SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
INHALE THERAPEUTIC SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
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and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
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[LOGO]
INHALE THERAPEUTIC SYSTEMS, INC.
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 8, 1999
------------------------
TO THE STOCKHOLDERS OF INHALE THERAPEUTICS SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of INHALE
THERAPEUTIC SYSTEMS, INC., a Delaware corporation (the "Company"), will be held
on June 8, 1999 at 10:00 A.M. local time at the Company's executive office
located at 150 Industrial Road, San Carlos, California 94070 for the following
purposes:
(1) To elect two directors to hold office until the 2002 Annual Meeting of
Stockholders.
(2) To ratify the selection of Ernst & Young LLP as independent auditors of
the Company for its fiscal year ending December 31, 1999.
(3) To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on April 23, 1999 as
the record date for the determination of stockholders 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
/s/ STEPHEN L. HURST
STEPHEN L. HURST
SECRETARY
San Carlos, California
May 3, 1999
ALL STOCKHOLDERS 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 IN ORDER 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, INC.
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
------------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
JUNE 8, 1999
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors (the
"Board") of Inhale Therapeutic Systems, Inc., a Delaware corporation (the
"Company"), for use at the Annual Meeting of Stockholders to be held on June 8,
1999, 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 office located at 150 Industrial Road, San Carlos, California 94070.
The Company intends to mail this proxy statement and accompanying proxy card on
or about May 3, 1999, to all stockholders 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 stockholders. 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 April 23,
1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on April 23, 1999 the Company had outstanding and entitled to
vote 16,941,154 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 is 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 revoked by filing with the
Secretary of the Company at the Company's executive office,
150 Industrial Road, San Carlos, California 94070, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the Company's
2000 Annual Meeting of Stockholders must be received by the Company no later
than February 19, 2000 in order to be included in the proxy statement and proxy
relating to that Annual Meeting. Stockholders are also advised to review the
Company's Bylaws, which contain additional requirements with respect to advance
notice of stockholder proposals and director nominations.
PROPOSAL ONE
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Board of Directors shall be divided into three classes, each class
consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board may
be filled only by persons elected by a majority of the remaining directors. A
director elected by the Board to fill a vacancy (including a vacancy created by
an increase in the Board of Directors) shall serve for the remainder of the full
term of the class of directors in which the vacancy occurred and until such
director's successor is elected and qualified.
The Board of Directors is presently composed of seven members. There are two
directors in the class whose term of office expires in 1999. Each of the
nominees for election to this class is currently a director of the Company who
was previously elected by the stockholders. If elected at the Annual Meeting,
each of the nominees would serve until the 2002 annual meeting and until his or
her successor is elected and has qualified, or until such director's earlier
death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the two nominees named below. In the event that any nominee should
be unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unable to serve.
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the Annual
Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2002 ANNUAL MEETING
AJIT S. GILL has served as President since April 1999, as Co-Chief Executive
Officer since August 1998 and as a Director since April 1998. Mr. Gill also
served as the Company's Chief Financial Officer from January 1993 to October
1996 and as Chief Operating Officer from October 1996 to August 1998. Before
joining Inhale, Mr. Gill was Vice President and General Manager of Kodak's
Interactive Systems divisions. Mr. Gill has served as Chief Financial Officer
for TRW-Fujitsu, Director of Business Development for Visicorp, and as a
start-up President for three high technology companies. He completed a BTech at
the Indian Institute of Technology, an MS in Electrical Engineering from the
University of Nebraska, and holds an M.B.A. from the University of Western
Ontario.
MELVIN PERELMAN, PH.D. has been a Director of the Company since 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
2
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.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE
DIRECTORS CONTINUING IN OFFICE UNTIL 2000 ANNUAL MEETING
ROBERT B. CHESS has been Chairman of the Board of Directors of the Company
since April 1999 and has served as Co-Chief Executive Officer of the Company
since August 1998 and as a Director of the Company since May 1992. From December
1991 to August 1998, Mr. Chess served as the President and from May 1992 to
August 1998 Mr. Chess served as the Chief Executive Officer of the Company. 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 Penederm in October 1989.
Prior to co-founding Penederm, Mr. Chess held management positions at Intel
Corp., a semiconductor manufacturer, and Metaphor, a computer software company
(acquired by International Business Machines). Mr. Chess holds a B.S. in
Engineering from the California Institute of Technology and a M.B.A. from the
Harvard Business School.
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 Chairman of
Ontyx, Inc., Proliance Pharmaceuticals, Inc. and Xylos, Inc., all private
companies. Prior to joining Prince, Mr. Gabrielson served in a variety of
marketing and business positions with SmithKline Beecham plc since July 1978.
JAMES B. GLAVIN has been a Director of the Company since May 1993. Mr.
Glavin is Chairman of the Board of The Immune Response Corporation, a
biotechnology company. He was President and Chief Executive Officer of The
Immune Response Corporation from 1987 until September 1994. From 1987 to 1990,
Mr. Glavin served as Chairman of the Board of Smith Laboratories, Inc. and was
President and Chief Executive Officer from 1985 to 1989. From 1985 to 1987, he
was a partner in CH Ventures, a venture capital firm. From 1983 to 1985, he
served as Chairman of the Board of Genetic Systems Corporation, a biotechnology
firm, and as its President and Chief Executive Officer from 1981 to 1983. Mr.
Glavin is a director of The Meridian Fund and Gish Biomedical, Inc.
DIRECTORS CONTINUING IN OFFICE UNTIL 2001 ANNUAL MEETING
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.
IRWIN LERNER has been a director of the Company since April 1999. From
September 1995 until present, Mr. Lerner has served on the Board of Medarex
Inc., a monoclonal antibodies products company and became Chairman of the Board
in May 1997. Mr. Lerner served as the Chairman of the Board of Sequana
Therapeutics, Inc., a biotechnology company, ("Sequana") from May 1995 until
Sequana merged
3
with Arris Pharmaceuticals Inc., a pharmaceutical company, to form Axys
Pharmaceuticals Inc. ("Axys") in January 1998 and has served on the Board of
Axys since then. Mr. Lerner served as Chairman of the Board of Directors and of
the Executive Committee of Hoffmann-La Roche Inc., a pharmaceutical and health
care company, from January 1993 until his retirement in September 1993, and from
1980 through December 1992, also served as President and Chief Executive
Officer. Mr. Lerner served for 12 years on the Board of the Pharmaceutical
Manufacturers' Association ("PhRMA"), where he chaired the Association's FDA
Issues Committee. Mr. Lerner received a B.S. and an M.B.A. from Rutgers
University. He is currently Distinguished Executive-in-Residence at Rutgers
University Graduate School of Management. Mr. Lerner is also a director of
Public Service Enterprise Group Incorporated, a diversified public utility
holding company, Humana Inc., a health care company, Covance, Inc., a contract
drug development company, and V.I. Technologies, Inc., a blood products company.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998 the Board of Directors held
seven meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is composed of two non-employee
directors: Messrs. Perelman and Glavin. It met once during the fiscal year ended
December 31, 1998.
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 three times during the fiscal year ended December
31, 1998.
During the fiscal year ended December 31, 1998, each director attended 75%
or more of the aggregate of the meetings of the Board and of the committees on
which he then served.
PROPOSAL TWO
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, 1999 and has
further directed that management submit the selection of independent auditors
for ratification by the stockholders 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.
Stockholder 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 stockholders for ratification as a matter of good corporate practice. If
the stockholders 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 stockholders.
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 TWO.
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 March 1, 1999 by: (i) each director; (ii)
each of the Named Executive Officers; (iii) all executive officers and directors
of the Company as a group; and (iv) all those known by the Company to be
beneficial owners of more than 5% of its Common Stock.
BENEFICIAL OWNER(1)
--------------------------------------
BENEFICIAL OWNERSHIP(1) NUMBER OF SHARES PERCENT OF TOTAL(2)
- ---------------------------------------------------------------------------- ----------------- -------------------
T. Rowe Price Associates, Inc.(3) .......................................... 1,819,123 10.74%
100 East Pratt Street
Baltimore, MD 21202
Franklin Resources Inc.(4) ................................................. 1,522,650 8.99%
777 Mariners Island Boulevard
San Mateo, CA 94404
Baxter International Inc. & Subsidiaries Pension Trust ..................... 1,335,897 7.89%
One Baxter Parkway
Deerfield, IL 60015
Capital Research and Management Company(5) ................................. 1,200,000 7.08%
333 South Hope Street, 55th Floor
Los Angeles, CA 90071
John S. Patton(6)........................................................... 381,710 2.25%
Robert B. Chess(7).......................................................... 372,132 2.20%
Robert M. Platz(8).......................................................... 281,149 1.66%
Mark J. Gabrielson(9)....................................................... 241,177 1.42%
Ajit S. Gill(10)............................................................ 206,034 1.21%
James B. Glavin(11)......................................................... 64,132 *
Stephen L. Hurst(12)........................................................ 26,149 *
Melvin Perelman(13)......................................................... 25,133 *
Irwin Lerner(14)............................................................ -- *
All directors and executive officers as a group (9 persons)(15).............
- ------------------------
* Less than 1%
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to the community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
shown as beneficially owned.
(2) Applicable percentages are based on 16,925,375 shares of Common Stock
outstanding as of March 1, 1999, adjusted as required by rules promulgated
by the SEC.
(3) Based solely on information obtained from a filing with the SEC made on an
amended Schedule 13G reporting such beneficial ownership as of February 12,
1999. T. Rowe Price Associates, Inc. ("T. Rowe Price Associates") is a
registered investment adviser providing investment advisory services for T.
Rowe Price New Horizons Fund, Inc. ("T. Rowe Price Fund"), a registered
investment company sponsored by T. Rowe Price Associates. T. Rowe Price
Associates has sole voting power
5
over 530,423 of the shares and has sole dispository power over all of the
shares. T. Rowe Price Fund has sole voting power over 852,550 of the
shares.
(4) Based solely on information obtained from a filing with the SEC made on an
amended Schedule 13G reporting such beneficial ownership as of January 27,
1999. Franklin Resources, Inc. ("FRI") is the parent holding company of two
registered investment advisers: Franklin Advisers, Inc. ("Franklin
Advisers") and Franklin Management Inc. ("Franklin Management"), which
provide investment advisory services for Franklin Small Cap Growth Fund, a
series of Franklin Strategic Series, a registered investment company which
holds the shares. Franklin Advisers has sole voting and dispositive power
over 1,500,800 of the shares. Franklin Management has sole investment power
over 21,850 of the shares. Charles B. Johnson and Rupert H. Johnson, Jr.
(collectively, "Principal Shareholders") each own in excess of 10% of the
outstanding common stock of FRI and are the principal shareholders of FRI.
FRI, Franklin Advisers, Franklin Management and the Principal Shareholders
disclaim any beneficial interest in the shares.
(5) Includes 1,000,000 shares held by Capital Research and Management Company
("CRMC") on behalf of SMALLCAP World Fund, Inc. ("World Fund") and 200,000
shares held by CRMC on behalf of American Variable Insurance Series--Growth
Fund, an affiliate of World Fund.
(6) Includes 295,002 shares held by John S. Patton & Jamie S. Patton, Trustees,
under the July 2, 1997 Patton Revocable Trust ("Patton Trust"). Also
includes an aggregate of 999 shares held by Mr. Patton's three children.
Also includes 85,709 shares issuable upon exercise of options exercisable
within 60 days of March 1, 1999.
(7) Includes 57,998 shares held as joint tenants with Mr. Chess' wife, Stacey
Phillip Chess. Also includes 95,377 shares issuable upon exercise of
options exercisable within 60 days of March 1, 1999.
(8) Includes 68,144 shares issuable upon exercise of options exercisable within
60 days of March 1, 1999.
(9) Includes 204,044 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 37,133 shares issuable upon the exercise of options
exercisable within 60 days of March 1, 1999.
(10) Includes 30,375 shares held by Ajit S. Gill & Ann C. Gill, Trustees, under
agreement dated October 14, 1998 FBO Ajit S. Gill & Ann C. Gill ("Gill
Trust"). Also includes 156,059 shares issuable upon exercise of options
exercisable within 60 days of March 1, 1999
(11) Includes 58,133 shares issuable upon exercise of options exercisable
within 60 days of March 1, 1999.
(12) Includes 10,781 shares held as joint tenants with Mr. Hurst's wife,
Antonia Althea Hurst. Also includes 15,368 shares issuable upon exercise
of options exercisable within 60 days of March 1, 1999.
(13) All shares issuable upon exercise of options exercisable within 60 days of
March 1, 1999.
(14) Mr. Lerner was appointed to the Board of Directors April 27, 1999. Upon
his election as a director, Mr. Lerner was granted options to purchase
20,000 shares of the Company's common stock under the terms of the 1994
Non-Employee Directors' Stock Option Plan (the "Directors' Plan").
(15) Includes 295,002 shares held by Patton Trust and an aggregate of 999
shares held by Mr. Patton's children, as described in footnote 6. Includes
57,998 shares held by Mr. Chess as joint tenants with Mrs. Chess, as
described in footnote 7. Includes 204,044 shares held by Prince (Mark
Gabrielson) as described in footnote 9. Includes 30,375 shares held by
Gill Trust, as described in footnote 10. Includes 10,781 shares held by
Mr. Hurst as joint tenants with Mrs. Hurst as described in footnote 12.
Also includes 541,056 shares issuable upon exercise of outstanding options
exercisable within 60 days of March 1, 1999. See footnotes 6 through 13.
6
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% stockholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
For the fiscal year ended December 31, 1998, each non-employee director of
the Company received $12,500 of cash compensation from the Company payable
quarterly. The members of the Board of Directors are also eligible for
reimbursement for their expenses incurred in connection with attendance at Board
meetings in accordance with Company policy.
Each member of the Company's Board of Directors who is not an employee of
the Company is automatically granted under the Directors' Plan, without further
action by the Company, the Board of Directors or the stockholders of the
Company, an option to purchase 30,000 shares of Common Stock of the Company for
each three year term to which he or she is elected. The non-employee directors
who began with a one or a two-year term when the Company first instituted the
classified board were granted 10,000 and 20,000 shares of Common Stock,
respectively. Vesting is monthly over the period of the term being served. 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. Option grants under the Directors' Plan are non-discretionary. 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 an aggregate of 130,200 shares of Common Stock have been granted to
all Non-Employee Directors of the Company to date under the Directors Plan,
6,000 of which have been exercised to date. Options to purchase an aggregate of
1,307,513 shares of Common Stock have been granted to Directors who are
employees of the Company as of March 1, 1999 under the Company's 1994 Equity
Incentive Plan, as amended (the "Equity Incentive Plan"), 495,012 of which have
been exercised to date.
7
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1998, 1997
and 1996, compensation awarded or paid to, or earned by, the Company's Co-Chief
Executive Officers and its other three most highly compensated executive
officers at December 31, 1998 (the "Named Executive Officers"(1)):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(2)
- --------------------------------------------------- --------- ---------- ---------- ----------- -----------------
Robert B. Chess.................................... 1998 $ 201,183 $ 78,859 50,000 $ 709
Chairman of the Board and 1997 195,666 136,763 15,900 510
Co-Chief Executive Officer 1996 183,936 72,986 28,000 330
Ajit S. Gill....................................... 1998 201,176 78,859 50,000 1,945
President and Co-Chief 1997 194,155 51,757 54,600 870
Executive Officer 1996 170,012 53,061 33,000 870
John S. Patton..................................... 1998 159,887 61,264 70,000 1,523
Vice President, Research 1997 150,119 32,344 7,500 1,440
1996 138,020 39,158 29,000 1,367
Stephen L. Hurst................................... 1998 160,333 54,054 39,000 461
General Counsel 1997 156,682 27,098 25,400 510
1996 146,529 33,264 9,000 510
Robert M. Platz.................................... 1998 145,374 36,345 19,900 838
Vice President, Technology 1997 140,797 24,651 5,400 850
1996 135,089 30,645 9,000 805
- ------------------------
(1) The Named Executive Officers include all the executive officers of the
Company.
(2) Amounts represent life insurance premiums paid by the Company.
8
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under the Equity
Incentive Plan. As of March 1, 1999, options to purchase a total of 2,722,263
shares were outstanding under the Equity Incentive Plan and options to purchase
989,827 shares remained available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at
year-end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE OR TERM (2)
OPTIONS FISCAL YEAR BASE PRICE EXPIRATION ------------------------
NAME GRANTED (1) ($/SHARE) DATE 5% 10%
- -------------------------------------------- ----------- ------------- ----------- ----------- ---------- ------------
Robert B. Chess............................. 15,000(3) 1.40% $ 29.250 08/18/08 $ 242,332 $ 645,759
35,000(4) 3.27 29.250 08/18/08 565,440 1,506,770
Ajit S. Gill................................ 15,000(3) 1.40 29.250 08/18/08 242,332 645,769
35,000(5) 3.27 29.250 08/18/08 565,440 1,506,770
John S. Patton.............................. 50,000(6) 4.68 27.625 08/18/08 889,022 2,233,779
6,000(3) 0.56 29.250 08/18/08 96,933 258,303
14,000(7) 1.31 29.250 08/18/08 222,176 602,708
Stephen L. Hurst............................ 4,000(8) 0.37 29.250 01/21/08 73,581 186,468
15,000(3) 1.40 29.250 01/21/08 275,928 699,255
20,000(6) 1.87 27.625 08/18/08 355,609 893,511
Robert M. Platz............................. 4,900(9) 0.46 29.250 01/21/08 90,136 228,423
15,000(6) 1.40 27.875 08/18/08 266,707 670,134
- ------------------------
(1) Based on an aggregate of 1,069,350 options granted to employees and
consultants to the Company in 1998, 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 5% and 10% is
used pursuant to rules promulgated by the SEC. The potential realizable
value is calculated by assuming that the market price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
(3) This option vests monthly over 5 years commencing in February 1998.
(4) This option vests monthly over 1 year commencing in November 2002.
(5) This option vests monthly over 1 year commencing in May 2002.
(6) This option vests monthly over 5 years commencing in August 1998.
(7) This option vests monthly over 1 year commencing in April 2002.
(8) This option vests monthly over 1 year commencing in March 2002.
(9) This option vests monthly over 1 year commencing in August 2002.
9
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND DECEMBER 31, 1998 OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE- MONEY OPTIONS AT
SHARES 1998(2) DECEMBER 31, 1998(3)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ----------- ----------- ------------- ------------ -------------
Robert B. Chess.................. 34,255 $ 959,014 90,858 125,386 $ 2,352,956 $ 1,863,369
Ajit S. Gill..................... -- -- 144,818 126,660 4,008,829 1,776,328
John S. Patton................... -- -- 80,191 100,586 2,075,731 1,071,965
Stephen L. Hurst................. 11,163 225,608 9,002 83,816 147,920 1,082,958
Robert M. Platz.................. -- -- 66,571 43,806 1,825,512 632,722
- ------------------------
(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, 1998 ($33.00 per share), minus the exercise price, multiplied by the
number of shares underlying the options.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION(1)
The Board has delegated to the Compensation Committee of the Board (the
"Committee") the authority to establish and administer the Company's
compensation programs. The Committee is comprised of two non-employee directors:
Messrs. Gabrielson and Glavin. The Committee is responsible for: (i) determining
the most effective total executive compensation strategy, based upon the
business needs of the Company and consistent with stockholders' interests; (ii)
administering the Company's executive compensation plans, programs and policies;
(iii) monitoring corporate performance and its relationship to compensation of
executive 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 stockholders'
interests are key elements of the Company's compensation philosophy. Four key
goals form the basis for compensation decisions for all employees of the
Company:
1. To attract and retain the most highly qualified management and employee
team;
2. To emphasize sustained performance by aligning rewards with stockholder
interests, especially through the use of equity participation programs;
- ------------------------
(1) The material in this report is not "soliciting material" and 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 1998 but remain below the industry median. In 1998, the Company continued
the variable compensation program implemented in 1996 for all employees,
including all executive officers, which provides that a portion of base salary
is variable based on certain qualitative and quantitative criteria for both the
Company and each employee.
STOCK OPTIONS
The option plans offered by the Company have been established to provide all
executive officers of the Company with an opportunity to share, along with the
stockholders of the Company, in the long-term performance of the Company. The
Committee strongly believes that a goal of the compensation program should be to
provide key employees who have significant responsibility for the management,
growth and future success of the Company with an opportunity to increase their
ownership of the Company and potentially gain financially from Company stock
price increases. The interests of stockholders, executives and employees should
thereby be closely aligned. Executives and employees are eligible to receive
stock options generally not more often than once a year, giving them the right
to purchase shares of Common Stock of the Company in the future at a price equal
to fair market value at the date of grant. All grants must be exercised
according to the provisions of the Company's stock option plans. All outstanding
options expire ten years from the date of grant.
As the base salaries for executive officers of the Company are in the lower
range for comparable companies, the Company has used stock options as the
primary incentive to attract and retain its executive officers. Option amounts
are based on salary grade within the Company and overall Company and individual
performance. After considering the criteria relating to awarding stock options,
the Committee determined that all executive officers, including the Co-Chief
Executive Officers, would receive option grants in fiscal 1998. The options
granted to executive officers in fiscal 1998 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, which is
determined at the discretion of the Committee. Corporate performance goals on
which 1998 bonuses were based were: the successful signing of new collaborative
partners and convening existing collaborative partners with feasibility
agreements to long-term development agreements; advancing the delivery system
technology by improving the performance and efficiency of the inhalation device,
the powder processing and the powder filling; and improving the Company's
liquidity by obtaining funding from corporate partners and from the sale of
securities. In January 1999, the Committee reviewed the Company's 1998 corporate
performance goals and determined that most of the goals had been achieved. Based
on such achievement, the Committee awarded bonuses for 1998 for all executive
officers.
CO-CEO COMPENSATION
The total cash compensation paid to Messrs. Chess and Gill in 1998 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 1998, Messrs. Chess and Gill received option grants to
purchase 50,000 shares each of the Company's Common Stock at the fair market
value of the Common Stock on the date of grant. This grant was based on the same
factors used in making grants to other executive officers. This grant was made
to enhance retention and the overall competitiveness of the compensation package
of Messrs. Chess and Gill and to strengthen the alignment of Messrs. Chess's and
Gill's interests with those of the stockholders. For 1998, the Committee set a
bonus of approximately 39% of salary for both Messrs. Chess's and Gill's bonuses
based upon the achievement of virtually all of the corporate goals discussed
above.
SUMMARY
The Committee believes that the compensation of executives by the Company is
appropriate and competitive with the compensation programs provided by other
drug delivery and biopharmaceutical companies with which the Company competes
for executives and employees. The Committee believes its compensation strategy,
principles and practices result in a compensation program fled to stockholder
returns and linked to the achievement of annual and longer-term financial and
operational results of the Company on behalf of the Company's stockholders.
COMPENSATION COMMITTEE
Mark J. Gabrielson
James B. Glavin
12
COMPARISON OF STOCKHOLDER 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, 1998.
COMPARISON OF CUMULATIVE TOTAL RETURN FROM MAY 2, 1994(3), AND ENDING ON
DECEMBER 31, 1998(4)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INHALE THERAPEUTIC SYSTEMS,
NASDAQ US NASDAQ PHARMACEUTICAL INC.
5/2/94 100 100 100
6/30/94 96 90 73
9/30/94 104 101 130
12/30/94 102 95 123
3/31/95 114 103 103
6/30/95 131 119 107
9/30/95 146 149 160
12/31/95 148 174 130
3/31/96 155 181 203
6/30/96 168 176 247
9/30/96 174 180 172
12/31/96 182 174 202
3/31/97 172 129 255
6/30/97 204 136 330
9/30/97 239 151 418
12/31/97 224 133 347
3/31/98 262 149 362
6/30/98 269 140 330
9/30/98 243 140 373
12/31/98 315 192 440
- ------------------------
(1) The material in this report is not "soliciting material" and 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
or after the date hereof and irrespective of any general incorporation
language contained in any such filing.
(2) The CRSP Total Return Index for the Nasdaq Stock Market and for the Nasdaq
Stock Market 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
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 1998 fiscal year
ended December 31, 1998.
(4) Assumes that $100.00 was invested on May 2, 1994, in the Company's Common
Stock at the Company's initial 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. Stockholder returns over the indicated period should not be
considered indicative of future shareholder returns.
CERTAIN TRANSACTIONS
The Company's Bylaws provide that the Company will indemnify its directors
and may indemnify its officers, employees and other agents to the fullest extent
permitted by Delaware law. The Company is also empowered under its Bylaws to
enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person whom it is required or permitted to
indemnify.
In addition, the Company's Certificate of Incorporation provides that the
liability of the directors for monetary damages shall be eliminated to the
fullest extent permissible under Delaware law. Pursuant to
13
Delaware law, the Company's directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company and its
stockholders. However, this provision does not eliminate the duty of care, and
in appropriate circumstances, equitable remedies such as injunctive or other
forms of nonmonetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for (i) breach
of the directors duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions, (iii) violating Section 174 of the Delaware General
Corporation Law, or (iv) any transaction from which the director derived an
improper personal benefit. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
In October 1998, the Company and Baxter agreed to amend their collaborative
agreement to facilitate signing a new corporate partner to fund further
development and commercialization of the undisclosed compound that has been
their focus since April 1998. Baxter continues to provide development funding
for this compound in preparation for Phase II trials while the two companies
continue to seek the new partner. Baxter owns in excess of 5% of the Company's
Common Stock.
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 their best judgment.
By Order Of The Board Of Directors
/s/ STEPHEN L. HURST
Stephen L. Hurst
SECRETARY
May 3, 1999
14
INHALE THERAPEUTIC SYSTEMS, INC.
PROXY
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 8, 1999
The undersigned hereby appoints ROBERT B. CHESS and AJIT S. GILL, 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, Inc. which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of Inhale Therapeutic Systems, Inc. to be held at the
Company's executive offices, 150 Industrial Road, San Carlos, California on
Tuesday, June 8, 1999 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.
Please mark
your votes as / X /
indicated in
this example
PROPOSAL 1: To elect directors to hold office until the next Annual Meeting
of Stockholders and until their successors are elected.
/ / FOR all nominees listed below (except as marked to the contrary below).
/ / WITHHOLD AUTHORITY to vote for all nominees listed below.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
Nominees: Ajit S. Gill and Melvin Perelman, Ph.D.
To withhold authority to vote for any individual nominee(s), write such
nominee(s)' name(s) below:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROPOSAL 2: To ratify selection of Ernst & Young LLP as independent auditors
of the Company for its fiscal year ending December 31, 1999.
/ / FOR / / AGAINST / / ABSTAIN
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 2.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
Signature(s)___________________________________________ Dated ________ , 1999
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.
- ------------------------------------------------------------------------------
FOLD AND DETACH HERE
