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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(AMENDMENT NO. 2)
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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER
31, 1999 OR
</TABLE>
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>
COMMISSION FILE NO. 0-23556
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INHALE THERAPEUTIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3134940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
150 INDUSTRIAL ROAD, SAN CARLOS, CA 94070
(Address of principal executive offices and zip code)
(650) 631-3100
(Registrant's telephone number, including area code)
------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.0001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock on March 15, 2000 as reported by Nasdaq National Market was approximately
$1,038,090,312. Determination of affiliate status for this purpose is not a
determination of affiliate status for any other purpose.
(Number of shares of common stock outstanding as of April 20, 2000)
20,911,359
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INHALE THERAPEUTIC SYSTEMS, INC.
1999 AMENDED ANNUAL REPORT ON FORM 10-K/A
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART III
Item 10. Directors and Executive Officers of the
Registrant.............................................. 2
Item 11. Executive Compensation........................... 4
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 11
Item 13. Certain Relationships and Related Transactions... 14
SIGNATURES
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Board of Directors shall be divided into three classes, each class
consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board may
be filled only by persons elected by a majority of the remaining directors. A
director elected by the Board to fill a vacancy (including a vacancy created by
an increase in the Board of Directors) shall serve for the remainder of the full
term of the class of directors in which the vacancy occurred and until such
director's successor is elected and qualified.
The Board of Directors is presently composed of seven members. There are
three directors in the class whose term of office expires in 2000.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the three 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.
Set forth below is biographical information for each of the Company's
directors.
DIRECTORS WHO AT THE 2000 ANNUAL MEETING WILL BE NOMINEES FOR ELECTION FOR A
THREE-YEAR TERM EXPIRING AT THE 2003 ANNUAL MEETING
ROBERT B. CHESS
Mr. Chess, age 43, has served as Chairman of the Board of Directors since
April 1999. Mr. Chess served as Co-Chief Executive Officer from August 1998 to
April 2000. Mr. Chess served as President from December 1991 to August 1998 and
as Chief Executive Officer from May 1992 to September 1998. Mr. Chess was
elected a Director in May 1992. From September 1990 until October 1991, he was
an Associate Deputy Director in the White House Office of Policy Development. In
March 1987, Mr. Chess co-founded Penederm Incorporated, a topical dermatological
drug delivery company, and served as its President until February 1989. He left
Penederm in October 1989. Prior to co-founding Penederm, Mr. Chess held
management positions at Intel Corp., a semiconductor manufacturer, and Metaphor,
a computer software company. Mr. Chess holds a BS in Engineering from the
California Institute of Technology and an MBA from the Harvard Business School.
2
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MARK J. GABRIELSON
Mr. Gabrielson, age 43, has been a Director since May 1992. Since
January 1991 he has been a general partner of Prince Ventures, L.P., a venture
capital management firm that serves as the general partner of Prince Venture
Partners III, L.P. Mr. Gabrielson is a Director of several private companies.
From 1978 until joining Prince, Mr. Gabrielson served in a variety of marketing
and business development positions with SmithKline Beecham plc.
JAMES B. GLAVIN
Mr. Glavin, age 64, has been a Director since May 1993. Mr. Glavin is
Chairman of the Board of The Immune Response Corporation, a biotechnology
company. He was President and Chief Executive Officer of The Immune Response
Corporation from 1987 until September 1994. From 1987 to 1990, Mr. Glavin served
as Chairman of the Board of Smith Laboratories, Inc. and was President and Chief
Executive Officer of Smith Laboratories from 1985 to 1989. From 1985 to 1987, he
was a partner in CH Ventures, a venture capital firm. From 1983 to 1985, he
served as Chairman of the Board of Genetic Systems Corporation, a biotechnology
firm, and as its President and Chief Executive Officer from 1981 to 1983.
Mr. Glavin is a director of The Meridian Fund and Gish Biomedical, Inc.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
JOHN S. PATTON, PH.D.
Dr. Patton, age 53, a co-founder of Inhale, has been Vice President,
Research since December 1991 and a Director since July 1990. He served as
President of Inhale from its incorporation in July 1990 to December 1991. From
1985 to 1990, Dr. Patton was a Project Team Leader with Genentech, Inc., a
biotechnology company, where he headed their non-invasive drug delivery
activities. Dr. Patton was on the faculty of the Marine Science and Microbiology
Departments at the University of Georgia from 1979 through 1985, where he was
granted tenure in 1984. Dr. Patton received a BS in Zoology and Biochemistry
from Pennsylvania State University, an MS from the University of Rhode Island, a
Ph.D. in Biology from the University of California, San Diego and received post
doctoral fellowships from Harvard Medical School and the University of Lund,
Sweden, both in biomedicine.
IRWIN LERNER
Mr. Lerner, age 69, has been a Director since April 1999. Mr. Lerner served
as Chairman of the Board of Directors and of the Executive Committee of
Hoffman-La Roche Inc., a pharmaceutical and health care company, from
January 1993 until his retirement in September 1993, and from 1980 through
December 1992, also served as President and Chief Executive Officer. From
September 1995 until present, Mr. Lerner has served on the Board of
Medarex, Inc., a monoclonal antibodies products company and became Chairman of
the Board in May 1997. Mr. Lerner served as the Chairman of the Board of Sequana
Therapeutics, Inc., a biotechnology company, from May 1995 until Sequana merged
with Arris Pharmaceuticals Inc., a pharmaceutical company, to form Axys
Pharmaceuticals, Inc. in January 1998 and has served on the Board of Axys since
then. Mr. Lerner served for 12 years on the Board of the Pharmaceutical
Manufacturers' Association where he chaired the Association's FDA Issues
Committee. Mr. Lerner received a B.S. and an M.B.A. from Rutgers University. He
is currently Distinguished Executive-in-Residence at Rutgers University Graduate
School of Management. Mr. Lerner is also a director of Public Service Enterprise
Group Incorporated, a diversified public utility holding company, Humana Inc., a
health care company, Covance, Inc., a contract drug development company, and
V.I. Technologies, Inc., a blood products company.
3
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DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING
AJIT S. GILL
Mr. Gill, age 52, has served as Chief Executive Officer since April 2000, as
President since April 1999, and as a Director since April 1998. Mr. Gill served
as Co-Chief Executive Officer from August 1988 to April 1998. Mr. Gill served as
Chief Operating Officer from October 1996 to August 1998 and Chief Financial
Officer from January 1993 until October 1996. Before joining Inhale, Mr. Gill
was Vice President and General Manager of Kodak's Interactive Systems division.
Mr. Gill has served as Chief Financial Officer for TRW-Fujitsu, Director of
Business Development for Visicorp, and as President for three start-up high
technology companies. He completed a BTech at the Indian Institute of
Technology, an MS in Electrical Engineering from the University of Nebraska, and
holds an MBA from the University of Western Ontario.
MELVIN PERELMAN, PH.D
Dr. Perelman, age 69, has been a Director since January 1996. Dr. Perelman
spent 36 years at Eli Lilly & Company, most recently as Executive Vice-President
and President of Lilly Research Laboratories, a position which he held from 1986
until his retirement in 1993. Dr. Perelman served as President of Lilly
International from 1976 until 1986. Dr. Perelman is a member of the Board of
Directors of Cinergy, Inc., DataChem, Inc., Immusol, Inc. and of The Immune
Response Corporation.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1999 the Board of Directors held
eight meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is composed of two non-employee
directors: Messrs. Perelman and Glavin. It met once during the fiscal year ended
December 31, 1999.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards, stock options to employees and consultants under
the Company's stock option plans and otherwise determines compensation levels
and performs such other functions regarding compensation as the Board may
delegate. The Compensation Committee is composed of two non-employee
directors:Messrs. Gabrielson and Glavin. It met seven times during the fiscal
year ended December 31, 1999.
During the fiscal year ended December 31, 1999, each director attended 75%
or more of the aggregate of the meetings of the Board and of the committees on
which he then served.
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% stockholders
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, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
4
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ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each non-employee director of the Company receives an annual retainer of
$15,000. In the fiscal year ended December 31, 1999, the total compensation paid
to non-employee directors was $78,250 including, the consulting fees paid to one
director as discussed below. The members of the Board of Directors are also
eligible for reimbursement for their expenses incurred in connection with
attendance at Board meetings in accordance with Company policy.
Each member of the Company's Board of Directors who is not an employee of
the Company is automatically granted under the 1994 Non-Employee Directors' Plan
(the "Non-Employee Directors' Plan"), without further action by the Company, the
Board of Directors or the stockholders of the Company, an option to purchase
30,000 shares of Common Stock of the Company for each three year term to which
he or she is elected. The non-employee directors who began with a one or a
two-year term when the Company first instituted the classified board were
granted 10,000 and 20,000 shares of Common Stock, respectively. Vesting is
monthly over the period of the term being served. Only non-employee directors of
the Company are eligible to receive options under the Non-Employee Directors'
Plan. Options granted under the Non-Employee Directors' Plan are intended by the
Company not to qualify as incentive stock options under the Code. The exercise
price of options granted under the Non-Employee Directors' Plan is 100% of the
fair market value of the Common Stock subject to the option on the date of the
option grant. Option grants under the Non-Employee Directors' Plan are
non-discretionary. The term of options granted under the Non-Employee Directors'
Plan is ten years. In the event of a merger of the Company with or into another
corporation or a consolidation in which the Company is the surviving
corporation, but the shares of the Company's Common Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, or any other capital reorganization in which 50% of the shares
of the Company entitled to vote are exchanged, the vesting of each option will
accelerate and the option will terminate if not exercised prior to the
consummation of the transaction.
Options to purchase an aggregate of 160,200 shares of Common Stock have been
granted to all Non-Employee Directors of the Company to date under the
Non-Employee Directors' Plan, 79,800 of which have been exercised as of
March 15, 2000. Options to purchase an aggregate of 1,645,646 shares of Common
Stock have been granted to Directors who are employees of the Company as of
March 15, 2000 under the Company's Equity Incentive Plan, 606,212 of which have
been exercised as of March 15, 2000.
On April 1, 1999, Irwin Lerner entered into a consulting agreement with the
Company. Pursuant to the agreement, Mr. Lerner performs consulting services
relating to product marketing and general business issues of at least four half
days per year as well as telephone discussions as needed in consideration for
his standard consulting fee. In 1999, Mr. Lerner received $14,500 in consulting
fees for services performed for the Company.
5
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COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1999, 1998
and 1997, compensation awarded or paid to, or earned by, the Company's Co-Chief
Executive Officers and its other four most highly compensated executive officers
at December 31, 1999 (the "Named Executive Officers"(1)):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
OTHER ------------
ANNUAL COMPENSATION ANNUAL SECURITIES
------------------------------- COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(4) OPTIONS(#) COMPENSATION($)(2)
- --------------------------- -------- --------- -------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Chess ......... 1999 $248,013 $113,249 -- 50,000 $ 6,005
Chairman of the Board and 1998 201,183 78,859 -- 50,000 709
Co-Chief Executive 1997 195,666 136,763 -- 15,900 510
Officer
Ajit S. Gill ............ 1999 248,013 113,249 -- 50,000 6,452
President and Co-Chief 1998 201,176 78,859 -- 50,000 1,945
Executive Officer 1997 194,155 51,757 -- 54,600 870
John S. Patton .......... 1999 190,774 76,518 -- 14,000 6,117
Vice President, Research 1998 159,887 61,264 -- 70,000 1,523
1997 150,119 32,344 -- 7,500 1,440
Stephen L. Hurst ........ 1999 179,316 57,605 -- 10,801 1,186
Vice President, Secretary 1998 160,333 54,054 -- 39,000 461
and General Counsel 1997 156,682 27,098 -- 25,400 510
Robert M. Platz ......... 1999 159,607 38,576 -- 7,000 5,459
Vice President, 1998 145,374 36,345 -- 19,900 838
Technology 1997 140,797 24,651 -- 5,400 850
Brigid A. Makes(3) ...... 1999 87,739 30,000 11,707 70,000 175
Vice President, 1998 -- -- -- -- --
Finance & Administration 1997 -- -- -- -- --
and Chief Financial
Officer
</TABLE>
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(1) The Named Executive Officers include all the executive officers of the
Company.
(2) Amounts include perquisites consisting of one or more of the following:
(i) life insurance premiums paid by the Company; (ii) reimbursement for
computer equipment used for Company business; (iii) entertainment gifts
associated with Company business; and (iv) Company's matching payments under
its 401(k) plan.
(3) Ms. Makes became an executive officer of the Company on June 26, 1999. Her
annualized salary in 1999 was $267,000.
(4) Includes $11,707 as reimbursement of expenses in connection with Ms. Makes
relocation.
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STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under the Equity
Incentive Plan. As of March 15, 2000, options to purchase a total of 4,427,125
shares had been granted under the Equity Incentive Plan and options to purchase
556,153 shares remained available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1999
certain information regarding options granted to, exercised by, and held at
year-end by, the Named Executive Officers at December 31, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENTAGE OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------------
NAME GRANTED(1)(#) FISCAL YEAR(2) ($/SHARE) DATE 5% 10%
- ---- ------------- -------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Chess......... 50,000(4) 3.52% $28.50 02/22/09 $ 896,175 $2,271,083
Ajit S. Gill............ 50,000(4) 3.52% 28.50 02/22/09 896,175 2,271,083
John S. Patton.......... 14,000(5) 0.99% 28.50 02/22/09 250,929 635,903
Stephen L. Hurst........ 9,801(5) 0.69% 28.50 02/22/09 175,668 445,177
1,000(6) 0.07% 28.50 02/22/09 17,923 45,421
Robert M. Platz......... 7,000(5) 0.49% 28.50 02/22/09 125,464 317,952
Brigid A. Makes......... 70,000(7) 4.93% 28.00 06/27/09 1,232,634 3,123,735
</TABLE>
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(1) The options will fully vest upon a change in control, asset sale, merger,
consolidation or reverse merger, as defined in the Company's Equity
Incentive Plan, unless the acquiring Company assumes the options or
substitutes similar options. The options will fully vest upon a securities
acquisition, as defined in the Company's Equity Incentive Plan. The Board of
Directors may reprice the options under the terms of the Company's Equity
Incentive Plan.
(2) Based on an aggregate of 1,419,251 options granted to employees and
consultants to the Company in 1999, including the Named Executive Officers.
(3) The potential realizable value is based on the term of the option at the
time of grant (ten years). Assumed stock price appreciation of 5% and 10% is
used pursuant to rules promulgated by the SEC. The potential realizable
value is calculated by assuming that the market price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
(4) This option vests monthly over 5 years commencing in February 1999.
(5) This option vests monthly over 1 year commencing in February 2003.
(6) This option vests annually over 5 years commencing in February 1999.
(7) One-fifth ( 1/5) of this option vests one year after June 28, 1999 and
one-sixtieth ( 1/60th) of this option vests monthly thereafter over the next
four years.
7
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND DECEMBER 31, 1999 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999(2) DECEMBER 31, 1999(3)
ACQUIRED ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- ---- ----------- -------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Chess........ -- -- 110,083 156,162 $3,634,556 $3,277,737
Ajit S. Gill........... -- -- 183,295 138,183 6,398,711 2,610,580
John S. Patton......... -- -- 99,749 95,029 3,280,096 1,763,165
Stephen L. Hurst....... -- -- 28,167 75,453 742,038 1,528,311
Robert M. Platz........ -- -- 74,291 43,087 2,664,727 947,434
Brigid A. Makes ....... -- -- -- 70,000 -- 1,019,375
</TABLE>
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(1) Based on the fair market value of the Company's Common Stock on the exercise
date, minus the exercise price, multiplied by the number of shares
exercised.
(2) On January 18, 1995, the Board amended the provisions of the options held by
the Named Executive Officers to provide that upon a change-in control of the
Company the vesting of all outstanding options held by such persons would be
accelerated by two years.
(3) Based on the fair market value of the Company's Common Stock as of
December 31, 1999 ($42.5625 per share), minus the exercise price, multiplied
by the number of shares underlying the options.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION(1)
The Board has delegated to the Compensation Committee of the Board (the
"Committee") the authority to establish and administer the Company's
compensation programs. The Committee is comprised of two non-employee directors:
Messrs. Gabrielson and Glavin. The Committee is responsible for:
(i) determining the most effective total executive compensation strategy, based
upon the business needs of the Company and consistent with stockholders'
interests; (ii) administering the Company's executive compensation plans,
programs and policies; (iii) monitoring corporate performance and its
relationship to compensation of executive officers; and (iv) making appropriate
recommendations concerning matters of executive compensation.
COMPENSATION PHILOSOPHY
The primary goals of the compensation program are to align compensation with
the attainment of key business objectives and to enable the Company to attract,
retain and reward capable executives who can contribute to the continued success
of the Company. Equity participation and a strong alignment to stockholders'
interests are key elements of the Company's compensation philosophy. Four key
goals form the basis for compensation decisions for all employees of the
Company:
1. To attract and retain the most highly qualified management and employee
team;
2. To emphasize sustained performance by aligning rewards with stockholder
interests, especially through the use of equity participation programs;
3. To pay competitively compared to similar drug delivery and
biopharmaceutical companies and to provide appropriate reward
opportunities for achieving high levels of performance compared to
similar organizations in the marketplace; and
4. To motivate executives and employees to achieve the Company's annual and
long-term business goals and encourage behavior toward the fulfillment of
those objectives.
8
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To meet these goals, the Committee has adopted a mix among the compensation
elements of salary, stock options and bonuses with a bias towards stock options.
BASE SALARY
The Committee recognizes the importance of maintaining compensation
practices and levels of compensation competitive with drug delivery and
biopharmaceutical companies in comparable stages of development. Base salary
represents the fixed component of the executive compensation program. The
Company's philosophy regarding base salaries is conservative, maintaining
salaries below the competitive industry median. Base salary levels are
established on an annual review of marketplace competitiveness with similar
pharmaceutical and drug delivery companies and on the basis of individual
performance. Periodic increases in base salary are the result of individual
contributions evaluated against established performance objectives, relative
success toward achieving the Company's annual and long-term business goals,
length of service with the Company and an annual salary survey of comparable
companies in Inhale's industry. Base salaries for executives were increased for
fiscal 1999 but remain below the industry median. In 1999, the Company continued
the variable compensation program implemented in 1996 for all employees,
including all executive officers, which provides that a portion of base salary
is variable based on certain qualitative and quantitative criteria for both the
Company and each employee.
STOCK OPTIONS
The option plans offered by the Company have been established to provide all
executive officers of the Company with an opportunity to share, along with the
stockholders of the Company, in the long-term performance of the Company. The
Committee strongly believes that a goal of the compensation program should be to
provide key employees who have significant responsibility for the management,
growth and future success of the Company with an opportunity to increase their
ownership of the Company and potentially gain financially from Company stock
price increases. The interests of stockholders, executives and employees should
thereby be closely aligned. Executives and employees are eligible to receive
stock options generally not more often than once a year, giving them the right
to purchase shares of Common Stock of the Company in the future at a price equal
to fair market value at the date of grant. All grants must be exercised
according to the provisions of the Company's stock option plans. All outstanding
options expire ten years from the date of grant.
As the base salaries for executive officers of the Company are in the lower
range for comparable companies, the Company has used stock options as the
primary incentive to attract and retain its executive officers. Option amounts
are based on salary grade within the Company and overall Company and individual
performance. After considering the criteria relating to awarding stock options,
the Committee determined that all executive officers, including the Co-Chief
Executive Officers, would receive option grants in fiscal 1999. The options
granted to executive officers in fiscal 1999 include options with standard
five-year vesting commencing upon the date of grant, as well as "evergreen"
options, which typically vest over a twelve month period commencing upon the
date previously granted options become fully vested.
Section 162(m) of the Code 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 in 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. However, the Committee
has determined that stock awards granted under the Equity Incentive Plan with an
exercise price at least equal to the fair market value of the Company's Common
Stock on the date of grant shall be treated as "performance-based compensation."
9
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BONUSES
Bonus awards are another component of the compensation program. Bonuses, if
any, are both linked to the achievement of specified corporate goals, which is
determined at the discretion of the Committee. Corporate performance goals on
which 1999 bonuses were based were: the successful signing of new collaborative
partners and convening existing collaborative partners with feasibility
agreements to long-term development agreements; advancing the delivery system
technology by improving the performance and efficiency of the inhalation device,
the powder processing and the powder filling; and improving the Company's
liquidity by obtaining funding from corporate partners and from the sale of
securities. In January 2000, the Committee reviewed the Company's 1999 corporate
performance goals and determined that most of the goals had been achieved. Based
on such achievement, the Committee awarded bonuses for 1999 for all executive
officers.
CO-CEO COMPENSATION
The total cash compensation paid to Messrs. Chess and Gill in 1999 was below
the average for chief executive officers in the Company's industry comparative
group. Under the Company's executive compensation program, the total
compensation mix for senior executives emphasizes longer-term rewards in the
form of stock options. In 1999, Messrs. Chess and Gill received option grants to
purchase 50,000 shares each of the Company's Common Stock at the fair market
value of the Common Stock on the date of grant. This grant was based on the same
factors used in making grants to other executive officers. This grant was made
to enhance retention and the overall competitiveness of the compensation package
of Messrs. Chess and Gill and to strengthen the alignment of Messrs. Chess's and
Gill's interests with those of the stockholders. For 1999, the Committee set a
bonus of approximately 33% of salary for both Messrs. Chess' and Gill's bonuses
based upon the achievement of virtually all of the corporate goals discussed
above.
SUMMARY
The Committee believes that the compensation of executives by the Company is
appropriate and competitive with the compensation programs provided by other
drug delivery and biopharmaceutical companies with which the Company competes
for executives and employees. The Committee believes its compensation strategy,
principles and practices result in a compensation program tied to stockholder
returns and linked to the achievement of annual and longer-term financial and
operational results of the Company on behalf of the Company's stockholders.
COMPENSATION COMMITTEE
Mark J. Gabrielson
James B. Glavin
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 15, 2000 by: (i) each director;
(ii) each of the Named Executive Officers; (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.
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<CAPTION>
BENEFICIAL OWNER(1)
--------------------------------------
BENEFICIAL OWNERSHIP(1) NUMBER OF SHARES PERCENT OF TOTAL(2)
- ----------------------- ---------------- -------------------
<S> <C> <C>
Franklin Resources, Inc.(3)................................. 2,627,330 12.7%
777 Mariners Island Boulevard
San Mateo, CA 94404
T. Rowe Price Associates, Inc.(4)........................... 2,128,950 10.3%
100 East Pratt Street
Baltimore, MD 21202
Baxter International Inc. & Subsidiaries Pension Trust...... 1,335,897 6.4%
One Baxter Parkway
Deerfield, IL 60015
Capital Research and Management Company(5).................. 1,301,650 6.3%
333 South Hope Street, 55th Floor
Los Angeles, CA 90071
Dresdner Bank AG(6)......................................... 1,073,225 5.2%
Jurgen-Ponto-Platz 1
60301 Frankfurt, Germany
Robert B. Chess(7).......................................... 334,993 1.6%
John S. Patton(8)........................................... 334,896 1.6%
Robert M. Platz(9).......................................... 245,983 1.2%
Ajit S. Gill(10)............................................ 173,874 *
Mark J. Gabrielson(11)...................................... 50,369 *
Melvin Perelman(14)......................................... 43,467 *
James B. Glavin(12)......................................... 29,965 *
Stephen L. Hurst(13)........................................ 8,901 *
Irwin Lerner(14)............................................ 9,167 *
All directors and executive officers as a group
(10 persons)(15).......................................... 1,231,615 5.8%
</TABLE>
- ------------------------
* Less than 1%
(1) This table is based upon information supplied by officers, directors and
principal stockholders 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 the community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
shown as beneficially owned.
(2) Applicable percentages are based on 20,742,112 shares of Common Stock
outstanding as of March 15, 2000, adjusted as required by
rules promulgated by the SEC.
(3) Based solely on information obtained from a filing with the SEC made on
amended Schedule 13G reporting such beneficial ownership as of January 25,
2000. Includes 1,030,920 shares of common
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stock issuable upon conversion of $33,000,000 principal amount of the
Company's convertible subordinated debentures due October 13, 2006.
Franklin Resources, Inc. ("FRI") is the parent holding company of two
registered investment advisers: Franklin Advisers, Inc. ("Franklin
Advisers") and Franklin Management, Inc. ("Franklin Management"), which
provide investment advisory services for Franklin Small Cap Growth Fund, a
series of Franklin Strategic Series, a registered investment company which
holds the shares. Franklin Advisers has sole voting and dispositive power
over 2,562,920 of the shares. Franklin Management has sole investment power
over 64,410 of the shares. Charles B. Johnson and Rupert H. Johnson, Jr.
(collectively, "Principal Shareholders") each own in excess of 10% of the
outstanding common stock of FRI and are the principal shareholders of FRI.
FRI, Franklin Advisers, Franklin Management and the Principal Shareholders
disclaim any beneficial interest in the shares.
(4) Based solely on information obtained from a filing with the SEC made on an
amended Schedule 13G reporting such beneficial ownership as of February 7,
2000. These shares are owned by various individual and institutional
investors which T. Rowe Price Associates, Inc. ("Price Associates"), an
investment adviser registered under the Investment Advisers Act of 1940,
serves as investment adviser with power to direct investments and/or sole
power to vote the shares. For purposes of the reporting requirements of the
Securities Act of 1934, Price Associates is deemed to be a beneficial owner
of such securities; however, Price Associates expressly disclaims that it
is, in fact, the beneficial owner of such securities. Price Associates
provides investment advisory services for T. Rowe Price New Horizons
Fund, Inc. ("T. Rowe Price Fund"), a registered investment company. Price
Associates has sole voting power over 528,600 of the shares and has sole
dispositive power over 2,128,950 of the shares. T. Rowe Price Fund has sole
voting power over 875,000 of the shares.
(5) Based solely on information obtained from a filing with the SEC made on a
Schedule 13G reporting such beneficial ownership as of December 31, 1999.
Capital Research and Management Company ("CRMC") is a registered investment
adviser registered under Section 203 of the Investment Advisers Act of 1940
which provides investment advisory services to SMALLCAP World Fund, Inc.
("SWFI") , an investment company registered under the Investment Company
Act of 1940. SWFI has sole voting power over 1,101,650 of the shares. CRMC
has sole dispositive power over 1,301,650 of the shares. CRMC disclaims
beneficial ownership of such shares.
(6) Based solely on information obtained from a filing with the SEC made on a
Schedule 13G reporting such beneficial ownership as of December 31, 1999.
Dresdner Bank AG, an international banking organization headquartered in
Frankfurt, Germany, ("Dresdner Bank") is the parent company of Dresdner RCM
US Holdings LLC, a Delaware Limited Liability Company ("DRCM Holdings"),
the parent holding company of a registered investment adviser: Dresdner RCM
Global Investors LLC, a Delaware Limited Liability Company ("Dresdner
RCM"). Dresdner RCM and DRCM Holdings each has sole voting power over
818,275 of the shares, sole dispositive power over 908,475 of the shares
and shared dispositive power over 164,650 of the shares, respectively.
Dresdner Bank has sole voting power over 818, 375 of the shares, sole
dispositive power over 908,575 of the shares and shared dispositive power
over 164,650 of the shares.
(7) Includes 109,283 shares issuable upon exercise of options exercisable
within 60 days of March 15, 2000.
(8) Includes 223,004 shares held by John S. Patton & Jamie S. Patton, Trustees,
under the July 2, 1997 Patton Revocable Trust ("Patton Trust"). Dr. Patton
and his wife, are sole trustees. Dr. Patton and his wife, Jamie S. Patton,
each acting alone, have the power to vote and dispose of such shares.
Includes 667 shares held by Dr. Patton's minor child. Also includes 1,499
shares held by two other children of Dr. Patton as to which shares
Dr. Patton disclaims beneficial ownership. Also includes 109,726 shares
issuable upon exercise of options exercisable within 60 days of March 15,
2000.
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(9) Includes 79,578 shares issuable upon exercise of options exercisable within
60 days of March 15, 2000.
(10) Includes 8,475 shares held by Ajit S. Gill & Ann C. Gill, Trustees, under
agreement dated October 14, 1998 FBO Ajit S. Gill & Ann C. Gill ("Gill
Trust"). Mr. Gill and his wife, are sole trustees. Mr. Gill and his wife,
Ann C. Gill, each acting alone, have the power to vote and dispose of such
shares. Also includes 154,599 shares issuable upon exercise of options
exercisable within 60 days of March 15, 2000.
(11) Also includes 47,966 shares issuable upon the exercise of options
exercisable within 60 days of March 15, 2000.
(12) Includes 23,966 shares issuable upon exercise of options exercisable
within 60 days of March 15, 2000.
(13) Includes 1,000 shares held as joint tenants with Mr. Hurst's wife, Antonia
Althea Hurst. Also includes 7,901 shares issuable upon exercise of options
exercisable within 60 days of March 15, 2000.
(14) All shares issuable upon exercise of options exercisable within 60 days of
March 15, 2000.
(15) Includes 223,004 shares held by Patton Trust and an aggregate of 2,166
shares held by Mr. Patton's children, as described in footnote 8. Includes
8,475 shares held by Gill Trust, as described in footnote 10. Includes
1,000 shares held by Mr. Hurst as joint tenants with right of survivorship
with Mrs. Hurst as described in footnote 13. Also includes 585,653 shares
issuable upon exercise of outstanding options exercisable within 60 days
of March 15, 2000. See footnotes 7 through 14.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The Company's Bylaws provide that the Company will indemnify its directors
and may indemnify its officers, employees and other agents to the fullest extent
permitted by Delaware law. The Company is also empowered under its Bylaws to
enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person whom it is required or permitted to
indemnify.
In addition, the Company's Restated Certificate of Incorporation provides
that the liability of the directors for monetary damages shall be eliminated to
the fullest extent permissible under Delaware law. Pursuant to Delaware law, the
Company's directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company and its stockholders. However,
this provision does not eliminate the duty of care, and in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for (i) breach of the
directors duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions, (iii) violating Section 174 of the Delaware General Corporation Law,
or (iv) any transaction from which the director derived an improper personal
benefit. The provision also does not affect a director's responsibilities under
any other law, such as the federal securities laws or state or federal
environmental laws.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 28th day of
April 2000.
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<S> <C> <C>
INHALE THERAPEUTIC SYSTEMS, INC.
By: /s/ AJIT S. GILL
-----------------------------------------
Ajit S. Gill
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
DIRECTOR
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