SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 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)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
[LOGO] ORPHAN MEDICAL
13911 RIDGEDALE DRIVE, SUITE 475
MINNETONKA, MINNESOTA 55305
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 8, 1997
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of
Orphan Medical, Inc. (the "Company") will be held on Thursday, May 8, 1997, at
3:30 p.m., Minneapolis time, at the Minneapolis Athletic Club, 615 Second Avenue
South, Minneapolis, Minnesota 55402, for the following purposes:
1. To elect seven directors to serve until the next Annual
Meeting of Shareholders;
2. To ratify an amendment to Company's 1994 Stock Option Plan
increasing from 1,250,000 to 1,550,000 the number of shares
reserved for issuance thereunder;
3. To ratify the appointment of Ernst & Young LLP as the
independent auditors for the Company for the year ending
December 31, 1997; and
4. To consider and act upon any other matters that may properly
come before the meeting or any adjournment thereof.
The Board of Directors of the Company has designated the close of
business on March 10, 1997 as the record date for the determination of
shareholders entitled to notice of and to vote at the meeting or any adjournment
thereof. Only shareholders of record of the Company's Common Stock at the close
of business on that date will be entitled to vote.
You are cordially invited to attend the meeting. However, whether or
not you plan to be personally present at the meeting, please complete, date and
sign the enclosed proxy and return it promptly in the enclosed envelope. If you
later desire to revoke your proxy, you may do so at any time before it is
exercised.
By Order of the Board of Directors
John Howell Bullion
Chief Executive Officer and Secretary
Minnetonka, Minnesota
March 17, 1997
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 475
MINNETONKA, MINNESOTA 55305
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 8, 1997
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 shareholders (the "Annual Meeting")
to be held on Thursday, May 8, 1997, at 3:30 p.m., Minneapolis time, at the
Minneapolis Athletic Club, 615 Second Avenue South, Minneapolis, Minnesota
55402, and at any adjournment thereof, for the purposes set forth in the Notice
of Annual Meeting of Shareholders. This Proxy Statement and the form of proxy
enclosed are being mailed to shareholders with the Company's Annual Report to
Shareholders commencing on or about March 17, 1997.
The only matters the Board of Directors knows will be presented are those stated
in Proposals 1, 2 and 3 of the notice. THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS 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
Only shareholders of record of the Common Stock of the Company whose
names appear of record on the Company's books at the close of business on March
10, 1997 will be entitled to vote at the Annual Meeting. As of that date, a
total of 6,063,088 shares of such Common Stock were outstanding, each share
being entitled to one vote. There is no cumulative voting. If a shareholder
returns a proxy withholding authority to vote the proxy with respect to a
nominee for director, then the shares of the Common 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 shareholder
abstains from voting as to any matter, then the shares held by such shareholder
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.
Shares of the Company's Common Stock represented by proxies in the form
solicited will be voted in the manner directed by a shareholder. 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 to the Company's
1994 Stock Option Plan and for approval of the appointment of Ernst & Young LLP
as the Company's independent auditors. So far as the 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 shareholders, the persons
named as proxies in the enclosed form of proxy will vote in accordance with
their best judgment on these matters. A proxy may be revoked at any time before
being exercised by delivery to an officer of the Company of a written notice of
termination of the proxy's authority or a duly elected proxy bearing a later
date.
PROPOSAL 1: ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AS DIRECTORS
The business and affairs of the Company are managed under the direction
of its Board of Directors, which is presently comprised of seven members. Seven
directors have been nominated for election to the Company's Board of Directors
at the Annual Meeting to hold office until the next annual meeting of
shareholders or until their successors are duly elected and qualified.
The Company's incumbent directors, John Howell Bullion, Bertram A.
Spilker, Ph.D., M.D., William B. Adams, Maurice R. Taylor, II, Lawrence C.
Weaver, Ph.D., D.Sc. (Hon.), W. Leigh Thompson, Ph.D., M.D. and William M.
Wardell, M.D., Ph.D., are being nominated for election at the Annual Meeting.
Chronimed, Inc. ("Chronimed") has the right pursuant to an agreement with the
Company to designate two members of the Company's Board of Directors. Mr. Taylor
and Dr. Weaver are Chronimed's designees on the Company's Board. Each of Messrs.
Bullion, Adams and Taylor and Drs. Spilker, Weaver, Thompson and Wardell 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, 45, has been a director and Chief
Executive Officer of the Company since its formation
in June 1994. Mr. Bullion is a co-founder of
Chronimed and has been a director of Chronimed since
1985. Since September 1993, Mr. Bullion has been
President of Bluestem Partners, Ltd., which invests
in and provides management services to developing
businesses. From March 1992 to July 1993, Mr. Bullion
served as President of Dahl & Associates, an
environmental soil and ground water remediation
company. Prior to joining Dahl & Associates, Mr.
Bullion served for one year as President of
Concurrent Knowledge Systems, Inc.
BERTRAM A. SPILKER, Dr. Spilker, 55, has been a director and President of
PH.D., M.D. the Company since its formation in June 1994. From
January 1993 to June 1994, Dr. Spilker was a Vice
President of Chronimed with responsibility for
managing the Orphan Medical Division. From 1983 to
1992, Dr. Spilker was Director of Project
Coordination and from 1979 to 1983, he was a Senior
Clinical Research Scientist at Burroughs Wellcome.
Dr. Spilker has held appointments as full professor
in medicine and pharmacology at the University of
North Carolina Medical School and as Clinical
Professor at the University of North Carolina School
of Pharmacy. Dr. Spilker was a full professor at the
Duke University Fuqua School of Business in 1993 and
is currently a Clinical Professor in Pharmacy
Practice at the University of Minnesota. Dr. Spilker
was Chair of the Pharmaceutical Manufacturers
Association's Commission on Drugs for Rare Diseases
and its Medical Relations Committee, and was awarded
a special citation by the Commissioners of the U.S.
Food and Drug Administration (the "FDA") in 1993 for
his contributions to orphan medicine development. Dr.
Spilker is the author of 11 and editor of three
textbooks on drug development and clinical trial
methodology.
WILLIAM B. ADAMS Mr. Adams, 50, has been Chairman of the Board and a
director of the Company since its formation in June
1994. Mr. Adams is a co-founder of Chronimed and
served as Chairman of the Board and a director of
Chronimed from 1985 to June 1994. Since 1990, Mr.
Adams has served as Chairman of the Board and Chief
Executive Officer of Eco Soil Systems Inc., a water
treatment and turf management company.
MAURICE R. TAYLOR, II Mr. Taylor, 51, has been a director of the Company
since its formation in June 1994. He is a co-founder
of Chronimed and has served as President, Chief
Executive Officer and a director of Chronimed since
1985. Prior to 1985, Mr. Taylor held various
management positions in companies whose principal
activities were manufacturing, distribution and
international trade. Mr. Taylor is a director of the
Whittier/Scripps Institute, a non-profit organization
dedicated to research, education and patient care in
the field of diabetes.
LAWRENCE C. WEAVER, Dr. Weaver, 73, has been a director of the Company
PH.D., D.SC. (HON.) since August 1994. Dr. Weaver is Chairman of the
Company's Advisory Board and a director of Chronimed.
Dr. Weaver has been Dean and Professor Emeritus at
the University of Minnesota since 1989. Dr. Weaver
served as Dean of the College of Pharmacy at the
University of Minnesota from 1966 through 1984, and
as the Interim Dean from 1994 through 1996. From 1984
through 1989, Dr. Weaver was Vice President for
Professional Relations of the Pharmaceutical
Manufacturers Association ("PMA") and Executive
Director of the PMA Commission on Rare Diseases.
Prior to 1966, Dr. Weaver held various scientific and
management positions in the pharmaceutical industry.
Dr. Weaver has received the FDA Commissioners Award
and other awards for his work in the orphan drug
area, has organized several international symposia on
orphan drugs and participated in the founding of
other orphan drug companies.
W. LEIGH THOMPSON, Dr. Thompson, 58, has been a director of the Company
PH.D., M.D. since August 1995. Dr. Thompson is President and
Chief Executive Officer of Profound Quality
Resources, Ltd., which provides worldwide consulting
services to health institutions and manufacturers.
From 1982 through 1995, Dr. Thompson held a number of
executive positions with Eli Lilly and Company, where
he had responsibility for animal and human product
research, including Chief Scientific Officer,
Director, Executive Director, Vice President, Group
Vice President and Executive Vice President. Prior to
Eli Lilly and Company, Dr. Thompson was Professor of
Medicine at Case Western Reserve University. Dr.
Thompson also serves on the boards of BAS, Inc.,
Corvas International, DNX/Chrysalis, ErgoScience,
GeneMedicine,, Guilford Pharmaceuticals, Galileo
Laboratories, Inspire Pharmaceuticals, LaJolla
Pharmaceuticals, Medarex, Ontogeny and Ophidian
Pharmaceuticals.
WILLIAM M. WARDELL, Dr. Wardell, 58, has been a director of the Company
M.D., PH.D. since August 1995. Since January 1996, Dr. Wardell
has been with Covance, Inc. (formerly
Corning-Besselaar), a contract research organization,
where he is the Senior Scientific Officer. From
January 1995 to January 1996, Dr. Wardell was
President of Wardell Associates International, a
pharmaceutical consulting firm. 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 Boeringer Ingelheim
Pharmaceuticals Inc. and was a member of Boeringer
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.
The affirmative vote of a majority of the shares of Common 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, ADAMS AND TAYLOR AND DRS. SPILKER, WEAVER, THOMPSON AND
WARDELL.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During 1996, the Board of Directors of the Company held five meetings.
The Board of Directors has established an Audit Committee consisting of Mr.
Taylor and Drs. Weaver and Wardell, a Compensation Committee consisting of
Messrs. Taylor and Adams and Dr. Thompson and a Regulatory Oversight Committee
consisting of Drs. Thompson, Wardell and Weaver. 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 twice during
1996. The Compensation Committee's function is to review and make certain
determinations with respect to matters concerning the remuneration of employees,
officers and directors. The Compensation Committee met twice during 1996. The
Regulatory Oversight Committee's function is to keep the Board informed on
matters pertaining to the Company's regulatory compliance. The Regulatory
Oversight Committee met three times during 1996 and was not compensated for its
activities. The Board of Directors does not have a standing nominating
committee. No director attended fewer than 75 percent of the meetings of the
Board of Directors and committees upon which such director served during 1996.
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. Dr. Weaver, who is Chairman of the Advisory Board, is the only director
of the Company who is also an Advisory Board member.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive $10,000 annually
(except for the Chairman of the Board, who receives $36,000 annually pursuant to
the consulting agreement described below) for serving on the Board of Directors,
plus a $200 fee for each meeting and a $100 fee for each telephone meeting
attended. 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 automatically receives an option
to purchase 25,000 shares on the date of such director's initial election to the
Board of Directors. Each such option has an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant and a term of
ten years. In August 1994, pursuant to the Stock Plan, each of Mr. Taylor and
Dr. Weaver were granted options to purchase 25,000 shares exercisable at $5.00
per share. As provided in the Stock Plan, in August 1994, Mr. Adams was granted
an option to purchase 100,000 shares exercisable at $5.00 per share in
recognition of his role and duties as Chairman of the Board. Mr. Taylor was
granted an option to purchase an additional 12,500 shares of Common Stock
exercisable at $5.00 per share in recognition of his efforts relating to the
establishment of the Company, and Dr. Weaver was granted an option to purchase
an additional 10,000 shares of Common Stock exercisable at $5.00 per share in
recognition of his efforts relating to the Advisory Board. In August 1995,
pursuant to the Stock Plan, Drs. Thompson and Wardell were granted options to
purchase 25,000 shares of Common Stock exercisable at $7.625 per share. In
November 1994, Mr. Adams entered into a consulting agreement with the Company
pursuant to which Mr. Adams receives $36,000 annually through June 30, 1997 for
his consulting services. Directors who are employees of the Company receive no
additional compensation for serving as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to August 1994, the Company's Board of Directors made all
decisions regarding executive officer compensation. Mr. Bullion and Dr. Spilker
served on the Board of Directors and participated in decisions concerning
executive compensation. However, Mr. Bullion and Dr. Spilker did not participate
in decisions regarding their own compensation. In August 1994, the Company
established a Compensation Committee of the Board of Directors, comprised of
non-employee directors, which is currently responsible for reviewing and
establishing the Company's executive compensation policies.
Mr. Taylor, a director of the Company and a member of its Compensation
Committee, is President and Chief Executive Officer of Chronimed, and Mr.
Bullion, Chief Executive Officer of the Company, is a director of Chronimed. For
further information regarding the relationship between the Company and
Chronimed, see the information set forth under the caption "Certain
Transactions."
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
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. The Compensation Committee's goal is to establish
compensation policies and programs that will attract and retain highly qualified
executives and align their financial interests closely with long-term
shareholder interests. The Compensation Committee is composed entirely of
directors who are not employees of the Company.
The Compensation Committee intends to make the Company's executive
compensation program competitive with the marketplace with emphasis on
compensation in the form of equity ownership, the value of which is contingent
on the long-term market performance of the Company's Common Stock. For this
purpose, the Compensation Committee utilizes information regarding compensation
levels and practices at other development stage companies.
Actual compensation levels may be greater than competitive levels at
other companies based upon annual and long-term Company performance as well as
individual performance. The Compensation Committee uses its discretion to set
executive compensation at levels warranted in its judgment by the Company's or
an individual executive officer's circumstances.
EXECUTIVE OFFICER COMPENSATION PROGRAM
The components of the Company's compensation program for its executive
officers include (a) base salary and annual bonus compensation, (b) long-term
incentive compensation in the form of stock options and (c) a 401(k) plan and
certain medical and miscellaneous fringe benefits.
BASE SALARY AND ANNUAL BONUS COMPENSATION. The Chief Executive Officer
makes annual recommendations to the Compensation Committee regarding the base
salaries and annual bonus awards for the executive officers (other than the
Chief Executive Officer). In making base salary recommendations, the Chief
Executive Officer takes into account individual experience and performance, as
well as specific issues particular to the Company. The Compensation Committee
generally approves the Chief Executive Officer's salary and bonus
recommendations. For the year ended December 31, 1996, the Compensation
Committee awarded cash bonuses to all executive officers and to other full-time
employees in recognition of achieving certain predetermined financial and
operational objectives. The Compensation Committee, in its discretion, may award
other cash bonuses to executive officers in future years.
STOCK OPTION PROGRAM. Stock options are granted to key management
employees under the Company's 1994 Stock Option Plan. The purpose of the Stock
Plan is to aid in maintaining and developing personnel capable of assuring the
future success of the Company, to offer such personnel additional incentives to
put forth maximum efforts for the success of the business, and to afford them an
opportunity to acquire a proprietary interest in the Company through stock
options. The Stock Plan authorizes the Compensation Committee to grant stock
options to executives and other key employees. All stock options outstanding
were granted at an option price equal to the fair market value of the Company's
Common Stock on the date of grant, have ten year terms and generally vest and
become exercisable in installments over a four-year period.
Stock options are granted upon commencement of employment after
considering the recommendation of the Chief Executive Officer. In determining
whether to recommend additional option grants to an executive officer, the Chief
Executive Officer and the Compensation Committee typically consider the
individual's performance and any planned change in functional responsibility.
The stock option position of executive officers is reviewed on an annual basis.
The Company's policy is to not grant stock options annually, but to review each
individual's stock option position, at which point the Compensation Committee
may or may not grant additional options in its discretion. The determination of
whether or not additional options will be granted is based on a number of
factors, including Company performance, individual performance and levels of
options granted by other comparable companies.
SAVINGS AND INVESTMENT PLAN; BENEFITS. The Company maintains a 401(k)
Savings Plan (the "Savings Plan"), which is funded by elective salary deferrals
by employees. The Savings Plan covers executive officers and substantially all
employees meeting minimum eligibility requirements. The Savings Plan does not
require mandatory contributions by the Company, but discretionary contributions
may be made at the election of the Company. Through December 31, 1996, the
Company had not made any discretionary contributions to the Savings Plan. In
addition, the Company provides medical and other miscellaneous benefits to
executive officers that are generally available to Company employees. The amount
of perquisites did not exceed 10% of total annual salary and bonus for any
executive officer for the fiscal year ended December 31, 1996.
CHIEF EXECUTIVE OFFICER COMPENSATION
BASE SALARY AND ANNUAL BONUS COMPENSATION. Pursuant to the terms of Mr.
Bullion's employment agreement with the Company, he received a base salary of
$136,250 for the year ended December 31, 1996. Factors taken into consideration
in the determination of the Chief Executive Officer's base salary include chief
executive officer salary levels at other comparable companies and the general
experience of the Compensation Committee members in dealing with compensation
matters at other companies. For the year ended December 31, 1996, the
Compensation Committee awarded Mr. Bullion a $35,000 bonus for achieving certain
predetermined budgetary objectives. In evaluating the performance and setting
the base salary and annual bonus compensation of Mr. Bullion, the Compensation
Committee has taken into account his performance in positioning the Company for
future profitability and the completion of the Company's secondary public
offering of Common Stock.
STOCK OPTION AWARDS. Mr. Bullion has options to purchase up to 350,000
shares of Common Stock at $5.00 per share under the Stock Plan. One option is
for 200,000 shares of Common Stock, 120,000 shares of which have vested as of
December 31, 1996. Such option will vest with respect to an additional 40,000
shares on each of August 1, 1997 and 1998. The second option is for 150,000
shares of Common Stock, 100,000 shares of which have vested as of December 31,
1996. Such option will vest with respect to the remaining 50,000 shares on
August 1, 2002, unless vesting of such option is accelerated by the Compensation
Committee. The Compensation Committee will consider the Company's performance
relative to budgetary objectives established by the Board of Directors in
determining whether to accelerate the vesting of such option. It is a condition
to the vesting of any option that Mr. Bullion be an employee of the Company on
the vesting date.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), should not affect the deductibility of compensation paid to the
Company's executive officers for the foreseeable future. However, the Stock Plan
complies with Section 162(m) in order that compensation resulting from stock
options under the Stock Plan will not be counted toward the $1,000,000 limit on
deductible compensation under Section 162(m). The Committee has not formulated
any policy with respect to qualifying other types of compensation for
deductibility under Section 162(m).
William B. Adams
Maurice R. Taylor, II
W. Leigh Thompson, Ph.D., M.D.
Members of the Compensation Committee
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for
the year ended December 31, 1996, the twelve months ended December 31, 1995 and
the fiscal year ended June 30, 1995 that was paid to or earned by the Chief
Executive Officer and all other executive officers of the Company.
<TABLE>
<CAPTION>
Long-Term
-------------------
Compensation
Compensation (1) Awards (1)
---------------------------------- -------------------
Securities
Base Underlying
Name and Principal Position Period Ended Salary Bonus Options (Shares)
- ------------------------------------ ------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
John Howell Bullion (2) 12/31/96 $136,250 $ 35,000 -0-
Chief Executive Officer and 12/31/95 128,750 17,500 -0-
Secretary 6/30/95 125,000 -0- 350,000
Bertram A. Spilker, Ph.D., M.D 12/31/96 $187,500 $ 77,000 -0-
President 12/31/95 162,500 82,000 -0-
6/30/95 150,000 40,000 312,500
Dayton T. Reardan, Ph.D. (3) 12/31/96 $107,673 $ 3,750 -0-
Vice President of 12/31/95 103,163 3,750 27,000
Regulatory Affairs 6/30/95 101,000 -0- 25,000
Patti A. Engel (3) 12/31/96 $106,599 $ 3,750 -0-
Vice President of Marketing 12/31/95 99,097 3,750 27,000
6/30/95 75,800 -0- 25,000
David A. Feste (4) 12/31/96 $ 94,167 $ 10,000 -0-
Former Chief Financial Officer 12/31/95 47,433 3,750 71,000
and Treasurer 6/30/95 -0- -0- -0-
</TABLE>
(1) The amounts reported for the period ended December 31, 1995 are for twelve
months and include base salary, bonus compensation and may include stock option
grants that are also reported in full or part for the fiscal year ended June 30,
1995. This overlap in reporting compensation and long-term compensation award
amounts is required because the Company changed its fiscal year ending June 30
to a calendar year ending December 31. The amounts reported for the periods
ended June 30, 1995 are for twelve months.
(2) Mr. Bullion has been the Chief Executive Officer of the Company since June
24, 1994.
(3) Dr. Reardan and Ms. Engel became executive officers of the Company in May
1995.
(4) Mr. Feste was the Chief Financial Officer and Treasurer of the Company from
August 1, 1995 to December 31, 1996. Mr. Feste continues to be employed by the
Company as a part-time employee. From July 1, 1994 through July 31, 1995, Mr.
Feste was a consultant to the Company. For the period January 1, 1995 through
July 31, 1995, Mr. Feste received approximately $55,000 in consulting fees from
the Company, which is not included in the base salary amount reported for the
twelve months ended December 31, 1995.
EMPLOYMENT AGREEMENTS
A three-year employment agreement between the Company and John Howell
Bullion, the Chief Executive Officer and a director of the Company, was
scheduled to terminate on June 30, 1997, but has been extended by the Board
through December 31, 1997. For the final year of Mr. Bullion's employment
agreement, the Company has an obligation to pay an annual base salary of
$175,000, but Mr. Bullion has set his annual base salary at $140,000 during this
period and will be paid a one-time payment of $35,000 at a later date. In
addition, on signing the employment agreement in August of 1994, Mr. Bullion was
granted stock options representing the right to purchase up to 350,000 shares of
Common Stock at $5.00 per share. Mr. Bullion's employment agreement provides
that if Mr. Bullion is terminated by the Company for any reason other than by
the parties' mutual agreement, his death, his total disability or his breach of
any term of the employment agreement, then Mr. Bullion will receive up to one
year's salary, a bonus equal to the minimum bonus which would be payable for the
fiscal year in which he was terminated and certain other benefits specified in
the employment agreement.
A three-year employment agreement between the Company and Bertram A.
Spilker, Ph.D., M.D., President and a director of the Company, was scheduled to
terminate on June 30, 1997, but has been extended by the Board through December
31, 1997. For the final year of Dr. Spilker's employment agreement, the Company
has an obligation to pay an annual base salary of $200,000. In addition, on
signing the employment agreement in August of 1994, Dr. Spilker was granted
stock options representing the right to purchase up to 312,500 shares of Common
Stock at $5.00 per share. Dr. Spilker is entitled to receive a cash bonus of up
to $125,000 for the three year term of his employment agreement for the
achievement of certain development milestones and budgetary objectives, of which
$84,000 has been accrued or paid through December 31, 1996. Dr. Spilker is also
entitled to an annual discretionary bonus in an amount ranging from $25,000 to
$150,000 per year, payable in 1995, 1996 and 1997 for the achievement of certain
goals and objectives determined by the Board of Directors, of which $40,000 has
been paid with respect to 1995 and $35,000 has been paid with respect to 1996.
Dr. Spilker's employment agreement provides that if Dr. Spilker is terminated by
the Company for any reason other than by the parties' mutual agreement, his
death, his total disability or his breach of any term of the employment
agreement, then Dr. Spilker will receive up to one year's salary, a bonus equal
to the minimum bonus which would be payable for the fiscal year in which he was
terminated and certain other benefits specified in the employment agreement.
STOCK OPTIONS
No stock options were granted in 1996 to any executive officer named in
the Summary Compensation Table.
The following tables summarizes stock option exercises in 1996 by the
executive officers named in the Summary Compensation Table above, and the value
of options held by such persons at December 31, 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES FOR THE YEAR ENDED DECEMBER 31, 1996 AND
VALUE OF OPTIONS HELD AT DECEMBER 31, 1996
Value of
Unexercised
Number of In-the-Money Options
Unexercised Options Held at
Shares Held at December 31, December 31, 1996
Acquired on Value 1996 (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable) (1)
- ----------------------------- ----------- -------- -------------------- ---------------------
<S> <C> <C> <C> <C>
John Howell Bullion -0- -0- 220,000/130,000 $1,045,000/$617,500
Bertram A. Spilker, Ph.D.,M.D. -0- -0- 195,834/116,666 $930,212/$554,164
Dayton T. Reardan, Ph.D. -0- -0- 20,000/17,000 $95,000/$80,750
Patti A. Engel -0- -0- 20,000/17,000 $95,000/$80,750
David A. Feste 15,000 $58,258 26,000/-0- $123,500/$0
</TABLE>
(1) "Value" is based upon the difference between the per share option exercise
price and the market value of the Common Stock at the date of exercise or the
December 31, 1996 last sale price of $9.75.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the dollar change in the cumulative total
shareholder return on the Company's Common Stock with the cumulative total
return on the NASDAQ Total Return Index (U.S. Companies) and the NASDAQ
Pharmaceutical Stock Index for the period beginning on October 31, 1994 (the
last day of the month in which the Company's Common Stock was first publicly
traded) and ending on December 31, 1996. The graph and table assume the
investment of $100 on October 31, 1994, in the Company's Common Stock, the
NASDAQ Total Return Index and the NASDAQ Pharmaceutical Stock Index.
[PLOT POINTS GRAPH]
<TABLE>
<CAPTION>
(Plot Points) (Plot Points) (Plot Points)
OMI Nasdaq
Date Index Index Drug Index
- --------- ------------- ------------- -------------
<C> <C> <C> <C>
10/12/94
10/31/94 100.00 100.00 100.00
11/30/94 91.43 96.68 100.44
12/31/94 105.71 96.95 97.19
1/31/95 77.14 97.50 102.57
2/28/95 80.00 102.65 106.44
3/31/95 88.57 105.70 104.92
4/30/95 102.86 109.02 107.87
5/31/95 103.22 111.83 109.23
6/30/95 117.14 120.90 122.02
7/31/95 151.43 129.78 132.53
8/31/95 171.43 132.41 148.20
9/30/95 168.57 135.46 152.47
10/31/95 145.71 134.68 146.77
11/30/95 134.29 137.84 154.13
12/31/95 148.57 137.11 177.80
1/31/96 176.43 137.79 193.25
2/29/96 185.71 143.04 189.61
3/31/96 191.43 143.52 185.03
4/30/96 185.71 155.42 194.58
5/31/96 214.29 162.56 201.17
6/30/96 205.71 155.23 179.79
7/31/96 162.86 141.41 160.21
8/31/96 205.71 149.33 171.82
9/30/96 251.43 160.76 183.84
10/31/96 197.14 159.00 175.58
11/30/96 214.29 168.85 172.98
12/31/96 222.86 168.66 177.99
</TABLE>
<TABLE>
<CAPTION>
October 31, June 30, December 31, December 31,
1994 1995 1995 1996
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Orphan Medical, Inc. 100.00 117.14 148.57 222.86
NASDAQ Stock Market (US)
Total Return Index 100.00 120.90 137.11 168.66
NASDAQ Pharmaceutical Stocks
Total Return Index 100.00 122.02 177.80 177.99
</TABLE>
The following table sets forth, as of March 1, 1997, certain
information with respect to the Company's Common Stock beneficially owned by
directors of the Company, all of the executive officers of the Company, all
directors and executive officers as a group and certain beneficial owners.
Except as otherwise indicated, the shareholders listed in the table have sole
voting and investment power with respect to the Common Stock owned by them.
<TABLE>
<CAPTION>
Name Number Percentage
- ------------------------------------------------------------------------ -------------- ----------
<S> <C> <C>
John Howell Bullion (1) 271,312 4.32%
Bertram A. Spilker, Ph.D., M.D. (2) 223,134 3.57%
Dayton T. Reardan, Ph.D. (3) 23,610 *
Patti A. Engel (3) 25,000 *
David A. Feste (4) 28,060 *
William B. Adams (5) 139,343 2.28%
Maurice R. Taylor, II (6) 62,500 1.03%
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.) (7) 29,915 *
W. Leigh Thompson, Ph.D., M.D. (8) 10,000 *
William M. Wardell, M.D., Ph.D. (8) 10,000 *
First Bank Systems, Inc. (9) 372,070 6.14%
Perkins Capital Management, Inc. and Perkins Opportunity Fund (9) 1,301,600 21.47%
Woodlawn Partners LLC (9) 304,700 5.03%
All directors and executive officers as a group (10 persons) 822,874 12.34%
</TABLE>
* Less than 1 percent.
(1) Includes 220,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $5.00 per share,
within 60 days.
(2) Includes 195,834 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $5.00 per share,
within 60 days.
(3) Includes 20,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $5.00 per share,
within 60 days.
(4) Includes 26,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $5.00 per share,
within 60 days.
(5) Includes 60,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $5.00 per share,
within 60 days.
(6) Includes 22,500 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $5.00 per share,
within 60 days.
(7) Includes 21,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $5.00 per share,
within 60 days.
(8) Includes 10,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable, at a price of $7.63 per share,
within 60 days.
(9) First Bank Systems, Inc., Perkins Capital Management, Inc. (including The
Perkins Opportunity Fund) and Woodlawn Partners LLC have sole voting power with
respect to 354,720, 418,700 and 258,300 shares of the Company's Common Stock,
respectively.
PROPOSAL 2: RATIFICATION 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. The 1994 Stock Option Plan (the "Stock Plan") adopted by
the Board of Directors of the Company (the "Board") in August 1994 provided for
the issuance of 1,250,000 shares of the Company's Common Stock. The Stock Plan
was ratified by the Company's shareholders on October 5, 1995. As of March 10,
1997, options to purchase 1,224,500 shares of the Company's Common Stock have
been granted, net of cancellations and forfeitures, under the Stock Plan and
25,500 shares are available to the Company for future option grants.
The Stock Plan was amended by the Board on December 13, 1996, to
increase the number of shares authorized for issuance thereunder from 1,250,000
to 1,550,000 shares. The amendment of December 13, 1996, is expressly subject to
the ratification by shareholders at the 1997 Annual Meeting. If shareholders do
not ratify the amendment at the 1997 Annual Meeting, any options granted under
the Stock Plan in excess of 1,250,000 shares would become null and void.
No options in excess of 1,250,000 have been granted under the Stock
Plan since the amendment by the Board in December 1996. However, should
shareholders fail to ratify the amendment to the Stock Plan, the Company would
likely be severely 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.
The Stock Plan provides for the grant of options to purchase shares of
Common Stock to any full 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 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 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 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. The Stock Plan provides that no employee may be
granted options for more than 400,000 shares of Common Stock in the aggregate in
any calendar year. Determinations and interpretations with respect to the Stock
Plan are in the sole discretion of the Compensation Committee, whose
determinations and interpretations will be final and conclusive. The Stock Plan
terminates on August 24, 2004, and no options may be granted after such date.
The exercise price of an incentive option granted under the Stock Plan
may not be less than the fair market value of the Common Stock on the date the
option is granted (in the event that a proposed optionee owns more than 10% of
the Company's Common Stock, any incentive stock option granted to such optionee
must have an exercise price not less than 110% of the then fair market value).
The exercise price of any non-incentive stock option granted under the Stock
Plan is determined by the Compensation Committee, but may not be less than the
fair market value of the underlying Common Stock on the date of grant. The term
of each incentive stock option is determined by the Compensation Committee, but
may not exceed 10 years from the date of grant (or, in the case of an incentive
option granted to an owner of more than 10% of the Common Stock, five years).
The term of any non-incentive stock option may not exceed 15 years. A person who
has been granted an option under the Stock Plan may be granted additional
options, but to the extent the aggregate fair market value (determined at the
time the option is granted) of the Common Stock with respect to which incentive
stock options are exercisable for the first time by such person during any
calendar year exceeds $100,000, such options will be treated as options that do
not qualify as incentive stock options.
The Board may suspend or terminate the Stock Plan or any portion
thereof at anytime. The Board may also amend the Stock Plan at any time, but
such action may not, without the consent of the affected participants, adversely
affect the rights or obligations of the participants under outstanding stock
options. The Board may increase the number of shares of Common Stock that will
be available for issuance under the Stock Plan, subject to shareholder approval.
No amendment or modification of the Stock Plan, without approval of the
shareholders of the Company, will be effective if shareholder approval of the
amendment is then required pursuant to Rule 16b(3) under the Exchange Act or any
successor rule, Section 422 of the Code, or the rules of the National
Association of Securities Dealers, Inc. Options outstanding at the time the
Stock Plan is terminated will continue to be exercisable in accordance with
their respective terms.
VOTE REQUIRED
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting is required for the ratification of the
amendment to the Stock Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
PROPOSAL TO AMEND THE STOCK PLAN.
CERTAIN TRANSACTIONS
John Howell Bullion, Chief Executive Officer and a director of the
Company, is also Secretary and a director of Chronimed. Maurice R. Taylor, II, a
director of the Company and a member of the Compensation Committee, is also
President, Chief Executive Officer and a director of Chronimed. Lawrence C.
Weaver, Ph.D., a director of the Company, is also a director of Chronimed.
William B. Adams, Chairman of the Board of Directors of the Company, was
Chairman of the Board of Directors of Chronimed from 1985 to June 1994 , and
Bertram A. Spilker, Ph.D., M.D., President of the Company, was an officer of
Chronimed from January 1993 to July 1994.
SECTION 16(a) REPORTING
Under federal securities laws, the Company's directors and officers,
and any beneficial owner of more than 10% of a class of equity securities of the
Company, are required to report their ownership of the Company's equity
securities and any changes in such ownership to the Securities and Exchange
Commission (the "Commission"). Specific due dates for these reports have been
established by the Commission, and the Company is required to disclose in this
Proxy Statement any delinquent filing of such reports and any failure to file
such reports during 1996. All officers and directors have filed all reports
required by the Commission on a timely basis, except that Mr. Bullion and Dr.
Weaver each filed one report late.
PROPOSAL 3: APPROVAL OF INDEPENDENT ACCOUNTANTS
The Board of Directors has appointed Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending December 31, 1997. A
proposal to ratify the appointment of Ernst & Young LLP will be presented at the
Annual Meeting. 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
shareholders. If the appointment of Ernst & Young LLP is not ratified by the
shareholders, the Board of Directors is not obligated to appoint other auditors,
but the Board of Directors will give consideration to such unfavorable vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
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 by telephone, telegraph, facsimile transmission or in person.
PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a shareholder to be presented at the 1997 Annual
Meeting must be received at the Company's executive offices, 13911 Ridgedale
Drive, Suite 475, Minnetonka, Minnesota 55305 not later than December 12, 1997.
ORPHAN MEDICAL, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having duly received the Notice of Annual Meeting of
Shareholders and Proxy Statement dated March 17, 1997, revoking all prior
proxies, hereby appoints John Howell Bullion and Dr. Bertram A. Spilker, and
each of them, with power to act without the other and to appoint a substitute,
to vote all shares the undersigned is entitled to vote at the Annual Meeting of
Shareholders of Orphan Medical, Inc. (the "Company") to be held on May 8, 1997,
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.
1. PROPOSAL TO ELECT SEVEN DIRECTORS
[ ] For all nominees listed below (Except as marked to the
contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below: John
Howell Bullion, Bertram A. Spilker, Ph.D., M.D., William
Adams, Maurice R. Taylor, II, Lawrence C. Weaver, Ph.D., D.Sc.
(Hon.), William M. Wardell, M.D., Ph.D., W. Leigh Thompson,
Ph.D., M.D.
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.
- --------------------------------------------------------------------------------
2. PROPOSAL TO RATIFY AMENDMENT TO 1994 STOCK OPTION PLAN.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
4. IN THEIR DISCRETION , THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
(continued and to be dated and signed on the other side)
(continued from other side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR NAMED IN ITEM 1, FOR ITEM 2, FOR
ITEM 3 AND IN THE DISCRETION OF THE NAMED PROXIES ON ALL OTHER MATTERS.
Please sign exactly as name appears below. When shares are held by joint
tenants, both must sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by an authorized person.
_____________________________________________
Signature
_____________________________________________
Signature if held jointly
Dated: ________________________________, 1997
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
