<PAGE> 1
SONUS PHARMACEUTICALS, INC.
22026 20TH AVENUE S.E.
BOTHELL, WASHINGTON 98021
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 29, 1999
TO THE STOCKHOLDERS OF SONUS PHARMACEUTICALS, INC.:
The 1999 Annual Meeting of Stockholders of SONUS Pharmaceuticals, Inc.
(the "Company") will be held at the Washington Athletic Club, 1325 Sixth Avenue,
Seattle, Washington, on April 29, 1999, at 9:00 A.M., for the following purposes
as more fully described in the accompanying Proxy Statement:
(1) To elect the following six (6) nominees to serve as directors
until the next annual meeting of stockholders or until their
successors are elected and have qualified:
Steven C. Quay, M.D., Ph.D. Christopher S. Henney, Ph.D., D.Sc.
Michael A. Martino Robert E. Ivy
George W. Dunbar, Jr. Dwight Winstead
(2) To approve an amendment to the Company's Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan - 1991 to increase the number of shares subject thereto by
300,000 to a total of 2,200,000;
(3) To approve an amendment to the Company's Employee Stock
Purchase Plan to increase the number of shares subject thereto
by 50,000 to a total of 100,000.
(4) To approve an amendment to the Company's 1995 Stock Option Plan
for Directors to increase the number of shares subject thereto
by 127,863 to a total of 250,000.
(5) To approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
Common Stock of the Company by 10,000,000 shares to 30,000,000.
(6) To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31,
1999; and
(7) To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on March 5, 1999
will be entitled to vote at the meeting or any adjournment or postponement
thereof.
By Order of the Board of Directors
Steven C. Quay, M.D., Ph.D.
Chairman of the Board, Chief Executive
Officer and Secretary
March 22, 1999
YOUR VOTE IS IMPORTANT. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING YOU SHOULD COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY. Any
stockholder present at the meeting may withdraw his or her proxy and vote
personally on each matter brought before the meeting. Stockholders attending the
meeting whose shares are held in the name of a broker or other nominee who
desire to vote their shares at the meeting should bring with them a proxy or
letter from that firm confirming their ownership of shares.
<PAGE> 2
SONUS PHARMACEUTICALS, INC.
22026 20TH AVENUE S.E.
BOTHELL, WASHINGTON 98021
---------------
PROXY STATEMENT
---------------
INTRODUCTION
This Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of SONUS Pharmaceuticals,
Inc., a Delaware corporation (the "Company"), for use at its 1999 Annual Meeting
of Stockholders ("Annual Meeting") to be held on April 29, 1999, at 9:00 A.M.,
at the Washington Athletic Club, 1325 Sixth Avenue, Seattle, Washington. This
Proxy Statement and the accompanying proxy are being mailed to stockholders on
or about March 22, 1999. The Company has retained the services of Corporate
Investor Communications, Inc. to assist in soliciting proxies from brokers and
nominees for the Annual Meeting. The estimated costs for these services is
$4,000 and will be borne by the Company. It is contemplated that this
solicitation of proxies will be made primarily by mail; however, if it should
appear desirable to do so in order to ensure adequate representation at the
meeting, directors, officers and employees of the Company may communicate with
stockholders, brokerage houses and others by telephone, telegraph or in person
to request that proxies be furnished and may reimburse banks, brokerage houses,
custodians, nominees and fiduciaries for their reasonable expenses in forwarding
proxy materials to the beneficial owners of the shares held by them. All
expenses incurred in connection with this solicitation shall be borne by the
Company.
Holders of shares of Common Stock of the Company ("stockholders") who
execute proxies retain the right to revoke them at any time before they are
voted. Any proxy given by a stockholder may be revoked or superseded by
executing a later dated proxy, by giving notice of revocation to the Secretary,
SONUS Pharmaceuticals, Inc., 22026 20th Avenue S.E., Bothell, Washington 98021
in writing prior to or at the meeting or by attending the meeting and voting in
person. A proxy, when executed and not so revoked, will be voted in accordance
with the instructions given in the proxy. If a choice is not specified in the
proxy, the proxy will be voted "FOR" the nominees for election of directors
named in this Proxy Statement, "FOR" the amendment of the Incentive Stock
Option, Nonqualified Stock Option and Restricted Stock Purchase Plan--1991,
"FOR" the amendment of the Employee Stock Purchase Plan, "FOR" the amendment of
the 1995 Stock Option Plan for Directors, "FOR" the amendment to the Company's
Certificate of Incorporation and "FOR" the ratification of Ernst & Young LLP as
the Company's independent auditors.
VOTING SECURITIES
The shares of Common Stock, $.001 par value, constitute the only
outstanding class of voting securities of the Company. Only the stockholders of
the Company of record as of the close of business on March 5, 1999 (the "Record
Date") will be entitled to vote at the meeting or any adjournment or
postponement thereof. As of the Record Date, there were 8,632,702 shares of
Common Stock outstanding and entitled to vote. No shares of the Company's
preferred stock, $0.001 par value, were outstanding. A majority of shares
entitled to vote represented in person or by proxy will constitute a quorum at
the meeting. Each stockholder is entitled to one vote for each share of Common
Stock held as of the Record Date. Abstentions and broker non-votes are each
included in the determination of the number of shares present and voting for the
purpose of determining whether a quorum is present. Abstentions will be treated
as shares present and entitled to vote for purposes of any matter requiring the
affirmative vote of a majority or other proportion of the shares present and
entitled to vote. With respect to shares relating to any proxy as to which a
broker non-vote is indicated on a proposal, those shares will not be considered
present and entitled to vote with respect to any such proposal. Abstentions or
broker non-votes or other failures to vote will have no effect in the election
of directors, who will be elected by a plurality of the affirmative votes cast.
With respect to any matter brought before the Annual Meeting requiring the
affirmative vote of a majority or other proportion of the outstanding shares, an
abstention or broker non-vote will have the same effect as a vote against the
matter being voted upon.
<PAGE> 3
All stockholders entitled to vote at the Annual Meeting may cumulate the votes
in the election of directors. With cumulative voting, each stockholder is
entitled to a number of votes as shall equal the number of votes which the
stockholder would be entitled to cast for the election of directors with respect
to the stockholder's shares of stock multiplied by the number of directors to be
elected by the stockholders, and each stockholder may cast all of such votes for
a single director or may distribute them among the number to be voted for, or
for any two or more of them as the stockholder may see fit. In order to cumulate
votes, stockholders must attend the meeting and vote in person or make
arrangements with their own proxies. Otherwise, the proxies solicited by the
Board of Directors confer discretionary authority in the proxy holders to
cumulate votes so as to elect the maximum number of nominees.
PROPOSAL ONE
ELECTION OF DIRECTORS
Currently, there are six (6) members of the Board of Directors.
Directors are elected at each annual stockholders' meeting to hold office until
the next annual meeting or until their successors are elected and have
qualified. Unless otherwise instructed, the proxy holders named in the enclosed
proxy will vote the proxies received by them for the six (6) nominees named
below. All of the nominees presently are directors of the Company.
If any nominee becomes unavailable for any reason before the election,
the enclosed proxy will be voted for the election of such substitute nominee or
nominees, if any, as shall be designated by the Board of Directors. The Board of
Directors has no reason to believe that any of the nominees will be unavailable
to serve.
Under Delaware law, the six (6) nominees receiving the highest number of
votes will be elected as directors at the Annual Meeting. As a result, proxies
voted to "Withhold Authority," which will be counted, and broker non-votes,
which will not be counted, will have no practical effect.
The names and certain information concerning the six (6) nominees for
election as directors are set forth below. THE BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE "FOR" THE ELECTION OF EACH OF THE NOMINEES NAMED BELOW.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Steven C. Quay, M.D., Ph.D. 48 Chairman, Chief Executive Officer and
Secretary
Michael A. Martino 43 President, Chief Operating Officer and
Director
George W. Dunbar, Jr. 52 Director
Christopher S. Henney, Ph.D., D.Sc. 58 Director
Robert E. Ivy 65 Director
Dwight Winstead 50 Director
</TABLE>
Steven C. Quay, M.D., Ph.D. founded the Company in 1991 and has served
as Chief Executive Officer and a director of the Company since its inception. In
October 1998, Dr. Quay was named Chairman of the Board of the Company. From the
Company's inception to September 1998, Dr. Quay served as President of the
Company. From 1984 to 1990, Dr. Quay was the Chief Executive Officer of Salutar,
Inc., a company founded by Dr. Quay to develop contrast agents for MRI tests.
Dr. Quay invented OmniScan(R), the first non-ionic MRI contrast agent used for
diagnosing tumors of the head and spine approved for marketing in the United
States. From 1980 to 1986, Dr. Quay was a member of the faculty of the Stanford
University School of Medicine. Dr. Quay holds an M.D. and a Ph.D. from the
University of Michigan Medical School and took post-graduate training at the
Massachusetts Institute of Technology and Harvard Medical School. He has been
awarded 31 United States patents covering diagnostic imaging and has written
more than 100 scientific papers related to diagnostic imaging, oncology and
biochemistry. Dr. Quay is a Member of the American Society of Echocardiography,
the American Society of Biochemistry and Molecular Biology, the Radiological
Society of North America and the American Institute of Ultrasound in Medicine.
2
<PAGE> 4
Michael A. Martino joined SONUS Pharmacuticals, Inc. in September 1998
as President, Chief Operating Officer and a director. Mr. Martino has more than
15 years of experience in the medical industry. From 1983 to 1998, Mr. Martino
held numerous positions of increasing responsibility in strategic planning,
business development, marketing and sales, and general management with
Mallinckrodt, Inc., a global healthcare products company, including serving as
Vice President and General Manager of the Nuclear Medicine Division where he was
responsible for annual revenues of approximately $250 million. Mr. Martino holds
a B.A. in business from Roanoke College and an M.B.A. from Virginia Polytechnic
Institute.
George W. Dunbar, Jr. was elected as a director of the Company in
November 1997. Mr. Dunbar is President, CEO and a director of Metra Biosystems,
Inc., a company developing new diagnostics and medical devices for detection and
management of bone and joint diseases. From 1988 until 1991, when Mr. Dunbar
joined Metra Biosystems, he was the Vice President of Licensing and Business
Development for The Ares-Serono Group, a Swiss health care company. From 1974
until 1987, he held various senior management positions with Amersham
International, a health care and life sciences company, where he most recently
served as Vice President for its Life Sciences business in North America. Mr.
Dunbar also serves as a director of LJL Biosystems, a life sciences company, and
The Valley Medical Center Foundation. Mr. Dunbar holds a B.S. in electrical
engineering and an M.B.A. from Auburn University and sits on the Auburn School
of Business M.B.A. Advisory Board.
Christopher S. Henney, Ph.D., D.Sc. was elected as a director of the
Company in February 1999. Since May 1995, Dr. Henney has been Chief Executive
Officer of Dendreon Corporation, a biotechnology company. From 1989 to 1995, Dr.
Henney served as a director, Vice Chairman and Scientific Director of Immunex
and from 1981 to 1989 he served as a director, Executive Vice President and
Scientific Director of ICOS. Immunex and ICOS are each biotechnology companies
that were co-founded by Dr. Henney. Dr. Henney received his Ph.D. in
experimental pathology and a D.Sc. in immunology from the University of
Birmingham. Dr. Henney has held faculty positions at Johns Hopkins University,
the University of Washington and the Fred Hutchinson Cancer Research Center,
where he was the first Head of Basic Immunology. He is the author of more than
200 published articles in the field of immunology and has been editor of a
number of scientific journals and has served on several scientific advisory
boards. He is a former section editor of Journal of Immunology and chairman of
the American Cancer Society's Advisory Committee on Immunology and
Immunotherapy. Dr. Henney is currently a director of Dendreon Corporation and
Techne Corporation.
Robert E. Ivy was elected as a director of the Company in February 1999.
Mr. Ivy has been Chief Executive Officer, President and a director of Ribi
ImmunoChem, a biopharmaceutical company, since July 1987 and was named Chairman
of the Board in April 1990. Prior to joining Ribi ImmunoChem, Mr. Ivy served as
President, Chief Executive Officer and a director of Oncogene Science, Inc.;
President, Chief Executive Officer and a director of Berlex Laboratories, Inc.
(a subsidiary of Schering A.G.); and President of the U.S.V. Pharmaceutical
Division of Revlon Health Care Group. Mr. Ivy began his career in 1958 with G.D.
Searle & Co. in sales and marketing rising to the position of Vice President,
Marketing and Sales. Mr. Ivy holds a B.S. in Chemistry and Biology from
Northwestern University and attended Northwestern University Medical School from
1954 to 1957.
Dwight Winstead has served as a director of the Company since July 1995.
In May 1997, Mr. Winstead became President of Owen Healthcare, Inc., a hospital
pharmacy management company and a subsidiary of Cardinal Health, Inc. From
January 1991 to May 1997, Mr. Winstead served as Executive Vice President of
VHA, Inc., a performance improvement company serving more than 1,200 health care
organizations in the United States. Prior to his promotion to Executive Vice
President, Mr. Winstead served in various capacities of VHA Supply Company, a
subsidiary of VHA, Inc., including Vice President, Sales and Marketing, Senior
Vice President, Chief Operating Officer and President from July 1987 to January
1991. Prior to joining VHA, Inc. in March 1984, Mr. Winstead served in a variety
of materials management and sales positions at several companies, including
Ortho Instruments and Worthington Diagnostics. Mr. Winstead holds a B.S. from
Delta State University.
OTHER EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
Gregory Sessler joined the Company as Chief Financial Officer in January
1995. From October 1990 to January 1995, Mr. Sessler was with MicroProbe
Corporation, a publicly-traded developer of therapeutic compounds and diagnostic
tests, most recently as Senior Vice President and Chief Financial Officer. From
1986 to 1990, Mr. Sessler served as Chief Financial Officer and Secretary of
Molecular Devices Corporation, a manufacturer of biomedical instrumentation.
From 1981 to 1986, Mr. Sessler served as Vice President, Chief Financial Officer
3
<PAGE> 5
and Secretary of Monoclonal Antibodies, Inc., a manufacturer of fertility
diagnostic test kits. He holds a B.S. from Syracuse University and an M.B.A.
from the Stanford University Graduate School of Business and is a Certified
Public Accountant.
Gordon Brandt, M.D. was appointed Vice President, Medical And Clinical
Affairs in October 1998. Mr. Brandt joined the Company as Director of Medical
Affairs in June 1997. From August 1995 to June 1997, Mr. Brandt was with Seimens
Ultrasound, most recently as Senior Product Manager. Prior to Siemens
Ultrasound, Mr. Brandt was a medical resident at Kaiser Permanente. He holds a
B.S. degree in Electronics Science from Yale University and an M.D. degree from
the University of California at San Francisco. Mr. Brandt is a member of the
American Heart Association and the American Society of Echocardiography. He
holds one U.S. patent and has published numerous papers in medical imaging
devices, drugs and economics.
Dilip M. Worah joined the Company as Vice President, Research and
Development in January 1992. From August 1984 to December 1991, Mr. Worah was
employed by Salutar, Inc. as Manager, Biological Sciences. From 1981 to 1984,
Mr. Worah served as a scientist at Miles Laboratories, a pharmaceutical company.
Prior to joining Salutar and Miles Laboratories, Mr. Worah served as a manager
of research and development at BioRad Laboratories and as a manager of research
and development of International Diagnostic Technology. Mr. Worah holds an M.S.
from the University of Denver. He has been awarded two U.S. patents covering MRI
technology and x-ray imaging agents and has published over 22 scientific papers.
BOARD MEETINGS AND ATTENDANCE
The Board of Directors of the Company held six meetings during the
fiscal year ended December 31, 1998. Each incumbent director attended at least
seventy-five percent (75%) of the aggregate of the number of meetings of the
Board and the number of meetings held by all committees of the Board on which he
served. There are no family relationships among any of the directors or
executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is presently comprised of two (2) directors
selected by the Board of Directors of the Company. The members of the Audit
Committee are Robert E. Ivy and Christopher S. Henney, Ph.D., D.Sc. The Audit
Committee is authorized to handle all matters which it deems appropriate
regarding the Company's independent accountants and to otherwise communicate and
act upon matters relating to the review and audit of the Company's books and
records, including the scope of the annual audit and the accounting methods and
systems to be utilized by the Company. In addition, the Audit Committee also
makes recommendations to the Board of Directors with respect to the selection of
the Company's independent accountants. The Audit Committee held two meetings
during the fiscal year ended December 31, 1998.
The Compensation Committee is presently comprised of two (2) directors
selected by the Board of Directors of the Company. The members of the
Compensation Committee are Dwight Winstead and George W. Dunbar, Jr. The
functions of the Compensation committee include advising the Board of Directors
on officer and employee compensation. The Board of Directors, based on input
from the Compensation Committee, establishes the annual compensation rates for
the Company's executive officers. The Compensation Committee held five meetings
during the fiscal year ended December 31, 1998.
The Board of Directors does not have a nominating committee. Instead,
the Board of Directors, as a whole, identifies and screens candidates for
membership on the Company's Board of Directors.
4
<PAGE> 6
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth compensation received for the fiscal year
ended December 31, 1998, by the Company's Chief Executive Officer and its other
executive officers (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Awards -
Annual Compensation Securities
------------------------- Underlying All Other
Name and Position Year Salary Bonus (1) Options Compensation
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Steven C. Quay, M.D., Ph.D 1998 $380,000 $ -- 19,700 $ --
Chairman, Chief 1997 360,000 112,500 33,500 --
Executive Officer and 1996 360,000 95,625 449,931 --
Secretary
Gordon Brandt, M.D. (2) 1998 147,989 -- 12,475 --
Vice President - 1997 68,538 7,425 15,000 --
Medical and Clinical 1996 -- -- -- --
Affairs
Charles H. Davis (3) 1998 174,000 -- 6,100 --
Vice President - 1997 169,000 42,250 14,500 --
Regulatory Affairs 1996 169,000 29,250 15,634 --
Michael A. Martino (4) 1998 54,968 -- 200,000 50,209
President and Chief 1997 -- -- -- --
Operating Officer 1996 -- -- -- --
Gregory Sessler 1998 190,000 -- 21,500 --
Chief Financial Officer 1997 165,000 41,250 16,150 --
1996 165,000 32,625 18,400 --
Terry E. Willard (5) 1998 182,480 -- 5,000 --
Vice President - 1997 180,000 33,750 16,750 --
Marketing 1996 180,000 33,750 17,676 --
and Business
Development
Dilip M. Worah 1998 162,000 -- 6,000 --
Vice President - 1997 157,000 39,000 15,100 --
Research and 1996 157,000 30,375 14,800 --
Development
</TABLE>
- ----------
(1) Bonus earned for the applicable fiscal year pursuant to Company's
Executive Incentive Compensation Plan, which provides for bonuses to be
paid on a percentage of salary provided that certain objectives are met.
The percentage of salary and objectives to be met are approved by the
Compensation Committee of the Board.
(2) Mr. Brandt joined the Company in June 1997.
(3) Mr. Davis terminated his employment with the Company in January 1999.
(4) Mr. Martino joined the Company in September 1998 at an annualized salary
of $250,000. The amounts included in other compensation include a
signing bonus of $40,000 and relocation expenses of $10,209.
(5) Mr. Willard terminated his employment with the Company in December 1998.
5
<PAGE> 7
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Potential Realizable Value at
Number of Options Assumed Annual Rates of
Securities Granted to Stock Price Appreciation for
Underlying Employees in Exercise or Option Term (3)
Options Fiscal Base Price Expiration ----------------------------
Name Granted Year (1) ($/Share) Date(2) 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven C. Quay, M.D., Ph.D ... 14,700 4.0% $ 38.63 02/06/08 $ 357,079 $ 904,907
5,000 1.4 19.38 04/30/08 60,924 154,394
Gordon Brandt ................ 2,475 0.7 13.00 06/01/08 20,235 51,279
10,000 2.8 6.94 10/05/08 43,630 110,566
Charles H. Davis ............. 6,100 1.7 38.63 02/06/08 148,175 375,506
Michael A. Martino ........... 200,000 55.0 6.75 09/29/08 849,008 2,151,552
Gregory Sessler .............. 6,500 1.8 38.63 02/06/08 157,892 400,129
15,000 4.1 12.50 08/19/08 117,918 298,827
Terry E. Willard ............. 5,000 1.4 38.63 02/06/08 121,455 307,792
Dilip M. Worah ............... 6,000 1.7 38.63 02/06/08 145,746 369,350
</TABLE>
- ----------
(1) Options to purchase an aggregate of 363,524 shares of Common Stock were
granted to employees, including the Named Executive Officers, during the
year ended December 31, 1998.
(2) Options granted have a term of 10 years, subject to earlier termination
in certain events related to termination of employment.
(3) In accordance with the rules and regulations of the Securities and
Exchange Commission, such gains are based on assumed rates of annual
compound stock appreciation of 5% and 10% from the date on which the
options were granted over the full term of the options. The rates do not
represent the Company's estimate or projection of future Common Stock
prices, and no assurance can be given that the rates of annual compound
stock appreciation assumed will be achieved.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options at Options at Fiscal
Shares Fiscal Year-End Year-End (1)
Acquired Value ---------------------------- ----------------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven C. Quay, M.D., Ph.D -- $ -- 537,728 41,738 $464,880 $ --
Gordon Brandt -- -- 5,625 21,850 -- --
Charles H. Davis 1,908 18,830 20,751 15,865 671 406
Michael A. Martino -- -- -- 200,000 -- --
Gregory Sessler -- -- 62,085 36,033 248,442 7,753
Terry E. Willard -- -- 24,370 -- 10,375 --
Dilip M. Worah 6,441 88,679 21,856 16,414 6,052 406
</TABLE>
- ----------
(1) Market value of underlying securities at exercise date or year-end, as
the case may be, minus the exercise or base price of "in-the-money"
options. The closing sale price for the Company's Common Stock as of
December 31, 1998 on the Nasdaq National Market was $6.75.
6
<PAGE> 8
DIRECTOR'S FEES
During 1998, the Company's non-employee directors received cash
compensation in the amount of $3,750 per quarter for service on the Company's
Board of Directors. Accordingly, Mr. Winstead and Mr. Dunbar each received
$15,000 during 1998. Mr. Ivy and Dr. Henney were elected to the Board of
Directors in February 1999, and therefore did not receive any cash compensation
during 1998. All directors may be reimbursed for certain expenses incurred for
meetings of the Board of Directors which they attended.
On May 12, 1995, the Company adopted a Stock Option Plan for Directors.
Under the Directors' Plan, continuing directors receive an option grant covering
5,000 shares on each anniversary of the respective director's initial grant
date. Accordingly, in 1998, Messrs. Quay, Winstead and Dunbar each were granted
options to purchase 5,000 shares.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
On February 11, 1999, the Company entered into an Employment Agreement
with Steven C. Quay, M.D., Ph.D., pursuant to which Dr. Quay will serve as
Chairman of the Board and Chief Executive Officer through June 30, 1999 and
thereafter will serve as Chairman of the Board and Chief Scientific Officer
through December 31, 2001. Dr. Quay's employment is full-time through December
31, 1999, during which period his annual base salary shall be $380,000, and will
be part-time thereafter through the remaining term of the Agreement, during
which period his earnings will be $2,000 per day of service. Concurrent with Dr.
Quay's Employment Agreement, Dr. Quay received options to purchase up to 400,000
shares of Common Stock of the Company, 180,000 of which were granted under the
Company's Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan - 1991, and 220,000 of which were granted under the Company's 1999
Nonqualified Stock Incentive Plan, subject to a vesting schedule over time and
acceleration of vesting upon the achievement of certain performance milestones.
The Company entered into an employment arrangement with Michael A.
Martino on September 15, 1998, which provides that Mr. Martino will act as the
Company's President and Chief Operating Officer and was appointed as a member of
the Company's Board of Directors. Mr. Martino received an initial stock option
grant to purchase up to 200,000 shares of Common Stock of the Company, subject
to a vesting schedule over time, and a one time payment of $40,000 upon
commencement of employment. Mr. Martino receives an annual base salary of
$250,000, an annual bonus of up to 35% of his annual base salary upon the
achievement of certain performance goals determined by the Board of Directors.
The employment arrangement may be terminated by Mr. Martino or the Company at
any time. In the event Mr. Martino's employment is terminated by the Company
without cause in circumstances not covered by the Change-in-Control Agreement
described below, the Company will continue to pay Mr. Martino's base salary for
a period of 12 months plus the number of months remaining in his first year of
employment.
On September 15, 1998, the Company entered into Change-in-Control
Agreements with each of Messrs. Quay, Martino and Sessler. Each of the
Agreements provides that upon termination of employment within 12 months
following a Change of Control, as defined in the Agreements, either voluntarily
for good reason or involuntarily without cause, the Company will pay the
employee accrued and unpaid base salary, declared and unpaid incentive
compensation and a severance payment equal the employee's highest annual base
salary in effect within 12 months of termination multiplied by 2.99. Each of the
Agreements has a maximum term of three years. The Company entered into an
amendment to the Change-in-Control Agreement with Dr. Quay on February 11, 1999
to clarify that the term of the Agreement terminates concurrently with Dr.
Quay's full-time employment.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon its review of the copies of reports furnished to the
Company, or written representations that no annual Form 5 reports were required,
the Company believes that all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") applicable to
its directors, officers and any persons holding ten percent (10%) or more of the
Company's Common Stock were made with respect to the Company's fiscal year ended
December 31, 1998.
7
<PAGE> 9
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
Set forth below is certain information as of the Record Date regarding
the beneficial ownership of the Company's Common Stock by (i) any person who was
known by the Company to own more than five percent (5%) of the voting securities
of the Company, (ii) all directors and nominees, (iii) each of the Named
Executive Officers identified in the Summary Compensation Table, and (iv) all
current directors and executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owners Beneficial Ownership (1) Class
- ------------------------------------- ------------------------ ----------
<S> <C> <C>
Steven C. Quay, M.D., Ph.D. (2)
Debra L. Quay ............................... 1,804,491 19.6%
c/o SONUS Pharmaceuticals, Inc.
22026 20th Avenue SE
Bothell, Washington 98021
FMR Corp. (3)
Fidelity Management and
Research Company ............................ 849,500 9.8%
82 Devonshire Street
Boston, Massachusetts 02109
Aperture Associates, L.P . (3) (4)
Horsley Bridge Partners, Inc. ............... 697,759 8.6%
505 Montgomery Street
San Francisco, California 94111
Abbott Laboratories (5) ..................... 500,000 5.5%
100 Abbott Park Road
Abbott Park, Illinois 60064
Daiichi Pharmaceutical Co., Ltd. ............ 462,857 5.4%
14-10, Nihonbashi 3-chome,
Chuo-ku, Tokyo 103, Japan
Gordon Brandt, M.D. (6) ..................... 7,799 *
Charles H. Davis (7) ........................ 36,616 *
Michael A. Martino .......................... -- *
Gregory Sessler (8) ......................... 91,708 1.1%
Terry E. Willard ............................ 39,540 *
Dilip M. Worah (9) .......................... 26,313 *
George W. Dunbar, Jr. (10) .................. 12,633 *
Christopher S. Henney, Ph.D.,D.Sc. (11) ..... 7,633 *
Robert E. Ivy (12) .......................... 7,633 *
Dwight Winstead (13) ........................ 22,633 *
All current executive officers and
directors as a group (9 persons) (14) ....... 2,056,999 21.9%
</TABLE>
- ----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options, warrants and convertible notes currently exercisable
or convertible, or exercisable or convertible within 60 days of the
Record Date, are deemed outstanding for computing the percentage of the
person holding such options but are not deemed outstanding for computing
the percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named
8
<PAGE> 10
in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) Includes (i) 1,237,995 shares owned by Dr. Steven C. Quay and Debra L.
Quay, (ii) 557,791 shares subject to stock options exercisable within 60
days of the Record Date, and (iii) 12,705 shares subject to warrants
exercisable within 60 days of the Record Date.
(3) Information is based on reports filed with the Securities and Exchange
Commission.
(4) Includes 52,358 shares subject to warrants exercisable within 60 days of
the Record Date.
(5) Includes 500,000 shares subject to warrants exercisable within 60 days
of the Record Date.
(6) Includes 7,699 shares subject to options exercisable within 60 days of
the Record Date.
(7) Includes 36,616 shares subject to options exercisable within 60 days of
the Record Date.
(8) Includes 68,697 shares subject to options exercisable within 60 days of
the Record Date.
(9) Includes 26,313 shares subject to options exercisable within 60 days of
the Record Date.
(10) Includes 12,633 shares subject to options exercisable within 60 days of
the Record Date.
(11) Includes 7,633 shares subject to options exercisable within 60 days of
the Record Date.
(12) Includes 7,633 shares subject to options exercisable within 60 days of
the Record Date.
(13) Includes 22,633 shares subject to options exercisable within 60 days of
the Record Date.
(14) Includes directors' and executive officers' shares listed above.
9
<PAGE> 11
REPORT OF THE COMPENSATION COMMITTEE
The following report is submitted by the Compensation Committee of the
Board of Directors with respect to the executive compensation policies
established by the Compensation Committee and recommended to the Board of
Directors and compensation paid or awarded to executive officers for the fiscal
year ended December 31, 1998.
The Compensation Committee determines the annual salary, bonus and other
benefits, including incentive compensation awards, of the Company's senior
management and recommends new employee benefit plans and changes to existing
plans to the Company's Board of Directors. The Compensation Committee met five
times in 1998 and is presently comprised entirely of directors who are not, and
were not formerly, officers or employees of the Company.
COMPENSATION POLICIES AND OBJECTIVES
The Company's executive compensation policy is designed to attract and
retain exceptional executives by offering compensation for superior performance
that is highly competitive with other well-managed organizations in the health
care industry. The Compensation Committee measures executive performance on an
individual and corporate basis.
There are three components to the Company's executive compensation
program, and each is consistent with the stated philosophy as follows:
- Base Salary. Base salaries for executives and other key
employees are determined by individual financial and
non-financial performance, position in salary range and general
economic conditions of the Company. For purposes of
administering base pay, all executive positions are evaluated
and placed in appropriate salary grades. Salary range levels are
reviewed on an annual basis to ensure competitiveness with a
peer group of other health care companies. In recommending
salaries for executive officers, the Compensation Committee (i)
reviews the historical performance of the executives, and (ii)
reviews specific information provided by Towers Perrin, a
compensation consulting firm, with respect to the
competitiveness of salaries paid to the Company's executives.
- Annual Bonus. Annual bonuses for executives and other key
employees are tied directly to the Company's financial
performance as well as individual performance. The purpose of
annual cash bonuses are to reward executives for achievements of
corporate, financial and operational goals. When certain
objective and subjective performance goals are not met, annual
bonuses would be reduced or not paid.
- Long-Term Incentives. The purpose of these plans is to create an
opportunity for executives and other key employees to share in
the enhancement of stockholder value through stock options. The
overall goal of this component of pay is to create a strong link
between the management of the Company and its stockholders
through management stock ownership and the achievement of
specific corporate financial measures that result in the
appreciation of Company share price. Stock options are awarded
if individual goals are achieved or exceeded. The Compensation
Committee generally has followed the practice of granting
options annually on terms which provide that the options become
exercisable with respect to 25% of the shares purchasable under
the option after one year and in monthly installments over a
three year period thereafter. The Compensation Committee
believes that this feature not only provides an employee
retention factor but also makes longer term growth in share
prices important for those receiving options.
FISCAL YEAR 1998 COMPENSATION
Dr. Quay's cash compensation paid in 1998 was $380,000. No cash bonuses
were paid pursuant to the Company's Executive Incentive Compensation Plan for
1998.
10
<PAGE> 12
The Company is required to disclose its policy regarding qualifying
executive compensation deductibility under Section 162(m) of the Internal
Revenue Code of 1986, as amended, which provides that, for purposes of the
regular income tax and the alternative minimum tax, the otherwise allowable
deduction for compensation paid or accrued with respect to a covered employee of
a public corporation is limited to no more than $1 million per year. It is not
expected that the compensation to be paid to the Company's executive officers
for fiscal 1999 will exceed the $1 million limit per officer. The Company's
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan is structured so that any compensation deemed paid to an executive officer
when he exercises an outstanding option under the plan, with an exercise price
equal to the fair market value of the option shares on the grant date, will
qualify as performance-based compensation that will not be subject to the $1
million limitation.
The Compensation Committee of the
Board of Directors
George W. Dunbar
Dwight Winstead
Notwithstanding anything to the contrary set forth in the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the foregoing Report and
the performance graph on page 12 shall not be incorporated by reference into any
such filings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1998, the Company's Board of
Directors, based upon the recommendations of the Compensation Committee,
established the levels of compensation for the Company's executive officers.
11
<PAGE> 13
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative stockholder
return on the Company's Common Stock with the cumulative total return of the
Nasdaq Pharmaceutical Index and the Nasdaq Stock Market - U.S. Index for the
period that commenced October 12, 1995, the date on which the Company's Common
Stock was first registered under the Exchange Act, and ended on December 31,
1998.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG SONUS PHARMACEUTICALS, INC.,
THE NASDAQ PHARMACEUTICAL INDEX
AND THE NASDAQ STOCK MARKET - U.S. INDEX
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------------------
10/12/95 12/95 3/96 6/96 9/96 12/96 3/97
-------- ----- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SONUS PHARMACEUTICALS, INC. 100 175 229 289 271 425 377
NASDAQ STOCK MARKET (U.S.) 100 104 109 118 122 128 121
NASDAQ PHARMACEUTICAL 100 122 127 123 126 122 116
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
----------------------------------------------------
6/97 9/97 12/97 3/98 6/98 9/98 12/98
---- ---- ----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
SONUS PHARMACEUTICALS, INC. 402 600 473 350 176 104 96
NASDAQ STOCK MARKET (U.S.) 143 167 157 184 189 171 221
NASDAQ PHARMACEUTICAL 125 140 126 139 128 121 161
</TABLE>
12
<PAGE> 14
PROPOSAL TWO
AMENDMENT TO THE 1991 PLAN TO INCREASE THE TOTAL
NUMBER OF SHARES ISSUABLE THEREUNDER
INTRODUCTION
The Board of Directors adopted and the stockholders of the Company
originally approved the Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1991 (the "1991 Plan") in November 1991. The
Board of Directors amended the 1991 Plan in February 1999 to increase the
authorized number of shares of Common Stock issuable thereunder by 300,000
shares and to reserve the additional shares for issuance under the 1991 Plan,
bringing the total number of shares of Common Stock subject to the 1991 Plan to
2,200,000.
Approval of the amendments to the 1991 Plan will require the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock
present or represented at the annual meeting of stockholders and entitled to
vote thereat. Proxies solicited by management for which no specific direction is
included will be voted FOR the amendment of the 1991 Plan to add 300,000 shares
of Common Stock to the pool of shares reserved for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE 1991
PLAN.
The principal features of the 1991 Plan are summarized below, but the
summary is qualified in its entirety by reference to the 1991 Plan itself.
Copies of the 1991 Plan can be obtained by writing to the Secretary, SONUS
Pharmaceuticals, Inc., 22026 20th Avenue S.E., Bothell, Washington 98021.
1991 PLAN TERMS
The 1991 Plan provides for the grant by the Company of options and/or
rights to purchase up to an aggregate of 1,900,000 shares of Common Stock of the
Company to its officers, directors, key employees, consultants and other
business persons having important business relationships with the Company, or
any parent or subsidiary corporation of the Company. As of the Record Date,
approximately five (5) executive officers and directors of the Company and
approximately fifty (50) other employees were eligible to participate. The
purpose of the 1991 Plan is to enable the Company to attract and retain persons
of ability as employees, officers, directors and consultants and to motivate
such persons by providing them with an equity participation in the Company. The
Company does not expect to grant directors options in excess of those granted
under the Stock Option Plan for Directors, but reserves the right to grant such
options if necessary to attract or retain qualified directors. The 1991 Plan
expires November 1, 2001 unless terminated earlier by the Board of Directors.
The 1991 Plan provides that it is to be administered by the Board of
Directors or a committee appointed by the Board. Presently, the Company's Board
of Directors administers the 1991 Plan (the "Administrator"). The Administrator
has broad discretion to determine the persons entitled to receive options and/or
rights to purchase under the 1991 Plan, the terms and conditions on which
options and/or rights to purchase are granted and the number of shares subject
thereto. The Administrator also has discretion to determine the nature of the
consideration to be paid upon the exercise of an option and/or right to purchase
granted under the 1991 Plan. Such consideration may generally consist of cash or
shares of Common Stock of the Company or, in the case of rights to purchase, a
promissory note.
Options granted under the 1991 Plan may be either "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code, or
"nonqualified stock options," as determined by the Administrator. Options may be
granted under the 1991 Plan for terms of up to ten (10) years. The exercise
price of options and the purchase price of rights to purchase must be at least
equal to the fair market value of the Common Stock of the Company as of the date
of grant. No optionee may be granted incentive stock options under the 1991 Plan
to the extent that the aggregate fair market value (determined as of the date of
grant) of the shares of Common Stock with respect to which incentive options are
exercisable for the first time by the optionee during any calendar year would
exceed $100,000. Further, no optionee may be granted options or rights to
purchase in excess of 500,000 shares in
13
<PAGE> 15
any year. Options granted under the 1991 Plan to officers, employees, directors,
or consultants of the Company may be exercised only while the optionee is
employed or retained by the Company or within three to six months after
termination for any reason, with the exact date of expiration to be determined
by the Administrator.
Upon the occurrence of a consolidation or merger in which the Company is
not the surviving corporation, the sale of substantially all of the Company's
assets and certain other similar events (a "Change-of-Control Event"), the 1991
Plan provides that the 1991 Plan itself and all outstanding options shall
terminate unless provision is made in writing for the continuance of the 1991
Plan and for the assumption of outstanding options and rights to purchase
previously granted. If provision for the assumption of outstanding options and
rights to purchase is not made in connection with a Change-of-Control Event,
then notice shall be provided to all participants and all outstanding options
and rights to purchase shall be accelerated. In the event that the outstanding
shares of Common Stock while the 1991 Plan is in effect are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of merger, consolidation or
reorganization in which the Company is the surviving corporation, or of a
recapitalization, stock split, combination of shares, reclassification,
reincorporation, stock dividend (in excess of 2%) or of another change in the
corporate structure of the Company, appropriate adjustments will be made by the
Board of Directors to the aggregate number and kind of shares subject to the
1991 Plan and the number and kind of shares and the price per share subject to
outstanding incentive options, nonqualified options and rights to purchase in
order to preserve, but not to increase, the benefits to persons then holding
incentive options, nonqualified options or rights to purchase.
Payment for shares upon exercise of an option or upon issuance of
restricted stock must be made in full at the time of exercise, or issuance with
respect to restricted stock. The form of consideration payable upon exercise of
an option or purchase of restricted stock shall, at the discretion of the
Administrator, be (i) by tender of United States dollars in cash, check or bank
draft; (ii) subject to any legal restriction against the Company's acquisition
or purchase of the Company's shares of Common Stock, shares of Common Stock,
which shall be deemed to have a value equal to the aggregate fair market value
of such shares determined on the date of exercise or purchase, (iii) by the
issuance of a promissory note acceptable to the Administrator; or (iv) pursuant
to other methods described in the 1991 Plan.
As of the Record Date, options to purchase an aggregate of 1,454,557
shares of Common Stock (net of canceled options) have been granted under the
1991 Plan to the following persons or groups: (i) Steven C. Quay, M.D., Ph.D.,
668,131 shares, 180,000 of which are purchasable under an option granted to Dr.
Quay concurrently with his Employment Agreement entered into in February 1999;
(ii) Gordon Brandt, 34,415; (iii) Charles H. Davis, 76,691 shares; (iv) Michael
A. Martino, 200,000 shares; (v) Gregory Sessler, 237,118 shares; (vi) Terry E.
Willard, 112,708 shares; (vii) Dilip Worah, 125,494 shares; (viii) all current
executive officers (as a group), 1,265,158 shares; and (ix) all other employees
who are not executive officers (as a group), 690,386.
FEDERAL TAX CONSEQUENCES
The following is a brief summary of the tax effects under the Code that
may accrue to participants in the 1991 Plan.
Incentive Stock Options. No taxable income will be recognized by an
optionee under the 1991 Plan upon either the grant or the exercise of an
incentive stock option; provided the optionee holds the stock for at least two
years after the grant of the options and one year after the exercise of the
option. If an incentive stock option is exercised more than three months after
termination, except for death or disability, it will be treated as the exercise
of a nonqualified stock option as described below. The Company receives no tax
deduction from the exercise of incentive stock options granted unless the
optionee fails to meet the holding requirements set forth above. Any gain or
loss as a result of a sale or other disposition of shares acquired upon the
exercise of an incentive stock option will be treated as capital gain.
Nonqualified Stock Options. No taxable income is recognized by an
optionee upon the grant of a nonqualified stock option. Upon exercise, however,
the optionee will recognize ordinary income in the amount by which the fair
market value of the shares purchased, on the date of exercise, exceeds the
exercise price paid for such shares. The income recognized by the optionee will
be subject to income tax withholding by the Company out of the optionee's
current compensation. If such compensation is insufficient to pay the taxes due,
the optionee will be required to make a direct payment to the Company for the
balance of the tax withholding obligation. The Company
14
<PAGE> 16
will be entitled to a tax deduction equal to the amount of ordinary income
recognized by the optionee, provided the applicable withholding requirements are
satisfied.
Restricted Stock. The receipt of restricted stock will not result in a
taxable event until the applicable period(s) of restriction lapse, unless the
participant makes an election under Section 83(b) of the Code to be taxed as of
the date of grant. If a Section 83(b) election is made, the participant will
recognize ordinary income in an amount equal to the excess, if any, of the fair
market value of such shares on the date of grant over the amount paid for such
shares. If no amount is paid for such shares, the participant will recognize
ordinary income in an amount equal to the fair market value of such shares on
the date of the grant. Even if the amount paid and the fair market value of the
shares are the same (in which case there would be no ordinary income), a Section
83(b) election must be made to avoid deferral of the date ordinary income is
recognized. If no Section 83(b) election is made, a taxable event will occur on
each date the participant's ownership rights vest (i.e., when the period(s) of
restriction lapse) as to the number of shares that vest on that date, and the
holding period for long-term capital gain purposes will not commence until the
date the shares vest. The participant will recognize ordinary income on each
date shares vest in an amount equal to the excess of the fair market value of
such shares on that date over the amount paid for such shares.
PROPOSAL THREE
APPROVAL OF AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors adopted and the stockholders of the Company
originally approved the Employee Stock Purchase Plan (the "Purchase Plan") in
September 1995. The purposes of the Purchase Plan are to provide to employees an
incentive to join and remain in the service of the Company and its subsidiaries,
to promote employee morale and to encourage employee ownership of the Company's
Common Stock by permitting them to purchase shares at a discount through payroll
deductions. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code. At the time of
its adoption, the Purchase Plan authorized the sale of up to 50,000 shares of
Common Stock. As of the Record Date, a total of 26,082 shares had been sold,
leaving 23,918 shares available for sale under the Purchase Plan. In February
1999, the Board of Directors amended the Purchase Plan to increase the
authorized number of shares of Common Stock issuable thereunder by 50,000 shares
and to reserve the additional shares for issuance under the Purchase Plan,
bringing the total number of shares of Common Stock subject to the Purchase Plan
to 100,000.
Approval of the amendments to the Purchase Plan will require the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock present or represented at the annual meeting of stockholders and
entitled to vote thereat. Proxies solicited by management for which no specific
direction is included will be voted FOR the amendment of the Purchase Plan to
add 50,000 shares of Common Stock to the pool of shares reserved for issuance
thereunder.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE
PURCHASE PLAN.
The principal features of the Purchase Plan are summarized below, but
the summary is qualified in its entirety by reference to the Purchase Plan
itself. Copies of the Purchase Plan can be obtained by writing to the Secretary,
SONUS Pharmaceuticals, Inc., 22026 20th Avenue S.E., Bothell, Washington 98021.
PURCHASE PLAN TERMS
Every full-time employee of the Company, including executive officers,
will be eligible to participate in offerings made under the Purchase Plan on the
first grant date under the Purchase Plan after such employee has been employed
by the Company for at least six months. An employee may not participate in an
offering under the Purchase Plan if immediately after the purchase the employee
would own shares or options to purchase shares of stock possessing 5% or more of
the total combined voting power or value of all classes of stock of the Company.
As of the Record Date, approximately 50 persons were eligible to participate in
the Purchase Plan.
15
<PAGE> 17
The Purchase Plan may be administered by either the Board of Directors
or a committee appointed by the Board (the "Committee"). The Board has delegated
administration of the Purchase Plan to the Compensation Committee, which is
comprised of two non-employee directors, who are not eligible to participate in
the Purchase Plan. Subject to the provisions of the Purchase Plan, the Committee
has full authority to implement, administer and make all determinations
necessary under the Purchase Plan.
The four annual grants under the Purchase Plan occur on the first day of
each calendar quarter (the "Grant Date") and continue until the end of the last
day of the applicable quarter (the "Offering Period").
Eligible employees who elect to participate in an offering will purchase
shares of Common Stock through regular payroll deductions in an amount
designated by the employee not to exceed 15% of such employee's compensation.
Shares of Common Stock will be purchased automatically on the last day of the
Offering Period (the "Purchase Date") at a price equal to 85% of the fair market
value of the shares on the Grant Date or 85% of the fair market value of the
shares as of the Purchase Date, whichever is lower. A participant may withdraw
from an offering at any time prior to the Purchase Date and receive a refund of
his payroll deductions, without interest. A participant's rights in the Purchase
Plan are nontransferable other than on the death of the participant. The
Purchase Plan is administered in a manner designed to ensure that any affiliate
participant's commencement or discontinuation of participation in the Purchase
Plan or increase or decrease of payroll deductions will be effected in
compliance with the exemptions from liability under Section 16(b) of the
Securities Exchange Act of 1934 as set forth in Rule 16b-3 promulgated
thereunder.
No employee may purchase stock in an amount which would permit his or
her rights under the Purchase Plan (and any similar purchase plans of the
Company and any parent and subsidiaries of the Company) to accrue at a rate
which exceeds $25,000 in fair market value, determined as of the Grant Date, for
each calendar year. In addition, no participant may purchase more than 1,000
shares in any Offering Period.
The Board of Directors may at any time amend, suspend or terminate the
Purchase Plan; provided that any amendment that would (i) increase the aggregate
number of shares authorized for sale under the Purchase Plan (except pursuant to
adjustments provided for in the Purchase Plan), (ii) change the standards of
eligibility for participation, or (iii) materially increase the benefits which
accrue to participants under the Purchase Plan, shall not be effective unless
approved by the stockholders within 12 months of the adoption of such amendment
by the Board. Unless previously terminated by the Board, the Purchase Plan will
terminate on December 31, 2005.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF PURCHASE PLAN
No taxable income is recognized by a participant either at the time of
election to participate in an offering under the Purchase Plan or at the time
shares are purchased thereunder.
If shares are disposed of at least two years after the Grant Date and at
least one year after the Purchase Date or in the event of a participant's death
(whenever occurring) while owning such shares, then the lesser of (i) the excess
of the fair market value of the shares at the time of such disposition over the
purchase price of the shares or (ii) fifteen percent of the fair market value of
the shares on the Grant Date will be treated as ordinary income to the
participant. Any further gain upon such disposition will be taxed as long-term
capital gain. Any long-term capital gain will be taxed as capital gain at the
rates then in effect. If the shares are sold and the sale price is less than the
purchase price, there is no ordinary income and the participant will have a
capital loss equal to the difference between the sale price and the purchase
price. The ability of a participant to utilize such a capital loss will depend
on the participant's other tax attributes and the statutory limitation on
capital loss deductions not discussed herein.
If the shares are sold or disposed of (including any disposition by way
of gift) before the expiration of the two-year holding period described above or
within one year after the shares are transferred to the participant, then the
excess of the fair market value of the shares on the Purchase Date over the
Purchase Price will be treated as ordinary income to the participant. This
excess will constitute ordinary income for the year of sale or other disposition
even if no gain is realized on the sale or a gratuitous transfer of shares is
made. The balance of the gain will be taxed as capital gain at the rates then in
effect. If the shares are sold for less than their fair market value on the
Purchase Date, the same amount of ordinary income will be attributed to the
Participant and a capital loss is recognized equal to the difference between the
sale price and the value of the shares on such Purchase Date. As indicated
above, the ability of the Participant to utilize
16
<PAGE> 18
such a capital loss will depend upon the Participant's other tax attributes and
the statutory limitation on capital losses not discussed herein.
PROPOSAL FOUR
APPROVAL OF THE AMENDMENT OF THE
SONUS PHARMACEUTICALS, INC.
1995 STOCK OPTION PLAN FOR DIRECTORS
INTRODUCTION
On May 12, 1995, the Board of Directors of the Company adopted the 1995
Stock Option Plan for Directors (the "Directors' Plan"), and the stockholders of
the Company originally approved the Directors' Plan by written consent on
September 29, 1995. In February 1999, the Board of Directors of the Company
amended the Directors' Plan to extend the term of the Directors' Plan to October
17, 2005 and to increase the authorized number of shares of Common Stock
issuable thereunder by 127,863 shares, to reserve the additional shares for
issuance under the Directors' Plan, bringing the total number of shares subject
to the Directors' Plan to 250,000. In April 1998, the Board of Directors further
amended the Directors' Plan to limit eligible participants to non-employee
directors.
Approval of the amendment to the Directors' Plan will require the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock present or represented at the annual meeting of stockholders and
entitled to vote thereat. Proxies solicited by management for which no specific
direction is included will be voted FOR the amendment of the Directors' Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT OF THE DIRECTORS' PLAN.
The principal features of the Directors' Plan are summarized below, but
the summary is qualified in its entirety by reference to the Directors' Plan
itself. Copies of the Directors' Plan can be obtained by writing to the
Secretary, SONUS Pharmaceuticals, Inc., 22026 20th Avenue, S.E., Bothell,
Washington 98021.
DIRECTORS' PLAN TERMS
The Directors' Plan provides for the grant by the Company of options to
purchase up to an aggregate of 122,137 shares of Common Stock of the Company.
The Directors' Plan provides that each member of the Company's Board of
Directors, excluding employees of the Company, automatically will be eligible to
receive options to purchase stock under the Directors' Plan. Pursuant to the
terms of the Directors' Plan, each non-employee director elected after April 30,
1995 will be granted an initial option under the plan covering 7,633 shares of
Common Stock. In addition, each director shall receive an additional option
covering 5,000 shares of Common Stock on each anniversary of such director's
original grant, provided such director is an eligible participant under the
Directors' Plan. As of the Record Date, four (4) directors of the Company were
eligible to participate. The purpose of the Directors' Plan is to provide
incentive to non-employee directors of the Company to encourage such directors
to acquire a proprietary interest in the Company and to continue their
associations with the Company. The Directors' Plan expires October 17, 2005
unless terminated earlier by the Board of Directors.
The Directors' Plan provides that it is to be administered by the
Company, which is responsible for carrying out the terms of the Directors' Plan
with respect to all plan administration matters. Options granted under the
Directors' Plan vest immediately and may have terms of up to ten (10) years. The
exercise price of options and the purchase price of rights to purchase must be
equal to the fair market value of the Common Stock of the Company as of the date
of grant. Options granted under the Directors' Plan may be exercised only while
the optionee is serving as a director of the Company or within six (6) months
after ceasing to so serve. Consideration paid upon the exercise of an option
granted under the Directors' Plan may consist of cash or, with the consent of
the Company, shares of Common Stock of the Company.
17
<PAGE> 19
The Directors' Plan provides that the Directors' Plan itself and all
outstanding options shall terminate upon the occurrence of a consolidation or
merger in which the Company is not the surviving corporation, the sale of
substantially all of the Company's assets and certain other similar events,
unless provision is made in writing for the continuance of the Directors' Plan
and for the assumption of options previously granted. In the event that the
outstanding shares of Common Stock while the Directors' Plan is in effect are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company by reason of merger,
consolidation or reorganization in which the Company is the surviving
corporation, or of a recapitalization, stock split, combination of shares,
reclassification, reincorporation, stock dividend or of another change in the
corporate structure of the Company, appropriate adjustments will be made by the
Board of Directors to the aggregate number and kind of shares subject to the
Directors' Plan and the number and kind of shares and the price per share
subject to outstanding options, but not to increase, the benefits to persons
then holding options.
As of the Record Date, options to purchase an aggregate of 88,165 shares
of Common Stock (net of cancelled options) have been granted under the
Directors' Plan to the following persons: (i) Steven C. Quay, M.D., Ph.D.,
15,000 shares, (ii) George W. Dunbar, 12,633 shares, (iii) Dwight Winstead,
22,633 shares, (iv) Robert E. Ivy, 7,633 shares, and (vii) Christopher S.
Henney, Ph.D., D.Sc., 7,633 shares.
FEDERAL TAX CONSEQUENCES
The following is a brief summary of the tax effects under the Internal
Revenue Code (the "Code") that may accrue to participants in the Directors'
Plan. No taxable income is recognized by an optionee upon the grant of a stock
option. Upon exercise, however, the optionee will recognize ordinary income in
the amount by which the fair market value of the shares purchased, on the date
of exercise, exceeds the exercise price paid for such shares. The income
recognized by the optionee will be subject to income tax withholding by the
Company out of the optionee's current compensation. If such compensation is
insufficient to pay the taxes due, the optionee will be required to make a
direct payment to the Company for the balance of the tax withholding obligation.
The Company will be entitled to a tax deduction equal to the amount of ordinary
income recognized by the optionee, provided the applicable withholding
requirements are satisfied.
PROPOSAL FIVE
AMENDMENT TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
Currently, Article IV authorizes the Company to issue up to 20,000,000
shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of
Preferred Stock, $0.001 par value per share. The amendment to the Amended and
Restated Certificate of Incorporation, which was unanimously approved by the
Company's Board of Directors, will increase the authorized number of shares of
Common Stock from 20,000,000 to 30,000,000.
Approval of the amendment to the Amended and Restated Certificate of
Incorporation will require the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock present and represented at the Annual
Meeting of stockholders and entitled to vote thereat. Proxies solicited by
management for which no specific direction is included will be voted FOR the
amendment to the Amended and Restated Certificate of Incorporation to increase
the authorized number of shares of Common Stock by 10,000,000.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED
SHARES OF COMMON STOCK TO 30,000,000.
As a result of the amendments to the Company's 1991 Plan, the Purchase
Plan and the Director's Plan, the total number of shares issuable under each has
increased. In addition, the Board of Directors of the Company approved the
Company's 1999 Nonqualified Stock Incentive Plan in February 1999. The 1999
Nonqualified Incentive Plan provides for the grant by the Company of options
and/or rights to purchase up to an aggregate of 600,000 shares of Common Stock
of the Company to its officers and other key employees of the Company. The
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<PAGE> 20
amendment to the Amended and Restated Certificate of Incorporation will increase
the total number of shares of Common Stock issuable by the Company.
It is not possible to state the effects of the amendment to the Amended
and Restated Certificate of Incorporation upon the rights of holders of Common
Stock. The effects of such issuance could include, however, (i) dilution of the
amount otherwise available for payment on dividends on Common Stock, (ii)
dilution of the voting power of Common Stock, and (iii) dilution of the amount
otherwise available for distribution of the Company's assets on liquidation.
The amendment to the Amended and Restated Certificate of Incorporation
will give the Company increased financial flexibility as it will allow
additional shares of Common Stock to be available for issuance from time to time
as determined by the Board for any proper corporate purpose. Such purpose could
include, without limitation, issuance for cash as a means of obtaining capital
for use by the Company, issuance as part or all of the consideration required to
be paid by the Company for acquisitions of other businesses or properties or
issuance pursuant to the Company's 1991 Plan, the Purchase Plan, the Directors
Plan, the 1999 Plan and any other equity incentive plans adopted by the Company.
The ability of the Board of Directors to issue such additional shares of
Common Stock could discourage an attempt by a party to acquire control of the
Company by tender offer or other means. Such issuances could therefore deprive
shareholders of benefits that could result from such an attempt, such as the
realization of a premium over the market price for their shares in a tender
offer or the temporary increase in market price that such an attempt could
cause. Moreover, the issuance of such additional shares of Common Stock to
persons friendly to the Board of Directors could make it more difficult to
remove incumbent managers and directors from office even if such change were to
be favorable to stockholders generally.
While the amendment to the Amended and Restated Certificate of
Incorporation may have anti-takeover ramifications, the Board of Directors
believes that financial flexibility offered by the amendment outweighs any
disadvantages. To the extent that it may have anti-takeover effects, the
amendment may encourage persons seeking to acquire the Company to negotiate
directly with the Board of Directors, enabling the Board to consider the
proposed transaction in a manner that best serves the shareholders' interests.
PROPOSAL SIX
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit the financial statements of the Company for the fiscal year
ending December 31, 1999, and recommends that stockholders vote for ratification
of such appointment. In the event of a negative vote on such ratification, the
Board of Directors will reconsider its selection.
Ernst & Young LLP has audited the Company's financial statements
annually since inception. Its representatives are expected to be present at the
meeting with the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
Any stockholder desiring to submit a proposal for action at the 2000
Annual Meeting of Stockholders and presentation in the Company's Proxy Statement
with respect to such meeting should arrange for such proposal to be delivered to
the Company at its principal place of business no later than December 31, 1999
in order to be considered for inclusion in the Company's proxy statement
relating to that meeting. Matters pertaining to such proposals, including the
number and length thereof, eligibility of persons entitled to have such
proposals included and other aspects are regulated by the Securities Exchange
Act of 1934, Rules and Regulations of the Securities and Exchange Commission and
other laws and regulations to which interested persons should refer.
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<PAGE> 21
OTHER MATTERS
Management is not aware of any other matters to come before the meeting.
If any other matter not mentioned in this Proxy Statement is brought before the
meeting, the proxy holders named in the enclosed Proxy will have discretionary
authority to vote all proxies with respect thereto in accordance with their
judgment.
By Order of the Board of Directors
Steven C. Quay, M.D., Ph.D.
Chairman of the Board, Chief Executive
Officer and Secretary
March 22, 1999
The Annual Report to Stockholders of the Company for the fiscal year
ended December 31, 1998 is being mailed concurrently with this Proxy Statement
to all stockholders of record as of March 5, 1999. The Annual Report is not to
be regarded as proxy soliciting material or as a communication by means of which
any solicitation is to be made.
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1998 WILL BE
PROVIDED TO STOCKHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO INVESTOR
RELATIONS, SONUS PHARMACEUTICALS, INC., 22026 20TH AVENUE S.E., BOTHELL,
WASHINGTON 98021.
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<PAGE> 22
PROXY SONUS PHARMACEUTICALS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
ANNUAL MEETING OF THE STOCKHOLDERS -- APRIL 29, 1999
The undersigned hereby nominates, constitutes and appoints Steven C. Quay,
M.D., Ph.D. and Gregory Sessler, and each of them individually, the attorney,
agent and proxy of the undersigned, with full power of substitution, to vote all
stock of SONUS PHARMACEUTICALS, INC. which the undersigned is entitled to
represent and vote at the 1999 Annual Meeting of Stockholders of the Company to
be held at the Washington Athletic Club, 1325 Sixth Avenue, Seattle, Washington,
on April 29, 1999, at 9:00 A.M., and at any and all adjournments or
postponements thereof, as fully as if the undersigned were present and voting at
the meeting, as follows:
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEMS 1, 2, 3, 4, 5 AND 6
1. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all nominees listed below
(except as marked to the contrary below)
</TABLE>
Election of the following nominees as directors: Steven C. Quay, M.D., Ph.D.,
Michael A. Martino, George W. Dunbar, Jr., Christopher S. Henney, Ph.D.,
D.Sc., Robert E. Ivy and Dwight Winstead.
(INSTRUCTIONS: To withhold authority to vote for any nominee, print that
nominee's name in the space provided below.)
- --------------------------------------------------------------------------------
2. Amendment of the Company's Incentive Stock Option, Non-Qualified Stock Option
and Restricted Stock Purchase Plan -- 1991 to increase the number of shares
subject thereto by 300,000 to a total of 2,200,000 shares of Common Stock:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Amendment of the Company's Employee Stock Purchase Plan to increase the
number of shares subject thereto by 50,000 to a total of 100,000 shares of
Common Stock:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Amendment of the Company's 1995 Stock Option Plan for Directors to increase
the number of shares subject thereto by 127,863 to a total of 250,000 shares
of Common Stock:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Important -- Please sign and date on the other side and return promptly.
<PAGE> 23
5. Amendment of the Company's Amended and Restated Certificate of Incorporation
to increase the number of authorized shares of Common Stock by 10,000,000
shares to a total of 30,000,000 shares of Common Stock:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Ratification of Ernst & Young LLP as independent auditors:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. In their discretion, on such other business as may properly come before the
meeting or any adjournment thereof.
IMPORTANT -- PLEASE SIGN AND DATE BELOW AND RETURN PROMPTLY
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER. WHERE NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED "FOR" THE
ELECTION OF THE DIRECTORS NAMED ON THE REVERSE SIDE OF THIS PROXY, "FOR" THE
AMENDMENT OF THE INCENTIVE STOCK OPTION, NON-QUALIFIED STOCK OPTION AND
RESTRICTED STOCK PURCHASE PLAN -- 1991, "FOR" THE AMENDMENT OF THE COMPANY'S
EMPLOYEE STOCK PURCHASE PLAN, "FOR" THE AMENDMENT OF THE COMPANY'S 1995 STOCK
OPTION PLAN FOR DIRECTORS, "FOR" THE AMENDMENT OF THE COMPANY'S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION AND "FOR" RATIFICATION OF ERNST & YOUNG
LLP AS INDEPENDENT AUDITORS. THIS PROXY CONFERS DISCRETIONARY AUTHORITY TO
CUMULATE VOTES FOR ANY AND ALL OF THE NOMINEES FOR ELECTION OF DIRECTORS FOR
WHICH AUTHORITY TO VOTE HAS NOT BEEN WITHHELD.
Date , 1999
----------------
---------------------------
(Signature of stockholder)
PLEASE SIGN YOUR NAME
EXACTLY AS IT APPEARS
HEREON. EXECUTORS,
ADMINISTRATORS, GUARDIANS,
OFFICERS OF CORPORATIONS AND
OTHERS SIGNING IN A
FIDUCIARY CAPACITY SHOULD
STATE THEIR FULL TITLES AS
SUCH.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN AND
RETURN THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
