SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Filed by the Registrant
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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 ss. 240.14a-11(c) or ss. 240.14a-12
ORPHAN MEDICAL, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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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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[ ] Fee paid previously with preliminary materials.
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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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4) Date Filed:
[COMPANY LOGO]
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
April 21, 2003
To Our Stockholders:
You are cordially invited to attend the 2003 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 22, 2003 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
six 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,
2003.
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 22, 2003.
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 22, 2003
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 22, 2003 at the
Radisson Plaza Hotel, 35 South 7th Street, Minneapolis, Minnesota 55402, for the
following purposes:
1. To elect six 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 3,175,000 shares to 3,675,000 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, 2003; 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 April 21, 2003 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
21, 2003 (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 21, 2003
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 250
MINNETONKA, MINNESOTA 55305
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
MAY 22, 2003
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 22, 2003 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 21, 2003.
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 April
8, 2003 will be entitled to vote at the Annual Meeting or any adjournments
thereof. As of that date, a total of 10,536,555 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 April 8, 2003, the Company's Senior
Convertible Preferred Stock was convertible into an aggregate of 1,069,533
shares of Common Stock, which approximates 122.850 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.
1
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 on the following page sets forth, as of March 1, 2003, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person who, to the knowledge of the Company, owned
beneficially more than five percent of such stock, (ii) each director, (iii)
each executive officer named in the "Summary Compensation Table" above, and (iv)
all directors and executive officers as a group. Unless otherwise noted, the
shares listed in the table below are subject to sole voting and investment power
of the indicated person.
Beneficial ownership is determined and presented in the table on the
following page 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, 2003,
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. With respect to UBS Capital II LLC, the
percentage of ownership calculation is based on Common Shares outstanding as of
March 1, 2003, plus 1,069,533 shares of Common Stock, which represents 8,709
shares of Senior Convertible Preferred Stock owned by UBS Capital II LLC on an
as converted basis.
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 11.56%
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
OrbiMed Advisors LLC (2) 1,617,302 15.42
767 Third Avenue - 6th Floor
New York, NY 10017-2023
UBS Capital II LLC (3) 1,750,552 14.30
299 Park Avenue
New York, NY 10171-0026
John Howell Bullion (4) 556,645 5.10
William Houghton, M.D. (5) 168,051 1.58
Mark D. Perrin (6) 25,000 *
Timothy G. McGrath (7) 42,119 *
Farah Champsi (8) 6,000 *
Michael Greene (9) 26,000 *
Thomas King (10) 6,000 *
Julius A. Vida, Ph.D. (11) 26,000 *
William M. Wardell, M.D., Ph.D. (12) 57,500 *
All directors and executive officers as a group (11 persons) (13) 905,514 8.04
-----------------------------
* Less than one 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 this capacity,
Alta Partners II, Inc. is affiliated with Alta BioPharma Partners II, L.P.,
Alta Embarcadero BioPharma Partners II, LLC, Alta BioPharma Management
Partners II, LLC, Alta Partners II, Inc. and Jean Deleage, Alix Marduel and
Farah Champsi. The beneficial ownership information is based on a schedule
13D filed by Alta Partners on December 17, 2001.
(2) OrbiMed Advisors LLC has shared voting and dispositive power with respect
to 1,617,302 shares of the Company's Common Stock. The number of shares
beneficially owned is based on a schedule 13G filed by OrbiMed Advisors on
February 14, 2003.
3
(3) 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 115,327 shares of unregistered
Common Stock. The shares of Senior Preferred Convertible Stock vote on an
as-converted basis. In addition, UBS Capital owns (i) 3,677 shares of
non-voting Series B Convertible Preferred Stock, which is convertible into
565,692 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.
(4) Includes 429,933 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, 2003.
(5) Includes 153,080 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, 2003.
(6) Includes 25,000 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, 2003.
(7) Includes 40,015 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, 2003.
(8) Includes 6,000 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, 2003. Ms. Champsi is affiliated
with Alta Partners II, Inc. and she disclaims beneficial ownership of any
shares of Common Stock beneficially owned by Alta Partners II, Inc. and its
affiliates.
(9) Includes 26,000 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, 2003.
(10) Includes 6,000 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, 2003.
(11) Includes 26,000 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, 2003.
(12) Includes 56,000 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, 2003.
(13) Includes 767,028 shares that may be acquired within 60 days of March 1,
2003 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 six members. Six
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. Dr. W.
Leigh Thompson resigned as a director of the Company in July 2002. This
resignation created a vacancy on the Board of Directors that the Board of
Directors has determined not to fill at this time.
The Company's incumbent directors, John Howell Bullion, Farah M. Champsi,
Michael Greene, Thomas B. King, 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. 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, 51, 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, 41, 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.
JULIUS A. VIDA, PH.D. Dr. Vida, 74, 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.
5
WILLIAM M. WARDELL, M.D., PH.D. Dr. Wardell, 64, has been a director of the
Company 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, 48, 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, 41, has been a director of the
Company since December 7, 2001. Ms. Champsi is a
managing director of Alta Partners, a venture
capital firm located in San Francisco,
California since May, 2000. Ms. Champsi was an
investment banker at Robertson Stephens &
Company, between May 1987 and December 1999,
where she was elected a general partner in 1992
and the head of life sciences investment banking
in 1995. She holds an M.B.A. from Stanford
University and a B.A. from Smith College. Ms.
Champsi serves on the board of Cytokinetics,
Incorporated., Renovis, Inc. and Myocor, Inc.
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 AND KING AND DRS. VIDA AND 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
6
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.
Upon re-election to the Board, each non-employee director is entitled to receive
an option to purchase 5,000 shares with 1,000 shares vesting immediately and the
remaining 4,000 shares vesting over a four year period in 1,000 share
increments. Each option has a term of ten years. In fiscal 2002, Ms. Champsi and
Mr. King received an option to purchase 25,000 shares upon being named to the
Company's Board of Directors. Upon re-election to the Board of Directors in May
2002, all non-employee directors received an option to purchase 5,000 shares of
the Company's common stock.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During 2002, the Board of Directors held seven meetings and acted twice 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.
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 2002. 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. The Compensation Committee's function is to review and make certain
determinations with respect to matters concerning the compensation of employees,
officers and directors. The Compensation Committee met three during 2002.
The Regulatory Oversight Committee consists of Dr. Wardell and, prior to
his resignation in July 2002, also consisted of Dr. W. Leigh Thompson. The
Regulatory Oversight Committee's function is to keep the Board informed on
matters pertaining to regulatory compliance. The Regulatory Oversight Committee
met once during 2002, prior to Dr. Thompson's resignation.
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.
7
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:
o Provide compensation that will attract, retain and motivate
high-caliber executives;
o Motivate officers to achieve important Company performance goals; and
o 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 at the mid-point of the range when compared to
salaries paid by comparable peer companies.
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 2002, 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
8
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 2002, Mr. Bullion was granted an option to purchase 35,000 shares
at $11.64 per share and an option to purchase 10,000 shares at $7.67 per share;
Dr. Houghton was granted an option to purchase 25,000 shares at $11.64 per share
and an option to purchase 7,500 at $7.67 per share; Mr. Perrin was granted an
option to purchase 51,250 shares at $9.75 per share, an option to purchase
73,750 shares at $9.75 per share and an option to purchase 7,500 shares at $7.67
per share; Mr. McGrath was granted an option to purchase 12,000 shares at $11.64
per share, an option to purchase 7,500 shares at $9.95 per share and an option
to purchase 5,000 shares at $7.67 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 3,175,000
shares to 3,675,000 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. Effective January 1, 2003, Mr. Bullion's salary
was increased to $275,000.
Mr. Bullion's annual base salary and annual bonus compensation are set by
the Compensation Committee, taking into account such factors as the Company's
financial performance, Mr. Bullion's leadership within the Company, his
performance with respect to personal performance goals, his pay in relation to
the pay of chief executive officers at comparable peer companies and the
Compensation Committee's overall compensation philosophy.
The Compensation Committee has not yet awarded Mr. Bullion a cash bonus for
his performance in fiscal 2002.
9
STOCK OPTION AWARDS
In fiscal 2002, the Compensation Committee approved option grants to Mr.
Bullion to purchase 45,000 shares of common stock.
Farah H. Champsi (Chairperson)
William M. Wardell, M.D., Ph.D.
Thomas B. King
Members of the Compensation Committee
10
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for the
three fiscal years ended December 31, 2002, awarded to or earned by the Chief
Executive Officer and all other executive officers of the Company.
Long-Term
Annual Compensation
Compensation Awards
--------------------------- --------------
Securities All Other
Underlying Compensation
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Options # ($)(4)
---------------------------------------- ------------ ------------ ------------- -------------- ---------------
John Howell Bullion 2002 220,655 0(1) 0 803
Chairman of the Board, Chief 2001 200,000 109,635(2) 29,833 500
Executive Officer and Secretary 2000 180,000 -- 0 730
William Houghton, M.D. 2002 281,551 112,621 0 2,102
Executive Vice President, Chief 2001 256,938 128,131 17,700 7,688(5)
Scientific and Chief Medical 2000 208,115 10,000 0 7,841(5)
Officer
Mark D. Perrin(3) 2002 154,277 61,784 125,000 397
Executive Vice President and
Chief Commercial Officer
Timothy G. McGrath 2002 161,042 56,361 0 444
Vice President and Chief 2001 142,917 27,592 6,600 419
Financial Officer 2000 135,000 47,000 0 524
-----------------------------
(1) The Compensation Committee has not yet awarded Mr. Bullion a cash bonus for
his performance in fiscal 2002.
(2) Includes $60,000 cash bonus paid to the named executive officer for his
performance in the fiscal year ending December 31, 2000.
(3) Mr. Perrin joined the Company on May 21, 2002.
(4) Except as indicated below, includes amounts paid for group term life
insurance paid for each executive, ($483 for Mr. Bullion, $124 for Mr.
McGrath and $120 for Mr. Perrin) and disability insurance paid for each
executive, ($320 for Mr. Bullion and Mr. McGrath and $187 for Mr. Perrin)
for the fiscal year ending December 31, 2002. Also includes amounts paid
for group term life and disability insurance paid for Mr. Bullion and Mr.
McGrath for the fiscal years ended December 31, 2001 and 2000.
(5) Includes disability insurance ($320) and group term life insurance ($1,782)
for the year ended December 31, 2002. Includes disability insurance, group
term life insurance and travel expenses per terms of employment for the
year ended December 31, 2001. Includes group term life insurance,
disability insurance, and travel expenses paid per terms of employment for
the fiscal year ended December 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of stock
options to each of the executive officers named in the Summary Compensation
Table during fiscal 2002. The percentage of total options set forth below is
based on an aggregate of 572,050 options granted to employees during fiscal
2002. All options were granted with an exercise price equal to the closing price
of the Company's common stock on the Nasdaq National Market on the date of
grant. Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts representing hypothetical gains are those that
could be achieved for the options if exercised at the end of the option term.
The assumed 5% and 10% rates of stock price appreciation are provided in
accordance
11
with rules of the Securities and Exchange Commission based on the fair market
value of the stock at the time of option grant, and do not represent our
estimate or projection of the future stock price.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2002
Potential Realizable
Value at Assumed
Annual Rate of Stock
Price Appreciation
Individual Grants For Option Term
---------------------------------------------------------- -----------------------
Number of
Shares of % of Total
Common Stock Option Exercise
Underlying Granted to Price
Options Employees in Per Expiration
Name Granted(1) FY 2002 (%) Share ($) Date 5% ($) 10% ($)
---------------------------- ---------------- -------------- ---------- ------------ ---------- -----------
John Howell Bullion........(1) 35,000 6.12 11.64 02/26/12 256,212 649,921
(2) 10,000 1.75 7.67 10/29/12 48,236 122,240
William Houghton, M.D......(1) 25,000 4.37 11.64 02/26/12 183,008 463,779
(2) 7,500 1.31 7.67 10/29/12 36,177 91,680
Mark D. Perrin.............(3) 51,250 8.96 9.75 05/21/12 314,521 796,373
(3) 73,750 12.89 9.75 05/21/12 452,215 1,146,000
(2) 7,500 1.31 7.67 10/29/12 36,177 91,680
Timothy G. McGrath.........(1) 12,000 2.10 11.64 02/26/12 87,844 222,614
(4) 7,500 1.31 9.95 07/15/12 46,931 118,933
(2) 5,000 0.87 7.67 10/29/12 24,024 60,881
-----------------------------
(1) All such options were granted February 26, 2002 under the Company's 1994
Stock Plan. All options vest 20% on the grant date and 20% on each of the
following four anniversaries of the grant date and are exercisable in full
after the end of four years of continued employment. In the event the
Company would consolidate with, merge into, or transfer all or
substantially all of its assets to another corporation, then all options
granted under this plan become immediately exercisable. The option exercise
price is not adjustable over the 10-year term of the options except due to
stock splits and similar occurrences affecting all outstanding stock.
(2) All such options were granted October 29, 2002 under the Company's 1994
Stock Plan. All options vest 100% on the first anniversary of the grant
date. In the event the Company would consolidate with, merge into, or
transfer all or substantially all of its assets to another corporation,
then all options granted under this plan become immediately exercisable.
The option exercise price is not adjustable over the 10-year term of the
options except due to stock splits and similar occurrences affecting all
outstanding stock.
(3) All such options were granted May 21, 2002 under the Company's 1994 Stock
Plan. All options vest 20% on the grant date and 20% on each of the
following four anniversaries of the grant date and are exercisable in full
after the end of four years of continued employment. In the event the
Company would consolidate with, merge into, or transfer all or
substantially all of its assets to another corporation, then all options
granted under this plan become immediately exercisable. The option exercise
price is not adjustable over the 10-year term of the options except due to
stock splits and similar occurrences affecting all outstanding stock.
(4) All such options were granted July 15, 2002 under the Company's 1994 Stock
Plan. All options vest 20% on the grant date and 20% on each of the
following four anniversaries of the grant date and are exercisable in full
after the end of four years of continued employment. In the event the
Company would consolidate with, merge into, or transfer all or
substantially all of its assets to another corporation, then all options
granted under this plan become immediately exercisable. The option exercise
price is not adjustable over the 10-year term of the options except due to
stock splits and similar occurrences affecting all outstanding stock.
12
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table summarizes stock option exercises in 2002 by the
executive officers named in the "Summary Compensation Table" above and the value
of options held by such persons at December 31, 2002.
Number of Unexercised Value of Unexercised
Options Held at In-the-Money Options
Shares December 31, 2002 Held at December 31,
Acquired on Value Realized (Exercisable/ 2002 (Exercisable/
Exercise ($) Unexercisable) Unexercisable) ($)(1)
-------------- ---------------- ----------------------- -------------------------
John Howell Bullion 0 0 428,933/60,900 1,468,000/22,800
William Houghton 0 0 153,080/33,120 217,550/8,475
Mark D. Perrin 0 0 25,000/107,500 0/8,475
Timothy G. McGrath 0 0 40,015/32,560 66,468/21,050
-----------------------------
(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,
2002, which was $8.80.
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, and
effective January 1, 2003, the Compensation Committee increased Mr. Bullion's
2003 annual base salary to $275,000. 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.
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.
13
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. Perrin, 18 months; and Mr. McGrath,
12 months.
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, 1997, 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 Total NASDAQ Pharmaceutical Total
Orphan Medical, Inc. Return Index Return Index
---------------------- ---------------------------- -------------------------------
December 1997 100.00 100.00 100.00
December 1998 161.02 140.99 126.94
December 1999 66.94 261.48 239.34
December 2000 272.29 157.42 298.55
December 2001 93.10 124.89 254.43
December 2002 66.92 86.33 164.36
14
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information as of December 31, 2002 relating
to equity compensation plans of the Company pursuant to which grants of options,
restricted stock, or other rights to acquire shares may be granted from time to
time. As of December 31, 2002, the Company had no equity compensation plans that
were not approved by security holders.
(c) Number of
securities remaining
(a) Number of available for future
securities to be issuance under
issued upon exercise (b) Weighted-average equity compensation
of outstanding exercise price of plans (excluding
options, warrants outstanding options, securities reflected
Plan Category and rights warrants and rights in column (a))
-------------------------- ------------------------ ------------------------- ------------------------
Equity Compensation
plans approved by
security holders......... 1,997,478 $7.90 369,928
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
2002. 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, 2002 all Section 16(a) filing requirements
applicable to its executive officers, directors and greater-than-10%
stockholders were complied with except that Messrs. Bullion, Fuller, McGrath,
Perrin and Reardon and Drs. Houghton and Thompson and Ms. Stahl failed to file
Form 4 on a timely basis.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
15
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 135 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. The Stock Plan was amended by the Board
on February 26, 2002, and approved by the Company's shareholders on May 23, 2002
to increase the number of shares authorized for issuance thereunder to
3,175,000.
As of March 1, 2003, options to purchase 2,228,278 shares of the Company's
Common Stock have been granted, net of cancellations and forfeitures, and
108,978 shares remain available for grant pursuant to the Stock Plan. 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 pursues its
business strategy and growth plans in the current and upcoming fiscal years. In
consideration of this recommendation from the Compensation Committee, on
February 12, 2003, the Board approved an amendment to the Stock Plan increasing
the number of shares authorized for issuance thereunder from 3,175,000 shares to
3,675,000 shares. The February 12, 2003 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 is 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.
16
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 that 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. If 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. 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, under the terms of
the relevant option agreement, 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 amend or discontinue the Stock Plan or any portion thereof at
anytime. However, the Board may not thereby alter or impair any outstanding
option without the consent of the holder of the option. The Board may amend the
Stock Plan to increase the number of shares of Common Stock that will be
available for issuance under the Stock Plan, and make certain other amendments
to the Stock Plan, only with stockholder approval. Options outstanding at the
time the Stock Plan is terminated will continue to be exercisable in accordance
with their respective terms.
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.
17
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). The Company will not be entitled to a tax deduction at the
time of exercise of an incentive stock option. 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 the option holder will recognize ordinary income at the time of
the disposition in an amount equal to the lesser of (1) the difference between
the option price and the fair market value of the shares at the time the option
was exercised, and (2) the difference between the option price and the amount
realized upon the disposition of the shares. The 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. 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 under the foregoing rules.
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, at the discretion of the Compensation
Committee, an option holder may exercise an option by tendering shares of Common
Stock owned by the option holder in payment of the exercise price. In that case
generally no gain or loss will be recognized by the option holder with respect
to the tendered shares, provided that if the tendered shares were acquired upon
exercise of an incentive stock option, the option holder has held the tendered
shares for the holding period required by the incentive stock option rules. In
the case of an incentive stock option, no income will be recognized by the
option holder upon the receipt of 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 3,175,000 SHARES TO 3,675,000.
18
PROPOSAL 3:
APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee has appointed Ernst & Young LLP as independent public
accountants for the Company for the fiscal year ending December 31, 2003. 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, 2002, 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 Audit
Committee is not obligated to appoint other independent public accountants, but
the Audit Committee 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.
19
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 approves 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, 2002 filed with the
Securities and Exchange Commission.
Michael Greene (Chairperson)
Julius A. Vida, Ph.D.
Farah H. Champsi
Members of the Audit Committee
20
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, 2002 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 $73,000.
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 $21,450. 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 2004 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 on or
before the close of business on December 9, 2003.
Any other stockholder proposals to be presented at the Company's Annual
Meeting to be held in 2004 must be received at the principal executive offices
of the Company by the close of business on February 23, 2004.
21
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 21, 2003
22
[ORPHAN MEDICAL LOGO]
ANNUAL MEETING OF STOCKHOLDERS
THURSDAY, MAY 22, 2003
3:30 P.M. (CENTRAL STANDARD TIME)
RADISSON PLAZA HOTEL
35 SOUTH 7TH STREET
MINNEAPOLIS, MN 55402
[ORPHAN MEDICAL LOGO] PROXY
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON MAY 22, 2003.
The undersigned, having duly received the Notice of Annual Meeting of
Stockholders and Proxy Statement dated April 8, 2003, 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 22, 2003 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 o Use any
touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 11:00 a.m. (CT) on May 21, 2003.
o You will be prompted to enter your 3-digit Company Number, your 7-digit
Control Number (these numbers are located on the proxy card) and the last 4
digits of the U.S. Social Security Number or Tax Identification Number for
this account. If you do not have a U.S. SSN or TIN please enter 4 zeros.
o Follow the simple instructions the voice provides you.
VOTE BY INTERNET -- HTTP://WWW.EPROXY.COM/ORPH/ -- QUICK EASY IMMEDIATE o Use
the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m. (CT) on May 21, 2003.
o You will be prompted to enter your 3-digit Company Number, your 7-digit
Control Number (these numbers are located on the proxy card) and the last 4
digits of the U.S. Social Security Number or Tax Identification Number for
this account to obtain your records and create an electronic ballot. If you
do not have a U.S. SSN or TIN please leave blank.
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", 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 ITEMS 1, 2 AND 3.
1. Election of 01 John Howell Bullion 04 William M. Wardell, M.D., Ph.D. [ ] Vote FOR [ ] Vote WITHHELD
directors: 02 Michael Greene 05 Farah H. Champsi all nominees from all nominees
03 Julius A. Vida, Ph.D 06 Thomas B. King (except as marked)
(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.)
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 from
3,175,000 shares to 3,675,000 shares. [ ] For [ ] Against [ ] Abstain
3. Proposal to approve the appointment of Ernst & Young LLP as independent
public accountants for the fiscal year ending December 31, 2003. [ ] For [ ] Against [ ] Abstain
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 AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
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, please sign in
partnership name by authorized
person.