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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
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14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to [ ] 240.14a-11(c) or [ ] 240.14a-12
Aradigm Corporation
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(Name of Registrant as Specified In Its Charter)
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
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ARADIGM CORPORATION
26219 EDEN LANDING ROAD
HAYWARD, CALIFORNIA 94545
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 15, 1998
TO THE SHAREHOLDERS OF ARADIGM CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Aradigm
Corporation, a California corporation (the "Company"), will be held on Friday,
May 15, 1998 at 9:00 a.m. local time at the Crowne Plaza, 1221 Chess Drive,
Foster City, California for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To approve the Company's 1996 Equity Incentive Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 1,000,000.
3. To approve the Company's Employee Stock Purchase Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 150,000.
4. To amend the Company's Bylaws to set the range of directors at five to
nine.
5. To ratify the selection of Ernst & Young LLP as independent auditors of
the Company for its fiscal year ending December 31, 1998.
6. To transact such other business as may properly come before the meeting
or any adjournment or postponement 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 March 31, 1998,
as the record date for the determination of shareholders entitled to notice of
and to vote at this Annual Meeting and at any adjournment or postponement
thereof.
By Order of the Board of Directors
LOGO
REID M. RUBSAMEN
Secretary
Hayward, California
April 13, 1998
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
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ARADIGM CORPORATION
26219 EDEN LANDING ROAD
HAYWARD, CALIFORNIA 94545
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
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INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Aradigm Corporation, a California corporation (the "Company"), for use at the
Annual Meeting of Shareholders to be held on May 15, 1998, at 9:00 a.m. local
time (the "Annual Meeting"), or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of Annual Meeting.
The Annual Meeting will be held at the Crowne Plaza, 1221 Chess Drive, Foster
City, California. The Company intends to mail this proxy statement and
accompanying proxy card on or about April 13, 1998, to all shareholders entitled
to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to shareholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on March
31, 1998 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on March 31, 1998 the Company had outstanding and entitled to
vote 10,611,040 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Except for Proposal 4, abstentions and broker
non-votes are counted towards a quorum but are not counted for any purpose in
determining whether a matter is approved. With respect to Proposal 4,
abstentions and broker non-votes will have the same effect as negative votes.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 26219 Eden
Landing Road, Hayward, California, 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.
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SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 1999 Annual Meeting of Shareholders must be received by the Company
not later than December 14, 1998 in order to be included in the proxy statement
and proxy relating to that Annual Meeting. Shareholders are also advised to
review the Company's Bylaws, which contain additional requirements with respect
to advance notice of shareholder proposals and director nominations.
PROPOSAL 1
ELECTION OF DIRECTORS
There are six nominees for the nine Board positions presently authorized in
the Company's Bylaws. Each director to be elected will hold office until the
next annual meeting of shareholders and until his successor is elected and has
qualified, or until such director's earlier death, resignation or removal. Each
nominee listed below is currently a director of the Company, all six directors
having been elected by the shareholders.
Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the six nominees named below. In the event
that any nominee should be unavailable for election as a result of an unexpected
occurrence, such shares will be voted for the election of such substitute
nominee as management may propose. Each person nominated for election has agreed
to serve if elected and management has no reason to believe that any nominee
will be unable to serve.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
NOMINEES
The names of the nominees and certain information about them are set forth
below:
PRINCIPAL OCCUPATION/
NAME AGE POSITION HELD WITH THE COMPANY
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Richard P. Thompson.................... 46 President and Chief Executive Officer
Burton J. McMurtry, Ph.D............... 63 General Partner, Technology Venture Investors
Reid M. Rubsamen, M.D.................. 41 Vice President, Medical Affairs and Secretary
Gordon W. Russell...................... 64 General Partner, Sequoia Capital
Fred E. Silverstein, M.D............... 55 Professor at the University of Washington
Virgil D. Thompson..................... 58 President, Chief Executive Officer and Director of
Cytel Corporation
RICHARD P. THOMPSON has been a director of the Company and has served as
the Company's President and Chief Executive Officer since 1994 and was Chief
Financial Officer from April 1996 until December 1996. From 1991 to 1994, he was
President of LifeScan, Inc., a Johnson & Johnson Company, a medical device
manufacturing and development company. Mr. Thompson holds a B.S. in biological
sciences from the University of California at Irvine and an M.B.A. from
California Lutheran College.
BURTON J. MCMURTRY, PH.D. has been a director of the Company since 1992.
Since July 1980, he has been a general partner of various limited partnerships
that, in turn, are general partners of various Technology Venture Investors
venture capital partnerships. Mr. McMurtry holds a B.A. and a B.S. in electrical
engineering from Rice University and an M.S. and a Ph.D. in electrical
engineering from Stanford University. He is also a director of Intuit, Inc. and
SpectraLink Corp.
REID M. RUBSAMEN, M.D., a founder of the Company, has been a director of
the Company and has served as the Company's Vice President of Medical Affairs
and Secretary since 1991. Dr. Rubsamen is a Board
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Certified anesthesiologist having received his medical training at Pacific
Medical Center, San Francisco and Massachusetts General Hospital, where in 1989
he served as Chief Resident in Anesthesia. He was also a doctoral candidate in
the computer science department at the Massachusetts Institute of Technology,
leaving in 1990 to found the Company. Dr. Rubsamen holds an A.B. in biochemistry
and computer science from the University of California, Berkeley, and an M.S. in
computer science and an M.D. from Stanford University.
GORDON W. RUSSELL has been a director of the Company since 1992. He has
been a general partner of Sequoia Capital, a venture capital investment
partnership, since 1979. Mr. Russell holds an A.B. in history from Dartmouth
College. Mr. Russell is Chairman of the Board of Overseers of the Dartmouth
Medical School and is Chairman Emeritus of the Board of Trustees of the Palo
Alto Medical Foundation. Mr. Russell is also a director of SangStat Medical
Corp., ChemTrak Incorporated and several privately-held health care companies.
FRED E. SILVERSTEIN, M.D. has been a director of the Company since 1996.
Dr. Silverstein is a Clinical Professor of Medicine at the University of
Washington, Seattle. Since 1994, he has been a partner of Frazier & Company
L.P., an investment partnership. He holds a B.S. from Alfred University and an
M.D. from Columbia University College of Physicians and Surgeons. He is Board
Certified in internal medicine and gastroenterology. Dr. Silverstein is also a
director of Vision Sciences Inc., a medical device development company, Focal,
Inc., a medical sealant company, and several privately-held companies. He has
authored more than 30 United States patents on a variety of medical devices.
VIRGIL D. THOMPSON has been a director of the Company since 1995. Since
January 1996, he has been the President and Chief Executive Officer and a
director of Cytel Corporation, a biopharmaceutical company. From 1994 to 1996,
he was President and Chief Executive Officer of Cibus Pharmaceuticals, Inc., a
drug delivery device company. From 1991 to 1993 he was President of Syntex
Laboratories, Inc. a pharmaceutical company. Mr. Thompson holds a B.S. in
Pharmacy from Kansas University and a J.D. from The George Washington University
Law School. He is also a director of two pharmaceutical companies, Biotechnology
General Corporation and Cypros Pharmaceutical Corporation.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1997 the Board of Directors held
eight meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee monitors the corporate financial reporting and the
internal and external audits of the Company, provides the Board of Directors the
results of its examinations and recommendations, outlines to the Board of
Directors the improvements made, or to be made, in internal accounting controls,
and nominates independent auditors. The Audit Committee is composed of two
non-employee directors: Burton J. McMurtry, Ph.D. and Gordon W. Russell. The
Audit Committee met once during 1997.
The Compensation Committee recommends to the Board of Directors
compensation levels for officers of the Company, establishes compensation levels
for non-officer employees of the Company, makes recommendations to the Board of
Directors regarding stock option grants under the Company's 1996 Equity
Incentive Plan (the "1996 Plan"), and otherwise administers the 1996 Plan. Prior
to March 25, 1998, the Compensation Committee was composed of three non-employee
directors: Jared A. Anderson, Ph.D., Ross A. Jaffe, M.D. and Virgil D. Thompson.
On March 25, 1998, the Compensation Committee was reconstituted and is currently
composed of the following two non-employee directors: Fred E. Silverstein and
Virgil Thompson. The Compensation Committee met twice during 1997.
During the fiscal year ended December 31, 1997, all directors except Burton
J. McMurtry attended at least 75% of the aggregate of the meetings of the Board
and of the committees on which he served, held during the period for which they
were a director or committee member, respectively.
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PROPOSAL 2
APPROVAL OF 1996 EQUITY INCENTIVE PLAN, AS AMENDED
In April 1996, the Board of Directors adopted, and the shareholders
subsequently approved, the Company's 1996 Plan. There are 1,980,000 shares of
the Company's Common Stock authorized for issuance under the 1996 Plan.
At January 31, 1998, options (net of canceled or expired options) covering
an aggregate of 1,918,845 shares of the Company's Common Stock had been granted
under the 1996 Plan, and only 153,816 shares (plus any shares that might in the
future be returned to the 1996 Plan as a result of cancellations or expiration
of options) remained available for future grant under the 1996 Plan. During the
last fiscal year, under the 1996 Plan, the Company granted to all current
executive officers as a group options to purchase 330,000 shares at exercise
prices of $7.00 to $12.875 per share and to all employees (excluding executive
officers) as a group options to purchase 220,600 shares at exercise prices of
$6.875 to $12.875 per share.
In February 1998, the Board approved an amendment to the 1996 Plan, subject
to shareholder approval, to enhance the flexibility of the Board and the
Compensation Committee in granting stock options to the Company's employees. The
amendment increases the number of shares authorized for issuance under the 1996
Plan from a total of 1,980,000 shares to 2,980,000 shares of Common Stock.
The Company operates in a very competitive environment with respect to the
hiring and retaining of qualified employees. The Board adopted this amendment
(i) to ensure that the Company can continue to grant stock options at levels
determined appropriate by the Board and the Compensation Committee in order to
employ the highly qualified individuals necessary for the Company's successful
growth and to retain existing employees and (ii) to meet the Company's
anticipated growth over the next two years, including the expected addition of
three new officers in calendar 1998.
Shareholders are requested in this Proposal 2 to approve the 1996 Plan, as
amended. The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and voting at the meeting will be required to
approve the 1996 Plan, as amended. For purposes of this vote, abstentions and
broker non-votes will not be counted for any purpose in determining whether this
matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the 1996 Plan are outlined below:
GENERAL
The 1996 Plan provides for the grant of both incentive and nonstatutory
stock options. Incentive stock options granted under the 1996 Plan are intended
to qualify as "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Nonstatutory stock
options granted under the 1996 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 incentive and nonstatutory stock options.
PURPOSE
The 1996 Plan was adopted to provide a means by which selected officers and
employees of and consultants to the Company and its affiliates could be given an
opportunity to purchase stock in the Company, to assist in retaining the
services of employees holding key positions, to secure and retain the services
of persons capable of filling such positions and to provide incentives for such
persons to exert maximum efforts for the success of the Company. At February 28,
1998, all of the Company's approximately 110 employees and consultants were
eligible to participate in the 1996 Plan.
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ADMINISTRATION
The 1996 Plan is administered by the Board of Directors of the Company. The
Board has the power to construe and interpret the 1996 Plan and, subject to the
provisions of the 1996 Plan, to determine the persons to whom and the dates on
which options 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 of Directors is
authorized to delegate administration of the 1996 Plan to a committee composed
of not fewer than two members of the Board. The Board has delegated
administration of the 1996 Plan to the Compensation Committee of the Board. As
used herein with respect to the 1996 Plan, the "Board" refers to the
Compensation Committee as well as to the Board of Directors itself. In addition,
the 1996 Plan provides that, in the Board's discretion, directors serving on the
Compensation Committee will be "outside directors" within the meaning of Section
162(m) of the Code ("Section 162(m)"). See "Federal Income Tax Information" for
a discussion of the application of Section 162(m).
ELIGIBILITY
Incentive stock options may be granted under the 1996 Plan only to selected
employees (including officers) of the Company and its affiliates. Selected
employees (including officers) and consultants are eligible to receive
nonstatutory stock options under the 1996 Plan. Directors who are not salaried
employees of or consultants to the Company or to any affiliate of the Company
are not eligible to participate in the 1996 Plan.
No incentive stock option may be granted under the 1996 Plan to any person
who, at the time of the grant, owns (or is deemed to own) stock possessing more
than 10% of the total combined voting power of the Company or any affiliate of
the Company, unless the option exercise price is at least 110% of the fair
market value of the stock subject to the option on the date of grant, and the
term of the option does not exceed five years from the date of grant. In
addition, for incentive stock options granted under the 1996 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.
STOCK SUBJECT TO THE 1996 PLAN
The shares subject to the 1996 Plan may be unissued shares or reacquired
shares, bought on the market or otherwise. If options granted under the 1996
Plan expire or otherwise terminate without being exercised, the Common Stock not
purchased pursuant to such options again becomes available for issuance under
the 1996 Plan.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under
the 1996 Plan. Individual option grants may be more restrictive as to any or all
of the permissible terms described below.
Exercise Price; Payment. The exercise price of incentive stock options
under the 1996 Plan may not be less than the fair market value of the Common
Stock subject to the option on the date of the option grant, and in some cases
(see "Eligibility" above), may not be less than 110% of such fair market value.
The exercise price of nonstatutory options under the 1996 Plan may not be less
than 85% of the fair market value of the Common Stock subject to the option on
the date of the option grant. However, if options were granted with exercise
prices below market value, deductions for compensation attributable to the
exercise of such options could be limited by Section 162(m). See "Federal Income
Tax Information." At March 30, 1998, the closing price of the Company's Common
Stock as reported on the Nasdaq National Market System was $12.00 per share.
In the event of a decline in the value of the Company's Common Stock, the
Board has the authority to offer employees the opportunity to replace
outstanding higher priced options, whether incentive or nonstatu-
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tory, with new lower priced options. To the extent required by Section 162(m),
an option repriced under the 1996 Plan is deemed to be canceled and a new option
granted.
The exercise price of options granted under the 1996 Plan must be paid
either: (a) in cash at the time the option is exercised, or (b) at the
discretion of the Board, (i) by delivery of other Common Stock of the Company,
(ii) pursuant to a deferred payment arrangement or (c) in any other form of
legal consideration acceptable to the Board.
Option Exercise. Options granted under the 1996 Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the 1996 Plan granted to newly
hired employees typically vest at the rate of 25% on the one (1) year
anniversary of the vesting commencement date and in equal quarterly installments
thereafter during the optionee's employment or services as a consultant. Shares
covered by currently outstanding options under the 1996 Plan granted to existing
employees typically vest at the rate of 1/16th per quarter (25% per year) during
the optionee's employment or services as a consultant. Shares covered by options
granted in the future under the 1996 Plan may be subject to different vesting
terms. The Board has the power to accelerate the time during which an option may
be exercised. In addition, options granted under the 1996 Plan may permit
exercise prior to vesting, but in such event the optionee may be required to
enter into an early exercise stock purchase agreement that allows the Company to
repurchase shares not yet vested at their exercise price should the optionee
leave the employ of the Company before vesting. To the extent provided by the
terms of an option, an optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such option by a cash payment
upon exercise, by authorizing the Company to withhold a portion of the stock
otherwise issuable to the optionee, by delivering already-owned stock of the
Company or by a combination of these means.
Term. The maximum term of options under the 1996 Plan is 10 years, except
that in certain cases (see "Eligibility") the maximum term is five years.
Options under the 1996 Plan terminate three months after termination of the
optionee's employment or relationship as a consultant or director of the Company
or any affiliate of the Company, unless (a) such termination is due to such
person's disability, in which case the option may, but need not, provide that it
may be exercised at any time within 12 months of such termination; (b) the
optionee dies while employed by or serving as a consultant or director of the
Company or any affiliate of the Company, or within a period specified in the
option after termination of such relationship, in which case the option may, but
need not, provide that it may be exercised (to the extent the option was
exercisable at the time of the optionee's death) within 12 months of the
optionee's death by the person or persons to whom the rights to such option pass
by will or by the laws of descent and distribution; or (c) the option by its
terms specifically provides otherwise. Individual options by their terms may
provide for exercise within a longer period of time following termination of
employment or the consulting relationship. The option term may also be extended
in the event that exercise of the option within these periods is prohibited for
specified reasons.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the 1996 Plan or subject to
any option granted under the 1996 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 1996 Plan and options
outstanding thereunder will be appropriately adjusted as to the class and the
maximum number of shares subject to such plan, the maximum number of shares
which may be granted to an employee during a calendar year, and the class,
number of shares and price per share of stock subject to such outstanding
options.
EFFECT OF CERTAIN CORPORATE EVENTS
The 1996 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 options outstanding under the 1996 Plan or substitute similar
options for those outstanding under such plan, or such outstanding options will
continue in full force and effect. In the event
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that any surviving corporation declines to assume or continue options
outstanding under the 1996 Plan, or to substitute similar options, then the time
during which such options may be exercised will be accelerated and the options
terminated if not exercised during such time. The acceleration of an option in
the event of an acquisition or similar corporate event may be viewed as an
antitakeover 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 1996 Plan without shareholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the 1996 Plan will terminate on April 15, 2006.
The Board may also amend the 1996 Plan at any time or from time to time.
However, no amendment will be effective unless approved by the shareholders of
the Company within 12 months before or after its adoption by the Board if the
amendment would: (a) modify the requirements as to eligibility for participation
(to the extent such modification requires shareholder approval in order for the
1996 Plan to satisfy Section 422 of the Code, if applicable, or Rule 16b-3
("Rule 16b-3") of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")); (b) increase the number of shares reserved for issuance upon exercise of
options; or (c) change any other provision of the 1996 Plan in any other way if
such modification requires shareholder approval in order to comply with Rule
16b-3 or satisfy the requirements of Section 422 of the Code. The Board may
submit any other amendment to the 1996 Plan for shareholder approval, including,
but not limited to, amendments intended to satisfy the requirements of Section
162(m) regarding the exclusion of performance-based compensation from the
limitation on the deductibility of compensation paid to certain employees.
RESTRICTIONS ON TRANSFER
Under the 1996 Plan, an incentive stock option 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.
A nonstatutory stock option may not be transferred except by will or by the laws
of descent and distribution or pursuant to a domestic relations order. In any
case, the optionee may designate in writing a third party who may exercise the
option in the event of the optionee's death. In addition, shares subject to
repurchase by the Company under an early exercise stock purchase agreement may
be subject to restrictions on transfer which the Board deems appropriate.
FEDERAL INCOME TAX INFORMATION
Incentive Stock Options. Incentive stock options under the 1996 Plan are
intended to be eligible for the favorable federal income tax treatment accorded
"incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be 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 maximum capital
gains rate for federal income tax purposes is currently 28% while the maximum
ordinary income rate is effectively 39.6% at the present time. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
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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) and the
satisfaction of a tax reporting obligation) to a corresponding business expense
deduction in the tax year in which the disqualifying disposition occurs.
Nonstatutory Stock Options. Nonstatutory stock options granted under the
1996 Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or the Company by reason of
the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary income equal to
the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, the Company is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) 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) 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 stock
options, 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), compensation
attributable to stock options will qualify as performance-based compensation,
provided that the option is granted by a compensation committee comprised solely
of "outside directors" and either: (i) the option plan contains a per-employee
limitation on the number of shares for which options may be granted during a
specified period, the per-employee limitation is approved by the shareholders,
and the exercise price of the option is no less than the fair market value of
the stock on the date of grant; or (ii) the option is granted (or exercisable)
only upon the achievement (as certified in writing by the compensation
committee) of an objective performance goal established in writing by the
compensation committee while the outcome is substantially uncertain, and the
option is approved by shareholders.
PROPOSAL 3
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
In April 1996, the Board of Directors adopted the Employee Stock Purchase
Plan (the "Purchase Plan") authorizing the issuance of 150,000 shares of the
Company's Common Stock. The shareholders of the Company approved the adoption of
the Purchase Plan in June 1996. At February 28, 1998, an aggregate of 21,824
shares had been issued under the Purchase Plan and 128,176 share remained for
the grant of future rights under the Purchase Plan. In April 1998, the Board of
Directors of the Company adopted an amendment to the Purchase Plan to increase
the number of shares authorized for issuance under the Purchase Plan to 300,000
shares. This amendment is intended to afford the Company greater flexibility in
providing employees with stock incentives and ensures that the Company can
continue to provide such incentives at levels determined appropriate by the
Board. During the last fiscal year, shares were purchased at $6.17 in the
following amounts under the Purchase Plan: Richard P. Thompson 2,301 shares,
Reid M. Rubsamen 1,636 shares, Max D. Fiore 891 shares, Igor Gonda 1,636 shares,
Mark A. Olbert 987 shares, all current executive officers as a group 7,451
shares, and all employees (excluding executive officers) as a group 14,005
shares.
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Shareholders are requested in this Proposal 3 to approve the Purchase Plan,
as amended. The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy and voting at the meeting will be
required to approve the Purchase Plan, as amended. For purposes of this vote
abstentions and broker non-votes will not be counted for any purpose in
determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
The essential features of the Purchase Plan, as amended, are outlined
below:
PURPOSE
The purpose of the Purchase Plan is to provide a means by which key
employees of the Company (and any parent or subsidiary of the Company designated
by the Board of Directors to participate in the Purchase Plan) may be given an
opportunity to purchase Common Stock of the Company through payroll deductions,
to assist the Company in retaining the services of its employees, to secure and
retain the services of new employees, and to provide incentives for such persons
to exert maximum efforts for the success of the Company. At February 28, 1998
approximately 77 of the Company's 100 employees were eligible to participate in
the Purchase Plan.
The rights to purchase Common Stock granted under the Purchase Plan are
intended to qualify as options issued under an "employee stock purchase plan" as
that term is defined in Section 423(b) of the Code.
ADMINISTRATION
The Purchase Plan is administered by the Board of Directors, which has the
final power to construe and interpret the Purchase Plan and the rights granted
under it. The Board has the power, subject to the provisions of the Purchase
Plan, to determine when and how rights to purchase Common Stock of the Company
will be granted, the provisions of each offering of such rights (which need not
be identical), and whether any parent or subsidiary of the Company shall be
eligible to participate in such plan. The Board has the power, which it has not
exercised, to delegate administration of such plan to a committee of not less
than two Board members. The Board may abolish any such committee at any time and
revest in itself the administration of the Purchase Plan.
OFFERINGS
The Purchase Plan is implemented by offerings of rights to all eligible
employees from time to time by the Board. Generally, each such offering is two
years in duration.
ELIGIBILITY
Any person who is customarily employed at least 20 hours per week and five
months per calendar year by the Company (or by any parent or subsidiary of the
Company designated from time to time by the Board) on the first day of an
offering period is eligible to participate in that offering under the Purchase
Plan, provided such employee has been in the continuous employ of the Company
for at least 10 days preceding the first day of the offering period.
Notwithstanding the foregoing, no employee is eligible for the grant of any
rights under the Purchase Plan if, immediately after such grant, the employee
would own, directly or indirectly, stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or of any
parent or subsidiary of the Company (including any stock which such employee may
purchase under all outstanding rights and options), nor will any employee be
granted rights that would permit him to buy more than $25,000 worth of stock
(determined at the fair market value of the shares at the time such rights are
granted) under all employee stock purchase plans of the Company in any calendar
year.
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PARTICIPATION IN THE PLAN
Eligible employees become participants in the Purchase Plan by delivering
to the Company, prior to the date selected by the Board as the offering date for
the offering, or as otherwise determined by the Board for new employees, an
agreement authorizing payroll deductions of up to 15% of such employees' total
compensation during the purchase period.
PURCHASE PRICE
The purchase price per share at which shares are sold in an offering under
the Purchase Plan is the lower of (a) 85% of the fair market value of a share of
Common Stock on the date of commencement of the offering, or (b) 85% of the fair
market value of a share of Common Stock on any purchase date.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the shares is accumulated by payroll deductions over
the offering period. At any time during the purchase period, a participant may
reduce or terminate his or her payroll deductions. A participant may not
increase or begin such payroll deductions after the beginning of any purchase
period, except, if the Board provides, in the case of an employee who first
becomes eligible to participate as of a date specified during the purchase
period. All payroll deductions made for a participant are credited to his or her
account under the Purchase Plan and deposited with the general funds of the
Company. A participant may not make any additional payments into such account.
PURCHASE OF STOCK
By executing an agreement to participate in the Purchase Plan, the employee
is entitled to purchase shares under such plan. In connection with offerings
made under the Purchase Plan, the Board specifies a maximum number of shares any
employee may be granted the right to purchase and the maximum aggregate number
of shares which may be purchased pursuant to such offering by all participants.
If the aggregate number of shares to be purchased upon exercise of rights
granted in the offering would exceed the maximum aggregate number, the Board
would make a pro rata allocation of shares available in a uniform and equitable
manner. Unless the employee's participation is discontinued, his or her right to
purchase shares is exercised automatically at the end of the purchase period at
the applicable price. See "Withdrawal" below.
WITHDRAWAL
While each participant in the Purchase Plan is required to sign an
agreement authorizing payroll deductions, the participant may withdraw from a
given offering by terminating his or her payroll deductions and by delivering to
the Company a notice of withdrawal from the Purchase Plan. Such withdrawal may
be elected at any time prior to the end of the applicable offering period.
Upon any withdrawal from an offering by the employee, the Company will
distribute to the employee his or her accumulated payroll deductions without
interest, less any accumulated deductions previously applied to the purchase of
stock on the employee's behalf during such offering, and such employee's
interest in the offering will be automatically terminated. The employee is not
entitled to again participate in such offering. An employee's withdrawal from an
offering will not have any effect upon such employee's eligibility to
participate in subsequent offerings under the Purchase Plan.
TERMINATION OF EMPLOYMENT
Rights granted pursuant to any offering under the Purchase Plan terminate
immediately upon cessation of an employee's employment for any reason, and the
Company will distribute to such employee all of his or her accumulated payroll
deductions, without interest.
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RESTRICTIONS ON TRANSFER
Rights granted under the Purchase Plan are not transferable and may be
exercised only by the person to whom such rights are granted.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend, terminate or amend the Purchase Plan at any time.
Any amendment of the Purchase Plan must be approved by the shareholders within
12 months of its adoption by the Board if the amendment would (a) increase the
number of shares of Common Stock reserved for issuance under the Purchase Plan,
(b) modify the requirements relating to eligibility for participation in the
Purchase Plan, or (c) modify any other provision of the Purchase Plan in a
manner that would materially increase the benefits accruing to participants
under the Purchase Plan, if such approval is required in order to comply with
the requirements of Rule 16b-3 under the Exchange Act.
Rights granted before amendment or termination of the Purchase Plan will
not be altered or impaired by any amendment or termination of such plan without
consent of the person to whom such rights were granted.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a dissolution, liquidation or specified type of merger of
the Company, the surviving corporation either will assume the rights under the
Purchase Plan or substitute similar rights, or the exercise date of any ongoing
offering will be accelerated such that the outstanding rights may be exercised
immediately prior to, or concurrent with, any such event.
STOCK SUBJECT TO PURCHASE PLAN
If rights granted under the Purchase Plan expire, lapse or otherwise
terminate without being exercised, the Common Stock not purchased under such
rights again becomes available for issuance under such plan.
FEDERAL INCOME TAX INFORMATION
Rights granted under the Purchase Plan are intended to qualify for
favorable federal income tax treatment associated with rights granted under an
employee stock purchase plan which qualifies under provisions of Section 423 of
the Code.
A participant will be taxed on amounts withheld for the purchase of shares
as if such amounts were actually received. Other than this, no income will be
taxable to a participant until disposition of the shares acquired, and the
method of taxation will depend upon the holding period of the purchase shares.
If the stock is disposed of at least two years after the beginning of the
offering period and at least one year after the stock is transferred to the
participant, then the lesser of (a) the excess of the fair market value of the
stock at the time of such disposition over the exercise price or (b) the excess
of the fair market value of the stock as of the beginning of the offering period
over the exercise price (determined as of the beginning of the offering period)
will be treated as ordinary income. Any further gain or any loss will be taxed
as a capital gain or loss. Capital gains currently are generally subject to
lower tax rates than ordinary income.
If the stock is sold or disposed of before the expiration of either of the
holding periods described above, then the excess of the fair market value of the
stock on the exercise date over the exercise price will be treated as ordinary
income at the time of such disposition, and the Company may, in the future, be
required to withhold income taxes relating to such ordinary income from other
payments made to the participant. The balance of any gain will be treated as
capital gain. Even if the stock is later disposed of for less than its fair
market value on the exercise date, the same amount of ordinary income is
attributed to the participant, and a capital loss is recognized equal to the
difference between the sales price and the fair market value of the stock on
such exercise date.
There are no federal income tax consequences to the Company by reason of
the grant or exercise of rights under the Purchase Plan. The Company is entitled
to a deduction to the extent amounts are taxed as ordinary
11
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income to a participant (subject to the requirement of reasonableness, the
provisions of Section 162(m) and the satisfaction of a tax reporting
obligation).
PROPOSAL 4
APPROVAL OF AMENDMENT TO THE COMPANY'S BYLAWS
Under the Company's current Bylaws, the Board of Directors must consist of
between six and 11 directors. In March 1998, the Board of Directors of the
Company adopted an amendment to the Bylaws to decrease the range of the number
of directors from six to 11 to five to nine. This amendment is intended to
afford the Company greater flexibility in having a Board of Directors of five
members if necessary.
Shareholders are requested in this Proposal 4 to approve the Bylaws, as
amended. The affirmative vote of a majority of the outstanding shares will be
required to approve the Bylaws, as amended. As a result, abstentions and broker
non-votes will have the same effect as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.
PROPOSAL 5
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998 and has
further directed that management submit the selection of independent auditors
for ratification by the shareholders at the Annual Meeting. Ernst & Young LLP
has audited the Company's financial statements since 1995. Representatives of
Ernst & Young LLP are expected to be present at the Annual Meeting, will have an
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.
Shareholder ratification of the selection of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Ernst & Young LLP
to the shareholders for ratification as a matter of good corporate practice. If
the shareholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of the Company
and its shareholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the Annual Meeting will be required
to ratify the selection of Ernst & Young LLP. For purposes of this vote,
abstentions and broker non-votes will not be counted for any purpose in
determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 5.
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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 January 31, 1998 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table employed by the Company in that capacity on January 31, 1998;
(iii) all executive officers and directors of the Company as a group; and (iv)
all those known by the Company to be beneficial owners of more than 5% of its
Common Stock.
BENEFICIAL OWNERSHIP(1)
------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES(#) TOTAL(%)
- ---------------- ---------- -----------
Burton J. McMurtry, Ph.D.................................... 1,224,510 11.5%
Technology Venture Investors-4, L.P.
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025(2)
Sprout Group................................................ 1,073,644 10.1
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025(3)
Fred E. Silverstein, M.D.................................... 653,863 6.1
Frazier & Company
Two Union Square
601 Union Street, Suite 2110
Seattle, WA 98101(4)
Jared A. Anderson, Ph.D..................................... 405,207 3.8
Richard P. Thompson(6)...................................... 359,795 3.4
Reid M. Rubsamen, M.D.(7)................................... 335,315 3.1
Lester John Lloyd(8)........................................ 332,095 3.1
Ross A. Jaffe, M.D.......................................... 315,213 3.0
Igor Gonda, Ph.D.(10)....................................... 167,500 1.6
Max D. Fiore(11)............................................ 119,591 1.1
Mark A. Olbert(12).......................................... 65,987 *
Gordon W. Russell(13)....................................... 18,911 *
Virgil D. Thompson(14)...................................... 19,500 *
All executive officers and directors as a group (12 4,017,487 37.0
persons)(15)..............................................
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the shareholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
10,632,133 shares outstanding on January 31, 1998, adjusted as required by
rules promulgated by the SEC.
(2) Represents 1,217,010 shares held by Technology Venture Investors-IV, as
nominee for various Technology Venture Investors funds. Mr. McMurtry, a
director of the Company, is a general partner of TVI Management-4, L.P.,
the General Partner of Technology Venture Investors-IV, and, as such, may
be deemed to share voting and investment power with respect to such shares.
Mr. McMurtry disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest in such shares arising from his interest
in the entities referred to herein. Includes 7,500 shares subject to an
option exercisable within 60 days of January 31, 1998, subject to
repurchase of unvested shares.
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(3) Represents 640,823 shares held by Sprout Capital VII, L.P. ("Sprout VII"),
374,125 shares held by Sprout Capital VI, L.P. ("Sprout VI") and 58,696
shares held by DLJ Capital Corporation ("DLJCC"). DLJCC is the Managing
General Partner of Sprout VII and Sprout VI and, as such, may be deemed to
share voting and investment power with respect to the shares beneficially
owned by Sprout VII and Sprout VI. Donaldson, Lufkin & Jenrette, Inc.
("DLJ") directly owns all of the capital stock of DLJCC and, as such, may
be deemed to share voting and investment power with respect to the shares
held by DLJCC, Sprout VII and Sprout VI. As of February 3, 1997, The
Equitable Companies Incorporated ("Equitable") beneficially owns, directly
and indirectly, 78.2% of DLJ and, as such, may be deemed to share voting
and investment power with respect to the shares held by DLJCC, Sprout VII
and Sprout VI.
(4) Represents 636,363 shares held by Frazier Healthcare II, L.P. and 10,000
shares held by Frazier Management, L.L.C. Dr. Silverstein, a director of
the Company, is a member of Frazier Management, L.L.C., the Managing Member
of FHM II, L.L.C., the General Partner of Frazier Healthcare II, L.P., and,
as such, may be deemed to share voting and investment power with respect to
such shares. Dr. Silverstein disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest in such shares arising from
his interest in Frazier Healthcare II, L.P. Includes 7,500 shares subject
to an option exercisable within 60 days of January 31, 1998, subject to
repurchase of unvested shares.
(5) Represents 397,707 shares held by Electronic Investments Ltd. Dr. Anderson,
a director of the Company, is the Financial Advisor of Electronic
Investments Ltd., and, as such, may be deemed to share voting and
investment power with respect to such shares. Dr. Anderson disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest arising from his interest in Electronic Investments Ltd. Includes
7,500 shares subject to an option exercisable within 60 days of January 31,
1998, subject to repurchase of unvested shares.
(6) Represents 233,158 shares held by Mr. Thompson, 200 shares held by members
of Mr. Thompson's immediate family, 71,437 shares held by the Thompson
Family Trust and 15,000 shares held by Thompson Family Partners. Mr.
Thompson is a Trustee of the Thompson Family Trust and a General Partner of
Thompson Family Partners and, as such, may be deemed to share voting and
investment power with respect to the shares held by the Thompson Family
Trust and Thompson Family Partners. Mr. Thompson disclaims beneficial
ownership of the shares held by his family members, the Thompson Family
Trust and Thompson Family Partnership except to the extent of his pecuniary
and proportionate partnership interest arising from his interest therein.
Includes 40,000 shares subject to an option exercisable within 60 days of
January 31, 1998, subject to repurchase of unvested shares.
(7) Includes 20,000 shares subject to an option exercisable within 60 days of
January 31, 1998, subject to repurchase of unvested shares.
(8) Represents 95,611 shares held by Mr. Lloyd and 8,620 shares held by The
Lloyd Trust. Mr. Lloyd, Chairman of the Board of Directors of the Company,
is Trustee of The Lloyd Trust and, as such, may be deemed to share voting
and investment power with respect to the shares held by The Lloyd Trust.
Mr. Lloyd disclaims beneficiary ownership of the shares held by The Lloyd
Trust except to the extent of his pecuniary interest arising from his
interest in such entity. Includes 226,323 shares held by Farm Street
Investments Ltd. ("Farm Street"). Mr. Lloyd is an investment advisor of
Farm Street and disclaims beneficial ownership of the 226,323 shares held
by Farm Street. Includes 1,541 shares subject to an option exercisable
within 60 days of January 31, 1998, subject to repurchase of unvested
shares.
(9) Represents 304,863 shares held by Brentwood Associates VI, L.P. and 2,850
shares owed by The Jaffe Family Trust. Dr. Jaffe, a director of the
Company, is a general partner of Brentwood VI Ventures, L.P., the General
Partner of Brentwood Associates VI, L.P., and a Trustee of The Jaffe Family
Trust and, as such, may be deemed to share voting and investment power with
respect to such shares. Dr. Jaffe disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest in such shares
arising from his interest in the entities referred to herein. Includes
7,500 shares subject to an option exercisable within 60 days of January 31,
1998, subject to repurchase of unvested shares.
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(10) Represents 146,700 shares held by Dr. Gonda. Also represents 800 shares
held by members of Dr. Gonda's immediate family. Dr. Gonda disclaims
beneficial ownership of such shares. Includes 20,000 shares subject to an
option exercisable within 60 days of January 31, 1998, subject to
repurchase of unvested shares.
(11) Includes 10,000 shares subject to an option exercisable within 60 days of
January 31, 1998, subject to repurchase of unvested shares.
(12) Includes 65,000 shares subject to an option exercisable within 60 days of
January 31, 1998, subject to repurchase of unvested shares.
(13) Represents 678 shares held by Mr. Russell, 8,915 shares held by Sequoia
XXIV and 1,818 shares held by Sequoia 1995, L.L.C. Mr. Russell, a director
of the Company, is an investment advisor of Sequoia XXIV and Sequoia 1995,
L.L.C., and, as such, may be deemed to share voting and investment power
with respect to such shares. Mr. Russell disclaims beneficial ownership of
the shares held by Sequoia XXIV and Sequoia 1995, L.L.C. except to the
extent of his pecuniary and proportionate partnership interest in such
shares arising from his interest in the entities referred to herein.
Includes 7,500 shares subject to an option exercisable within 60 days of
January 31, 1998, subject to repurchase of unvested shares.
(14) Represents 19,500 shares subject to an option exercisable within 60 days of
January 31, 1998, subject to repurchase of unvested shares.
(15) See Notes (1) through (14) above, as applicable.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with; except that two reports
covering two transactions were filed late by each of Dr, Anderson, Mr. Lloyd and
Dr. Silverstein.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses incurred in connection with attendance at Board
meetings in accordance with Company policy.
Each non-employee director of the Company also receives stock option grants
under the Non-Employee Directors' Stock Option Plan (the "Directors' Plan").
Only non-employee directors of the Company are eligible to receive options under
the Directors' Plan. Options granted under the Directors' Plan are intended by
the Company not to qualify as incentive stock options under the Code.
Option grants under the Directors' Plan are non-discretionary. On June 19
of each year (or the next business day should such date be a legal holiday)
beginning with June 19, 1997, each member of the Company's Board of Directors
who is not an employee of the Company is automatically granted under the
Directors' Plan, without further action by the Company, the Board of Directors
or the shareholders of the Company, an option to purchase 7,500 shares of Common
Stock of the Company (pro-rated for non-employee directors with less than a full
year's tenure).
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Options under the Directors' Plan will vest in four equal, quarterly
installments commencing on the date of the grant of the option. The exercise
price of the options granted under the Directors' Plan is the fair market value
of the Common Stock granted on the date of grant. No option granted under the
Directors' Plan may be exercised after the expiration of 10 years from the date
it was granted. Options granted under the Directors' Plan are generally
non-transferable except pursuant to a qualified domestic relations order in
beneficiary descriptions. The Directors' Plan will terminate at the direction of
the Board.
In the event of certain changes of control, options outstanding under the
Directors' Plan will automatically become fully vested and will terminate if not
exercised prior to such change of control.
As of February 28, 1998, 52,500 options to purchase Common Stock have been
granted pursuant to the Director's Plan and 97,500 shares remained available for
grant thereunder.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended December 31, 1995,
1996 and 1997, compensation awarded or 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
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1)
--------------------------- ---- --------- -------- -------------
Richard P. Thompson............................... 1997 225,000 55,553 40,000
President, Chief Executive Officer 1996 185,000 62,221 106,596
and Director 1995 150,000 30,000 --
Reid M. Rubsamen, M.D............................. 1997 160,000 31,604 20,000
Vice President, Medical Affairs, 1996 132,000 35,592 28,065
Secretary and Director 1995 120,000 -- --
Max D. Fiore...................................... 1997 140,000 27,653 10,000
Vice President, Engineering 1996 130,000 35,074 28,075
1995 115,000 15,000 --
Igor Gonda, Ph.D.................................. 1997 160,000 31,604 20,000
Vice President, Research 1996 144,000 39,012 --
and Development 1995 -- -- --
Mark A. Olbert(2)................................. 1997 145,000 28,170 65,000
Chief Financial Officer 1996 -- -- --
and Vice President, Finance 1995 -- -- --
and Administration
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(1) The Company has not issued any stock appreciation rights (SARs).
(2) Mr. Olbert started with the Company in January 1997.
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STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1996 Plan.
The following tables show for the fiscal year ended December 31, 1997, certain
information regarding options granted to, exercised by, and held at year end by,
the Named Executive Officers:
OPTION GRANTS IN FISCAL 1997
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENTAGE
OF TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED ANNUAL RATES OF STOCK
UNDERLYING TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM(3)
GRANTED IN FISCAL PRICE EXPIRATION ----------------------
NAME (#)(1) 1997(%)(2) ($/SH) DATE 5%($) 10%($)
---- ------------ ----------- --------- ----------- --------- ---------
Richard P.Thompson............. 40,000 7.3% $8.75 02/10/07 $220,500 $556,500
Reid M. Rubsamen, M.D.......... 20,000 3.6 8.75 02/10/07 110,250 278,250
Max D. Fiore................... 10,000 1.8 8.75 02/10/07 55,125 139,125
Igor Gonda, Ph.D............... 20,000 3.6 8.75 02/10/07 110,250 278,250
Mark A. Olbert................. 65,000 11.8 8.75 02/10/07 358,313 904,313
- ---------------
(1) Options vests quarterly over a four-year period. The options will fully vest
upon a change of control, as defined in the 1996 Plan, unless the acquiring
company assumes the options or substitutes similar options. The Board of
Directors may reprice options under the terms of the 1996 Plan.
(2) Based on options to purchase 550,600 shares granted in 1997.
(3) The potential realizable value is based on the term of the option at its
time of grant (10 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. These
amounts represent certain assumed rates of appreciation only, in accordance
with the rules of the SEC, and do not reflect the Company's estimate or
projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of the Company's Common Stock and
no gain to the optionee is possible unless the stock price increases over
the option term, which will benefit all shareholders.
VALUE OF OPTIONS AT END OF FISCAL 1997(1)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS/SARS AT FY-END(#)
NAME EXERCISABLE/UNEXERCISABLE(2)
---- ------------------------------
Richard P. Thompson......................................... 40,000/--
Reid M. Rubsamen, M.D....................................... 20,000/--
Max D. Fiore................................................ 10,000/--
Igor Gonda, Ph.D............................................ 20,000/--
Mark A. Olbert.............................................. 65,000/--
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(1) No Named Executive Officer exercised any option in 1997. In addition, none
of the options held by the Named Executive Officers were "in-the-money".
"In-the-money" options are options with exercise prices below the market
price of the Company's Common Stock at December 31, 1997. The fair market
value of the Company's Common Stock at December 31, 1997 was $8.50 per
share.
(2) Reflects shares vested and unvested at December 31, 1997. Options granted
under the 1996 Plan are immediately exercisable, but are subject to the
Company's right to repurchase unvested shares on termination of employment.
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REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION(1)
The Compensation Committee of the Board of Directors (the "Committee") is
responsible for setting and administering the policies that govern annual
executive salaries, bonuses and stock option grants. The Committee annually
evaluates the performance, and determines the level of compensation, of the
Chief Executive Officer ("CEO"), and the other executive officers of the Company
based upon a mix of the achievement of the corporate goals, individual
performance and comparisons with other biotechnology companies. The CEO is not
present during the discussion of his compensation.
The policies of the Committee with respect to executive officers, including
the CEO, are to provide compensation sufficient to attract, motivate and retain
executives of outstanding ability and potential and to establish an appropriate
relationship between executive compensation and the creation of shareholder
value. To meet these goals, the Committee has adopted a mix among the
compensation elements of salary, bonus and stock options, with a bias toward
stock options to emphasize the link between executive incentives and the
creation of shareholder value as measured by the equity markets.
In general, the salaries of executive officers are based upon a review of
surveys of publicly-held biotechnology companies of a similar size to the
Company in terms of number of persons employed. Based upon such surveys, the
executive officers' salaries are set at the beginning of a fiscal year in the
low- to mid-range as compared to other biotechnology companies described above.
The salaries are adjusted at such time within such range based upon whether an
executive officer met specific individual performance goals. Such individual
performance goals are based upon the officer's contribution toward Company
goals. For the fiscal year ended December 31, 1997, the average increase in the
salaries of the executive officers, including the CEO, was 13.7%.
Target bonuses of executive officers are based upon the surveys of other
biotechnology companies described above and are set at the beginning of each
fiscal year as a percentage of base salary, which percentage is in the mid-range
as compared to such other biotechnology companies. Actual bonuses are paid at
the end of each fiscal year and may be above or below target depending on
whether certain corporate goals have been met during the year. The set of
corporate goals is the same for all executive officers. Because the Company is a
development stage company, the corporate goals are based upon product
development and financing objectives rather than the operating performance of
the Company. The Board of Directors assigns a weight to each goal according to
whether it was attained or surpassed. The bonus is capped at 150% of the target
percentage based on maximum goal achievement.
For the fiscal year ended December 31, 1997, the target bonus for the CEO
was at 30% of base salary while the target bonus for all other executive
officers was set at 24% of base salary. For the bonus for services rendered in
1997, the corporate performance goals related to (i) the execution of AERx(TM)
feasibility and product development agreements, (ii) the successful launch of
the SmartMist(R) Respiratory Management System, (iii) the execution of a
clinical trial showing the pharmacoeconomic benefits of the SmartMist
Respiratory Management System, (iv) the improvement of the quality of aerosols
produced by AERx technology, (v) the implementation of a stand-alone clinical
supply capability able to support clinical trials planned for AERx systems, (vi)
the completion of partner-sponsored feasibility programs on time and on budget,
(vii) the completion of development of a prototype AERx Pulmonary Diagnostic
System, and (viii) the demonstration of the delivery of
therapeutically-significant levels of insulin into the bloodstream of healthy
volunteers using AERx technology. Because most of the corporate goals were
either attained or surpassed during 1997 according to information obtained by
management and approved by the Board of Directors, the actual bonus awarded for
each executive officer, including the CEO, was 82.3% of the target.
In recommending stock options for executive officers, the Committee
considers individual performance, overall contribution to the Company and the
total number of stock options to be awarded. The level of stock option awards is
also based upon the surveys of other biotechnology companies described above.
After considering the criteria relating to awarding stock options, the Committee
determined that four executive officers, including the CEO, would receive option
grants in the fiscal year ended December 31, 1997.
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The Committee uses the same procedures described above for the other
executive officers in setting the annual salary, bonus and stock option awards
for the CEO, except that the CEO's salary is adjusted according to whether
corporate rather than individual goals are met. The corporate goals used in
adjusting the salary of the CEO are the same as the corporate goals utilized in
adjusting the bonuses of all executive officers. The CEO's salary and bonus are
determined based on comparisons with other biotechnology companies and adjusted
according to corporate performance described above. Because most of the
corporate goals were met in 1997, the CEO received an increase in salary of
15.6% and a bonus that was 82.3% of the target bonus. In awarding stock options,
the Committee considers the CEO's performance, overall contribution to the
Company, the total number of options awarded and the level of options granted by
other biotechnology companies described above. Based on such criteria, the CEO
received an option to purchase an aggregate of 100,000 shares of the Company's
Common Stock for the fiscal year ended December 31, 1997. Compared to other
biotechnology companies described above, the CEO's salary and stock options are
in the low- to mid-range.
Section 162(m) limits the Company to a deduction for federal income tax
purposes of no more than $1 million of compensation paid to certain Named
Executive Officers during a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code. The Committee believes that at the present time it is unlikely that the
compensation paid to any Named Executive Officer in a taxable year which is
subject to the deduction limit will exceed $1 million. Therefore, the Committee
has not yet established a policy for determining which forms of incentive
compensation awarded to its Named Executive Officers shall be designed to
qualify as "performance-based compensation." The Committee intends to continue
to evaluate the effects of the statute and any Treasury regulations and to
comply with Section 162(m) in the future to the extent consistent with the best
interests of the Company.
From the current and former members of the Committee of Aradigm
Corporation:
Jared A. Anderson, Ph.D.(2)
Fred E. Silvestein
Ross A. Jaffe, M.D.(2)
Virgil D. Thompson
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(1) This section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended (the "Securities Act") or the
Exchange Act whether made before or after the date hereof and irrespective
of any general incorporation language in any such filing.
(2) Former member of the Compensation Committee. See "Proposal 1 -- Board
Committees and Meetings."
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph compares total shareholder returns of the Company since
its initial public offering of Common Stock on June 20, 1996 to two indices; the
Nasdaq CRSP Total Return Index for the Nasdaq Stock Market (U.S. companies) (the
"Nasdaq-US") and the Nasdaq Pharmaceutical Index (the "Nasdaq-Pharmaceutical").
The total return for the Company's stock and for each index assumes the
reinvestment of dividends, although dividends have never been declared on the
Company's stock, and is based on the returns of the component companies weighted
according to their capitalizations as of the end of each quarterly period. The
Nasdaq-US tracks the aggregate price performance of equity securities of U.S.
companies traded on the Nasdaq National Market (the "NM"). The
Nasdaq-Pharmaceutical tracks the aggregate price performance of equity
securities of pharmaceutical companies traded on the NM. The Company's Common
Stock is traded on the NM and is a component of both the Nasdaq-US and the
Nasdaq-Pharmaceutical.
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COMPARISON OF CUMULATIVE TOTAL RETURN ON INVESTMENT
SINCE THE COMPANY'S INITIAL PUBLIC OFFERING ON JUNE 20, 1996(2)
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) ARDM NASDAQ-US NASDAQ-PHARM
6/28/96 100.00 100.00 100.00
9/30/96 88.64 103.58 102.26
12/31/96 89.77 108.70 99.00
3/31/97 82.95 102.81 94.24
6/30/97 51.14 121.74 101.75
9/30/97 127.27 142.20 114.29
12/31/97 77.27 133.50 102.76
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(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the Securities Act or the Exchange Act whether made before or after
the date hereof and irrespective of any general incorporation language in
any such filing.
(2) Shows the cumulative total return on investment assuming an investment of
$100 in each of the Company, the Nasdaq-US and the Nasdaq-Pharmaceutical on
June 20, 1996. The cumulative total return on the Company's stock has been
computed based on an initial price of $11.00 per share, the price at which
the Company's shares were sold in its initial public offering on June 20,
1996.
CERTAIN TRANSACTIONS
In May 1994, the Company issued and sold to Richard P. Thompson, President,
Chief Executive Officer and a director of the Company, an aggregate of 225,000
shares of its Common Stock for an aggregate purchase price of $82,500, payable
pursuant to a secured promissory note bearing interest at the rate of 7% per
annum, with accrued but unpaid interest due and payable annually and the
principal and remaining interest due and payable on July 1, 1999. In February
1996, the Company issued and sold to Mr. Thompson an aggregate of 106,596 shares
of its Common Stock for an aggregate purchase price of $60,404, $54,364 of which
was paid pursuant to a secured promissory note bearing interest at the rate of
5.45% per annum, with the principal and accrued but unpaid interest due and
payable on February 28, 2001. The largest aggregate amount of Mr. Thompson's
indebtedness to the Company during fiscal 1997 was $144,158. The outstanding
balance of the loans to Mr. Thompson was $125,506 as of February 28, 1998.
In May 1995, the Company issued and sold to R. Ray Cummings, Vice President
of Business Development of the Company, an aggregate of 67,500 shares of its
Common Stock for an aggregate purchase price of $29,250, payable pursuant to a
secured promissory note bearing interest at the rate of 7.12% per annum, with
accrued but unpaid interest due and payable annually and the principal and
remaining interest due and payable on July 1, 2000. In May 1995, the Company
made a relocation loan to Mr. Cummings of $53,235 pursuant to a Promissory Note
Secured by Deed of Trust, with the principal and 6% interest due and payable on
February 7, 2001. In March 1996, the Company issued and sold to Mr. Cummings
4,357 shares of its Common Stock for an aggregate purchase price of $2,469,
$2,222 of which was paid pursuant to a secured promissory note bearing interest
at the rate of 5.45% per annum, with the principal and accrued but unpaid
interest due and payable on March 10, 2001. The largest aggregate amount of Mr.
Cummings' indebtedness to the Company during fiscal 1997 was $93,237. When Mr.
Cummings left the Company in January 1998, the loans to Mr. Cummings were
settled and the outstanding balances brought to $0.
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23
In December 1995, the Company issued and sold to Dr. Gonda, Vice President
of Research and Development of the Company, 150,000 shares of its Common Stock
for an aggregate purchase price of $65,000, $58,500 of which was paid pursuant
to a secured promissory note bearing interest at the rate of 5.91% per annum,
with the principal and accrued but unpaid interest due and payable on December
27, 2000. In October 1995, the Company made a relocation loan to Dr. Gonda
$90,000 pursuant to an interest-free promissory note, with the principal amount
due and payable in October 1998. The largest aggregate amount of Dr. Gonda's
indebtedness to the Company during fiscal 1997 was $154,301. The aggregate
outstanding balance of the loans to Dr. Gonda was $132,157 as of February 28,
1998.
The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party be
reason of his position as a director, officer or other agent of the Company, and
otherwise to the full extent permitted under California law and the Company's
Bylaws.
The Company believes that the foregoing transactions were in its best
interests. As a matter of policy these transactions were, and all future
transactions between the Company and any of its officers, directors or principal
shareholders will be, approved by a majority of the independent and
disinterested members of the Board of Directors, will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be in connection with bona fide business purposes of the Company.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
LOGO
REID M. RUBSAMEN
Secretary
April 13, 1998
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 IS AVAILABLE
WITHOUT CHARGE UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, ARADIGM
CORPORATION, 26219 EDEN LANDING ROAD, HAYWARD, CA 94545.
21
24
DETACH HERE
PROXY
ARADIGM CORPORATION
26219 Eden Landing Road
Hayward, California 94545
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Richard P. Thompson, Mark A. Olbert and
Reid M. Rubsamen each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse side, all
shares of common stock of Aradigm Corporation (the "Company") held of record by
the undersigned on March 31, 1998 at the Annual Meeting of Shareholders to be
held on May 15th, 1998 and any adjournments thereof, with all powers that the
undersigned would possess if personally present, upon and in respect of the
following matters in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS GIVEN WITH RESPECT TO A PARTICULAR PROPOSAL, THIS PROXY WILL BE
VOTED FOR SUCH PROPOSAL.
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
25
Dear Fellow Aradigm Shareholder:
Accompanying this proxy card is Aradigm's 1997 Annual Report and its 1998 Proxy
Statement. Your company made significant progress in 1997, which is highlighted
in the Annual report. We are working hard to make 1998 an equally important
year for your Aradigm.
I would appreciate your taking a minute to review the important information
enclosed with this Proxy. There are a number of issues related to Aradigm's
operation that require your prompt attention. Your vote counts, and I strongly
encourage you to exercise your right to vote your shares.
Please mark the boxes on the proxy card to indicate how your shares will be
voted, sign the card, detach it and return your proxy in the enclosed postage
paid envelope.
Sincerely,
/s/ Richard P. Thompson
- -------------------------------
Richard P. Thompson
President and Chief Executive officer
Aradigm Corporation
DETACH HERE
26
DETACH HERE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES LISTED IN PROPOSAL 1
AND FOR PROPOSALS 2, 3, 4, AND 5.
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE
1. Election of Directors.
Elect the Burton J. .McMurtry,
following Reid M. Rubsamen,
nominees Gordon W. Russell,
whether by Fred W. Silverstein,
cumulative Richard P. Thompson
voting or and Virgil D. Thompson
otherwise:
[ ] FOR [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
[ ]
------------------------------------------------------
For all nominees except as noted above
FOR AGAINST ABSTAIN
2. Approve the Company's 1996 Equity [ ] [ ] [ ]
Incentive Plan, as amended, to increase
the aggregate number of shares of
common stock authorized for issuance
under such plan by 1,000,000 shares.
3. Approve the Company's Employee Stock [ ] [ ] [ ]
Purchase Plan, as amended, to increase
the aggregate number of shares of
common stock authorized for issuance
under such plan by 150,000 shares.
FOR AGAINST ABSTAIN
4. Amend the Company's Bylaws to set the [ ] [ ] [ ]
range of directors at five to nine.
5. Ratify the appointment of Ernst & Young [ ] [ ] [ ]
LLP as independent auditors for 1998.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign exactly as name appears hereon. Joint owners should each sign.
Executors, administrators, trustees, guardians or other fiduciaries should give
full title as such. If signing for a corporation, please sign in full corporate
name by a duly authorized officer.
Signature: Date:
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Signature: Date:
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