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) Perunit 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:
<PAGE>
[LOGO] ORPHAN MEDICAL
13911 RIDGEDALE DRIVE, SUITE 475
MINNETONKA, MINNESOTA 55305
TELEPHONE (612) 513-6900
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 27, 1998
The Annual Meeting of Shareholders of Orphan Medical, Inc. (the
"Company") will be held Wednesday, May 27, 1998, at 3:30 p.m. (Central Standard
Time), at the Minneapolis Athletic Club, 615 Second Avenue South, Minneapolis,
Minnesota 55402, for the following purposes:
1. To elect six directors to serve until the next Annual Meeting
of Shareholders;
2. To ratify the selection of Ernst & Young LLP as the
independent public accountants of the Company for the fiscal
year ending December 31, 1998; and
3. To consider and act upon any other business that may properly
come before the meeting or any adjournment thereof.
The Board of Directors of the Company has designated the close of
business on March 30, 1998 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
/s/ John Howell Bullion
John Howell Bullion
Chief Executive Officer and Secretary
Minnetonka, Minnesota
April 8, 1998
<PAGE>
ORPHAN MEDICAL, INC.
13911 RIDGEDALE DRIVE, SUITE 475
MINNETONKA, MINNESOTA 55305
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 27, 1998
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 Wednesday, May 27, 1998, at 3:30 p.m. (Central Standard 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 April 8, 1998.
The only matters the Board of Directors knows will be presented are those stated
in Proposals 1 and 2 of this Proxy Statement. THE BOARD OF DIRECTORS RECOMMENDS
THAT SHAREHOLDERS VOTE IN FAVOR OF PROPOSALS 1 AND 2. 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
30, 1998 will be entitled to vote at the Annual Meeting. As of that date, a
total of 6,115,962 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 and for approval of the selection of Ernst & Young
LLP as the Company's independent public accountants. 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.
<PAGE>
PROPOSAL 1: ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AS DIRECTORS
The business and affairs of the Company are managed under the direction
of its Board of Directors, which is presently comprised of six members. Six
directors have been nominated for election to the Company's Board of Directors
at the Annual Meeting to hold office until the next Annual Meeting of
Shareholders or until their successors are duly elected and qualified.
The Company's incumbent directors, John Howell Bullion, 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. Each of Messrs. Bullion, Adams and Taylor
and Drs. 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.
<TABLE>
<S> <C>
JOHN HOWELL BULLION Mr. Bullion, 46, 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.
WILLIAM B. ADAMS Mr. Adams, 51, 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, 52, 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 Chairman 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, 74, has been a director of the Company since August 1994. Dr.
PH.D., D.SC. (HON.) 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.
<PAGE>
W. LEIGH THOMPSON, PH.D., Dr. Thompson, 59, has been a director of the Company since August 1995. Dr.
M.D. 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, DepoMed, ErgoScience, GeneMedicine, Guilford Pharmaceuticals,
Inspire Pharmaceuticals, LaJolla Pharmaceuticals, Medarex, Ontogeny and
Ophidian Pharmaceuticals.
WILLIAM M. WARDELL, Dr. Wardell, 59, has been a director of the Company since August 1995. Since
M.D., PH.D. 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.
</TABLE>
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. WEAVER, THOMPSON AND WARDELL.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During 1997, the Board of Directors of the Company held six 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
1997. 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 1997. 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 five times during 1997. 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 1997.
<PAGE>
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) 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 June
1998, Drs. Thompson and Wardell were granted options to purchase an additional
12,500 and 15,000 shares of Common Stock, respectively, exercisable at $6.125
per share in recognition of their efforts relating to various matters pertaining
to the Company's Busulfex and Xyrem clinical trial programs. 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 served on the
Board of Directors and participated in decisions concerning executive
compensation. However, Mr. Bullion did not participate in decisions regarding
his 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."
<PAGE>
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, 1997, the Compensation
Committee awarded cash bonuses to all executive officers, except the Chief
Executive Officer and the President, and to other 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 and generally vest and become exercisable in
installments over a four-year period. Options granted under the Stock Plan may
only be granted during a 10-year period ending on August 24, 2004, unless an
option award agreement provides otherwise.
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
<PAGE>
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, 1997, 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, 1997.
CHIEF EXECUTIVE OFFICER COMPENSATION
BASE SALARY AND ANNUAL BONUS COMPENSATION. Mr. Bullion's annual base
salary and bonus compensation are set by the Compensation Committee of the Board
using the same policies and criteria used for other executive officers. For the
year ended December 31, 1997, the Compensation Committee did not award Mr.
Bullion a bonus. However, the Compensation Committee approved the payment of
previously earned base salary amounts that Mr. Bullion had voluntarily deferred
during 1997 amounting to approximately $24,000, which has been classified as
bonus on the Summary Compensation Table. 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.
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, 160,000 shares of which have vested as of
December 31, 1997. Such option will vest with respect to an additional 40,000
shares on August 1, 1998. The second option is for 150,000 shares of Common
Stock, 100,000 shares of which have vested as of December 31, 1997. 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, 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
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for
the three (3) fiscal years ended December 31, 1997 earned by the Chief Executive
Officer and all other executive officers of the Company.
<TABLE>
<CAPTION>
Long-Term
Compensation
Compensation Awards
---------------------------------- ------------------
Securities
Base Underlying
Name and Principal Position Period Ended Salary Bonus Options (Shares)
- ------------------------------------ ------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
- ------------------------------------
John Howell Bullion 12/31/97 $136,250 $24,000 -0-
Chief Executive Officer and 12/31/96 136,250 35,000 -0-
Secretary 12/31/95 128,750 17,500 -0-
- -------------------------------------
Bertram A. Spilker, Ph.D., M.D. (1) 12/31/97 $222,692 $-0- -0-
Former President 12/31/96 187,500 77,000 -0-
12/31/95 162,500 82,000 -0-
- -------------------------------------
Dayton T. Reardan, Ph.D. (2) 12/31/97 $111,986 $3,500 38,000
Vice President of 12/31/96 107,673 3,750 -0-
Regulatory Affairs 12/31/95 103,163 3,750 27,000
- -------------------------------------
Patti A. Engel (2) 12/31/97 $111,300 $3,500 23,000
Vice President of Sales and 12/31/96 106,599 3,750 -0-
Marketing 12/31/95 99,097 3,750 27,000
</TABLE>
(1) Dr. Spilker was the President of the Company from June 1994 until December
19, 1997, the effective date of his resignation. Dr. Spilker will continue to
advise the Company through 1998 on matters relating to development of its drugs
and assist with FDA approvals and other regulatory matters. The Company has
agreed to compensate Dr. Spilker for his services at an amount not to exceed
$75,000, plus the continuation of certain employee benefits. At December 19,
1997, Dr. Spilker had vested options to acquire 233,333 shares of the Company's
Common Stock, which will become exercisable on July 1, 1998 and expire on March
31, 1999.
(2) Dr. Reardan and Ms. Engel became executive officers of the Company in May
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 was extended by the Compensation
Committee of the Board through December 31, 1997. The Compensation Committee has
offered to extend Mr. Bullion's employment agreement through December 31, 1998,
with an option for 1999. Mr. Bullion's employment agreement for 1997 provided
for, and 1998 is expected to provide for, an annual base salary of $175,000.
However, as part of an effort to conserve cash resources, Mr. Bullion has agreed
to defer the payment of a portion of his annual base salary. Mr. Bullion
deferred approximately $39,000 in 1997 and will defer approximately $50,000 in
1998. The Compensation Committee of the Board determines the timing of any
payment of deferred annual base salary to Mr. Bullion. 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 $5.00 per share. The proposed employment agreement offered to Mr. Bullion
provides that if Mr. Bullion is terminated by the Company for any reason other
than by the parties' mutual agreement, his death, his total disability or his
breach of any term of the employment agreement, then Mr. Bullion will receive up
to one year's salary, a bonus equal to the minimum bonus which would be payable
for the fiscal year in which he was terminated and certain other benefits
specified in the employment agreement.
<PAGE>
STOCK OPTIONS
OPTION GRANTS DURING TWELVE MONTHS ENDED DECEMBER 31, 1997
The following table contains information concerning grants of stock
options to certain executive officers named in the Summary Compensation Table
above during 1997.
<TABLE>
<CAPTION>
1997 OPTION GRANTS
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term (2)
----------------- --------------------------------------
% of Total
Options
Granted to
Number of Employees Exercise or
Options Year Ended Base Price Expiration
Name Granted 12/31/97 ($/Share) Date 5% 10%
- ---------------------- -------- ---------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Dayton Reardan, 23,000 8.36% $6.125 8/24/04 $59,294 $138,934
Ph.D.(1) 15,000 5.45% $5.375 8/24/04 31,174 72,062
Patti A. Engel (1) 23,000 8.36% $6.125 8/24/04 $59,294 $138,934
</TABLE>
(1) On June 25, 1997 an option to purchase 23,000 shares, which has
approximately a 7.2-year term, was granted to Dr. Reardan and Ms. Engel,
respectively. Such option vested and became exercisable with respect to 20% of
such shares on the date of grant and will vest and become exercisable with
respect to an additional 20% of the shares subject thereto on each of June 25,
1998, 1999, 2000 and 2001. In addition, on December 17, 1997 an option to
purchase 15,000 shares, which has a 6.7-year term, was granted to Dr. Reardan.
Such option shall vest in full on August 24, 2004. However, the vesting of this
option may be accelerated if the Company achieves certain predetermined
objectives with respect to the development of specific products.
(2) Potential realizable value is based on an assumption that the market price
for the Company's Common Stock appreciates at the stated rate, compounded
annually, from date of grant until the expiration date of the option. These
values are calculated based on regulations promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future stock
price appreciation. There is no assurance that the actual stock price over the
term of the option will be at the assumed 5% or 10% levels, or at any other
defined level.
AGGREGATED OPTION EXERCISES FOR THE YEAR ENDED DECEMBER 31, 1997 AND VALUE OF
OPTIONS HELD AT DECEMBER 31, 1997
The following tables summarizes stock option exercises in 1997 by the
executive officers named in the Summary Compensation Table above, and the value
of options held by such persons at December 31, 1997.
<TABLE>
<CAPTION>
Value of
Unexercised
Number of In-the-Money Options
Unexercised Options Held at
Shares Held at December 31, December 31, 1997
Acquired on Value 1997 (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable) (1)
- ------------------------------- -------- -------- -------------- ------------------
<S> <C> <C> <C> <C>
John Howell Bullion -0- -0- 260,000/90,000 $-0-/$-0-
Bertram A. Spilker, Ph.D., M.D. -0- -0- 233,333/-0- $-0-/$-0-
Dayton T. Reardan, Ph.D. -0- -0- 36,600/38,400 $-0-/$-0-
Patti A. Engel -0- -0- 36,600/23,400 $-0-/$-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, 1997 last sale price of $4.813. Accordingly, none of the options
listed above were "In-the-Money" because the exercise price for these options
was greater than the closing sale price for the Company's Common Stock on
December 31, 1997.
<PAGE>
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, 1997. 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.
[STOCK PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
October 31, June 30, December 31, December 31, December 31,
1994 1995 1995 1996 1997
---------------- ----------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Orphan Medical, Inc. 100.00 117.14 148.57 222.86 110.01
NASDAQ Stock Market
Total Return Index 100.00 120.90 137.11 168.66 207.05
NASDAQ Pharmaceutical
Total Return Index 100.00 122.02 177.80 177.99 184.26
</TABLE>
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table on the following page sets forth, as of March 30, 1998,
certain information with respect to the beneficial ownership of the Company's
Common Stock by (i) each person who, to the knowledge of the Company, owned
beneficially more than five percent of such stock, (ii) each director, (iii)
each executive officer named in the "Summary Compensation Table" above, and (iv)
all directors and executive officers as a group. Unless otherwise noted, the
shares listed in the table below are subject to sole voting and investment power
of the indicated person.
Beneficial ownership is determined and presented in the table on the
following page in accordance with rules of the Securities and Exchange
Commission, and includes general voting power and/or investment power with
respect to the securities. Shares of the Company's Common Stock subject to
options currently exercisable or exercisable within 60 days of March 30, 1998,
are deemed to be outstanding for purposes of computing the percentage of the
person holding such options, but are not deemed outstanding for computing the
percentage of any other person.
<TABLE>
<CAPTION>
Name Number Percentage
- ------------------------------------------------------------------------- ------------ --------------
<S> <C> <C>
John Howell Bullion (1) 311,312 4.88%
Bertram A. Spilker, Ph.D., M.D. (2) 260,633 4.10%
Dayton T. Reardan, Ph.D. (3) 40,210 *
Patti A. Engel (3) 41,600 *
William B. Adams (4) 179,343 2.89%
Maurice R. Taylor, II (5) 64,400 1.05%
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.) (6) 43,340 *
W. Leigh Thompson, Ph.D., M.D. (7) 17,500 *
William M. Wardell, M.D., Ph.D. (8) 18,000 *
Paul T. Lambert (9) 325,000 5.31%
Perkins Capital Management, Inc. and Perkins Opportunity Fund (9) 568,150 9.29%
Woodlawn Partners LLC (9) 360,400 5.89%
All directors and executive officers as a group (9 persons) 976,338 14.24%
</TABLE>
* Less than 1 percent.
(1) Includes 260,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable at a price of $5.00 per share.
(2) Includes 233,333 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable at a price of $5.00 per share.
(3) Includes 32,000 and 4,600 shares issuable upon the exercise of options that
are currently exercisable or will become exercisable at a price of $5.00 and
$6.125 per share, respectively.
(4) Includes 80,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable at a price of $5.00 per share.
(5) Includes 30,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable at a price of $5.00 per share.
(6) Includes 28,000 shares issuable upon the exercise of options that are
currently exercisable or will become exercisable at a price of $5.00 per share.
(7) Includes 15,000 and 2,500 shares issuable upon the exercise of options that
are currently exercisable or will become exercisable at a price of $7.63 and
$6.125 per share, respectively.
(8) Includes 15,000 and 3,000 shares issuable upon the exercise of options that
are currently exercisable or will become exercisable at a price of $7.63 and
$6.125 per share, respectively.
(9) Paul T. Lambert., Perkins Capital Management, Inc. (including The Perkins
Opportunity Fund) and Woodlawn Partners LLC have sole voting power with respect
to 325,000, 197,300 and 304,700 shares of the Company's Common Stock,
respectively.
<PAGE>
CERTAIN TRANSACTIONS
John Howell Bullion, Chief Executive Officer and a director of the
Company, is also a director of Chronimed. Maurice R. Taylor, II, a director of
the Company and a member of the Compensation Committee, is also 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.
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 1997. To the Company's knowledge, based solely on review of
the copies of such reports furnished to the Company and written representations
that no other reports were required, during the fiscal year ended December 31,
1997, all Section 16(a) filing requirements applicable to executive officers,
directors and greater than ten-percent beneficial owners were properly met.
PROPOSAL 2: APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Ernst & Young LLP as independent
public accountants for the Company for the fiscal year ending December 31, 1998.
A proposal to ratify the appointment of Ernst & Young LLP will be presented at
the Annual Meeting. Ernst & Young LLP has audited the Company's financial
statements for the fiscal year ended December 31, 1997, and for all prior years.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they desire to do so
and will be available to answer appropriate questions from shareholders. If the
appointment of Ernst & Young LLP is not ratified by the shareholders, the Board
of Directors is not obligated to appoint other independent public accountants,
but the Board of Directors will give consideration to such unfavorable vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS.
SOLICITATION OF PROXIES
All of the expenses involved in preparing, assembling and mailing this
Proxy Statement and the material enclosed herewith will be paid by the Company.
The Company may reimburse banks, brokerage firms, and other custodians, nominees
and fiduciaries for reasonable expenses incurred by them in sending proxy
materials to beneficial owners of the Company's Common Stock. Although proxies
are being solicited primarily by mail, officers and regular employees of the
Company who will receive no extra compensation for their services, may solicit
such proxies by telephone, telegraph, facsimile transmission or in person.
PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a shareholder to be presented at the 1999 Annual
Meeting must be received at the Company's executive offices, 13911 Ridgedale
Drive, Suite 475, Minnetonka, Minnesota 55305 not later than December 15, 1998.
<PAGE>
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 April 8, 1998, revoking all prior
proxies, hereby appoints John Howell Bullion and William Adams, 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 27, 1998,
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 SIX 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, 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 THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
3. 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 AND FOR ITEM 2,
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: ________________________________, 1998
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
