Edgar Filing: ARADIGM CORP

Aradigm Corporation

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )


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Aradigm Corporation

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TABLE OF CONTENTS


INFORMATION CONCERNING SOLICITATION AND VOTING
	GENERAL
	SOLICITATION
	VOTING RIGHTS AND OUTSTANDING SHARES
	REVOCABILITY OF PROXIES
	MATERIALS INCORPORATED BY REFERENCE
	PROPOSAL
APPROVAL OF THE ISSUANCE OF SECURITIES IN CONNECTION WITH A FINANCING TRANSACTION
	Background
	Shareholder Approval Required under NASD Rules
	Reasons for the Financing
	Consequences of Non-Approval by Shareholders
	Terms of the Financing
	Terms of the Shares and the Warrant Shares
	Registration Rights
	Terms of the Warrants
	Terms of the Warrant Repricing
	Use of Proceeds
	Board Recommendation
	Vote Required
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ARADIGM CORPORATION
3929 Point Eden Way
Hayward, California 94545

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON [FRIDAY, MARCH 7], 2003

TO THE SHAREHOLDERS OF ARADIGM CORPORATION:

NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of ARADIGM CORPORATION, a California corporation (the “Company”), will be held on[Friday, March 7], 2003 at 10:00 a.m. local time at the Company’s offices located at 3929 Point Eden Way, Hayward, California to approve: (i) the issuance and sale of up to [ ] shares of the Company’s Common Stock, (ii) the issuance of warrants to purchase an aggregate of up to [ ] shares of the Company’s Common Stock and the Common Stock that is issuable upon exercise of such warrants, and (iii) the cancellation and reissuance of certain outstanding warrants and the issuance of the Common Stock that is issuable upon exercise of such warrants, in a private financing on the terms and subject to the conditions described in the Proxy Statement.

The foregoing item of business is more fully described in the Proxy Statement accompanying this Notice.

The Board of Directors has fixed the close of business on [Tuesday], February [11], 2003, as the record date for the determination of shareholders entitled to notice of and to vote at this Special Meeting and at any adjournment or postponement thereof.


		By Order of the Board of Directors


		RICHARD P. THOMPSON Chairman, President and Chief Executive Officer

Hayward, California
February , 2003

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 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.

ARADIGM CORPORATION
3929 Point Eden Way
Hayward, California 94545

PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS

[March 7], 2003

INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

The enclosed proxy is solicited on behalf of the Board of Directors of Aradigm Corporation, a California corporation (the “Company”), for use at the Special Meeting of Shareholders to be held on [March 7], 2003, at 10:00 a.m. local time (the “Special Meeting”), or at any adjournment or postponement thereof, for the purposes set forth herein and in the accompanying Notice of Special Meeting. The Special Meeting will be held at the Company’s offices located at 3929 Point Eden Way, Hayward, California. The Company intends to mail this proxy statement and accompanying proxy card on or about February [21], 2003, to all shareholders entitled to vote at the Special 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 the Company’s Common Stock (the “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 the Company’s Common Stock and Series A Convertible Preferred Stock (the “Preferred Stock”) at the close of business on February [11], 2003 will be entitled to notice of and to vote at the Special Meeting. At the close of business on February [11], 2003, the Company had outstanding and entitled to vote [31,157,612] shares of Common Stock and [2,001,236] shares of Preferred Stock.

Each holder of record of Common Stock on such date will be entitled to one vote for each share held, and each holder of record of Preferred Stock on such date will be entitled to four votes for each share held (based on the number of shares into which such stock may be converted) on all matters to be voted upon at the Special 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 will be counted towards the tabulation of votes cast on proposals presented to the shareholders and will have the same effect as negative votes. 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 revoked by filing with the Secretary of the Company at the Company’s principal executive office, 3929 Point Eden Way, Hayward, California 94545, 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.

MATERIALS INCORPORATED BY REFERENCE

All materials incorporated by reference into this proxy statement but not delivered to the recipients hereof will be provided promptly, upon written or oral request to the Company and at no expense to the requestor. Written requests can by made to [ ], the Secretary of the Company at the Company’s principal executive office, 3929 Point Eden Way, Hayward, California 94545. Oral requests may be made to [ ], the Secretary of the Company at (510) 265-9000.

SHAREHOLDER PROPOSALS

The deadline for submitting a proposal for inclusion in the Company’s proxy statement and form of proxy for the Company’s 2003 annual meeting of shareholders pursuant to Rule 14a-8 of the Securities and Exchange Commission (the “SEC”) was December 17, 2002. The deadline for submitting a shareholder proposal that is not included in such proxy statement is not later than the close of business on March 18, 2003 nor earlier than the close of business on February 16, 2003. 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

APPROVAL OF THE ISSUANCE OF SECURITIES
IN CONNECTION WITH A FINANCING TRANSACTION

Background

The shareholders of the Company are being asked to approve (i) the issuance and sale of up to [ ] shares of the Company’s Common Stock (the “Shares”), (ii) the issuance of warrants to purchase an aggregate of up to [ ] shares of the Company’s Common Stock (the “Warrants”) and the Common Stock that is issuable upon exercise of the warrants (the “Warrant Shares”), and (iii) the cancellation and reissuance of certain outstanding warrants and the issuance of The Common Stock that is issuable upon exercise of such warrants (the “Warrant Repricing”) (collectively, the “Financing”), all as described in further detail below. The warrants, among other things, that are issued in connection with the Warrant Repricing, together with the Shares and the Warrants, are referred to as the “Securities.”

In connection with the Financing, certain of the shareholders of the Company holding approximately [ ]% of the Company’s Common Stock (on an as-converted basis) have entered into a voting agreement, whereby they have agreed to vote all outstanding shares of the Company’s capital stock held by them in favor of the financing.

The Company has received binding commitments to purchase up to $[15,004,000] of Shares and Warrants. The closing of the Financing (the “Closing”), is contingent upon, among other things, the approval by the shareholders of the Company at the Special Meeting. If shareholder approval of the Financing is obtained, the Closing of the Financing is expected to occur promptly after the Special Meeting.

THIS PROXY STATEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF THE COMPANY. THE SECURITIES REFERRED TO IN THIS PROXY STATEMENT HAVE NOT BEEN REGISTERED FOR SALE BY THE COMPANY UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SO OFFERED OR SOLD ABSENT SUCH REGISTRATION UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF.

The purchasers in the Financing consist of a limited number of accredited investors, and the sale of the Shares and the Warrants and the Warrant Repricing in the Financing will be made in reliance on Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”), which offers exemptions from the registration requirements under the Securities Act. SG Cowen Securities Corporation (“SG Cowen”) is serving as placement agent for the Company in connection with the Financing.

Shareholder Approval Required under NASD Rules

The issuance of the Securities by the Company is subject to shareholder approval pursuant to the Rules of the National Association of Securities Dealers, Inc. (“NASD”) applicable to companies whose securities are traded on the Nasdaq National Market (“Nasdaq”). Rule 4350(i) of the NASD rules (the “20% Rule”) requires companies that are listed on Nasdaq to obtain shareholder approval prior to issuing common stock (or shares convertible into or exercisable for common stock) in a private financing at a price less than the market value of the common stock, where the amount of common stock to be issued (or issuable upon conversion or exercise) is or will be greater than 20% of the common stock or voting power of the Company outstanding prior to the issuance. In addition, Rule 4350(i) of the NASD rules (the “Change of Control Rule”) requires companies that are listed on Nasdaq to obtain shareholder approval prior to issuing common stock (or shares convertible into or exercisable for common stock) if such issuance will result in a change of control of the issuer.

Because the Shares and Warrants are being issued in a private financing at a price that is below the market price of the Company’s Common Stock, approval of the Company’s shareholders will be required in order to permit the number of Shares and Warrants to constitute more than 20% of the shares outstanding immediately prior to the Financing. The Shares and Warrants to be issued in the Financing will constitute approximately [ ]% of the shares outstanding prior to the Financing. As such, the Company is seeking shareholder approval of the Financing prior to and as a condition to the Closing.

In addition, as a result of its participation in the Financing, New Enterprise Associates 10, Limited Partnership (“NEA 10”) is increasing its percentage ownership of the Company’s outstanding capital stock from approximately 16.9% to approximately [ ]%. As a result of this increase, the Financing could be viewed under Rule 4350(i) of the NASD rules as an issuance that results in a “change of control,” thereby requiring shareholder approval.

Reasons for the Financing

The Board of Directors has determined that obtaining additional funds is critical to the Company’s ability to execute on its current business plan. However, because of the restrictions of the 20% Rule and the Change of Control Rule, the Company is limited in the amount it may raise through the sale of its equity securities without obtaining shareholder approval. If the approval sought hereby is obtained and the other conditions to the Closing of the Financing are satisfied, the Company will raise up to [$15,004,000] in the Financing. Based on current market conditions, management and the Board of Directors believes that a sale of the Company’s securities in a public offering at the current market price of the Common Stock would not likely be achievable. A public offering would also involve substantial delay and significant expense, and might be unsuccessful given current conditions in the market for public company issuances. Therefore, the Board of Directors believes that the Company’s best option for additional financing is to complete the Financing on the terms outlined in this proposal.

The Board of Directors has also determined, based on current market conditions, the extensive arms-length negotiations with the purchasers of the Securities and discussions with other potential investors, that the equity securities being sold in the Financing are being issued and sold for fair value.

Consequences of Non-Approval by Shareholders

Because shareholder approval of the Financing is a condition to the Closing of the Financing, the purchasers would no longer be obligated to complete the Financing if shareholder approval is not obtained.

Terms of the Financing

The terms of the Financing and a description of the Securities is summarized below. Copies of (i) the Securities Purchase Agreement by and among the Company and the purchasers of the Shares and Warrants dated February [10], 2003 (the “Securities Purchase Agreement”), (ii) the form of Warrant and (iii) the Warrant Repricing Agreement by and among the Company and certain holders of outstanding warrants dated February [10], 2003 (the “Warrant Repricing Agreement”) (collectively, the “Financing Documents”) have been filed by the Company as exhibits to the Current Report on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on February [11], 2003, and you are encouraged to review the full text of the Financing Documents. The following summary is qualified in its entirety by reference to the more detailed terms set forth in the Financing Documents.

Terms of the Shares and the Warrant Shares

Purchase Price.

The price per share for the Shares purchased in the Financing is $0.79 (the “Purchase Price”), which is 85% of the volume-weighted average price of Company Common Stock on Nasdaq for the 7 trading days immediately preceding the date of the execution of the Securities Purchase Agreement (the “7-Day Average Price”).

Warrant Coverage.

For each Share purchased in the Financing, each purchaser will receive a Warrant to purchase 0.225 shares of the Company’s Common Stock.

Rights Associated with the Shares.

The holders of the Shares and the Warrant Shares (issued upon exercise of the Warrants) will be entitled to one vote per share on all matters to be voted on by the shareholders of the Company and there is no cumulative voting. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock, holders of the Shares and the Warrant Shares will be entitled to receive ratably all assets remaining after payment of liabilities. Holders of the Shares and Warrant Shares will have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the Shares and the Warrant Shares.

Registration Rights

Restricted Securities.

The issuance of the Securities (and the Warrant Shares and shares underlying the Repriced Warrants (the “Repriced Warrant Shares”)) will not be registered under the Securities Act or any other applicable securities laws and will therefore be deemed “restricted securities” under the Securities Act. As a result, the Securities (and the Warrant Shares and shares underlying the Repriced Warrants) may only be sold, assigned, transferred or otherwise disposed of by the purchaser if subsequently registered or an exemption from registration is available.

Registration of the Resale of the Shares and the Warrant Shares.

The Company agreed, pursuant to the Securities Purchase Agreement and the Warrant Repricing Agreement, to use commercially reasonable efforts to prepare and file with the SEC, within 30 days of the Closing Date, a registration statement (the “Registration Statement”) registering the resale of the Shares, the Warrant Shares and the Repriced Warrant Shares. The Company also agreed to use commercially reasonable efforts to insure that the Registration Statement is declared effective within 60 days from its filing date. In the event that the Registration Statement is reviewed by the SEC, the Company agreed to use commercially reasonable efforts to insure that the Registration Statement is declared effective with 120 days.

Potential Cash Delay Payments.

If the Registration Statement is not declared effective by the SEC within 60 days from the Closing Date (the “Target Date”), the Company shall be required to pay to each purchaser in the Financing an amount of cash equal to 1.5% of the aggregate Purchase Price paid by such purchaser in the Financing for each 30-day period following the Target Date up to the date the Registration Statement is declared effective; provided, however, that in the event that the Registration Statement is reviewed by the SEC, the Target Date shall mean the date that is 120 days from the Closing Date. The shareholder approval being sought hereby will constitute consent to the payment of these cash penalties.

Terms of the Warrants

Exercise Period.

The Warrants are exercisable at any time within the first four years of their issuance, and terminate if not exercised prior to such date.

Exercise Price, Adjustment.

The $1.07 per share exercise price of the Warrants is equal to 115% of the 7-Day Average Price per share (the “Warrant Exercise Price”). The Warrant Exercise Price and the number of shares subject to the Warrants will be subject to adjustment in certain events including: the issuance of any dividends; stock splits; stock dividends; reclassifications; subdivisions; or combinations of the Company’s Common Stock.

Terms of the Warrant Repricing

As part of the Financing, the Company has entered into the Warrant Repricing Agreement with certain individuals that currently hold warrants to purchase an aggregate of 4,016,024 shares of the Company’s Common Stock at a price per share of $6.97 (the “Existing Warrants”). As an inducement to the holders of the Existing Warrants to participate in the Financing, the parties to the Warrant Repricing Agreement have agreed to cancel the Existing Warrants and issue in their place, on a one to one basis, new warrants to purchase shares of the Company’s Common Stock (the “Repriced Warrants”). The Repriced Warrants will be substantially similar to the Existing Warrants, except that (i) the exercise price per share of the Repriced Warrants will be $1.12 and (ii) the Repriced Warrants will not allow for cashless exercise.

Use of Proceeds

The Company intends to use the proceeds from the sale of the Securities for working capital and general corporate purposes. In addition, in connection with the Financing, the Company has agreed to pay to SG Cowen, as placement agent, fees totalling [$ ].

Board Recommendation

Although the issuance of the Securities in connection with the Financing will have a dilutive effect on the Company’s current shareholders, the Board of Directors believes that shareholder approval of the Financing is in the best interest of the Company because the Company requires additional capital to assure funding of its business operations well into 2004. Accordingly, the Board of Directors strongly recommends the approval of the Financing.

Vote Required

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting will be required to approve the Financing.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.

SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of Common Stock, including Common Stock available upon the exercise of stock options exercisable on or prior to April 1, 2003, and Preferred Stock as of January 31, 2003, by (i) each person known to us to own beneficially more than five percent of the Common Stock or Preferred Stock, (ii) each director, (iii) the Company’s Chief Executive Officer and its four other most highly compensated executive officers, and (iv) all executive officers and directors of the Company as a group. The Preferred Stock votes together with our Common Stock as if it had been converted into Common Stock. To our knowledge, the persons named in the table have sole voting and investment power with respect to all Common Stock and Preferred Stock shown as beneficially owned by them, subject to applicable community property laws and except as otherwise noted.


	Beneficial Ownership (1)

											Common
											Stock and
						Number					Preferred
	Number of					of Shares					Stock
	Shares of					of					Combined
	Common		Percent			Preferred		Percent			Voting Power
Beneficial Owner	Stock		of Total			Stock		of Total			Percentage

New Enterprise Associates 10, Limited Partnership (2) 1119 St. Paul Street Baltimore, MD 21202		5,424,491		15.9	%		1,033,057		51.6	%		22.7	%

Novo Nordisk A/S (3) Novo Alle DK-2880 Bagsvaerd, Denmark		7,868,369		25.3			—		—			20.1

State Street Research & Management Company (4) One Financial Center Boston, MA 02111		2,380,340		7.6			—		—			6.1

Entities associated with RS Investment Management Co. LLC (5) 388 Market Street, Suite 200 San Francisco, CA 94111		2,092,500		6.7			—		—			5.3

Entities associated with Dr. Lindsay Rosenwald (6) 787 Seventh Avenue, 48th Floor New York, NY 10019		1,463,006		4.7			—		—			3.7

Richard P. Thompson (7)		985,312		3.1			—		—			2.5

Federated Kaufmann Fund (8) 1001 Liberty Avenue Pittsburgh, PA 15222		650,000		2.0			250,000		12.5			4.1

MPM BioEquities Master Fund LP (9) 601 Gateway Blvd., Suite 360 South San Francisco, CA 94080		537,188		1.7			206,611		10.3			3.4

Domain Public Equity Partners, LP (10) One Palmer Square Princeton, NJ 08542		402,890		1.3			154,958		7.7			2.6


Camden Partners Strategic Fund II-A, LP (11) c/o Camden Partners, Inc. One South Street, Suite 2150 Baltimore, MD 21202	368,160	1.2	141,600	7.1	2.4

Castle Creek Healthcare Partners LLC (12), 111 West Jackson Blvd., Ste. 2020, Chicago, IL 60604	268,593	*	103,305	5.2	1.7

CC Lifescience, Ltd. (13), c/o Castle Creek Healthcare Partners LLC, 111 West Jackson Blvd., Ste. 2020, Chicago, IL 60604	268,593	*	103,305	5.2	1.7

Stephen Farr, Ph.D. (14)	379,854	1.2	—	—	1.0

Babatunde A. Otulana (15)	371,623	1.2	—	—	*

Igor Gonda, Ph.D. (16)	391,281	1.2	—	—	1.0

Klaus Kohl (17)	220,000	*	—	—	*

Virgil D. Thompson (18)	142,500	*	—	—	*

Wayne I. Roe (19)	90,212	*	—	—	*

Frank H. Barker (20)	90,212	*	—	—	*

Stan M. Benson (21)	57,500	*	—	—	*

John M. Nehra (22)	20,000	*	—	—	*

All Officers and Directors as a group (15 persons) (23)	4,269,558	12.3	—	—	10.0

*		Less than one percent.

(1)		This table is based upon information supplied by officers, directors and principal shareholders and Schedules 13D and 13G filed with the SEC. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 31,157,612 shares of Common Stock and 2,001,236 shares of Preferred Stock (convertible at any time into 8,004,944 shares of Common Stock) outstanding on January 31, 2003, adjusted as required by rules promulgated by the SEC.

(2)		Includes 2,489,585 shares and warrants to purchase an aggregate of 2,934,906 shares held by NEA 10. In addition, NEA 10 holds 1,033,057 shares of the Company’s Preferred Stock that are convertible at any time into 4,132,228 shares of Common Stock. According to a Schedule 13D Amendment No. 1 dated April 25, 2002, and filed jointly by NEA 10, NEA Partners 10, Limited Partnership (“NEA Partners 10”), Stewart Alsop, James Barrett, Peter J. Barris, Robert T. Coneybeer, Nancy L. Dorman, Ronald H. Kase, C. Richard Kramlich, Thomas C. McConnell, Peter T. Morris, Charles W. Newhall III, Mark W. Perry, Scott D. Sandell and Eugene A. Trainor III, each of the aforementioned general partners of NEA 10 has shared dispositive and shared voting power with respect to the shares held by NEA 10. Each of the aforementioned disclaims beneficial ownership as to the shares held by NEA 10, except to the extent of their pecuniary interest therein.

(3)		Represents 7,868,369 shares held by Novo Nordisk A/S, a publicly quoted Danish company. According to a Schedule 13D Amendment No. 2 dated August 7, 2002, Novo Nordisk A/S holds the shares through

		Novo Nordisk Pharmaceuticals, Inc., a Delaware corporation. Novo Nordisk Pharmaceuticals is a wholly-owned subsidiary of Novo Nordisk of North America, Inc., a Delaware corporation. Novo Nordisk North America is wholly owned by Novo Nordisk A/S. Novo A/S, a private limited Danish company, owns approximately 26.7% of Novo Nordisk A/S’s total share capital, representing approximately 69.0% of the voting rights of Novo Nordisk A/S and may be deemed to control Novo Nordisk A/S. Novo A/S is a wholly-owned subsidiary of Novo Nordisk Foundation, a self-governing and self-owned foundation.

(4)		According to information provided by the shareholder, State Street Research & Management Company (“SSRM”) is a registered investment advisor under Section 203 of the Investment Advisors Act of 1940. The 2,380,340 shares reported are owned by various clients of SSRM. SSRM disclaims any beneficial ownership in such shares.

(5)		According to information contained in a Schedule 13G Amendment No. 2 dated September 23, 2002, R.S. Investment Management, L.P., a registered investment advisor, RS Investment Management Co. LLC, a holding company, and RS Diversified Growth Fund, an investment company, share voting and dispositive power with respect to the shares.

(6)		Represents 423,474 shares held by Aries Domestic Fund, L.P., 154,021 shares held by Aries Domestic Fund II, L.P. and 885,511 shares held by The Aries Master Fund. Dr. Rosenwald is the sole shareholder of Paramount Capital Asset Management, Inc., the general partner of Aries Domestic Fund L.P. and Aries Domestic Fund II, L.P. and the investment manager to Aries Master Fund.

(7)		Includes 109,613 shares held by Mr. Thompson, 100 shares held by a member of Mr. Thompson’s immediate family, 190,599 shares held by the Thompson Family Trust and 15,000 shares held by Thompson Family Partners. Mr. Thompson is a co-trustee of the Thompson Family Trust and a General Partner of Thompson Family Partners and, as such, may be deemed to share voting and investment power with respect to the shares held by the Thompson Family Trust and Thompson Family Partners. Mr. Thompson disclaims beneficial ownership of the shares held by his family members, the Thompson Family Trust and Thompson Family Partnership except to the extent of his pecuniary and proportionate partnership interest arising from his interest therein. Includes 670,000 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(8)		Includes 650,000 shares of Common Stock issuable upon exercise of a warrant.

(9)		Includes 537,188 shares of Common Stock issuable upon exercise of a warrant.

(10)		Includes 402,890 shares of Common Stock issuable upon exercise of a warrant.

(11)		Includes 368,160 shares of Common Stock issuable upon exercise of a warrant.

(12)		Includes 268,593 shares of Common Stock issuable upon exercise of a warrant.

(13)		Includes 268,593 shares of Common Stock issuable upon exercise of a warrant.

(14)		Includes 327,500 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(15)		Includes 365,000 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(16)		Includes 125,081 shares held by Dr. Gonda and 1,200 shares held by members of Dr. Gonda’s immediate family. Dr. Gonda disclaims beneficial ownership of such shares. Includes 265,000 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(17)		Includes 220,000 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(18)		Includes 123,000 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(19)		Includes 90,212 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(20)		Includes 90,212 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(21)		Includes 57,500 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares.

(22)		Includes 20,000 shares subject to options exercisable within 60 days of January 31, 2003, subject to repurchase of unvested shares. Does not include 9,556,719 shares, including shares of Common Stock issuable upon conversion of Preferred Stock, beneficially owned by NEA 10. Mr. Nehra is a director of the Company and a limited partner of NEA Partners 10, the general partner of NEA 10. Mr. Nehra disclaims beneficial ownership of the shares held by NEA 10 except to the extend of his pecuniary interest therein.

(23)		See footnotes (1) through (22) above, as applicable.

10.

CERTAIN RELATIONSHIPS

NEA is investing $[ ] in the Financing. John M. Nehra is a director of the Company and a limited partner of NEA Partners 10, the general partner of NEA 10.

[ ] and [ ], officers of the Company, are investing $[ ] and $[ ], respectively, in the Financing.

10.1

OTHER MATTERS

No other matters will be presented for consideration at the Special Meeting.


		By Order of the Board of Directors



		RICHARD P. THOMPSON Chairman, President and Chief Executive Officer

February ___, 2003

11.

PROXY

ARADIGM CORPORATION

PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [MARCH 7], 2003

The undersigned hereby appoints RICHARD P. THOMPSON and THOMAS C. CHESTERMAN, 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 Aradigm Corporation which the undersigned may be entitled to vote at the Special Meeting of Shareholders of Aradigm Corporation to be held at the Company’s offices at 3929 Point Eden Way, Hayward, California on [Friday], March [7], 2003, at 9:00 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.

UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1 .


PROPOSAL 1:		To approve (i) the issuance and sale of up to [ ] shares of the Company’s Common Stock, (ii) the issuance of warrants to purchase an aggregate of up to [ ] shares of the Company’s Common Stock and the Common Stock that is issuable upon exercise of such warrants, and (iii) the cancellation and reissuance of certain outstanding warrants and the issuance of the Common Stock that is issuable upon exercise of such warrants, in a private financing on the terms and subject to the conditions described in the Proxy Statement.


o FOR		o AGAINST		o ABSTAIN


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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