000
shares to 3,175,000 shares. See "Proposal 2: Approval of Amendment to 1994 Stock
Option Plan" in this Proxy Statement.
Chief Executive Officer Compensation
Base Salary and Annual Bonus Compensation
Effective October 29, 1999, Mr. John Bullion, Chief Executive Officer,
entered into an employment agreement with the Company that provides for an
annual base salary of $180,000 in fiscal 2000 and $200,000 in fiscal 2001 and
2002. In February 2002, the Compensation Committee increased Mr. Bullion's 2002
annual base salary to $225,000. During 1997, Mr. Bullion voluntarily reduced his
base salary from $175,000 to $110,000 on an annualized basis through October
1998 and from $175,000 to $160,000 on an annualized basis from November 1998
through October 1999.
10
Mr. Bullion's annual base salary and annual bonus compensation are set
by the Compensation Committee, taking into account such factors as the Company's
financial performance, Mr. Bullion's leadership within the Company, his
performance with respect to personal performance goals, his pay in relation to
the pay of chief executive officers at comparable peer companies and the
Compensation Committee's overall compensation philosophy.
The Compensation Committee awarded Mr. Bullion a cash bonus of $49,635
for his performance in fiscal 2001 and a cash bonus of $60,000 for his
performance in fiscal 2000.
Stock Option Awards
The Compensation Committee approved options grants to Mr. Bullion to
purchase 29,833 shares of common stock for his performance in fiscal 2001.
Tax Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally limits the corporate deduction for compensation paid to
executive officers to $1,000,000, unless the compensation qualifies as
"performance based compensation" under the Code. This limitation should not
affect the deductibility of compensation paid to the Company's executive
officers for the foreseeable future. The Stock Plan complies with Section 162(m)
in order that compensation resulting from stock options under the Stock Plan
will not be counted toward the $1,000,000 limit on deductible compensation under
Section 162(m). The Company is seeking stockholder approval of an amendment to
the Stock Plan to increase the number of authorized shares so that the
compensation attributable to the exercise of stock options may continue to be
excluded from the $1,000,000 limitation. See "Proposal 2: Approval of Amendment
to 1994 Stock Option Plan" in this Proxy Statement. The Committee has not
formulated any policy with respect to qualifying other types of compensation for
deductibility under Section 162(m).
William M. Wardell, M.D., Ph.D.
Thomas B. King
Farah H. Champsi
Members of the Compensation Committee
11
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for
the three fiscal years ended December 31, 2001, 2000 and 1999 awarded to or
earned by the Chief Executive Officer and all other executive officers of the
Company.
Long-Term
Annual Compensation
Compensation Awards
------------------------- -----------------
Securities All Other
Fiscal Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options # ($) (4)
------------------------------- -------- ------------- ----------- ----------------- ------------
John Howell Bullion 2001 200,000 109,635(1) 29,833 500
Chairman of the Board, Chief 2000 180,000 0 0 730
Executive Officer and 1999 175,000 1,875 65,000 264
Secretary
William Houghton, M.D. 2001 256,938 128,131 17,700 7,688(5)
Chief Operating Officer 2000 208,115 10,000 0 7,841(5)
1999 200,000 0 36,000 2,260(5)
Dayton T. Reardan, Ph.D. 2001 166,000 32,036 6,600 500
Vice President of 2000 150,000 30,000 0 660
Regulatory Affairs 1999 146,667 0 7,000 155
Pamela Stahl (2) 2001 37,533 20,000 50,000 80
Vice President of -- -- -- -- --
Commercial -- -- -- -- --
Operations
Timothy G. McGrath (3) 2001 142,917 27,592 6,600 419
Vice President and Chief 2000 135,000 47,000 0 524
Financial Officer 1999 33,750 0 41,475 15
(1) Includes $60,000 cash bonus paid to the named executive officer for his
performance in the fiscal year ending December 31, 2000.
(2) Ms. Stahl was hired as the Company's Vice President of Commercial
Operations effective October 1, 2001.
(3) Mr. McGrath was hired as the Company's Vice President and Chief
Financial Officer effective October 1, 1999. From April 1999 through
September 1999, the Company retained Mr. McGrath as a consultant and
paid $38,175 for consulting fees during 1999.
(4) Except as indicated below, includes amounts paid for group term life
insurance paid for each executive, ($180 for Mr. Bullion, $180 for Dr.
Reardan, $27 for Ms. Stahl and $100 for Mr. McGrath) and disability
insurance paid for each executive, ($320 for Mr. Bullion, $320 for Dr.
Reardan, $53 for Ms. Stahl, and $320 for Mr. McGrath) for the fiscal
year ending December 31, 2001. Also includes amounts paid for group
term life and disability insurance paid for each executive officer for
the fiscal year ending December 31, 2000.
(5) Includes group term life insurance ($516), disability insurance ($320),
and travel expenses paid per terms of employment for the fiscal year
ended December 31, 2001. Also includes amounts paid for group term life
and disability insurance paid for the named executive officer for the
fiscal year ending December 31, 2000.
12
OPTION GRANTS IN LAST FISCAL YEAR
In 2001, the Compensation Committee approved stock options to each of
the executive officers listed in the "Summary Compensation Table" above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following tables summarizes stock option exercises in fiscal 2001
by the executive officers named in the "Summary Compensation Table" above and
the value of options held by such persons at December 31, 2001.
Number of Securities Value of
Underlying Unexercised
Unexercised Options In-the-Money Options
Shares At Fiscal Year End At Fiscal Year End
Acquired on Value (Exercisable/ (Exercisable/
Exercise Realized ($) Unexercisable) Unexercisable) ($) (1)
-----------------------------------------------------------------------------
John Howell Bullion 0 0 410,967/33,866 3,220,603/75,912
William Houghton 0 0 110,540/43,160 633,550/175,600
Dayton T. Reardan 0 0 83,320/5,280 633,300/0
Pamela Stahl 0 0 0/50,000 0/247,500
Timothy G. McGrath 0 0 26,795/21,280 161,884/100,400
------------
(1) "Value" is based upon the difference between the per share option exercise
price and the last sale price per share of the Common Stock on December 31,
2001, which was $13.15.
EMPLOYMENT AGREEMENTS
An employment agreement between the Company and John Howell Bullion,
Chief Executive Officer, was executed on October 29, 1999. The agreement
commenced October 20, 1999 and continues for a three-year period. At the end of
the three-year period, the agreement will automatically renew for successive
two-year periods, unless terminated by either party in accordance with the terms
of the agreement. The employment agreement automatically terminates upon the
mutual agreement of the parties, upon Mr. Bullion's death, or if Mr. Bullion is
disabled for a continuous nine-month period. Mr. Bullion's employment agreement
provides for an annual base salary of $180,000 for the calendar year 2000 and
$200,000 for calendar years 2001 and 2002. In February 2002, the Compensation
Committee increased Mr. Bullion's 2002 annual base salary to $225,000. Mr.
Bullion may terminate his employment at any time upon 90 days written notice to
the Company, in which case he will receive his base salary and accrued vacation
and sick pay through the date of termination.
The Company may terminate Mr. Bullion's employment at any time for good
cause. The employment agreement defines good cause a willful and continued
failure by Mr. Bullion to substantially perform his duties, or willful
misconduct by Mr. Bullion that is materially injurious to the Company. If the
Company terminates Mr. Bullion for cause, Mr. Bullion will receive his base
salary and accrued vacation and sick pay through the date of termination. If the
Company terminates Mr. Bullion without cause, the employment agreement provides
that Mr. Bullion will receive one year's salary, a bonus equal to the average
bonus paid to him in the most recent two fiscal years, all accrued vacation and
sick pay. In addition, upon a termination without cause, all of Mr. Bullion's
unvested options will immediately vest and he will be entitled to participate in
the Company's benefit plans for a two year period, which includes continued
payment by the Company of Mr. Bullion's health, life and disability insurance
premiums for that period. The employment agreement provides that Mr. Bullion may
treat a material change in his position, duties or location of employment as a
termination by the Company without cause. Mr. Bullion may also treat termination
of his employment upon one year's advance notice by the Company as a termination
without cause.
13
The employment agreement also provides for payments to Mr. Bullion if
the Company terminates him within 120 days of the effective date of a change in
control of the Company. In such event, Mr. Bullion will receive two years' base
salary, all accrued vacation and sick pay as of the date of termination and the
Company will continue to pay his health, life and disability insurance premiums
for two years. The Company may offset severance payments to Mr. Bullion by
amounts Mr. Bullion receives from other full-time employment during the two
year-period following his termination.
CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into agreements with its executive officers
providing for the payment of certain benefits to the officers if their
employment terminates following a "change in control" of the Company. The
agreements provide for payment of benefits if an officer's employment is
terminated within the 12 months following a change in control if the officer was
terminated without cause, required to relocate or required to accept less pay or
less responsibility. The formula and payout for the benefits under the change in
control agreement is the highest annual salary and incentive payment within the
last two years divided by 12 multiplied by the following number of months for
the officers: Dr. Houghton, 18 months; Mr. McGrath, 12 months; Dr. Reardan, 12
months; and Ms. Stahl, 12 months.
14
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total return on the Company's
Common Stock for the last five fiscal years with the cumulative total return of
the NASDAQ Total Return Index (U.S. Companies) and the NASDAQ Pharmaceutical
Stock Index for the same period. The graph assumes the investment of $100 on
December 31, 1996, in the Company's Common Stock, the NASDAQ Total Return Index
and the NASDAQ Pharmaceutical Stock Index and reinvestment of all dividends.
[LINE GRAPH]
NASDAQ Stock Market NASDAQ Pharmaceutical
Orphan Medical, Inc. Total Return Index Total Return Index
--------------------------------------------------------------------------------
December 1996 100.00 100.00 100.00
December 1997 49.36 122.48 103.34
December 1998 79.49 172.72 131.55
December 1999 53.21 320.83 247.26
December 2000 144.87 193.13 307.55
December 2001 134.87 153.19 262.67
15
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors, executive officers and persons
who beneficially own more than 10% of a class of the Voting Stock of the
Company, to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and reports of changes in ownership of the Company's Voting
Stock and other equity securities. Executive officers, directors and
greater-than-10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file.
The Company is required to disclose in this Proxy Statement any
delinquent filing of such reports and any failure to file such reports during
fiscal year 2001. Based solely upon a review of the forms filed by the Company's
executive officers, directors and greater-than-10% stockholders, and written
representations from such reporting persons, the Company believes that during
the fiscal year ended December 31, 2001 all Section 16(a) filing requirements
applicable to its executive officers, directors and greater-than-10%
stockholders were complied with, except that Messrs. Bullion and Reardon and
Drs. Houghton, Thompson, Wardell and Weaver failed to file Form 5 on a timely
basis and Ms. Stahl failed to file Form 3 on a timely basis.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 7, 2001, the Company completed the sale of shares of Common
Stock to Alta BioPharma Partners II, L.P., Alta Embarcadero BioPharma Partners
II, LLC and to several of the Company's existing stockholders with gross
proceeds to the Company of $14.1 million. Alta Partners II, Inc. is the
management advisor for Alta BioPharma Partners II, L.P. and Alta Embarcadero
Partners II, LLC. Director and nominee Farah Champsi is an officer of Alta
Partners. As of March 1, 2002, Alta Partners owned in the aggregate, 11.78% of
the Company's issued and outstanding shares of Common Stock. The purchase price
received by the Company from Alta BioPharma Partners II, L.P. was $9,645,182.25
for 1,169,113 shares, and the purchase price received by the Company from Alta
Embarcadero BioPharma Partners II, LLC was $354,816.00 for 43,008 shares.
16
PROPOSAL 2:
APPROVAL OF AMENDMENT TO 1994 STOCK OPTION PLAN
The Company believes that stock options are an important element of
compensation in attracting and retaining executives, other key employees and
outside directors, and in motivating and retaining skilled management personnel
and outside directors. There are currently 71 participants in the Stock Plan.
Generally, the consideration to be received by the Company for awards under the
1994 Stock Plan ("Stock Plan") will be the participants' past, present or
expected future contributions to the success of the Company. The Stock Plan was
adopted by the Board of Directors of the Company (the "Board") in August 1994,
and provided for the issuance of 1,250,000 shares of the Company's Common Stock.
The Stock Plan was approved by the Company's stockholders on October 5, 1995.
The Stock Plan was amended by the Board on December 13, 1996, and approved by
the Company's stockholders on May 8, 1997, to increase the number of shares
authorized for issuance thereunder from 1,250,000 to 1,550,000 shares. The Stock
Plan was also amended by the Board on March 3, 1999, and approved by the
Company's stockholders on May 26, 1999, to increase the number of shares
authorized for issuance thereunder to 1,925,000 shares. The Stock Plan was
amended again by the Board on March 6, 2001, and approved by the Company's
stockholders on May 24, 2001 to increase the number of shares authorized for
issuance thereunder to 2,675,000 shares.
As of March 1, 2002, options to purchase 1,668,298 shares of the
Company's Common Stock have been granted, net of cancellations and forfeitures,
and 390,091 shares remain available for grant. The Board of Directors, upon the
advice of the Company's Compensation Committee, believes that an increase in the
number of shares available for issuance under the Stock Plan is necessary to
maintain the Company's ability to attract and retain qualified executives and
management personnel as the Company's pursues is business strategy and growth
plans in the current and upcoming fiscal years. In consideration of this
recommendation from the Compensation Committee, on February 26, 2002, the Board
approved an amendment to the Stock Plan increasing the number of shares
authorized for issuance thereunder from 2,675,000 shares to 3,175,000 shares.
The February 26, 2002 amendment is subject to approval by the Company's
stockholders at the Annual Meeting. If the stockholders fail to approve the
amendment at the Annual Meeting, the Company believes it will be constrained in
its ability to attract and retain executives, other key employees and outside
directors, and in motivating and retaining skilled management personnel and
outside directors necessary for the Company's success. Except for annual option
grants to non-employee directors, the number of options that will be granted to
individual participants under the amended Stock Plan are not determinable, as
the Compensation Committee will make such determinations in its sole discretion.
SUMMARY OF THE STOCK PLAN
The Stock Plan provides for the grant of options to purchase shares of
Common Stock to any director, full-time or part-time employee of, or any
consultant to the Company. Options granted under the Stock Plan to full or
part-time employees may qualify as incentive stock options under the Code or may
be non-incentive stock options. Options granted to persons who are not full-time
or part-time employees of the Company may not qualify as incentive stock options
under the Code. The Stock Plan is administered by the Compensation Committee,
which is comprised solely of non-employee directors selected by the Board. The
Compensation Committee has the authority: (i) to determine the purchase price of
the Common Stock covered by each option, (ii) to determine the directors and
employees to whom and the time or times at which such options shall be granted
and the number of shares to be subject to each option, (iii) to determine the
terms and provisions of each option agreement under the Stock Plan, including
the designation of those options intended to be incentive stock options, (iv) to
determine the terms and conditions for the vesting and exercise of each option,
(v) to accelerate the time at which all or any part of an option may be
exercised, (vi) to amend or modify the terms of any option with the consent of
the optionee, (vii) to interpret the Stock Plan, (viii) to prescribe, amend and
rescind rules and regulations relating to the Stock Plan, and (ix) to make all
other determinations necessary or advisable for the administration of the Stock
Plan, subject to the exclusive authority of the Board of Directors to amend or
terminate the Stock Plan.
17
The Stock Plan provides that no employee may be granted options for
more than 400,000 shares of Common Stock in the aggregate in any calendar year.
Determinations and interpretations with respect to the Stock Plan are in the
sole discretion of the Compensation Committee, whose determinations and
interpretations will be final and conclusive. The Stock Plan terminates on
August 24, 2004, and no options may be granted after such date.
The exercise price of an incentive option granted under the Stock Plan
may not be less than the fair market value of the Common Stock on the date the
option is granted (in the event that a proposed optionee owns more than 10% of
the Company's Common Stock, any incentive stock option granted to such optionee
must have an exercise price not less than 110% of the then fair market value).
The exercise price of any non-incentive stock option granted under the Stock
Plan is determined by the Compensation Committee, but may not be less than the
fair market value of the underlying Common Stock on the date of grant. The term
of each incentive stock option is determined by the Compensation Committee, but
may not exceed 10 years from the date of grant (or, in the case of an incentive
option granted to an owner of more than 10% of the Common Stock, five years).
The term of any non-incentive stock option may not exceed 15 years. A person who
has been granted an option under the Stock Plan may be granted additional
options, but to the extent the aggregate fair market value (determined at the
time the option is granted) of the Common Stock with respect to which incentive
stock options are exercisable for the first time by such person during any
calendar year exceeds $100,000, such options will be treated as options that do
not qualify as incentive stock options.
Options granted under the Stock Plan are not transferable except in
limited circumstances. Options that qualify as incentive stock options may be
transferred only upon the death of the option holder, either by will or by the
laws of intestate succession. Options that do not qualify as incentive stock
options may be transferred to the option holder's blood or adoptive children, or
upon the death of the option holder, either by will or the laws of intestate
succession.
All stock options granted under the Stock Plan provide for an
acceleration of vesting of such options in the event of a "change of control". A
change of control is defined as any of the following: (i) a public announcement
that any person has acquired or has the right to acquire beneficial ownership of
51% or more of the then outstanding shares of the Common Stock of the Company
and, for this purpose, the terms "person" and "beneficial ownership" shall have
the meanings provided in Section 13(d) of the Securities Exchange Act of 1934 or
related rules promulgated by the Securities and Exchange Commission; (ii) the
commencement of or public announcement of an intention to make a tender or
exchange offer for 51% or more of the then outstanding Common Stock of the
Company; (iii) a sale of substantially all of the assets of the Company; or (iv)
the Board of Directors of the Company, in its sole and absolute discretion,
determines that there has been a sufficient change in the stock ownership of the
Company to constitute a change of control of the Company. In the event of a
change of control, all options granted under the Stock Plan and outstanding at
the time of the change of control become immediately exercisable, regardless of
the vesting requirements of such options pursuant the terms of the individual
participant's stock option agreement.
The Board may suspend or terminate the Stock Plan or any portion
thereof at anytime. The Board may also amend the Stock Plan at any time, but
such action may not, without the consent of the affected participants, adversely
affect the rights or obligations of the participants under outstanding stock
options. The Board may increase the number of shares of Common Stock that will
be available for issuance under the Stock Plan, subject to stockholder approval.
No amendment or modification of the Stock Plan, without approval of the
stockholders of the Company, will be effective if stockholder approval of the
amendment is then required under Section 422 of the Code or the rules of the
National Association of Securities Dealers, Inc. Options outstanding at the time
the Stock Plan is terminated will continue to be exercisable in accordance with
their respective terms.
18
FEDERAL INCOME TAX CONSEQUENCES
This discussion sets forth only general federal tax principles
affecting options which may be granted under the Stock Plan. Special rules may
apply to option holders who are subject to Section 16 of the Securities Exchange
Act of 1934, as amended.
Under current federal income tax law, there are no federal income tax
consequences to the Company or the option holder upon the granting of an option.
An option holder who exercises an incentive stock option will not
recognize income at the time of exercise for purposes of the regular income tax
(although such option holder will realize income at such time for purposes of
the alternative minimum tax in an amount equal to the amount by which the fair
market value of the Common Stock received by the option holder exceeds the
option price paid), and the Company will not be entitled to a tax deduction at
such time. If the option holder holds shares of Common Stock received upon
exercise of an incentive stock option for at least one year after exercise and
two years from the date the incentive stock option was granted, then upon the
sale of such shares, the option holder will recognize long-term capital gain and
no tax deduction will be allowed to the Company. If the option holder sells or
otherwise disposes of shares of Common Stock received upon exercise of an
incentive stock option before such holding period is satisfied, then (a) the
option holder will recognize ordinary income at the time of the disposition in
an amount equal to the lesser of (i) the difference between the option price and
the fair market value of the shares at the time the option was exercised, and
(ii) the difference between the option price and the amount realized upon the
disposition of the shares, (b) such option holder will recognize short-term or
long-term capital gain, depending upon whether the holding period for such
shares is less or more than one year, to the extent of any excess of the amount
realized upon the disposition of the shares over the fair market value of the
shares at the time of exercise of the option, and (c) subject to the general
rules concerning deductibility of compensation, the Company will be allowed a
tax deduction in the amount that, and for its taxable year in which, the option
holder recognizes ordinary income.
Upon the exercise of an option which does not qualify as an incentive
stock option, the option holder generally will recognize ordinary income equal
to the difference between the exercise price and the fair market value of the
shares on the date of exercise. Subject to the general rules concerning
deductibility of compensation, the Company will be allowed a tax deduction in
the amount that, and for its taxable year in which, the option holder recognizes
ordinary income upon the exercise of a non-incentive stock option.
The Stock Plan provides that, with the approval of the administrators
of the Option Plan, an option holder may exercise an option by tendering shares
of Common Stock owned by the option holder in lieu of cash, in which case
generally no gain or loss will be recognized by the option holder with respect
to the tendered shares if the option holder has held the tendered shares for the
required holding period, if any. In the case of an incentive stock option, no
income will be recognized by the option holder upon the receipt of additional
shares of Common Stock as a result of such an exercise. In the case of a
non-incentive stock option, the option holder will recognize ordinary income as
a result of such an exercise in an amount equal to the fair market value of that
number of shares equal to the excess of the number of shares received upon
exercise of the option over the number of shares tendered by the option holder.
BOARD RECOMMENDATION AND REQUIRED STOCKHOLDER VOTE
The affirmative vote of a majority of the shares of Voting Stock
represented at the Annual Meeting is required for approval of the amendment to
the Stock Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT INCREASING THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE UNDER THE
COMPANY'S 1994 STOCK OPTION PLAN FROM 2,675,000 SHARES TO 3,175,000 SHARES.
19
PROPOSAL 3:
APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Ernst & Young LLP as independent
public accountants for the Company for the fiscal year ending December 31, 2002.
A proposal to approve the appointment of Ernst & Young LLP will be presented at
the Annual Meeting. Ernst & Young LLP has audited the Company's financial
statements for the fiscal year ended December 31, 2001, and for all prior years.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they desire to do so
and will be available to answer appropriate questions from stockholders. If the
appointment of Ernst & Young LLP is not approved by the stockholders, the Board
of Directors is not obligated to appoint other independent public accountants,
but the Board of Directors will give consideration to such unfavorable vote.
BOARD RECOMMENDATION AND REQUIRED STOCKHOLDER VOTE
The affirmative vote of a majority of the shares of Voting Stock
represented at the Annual Meeting is required for approval of appointment of
Ernst & Young LLP as the Company's independent public accountants. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE APPOINTMENT OF ERNST & YOUNG LLP
AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS.
20
AUDIT COMMITTEE REPORT
The Audit Committee of the Company's Board of Directors is composed of
the following non-employee directors: Mr. Greene, Dr. Vida and Ms. Champsi. All
of the members of the Audit Committee are independent for purposes of the Nasdaq
listing requirements. The Audit Committee operates under a written charter
adopted by the Board of Directors, a copy of which has previously been filed
with the Securities and Exchange Commission. The Audit Committee recommends to
the Board of Directors, subject to stockholder ratification, the appointment of
the Company's independent accountants.
Management is responsible for the Company's internal controls and the
financial reporting process. The Company's independent accountants are
responsible for performing an independent audit of the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and to issue a report on the Company's financial statements. The Audit
Committee's responsibility is to monitor and oversee these processes.
In this context, the Audit Committee has met and held discussions with
management and the independent accountants. Management represented to the Audit
Committee that the Company's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee has reviewed and discussed the consolidated financial statements with
management and the independent accountants. The Audit Committee discussed with
the independent accountants matters required to be discussed by Statement on
Auditing Standards No. 61 (Communications with Audit Committees).
The Company's independent accountants also provided to the Audit
Committee the written disclosure required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees), and the Audit
Committee discussed with the independent accountants the accounting firm's
independence. The Committee also considered whether non-audit services provided
by the independent accountants during the last fiscal year were compatible with
maintaining the independent accountants' independence.
Based upon the Audit Committee's discussion with management and the
independent accountants and the Audit Committee's review of the representation
of management and the report of the independent accountants to the Audit
Committee, the Audit Committee recommended to the Board of Directors that the
audited consolidated financial statements be included in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 2001 filed with the
Securities and Exchange Commission.
Michael Greene
Julius A. Vida, Ph.D.
Farah H. Champsi
Members of the Audit Committee
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AUDIT FEES
Audit fees billed or expected to be billed to the Company by Ernst &
Young LLP for the audit of the Company's financial statements for the fiscal
year ended December 31, 2001 and for reviews of the Company's financial
statements included in the Company's quarterly reports on Form 10-Q for the last
fiscal year totaled $46,500.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
There were no services provided by Ernst & Young LLP for the design and
implementation of financial information systems during the last fiscal year.
ALL OTHER FEES
Fees billed or expected to be billed to the Company by Ernst & Young
LLP for all other non-audit services, including tax-related services, provided
during the last fiscal year totaled $28,515. The Audit Committee has reviewed
the fees charged to the Company for these non-audit services and has determined
that the provision of non-audit services for which these fees were charged are
compatible with maintaining the independence of Ernst & Young LLP as the
Company's independent public accountants.
SOLICITATION OF PROXIES
All of the expenses involved in preparing, assembling and mailing this
Proxy Statement and the material enclosed herewith will be paid by the Company.
The Company may reimburse banks, brokerage firms, and other custodians, nominees
and fiduciaries for reasonable expenses incurred by them in sending proxy
materials to beneficial owners of the Company's Common Stock. Although proxies
are being solicited primarily by mail, officers and regular employees of the
Company who will receive no extra compensation for their services, may solicit
such proxies in person, by telephone or facsimile.
STOCKHOLDER PROPOSALS FOR THE 2003 ANNUAL MEETING
Any stockholder proposals intended for the Company's Annual Meeting of
Stockholders to be held in 2003 that are requested to be included in the
Company's Proxy Statement must be received at the principal executive offices of
the Company, 13911 Ridgedale Drive, Suite 250, Minnetonka, Minnesota 55305 by
the close of business on December 6, 2002.
Any other stockholder proposals to be presented at the Company's Annual
Meeting to be held in 2003 must be received at the principal executive offices
of the Company by the close of business on February 21, 2003.
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OTHER MATTERS
The Board of Directors does not know of any other business to be
presented for consideration at the Annual Meeting. If any other business does
properly come before the Annual Meeting, the persons named as proxies in the
enclosed proxy will vote in accordance with their best judgment as to the best
interests of the Company.
/s/ John Howell Bullion
-----------------------
John Howell Bullion
Chief Executive Officer and Secretary
Dated: April 8, 2002
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[ORPHAN MEDICAL LOGO]
2002 ANNUAL MEETING OF STOCKHOLDERS
MAY 23, 2002
[ORPHAN MEDICAL LOGO] PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, having duly received the Notice of Annual Meeting of
Stockholders and Proxy Statement dated April 8, 2002, revoking all prior
proxies, hereby appoints John Howell Bullion and Timothy G. McGrath, and each of
them, with the power to appoint a substitute, to vote all shares the undersigned
is entitled to vote at the Annual Meeting of Stockholders of Orphan Medical,
Inc, (the "Company") to be held at 3:30 p.m. (Central Standard Time) on
Thursday, May 23, 2002 at the Radisson Plaza Hotel, 35 South 7th Street,
Minneapolis, Minnesota 55402, and at all adjournments thereof, as specified
below on each matter referred to, and, in their discretion, upon any other
matters which may be brought before the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY BY MAIL, BY TELEPHONE OR
THE INTERNET AS DESCRIBED ON THE REVERSE SIDE.
See reverse for voting instructions.
COMPANY #
CONTROL #
THERE ARE THREE WAYS TO VOTE YOUR PROXY
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY PHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK *** EASY *** IMMEDIATE
- Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 12:00 p.m. (CST) on May 22, 2002.
- You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which are located above.
- Follow the simple instructions the voice provides you.
VOTE BY INTERNET -- http://www.eproxy.com/orph/ -- QUICK *** EASY *** IMMEDIATE
- Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m. (CST) on May 22, 2002.
- You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which are located above to obtain your records and create
an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to ORPHAN MEDICAL, INC., c/o Shareowner
Services(SM), P.O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD
- Please detach here -
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1.
1. Election of 01 John Howell Bullion 04 William M. Wardell, M.D., Ph.D. 07 Thomas B. King
directors: 02 Michael Greene 05 W. Leigh Thompson, Ph.D., M.D.
03 Julius A. Vida, Ph.D 06 Farah H. Champsi
[ ] Vote FOR [ ] WITHHOLD
all nominees AUTHORITY
(except as marked) to vote for all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, WRITE [ ]
THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 2.
2. Proposal to approve an amendment to the Company's 1994 Stock Option Plan
to increase the number of shares authorized for issuance under the plan FOR AGAINST ABSTAIN
from 2,675,000 shares to 3,175,000 shares. [ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 3.
3. Proposal to approve the appointment of Ernst & Young LLP as independent FOR AGAINST ABSTAIN
public accountants for the fiscal year ending December 31, 2002. [ ] [ ] [ ]
4. To vote with discretionary authority on any other business as may properly
come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF NOMINEES FOR DIRECTOR NAMED IN ITEM 1, FOR ITEM 2 AND FOR
ITEM 3 AND IN THE DISCRETION OF THE NAMED PROXIES ON ALL OTHER MATTERS.
Address Change? Mark Box [ ] Indicate changes below: Date ___________________________
[ ]
Signature(s) in Box
Please sign exactly as your
name(s) appear on the Proxy.
When shares are held by joint
tenants, both must sign. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full title
of such. If a corporation,
please sign full corporate name
by President or other authorized
officer. If a partnership,
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