SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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Section240.14a-12
INHALE THERAPEUTIC SYSTEMS
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(Name of Registrant as Specified In Its Charter)
INHALE THERAPEUTIC SYSTEMS
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INHALE THERAPEUTIC SYSTEMS
1060 EAST MEADOW CIRCLE
PALO ALTO, CALIFORNIA 94303
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 17, 1997
------------------------
TO THE SHAREHOLDERS OF INHALE THERAPEUTIC SYSTEMS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Inhale
Therapeutic Systems, a California corporation (the "Company"), will be held on
Tuesday, June 17, 1997 at 10:00 a.m. local time at the Company's executive
offices located at 1060 East Meadow Circle, Palo Alto, California 94303 for the
following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To ratify the selection of Ernst & Young LLP as independent auditors of
the Company for its fiscal year ending December 31, 1997.
3. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on May 1, 1997 as the
record date for the determination of shareholders entitled to notice of and to
vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors
[sig]
Mark P. Tanoury
SECRETARY
Palo Alto, California
May 8, 1997
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE TO ENSURE YOUR REPRESENTATION
AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE
UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY,
YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER,
THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND
YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY
ISSUED IN YOUR NAME.
INHALE THERAPEUTIC SYSTEMS
1060 EAST MEADOW CIRCLE
PALO ALTO, CALIFORNIA 94303
------------------------
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Inhale Therapeutic Systems, a California corporation (the "Company"), for use at
the Annual Meeting of Shareholders to be held on Tuesday, June 17, 1997, at
10:00 a.m. local time (the "Annual Meeting"), or at any adjournment or
postponement thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting. The Annual Meeting will be held at the Company's
executive offices located at 1060 East Meadow Circle, Palo Alto, California
94303. The Company intends to mail this proxy statement and accompanying proxy
card on or about May 8, 1997, to all shareholders entitled to vote at the Annual
Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to shareholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on May 1,
1997 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on May 1, 1997 the Company had outstanding and entitled to
vote 13,642,004 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum, but are not counted for any purpose in determining whether a
matter has been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revised by filing with the
Secretary of the Company at the Company's executive offices, 1060 East Meadow
Circle, Palo Alto, California 94303, a written notice of revocation or a duly
executed proxy bearing a later date, or it may be revoked by attending the
Annual Meeting and voting in person. Attendance at the Annual Meeting will not,
by itself, revoke a proxy.
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the Company's
1998 Annual Meeting of Shareholders must be received by the Company not later
than January 8, 1998 to be included in the proxy statement and proxy relating to
that meeting. Shareholders are also advised to review the Company's Bylaws,
which contain additional requirements with respect to advance notice of
shareholder proposals and director nominations.
PROPOSAL 1
ELECTION OF DIRECTORS
There are six nominees for the six Board of Directors positions presently
authorized in the Company's Bylaws. Each director to be elected will hold office
until the next annual meeting of shareholders and until his successor is elected
and has qualified, or until such director's earlier death, resignation or
removal. Each nominee listed below is currently a director of the Company
elected by the shareholders.
Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the six nominees named below. In the event
that any nominee should be unavailable for election as a result of an unexpected
occurrence, such shares will be voted for the election of such substitute
nominee as management may propose. Each person nominated for election has agreed
to serve if elected and management has no reason to believe that any nominee
will be unable to serve.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
IN FAVOR OF EACH NAMED NOMINEE
The names of the nominees and certain information about them are set forth
below:
NAME AGE POSITION
- ------------------------------- --- -------------------------------------------------------
Robert B. Chess 40 President and Chief Executive Officer
John S. Patton, Ph.D. 50 Vice President of Research
Terry L. Opdendyk 49 Chairman; General Partner, ONSET Ventures
Mark J. Gabrielson 41 General Partner, Prince Ventures
James B. Glavin 61 Chairman of the Board, The Immune Response Corporation
Melvin Perelman, Ph.D. 66 Former Executive Vice President, Eli Lilly and Company
ROBERT B. CHESS has served as President of the Company since December 1991
and as Chief Executive Officer since May 1992. Mr. Chess was also elected a
Director of the Company in May 1992. From September 1990 until October 1991, he
was an Associate Deputy Director in the White House Office of Policy
Development. In March 1987, Mr. Chess co-founded Penederm Incorporated
("Penederm"), a topical dermatological drug delivery company, and served as its
President until February 1989. He left the company in October 1989. Prior to
co-founding Penederm, Mr. Chess held management positions at Intel Corp., a
semiconductor manufacturer, and Metaphor, a computer software company (acquired
by International Business Machines). Mr. Chess holds a B.S. in Engineering from
the California Institute of Technology and an M.B.A. from the Harvard Business
School.
2
JOHN S. PATTON, PH.D., a co-founder of Inhale, has been Vice President of
Research since December 1991 and a Director of the Company since July 1990. He
served as President of the Company from its incorporation in July 1990 to
December 1991. From 1985 to 1990, Dr. Patton was a Project Team Leader with
Genentech, Inc., a biotechnology company, where he headed their non-invasive
drug delivery activities. Dr. Patton was on the faculty of the Marine Science
and Microbiology Departments at the University of Georgia from 1979 through
1985, where he was granted tenure in 1984. Dr. Patton received a B.S. in Zoology
and Biochemistry from Pennsylvania State University, an M.S. from the University
of Rhode Island, a Ph.D. in Biology from the University of California, San Diego
and received post doctorate fellowships from Harvard Medical School and the
University of Lund, Sweden, both in biomedicine.
TERRY L. OPDENDYK has been the Chairman of the Board of Directors of the
Company since August 1991. He served as acting Chief Executive Officer of the
Company between August 1991 and May 1992. Mr. Opdendyk has been a general
partner of the general partner of ONSET, a California Limited Partnership, a
venture capital limited partnership, since 1984; a general partner of the
general partner of ONSET Enterprise Associates, L.P. ("OEA"), a venture capital
limited partnership, since 1989; a general partner of the general partner of
ONSET Enterprise Associates II, L.P., a venture capital partnership, since 1994;
a special limited partner of the general partner of New Enterprise Associates V,
Limited Partnership, a venture capital limited partnership, since 1990; and a
special limited partner of the general partner of New Enterprise Associates VI,
Limited Partnership, a venture capital limited partnership, since 1993. From
1980 to 1984, he served as president of VisiCorp, a computer software company.
Prior to 1980, Mr. Opdendyk held management positions with Intel Corp., a
semiconductor manufacturer, and Hewlett-Packard Co., a computer and peripherals
manufacturer. Mr. Opdendyk is a director of Penederm and a director of several
private companies.
MARK J. GABRIELSON has been a Director of the Company since May 1992. Since
January 1991 he has been a general partner of Prince Ventures, L.P., a venture
capital management firm that serves as the general partner of Prince Venture
Partners III, L.P. ("Prince"). In addition, Mr. Gabrielson is the President of
Pharmaply, Inc., Chairman of Strategic Medical Information, Inc. and Chairman
and Chief Executive Officer of Ontyx, Inc. Prior to joining Prince, Mr.
Gabrielson served in a variety of marketing and business positions with
SmithKline Beecham plc since July 1975. Mr. Gabrielson is a director of
Penederm.
JAMES B. GLAVIN was elected to the Board of Directors of Inhale in May 1993.
Mr. Glavin is Chairman of the Board of The Immune Response Corporation, a
biotechnology company. He was President and Chief Executive Officer of The
Immune Response Corporation from 1987 until September 1994. From 1987 to 1990,
Mr. Glavin served as Chairman of the Board of Smith Laboratories, Inc. and was
President and Chief Executive Officer from 1985 to 1989. From 1985 to 1987, he
was a partner in CH Ventures, a venture capital firm. From 1983 to 1985, he
served as Chairman of the Board of Genetic Systems Corporation, a biotechnology
firm, and as its President and Chief Executive Officer from 1981 to 1983. Mr.
Glavin is a director of The Meridian Fund and Gish Biomedical, Inc.
MELVIN PERELMAN, PH.D. was appointed to the Board of Directors of Inhale in
January 1996. Dr. Perelman spent 36 years at Eli Lilly and Company, most
recently as Executive Vice-President and President of Lilly Research
Laboratories, a position which he held from 1986 until his retirement in 1993.
Dr. Perelman served as President of Lilly International from 1976 until 1986. He
was a member of the Board of Directors of Eli Lilly and Company from 1976 until
1993. Dr. Perelman is a member of the Board of Directors of Cinergy, Inc.,
DataChem, Inc., Immusol, Inc. and of The Immune Response Corporation.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1996 the Board of Directors held 6
meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent
3
auditors to be retained; and receives and considers the accountants' comments as
to controls, adequacy of staff and management performance and procedures in
connection with audit and financial controls. The Audit Committee is composed of
two non-employee directors: Messrs. Gabrielson and Glavin. It met once during
the fiscal year ended December 31, 1996.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation and otherwise determines compensation levels and performs
such other functions regarding compensation as the Board may delegate. The
Compensation Committee is composed of two non-employee directors: Messrs.
Gabrielson and Glavin. It met once during the fiscal year ended December 31,
1996.
During the fiscal year ended December 31, 1996, each director attended 75
percent or more of the aggregate of the meetings of the Board and of the
committees on which he then served, held during the period for which he was a
director or committee member, respectively.
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The board of Directors has selected Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1997 and has
further directed that management submit the selection of independent auditors
for ratification by the shareholders at the Annual Meeting. Ernst & Young LLP
has audited the Company's financial statements since its inception in 1990.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
Shareholder ratification of the selection of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Ernst & Young LLP
to the shareholders for ratification as a matter of good corporate practice. If
the shareholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of the Company
and its shareholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the Annual Meeting will be required
to ratify the selection of Ernst & Young LLP.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2
4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of February 7, 1997 by: (i) each nominee for
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent of its Common Stock.
BENEFICIAL OWNERSHIP (1)
--------------------------------------
PERCENT OF TOTAL
NAME NUMBER OF SHARES (2)
- ------------------------------------------------------- ----------------- -------------------
Baxter Healthcare Corporation.......................... 1,335,897 9.8%
One Baxter Parkway
Deerfield, IL 60015
Mark J. Gabrielson (3)................................. 906,844 6.6%
One Gorham Island
Westport, CT 06880
Prince Venture Partners III (4)........................ 887,044 6.5%
One Gorham Island
Westport, CT 06880
Quantum Partners LDC................................... 750,000 5.5%
c/o Soros Fund Management LDS
888 Seventh Avenue, 33rd Floor
New York, NY 10106
Pfizer Inc............................................. 725,552 5.3%
235 East 42nd Street
New York, NY 10017
Terry L. Opdendyk (5).................................. 732,890 5.4%
2490 Sand Hill Road
Menlo Park, CA 94025
Robert B. Chess (6).................................... 392,529 2.9%
John S. Patton (7)..................................... 461,568 3.4%
Robert M. Platz (8).................................... 323,673 2.4%
Ajit S. Gill (9)....................................... 148,718 1.1%
Stephen L. Hurst (10).................................. 24,268 *
James B. Glavin (11)................................... 46,800 *
Melvin Perelman (12)................................... 7,800 *
All directors and executive officers as a group (10
persons) (13)........................................ 3,045,215 21.8%
- ------------------------
* Less than 1%
(1) This table is based upon information supplied by officers, directors and
principal shareholders. Unless otherwise indicated in the footnotes to this
table and subject to the community property laws where applicable, the
Company believes that each of the shareholders named in this table has sole
voting and investment power with respect to the shares shown as beneficially
owned.
(2) Applicable percentages are based on 13,634,792 shares of Common Stock
outstanding as of February 7, 1997, adjusted as required by rules
promulgated by the Securities and Exchange Commission (the "SEC").
5
(3) Includes 887,044 shares held by Prince. Mr. Gabrielson is a general partner
of the general partner of Prince. Mr. Gabrielson disclaims beneficial
ownership of such shares except to the extent of his pro rata interest
therein. Also includes 19,800 shares issuable upon the exercise of options
exercisable within 60 days of February 7, 1997.
(4) All shares owned by Prince. Mark J. Garbrielson, a Director of the Company,
is a general partner of the general partner of Prince. Mr. Gabrielson
disclaims beneficial ownership of such shares except to the extent of his
pro rata interest therein.
(5) Includes 653,455 shares held by OEA. Mr. Opdendyk, a Director of the
Company, is a general partner of the general partner of OEA. Mr. Opdendyk
disclaims beneficial ownership of such shares except to the extent of his
pro rata interest therein. Also includes 19,800 shares issuable upon the
exercise of options exercisable within 60 days of February 7, 1997.
(6) Includes 28,774 shares issuable upon exercise of options exercisable within
60 days of February 7, 1997.
(7) Includes 44,568 shares issuable upon exercise of options exercisable within
60 days of February 7, 1997.
(8) Includes 40,668 shares issuable upon exercise of options exercisable within
60 days of February 7, 1997.
(9) Includes 77,343 shares issuable upon exercise of options exercisable within
60 days of February 7, 1997.
(10) All shares issuable upon exercise of options exercisable within 60 days of
February 7, 1997.
(11) Includes 40,800 shares issuable upon exercise of options exercisable within
60 days of February 7, 1997.
(12) All shares issuable upon exercise of option exercisable within 60 days of
February 7, 1997.
(13) Includes 1,540,499 shares held by entities affiliated with certain
directors as described in footnotes 3 through 5. Also includes 303,946
shares issuable upon exercise of outstanding options exercisable within 60
days of February 7, 1997. See footnotes 3, 5 and 6 through 12.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that
initial reports of ownership were filed late by Dr. Perelman, Judi Lum and
Baxter Healthcare Corporation.
6
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
For the fiscal year ended December 31, 1996, each non-employee director
received $7,500 of cash compensation from the Company. In March 1996, the Board
adopted a cash compensation program which will provide for an annual payment of
$10,000 to each Non-Employee Director, payable quarterly. The members of the
Board of Directors are eligible for reimbursement for their expenses incurred in
connection with attendance at Board meetings in accordance with Company policy.
On June 1, 1996, each non-employee director of the Company was granted an
option to purchase 14,400 shares of the Company's Common Stock under the
Company's 1994 Non-Employee Directors' Stock Option Plan (the "Directors' Plan")
at a purchase price of $17.50 per share (the closing sales price reported on the
Nasdaq National Market on the day prior to the date of grant). Only non-employee
directors of the Company are eligible to receive options under the Directors'
Plan. Options granted under the Directors' Plan are intended by the Company not
to qualify as incentive stock options under the Internal Revenue Code of 1986,
as amended (the "Code"). The options granted in 1996 under the Directors' Plan
vest monthly over 24 months from the date of grant. On January 23, 1996, upon
his initial election to the Board, Dr. Perelman was granted an option to
purchase 2,400 shares of the Company's Common Stock under the Directors' Plan at
a purchase price of $10.125 per share.
Option grants under the Directors' Plan are non-discretionary. On June 1 of
every other year (or the next business day should such date be a legal holiday),
commencing June 1, 1996, each member of the Company's Board of Directors who is
not an employee of the Company is automatically granted under the Directors'
Plan, without further action by the Company, the Board of Directors or the
shareholders of the Company, an option to purchase 14,400 shares of Common Stock
of the Company. The exercise price of options granted under the Directors' Plan
is 100% of the fair market value of the Common Stock subject to the option on
the date of the option grant. Options granted under the Directors' Plan vest
over 24 months from the date of grant. The term of options granted under the
Directors' Plan is ten years. In the event of a merger of the Company with or
into another corporation or a consolidation, acquisition of assets or other
change-in-control transaction involving the Company, the vesting of each option
will accelerate and the option will terminate if not exercised prior to the
consummation of the transaction. Options to purchase 6,000 shares of Common
Stock have been exercised under the Directors' Plan.
7
COMPENSATION OF EXECUTIVE OFFICERS
The following tables shows for the years ending December 31, 1996, 1995 and
1994, compensation awarded or paid to, or earned by the Company's Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company at December 31, 1996 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION (1)
- ---------------------------------------------- --------- ---------- --------- ---------------- -----------------
Robert B. Chess .............................. 1996 $ 183,936 $ 72,986 28,000 $ 330
President and Chief Executive Officer 1995 172,521 55,000 55,800 330
1994 134,457 31,000 120,557 305
Ajit S. Gill ................................. 1996 170,012 53,061 33,000 870
Chief Operating Officer 1995 158,283 37,000 21,400 40,870
1994 129,821 16,600 80,078 770
John S. Patton ............................... 1996 138,020 39,158 29,000 1,367
Vice President, Research 1995 128,721 27,000 15,800 770
1994 106,499 16,600 58,478 609
Stephen L. Hurst ............................. 1996 146,529 33,264 9,000 510
Vice President, Intellectual Property and 1995 137,093 27,000 24,000 480
Licensing 1994 108,081 31,433 50,400 243
Robert M. Platz .............................. 1996 135,089 30,645 9,000 805
Vice President, Technology 1995 126,263 27,000 17,600 443
1994 99,729 15,600 58,478 328
- ------------------------
(1) Except for the $40,000 paid to Mr. Gill in 1995 pursuant to an agreement
with the Company to cover expenses incurred by Mr. Gill in connection with
his relocation upon joining the Company, amounts represent life insurance
premiums paid by the Company.
8
STOCK OPTION GRANTS AND EXERCISES
The Company has granted options to its executive officers under the Equity
Incentive Plan. As of March 31, 1997, options to purchase a total of 1,985,699
shares were outstanding under the Equity Incentive Plan and options to purchase
1,246,109 shares remained available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1996,
certain information regarding options granted to, exercised by and held at year
end by the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (1) FISCAL YEAR (1) ($/SH) DATE 5% 10%
- ---------------------------------- ------------ ----------------- ----------- ----------- ---------- ----------
Robert B. Chess................... 28,000(3) 5.0% $ 10.125 01/22/06 $ 178,292 $ 451,826
Ajit S. Gill...................... 20,000(4) 3.6% 10.125 01/22/06 127,351 322,733
13,000(5) 2.3% 10.125 01/22/06 82,778 209,776
John S. Patton.................... 20,000(6) 3.6% 10.125 01/22/06 127,351 322,733
9,000(7) 1.6% 10.125 01/22/06 57,308 145,230
Stephen L. Hurst.................. 9,000(8) 1.6% 10.125 01/22/06 57,308 145,230
Robert M. Platz................... 9,000(9) 1.6% 10.125 10/22/06 57,308 145,230
- ------------------------
(1) Based on an aggregate of 560,500 options granted to employees of and
consultants to the Company in 1996, including the Named Executive Officers.
(2) The potential realizable value is based on the term of the option at the
time of grant (ten years). Assumed stock price appreciation of five percent
and ten percent is used pursuant to rules promulgated by the SEC. The
potential realizable value is calculated by assuming that the market price
on the date of grant appreciates at the indicated rate for the entire term
of the option and that the option is exercised at the exercise price and
sold on the last day of its term at the appreciated price.
(3) This option vests monthly over 1 year commencing in November 2000.
(4) This option vests monthly over 5 years commencing in January 1996.
(5) This option vests monthly over 1 year commencing in May 2000.
(6) This option vests monthly over 5 years commencing in January 1996.
(7) This option vests monthly over 1 year commencing in August 2000.
(8) This option vests monthly over 1 year commencing in March 2000.
(9) This option vests monthly over 1 year commencing in August 2000.
9
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND DECEMBER 31, 1996 OPTION
VALUES
NUMBER OF SECURITIES VALUE OF UNEXCERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, AT DECEMBER 31,
ACQUIRED VALUE 1996 (2) 1996 ($)(3)
ON REALIZED -------------------------- --------------------------
NAME EXERCISE (#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ------------- ----------- ----------- ------------- ----------- -------------
Robert B. Chess............... -- -- 14,681 169,918 $ 103,080 $ 1,336,370
Ajit S. Gill.................. -- -- 67,784 99,093 870,257 829,649
John S. Patton................ -- -- 37,708 65,569 384,333 464,471
Stephen L. Hurst.............. 10,000 $ 100,313 20,405 47,594 153,774 319,595
Robert M. Platz............... -- -- 34,720 50,357 370,086 389,532
- ------------------------
(1) Based on the fair market value of the Company's Common Stock on the exercise
date, minus the exercise price, multiplied by the number of shares
exercised.
(2) On January 18, 1995, the Board amended the provisions of the options held by
the Named Executive Officers to provide that upon a change-in control of the
Company the vesting of all outstanding options held by such persons would be
accelerated by two years.
(3) Based on the fair market value of the Company's Common Stock as of December
31, 1996, ($15.125 per share), minus the exercise price, multiplied by the
number of shares underlying the options.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION(1)
The Board of Directors of the Company (the "Board") has delegated to the
Compensation Committee of the Board (the "Committee") the authority to establish
and administer the Company's compensation programs. The Compensation Committee
is comprised of two non-employee directors: Messrs. Gabrielson and Glavin. The
Committee is responsible for: (i) determining the most effective total executive
compensation strategy, based upon the business needs of the Company and
consistent with shareholders' interests; (ii) administering the Company's
executive compensation plans, programs and policies; (iii) monitoring corporate
performance and its relationship to compensation of executive offers; and (iv)
making appropriate recommendations concerning matters of executive compensation.
COMPENSATION PHILOSOPHY
The primary goals of the compensation program are to align compensation with
the attainment of key business objectives and to enable the Company to attract,
retain and reward capable executives who can contribute to the continued success
of the Company. Equity participation and a strong alignment to shareholders'
interests are key elements of the Company's compensation philosophy. Four key
goals form the basis for compensation decisions for all employees of the
Company:
1. To attract and retain the most highly qualified management and employee
team;
2. To emphasize sustained performance by aligning rewards with shareholder
interests, especially through the use of equity participation programs;
- ------------------------
(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended (the
"Act") or the Exchange Act, whether made before or after the date hereof and
irrespective of any general incorporation language contained in any such
filing.
10
3. To pay competitively compared to similar drug delivery and biopharmaceutical
companies and to provide appropriate reward opportunities for achieving high
levels of performance compared to similar organizations in the marketplace;
and
4. To motivate executives and employees to achieve the Company's annual and
long-term business goals and encourage behavior toward the fulfillment of
those objectives.
To meet these goals, the Committee has adopted a mix among the compensation
elements of salary, stock options and bonuses with a bias towards stock options.
BASE SALARY
The Committee recognizes the importance of maintaining compensation
practices and levels of compensation competitive with drug delivery and
biopharmaceutical companies in comparable stages of development. Base salary
represents the fixed component of the executive compensation program. The
Company's philosophy regarding base salaries is conservative, maintaining
salaries below the competitive industry median. Base salary levels are
established on an annual review of marketplace competitiveness with similar
pharmaceutical and drug delivery companies and on the basis of individual
performance. Periodic increases in base salary are the result of individual
contributions evaluated against established performance objectives, relative
success toward achieving the Company's annual and long-term business goals,
length of service with the Company and an annual salary survey of comparable
companies in Inhale's industry. Base salaries for executives were increased for
fiscal 1996 but remain below the industry median. In 1996, the Company
implemented a variable compensation program for all employees, including all
executive officers, which provides that a portion of base salary is variable
based on certain qualitative and quantitative criteria for both the Company and
each employee.
STOCK OPTIONS
The option plans offered by the Company have been established to provide all
executive officers of the Company with an opportunity to share, along with the
shareholders of the Company, in the long-term performance of the Company. The
Committee strongly believes that a goal of the compensation program should be to
provide key employees who have significant responsibility for the management,
growth and future success of the Company with an opportunity to increase their
ownership of the Company and potentially gain financially from Company stock
price increases. The interests of shareholders, executives and employees should
thereby be closely aligned. Executives and employees are eligible to receive
stock options generally not more often than once a year, giving them the right
to purchase shares of Common Stock of the Company in the future at a price equal
to fair market value at the date of grant. All grants must be exercised
according to the provisions of the Company's stock option plans. All outstanding
options expire ten years from the date of grant.
As the base salaries for executive officers of the Company are in the lower
range for comparable companies, the Company has used stock options as the
primary incentive to attract and retain its executive officers. Option amounts
are based on salary grade within the Company and overall Company and individual
performance. After considering the criteria relating to awarding stock options,
the Committee determined that all executive officers, including the CEO, would
receive option grants in fiscal 1996. The options granted to executive officers
in fiscal 1996 include options with standard five-year vesting commencing upon
the date of grant, as well as "evergreen" options, which typically vest over a
twelve-month period commencing upon the date previously granted options become
fully vested.
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code. The Committee believes that at the present time it is unlikely that the
compensation paid to any Named Executive Officer in a taxable year which is
subject to the deduction limit will exceed
11
$1 million. However, the Committee has determined that stock awards granted
under the Equity Incentive Plan with an exercise price at least equal to the
fair market value of the Company's Common Stock on the date of grant shall be
treated as "performance-based compensation."
BONUSES
Bonus awards are another component of the compensation program. Bonuses, if
any, are both linked to the achievement of specified corporate goals and
personal performance which is determined at the discretion of the Compensation
Committee. Corporate performance goals on which 1996 bonuses were based were:
the successful signing of new collaborative partners and converting existing
collaborative partners with feasibility agreements to long-term development
agreements; advancing the delivery system technology by improving the
performance and efficiency of the inhalation device, the powder processing and
the powder filling; and improving the Company's liquidity by obtaining funding
from corporate partners and from the sale of securities. In January 1997, the
Committee reviewed the Company's 1996 corporate performance goals and determined
that most of the goals had been achieved. Based on such achievement, the
Committee awarded bonuses for 1996 for all executive officers.
CEO COMPENSATION
The total cash compensation paid to Mr. Chess in 1996 is below the average
for chief executive officers in the Company's industry comparative group. Under
the Company's executive compensation program, the total compensation mix for
senior executives emphasizes longer-term rewards in the form of stock options.
In 1996, Mr. Chess received an option grant to purchase 28,000 shares of the
Company's Common Stock at the fair market value of the Common Stock on the date
of grant. This grant was based on the same factors used in making grants to
other executive officers. This grant was made to enhance retention and the
overall competitiveness of Mr. Chess's compensation package and to strengthen
the alignment of Mr. Chess's interests with those of the shareholders. For 1996,
the Committee set a bonus of approximately 24% of salary for Mr. Chess's bonus
based upon the achievement of virtually all of the corporate goals discussed
above.
SUMMARY
The Committee believes that the compensation of executives by the Company is
appropriate and competitive with the compensation programs provided by other
drug delivery and biopharmaceutical companies with which the Company competes
for executives and employees. The Committee believes its compensation strategy,
principles and practices result in a compensation program fled to shareholder
returns and linked to the achievement of annual and longer-term financial and
operational results of the Company on behalf of the Company's shareholders.
COMPENSATION COMMITTEE
Mark J. Gabrielson
James B. Glavin
12
COMPARISON OF SHAREHOLDER RETURN(1)
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the CRSP Total
Return Index for the Nasdaq Stock Market (U.S. Companies) and the CRSP Total
Return Index for the Nasdaq Pharmaceutical Stocks(2) for the period commencing
on May 2, 1994, and ending on December 31, 1996.
COMPARISON OF CUMULATIVE TOTAL RETURN FROM MAY 3, 1994(3) THROUGH DECEMBER 31,
1996(4)
INHALE THERAPEUTICS SYSTEMS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INHALE NASDAQ PHARMACEUTICAL
5/2/94 $100 $100 $100
6/30/94 73 96 90
9/30/94 130 104 101
12/31/94 123 102 95
3/31/95 103 114 103
6/30/95 107 131 119
9/30/95 160 146 149
12/31/95 130 148 174
3/31/96 203 155 181
6/30/96 247 168 176
9/30/96 172 174 180
12/31/96 202 182 174
- ------------------------
(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Act or the Exchange Act, whether made before
of after the date hereof and irrespective of any general incorporation
language contained in any such filing.
(2) The CSRP Total Return Index for the Nasdaq Stock Market and the Nasdaq
Pharmaceutical Stocks are calculated by the Center for Research in
Securities Prices (CRSP).
(3) For purposes of this presentation, the Company has assumed that its initial
public offering price of $7.50 per share would have been the closing sales
price on May 2, 1994, the day prior to commencement of trading. The
Company's initial public offering commenced on May 3, 1994 and the Company's
1996 fiscal year ended on December 31, 1996.
(4) Assumes that $100.00 was invested on May 2, 1994 in the Company's Common
Stock at the Company's initial public offering price of $7.50 per share and
at the closing sales price for each index on that date and that all
dividends were reinvested. No cash dividends have been declared on the
Company's Common Stock. Shareholder returns over the indicated period should
not be considered indicative of future shareholder returns.
13
CERTAIN TRANSACTIONS
In January 1995, the Company entered into a Collaborative Development and
License Agreement with Pfizer Inc. ("Pfizer") to develop and market a
pulmonary-delivered insulin product. Under the terms of the agreement, Pfizer
provides the Company research, development, milestone and equity funding as well
as royalties on sales of products in exchange for worldwide commercialization
rights. Upon commercialization, the Company will supply Pfizer with devices and
powders. The program is currently in a multi-site Phase IIb clinical trial.
Pfizer is leading the clinical development and Inhale is providing inhalation
devices and packaged powders. In connection with the collaboration, Pfizer
purchased $5 million of the Company's common stock in February 1995 and an
additional $5 million of stock in October 1996. Both investments were made at a
25% premium to the market price at the time of each investment. As a result of
the purchases, Pfizer owns greater than 5% of the Company's common stock.
In March 1996, the Company entered into a Collaborative Research and
Development Agreement with Baxter Healthcare Corporation (a subsidiary of Baxter
International) ("Baxter") to use Inhale's dry powder pulmonary delivery system
as a technology platform for developing and launching therapeutic products.
Under the terms of the agreement, initial work will begin with four compounds
with Baxter providing the Company research, development, milestone and equity
funding in exchange for worldwide commercialization rights. Baxter also has an
option to add molecules to the collaboration. Inhale would receive royalties and
manufacturing revenue on sales of products that are successfully commercialized
as a result of the collaboration. Inhale is responsible for managing clinical
trials, and processing and packaging powders for clinical supplies and marketed
products. In connection with the collaboration, Baxter purchased $20 million of
the Company's common stock in April 1996 at a 25% premium to the market price at
the time of the investment. As a result of the purchase, Baxter owns greater
than 5% of the Company's common stock.
The Company's Bylaws provide that the Company will indemnify its directors
and may indemnify its officers, employees and other agents to the fullest extent
permitted by California law. The Company is also empowered under its Bylaws to
enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person whom it is required or permitted to
indemnify. Pursuant to these provisions, the Company has entered into indemnity
agreements with each of its directors and executive officers and has obtained
director and officer liability insurance in the amount of $5,000,000.
In addition, the Company's Amended and Restated Articles of Incorporation
provide that the liability of the directors for monetary damages shall be
eliminated to the fullest extent permissible under California law. Pursuant to
California law, the Company's directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company and its
shareholders. However, this provision does not eliminate the duty of care, and
in appropriate circumstances, equitable remedies such as injunctive or other
forms of nonmonetary relief will remain available under California law. In
addition, each director will continue to be subject to liability for (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) acts or omissions that a director believes to be contrary
to the best interests of the Company or its shareholders or that involve the
absence of good faith on the part of the director, (iii) any transaction from
which a director derived an improper personal benefit, (iv) acts or omissions
that show a reckless disregard for the director's duty to the Company or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the Company or its shareholders, (v) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Company or its shareholders, (vi) any transaction
that constitutes an illegal distribution or dividend under California law, and
(vii) any transaction involving an unlawful conflict of interest between the
director and the Company under California law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
14
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with then, best judgment.
By Order of the Board of Directors
[sig]
Mark P. Tanoury
SECRETARY
May 8, 1997
15
INHALE THERAPEUTIC SYSTEMS
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 17, 1997
The undersigned hereby appoints Robert B. Chess and Judi R. Lum, and
each of them, as attorneys and proxies of the undersigned, with full
power of substitution, to vote all of the shares of stock of Inhale
Therapeutic Systems which the undersigned may be entitled to vote at
the Annual Meeting of Shareholders of Inhale Therapeutic Systems to be
held at the Company s executive offices, 1060 East Meadow Circle, Palo
Alto, California on Tuesday, June 17, 1997 at 10:00 a.m. local time,
and at any and all postponements, continuations and adjournments
thereof, with all powers that the undersigned would possess if
| | personally present, upon and in respect of the following matters and in
| | accordance with the following instructions, with discretionary
| | authority as to any and all other matters that may properly come before
| | the meeting.
| |
| | Unless a contrary direction is indicated, this Proxy will be
| | voted for all nominees listed in Proposal 1 and for Proposal 2, as
more specifically described in the Proxy Statement. If specific
instructions are indicated, this Proxy will be voted in accordance
therewith.
(CONTINUED ON OTHER SIDE)
_______________________________________________________________________________
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Please mark
your votes as / X /
indicated in
this example
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
FOR all nominees listed below (except WITHHOLD AUTHORITY to vote for
as marked to the contrary below) for all nominees listed below.
Proposal 1: To elect directors to / / / /
hold office until the
next Annual Meeting of
Shareholders and until
their successors are
elected.
NOMINEES: Robert B. Chess, John S. Patton, Ph.D., Terry L. Opdendyk,
Mark J. Gabrielson, James B. Glavin and Melvin Perelman, Ph.D.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S), WRITE SUCH NOMINEE(S),
NAME(S) BELOW:
________________________________________________________________________
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 2.
FOR AGAINST ABSTAIN
Proposal 2: To ratify selection of Ernst & Young
LLP as independent auditors of the / / / / / /
Company for its fiscal year ending
December 31, 1997.
DATED ___________________
__ __ _____________________________________
|
| _____________________________________
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
HEREON. IF THE STOCK IS REGISTERED IN
THE NAMES OF TWO OR MORE PERSONS, EACH
SHOULD SIGN. EXECUTORS, ADMINISTRATORS,
TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT
SHOULD ADD THEIR TITLES. IF SIGNER IS A
CORPORATION, PLEASE GIVE FULL CORPORATE
NAME AND HAVE A DULY AUTHORIZED OFFICER
SIGN, STATING TITLE. IF SIGNER IS A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP
NAME BY AUTHORIZED PERSON.
PLEASE VOTE, DATE AND PROMPTLY RETURN
THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES.
_______________________________________________________________________________
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