UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
SCHEDULE 14A INFORMATION
INFORMATION REQUIRED IN PROXY STATEMENT
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended
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Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
DOR BIOPHARMA, INC.
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(Name of Registrant as Specified In Its Charter)
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/X/ No fee required.
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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paid previously. Identify the previous filing by registration statement
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DOR BIOPHARMA, INC.
28101 BALLARD DR., SUITE F
LAKE FOREST, ILLINOIS 60045
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
AUGUST 29, 2003
To the Stockholders:
The annual meeting of stockholders of DOR BioPharma, Inc., will be held
at on August 29, 2003, at 10:00 a.m., Eastern, for the following
purposes, each as more fully described herein:
1. To elect eight directors to serve until the next annual
meeting of stockholders or until their respective successors have been duly
elected and qualified;
2. To consider and approve an amendment to our Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 50,000,000 to 100,000,000;
3. To consider and approve the sale and issuance of (i) 6,796,919
shares of Common Stock at $0.796 per share and (ii) warrants exercisable for
6,796,919 shares of Common Stock, to selected institutional and accredited
investors, in a private placement exempt from registration under the Securities
Act of 1933;
4. To consider and approve an amendment to our Amended and
Restated 1995 Omnibus Incentive Plan to increase the number of shares of Common
Stock available for issuance under the 1995 Plan from 4,708,257 to 10,000,000
shares of Common Stock and increase from 750,000 to 2,500,000 the maximum number
of shares of Common Stock for which any participant may receive options or
separately exercisable stock appreciation rights in the aggregate per calendar
year;
5. To ratify the appointment of Ernst and Young LLP as our
independent auditors for the year ending December 31, 2003; and
6. To transact such other business as may properly come before
the Annual Meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on August 4, 2003
are entitled to notice of and to vote at the Annual Meeting. A list of
stockholders eligible to vote at the meeting will be available for inspection at
the meeting and for a period of 10 days prior to the meeting, during regular
business hours, at our corporate headquarters at the address set forth above.
Information concerning the matters to be acted upon at the Annual
Meeting is included in the accompanying proxy statement. Whether or not you
expect to attend the Annual Meeting, your vote is important. To assure your
shares are represented at the Annual Meeting, please sign and date the enclosed
proxy card and return it promptly in the enclosed envelope, which requires no
additional postage if mailed in the United States.
By Order of the Board of Directors
Ralph M. Ellison
President and Chief Executive Officer
Lake Forest, Illinois
[________], 2003
DOR BIOPHARMA, INC.
28101 BALLARD DRIVE
LAKE FOREST, IL 60045
PHONE: 847-573-8990
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
We are furnishing this Proxy Statement to stockholders of record as of
the close of business on August 4, 2003 in connection with the solicitation of
proxies by our Board of Directors for use at the Annual Meeting of Stockholders
to be held on August 29, 2003. This Proxy Statement and the accompanying form of
proxy are being mailed to the stockholders on or about August 14, 2003. Our
Annual Report on Form 10-KSB for the year ended December 31, 2002 (which does
not form a part of the proxy solicitation materials) is being distributed
concurrently herewith to stockholders.
VOTING SECURITIES; PROXIES; REQUIRED VOTE
VOTING SECURITIES
We have two classes of voting securities: Common Stock and Series B
Convertible Preferred Stock. The Common Stock and Series B Convertible Preferred
Stock vote together as a single class. At the annual meeting, each holder of
record of Common Stock at the close of business on August 4, 2003 will be
entitled to one vote for each share of Common Stock owned on that date as to
each matter presented at the Annual Meeting. In addition, the Series B
Convertible Preferred Stock votes on an as converted to Common Stock basis.
Accordingly, each stockholder of record on August 4, 2003 of Series B
Convertible Preferred Stock will be entitled to 15.19 votes for each share of
Series B Convertible Preferred Stock owned as to each matter presented at the
Annual Meeting. However, fractional votes will not be permitted, and any
fractional votes on an as-converted basis will be rounded to the nearest whole
number of votes. On June 30, 2003, 27,622,379 shares of Common Stock and 119,662
shares of Series B Convertible Preferred Stock, representing a total of
1,817,379 votes, were outstanding.
PROXIES
You cannot vote your shares at the meeting unless you are present in
person or represented by proxy. All properly executed and unrevoked proxies in
the accompanying form that are received in time for the meeting will be voted at
the meeting or any adjournment or postponement thereof in accordance with
instructions thereon, or if no instructions are given, will be voted "FOR" the
election of all of the named nominees as Directors, "FOR" the amendment to our
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock, "FOR" the approval of the sale and issuance
of Common Stock and warrants in the private placement, "FOR" the amendment to
our Amended and Restated 1995 Omnibus Incentive Plan, "FOR" the ratification of
Ernst and Young LLP as our independent auditors, and in accordance with the
judgment of the persons appointed as proxies with respect to other matters which
properly come before the Annual Meeting. You may revoke a proxy by written
notice to us at any time prior to exercise of the proxy. In addition, although
mere attendance at the Annual Meeting will not revoke a proxy, you may withdraw
your proxy by voting in person.
REQUIRED VOTE
At the Annual Meeting, (1) a plurality of the votes cast in person or
by proxy is required to elect Directors; (2) the affirmative vote of holders of
at least a majority of the voting power of the outstanding shares of Common
Stock and Series B Preferred Stock represented in person or by proxy at the
meeting, voting together as a single class, is required to (a) approve the sale
and issuance of shares of Common Stock and warrants in the private placement,
(b) approve the amendment to our Amended and Restated 1995 Omnibus Incentive
Plan and (c) ratify the appointment of Ernst and Young LLP as the independent
auditors of our financial statements for the year ending December 31, 2003 and
(3) the affirmative vote of holders of at least a majority of the voting power
of the outstanding shares of Common Stock and the Series B Preferred Stock,
voting together as a single class, is required to approve the amendment our
Amended and Restated Certificate of Incorporation. In addition, the affirmative
vote of holders of at least a majority of the voting power of the outstanding
shares of Common Stock, voting as a separate class, is required to approve the
amendment to our Amended and Restated Certificate of Incorporation. Stockholders
are not allowed to cumulate their votes in the election of directors. With
respect to the proposal to amend our Amended and Restated Certificate of
Incorporation, both abstentions and broker non-votes (which occur when a broker
holding shares for a beneficial owner does not vote on a particular proposal
because the broker does not have discretionary voting power with respect to that
item and has not received voting instructions from the beneficial owner) will
have the same effect as votes against that proposal. Abstentions will have the
same effect as votes against the proposals to approve the sale and issuance of
Common Stock and warrants in the private placement, to amend our Amended and
Restated 1995 Omnibus Incentive Plan and to ratify the appointment of Ernst and
Young LLP, but broker non-votes will have no effect on the voting on such
proposals. Neither abstentions nor broker non-votes will have any effect on the
voting to elect directors.
QUORUM
The required quorum for the transaction of business at the Annual
Meeting will be a majority of the voting power of shares of Common Stock and
Series B Convertible Preferred Stock issued and outstanding on the record date,
voting together as a single class. Abstentions and broker non-votes will be
included in determining the presence of a quorum.
PROPOSAL 1
ELECTION OF DIRECTORS
Unless otherwise directed, the persons appointed in the accompanying
form of proxy intend to vote at the Annual Meeting for the election of the eight
nominees named below as directors to serve until our next annual meeting of
stockholders or until their successors have been duly elected and qualified. If
any nominee is unable to be a candidate when the election takes place, the
shares represented by valid proxies will be voted in favor of such substitute
nominee as the Board of Directors recommends or to allow the vacancy to remain
open until filled by the Board of Directors, as the Board of Directors
recommends. The Board of Directors does not currently anticipate that any
nominee will be unable to be a candidate for election. The eight nominees who
receive the greatest number of "FOR" votes of our outstanding Common Stock and
Series B Convertible Preferred Stock, voting together as a single class, cast at
the Annual Meeting will be elected as directors. Stockholders are not permitted
to cumulate their votes in the election of directors.
The Board of Directors currently has eight members, all of whom are
nominees for re-election. Each Director will serve until the next annual meeting
of stockholders or until his successor has been duly elected and qualified,
unless he dies, resigns or is removed from office prior to that time. Three of
the eight nominees were appointed to the Board of Directors since the last
election of directors at the 2002 annual stockholders meeting on May 23, 2002:
Alexander M. Haig Jr. was appointed on December 23, 2002, Evan Myrianthopoulos
was appointed on October 13, 2002, and Ralph M. Ellison was appointed on March
17, 2003.
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ELECTION OF DIRECTORS -- NOMINEES FOR ELECTION AS DIRECTORS
SERVED AS
NAME AGE POSITION(s) WITH COMPANY DIRECTOR SINCE
--------------------------------------------------- -------- -------------------------------------- ------------------
Alexander M. Haig.............................. 76 Chairman of the Board 2002
Steve H. Kanzer(1)............................. 39 Vice Chairman of the Board 1996
Ralph M. Ellison............................... 41 President, Chief Executive Officer 2003
and Director
Larry Kessel(2)................................ 48 Director 2002
Arthur Asher Kornbluth......................... 42 Director 2002
Paul D. Rubin.................................. 49 Director 1997
Evan Myrianthopoulos(1)........................ 38 Director 2002
Peter Salomon(2)............................... 43 Director 2002
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(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Alexander M. Haig, Jr., 76, currently serves as our non-employee
Chairman of the Board. Since 1984, Mr. Haig has been Chairman and President of
Worldwide Associates, Inc., a Washington D.C. based international advisory firm.
He served as Secretary of State (1981-82), President and Chief Operating Officer
of United Technologies Company (1978-81), and Supreme Allied Commander in Europe
(1974-79). Before that, he was White House Chief of Staff, Vice Chief of Staff,
Vice Chief of Staff of the U.S. Army, and Deputy National Security Advisor. Mr.
Haig currently serves on the Board of Directors of MGM Mirage, Inc.; Indevus
Pharmaceuticals, Inc.; SDC International, Inc.; and Metro-Goldwyn-Mayer, Inc. He
is also the host of his own weekly television program, "World Business Review."
Steve H. Kanzer, C.P.A., ESQ., 39, currently serves as our non-employee
Vice Chairman after having served as our Non-Employee Interim President from
June 30, 2002 through January 4, 2003 and as a member of the Board of Directors
since 1996. Since December 2000, he has served as Chairman of Accredited
Ventures Inc. and Accredited Equities Inc., a venture capital and NASD member
investment banking firm respectively specializing in the biotechnology
industries. He also serves as President of several private biotechnology
companies, including, CD4 Biosciences, Inc., Developmental Therapeutics, Inc.
and Solovax, Inc. He was a co-founder of Paramount Capital, Inc. in 1991 and
served as Senior Managing Director -- Head of Venture Capital of Paramount
Capital until December 2000. While at Paramount Capital, Mr. Kanzer was involved
in the formation and financing of numerous biotechnology companies, including
Corporate Technology Development, Inc. (CTD) Mr. Kanzer was Chief Executive
Officer of CTD from 1997 until its acquisition by us in November 2001. From 1993
until 2003, he was a member of the board of directors of Atlantic Technology
Ventures, Inc. a public biotechnology company. From 1995 until June 1999, Mr.
Kanzer was a founder and Chairman of the Board of Discovery Laboratories, Inc.,
a public biotechnology company. From 1997 until December 2000, Mr. Kanzer was
President of PolaRx Biopharmaceuticals, Inc., a private pharmaceutical company
developing arsenic trioxide as a treatment for acute leukemia. PolaRx was
subsequently acquired by Cell Therapeutics, Inc., a public biotechnology
company, which currently markets arsenic trioxide under the name Trisenox(R).
Prior to joining Paramount Capital in 1991, Mr. Kanzer was an attorney
at the law firm of Skadden, Arps, Slate, Meagher & Flom in New York, where he
specialized in mergers and acquisitions. Mr. Kanzer is a member of the Licensing
Executive Society and has served as the Co-Chair of its New York Chapter. Mr.
Kanzer received his J.D. from New York University School of Law and B.B.A. in
Accounting from Baruch College.
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Ralph M. Ellison, M.D., M.B.A., 41, became our Chief Executive Officer
and President in March 2003. From May 1997 to January 2000, Dr. Ellison was a
co-founder, Chief Executive Officer and Director of PolaRx Biopharmaceuticals,
Inc., an oncology focused drug development company that developed Trisenox(R)
(arsenic trioxide) for the treatment of cancer. Following the successful
completion of PolaRx's pivotal phase III clinical trial, PolaRx was acquired by
Cell Therapeutics, Inc., a public biopharmaceutical company based in Seattle,
Washington. During his tenure as the Chief Executive Officer of PolaRx, Dr.
Ellison was responsible for all aspects of PolaRx's drug development program
from IND filing through the end of phase III testing. Trisenox(R) currently
holds the record as the fastest drug developed and approved by the FDA. From
January 2000 to March 2003, Dr. Ellison worked as a consultant to Cell
Therapeutics during the preparation and filing of the new drug application for
Trisenox(R), which was ultimately approved by the FDA for the treatment of
relapsed acute promyelocytic leukemia, a life-threatening cancer of the blood.
Trisenox(R) is currently in clinical trials to treat more than 10 types of
cancer, including multiple myeloma, myelodysplasia and chronic myeloid leukemia.
Prior to founding PolaRx, Dr. Ellison started and ran a contract research
organization, which was a division of RTL, Inc., a drug testing facility based
in New York. At RTL he spent five years designing, implementing and completing
clinical trials for both large and small pharmaceutical companies. Dr. Ellison's
experience includes the development of anticancer compounds, antifungals,
analgesics, anti-inflammatories, antibiotics and drug delivery systems Dr.
Ellison holds a degree of Doctor of Medicine from the University of the
Witwatersrand in South Africa and a Masters of Business Administration from the
University of Cape Town South Africa.
Larry J. Kessel, M.D., 48, is president of a five physician practice
specializing in Internal Medicine and Geriatrics since 1984. He graduated Magna
Cum Laude with a B.S. degree from the University of Pittsburgh as an honors
major in Biology and subsequently graduated with an MD degree from Temple
Medical School. He completed a formal residency in Internal Medicine at Abington
Memorial Hospital, and is board certified in Internal Medicine, with added
qualifications as a diplomat in Geriatric Medicine. He is an active staff
attending and Clinical Instructor at Chestnut Hill Hospital (University of
Pennsylvania affiliate) and Roxborough Memorial Hospital in Philadelphia
Pennsylvania. Dr. Kessel is a Board Reviewer for the American Board of Internal
Medicine, as well as a fellow of the American College of Physicians. He also
serves on the advisory board of Independence Blue Cross. Dr. Kessel Presently
serves as a director of Cypress Biosciences, Inc of San Diego, California and
NovaDel Pharma Inc. of Flemington, New Jersey. He previously served on the Board
of Genta Inc.
Arthur Asher Kornbluth, M.D., 42, is a Board Certified
Gastroenterologist and Associate Clinical Professor of Medicine at Mount Sinai
Medical Center and School of Medicine in New York City, an internationally
recognized leading center in the clinical research and management of
inflammatory bowel disease. Dr. Kornbluth is an active clinical investigator and
practicing clinician, with a large practice specializing in the management of
patients with complex inflammatory bowel disease. He has published extensively
in peer-reviewed journals regarding the pharmacologic and biologic treatments of
inflammatory bowel disease. He is the author of several book chapters regarding
the diagnosis and management of inflammatory bowel disease. He is the principal
author of the American College of Gastroenterology's "Ulcerative Colitis
Practice Guidelines in Adults." He has taught and lectured extensively
throughout the United States and has received numerous awards as a medical
educator. Dr. Kornbluth received his undergraduate degree from Brooklyn College
and his medical degree from Downstate Medical Center. He completed his
postgraduate training in internal medicine at the Albert Einstein College of
Medicine, where he was chosen as chief medical resident. He performed his
gastroenterology fellowship at the Mount Sinai Medical Center in New York City.
He is a member of the American Gastroenterology Association, the American
College of Gastroenterology and the Alpha Omega Alpha Honor Medical Society, for
which he was selected as both an educator and clinician at the Mount Sinai
School of Medicine. He is a member of the Crohn's and Colitis Foundation of
America and
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that foundation's Clinical Research Alliance, has served on their Clinical
Trials Protocol Review Committee and currently serves on the Clinical Research
Agenda Task Force.
Evan Myrianthopoulos, 38, is currently the President of CVL Advisors,
LLC, a financial consulting firm he founded that specializes in the
biotechnology sector. Before founding CVL Advisors, Mr. Myrianthopoulos was a
co-founder of Discovery Laboratories, Inc., a public specialty pharmaceutical
company developing respiratory therapies. While at Discovery, Mr.
Myrianthopoulos held the positions of Chief Financial Officer and Vice President
of Finance. Before co-founding Discovery, Mr. Myrianthopoulos was a Technology
Associate at Paramount Capital Investments, L.L.C., a New York City based
biotechnology venture capital and investment banking firm.
Paul D. Rubin, M.D., 49, has served as a member of the Board of
Directors since November 1997. Dr. Rubin is currently the Chief Executive
Officer and President of Critical Therapeutics, Inc., a private pharmaceuticals
company. Prior to joining Critical Therapeutics in 2002, Dr. Rubin served as
Executive Vice President for Drug Development at Sepracor, Inc., having
previously been Senior Vice President of Sepracor since 1996. He is responsible
for managing research and development programs for Sepracor's improved chemical
entities portfolio, which includes the management of discovery research,
regulatory, clinical, preclinical and project management teams. Dr. Rubin has
also played a key role in the evaluation of external technology and licensing
opportunities. From 1993 to 1996, Dr. Rubin was the Vice President and Worldwide
Director of Early Clinical Development and Clinical Pharmacology at Glaxo
Wellcome. Prior to joining Glaxo, Dr. Rubin held various executive research
positions at Abbott Laboratories. Dr. Rubin received his M.D. from Rush Medical
College in Chicago and completed his residency in Internal Medicine at the
University of Wisconsin Hospitals and clinics in Madison, Wisconsin.
Peter Salomon, M.D., F.A.C.G., 43, is a Board Certified
gastroenterologist and has been in private practice with Gastroenterology
Associates of South Florida for the last 11 years. An active clinical researcher
in the treatment of Crohn's disease, Dr. Salomon has treated several thousand
patients suffering from inflammatory bowel disease. Dr. Salomon has authored
numerous peer-reviewed publications on the subject of Crohn's disease and is
co-author of the chapter of a leading gastroenterology textbook, Sleisinger &
Fordtran's Gastrointestinal & Liver Diseases. Dr. Salomon received his
undergraduate degree from New York University in 1981 and his Medical Degree
from New York University in 1985. Dr. Salomon received his training in Internal
Medicine and Gastroenterology at The Mount Sinai Hospital in New York, where he
also held a grant from the Crohn's and Colitis Foundation to perform research in
inflammatory bowel disease. Dr. Salomon has previously been a member of the
Board of Directors of Genta Inc. and PolaRx and has been a scientific advisor to
Cypress Biosciences Inc.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that you vote "FOR" the election of
all of the nominees listed above.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
We are required to identify each person who was an officer, director or
beneficial owner of more than 10% of our Common Stock during our most recent
fiscal year and who failed to file on a timely basis reports required by Section
16(a) of the Securities Exchange Act of 1934. Based solely on our review of the
copies of such reports received by us, and representatives from certain
reporting persons, we believe that, during the year ended December 31, 2002, our
directors, executive officers and beneficial owners of more than 10% of our
Common Stock complied with all such filing requirements applicable to them,
except that (a) William Milling filed one late Form 3 and one late Form 4
reporting one transaction; (b)
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Steve Kanzer filed one late Form 4 reporting one transaction; (c) Peter Salomon
filed one late Form 4 reporting one transaction; (d) Paul Rubin filed one late
Form 4 reporting one transaction; (e) Larry Kessel filed one late Form 4
reporting one transaction and (f) Arthur Asher Kornbluth filed one late Form 4
reporting one transaction.
BOARD AND COMMITTEE MEETINGS
During the year ended December 31, 2002, the Board of Directors held 12
meetings. During 2002, each of the current members of the Board of Directors
attended at least 75 percent of all of the Board meetings, while a director, and
meetings of the committees on which he served, while a member of those
committees. In addition to formal meetings, the Board of Directors and the
members of the Audit and Compensation Committees conferred frequently on an
informal basis.
The Compensation Committee of the Board of Directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees and
consultants. The Compensation Committee also administers various incentive
compensation, stock and benefit plans. Dr. Salomon and Dr. Kessel are currently
the Compensation Committee members, with Dr. Salomon serving as Chairman. The
Compensation Committee held two meetings during 2002.
The Audit Committee of the Board of Directors reviews, acts on and
reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of our independent auditors, the
scope of the annual audits, fees to be paid to the auditors, the performance of
the auditors and our accounting practices. Messrs. Kanzer and Myrianthopoulos
were for the fiscal year ended December 31, 2002, and currently are, the Audit
Committee members, with Mr. Myrianthopoulos serving as Chairman. Messrs. Kanzer
and Myrianthopoulos are independent as defined by Section 121(A) of the American
Stock Exchange's listing standards; and the Board of Directors believes that
each of these individuals has the requisite financial skills and experience to
discharge his obligations as a member of the Audit Committee. The Audit
Committee held four meetings during 2002.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee exercises oversight responsibilities regarding the
quality and integrity of our accounting, auditing and financial reporting
practices. In discharging its oversight responsibilities regarding the audit
process for the year ended December 31, 2002, the Audit Committee:
- reviewed and discussed the audited financial statements with
management and with Ernst and Young LLP, our independent auditors;
- discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 as amended;
- reviewed the selection, application and disclosure of our critical
accounting policies pursuant to SEC Financial Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting
Policies;" and
- reviewed the written disclosures and the letter from the
independent auditors required by the Independence Standards
Board's Standard No. 1, and discussed with the independent
auditors any relationships that may impact their objectivity and
independence.
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Based upon the review and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2002, as filed with the SEC.
The Audit Committee has considered and determined that the level of
fees of Ernst and Young LLP for provision of services other than the audit
services is compatible with maintaining the auditor's independence. The Audit
Committee has approved the appointment of Ernst and Young LLP as our auditors of
our financial statements for the year ending December 31, 2003, subject to
ratification by our stockholders at the Annual Meeting (See "Proposal 5.
Ratification of Independent Auditors").
The Audit Committee Members
Steve H. Kanzer
Evan Myrianthopoulos
EXECUTIVE COMPENSATION
The following table contains information concerning the compensation
paid during the fiscal years ended December 31, 2000, 2001 and 2002 to the two
persons who served as our Chief Executive Officers during 2002 and the other two
other most highly compensated (based on combined salary and bonus) persons who
served as executive officers during that year (who we collectively refer to as
the Named Executive Officers).
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION($)
-------------------------------------- ---- ---------- --------- ------------ --------------
Steve H. Kanzer..................... 2002 $ -- $ -- 250,000 $ --
Non-Employee Interim President (1)
Dr. Colin Bier...................... 2002 $103,124 $47,948 -- $152,066
Chairman and Chief Executive 2001 $24,863 $ -- 700,000 $ --
Officer (2)
Michael S. Rosen.................... 2002 $116,691 $ -- -- $266,050
President, Chief Operating 2001 $254,600 $ -- 160,000 $ --
Officer (3) 2000 $249,600 $ --
Panos Constantinides................ 2002 $$90,099 $ -- 30,000 $114,646
Vice President of Research and 2001 $163,000 $ -- 60,000 $ --
Development (4)
---------------
(1) Mr. Kanzer assumed the role of Non-Employee Interim President from June
30, 2002 through January 4, 2003 without salary. Mr. Kanzer received
options to purchase 250,000 shares of Common Stock in connection with his
role as a director, as well as his role as Non-Employee Interim
President.
(2) Dr. Bier joined our company in November 2001 and resigned on June 15,
2002.
(3) Mr. Rosen resigned from our company on June 14, 2002.
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(4) Mr. Constantinides joined our company in February of 2001, and resigned
in July 2002.
The following table contains information concerning options granted to
our Named Executive Officers during the year ended December 31, 2002. No SARs
were granted during 2002.
OPTION GRANTS IN LAST FISCAL YEAR
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO EXERCISE EXPIRATION
UNDERLYING OPTIONS EMPLOYEES IN PRICE DATE
GRANTED (#) FISCAL YEAR (1) ($/SHARE) (2)
------------------------------------------ ----------------------- ------------------- ----------------- -------------
Steve Kanzer (3)....................... 250,000 30.5% 0.20 10/23/12
Colin Bier............................. -- --
Michael S. Rosen....................... -- --
Panos P. Constantinides (4)............ 30,000 3.7% 1.29 10/31/02
----------------
(1) Based on options to purchase an aggregate of 821,000 shares of our Common
Stock granted to employees in the year ended December 31, 2002, including
all options granted to our named executive officers in all capacities.
(2) The exercise price of each grant is equal to the fair market value of our
Common Stock on the date of the grant.
(3) Mr. Kanzer's options were fully vested on the date of the grant.
(4) Mr. Constantinides' options were granted as compensation for his services
to us in all capacities and expired on October 31, 2002, 90 days after
the termination of his employment.
The following table sets forth information concerning stock options
held as of December 31, 2002 by each of the Named Executive Officers. None of
the Named Executive Officers exercised any options during 2002. There were no
SARs exercised in, or outstanding at the end of, 2002.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/02 (#) 12/31/02($)(1)
-------------------------------- -----------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------------------------------- -------------------------------- -----------------------------
Steve Kanzer........................................ 666,800/-- 50,000/--
Colin Bier.......................................... 213,572/-- --/--
Michael S. Rosen.................................... 835,000/-- --/--
Panos P. Constantinides............................. --/-- --/--
----------------
(1) Based on the difference between the closing price for our Common Stock on
December 31, 2002 of $0.47, as reported on the American Stock Exchange,
and the exercise prices of outstanding options.
8
EMPLOYMENT AND SEVERANCE AGREEMENTS
Following the implementation of our restructuring plan in June 2002, we
entered into Separation and General Release Agreements with Dr. Colin Bier, our
former Chairman and Chief Executive Officer, and Michael S. Rosen, our former
President and Chief Operating Officer. Under these agreements, our former
executives immediately received six months' severance pay, and any options to
purchase our Common Stock held by these executives which were not vested at the
time of termination immediately became vested, and the options remained
exercisable for one year following the execution of the separation agreements.
Each of the terminated executives was also entitled to receive six additional
months of severance pay beginning six months after termination, however this
severance was offset by any earnings the executives received from other sources.
On September 20, 2002, we entered into an employment agreement with
William Milling, CPA, our Controller, Corporate Secretary and Treasurer. Under
this agreement, we agreed to pay Mr. Milling a base salary of $95,000 per year
and we granted Mr. Milling options to purchase 200,000 shares of our Common
Stock, vesting over three years.
On October 7, 2002, we entered into an employment agreement with Robin
Simuncak, our Director of Clinical Affairs. Under the this agreement, we agreed
to pay Ms. Simuncak a base salary of $90,000 per year and we granted Ms.
Simuncak options to purchase 100,000 shares of our Common Stock, vesting over
three years.
On December 10, 2002, we entered into an employment agreement with
Robert N. Brey, Ph.D., our Vice President of Research and Development. Under
this agreement, we agreed to pay Dr. Brey a base salary of $155,000 per year and
we granted Dr. Brey options to purchase 100,000 shares of our Common Stock,
vesting over three years.
During March 2003, we entered into a three-year employment agreement
with Ralph M. Ellison M.D., M.B.A., our Chief Executive Officer and President.
Pursuant to this Employment Agreement we agreed to pay Dr. Ellison a base salary
of $200,000 per year, as well as a bonus of 30% of his base salary. Upon the
completion of an equity financing of at least $1,000,000, such as the private
placement for which stockholder approval is being sought at the Annual Meeting,
Dr. Ellison will receive an increase in base salary to $300,000 per year. In
addition, we agreed to issue options to Dr. Ellison to purchase 2,000,000 shares
of our Common Stock, with one-third immediately vesting and the remainder
vesting over three years. Upon the termination of Dr. Ellison without "just
cause" as defined by this agreement, we would pay Dr. Ellison six months'
severance, as well as any earned but unpaid bonuses, and all unvested options
would immediately become vested.
AGREEMENT WITH DIRECTOR
On December 23, 2002, we entered into an agreement with Alexander M.
Haig, Jr. to serve as the Chairman of our Board of Directors. We agreed to pay
Mr. Haig a retainer of $50,000 per year for consulting services and to issue him
options to purchase 2,000,000 shares of our Common Stock.
DIRECTOR COMPENSATION
Directors who are compensated as full-time employees receive no
additional compensation for service on our Board of Directors or its committees.
During 2002, each director who was not a full-time employee was paid $1,000 for
each Board or committee meeting attended ($500 if attended
9
telephonically). This rate applied until the October 23, 2002 Board meeting. At
that meeting, the rate was changed to $2,000 for each meeting attended ($1,000
if attended telephonically).
We maintain a stock option grant program pursuant to the Amended and
Restated 1995 Omnibus Incentive Plan, whereby members of our Board of Directors
who are not full-time employees receive an initial grant of fully vested options
to purchase 50,000 shares of Common Stock, and subsequent yearly grants of fully
vested options to purchase 50,000 shares of Common Stock after re-election to
our Board of Directors. In addition, each member of the Board of Directors
received a one-time grant of fully vested options to purchase 100,000 shares of
Common Stock on October 23, 2002.
In 2002, Mr. Haig received, instead of the regular initial grant,
options to purchase an aggregate of 2,000,000 shares of our Common Stock, of
which options to purchase 900,000 shares of Common Stock are subject to
stockholder approval of the amendment to our option plan at the Annual Meeting,
in connection with our retention of him as Chairman of the Board. In addition,
Mr. Kanzer also received additional options to purchase 100,000 shares of Common
Stock in consideration for his service as our Non-Employee Interim President
during 2002, and Mr. Haig will receive an additional $50,000 a year for
consulting services outside of his service as Chairman of the Board. (See
"Proposal 4. Proposal to Amend the 1995 Omnibus Incentive Plan.")
RELATED PARTY TRANSACTIONS
In December 2002, we completed a private placement of 3,093,569 shares
of our Common Stock and warrants to purchase 1,546,789 shares of our Common
Stock. In this private placement we received total proceeds of $1,082,750.
Purchasers in this private placement on the same terms and conditions as the
other subscribers, included (i) David M. Kent, our former Chief Executive
Officer and President, who purchased 142,857 shares of Common Stock and warrants
to purchase 71,429 shares of Common Stock for an aggregate price of $50,000,
(ii) Ralph M. Ellison, M.D., our current President, Chief Executive Officer and
a member of our Board of Directors, who purchased 142,857 shares of Common Stock
and warrants to purchase 71,429 shares of Common Stock for an aggregate price of
$50,000, (iii) Steve H. Kanzer, a member of our Board of Directors who purchased
285,714 shares of Common Stock and warrants to purchase 285,714 shares of Common
Stock for an aggregate price of $100,000, (iv) Lawrence Kessel, a member of our
Board of Directors who purchased 42,857 shares of Common Stock and warrants to
purchase 10,000 shares of Common Stock for an aggregate price of $15,000, and
(v) Peter Salomon, a member of our Board of Directors who purchased 10,000
shares of Common Stock and warrants to purchase 5,000 shares of Common Stock for
an aggregate price of $3,500.
In connection with our 2002 private placement, we issued warrants to
purchase 463,073 shares of our Common Stock to certain individuals and entities,
including warrants to purchase 80,913 shares of our Common Stock to Mr. Kanzer,
in consideration for placement services rendered in connection with this private
placement. In addition, Evan Myrianthopoulos, a member of our Board of
Directors, acted as a placement agent, introducing certain investors to us. For
these services, we paid Mr. Myrianthopoulos $15,375 in cash compensation and
issued to him warrants to purchase 65,454 shares of Common Stock.
In connection with the private placement we are seeking approval of at
this Annual Meeting (see "Proposal 3. Proposal to Approve the Sale and Issuance
of Shares of Common Stock and Warrants in a Private Placement"), upon the
issuance of the securities to the subscribers in this private placement, we have
agreed to (i) issue warrants to purchase 150,754 shares of our Common Stock to
Mr. Kanzer and to pay Mr. Kanzer $21,000, and (ii) issue warrants to purchase
[________] shares of our Common Stock to Mr. Myrianthopoulos and to pay Mr.
Myrianthopoulos [_____], each in consideration for placement services rendered
in connection with this private placement. In addition, Mr. Kanzer has agreed to
purchase 125,628 shares of Common Stock and warrants to purchase 125,628 shares
of Common Stock
10
for $100,000, on the same terms and conditions as were offered to the other
subscribers in this private placement.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The table below provides information regarding the beneficial ownership
of the Common Stock and Series B Convertible Preferred Stock as of June 30,
2003. The table reflects ownership by: (1) each person or entity who owns
beneficially 5% or more of the shares of our outstanding Common Stock or Series
B Convertible Preferred Stock; (2) each of our directors, (3) each of the Named
Executive Officers, and (4) our directors and officers as a group. Except as
otherwise indicated, and subject to applicable community property laws, we
believe the persons named in the table have sole voting and investment power
with respect to all shares of Common Stock held by them. Except as otherwise
indicated, each stockholder's percentage ownership of our Common Stock in the
following table is based on 27,622,379 shares of Common Stock outstanding as of
June 30, 2003.
SHARES OF
SERIES B
CONVERTIBLE
SHARES OF PREFERRED STOCK
COMMON STOCK PERCENT BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS OWNED OF CLASS
------------------------ -------------------- -------- --------------- --------
Aries Select, Ltd. (1)........................ 2,326,652 8.42% -- --
Nomura Bank (2)............................... 1,390,358 5.03% -- --
TVM Medical Ventures GmbH & Co. KG (3)........ 1,310,663 4.74% -- --
Aries Select I LLC (4)........................ 1,052,747 3.81% -- --
Elan International Services, Ltd. (5)......... 3,601,028 12.12% 119,662 100%
Lindsay A. Rosenwald, M.D. (6)................ 5,882,680 21.30% -- --
Paramount Capital Asset Management, Inc. (7).. 3,399,684 12.31% -- --
Steve H. Kanzer (8)........................... 747,713 2.71% -- --
Henry Schwartz (17)........................... 831,666 3.01% -- --
Alexander M. Haig, Jr. (9).................... 1,100,000 3.98% -- --
Ralph M. Ellison, M.D., M.B.A. (10)........... 142,857 * -- --
Paul Rubin M.D. (11).......................... 204,000 * -- --
Arthur Asher Kornbluth, M.D. (12)............. 150,000 * -- --
Evan Myrianthopoulos (13)..................... 215,454 * -- --
Peter Salomon, M.D. (14)...................... 165,000 * -- --
Larry Kessel, M.D. (15)....................... 214,286 * -- --
Colin Bier (16)............................... -- * -- --
Michael S. Rosen (16)......................... -- * -- --
Panos P. Constantinides (16).................. -- * -- --
All directors and executive officers as a
group (10 persons)............................ 3,968,476 14.37% -- --
---------------
* Less than 1%.
(1) Number of shares beneficially owned includes 112,159 shares of Common
Stock immediately issuable upon exercise of warrants until April 16, 2008. The
address of Aries Select, Ltd. is 787 Seventh Avenue, New York, NY 10019.
(2) The address of Nomura Bank is Kasamari Strasse I, CH 8021, Zurich,
Switzerland.
(3) As reported on a Schedule 13G filed with the SEC on February 14, 2003
by TVM Medical Ventures GmbH & Co. KG. According to the Schedule 13G, TVM
Medical Ventures GmbH & Co. KG has sole voting and dispositive power with
respect to 1,310,663 shares. The address of TVM Medical Ventures GmbH & Co. KG
is 101 Arch Street, Suite 1950, Boston, MA 02110.
11
(4) Number of shares beneficially owned includes 56,533 shares of Common
Stock immediately issuable upon exercise of warrants until April 16, 2008. The
address of Aries Select I LLC is 787 Seventh Avenue, New York, NY 10019.
(5) Number of shares beneficially owned includes 1,817,379 shares of Common
Stock immediately issuable upon conversion of Series B Convertible Preferred
Stock, and 230,770 shares of Common Stock immediately issuable upon exercise of
warrants until January 21, 2004. The Address of Elan International is 102 St.
James Court, Fletts Smith, SC, 04 Bermuda.
(6) Lindsay A. Rosenwald, M.D., is the Chairman and Chief Executive Officer
of Paramount Capital Asset Management, Inc. ("PCAM"). PCAM is the investment
manager of Aries Select, Ltd and is the managing member of Aries Select I LLC.
Dr. Rosenwald and PCAM share the power to vote and/or dispose of the shares held
by Aries Select, Ltd. and Aries Select I LLC. The securities beneficially owned
by Dr. Rosenwald include 1,392,783 shares of Common Stock immediately issuable
upon exercise of warrants exercisable until April 16, 2008, 66,931 shares of
Common Stock immediately issuable upon exercise of warrants exercisable until
October 2007, 2,326,652 shares of Common Stock beneficially owned by Aries
Select I LLC, 1,052,747 shares of Common Stock beneficially owned by Aries
Select, Ltd. and 20,284 shares of Common Stock beneficially owned by Aries
Select II LLC. The securities beneficially owned by Dr. Rosenwald also include
682,774 shares of Common Stock owned by Paramount Capital Drug Development
Holdings, LLC and 13,572 shares of Common Stock owned by each of June Street
Company and Huntington Street Company. The address of Dr. Rosenwald is 787
Seventh Avenue, New York, NY 10019.
(7) Includes the 2,326,652 shares of Common Stock beneficially owned by
Aries Select, Ltd. and the 1,52,748 shares of Common Stock beneficially owned by
Aries Select I LLC and 20,284 shares of Common Stock beneficially owned by Aries
Select II, LLC. The address of Paramount Capital Asset Management, Inc. is 787
Seventh Avenue, New York, NY 10019.
(8) The number of shares beneficially owned by Mr. Kanzer includes 747,713
shares of Common Stock immediately issuable upon exercise of options and
warrants. The number of shares beneficially owned by Mr. Kanzer does not include
688,809 shares of Common Stock and 142,857 shares of Common Stock issuable upon
the exercise of warrants held by Pharma Investors, L.L.C. or 125,628 shares of
Common Stock and 125,628 shares of Common Stock issuable upon the exercise of
warrants, to be purchased in the July private placement, pending stockholder
approval. See footnote (18). The address of Mr. Kanzer is 28101 N. Ballard
Drive, Suite F, Lake Forest, IL 60045.
(9) Includes 1,100,000 shares of Common Stock immediately issuable upon the
exercise of options. Excludes 900,000 shares of Common Stock issuable upon the
exercise of options issued pending stockholder approval of the amendment to the
Amended and Restated 1995 Omnibus Incentive Plan at the Annual Meeting. The
address of Mr. Haig is c/o Worldwide Associates, Inc., 1155 15 Street, N.W.
Suite 800, Washington, D.C. 20005.
(10) Includes 142,857 shares of Common Stock owned by Ralph M. Ellison,
M.D., MBA, 71,429 shares of Common Stock immediately issuable upon the exercise
of warrants until December 31, 2007. Excludes 833,750 shares of Common Stock
issuable upon the exercise of options within 60 days of June 30, 2003 issued
pending stockholder approval of the amendment to the 1995 Omnibus Incentive Plan
at the Annual Meeting. The address of Dr. Ellison is 28101 N. Ballard Drive,
Suite F, Lake Forest, IL 60045.
(11) Includes 204,000 shares of Common Stock issuable upon the exercise of
options within 60 days of June 30, 2003. The address of Dr. Rubin is c/o
Critical Therapeutics, 675 Massachusetts Ave., 14th Floor, Cambridge, MD 02139.
(12) Includes 150,000 shares of Common Stock issuable upon the exercise of
options within 60 days of June 30, 2003. The address of Dr. Kornbluth is c/o Mt.
Sinai Medical Center, 1751 York Avenue, New York, NY 10178.
(13) Includes 150,000 shares of Common Stock issuable upon the exercise of
options within 60 days of June 30, 2003 and 65,454 shares of Common Stock
immediately issuable upon the exercise of warrants until December 31,
12
2007. The address of Mr. Myrianthopoulos is c/o CVL Advisors 305 Fifth Avenue,
Suite 5411, New York, NY 10018.
(14) Includes 150,000 shares of Common Stock issuable upon the exercise of
options within 60 days of June 30, 2003 and 5,000 shares immediately issuable
upon the exercise of warrants exercisable until December 31, 2007. Excludes
150,000 shares of Common Stock issuable upon exercise options issued pending
stockholder approval of the amendment to the Amended and Restated 1995 Omnibus
Incentive Plan at the Annual Meeting. The address of Peter Salomon is c/o
Gastroenterology Consultants, 951 N.W. 13th St., Boca Raton, FL 33486.
(15) Includes 150,000 shares of Common Stock issuable upon the exercise of
options within 60 days of June 30, 2003 and 21,429 shares immediately issuable
upon the exercise of warrants exercisable until December 31, 2007. Excludes
150,000 shares of Common Stock issuable upon exercise options issued pending
stockholder approval of the amendment to the Amended and Restated 1995 Omnibus
Incentive Plan at the Annual Meeting. The address of Dr. Kessel is 4114 Hain
Drive, Lafayette Hill, PA 19444-1514.
(16) Messers. Bier, Rosen and Constantinides are no longer employed by our
company.
(17) Pharma Investors, LLC, is a limited liability company incorporated
under the laws of Nevis, the sole member of which is an irrevocable trust of
which Steve H. Kanzer is a beneficiary, but over which he has no control. Henry
Schwartz is the sole trustee of the irrevocable trust. The shares beneficially
owned by Pharma Investors, LLC consist of 688,809 shares of Common Stock and
142,857 shares of Common Stock immediately issuable upon the exercise of
warrants. Mr. Kanzer disclaims beneficial ownership of all such shares.
EQUITY COMPENSATION PLAN INFORMATION
As of December 31, 2002, we maintained our 1995 Amended and Restated
Omnibus Incentive Plan, which was approved by our stockholders. In December
2002, our Board of Directors approved an amendment to our 1995 Plan to increase
the number of shares available for issuance under the 1995 Plan to 11,000,000
and increase the maximum number of shares for which any participant may receive
options or separately exercisable stock appreciation rights in the aggregate per
calendar year under the 1995 Plan to 2,500,000, subject to stockholder approval.
In June 2003, our Board of Directors modified the amendment to the 1995 Plan, to
reduce the maximum number of shares available for issuance under the 1995 Plan
to 10,000,000, subject to stockholder approval of the amendment at the Annual
Meeting. Because this amendment, and options issued based upon that amendment,
are subject to stockholder approval, the additional shares and those options are
included in the category "Equity Compensation Plans Not Approved by Security
Holders."
(a) (b) (c)
-------------------------------------- ----------------------- -------------------------- ----------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------- ------------------- ------------------- ------------------------
Equity compensation plans approved
by security holders................. 4,708,257 $0.95 0
Equity compensation plans not
approved by security holders........ 1,355,580 $0.35 5,600,000
Total............................... 6,063,837 $0.82 5,600,000
For further information regarding the 1995 Plan, see "Proposal 4.
Proposal to Amend the 1995 Omnibus Incentive Plan."
13
PROPOSAL 2
PROPOSAL TO AMEND THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES
GENERAL
Our Amended and Restated Certificate of Incorporation currently
authorize the issuance of 50,000,000 shares of Common Stock. In June 2003, the
Board of Directors adopted a resolution proposing that the Amended and Restated
Certificate of Incorporation be amended to increase the authorized number of
shares of Common Stock to 100,00,000 shares, subject to stockholder approval of
the amendment. No changes will be made to the number of authorized shares of our
preferred stock.
The proposed amendment to the Amended and Restated Certificate of
Incorporation will be effected by amending paragraph A. of Article FOURTH
thereof to read in full as follows:
"A. AUTHORIZATION
The total number of shares of all classes of stock which we shall have
authority to issue is 105,000,000 consisting of 100,000,000 shares of Common
Stock, par value $.001 per share (the "Common Stock"), and 5,000,000 shares of
Preferred Stock, par value $.001 per share (the "Preferred Stock").
The Board may divide the Preferred Stock into any number of series, fix
the designation and number of shares of each such series, and determine or
change the designation, relative rights, preferences, and limitations of any
series of Preferred Stock. The Board (within the limits and restrictions of any
resolutions adopted by it originally fixing the number of any shares of any
series of Preferred Stock) may increase or decrease the number of shares
initially fixed for any series, but no such decrease shall reduce the number
below the number of shares then outstanding and shares duly reserved for
issuance."
PURPOSE OF THE CHARTER AMENDMENT
As of June 30, 2003 we had 27,622,379 shares of Common Stock
outstanding. In addition, as of such date, 764,961 shares reserved for future
option grants and 7,143,326 shares reserved for issuance upon exercise of
presently outstanding options under the Amended and Restated 1995 Omnibus
Incentive Plan. Based upon the foregoing number of outstanding and reserved
shares of Common Stock, we have 7,424,975 shares remaining available for other
purposes.
The proposed increase in the number of shares available for issuance
under the Certificate is required in order for our company to have sufficient
shares of Common Stock available for the issuance of shares of Common Stock
which we have agreed to sell in the private placement and the shares of Common
Stock issuable upon exercise of the warrants to be issued in the private
placement. If stockholders do not approve of the amendment to our Certificate,
we will be required to make a payment equal to 25% of the amount raised in the
recent private placement (see "Proposal 3. Proposal to Approve the Sale and
Issuance of Shares of Common Stock and Warrants in a Private Placement"). In
addition, the proposed increase in the number of shares available for issuance
under the Certificate is intended to provide the Board of Directors with
authority, without further action of the stockholders, to issue the additional
shares of Common Stock, from time to time in such amounts as the Board of
Directors deems necessary. Without limitation of the foregoing, the additional
shares may be issued in connection with (1) private financings, including the
July private placement; and (2) strategic partnering transactions involving the
issuance of securities pursuant to exemptions from the registration requirements
of the
14
Securities Act. In addition to the July private placement, we may decide to seek
additional capital through the sale of Common Stock and/or securities
convertible into or exercisable for Common Stock in the private and/or public
equity markets to support a higher level of growth, respond to competitive
pressures, develop new products and services and support new strategic
partnership expenditures.
In the absence of a proportionate increase in our earnings and book
value, an increase in the aggregate number of outstanding shares of Common Stock
caused by the issuance of the additional shares would dilute the earnings per
share (including projected future earnings per share) and book value per share
of all outstanding shares of our Common Stock. If such factors were reflected in
the price per share of the Common Stock, the potential realizable value of a
stockholder's investment could be adversely affected. An issuance of additional
shares of Common Stock, could therefore have an adverse effect on the potential
realizable value of a stockholder's investment. The holders of outstanding
shares of Common Stock have no preemptive rights to purchase additional shares.
The proposed increase in the authorized number of shares of Common
Stock could have other effects on our stockholders. The increase could deter
takeovers, in that additional shares could be issued (within the limits imposed
by applicable law) in one or more transactions that could make a change in
control or takeover of us more difficult. For example, additional shares could
be issued by us so as to dilute the stock ownership or voting rights of persons
seeking to obtain control. Similarly, the issuance of additional shares to
certain persons allied with our management could have the effect of making it
more difficult to remove our current management by diluting the stock ownership
or voting rights of persons seeking to cause such removal.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that you vote "FOR" the approval of
the amendment to our Amended and Restated Certificate of Incorporation.
PROPOSAL 3
PROPOSAL TO APPROVE THE SALE AND ISSUANCE OF SHARES OF
COMMON STOCK AND WARRANTS IN A PRIVATE PLACEMENT
GENERAL
You are being asked to approve the sale and issuance of (i) 6,796,919
shares of Common Stock at $0.796 per share and (ii) warrants exercisable for
6,796,919 shares of Common Stock, to selected institutional and accredited
investors, in a private placement exempt from registration under the Securities
Act of 1933.
The following is a summary of the terms of the private placement.
Copies of the principal documents relating to the transaction have been filed
with the Securities and Exchange Commission as Exhibits to a Form 8-K filed on
July 21, 2003.
We entered into Subscription Agreements dated as of July 18, 2003, with
selected accredited and institutional investors to sell an aggregate of (i)
6,796,919 shares of our Common Stock at $0.796 per share and (ii) warrants
exercisable for 6,796,919 shares of our Common Stock, to selected institutional
and accredited investors. The gross proceeds from this private placement will,
upon satisfaction of all the requirements of the private placement, including
stockholder approval of this private placement, be $5,410,348. After the
satisfaction of all the requirements of the private placement and the issuance
of the shares of Common Stock and warrants, we would have 34,190,101 shares of
Common Stock outstanding and 57,299,049 shares of Common Stock outstanding on a
fully diluted basis.
15
The shares of Common Stock and warrants have been offered in
transactions exempt from registration under the Securities Act of 1933 in
reliance upon Rule 506 of Regulation D under Section 4(2) of the Securities Act,
as transactions not involving a public offering. Each of the subscribers
represented to us that it was an "accredited investor" under Rule 501(a) of
Regulation D.
USE OF PROCEEDS
The net proceeds from this private placement, after the payment of the
placement agent fees and other expenses of the offering will be approximately
$4,900,000. We intend to use these net proceeds, after the transaction is
completed, to continue the research and development of our current drug
candidates as well as to possibly expand our portfolio of drug candidates, if a
describable drug candidate becomes available to us. Specifically, we will use
the proceeds to fund ongoing clinical activities for orBec(R), which is
currently in a pivotal phase III trial for the treatment of Graft vs. Host
Disease. In addition, we have recently announced that we will begin a phase II
trial using orBec(R) to treat Irritable Bowel Syndrome. Proceeds from this
private placement will also be used to further progress of our biodefense
vaccines, including development of a novel synthetic ricin vaccine in both the
injectable and oral forms, and continued research on a Botulinum toxin vaccine.
We will also use the proceeds of this financing for general and administrative
expenses. Furthermore, on June 27, 2003, the American Stock Exchange notified us
that we are below the current minimum listing requirement of $4,000,000 in
stockholders equity. We have agreed to submit a plan by August 4, 2003 which
outlines how we will regain compliance with the minimum listing requirement
within the next 18 months. This private placement will raise our stockholders
equity to over $7,000,000, thereby bringing us back into compliance with the
American Stock Exchange's minimum stockholder' equity requirement. There can be
no assurances, however, that the American Stock Exchange will accept our
compliance plan or that our Common Stock will remain listed on the American
Stock Exchange.
THE WARRANTS
The exercise price on the warrants is $0.8756 per share of Common
Stock. The warrants are exercisable until 5 years from the original date of
issuance of the warrant; provided however, that upon notice to the subscribers,
we may accelerate the expiration date of the warrants, to that date which is 60
days from the date of notice, if the closing price for our Common Stock is
greater than $2.62 per share for a period of 20 consecutive trading days. If
each of the warrants sold in this private placement were exercised, the
aggregate gross proceeds to our company would be $5,951,382, and 6,796,919
shares of Common Stock would be issued. Until July 18, 2004, however, if the
shares of Common Stock issuable upon exercise of the warrants are not registered
under an effective registration statement as required by the Subscription
Agreements (as discussed below), the warrants will have a cashless exercise
feature until a registration statement covering the shares of Common Stock
issuable upon exercise of the warrants is declared effective by the SEC.
ANTI-DILUTION PROTECTION
Until July 18, 2004, the exercise price of the warrants will be subject
to (i) adjustment in connection with any stock split or stock dividend and (ii)
anti-dilution adjustment on a price-based weighted average basis if we issue
Common Stock or Common Stock equivalents (other than certain excluded issuances)
at a purchase price per share that is less than the exercise price of the
warrants.
16
OTHER TERMS OF THE PRIVATE PLACEMENT
REGISTRATION RIGHTS
We are required to file a shelf registration statement on Form S-3
under the Securities Act, covering resales of the shares of Common Stock and
shares of Common Stock issuable upon the exercise of the warrants sold in the
private placement, within 30 days of the issuance of the shares and warrants. If
that shelf registration statement has not been declared effective by the SEC
within 120 days of the issuance of the Common Stock and warrants, we will be
required to pay a penalty equal to 2% of the purchase price paid by the
subscribers for each month the shares remain unregistered.
PREEMPTIVE RIGHTS
If we receive the required stockholder approvals and issue the Common
Stock and warrants to the subscribers, each of the subscribers under this
private placement will have preemptive rights on all future issuances of any
equity securities, or other securities convertible into any equity securities,
until July 18, 2004. If prior to July 18, 2004, we propose to issue any equity
securities, or other securities convertible into any equity securities, we will
give each of the subscribers under this private placement 15 days' prior notice
of such proposed issuance, and each of the subscribers will have the right to
provide notice of their intent to purchase its pro rata share of such proposed
issuance during such 15-day period. These preemptive rights will not apply to
(i) issuances of Common Stock pursuant to stock incentive plans, (ii) shares of
Common Stock issued upon the conversion of outstanding warrants, (iii) shares of
Common Stock issued and sold in a firm commitment underwritten public offering
or (iv) shares of Common Stock issued as consideration for the acquisition of
another company or business, which has been approved by the Board.
SHORT SALES
The subscribers are not permitted to "short" or "short against the box"
(as those terms are generally understood) our Common Stock from July 18, 2003
until the earlier of (i) two months after the date of issuance of the shares and
warrants or (ii) such time as the Company's Common Stock trades at or above
$1.592 for a period of 20 consecutive trading days.
RELEASE OF PROCEEDS FROM ESCROW
All of the proceeds from this private placement have been placed into
an Escrow Account with US Bank Trust National Association, pursuant to the terms
of an Escrow Agreement by and between us and US Bank. The primary condition for
the release of the proceeds from the private placement being released to us is
stockholder approval of (i) the amendment to our Amended and Restated
Certificate of Incorporation increasing the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 (see "Proposal 2. Proposal to Amend
the Amended and Restated Certificate of Incorporation to Increase the Number of
Authorized Shares") and (ii) this private placement pursuant to this Proposal 3.
Upon stockholder approval of the amendment to the Amended and Restated
Certificate of Incorporation and the terms of the private placement, and the
satisfaction of certain other conditions contained in the Subscription
Agreements, the proceeds from the private placement will be released to us and
DOR will issue the shares of Common Stock and the warrants purchased by the
subscribers under the Subscription Agreements.
FAILURE TO RECEIVE STOCKHOLDER APPROVAL
If our stockholders do not approve both (i) the amendment to our
Amended and Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock from
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50,000,000 to 100,000,000 (see "Proposal 2. Proposal to Amend the Amended and
Restated Certificate of Incorporation to Increase the Number of Authorized
Shares") and (ii) the terms of the private placement pursuant to this Proposal
3, then (a) the proceeds from the private placement will be returned to the
subscribers and (b) we will be required to pay to each of the subscribers a
penalty equal to 25% of the purchase price for the shares of Common Stock and
warrants. We will be permitted to pay up to 50% of this penalty through the
issuance of our Common Stock, which will be valued at the average closing price
of our Common Stock for the five trading days immediately preceding the date of
the payment of the penalty.
During the course of negotiating this private placement with the
potential investors, some of the investors indicated that they were not prepared
to take all of the risk relating to the stockholder approval requirements,
without some countervailing consideration. Specifically, the investors are
taking the risk that if the market price for our Common Stock has decreased at
the time of the Annual Meeting, they will still be committed to buying the
Common Stock at a price that is higher than the then current market price. The
investors have additionally assumed the risk that if the market price of our
Common Stock were to move substantially higher, our stockholders might choose to
not approve the financing, freeing us from the obligation to sell the Common
Stock and warrants at a price lower than the then current market price and
allowing us to enter the capital markets with a higher market price for our
Common Stock. Under such a scenario, the investors felt they would have all of
the risk of a fall in the market price for the Common Stock, but might not
receive the benefit of an increase in the market price for our Common Stock
during the period between the signing of the Subscription Agreements and the
Annual Meeting. As a result, certain of the investors demanded that we agree to
pay them some meaningful consideration if the transaction was in fact turned
down by our stockholders. These investors clearly indicated that they would not
make the investment if this demand was met. The investors demanded a much higher
penalty upon the rejection of the private placement, however, we reached a
compromise with the investors that we believe is not unnecessarily coercive to
our stockholders.
EFFECTS OF THE PRIVATE PLACEMENT
In the absence of a proportionate increase in our earnings and book
value, the increase in the aggregate number of outstanding shares of Common
Stock caused by the issuance of the additional shares of Common Stock and
warrants will dilute our earnings per share (including projected future earnings
per share) and book value per share of all outstanding shares of our Common
Stock. If such factors are reflected in the price per share of the Common Stock,
the potential realizable value of a stockholder's investment may be adversely
affected. The issuance of the shares of Common Stock and warrants, may therefore
have an adverse effect on the potential realizable value of a stockholder's
investment. The holders of outstanding shares of Common Stock have no preemptive
rights to purchase additional shares.
PLACEMENT AGREEMENT
On April 15, 2003, we entered into a Placement Agreement with Paramount
Capital, Inc., pursuant to which, Paramount will receive (i) a placement fee
equal to 7% of the gross proceeds on the securities sold to investors introduced
to us by Paramount and (ii) warrants to purchase 10% of the securities purchased
by such investors, exercisable until July 18, 2008. Paramount has entered in to
Selected Dealer Agreements with KJM Securities, Inc. and Accredited Equities,
Inc., pursuant to which KJM and Accredited will receive certain consideration
from Paramount with respect to investors introduced to us by them. Steve Kanzer
and Evan Myrianthopoulos, members of our Board of Directors, are affiliated with
Accredited and KJM, respectively, and will receive consideration of $21,000 and
warrants to purchase 150,754 shares of Common Stock and [___________],
respectively, from this private placement. If we receive stockholder approval of
the amendment to our Amended and Restated Certificate of Incorporation and the
terms of the private placement, then Paramount will receive: (i) $378,727 in
gross commissions and (ii) warrants to purchase 1,359,383 shares of Common
Stock.
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RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that you vote "FOR" the approval the
sale and issuance of shares of Common Stock and warrants in the private
placement.
PROPOSAL 4
PROPOSAL TO AMEND THE AMENDED AND RESTATED 1995 OMNIBUS INCENTIVE
PLAN TO INCREASE THE NUMBER OF AUTHORIZED SHARES
Subject to the approval of stockholders at the Annual Meeting, the
Board of Directors has adopted an amendment to the DOR BioPharma, Inc. Amended
and Restated 1995 Omnibus Incentive Plan, or 1995 Plan, which will have the
following effects:
(1) increase the number of shares of Common Stock issuable under the 1995
Plan by an additional 5,291,743 shares to an aggregate of 10,000,000 shares; and
(2) increase from 750,000 to 2,500,000 the maximum number of shares of
Common Stock for which any participant may receive options or separately
exercisable stock appreciation rights in the aggregate per calendar year.
Stockholder approval of this amendment is sought to (a) meet the
requirements of the American Stock Exchange, (b) qualify awards under the 1995
Plan as performance-based compensation that is tax deductible without limitation
under Section 162(m) of the Code, and (c) qualify certain stock options granted
under the 1995 Plan as incentive stock options.
As of June 30, 2003, options to purchase a total of 3,943,326 shares of
Common Stock were either (1) outstanding (excluding options granted subject to
stockholder approval of the amendment to the 1995 Omnibus Incentive Plan) or (2)
already been exercised under the 1995 Plan. As a result, 764,931 shares remained
available for issuance under the 1995 Plan. In December 2002, our Board of
Directors approved an amendment to the 1995 Plan to increase the number of
shares available for issuance under the 1995 Plan to 11,000,000 and increase the
maximum number of shares for which any participant may receive options or
separately exercisable stock appreciation rights in the aggregate per calendar
year under the 1995 Plan to 2,500,000, subject to stockholder approval. In June
2003, our Board of Directors modified the amendment to the 1995 Plan, to reduce
the maximum number of shares available for issuance under the 1995 Plan to
10,000,000, subject to stockholder approval of the amendment at the Annual
Meeting. The 5,291,743 shares of Common Stock by which the amendment will
increase the shares available for awards under the 1995 Plan, representing
approximately 16% of the shares of Common Stock outstanding as of June 30, 2003.
Since December 2002, we have granted (i) Mr. Haig options to purchase 900,000
shares of our Common Stock; (ii) Dr. Ellison options to purchase 2,000,000
shares of our Common Stock; (iii) Dr. Salomon options to purchase 150,000 shares
of our Common Stock and (iv) Dr. Kessel options to purchase 150,000 shares of
our Common Stock, each subject to stockholder approval of the amendment to the
1995 Plan. If stockholders do not approve this proposal, these grants to Mr.
Haig, Dr. Ellison, Dr. Salomon, and Dr. Kessel will terminate.
The 1995 Plan provides the Compensation Committee, which currently
administers the Employee Plan, with the flexibility to award stock-based and
performance-related incentives to our executive officers and other employees, as
the Compensation Committee deems appropriate. We believe the amendment to
increase the share reserve and increase the maximum aggregate annual award size
per participant is necessary to allow us continue to utilize equity incentives
to attract and retain the services of key individuals essential to our long term
growth and financial success. We rely significantly on equity incentives in the
form of stock option grants in order to attract and retain key employees and
believe that
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such equity incentives are necessary for us to remain competitive in the
marketplace for executive talent and other key employees. Option grants made to
newly-hired or continuing employees will be based on both competitive market
conditions and individual performance.
The following is a summary of the principal features of the 1995 Plan,
as most recently amended. Any stockholder who wishes to obtain a copy of the
actual plan document may do so upon written request to us at 28101 Ballard
Drive, Suite F, Lake Forest, Illinois 60045.
EQUITY INCENTIVE PROGRAMS
The 1995 Plan consists of four separate equity incentive programs: (1)
the Discretionary Option Grant Program, (2) the Salary Investment Option Grant
Program, (3) the Automatic Option Grant Program for non-employee Board members
and (4) the Director Fee Option Grant Program for non-employee Board members.
The principal features of each program are described below. The Compensation
Committee of the Board of Directors administers the Discretionary Option Grant
Program, determines the calendar year or years in which the Salary Investment
Option Grant Program are in effect and selects the individuals who are to
participate in such program. The Board of Directors may at any time appoint a
secondary committee of one or more Board members to have separate but concurrent
authority with the Compensation Committee to make option grants under the
Discretionary Option Grant Program to individuals other than our executive
officers and non-employee Board members. All grants under the Salary Investment
Option Grant, the Automatic Option Grant and the Director Fee Option Grant
Programs are made in strict compliance with the express provisions of each such
program. Neither the Compensation Committee nor any secondary committee
exercises any administrative discretion under those programs. The term plan
administrator, as used in this summary, means the Compensation Committee and any
secondary committee, to the extent each such entity is acting within the scope
of its administrative jurisdiction under the 1995 Plan.
SHARE RESERVE
An aggregate of 10,000,000 shares of Common Stock has been reserved for
issuance over the term of the 1995 Plan, including the increase of 5,291,743
shares of Common Stock that forms part of this proposal. In addition, on the
first trading day of each calendar year during the term of the 1995 Plan, the
number of shares of Common Stock available for issuance under the 1995 Plan will
automatically increase by an amount equal to 1% of the total number of shares of
our Common Stock outstanding on the last trading day of the immediately
preceding fiscal year. In no event will any such annual increase exceed 500,000
shares of Common Stock.
As of June 30, 2003, 3,943,326 shares of Common Stock were either
subject to outstanding options under the 1995 Plan or had been issued pursuant
to the exercise of options granted under the 1995 Plan, and 764,931 shares of
Common Stock remained available for future issuance under the 1995 Plan (without
giving effect to the options issued subject to stockholder approval of the
amendment).
Subject to stockholder approval of the amendment, no participant in the
1995 Plan may receive option grants or separately exercisable stock appreciation
rights for more than 2,500,000 shares of Common Stock in the aggregate per
calendar year.
The shares of Common Stock issuable under the 1995 Plan may be drawn
from shares of our authorized but unissued shares of Common Stock or shares of
Common Stock reacquired by us, including shares repurchased on the open market.
In the event any change is made to the outstanding shares of Common
Stock by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in
20
corporate structure effected without the receipt of consideration by us,
appropriate adjustments will be made to: (1) the maximum number and/or class of
securities issuable under the 1995 Plan, (2) the maximum number and/or class of
securities by which the share reserve may increase annually under the automatic
share increase reserve provisions, (3) the number and/or class of securities for
which any one person may be granted options or separately exercisable stock
appreciation rights per calendar year, (4) the number and/or class of securities
for which automatic option grants are to be subsequently granted to eligible
Directors, and (5) the number and/or class of securities and the exercise price
per share in effect under each outstanding option (including any options
incorporated from the predecessor 1994 Non-Employee Stock Option Plan and
Incentive Stock Option Plan which were incorporated into the 1995 Plan).
ELIGIBILITY
Employees, non-employee Board members and independent consultants in
our service or the service of our parent and subsidiaries (whether now existing
or subsequently established) are eligible to participate in the Discretionary
Option Grant Program. Executive officers and other highly paid employees are
also eligible to participate in the Salary Investment Option Grant Program.
Participation in the Automatic Option Grant and Director Fee Option Grant
Programs is limited to non-employee members of the Board.
As of June 30, 2003 three executive officers, seven non-employee Board
members and approximately 11 other employees and consultants were eligible to
participate in the Discretionary Option Grant Program. The seven non-employee
Board members were also eligible to participate in the Automatic Option Grant
and Director Fee Option Grant Programs.
VALUATION
The fair market value per share of Common Stock on any relevant date
under the 1995 Plan is deemed to be equal to the closing selling price per share
on that date on a stock exchange where shares of our Common Stock are traded. On
July 23, 2003, the fair market value per share determined on that basis was
$0.77.
DISCRETIONARY OPTION GRANT PROGRAM
The plan administrator has complete discretion under the Discretionary
Option Grant Program to determine which eligible individuals are to receive
option grants, the time or times when those grants are to be made, the number of
shares subject to each such grant, the status of any granted option as either an
incentive stock option or a non-statutory option under the federal tax laws, the
vesting schedule (if any) to be in effect for the option grant and the maximum
term for which any granted option is to remain outstanding.
Each granted option must have an exercise price per share no less than
85% of the fair market value of the shares on the grant date unless otherwise
determined by the plan administrator. No granted option may have a term in
excess of 10 years, and the option will generally become exercisable in one or
more installments over a specified period of service measured from the grant
date. However, one or more options may be structured so that they will be
immediately exercisable for any or all of the option shares. The shares acquired
under immediately exercisable options will be subject to repurchase by us, at
the exercise price paid per share, if the optionee ceases service with us prior
to any required vesting in those shares.
Upon cessation of service, the optionee will have a limited period of
time in which to exercise any outstanding option to the extent exercisable for
vested shares. The plan administrator will have
21
complete discretion to extend the period following the optionee's cessation of
service during which his or her outstanding options may be exercised and/or to
accelerate the exercisability or vesting of such options in whole or in part.
Such discretion may be exercised at any time while the options remain
outstanding, whether before or after the optionee's actual cessation of service.
The plan administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program:
- Tandem Stock Appreciation Rights, which provide the holders
with the right to surrender their options for an appreciation
distribution from us equal in amount to the excess of (a) the
fair market value of the vested shares of Common Stock subject
to the surrendered option over (b) the aggregate exercise
price payable for such shares (which appreciation distribution
may, at the discretion of the plan administrator, be made in
cash or in shares of Common Stock); and
- Limited Stock Appreciation Rights, which may be granted to our
officers as part of their option grants. Any option with such
a limited stock appreciation right in effect may be
surrendered to us upon the successful completion of a hostile
takeover of us. In return for the surrendered option, the
officer will be entitled to a cash distribution from us in an
amount per surrendered option share equal to the excess of (a)
the take-over price per share over (b) the exercise price
payable for such share.
The plan administrator also has the authority to effect the
cancellation of outstanding options under the Discretionary Option Grant Program
(and outstanding options incorporated from the predecessor 1994 Non-Employee
Stock Option Plan and Incentive Stock Option Plan which were incorporated into
the 1995 Plan) that have exercise prices in excess of the then-current market
price of our Common Stock and to issue replacement options with an exercise
priced on the market price of our Common Stock at the time of the new grant.
SALARY INVESTMENT OPTION GRANT PROGRAM
The Compensation Committee has complete discretion to implement the
Salary Investment Option Grant Program for one or more calendar years and in
selecting the executive officers and other eligible individuals who are to
participate in the program. As a condition to such participation, each selected
individual must, prior to the start of the calendar year of participation, file
with the Compensation Committee an irrevocable authorization directing us to
reduce his or her base salary for the upcoming calendar year by a specified
dollar amount not less than $10,000 nor more than $75,000 and to apply that
amount to the acquisition of a special option grant under the program. Each
selected individual who files such a timely election will automatically be
granted a non-statutory option on or before the last trading day in January of
the calendar year for which that salary reduction is to be in effect.
The number of shares subject to each option will be determined by
dividing the salary reduction amount by two-thirds of the fair market value per
share of our Common Stock on the grant date. The exercise price will be equal to
one-third of the fair market value of our Common Stock per share on the grant
date. As a result, the total spread on the option shares at the time of grant
(the fair market value of the option shares on the grant date less the aggregate
exercise price payable for those shares) will be equal to the amount by which
the optionee's salary is to be reduced for the calendar year. In effect, the
salary reduction serves as an immediate prepayment, as of the time of the option
grant, of two thirds of the then-current market price of the shares of Common
Stock subject to the option.
The option will become exercisable in a series of 12 equal monthly
installments upon the optionee's completion of each month of service in the
calendar year for which such salary reduction is in
22
effect and will become immediately exercisable for all the option shares on an
accelerated basis should we experience certain changes in ownership or control.
Each option will remain exercisable for any vested shares until the earlier of
(1) the expiration of the ten-year option term or (2) the end of the three-year
period measured from the date of the optionee's cessation of service.
We have not yet implemented the Salary Investment Option Grant Program.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, eligible non-employee Board
members receive a series of option grants over their period of Board service.
Each non-employee Board member, at the time of his or her initial election or
appointment to the Board receives a non-statutory stock option grant for 50,000
shares of Common Stock. In addition, on the date of each annual stockholders
meeting, including this Annual Meeting, each individual who is re-elected to
serve as a non-employee Board member is automatically granted an option to
purchase 50,000 shares of Common Stock (provided such individual has served as a
non-employee Board member for at least six months). There is no limit on the
number of such 50,000-share option grants any one eligible non-employee Board
member may receive over his or her period of continued Board service.
Each automatic grant has an exercise price per share equal to the fair
market value per share of Common Stock on the grant date and has a maximum term
of 10 years, subject to earlier termination following the optionee's cessation
of Board service.
The shares subject to each 50,000 share automatic grant vest
immediately. Each 50,000 share option is immediately exercisable for the option
shares, and the shares acquired under the option are subject to repurchase by us
at the option exercise price paid per share, upon the optionee's cessation of
Board service prior to vesting in those shares.
Each outstanding automatic option grant will automatically accelerate
and become immediately exercisable for any or all of the option shares as
fully-vested shares upon certain changes in control or ownership of our company
or upon the optionee's death or disability while a member of the Board of
Directors. Following the optionee's cessation of Board service for any reason,
each option will remain exercisable for a 12-month period and may be exercised
during that time for any or all shares in which the optionee is vested at the
time of such cessation of Board service.
DIRECTOR FEE OPTION GRANT PROGRAM
The Compensation Committee has complete discretion to implement the
Director Fee Option Grant Program for one or more calendar years in which
non-employee Board members may participate. As a condition to such
participation, each non-employee Board member must, prior to the start of the
calendar year of participation, file with our Treasurer an irrevocable
authorization directing us to apply all or a portion of his or her cash retainer
fee for the upcoming calendar year to the acquisition of a special option grant
under the program.
Each non-employee Board member who files such a timely election will
automatically be granted a non-statutory option on the first trading day in
January of the calendar year for which that retainer fee election is to be in
effect.
The number of shares subject to each such option will be determined by
dividing the amount of the retainer fee for the calendar year to be applied to
the program by two-thirds of the fair market value per share of our Common Stock
on the grant date. The exercise price will be equal to one-third of the fair
market value of our Common Stock per share on the grant date. As a result, the
total spread on the option
23
shares at the time of grant (the fair market value of the option shares on the
grant date less the aggregate exercise price payable for those shares) will be
equal to the portion of the retainer fee that optionee has elected to be applied
to the program. In effect, the portion of the annual retainer fee otherwise
payable in cash serves as an immediate prepayment, as of the time of the option
grant, of two thirds of the then-current market price of the shares of Common
Stock subject to the option.
The option will become exercisable for 50% of the option shares upon
the optionee's completion of six months of service in the calendar year for
which such retainer fee election is in effect and the balance will become
exercisable in a series of six equal monthly installments upon the optionee's
completion of each additional month of service during that calendar year. The
option will become immediately exercisable for all the option shares on an
accelerated basis should we experience certain changes in ownership or control.
Each option will remain exercisable for any vested shares until the earlier of
(1) the expiration of the ten-year option term or (2) the end of the three-year
period measured from the date of the optionee's cessation of service.
We have not yet implemented the Director Fee Option Grant Program.
GENERAL PROVISIONS
ACCELERATION
In the event that we are acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program that is not to
be assumed or replaced by the successor corporation will automatically
accelerate in full, and all unvested shares outstanding under the Discretionary
Option Grant Program will immediately vest, except to the extent our repurchase
rights with respect to those shares are to be assigned to the successor
corporation.
The plan administrator will have the authority under the Discretionary
Option Grant Program to provide that options granted under such program will
automatically vest in full (1) upon an acquisition of DOR, whether or not those
options are assumed or replaced, (2) upon a hostile change in control of our
company effected through a tender offer for more than 50% of our outstanding
voting stock or by proxy contest for the election of Board members, or (3) in
the event the individual's service is terminated, whether involuntarily or
through a resignation for good reason, within a designated period (not to exceed
18 months) following an acquisition in which those options are assumed or
replaced or a hostile change in control. The options granted under the Salary
Investment Option Grant Program, the Automatic Option Grant Program and the
Director Fee Option Grant Program will automatically accelerate and become
exercisable in full upon an acquisition or change in control transaction.
The acceleration of vesting in the event of a change in the ownership
or control may be seen as an anti-takeover provision and may have the effect of
discouraging a merger proposal, a takeover attempt or other efforts to gain
control of our company.
LIMITED STOCK APPRECIATION RIGHTS
Each option granted under the Automatic Option Grant and Director Fee
Option Grant Programs includes a limited stock appreciation right so that upon
the successful completion of a hostile tender offer for more than 50% of our
outstanding voting securities, the option may be surrendered to us in return for
a cash distribution from us. The amount of the distribution per surrendered
option share will be equal to the excess of (1) the fair market value per share
at the time the option is surrendered or, if greater, the tender offer price
paid per share in the hostile takeover over (2) the exercise price payable per
share under such option. In addition, the plan administrator may grant such
rights to our officers as part of their option grants under the Discretionary
Option Grant Program.
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FINANCIAL ASSISTANCE
The plan administrator may institute a loan program to assist one or
more participants in financing the exercise of outstanding options under the
Discretionary Option Grant Program through full-recourse interest bearing
promissory notes. However, the maximum amount of financing provided any
participant may not exceed the cash consideration payable for the issued shares
plus all applicable withholding taxes incurred in connection with the
acquisition of those shares.
SPECIAL TAX ELECTION
The plan administrator may provide one or more holders of non-statutory
options under the 1995 Plan with the right to have us withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the withholding
taxes to which such individuals become subject in connection with the exercise
of those options or the vesting of those shares. Alternatively, the plan
administrator may allow such individuals to deliver previously acquired shares
of Common Stock in payment of such withholding tax liability.
AMENDMENT AND TERMINATION
The Board may amend or modify the 1995 Plan at any time, subject to any
required stockholder approval pursuant to applicable laws and regulations.
Unless sooner terminated by the Board, the 1995 Plan will terminate on the
earliest of (1) April 23, 2005, (2) the date on which all shares available for
issuance under the 1995 Plan have been issued as fully-vested shares or (3) the
termination of all outstanding options in connection with certain changes in
control or ownership of DOR.
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the 1995 Plan may be either incentive stock
options which satisfy the requirements of Section 422 of the Internal Revenue
Code or non-statutory options which are not intended to meet such requirements.
The Federal income tax treatment for the two types of options differs as
follows:
Incentive Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed.
For Federal income tax purposes, dispositions are divided into two categories:
(1) qualifying and (2) disqualifying. A qualifying disposition occurs if the
sale or other disposition is made after the optionee has held the shares for
more than two years after the option grant date and more than one year after the
exercise date. If either of these two holding periods is not satisfied, then a
disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased
shares, the optionee will recognize compensation income and we will be entitled
to an income tax deduction, for the taxable year in which such disposition
occurs, equal to the excess of (1) the fair market value of such shares on the
option exercise date over (2) the exercise price paid for the shares. If the
optionee makes a qualifying disposition, we will not be entitled to any income
tax deduction and the entire gain for the optionee will be treated as a capital
gain.
Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option
25
is exercised equal to the excess of the fair market value of the purchased
shares on the exercise date over the exercise price paid for the shares, and the
optionee will be required to satisfy the tax withholding requirements applicable
to such income.
If, however, the shares acquired upon exercise of the non-statutory
option are unvested and subject to repurchase by us in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, as and when our repurchase right lapses, an
amount equal to the excess of (1) the fair market value of the shares on the
date the repurchase right lapses over (2) the exercise price paid for the
shares. The optionee may, however, elect under Section 83(b) of the Internal
Revenue Code to include as ordinary income in the year of exercise of the option
an amount equal to the excess of (1) the fair market value of the purchased
shares on the exercise date over (2) the exercise price paid for such shares. If
the Section 83(b) election is made, the optionee will not recognize any
additional income as and when the repurchase right lapses.
We will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
No taxable income is recognized upon receipt of a stock appreciation
right. The holder will recognize ordinary income, in the year in which the stock
appreciation right is exercised, in an amount equal to the appreciation
distribution. We will be entitled to an income tax deduction equal to the
appreciation distribution in the taxable year in which such ordinary income is
recognized by the optionee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
We anticipate that any compensation deemed paid by us in connection
with the disqualifying dispositions of incentive stock option shares or the
exercise of non-statutory options with exercise prices equal to the fair market
value of the option shares on the grant date will qualify as performance-based
compensation for purposes of Internal Revenue Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain of
our executive officers. Accordingly, all compensation deemed paid with respect
to those options will remain deductible by us without limitation under Code
Section 162(m).
ACCOUNTING TREATMENT
Option grants made to employees and directors under the 1995 Plan with
exercise prices equal to the fair market value of the option shares on the grant
date will not result in any direct charge to our reported earnings. However, the
fair value of those options is required to be disclosed in the notes to our
annual and quarterly financial statements, and we must also disclose, in notes
to our financial statements, the pro forma impact those options would have upon
our reported earnings were the fair value of those options at the time of grant
treated as a compensation expense. In addition, the number of outstanding
options may be a factor in determining our earnings per share on a fully diluted
basis.
For any options issued pending approval of the amendment of the Amended
and Restated 1995 Omnibus Incentive Plan, we will be required to record
compensation expense as the options vest if the market price of our Common Stock
exceeds the option price on the date stockholder approval is obtained. Option
grants made to employees and directors under the 1995 Plan with exercise prices
less than the fair market value of the shares on the grant or issue date will
result in a direct compensation expense in an
26
amount equal to the excess of such fair market value over the exercise or issue
price. The expense must be amortized against our earnings over the period that
the option shares or issued shares are to vest.
Option grants made to consultants (but not non-employee Board members)
will result in a direct charge to our reported earnings based upon the fair
value of the option measured initially as of the grant date and then
subsequently on the vesting date of each installment of the underlying option
shares. Such charge will accordingly include the appreciation in the value of
the option shares over the period between the grant date of the option and the
vesting date of each installment of the option shares.
Should one or more individuals be granted tandem stock appreciation
rights under the 1995 Plan, then such rights would result in a compensation
expense to be charged against our reported earnings. Accordingly, at the end of
each fiscal quarter, the amount (if any) by which the fair market value of the
shares of Common Stock subject to such outstanding stock appreciation rights has
increased from the prior quarter-end would be accrued as compensation expense,
to the extent such fair market value is in excess of the aggregate exercise
price in effect for those rights.
NEW PLAN BENEFITS
The table below presents the number of shares of Common Stock
underlying options that have been previously granted under the 1995 Plan to our
current executive officers, other employees and non-executive directors.
NUMBER OF
SHARES OF
COMMON STOCK
UNDERLYING
OPTIONS GRANTED (#)
-----------------------
Ralph M. Ellison......................................... 2,000,000 (1)
Chief Executive Officer, President and Director
Robert Brey.............................................. 190,000
Vice President Research and Development
William Milling.......................................... 200,000
Controller/Treasurer/Corporate Secretary
Executive Group.......................................... 2,390,000 (1)
Non-Executive Director Group............................. 4,070,800 (2)
Non-Executive Officer Employee Group .................... 156,000
---------------
(1) Includes 2,000,000 shares of Common Stock issuable upon exercise of
options issued to Dr. Ellison subject to stockholder approval of the amendment
to the 1995 Plan at the Annual Meeting.
(2) Includes 1,200,000 shares of Common Stock issuable upon exercise of
options issued to non-executive members of our Board of Directors subject to
stockholder approval of the amendment to the 1995 Plan at the Annual Meeting.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that you vote "FOR" the approval of
the amendment to the 1995 Plan.
27
PROPOSAL 5
RATIFICATION OF INDEPENDENT AUDITORS
The Audit Committee of the Board of Directors appointed Ernst & Young
LLP, independent public accountants, as auditors of our financial statements for
the year ending December 31, 2003, subject to the ratification of such
appointment by stockholders at the Annual Meeting.
A representative of Ernst & Young LLP is expected to be available at
the annual meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that you vote "FOR" ratification of
Ernst & Young LLP as our independent auditors for the year ending December 31,
2003.
AUDIT FEES
The aggregate fees for professional services rendered by Ernst & Young
LLP in connection with their audit of our consolidated financial statements
included in our Annual Report on Form 10-KSB and review of our financial
statements included in our Quarterly Reports on Form 10-QSB for the year ended
December 31, 2002 were $212,250. Other audit related fees for professional
services during the year ended December 31, 2002 were $5,141.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
There were no professional services rendered by Ernst & Young LLP in
the year ended December 31, 2002 relating to financial information systems
design and implementation.
ALL OTHER FEES
The aggregate fees for tax preparation and consulting services rendered
by Ernst & Young LLP in the year ended December 31, 2002 were $13,380.
STOCKHOLDER PROPOSALS
Under SEC Rule 14a-8, stockholder proposals for the annual meeting of
stockholders to be held in 2004 will not be included in the Proxy Statement for
that meeting unless the proposal is proper for inclusion in the Proxy Statement
and for consideration at the next annual meeting of stockholders, and is
received by our Secretary at our executive offices, no later than [______],
2004. Stockholders must also follow the other procedures prescribed in SEC Rule
14a-8 under the Exchange Act, as well as our By-Laws, which contain requirements
that are separate and apart from the SEC requirements of Rule 14a-8. Our By-Laws
provide that stockholders desiring to bring business before the 2004 annual
meeting, including nomination of a person for election to our Board of
Directors, must provide written notice to our Secretary at our executive offices
no earlier than 75 days, and no later than 45 days, before the one year
anniversary of the mailing of this Proxy Statement. The written notice must
include the information required by Section 2.4 of the By-Laws.
28
OTHER MATTERS
Management knows of no matters that are to be presented for action at
the meeting other than those set forth above. If any other matters properly come
before the meeting, the persons named in the enclosed form of proxy will vote
the shares represented by proxies in accordance with their judgment on such
matters.
The cost of this proxy solicitation will be borne by us. In addition to
the solicitation of proxies by mail, our directors, officers and employees may
also solicit proxies by telephone, facsimile, e-mail or other forms of
communication, without special compensation for such activities. We will also
request banks, brokers, fiduciaries, custodians, nominees and certain other
record holders to send proxies, proxy statements and other materials to their
principals at our expense. We will reimburse such banks, brokers, fiduciaries,
custodians, nominees and other record holders for their reasonable out-of-pocket
expenses of solicitation. We do not anticipate that costs and expenses incurred
in connection with this proxy solicitation will exceed those normally expended
for a proxy solicitation for an election of directors in the absence of a
contest.
29
By Order of the Board of
DOR BIOPHARMA, INC.
28101 BALLARD DR., SUITE F, LAKE FOREST, ILLINOIS 60045
ANNUAL MEETING OF STOCKHOLDERS -- AUGUST 29, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
DOR BIOPHARMA, INC.
The undersigned hereby appoints Dr. Ralph M. Ellison, the Chief
Executive Officer and President of DOR BioPharma, Inc, Steve H. Kanzer, the Vice
Chairman of DOR BioPharma, and William D. Milling, the Secretary and Treasurer
of DOR BioPharma, Inc., or any of them, each with the power of substitution, and
hereby authorizes each of them to represent and to vote as designated on the
reverse side of this proxy card, all of the shares of Common Stock and Series B
Preferred Stock of DOR BioPharma, Inc. that the undersigned is entitled to vote
at the annual meeting of stockholders to be held at 10:00 a.m., Eastern Daylight
Time, on August 29, 2003 at [-______________________________________], or any
adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO SUCH DIRECTIONS ARE MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF THE NOMINEES LISTED ON THE REVERSE SIDE OF THIS PROXY
CARD FOR THE BOARD OF DIRECTORS AND FOR EACH OF THE OTHER PROPOSALS SET FORTH ON
THE REVERSE SIDE.
The Board of Directors recommends you vote `FOR' the nominees listed on
the reverse side of this proxy card for the Board of Directors and `FOR' each of
the other proposals set forth on the reverse side.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
DOR BIOPHARMA, INC.
August 29, 2003
/ Please Detach and Mail in the Envelope Provided /