-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T7JEfwL8DJJTCbnwojtcTFkbxzgaJuJsOyhgy9Omnh3QD3LoL68/pHZwtGMS0IR6 iC5NexktZlo4yGZP830Sfw== /in/edgar/work/20000814/0000950131-00-004907/0000950131-00-004907.txt : 20000921 0000950131-00-004907.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950131-00-004907 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENDOREX CORP CENTRAL INDEX KEY: 0000812796 STANDARD INDUSTRIAL CLASSIFICATION: [2834 ] IRS NUMBER: 411505029 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16929 FILM NUMBER: 698566 BUSINESS ADDRESS: STREET 1: 28101 BALLARD DR. CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 847-573-8990 MAIL ADDRESS: STREET 1: 28101 BALLARD DR. CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOTHERAPEUTICS INC DATE OF NAME CHANGE: 19920703 10QSB 1 0001.txt FORM 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly Period Ended June 30, 2000 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to ____________ Commission File No. 1-14778 ENDOREX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 41-1505029 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 28101 BALLARD DRIVE, SUITE F, LAKE FOREST, IL 60045 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (847) 573-8990 (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] At August 11, 2000, 12,741,858 shares of the registrant's common stock (par value, $.001 per share) were outstanding. Transitional Small Business Disclosure Format (check one): Yes [_] No [X] PART I. - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, 2000 ASSETS Current assets: Cash and cash equivalents $ 10,170,382 Marketable securities - available for sale 4,030,281 Prepaid expenses 178,478 ------------ Total current assets 14,379,141 Leasehold improvements and equipment, net of accumulated amortization of $723,389 426,839 Patent issuance costs, net of accumulated amortization of $8,909 206,507 ------------ TOTAL ASSETS $ 15,012,487 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 335,504 Accrued compensation 109,822 Due to joint venture 1,557,419 Current portion of line of credit 108,752 ------------ Total current liabilities 2,111,497 Long-term liabilities: Long-term portion of line of credit 271,139 ------------ Total long-term liabilities 271,139 ------------ Total Liabilities 2,382,636 Series C exchangeable convertible preferred stock, $.05 par value. Authorized 200,000 shares; 91,218 issued and outstanding at liquidation value 9,344,530 Stockholders' equity: Preferred stock, $.05 par value. Authorized 100,000 shares; none issued and outstanding -- Series B convertible preferred stock, $.05 par value. Authorized 200,000 shares; 92,973 issued and outstanding at liquidation value 9,667,159 Common stock, $.001 par value. Authorized 50,000,000 shares; 12,860,500 issued, and 12,741,858 outstanding 12,861 Additional paid-in capital 41,108,730 Unearned compensation (41,568) Deficit accumulated during the development stage (47,025,041) Unrealized gain/(loss) on marketable securities 6,930 ------------ 3,729,071 Less: Treasury stock, at cost, 118,642 shares (443,750) ------------ Total Stockholders' Equity 3,285,321 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,012,487 ============
See accompanying condensed notes to financial statements. ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative from Six Months February 15, 1985 Ended June 30, (date of inception) 2000 1999 to June 30, 2000 Revenue: SBIR contract revenue $ -- $ -- $ 100,000 Expenses: SBIR contract research and development -- -- 86,168 Proprietary research and development 468,193 1,017,074 14,344,457 General and administrative 981,521 1,747,166 11,951,798 ----------- ----------- ------------ Total operating expenses 1,449,714 2,764,240 26,382,423 ----------- ----------- ------------ Loss from operations (1,449,714) (2,764,240) (26,282,423) Equity losses in joint ventures (1,578,855) (1,491,851) (21,542,737) Other income -- -- 5,302 Interest income 295,330 254,364 2,589,845 Realized gain on marketable securites available for sale 25,635 -- 25,635 Interest expense (23,020) (25,518) (284,440) ----------- ----------- ------------ Net loss (2,730,624) (4,027,245) (45,488,818) Preferred stock dividends (687,378) (618,350) (2,685,978) ----------- ----------- ------------ Net loss available to common stockholders $(3,418,002) $(4,645,595) $(48,174,796) =========== =========== ============ Basic and diluted net loss per share available to common stockholders $ (0.29) $ (0.43) $ (17.14) Basic and diluted weighted average common shares outstanding 11,646,663 10,755,319 2,809,906
See accompanying condensed notes to financial statements. ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended June 30, 2000 1999 Revenue: SBIR contract revenue $ -- $ -- Expenses: SBIR contract research and development -- -- Proprietary research and development 217,112 436,386 General and administrative 615,559 950,542 ----------- ----------- Total operating expenses 832,671 1,386,928 ----------- ----------- Loss from operations (832,671) (1,386,928) Equity in losses from joint ventures (648,779) (914,246) Interest income 198,165 109,431 Realized gain on marketable securities available for sale -- -- Interest expense (11,221) (12,631) ----------- ----------- Net loss (1,294,506) (2,204,374) Preferred stock dividends (342,747) (306,542) ----------- ----------- Net loss available to common stockholders $(1,637,253) $(2,510,916) =========== =========== Basic and diluted net loss per share available to common stockholders $ (0.13) $ (0.23) Basic and diluted weighted average common shares outstanding 12,488,842 10,755,319 See accompanying condensed notes to financial statements. ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative from Six Months February 15, 1985 Ended June 30, (date of inception) 2000 1999 to June 30, 2000 Net cash used in operating activities $(1,319,747) $(2,088,138) $(17,434,844) ----------- ----------- ------------ INVESTING ACTIVITIES: Patent issuance cost (33,454) (86,015) (709,967) Investment in joint ventures (964,064) (1,235,432) (20,485,321) Organizational costs incurred -- -- (135) Purchases of leasehold improvements -- -- (695,613) Purchases of office and lab equipment (52,236) (103,624) (963,512) Proceeds from assets sold -- -- 4,790 Purchases of marketable Securities - available for sale (3,456,799) (3,095,000) (9,069,898) Proceeds from sale of marketable securities - available for sale 3,000,000 1,260,000 5,175,496 ----------- ----------- ------------ Net cash used in investing activities (1,506,553) (3,260,071) (26,744,160) ----------- ----------- ------------ FINANCING ACTIVITIES: Net proceeds from issuance of common stock, net of costs 7,797,238 -- 37,821,960 Net proceeds from issuance of preferred stock -- -- 16,325,712 Proceeds from exercise of options 215,888 -- 417,226 Proceeds from note payable Proceeds from borrowings from President -- -- 41,433 Repayment of borrowings from President -- -- (41,433) Proceeds from borrowings under line of credit 45,621 95,774 1,196,534 Repayment of borrowings under line of credit (57,971) (52,679) (816,643) Proceeds from note payable to bank -- -- 150,000 Payments on note payable to bank -- -- (150,000) Proceeds from borrowings from stockholders -- -- 15,867 Repayment of borrowings from stockholders -- -- (15,867) Advances from parent company -- -- 135,000 Payments to parent company -- -- (135,000) Repayment of long- term note receivable -- -- 50,315 Repayment of note payable issued in exchange for legal service -- -- (71,968) Purchase and retirement of common stock -- -- (130,000) Purchase of treasury stock -- -- (443,750) ----------- ----------- ------------ Net cash provided by financing activities 8,000,776 397,549 54,349,386 ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents 5,174,476 (4,950,660) 10,170,382 Cash and cash equivalents at beginning of periods 4,995,906 12,202,415 -- ----------- ----------- ------------ Cash and cash equivalents at end of periods $10,170,382 $ 7,251,755 $ 10,170,382 =========== =========== ============
See accompanying condensed notes to financial statements. ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO FINANCIAL STATEMENTS We prepared these unaudited interim consolidated financial statements under the rules and regulations for reporting on Form 10-QSB. Accordingly, we omitted some information and footnote disclosures normally accompanying the annual financial statements. You should read these interim financial statements and notes in conjunction with the consolidated financial statements and their notes included in our latest annual report on Form 10-KSB. It is our opinion that the consolidated financial statements include all adjustments necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods. All adjustments were of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the full fiscal year. NET LOSS PER SHARE The number of shares outstanding in prior periods has been adjusted to include the effect of the common stock dividends issued in 1999. The effect on the earnings per share for 1999 is a decrease in net loss per share of $0.02 for the six-month period ended June 30, 1999, and a decrease of $.01 for the three-month period ended March 31, 1999. Net loss per share is presented on the Consolidated Statements of Operations in accordance with SFAS No. 128 for the current and prior periods. Endorex had a net loss for all periods being presented, which resulted in diluted and basic earnings per share being the same for all periods presented. The potential impact of warrants and stock options outstanding was not included in the calculation because their inclusion would have been anti-dilutive. JOINT VENTURE ESTIMATES The preparation of the quarterly consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts related to the activities of InnoVaccines Corporation ("InnoVaccines") and Endorex Newco, Ltd. ("Newco"), our joint ventures with Elan Corporation, plc ("Elan"), including the reported net liabilities related to the joint ventures and the reported amounts of equity in losses from joint ventures. Actual results could differ from those estimates. UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR UNCONSOLIDATED JOINT VENTURES Condensed, unaudited financial statement information of the joint ventures is stated below. The joint ventures had no revenues. Net expenses equaled the net loss for all periods.
For the Six Months Ended June 30, 2000 1999 ------------ ------------ InnoVaccines, net of Endorex mark up on billings to InnoVaccines....................... $(2,077,843) $(2,418,501) Newco, net of Endorex mark up on billings to Newco....................................... (131,496) - ------------ ------------ Total net loss................................... $(2,209,339) $(2,418,501) ============ ============ Reconciliation to equity in losses from joint ventures: Total joint venture net losses................... $(2,209,339) $(2,418,501) Less: Elan minority interest..................... 630,454 926,650 ------------ ------------ Equity in losses from joint ventures............. $(1,578,885) $(1,491,851) ============ ============
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 2000 financial statement presentation. The reclassifications did not impact previously reported net loss or deficit accumulated during the development stage. COMMON STOCK PRIVATE PLACEMENT On April 12, 2000, we completed a private placement of common stock and warrants with domestic and foreign institutional investors. Gross proceeds were approximately $8.6 million. The private placement consisted of approximately 1.81 million newly issued common shares priced at $4.725 per share and warrants to purchase 452,383 common shares at $5.91 per share. These warrants are immediately exercisable and expire in April 2005. In partial consideration for its services in assisting us through the capital raising process, Paramount Capital, Inc. received warrants to purchase 226,190 common shares at $5.25 per share. These warrants are exercisable after October 12, 2000, expire in October 2007, and we may call if the closing bid price of our common stock has equaled or exceeded $13.125 per share for at least 20 consecutive trading days. We intend to use the $7.8 million net proceeds of this financing to fund the development of our drug delivery technologies, to continue our clinical development efforts, and for other general corporate purposes. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion provides information to explain our results of operations and financial condition. You should also read our unaudited consolidated interim financial statements and their notes and our Annual Report on Form 10-KSB. This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe-harbors created by those sections. These forward-looking statements are subject to significant risks and uncertainties, including those identified in Exhibit 99 "Risk Factors" of this Form 10-QSB, which may cause actual results to differ materially from those discussed in any forward-looking statements. The forward-looking statements within this Form 10-QSB are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any revisions to forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this form 10-QSB with the SEC. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business. Endorex is a development stage enterprise and expects no significant revenue from the sale of products in the near future. Material Changes in Results of Operations For the three-month period ended June 30, 2000, net loss decreased approximately $0.9 million, or 41%, to $1.3 million as compared to a loss of $2.2 million for the three months ended June 30, 1999. After giving effect to dividends on preferred stock, which are paid in additional preferred shares, net loss available to common stockholders decreased approximately $0.9 million (35%) to $1.6 million, or $0.13 per share, compared with $2.5 million, or $0.23 per share, for the prior year period. Reduced spending on cancer product development and the absence of financial advisory warrant amortization were the major factors resulting in the decline in net loss. Proprietary research and development expenditures for the three months ended June 30, 2000 decreased approximately $0.2 million, or 50%, compared with $0.4 million for the corresponding period ended June 30, 1999. On March 1, 2000 we announced our decision to divest our oncology business. As a result, spending on cancer-related programs during the second quarter of 2000 was reduced by approximately $260 thousand compared to the second quarter of the previous year. During the second quarter of 2000 a third U.S. patent on the Orasome(TM) drug and vaccine delivery system issued to Endorex. The patent describes targeted polymerized liposomes (Orasomes(TM)) for oral and/or mucosal delivery of vaccines, allergens and therapeutics. The patent also describes Orasomes(TM) that have been modified on their surfaces to contain a ligand (biological "magnet") to target the Orasome(TM) to a specific site or cell type. General and administrative expenses for the three months ended June 30, 2000 decreased $0.3 million, or 35%, to $0.6 million as compared to the three months ended June 30, 1999. During the second quarter of 1999 general and administrative expense included approximately $0.4 million of amortization of the cost of financial advisory warrants issued in association with capital raising transactions in 1997. These warrants were fully amortized as of the beginning of 2000. Endorex has two joint ventures with Elan Corporation, plc ("Elan"). InnoVaccines is developing the Orasome(TM) delivery system for oral and mucosal vaccines. Newco is developing Elan's MEDIPAD(R) drug delivery system, which consists of a small, disposable drug delivery device that combines a microinfusion pump with the convenience of patch technology, for the delivery of iron chelation drugs. Our share of research and development expenditures through these joint ventures is recorded as equity in losses from joint ventures. During the second quarter of 2000, equity in losses from joint venture activities decreased by approximately $0.3 million, or 29%, to $0.6 million compared to $0.9 million for the same period of 1999. During the second quarter of 1999 we incurred approximately $215 thousand of patent license expense to fund our share of InnoVaccines' acquisition of a vaccine delivery patent portfolio from the Southern Research Institute / University of Alabama Research Foundation. These expenses did not recur in the second quarter of 2000. Interest income for the second quarter of 2000 increased by approximately $90 thousand to $198 thousand due to our investment of the proceeds of the equity financing completed in April of this year. Net loss for the six months ended June 30, 2000 decreased approximately $1.3 million, or 32%, to $2.7 million as compared to a loss of $4.0 million for the six months ended June 30, 1999. Net loss available to common stockholders, which reflects preferred dividends, decreased approximately $1.2 million (26%) to $3.4 million, or $0.29 per share, compared with $4.6 million, or $0.43 per share, for the prior year period. The lower level of net loss through the first half of 2000 stemmed from reductions in proprietary research and development expenditures, due principally to the absence of significant cancer product development activities, accompanied by lower general and administrative expenses due primarily to the absence of amortization of financial advisory warrants. These expense reductions were partially offset by increased equity in losses in joint ventures. Proprietary research and development expenditures for the six months ended June 30, 2000 decreased approximately $0.5 million, or 54%, to approximately $0.5 million as compared to the corresponding period ended June 30, 1999. The decline in proprietary research and development expense primarily represents reduced spending on oncology product development. Substantially all proprietary research and development expense in the first six months of 2000 related to development of our Orasome/TM/ drug delivery system, which we are developing for oral delivery of proteins and peptides, including hormones. General and administrative expenses for the six months ended June 30, 2000 decreased approximately $0.8 million, or 44%, to approximately $1.0 million as compared to the six months ended June 30, 1999, with substantially all of the decline related to the absence of the cost of amortizing financial advisory warrants issued in association with capital raising transactions in 1997. For the six months ended June 30, 2000, equity losses from joint ventures increased by approximately $0.1 million, or 6%, to $1.6 million. The increase in equity in losses from joint ventures reflects lower overall joint venture spending offset by the impact of a decline in Elan's contractual share of joint venture losses. Interest income and realized gain on sale of marketable securities for the six months ended June 30, 2000 increased approximately $67 thousand, to $0.3 million as compared to the six months ended June 30, 1999, with the difference attributable to higher interest rates on investments. Plan of Operation and Financial Condition Endorex intends to continue to progress preclinical development of the Orasome/TM/ delivery system for the oral delivery of proteins and peptides, including hormones. Under a research and option agreement with Novo Nordisk, we intend to jointly evaluate the Orasome/TM/ system for delivery of Norditropin(R), Novo Nordisk's brand of human growth hormone, in several animal models. Reflecting our decision to exit the oncology business, we will continue to seek opportunities to realize value from those assets. During the remainder of 2000, we anticipate that InnoVaccines will begin efforts to scale up production of its first oral vaccine to take into human clinical trials. Additionally, InnoVaccines intends to continue its efforts to develop additional prototype oral vaccines (including flu vaccine) and evaluate them in animal models. In conjunction with Schein Pharmaceutical, Newco will continue its efforts to meet U.S. regulatory requirements and scale up production in preparation for launching the Medipad(R)/iron chelator product. On June 30, 2000 and December 31, 1999, we had cash, cash equivalents, and marketable securities of approximately $14.2 million and $8.5 million, respectively, and working capital of approximately $12.2 million and $6.9 million, respectively. Endorex has committed credit availability totaling approximately $5.0 million, of which $4.8 million is available from Elan for the purpose of funding Newco. In principle, Elan has agreed to lend up to $2.5 million to Endorex to fund Innovaccines. Documentation of this latter financing has not yet been finalized. Our current level of activities requires the expenditure of approximately $400,000 per month, including costs associated with the joint ventures. We believe that our current cash resources will be sufficient to support currently planned operations for the next two years. However, we intend, from time to time in the future, to seek to expand our research and development activities into other technologies and/or products that we either may license from other persons or develop. Any such activities may require the expenditure of funds not presently available and may deplete our cash resources sooner than anticipated. We also may seek to obtain funds from possible future public or private sales of our securities or other sources. See Exhibit 99--"Risk Factors." In April 2000, we completed a private placement that raised gross proceeds of approximately $8.6 million. Net proceeds to the Company were approximately $7.8 million. We intend to use the $7.8 million net proceeds of this financing to fund the development of our drug delivery technologies, to continue our clinical development efforts, and for other general corporate purposes. From April 2000 through June 30, 2000, we have used approximately $1.2 million to fund research and development, including capital improvements and equipment, and operations. PART II. - OTHER INFORMATION ITEM 2--CHANGES IN SECURITIES Pursuant to a private placement under Rule 506 of the Securities Act of 1933, as amended, on April 12, 2000 we issued to investors an aggregate of approximately 1.81 million shares of our common stock and warrants to purchase 452,383 shares of our common stock. The warrants issued to these investors are immediately exercisable at $5.91 per share and expire in April 2005. The gross proceeds of the private placement were approximately $8.6 million and the net proceeds were approximately $7.8 million. As part of the compensation received by Paramount Capital, Inc. for its assistance in the private placement, Paramount Capital, Inc. received warrants to purchase 226,190 shares of our common stock. These warrants issued to Paramount Capital, Inc. are exercisable after October 12, 2000 at $5.25 per share and expire in October 2007. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The Company's Annual Meeting of Stockholders was held on May 17, 2000. c) The motions before the stockholders were: 1) To elect seven directors:
Votes Votes Votes Broker Name of Director For Against Withheld Abstentions Nonvotes Michael S. Rosen 7,971,541 78,381 - - - Richard Dunning 7,971,548 78,374 - - - Steve H. Kanzer 7,971,541 78,381 - - - Paul Rubin 7,971,541 78,381 - - - H. Laurence Shaw 7,971,548 78,374 - - - Kenneth F. Tempero 7,971,541 78,381 - - - Steven Thornton 7,971,548 78,374 - - -
2) To ratify the appointment of PricewaterhouseCoopers LLP as independent public accountants for the year ending December 31, 2000: Votes For: 9,302,999 Votes Against: 3,869 Votes Withheld: - Abstentions: 2,851 Broker Nonvotes: - 3) To approve the amended and restated certificate of incorporation of Endorex Corporation: Votes For: 6,158,402 Votes Against: 60,069 Votes Withheld: - Abstentions: 8,643 Broker Nonvotes: - ITEM 5 - OTHER INFORMATION FILING OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION On February 8, 2000, the Board of Directors duly adopted resolutions proposing to amend and restate Endorex's Certificate of Incorporation, declaring said amendment and restatement to be advisable and in the best interests of the Company and its stockholders, and authorizing the appropriate corporate officers to solicit the consent of the stockholders. The proposed Amended and Restated Certificate of Incorporation was approved by the stockholders at the annual meeting held on May 17, 2000 and was filed with the Secretary of State of Delaware on June 5, 2000. The Amended and Restated Certificate of Incorporation restates the previous Certificate of Incorporation and all amendments, corrections and Certificates of Designation into one Amended and Restated Certificate of Incorporation. It also made the following amendments. a) Increased the authorized number of shares of preferred stock from 500,000 to 5,000,000 shares. b) The previous Article B of the Certificate of Incorporation provided that the election of the directors of the Company need not be made by written ballots, subject to the provisions of the Bylaws of the Company. The Amended and Restated Certificate of Incorporation deletes the language "unless otherwise provided in the Bylaws of the Corporation." The discussion herein is qualified in its entirety by reference to the Amended and Restated Certificate of Incorporation, which is attached hereto as Exhibit 3.1. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: 3.1 Amended and Restated Certificate of Incorporation 4.1 Form of Subscription Agreement by and between the Registrant and each investor dated as of April 11, 2000. (1) 4.2 Form of Amendment and Supplement to Subscription Agreement entered into by each investor as of April 11, 2000. (1) 4.3 Form of Second Amendment and Supplement to Subscription Agreement entered into by each investor as of April 11, 2000. (1) 4.4 Form of Investor Warrant issued to each investor dated as of April 12, 2000. (1) 4.5 Form of Finder Warrant issued to Paramount Capital, Inc. dated as of April 12, 2000. (1 ) 10.1 Employment Agreement between the Registrant and Michael S. Rosen dated as of May 17, 2000 . 10.2 Consulting Agreement between the Registrant and Kenneth Tempero, M.D., Ph.D., dated as of May 17, 2000. 27 Financial Data Schedule 99.1 Risk Factors ____________________ (1) Incorporated by reference to our Registration Statement on Form S-3 filed with the Commission on May 12, 2000. b) Reports on Form 8-K: None SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENDOREX CORPORATION August 11, 2000 /s/ Michael S. Rosen -------------------- Michael S. Rosen President and Chief Executive Officer (principal executive officer) /s/ Frank C. Reid ----------------- August 11, 2000 Frank C. Reid Vice President, Finance and Corporate Development (principal financial and accounting officer) EX-3.1 2 0002.txt AMENDED AND RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ENDOREX CORPORATION (Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware) Endorex Corporation (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY: FIRST: That the Corporation was originally incorporated in Delaware under the name Biological Therapeutics, Inc., and the date of filing of its original Certificate of Incorporation with the Secretary of State of Delaware was January 16, 1987. On March 13, 1987, the Corporation filed with the Secretary of State of the State of Delaware a Certificate of Ownership and Merger which merged Biological Therapeutics, Inc., a North Dakota corporation, with and into the Corporation, pursuant to which the Corporation changed its name to Immunotherapeutics, Inc. Certificates of Amendment were filed with the Secretary of State of the State of Delaware on September 7, 1989, November 13, 1990, May 29, 1991, at 9 a.m. and 9:05 on February 27, 1992, June 29, 1993 and July 3, 1995, respectively. A Certificate of Amendment was filed with the Secretary of State of the State of Delaware on August 15, 1996, pursuant to which the Corporation changed its name to Endorex Corp. A Certificate of Amendment was filed with the Secretary of State of the State of Delaware on June 10, 1997. Certificates of Designation were filed with the Secretary of State of the State of Delaware on January 21, 1998 and October 20, 1998, respectively. A Certificate of Amendment was filed with the Secretary of State of the State of Delaware on December 12, 1998, pursuant to which the Corporation changed its name to Endorex Corporation. SECOND: That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of the Corporation, declaring said amendment and restatement to be advisable and in the best interests of the Corporation and its stockholders, and authorizing the appropriate officers of the Corporation to solicit the consent of the stockholders therefore, which resolution setting forth the proposed amendment and restatement is as follows: "RESOLVED, that the Certificate of Incorporation of the Corporation be amended and restated in its entirety as follows: ARTICLE I The name of the corporation herein referred to as the "Corporation" is Endorex Corporation. ARTICLE II The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805. The name of its registered agent at such address is United States Corporation Company. ARTICLE III The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law. ARTICLE IV The total number of shares of capital stock of all classes which the Corporation shall have authority to issue is fifty five million (55,000,000) shares, of which fifty million (50,000,000) shares, of a par value of $.001 per share, shall be of a class designated "Common Stock," four million six hundred thousand (4,600,000) shares, of a par value of $.001 per share, shall be of a class designated "Preferred Stock," two hundred thousand (200,000) shares, of a par value of $.05 per share, shall be of a class designated "Series B Convertible Preferred Stock," and two hundred thousand (200,000) shares, of a par value of $.05 per share, shall be of a class designated "Series C Convertible Preferred Stock." The designations, powers, preferences, privileges, and relative, participating, option, or other special rights and qualifications, limitations, or restrictions of the above classes of capital stock shall be as follows: A. Common Stock. 1. General. All shares of Common Stock will be identical and will entitle the holders thereof to the same rights, powers and privileges. The rights, powers and privileges of the holders of the Common Stock are subject to and qualified by the rights of holders of the Preferred Stock. 2. Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 3. Dissolution, Liquidation or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, each issued and outstanding share of Common Stock shall entitle the holder thereof to receive an equal portion of the net assets of the Corporation available for distribution to the holders of Common Stock, subject to any preferential rights of any then outstanding Preferred Stock. 4. Voting Rights. Except as otherwise required by law or this Amended and Restated Certificate of Incorporation, each holder of Common Stock shall have 2 one vote in respect of each share of stock held of record by such holder on the books of the Corporation for the election of directors and on all matters submitted to a vote of stockholders of the Corporation. Except as otherwise required by law or provided herein, holders of Common Stock shall vote together with holders of Preferred Stock as a single class, subject to any special or preferential voting rights of any then outstanding Preferred Stock. There shall be no cumulative voting. 5. Redemption. The Common Stock is not redeemable. B. Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this ARTICLE IV, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: 1. The number of shares constituting that series and the distinctive designation of that series; 2. The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; 3. Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; 4. Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; 5. Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; 6. Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; 7. The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights or priority, if any, of payment of shares of that series; and 8. Any other relative rights, preferences and limitations of that series. 3 Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the Common Stock with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. C. Series B Convertible Preferred Stock. The designations, powers, number, preferences and relative, participating, option or other special rights, and the qualifications, limitations or restrictions of the Series B Convertible Preferred Stock are set forth below: 1. Designation. 200,000 shares of the Preferred Stock shall be designated and known as the "Series B Convertible Preferred Stock." Such number of shares may be increased or decreased by resolution of the Board of Directors after obtaining the consent of a majority in interest of the then outstanding shares of Series B Convertible Preferred Stock; provided, however, that no decrease shall reduce the number of shares of Series B Convertible Preferred Stock to a number less than the number of shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. Dividend Provisions. (a) Subject to the prior and superior rights of any series of Preferred Stock which may from time to time come into existence, the holders of shares of Series B Convertible Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible solely into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of eight percent (8%) per annum. Such dividends shall be cumulative and accrue annually on the last day of December (except that if any such date is a Saturday, Sunday or legal holiday, then such dividend shall be payable on the next day that is not a Saturday, Sunday or legal holiday), in each year, commencing on December 31, 1998, for each full year and each portion of a year that the share entitled to such dividend is outstanding. (b) Such dividends shall be payable in shares (but not fractional shares) of Series B Convertible Preferred Stock. (c) In addition, when and if the Board of Directors shall declare a dividend or distribution payable with respect to the then outstanding shares of Common Stock of the Corporation (other than a dividend payable solely in shares of Common Stock), the holders of the Series B Convertible Preferred Stock shall be entitled to the amount of dividends per share as would be payable on the largest number of whole shares of Common Stock into 4 which each share of Series B Convertible Preferred Stock could then be converted pursuant to Section 5 hereof (such number to be determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend). 3. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation, whether voluntary or involuntary (collectively, a "Liquidation"), before any payment of cash or distribution of other property shall be made to the holders of the Common Stock (the "Common Stockholders") or any other class or series of stock subordinate in Liquidation Preference to the Series B Convertible Preferred Stock, the Series B Convertible Preferred Stockholders shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders, an amount equal to the sum of (i) the Original Purchase Price per share (as appropriately adjusted for any combinations or divisions or similar recapitalizations affecting the Series B Convertible Preferred Stock after issuance) (the "Series B Liquidation Preference"), out of funds legally available therefor, and (ii) an amount equal to any declared but unpaid dividends thereon. As used herein, the "Original Purchase Price" is $100 per share. (b) If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series B Convertible Preferred Stockholders the full amounts to which they shall be entitled, the Series B Convertible Preferred Stockholders shall share ratably in any distribution of assets in proportion to the respective amounts which would be payable to them in respect of the shares held by them if all amounts payable to them in respect of such were paid in full pursuant to Section 3(a). (c) After the distributions described in subsection (a) above have been paid, subject to the rights of other series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each. (d) For purposes of this Section 3, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation), unless the Corporation's stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition (by virtue of securities issued as consideration for the Corporation's acquisition) hold at least 50% of the voting power of the surviving or acquiring entity; or (B) a sale of all or substantially all of the assets of the Corporation. (i) In any of such events, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value, which shall be valued as follows: 5 (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below: (1) If traded on a securities exchange or through Nasdaq (as defined below), the average of the closing prices of the securities on such exchange during the thirty (30) day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and (3) If there is no active public market, the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Series B Convertible Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (ii) In the event the requirements of this subsection 3(d) are not complied with, the Corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 3 have been complied with; or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series B Convertible Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 3(c)(iii) hereof. (iii) The Corporation shall give each holder of record of Series B Convertible Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such trans-action, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 3, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. 6 4. Redemption. (a) At any time on or after the second anniversary of the date upon which any shares of Series B Convertible Preferred Stock were first issued (the "Purchase Date"), the Company may, at its option, redeem the Series B Convertible Preferred Stock on any date set by the Board of Directors (the "Redemption Date") by paying an amount in cash equal to the then applicable Liquidation Preference and accrued and unpaid dividends to the Redemption Date. The Corporation may exercise such option only if (i) the Common Stock shall be listed on The Nasdaq National Market System or The Nasdaq SmallCap Market (collectively, "Nasdaq"), (ii) the Common Stock shall have had an average weekly sales volume during each of the four full calendar weeks prior to the week during which the redemption notice is given of at least 100,000 shares, and (iii) for twenty (20) of any thirty (30) consecutive trading days during the 90 days prior to the Redemption Date, the Closing Price (as defined below) of the Common Stock exceeds $9.75. The "Closing Price" for each trading day shall be (i) the closing price if the security is traded on a national securities exchange, or (ii) if the security is quoted on Nasdaq, the average of the high bid and low asked prices on such day as reported by the National Association of Securities Dealers, Inc. through Nasdaq, or (iii) if the National Association of Securities Dealers, Inc. through Nasdaq shall not have reported any bid and asked prices for the Common Stock on such day, the average of the bid and asked prices for such day as furnished by any NYSE member firm selected from time to time by the Corporation for such purpose. (b) To exercise its redemption right under this Paragraph 4, the Corporation must, not more than ninety (90) nor less than forty-five (45) days prior to the Redemption Date (the "Notice Period"), give notice by first class mail, postage prepaid, to the holders of record of the Series B Convertible Preferred Stock to be redeemed, addressed to such stockholders at their last addresses as shown on the stock books of the Corporation. Each such notice of redemption shall specify the Redemption Date; the redemption price; the place or places for payment or delivery; that payment will be made upon presentation and surrender of the certificates representing shares of Series B Convertible Preferred Stock being redeemed; that accrued but unpaid dividends to the Redemption Date will be paid on the Redemption Date; that the holders of Series B Convertible Preferred Stock shall be entitled to exercise their Conversion Rights (as defined below) until the last day of the Notice Period; and that on and after the Redemption Date, dividends will cease to accrue on such shares. If a dividend with respect to the Series B Convertible Preferred Stock has been declared by the Board of Directors of the Corporation and if the Redemption Date with respect to a redemption of Series B Convertible Preferred Stock falls after the dividend record date established by the Board of Directors of the Corporation with respect to such dividend, but prior to the related dividend payment date, the record holders of the Series B Convertible Preferred Stock on such record date will be entitled to receive the dividend payable on the Series B Convertible Preferred Stock, notwithstanding the redemption thereof. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the Series B Convertible Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series B Convertible Preferred Stock. On or after the Redemption Date, as stated in such notice, each holder of the shares of Series B Convertible 7 Preferred Stock called for redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the redemption price. If less than all shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. If on the Redemption Date the funds necessary for the redemption shall be available therefor and shall have been irrevocably deposited with the transfer agent for the Series B Convertible Preferred Stock, then, notwithstanding that the certificates evidencing any shares of Series B Convertible Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to the shares of Series B Convertible Preferred Stock so called for redemption shall cease to accrue after the Redemption Date, such shares shall no longer be deemed outstanding, and all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive any Common Stock issuable and any cash payable, without interest, upon surrender of their certificates therefor) shall terminate. (c) The Corporation shall not be liable to pay any tax which may become due or payable in respect of any transfer involved in the issue and delivery upon redemption of shares of Series B Convertible Preferred Stock for shares of Common Stock in a name other than that of the record holder of the shares of the Series B Convertible Preferred Stock being redeemed. In addition, the Corporation shall not be required to issue or deliver any such shares unless and until the person or persons requesting the issuance thereof shall have (i) paid to the Corporation the amount of any such tax, (ii) established to the satisfaction of the Corporation that such tax has been paid or (iii) agreed in writing to indemnify the Corporation from and against any liability arising from a failure to pay or withhold such tax, as well as any interest and penalty related thereto. 5. Conversion. The holders of the Series B Convertible Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series B Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series B Liquidation Preference by the conversion price applicable to such share (the "Conversion Price"), determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for shares of Series B Convertible Preferred Stock shall be $7.50; provided, however, that the Conversion Price for the Series B Convertible Preferred Stock shall be subject to adjustment as set forth in subsection 5(d). (b) Automatic Conversion. Each share of Series B Convertible Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series B Convertible Preferred Stock immediately upon the earlier of (i) at any time following the five-year anniversary of the date of the filing of this Certificate of Designations if, at such time, the Corporation and its Common Stock meet the criteria set forth in the second sentence of Section 4(a) above, and (ii) the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not 8 less than $7.50 per share (adjusted to reflect subsequent stock dividends, combinations, splits or recapitalization) and with aggregate gross proceeds of not less than $10,000,000 (a "Qualified Public Offering"). (c) Mechanics of Conversion. Before any holder of Series B Convertible Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Convertible Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series B Convertible Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Convertible Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with a Qualified Public Offering, the conversion may, at the option of any holder tendering Series B Convertible Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series B Convertible Preferred Stock shall not be deemed to have converted such Series B Convertible Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series B Convertible Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If the Corporation shall issue, after the Purchase Date, any Additional Stock (as defined below) without consideration or for a consideration per share less than the Closing Price on such date, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price equal to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the sum of (w) the number of shares of Common Stock outstanding immediately prior to such issuance (assuming the conversion of all then outstanding shares of Series B Convertible Preferred Stock and including shares issued or issuable pursuant to Section 5(d)(ii)(B)) and (x) the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the sum of (y) the number of shares of Common Stock outstanding immediately prior to such issuance (assuming the conversion of all then outstanding shares of Series B Convertible Preferred Stock and including shares issued or issuable pursuant to Section 5(d)(ii)(B)) and (z) the number of shares of such Additional Stock. 9 (B) No adjustment of the Conversion Price for the Series B Convertible Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 5(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 5(d)(i) and subsection 5(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (to the extent then exercisable) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 5(d)(i)(C) and (d)(i)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (to the extent then convertible or exchangeable) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or 10 rights (the consideration in each case to be determined in the manner provided in subsections 5(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series B Convertible Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series B Convertible Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 5(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 5(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 5(d)(i)(E)) by the Corporation after the Purchase Date to Affiliates of Endorex or directors, officers, employees or agents of such Affiliates, other than shares of Common Stock issuable or issued to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation (provided that the sum of such number of shares of Common Stock issuable or issued pursuant to such stock option plan or restricted stock plan shall in no event represent more than fifteen percent (15%) of the authorized number of Common Stock). "Affiliates" shall mean, with respect to any party, any entity that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such party. For purposes of this definition, "control" means the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise. (iii) In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to 11 receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series B Convertible Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 5(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series B Convertible Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 5(d)(iii), then, in each such case for the purpose of this subsection 5(e), the holders of the Series B Convertible Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series B Convertible Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 5 or Section 3) provision shall be made so that the holders of the Series B Convertible Preferred Stock shall thereafter be entitled to receive upon conversion of the Series B Convertible Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5 with respect to the rights of the holders of the Series B Convertible Preferred Stock after the recapitalization to the end that the provisions of this Section 5 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series B Convertible Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed 12 or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series B Convertible Preferred Stock against impairment. (h) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series B Convertible Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series B Convertible Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series B Convertible Preferred Stock pursuant to this Section 5, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series B Convertible Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series B Convertible Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series B Convertible Preferred Stock. (i) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series B Convertible Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Convertible Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Convertible Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Convertible Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of 13 its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate of Incorporation, as amended. (k) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Series B Convertible Preferred Stock shall be deemed given on the date of service if served personally on the party to whom notice is to be given or on the date of transmittal of services via telecopy to the party to whom notice is to be given and addressed to each holder of record at his address appearing on the books of the Corporation. 6. Voting Rights. (a) The holder of each share of Series B Convertible Preferred Stock shall have the right to one vote for each share of Common Stock into which such share of Series B Convertible Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote, except as greater rights are provided by law. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as- converted basis (after aggregating all shares into which shares of Series B Convertible Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) In any vote by the holders of the Series B Convertible Preferred Stock acting as a class, each holder of Series B Convertible Preferred Stock shall be entitled to one (1) vote for each share of Series B Convertible Preferred Stock. 7. Protective Provisions. Subject to the rights of any series of Preferred Stock which may from time to time come into existence, so long as any shares of Series B Convertible Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Convertible Preferred Stock, voting separately as two series: (a) increase or decrease the authorized or outstanding number of the shares of Series B Convertible Preferred Stock, respectively, so as to affect adversely the shares; or (b) authorize or issue any other equity security, or security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series B Convertible Preferred Stock with respect to voting, dividends, liquidation or redemption, respectively. 14 8. Status of Converted or Redeemed Stock. In the event any shares of Series B Convertible Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so converted shall be cancelled and shall not be reissuable by the Corporation. The Certificate of Incorporation, as amended, of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. D. Series C Convertible Preferred Stock. The designations, powers, number, preferences and relative, participating, option or other special rights, and the qualifications, limitations or restrictions of the Series C Convertible Preferred Stock are set forth below: 1. Designation. 200,000 shares of the Preferred Stock shall be designated and known as the "Series C Convertible Preferred Stock." Such number of shares may be increased or decreased by resolution of the Board of Directors after obtaining the consent of a majority in interest of the then outstanding shares of Series C Convertible Preferred Stock; provided, however, that no decrease shall reduce the number of shares of Series C Convertible Preferred Stock to a number less than the number of shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. Dividend Provisions. (a) Subject to the prior and superior rights of any series of Preferred Stock which may from time to time come into existence, the holders of shares of Series C Convertible Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible solely into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of seven percent (7%) per annum. Such dividends shall be cumulative and accrue annually on the last day of December (except that if any such date is a Saturday, Sunday or legal holiday, then such dividend shall be payable on the next day that is not a Saturday, Sunday or legal holiday), in each year, commencing on December 31, 1998, for each full year and each portion of a year that the share entitled to such dividend is outstanding. (b) Such dividends shall be payable in shares (but not fractional shares) of Series C Convertible Preferred Stock. (c) In addition, when and if the Board of Directors shall declare a dividend or distribution payable with respect to the then outstanding shares of Common Stock of the Corporation (other than a dividend payable solely in shares of Common Stock), the holders of the Series C Convertible Preferred Stock shall be entitled to the amount of dividends per share as would be payable on the largest number of whole shares of Common Stock into which each share of Series C Convertible Preferred Stock could then be converted pursuant to Section 5 hereof (such number to be determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend). 15 3. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation, whether voluntary or involuntary (collectively, a "Liquidation"), before any payment of cash or distribution of other property shall be made to the holders of the Common Stock (the "Common Stockholders") or any other class or series of stock subordinate in Liquidation Preference to the Series C Convertible Preferred Stock, the Series C Convertible Preferred Stockholders shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders, an amount equal to the sum of (i) the Original Purchase Price per share (as appropriately adjusted for any combinations or divisions or similar recapitalizations affecting the Series C Convertible Preferred Stock after issuance) (the "Series C Liquidation Preference"), out of funds legally available therefor, and (ii) an amount equal to any declared but unpaid dividends thereon. As used herein, the "Original Purchase Price" is $100 per share. (b) If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series C Convertible Preferred Stockholders the full amounts to which they shall be entitled, the Series C Convertible Preferred Stockholders shall share ratably in any distribution of assets in proportion to the respective amounts which would be payable to them in respect of the shares held by them if all amounts payable to them in respect of such were paid in full pursuant to Section 3(a). (c) After the distributions described in subsection (a) above have been paid, subject to the rights of other series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each. (d) For purposes of this Section 3, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation), unless the Corporation's stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition (by virtue of securities issued as consideration for the Corporation's acquisition) hold at least 50% of the voting power of the surviving or acquiring entity; or (B) a sale of all or substantially all of the assets of the Corporation. (i) In any of such events, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value, which shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below: 16 (1) If traded on a securities exchange or through Nasdaq (as defined below), the average of the closing prices of the securities on such exchange during the thirty (30) day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and (3) If there is no active public market, the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Series C Convertible Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (ii) In the event the requirements of this subsection 3(d) are not complied with, the Corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 3 have been complied with; or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series C Convertible Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 3(d)(iii) hereof. (iii) The Corporation shall give each holder of record of Series C Convertible Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 3, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. 17 4. Exchange. (a) At any time on or after the date upon which any shares of Series C Convertible Preferred Stock were first issued (the "Purchase Date"), each holder of record of Series C Convertible Preferred Stock may, at its option, on one occasion, exchange (the "Exchange Right") the Series C Convertible Preferred Stock for shares of common stock, par value $1.00 per share, of Endorex Newco, Ltd., a Bermuda corporation ("Newco"), formed by the Corporation and Elan International Systems, Ltd., such that the aggregate percentage ownership of all holders of record of Series C Convertible Preferred Stock becomes fifty percent (50%) of the then outstanding shares of Newco common stock (the "Newco Common Stock"), provided that all holders of record of Series C Convertible Preferred Stock shall elect to exercise the Exchange Right at the same time and shall have not exercised any portion of the Conversion Rights (as defined herein). (b) To exercise the Exchange Right under this Paragraph 4, each holder of record of Series C Convertible Preferred Stock, not more than ninety (90) nor less than forty-five (45) days prior to the date on which the Exchange Right is to be exercised (the "Exchange Date"), shall give notice by first class mail, postage prepaid, to the Corporation. Each such notice of exchange shall specify the Exchange Date; the place or places for delivery; that accrued but unpaid dividends to the Exchange Date are to be paid on the Exchange Date; and that on and after the Exchange Date, such shares of Series C Convertible Preferred Stock shall be surrendered and extinguished, and all rights whatsoever with respect to such shares, including any rights of conversion, shall terminate. On or after the Exchange Date, as stated in such notice, each holder of the shares of Series C Convertible Preferred Stock shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive such number of shares of Newco Common Stock so as to increase the aggregate percentage ownership of all holders of record of Series C Convertible Preferred Stock to 50% of the then outstanding shares of Newco Common Stock. (c) Neither the Corporation nor Newco shall be liable to pay any tax which may become due or payable in respect of any transfer involved in the issue and delivery upon exchange of the Series C Convertible Preferred Stock for the Newco Common Stock in a name other than that of the record holder of the shares of the Series C Convertible Preferred Stock being exchanged. In addition, neither the Corporation nor Newco shall be required to issue or deliver any such shares unless and until the person or persons requesting the issuance thereof shall have (i) paid to the Corporation or Newco the amount of any such tax, (ii) established to the satisfaction of the Corporation or Newco that such tax has been paid or (iii) agreed in writing to indemnify the Corporation and Newco from and against any liability arising from a failure to pay or withhold such tax, as well as any interest and penalty related thereto. 5. Conversion. The holders of the Series C Convertible Preferred Stock shall have conversion rights (the "Conversion Rights") as follows: (a) Right to Convert. Each share of Series C Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time two years after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is 18 determined by dividing the Series C Liquidation Preference by the conversion price applicable to such share (the "Conversion Price"), determined as hereafter provided, in effect on the date the certificate is surrendered for conversion; provided, however, that in no event shall any holder of Series C Convertible Preferred Stock be entitled to convert his, her or its shares of Series C Convertible Preferred Stock in excess of that number of Series C Convertible Preferred Stock which, upon giving effect to such conversion, would cause the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates to exceed nineteen and nine-tenths percent (19.9%) of the outstanding shares of Common Stock following such conversion. For purposes of the foregoing provision, the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Series C Convertible Preferred Stock with respect to which the determination of such provision is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) conversion of the remaining, nonconverted shares of Series C Convertible Preferred Stock beneficially owned by the holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the holder and its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 5(a), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. The initial Conversion Price per share for shares of Series C Convertible Preferred Stock shall be $9.00; provided, however, that the Conversion Price for the Series C Convertible Preferred Stock shall be subject to adjustment as set forth in subsection 5(d). (b) Automatic Conversion. Each share of Series C Convertible Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series C Convertible Preferred Stock immediately upon the earlier of (i) October 21, 2002 and (ii) the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $9.00 per share (adjusted to reflect subsequent stock dividends, combinations, splits or recapitalization) and with aggregate gross proceeds of not less than $10,000,000 (a "Qualified Public Offering"). (c) Mechanics of Conversion. Before any holder of Series C Convertible Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series C Convertible Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series C Convertible Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series C Convertible Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with a Qualified Public Offering, the conversion 19 may, at the option of any holder tendering Series C Convertible Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series C Convertible Preferred Stock shall not be deemed to have converted such Series C Convertible Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series C Convertible Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If the Corporation shall issue, after the Purchase Date, any Additional Stock (as defined below) without consideration or for a consideration per share less than the Closing Price on such date, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price equal to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the sum of (w) the number of shares of Common Stock outstanding immediately prior to such issuance (assuming the conversion of all then outstanding shares of Series C Convertible Preferred Stock and including shares issued or issuable pursuant to Section 5(d)(ii)(B)) and (x) the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the sum of (y) the number of shares of Common Stock outstanding immediately prior to such issuance (assuming the conversion of all then outstanding shares of Series C Convertible Preferred Stock and including shares issued or issuable pursuant to Section 5(d)(ii)(B)) and (z) the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series C Convertible Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 5(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash 20 shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 5(d)(i) and subsection 5(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (to the extent then exercisable) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 5(d)(i)(C) and (d)(i)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (to the extent then convertible or exchangeable) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 5(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series C Convertible Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series C Convertible Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and 21 convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 5(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 5(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 5(d)(i)(E)) by the Corporation after the Purchase Date to Affiliates of the Corporation or directors, officers, employees or agents of such Affiliates, other than shares of Common Stock issuable or issued to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation (provided that the sum of such number of shares of Common Stock issuable or issued pursuant to such stock option plan or restricted stock plan shall in no event represent more than fifteen percent (15%) of the authorized number of shares of Common Stock). "Affiliates" shall mean, with respect to any party, any entity that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such party. For purposes of this definition, "control" means the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise. (iii) In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series C Convertible Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 5(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series C Convertible Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. 22 (e) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 5(d)(iii), then, in each such case for the purpose of this subsection 5(e), the holders of the Series C Convertible Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series C Convertible Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 5 or Section 3) provision shall be made so that the holders of the Series C Convertible Preferred Stock shall thereafter be entitled to receive upon conversion of the Series C Convertible Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5 with respect to the rights of the holders of the Series C Convertible Preferred Stock after the recapitalization to the end that the provisions of this Section 5 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series C Convertible Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series C Convertible Preferred Stock against impairment. (h) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series C Convertible Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series C Convertible Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series C Convertible Preferred Stock pursuant to this Section 5, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of 23 Series C Convertible Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series C Convertible Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series C Convertible Preferred Stock. (i) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series C Convertible Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series C Convertible Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series C Convertible Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series C Convertible Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate of Incorporation, as amended. (k) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Series C Convertible Preferred Stock shall be deemed given (i) on the date of service if served personally on the party to whom notice is to be given, or (ii) on the date of transmittal of such notice if sent via telecopy to the party to whom notice is to be given and addressed to each holder of record at his address appearing on the books of the Corporation, or (iii) two business days following the date of mailing if such notice is sent by recognized overnight courier or by regular postal service. 6. Voting Rights. In any vote by the holders of the Series C Convertible Preferred Stock acting as a class, each holder of Series C Convertible Preferred Stock shall be entitled to one (1) vote for each share of Series C Convertible Preferred Stock. 7. Protective Provisions. Subject to the rights of any series of Preferred Stock which may from time to time come into existence, so long as any shares of 24 Series C Convertible Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series C Convertible Preferred Stock, voting separately as a class: (i) increase or decrease the authorized or outstanding number of the shares of Series C Convertible Preferred Stock, respectively, so as to affect adversely the shares; or (ii) authorize or issue any other equity security, or security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series C Convertible Preferred Stock with respect to voting, dividends, liquidation or redemption, respectively. 8. Status of Converted or Exchanged Stock. In the event any shares of Series C Convertible Preferred Stock shall be exchanged pursuant to Section 4 or converted pursuant to Section 5 hereof, the shares so exchanged or converted shall be cancelled and shall not be reissuable by the Corporation. The Certificate of Incorporation, as amended, of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. ARTICLE V The Corporation is to have perpetual existence. In furtherance of and not in limitation of powers conferred by statute, it is further provided: 1. Election of directors need not be by written ballot. 2. The Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation. ARTICLE VI The number of directors of the Corporation shall be fixed from time to time by the bylaws of the Corporation or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE VII Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof, or on 25 the application of any receiver or receivers appointed for the Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. ARTICLE VIII The Corporation reserves the right to amend, alter, change, or repeal any provisions herein contained, in the manner now or hereafter prescribed by statute, and all rights, powers, privileges, and discretionary authority granted or conferred herein upon stockholders are granted subject to this reservation. ARTICLE IX A Director of the Corporation shall have no personal liability to the Corporation or its stockholders for monetary damages for breach of his fiduciary duty as a Director; provided, however, this Article shall not eliminate or limit the liability of a Director (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for the unlawful payment of dividends or unlawful stock repurchases under Section 174 of the General Corporation Law of the State of Delaware; or (iv) for any transaction from which the Director derived an improper personal benefit. If the General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE X The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed 26 action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. Indemnification may include payment by the Corporation of expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of an undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to indemnification under this Article, which undertaking may be accepted without reference to the financial ability of such person to make such repayment. The Corporation shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by the Board of Directors of the Corporation. The indemnification rights provided in this Article (i) shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, agreement or vote of stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of such persons. The Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. ARTICLE XI Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. * * * THIRD: The foregoing restatement has been duly adopted by the Board of Directors in accordance with the applicable provisions of Sections 242 and 245 of the General Corporation Law. 27 IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been signed by the President and Chief Executive Officer of the Corporation this 18 day of May, 2000. ENDOREX CORPORATION By: /s/ Michael S. Rosen --------------------------------- Michael S. Rosen President and Chief Executive Officer 28 EX-10.1 3 0003.txt EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT By and Between Endorex Corporation and Michael S. Rosen Agreement made this 17th day of May, 2000, between Endorex Corporation, a Delaware corporation (the "Company") and Michael S. Rosen (the "Executive"), superseding an Employment Agreement between the parties dated July 25, 1996. The Company is desirous of continuing to employ the Executive as its President and Chief Executive Officer, and the Executive is desirous of continuing to be employed by the Company in those capacities. The Company and the Executive desire to set forth in this Agreement the terms and conditions on which the Executive will continue to be employed by the Company as its President and Chief Executive Officer. Accordingly, in consideration of the promises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment The Company hereby agrees to continue to employ the Executive, and the Executive hereby agrees to continue to serve the Company, on the terms and conditions set forth herein. 2. Term The employment of the Executive by the Company under this agreement as provided in Section I commenced with the action by the Board of Directors of the Company (the "Board") on February 8, 2000, and shall continue until terminated as hereinafter provided. 3. Position and Duties The Executive shall serve as President and Chief Executive Officer of the Company, and shall have such responsibilities and authority consistent with those positions as may, from time to time, be assigned to the Executive by the Board of Directors of the Company (the "Board"). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company. Executive may not accept directorships in for-profit corporations, whether public or private, without prior written authorization from the Board or the Executive Committee of the Board. 4. Place of Performance In connection with the Executive's employment by the Company, the Executive shall be based at the principal executive offices of the Company, currently located in Lake Forest, Illinois, except for required travel on the Company's business. 5. Compensation and Related Matters (a) Salary. During the period of the Executive's employment hereunder, the Company shall pay to the Executive a salary at a rate of not less than $249,600 per annum in equal monthly or other installments. The Executive's salary shall be subject to an annual review near or shortly after the end of each calendar year during the Term of this Agreement. (b) Bonuses. The Executive shall be entitled to an annual bonus of up to 50% of his base salary based upon meeting mutually acceptable objectively measurable milestones. The Company's assessment of the Executive's achievement of the milestones shall be issued in writing to the Executive within a reasonable time after the conclusion of the bonus period being assessed. (c) Expenses. The Company shall reimburse Executive for all normal, usual and necessary expenses incurred by Executive in furtherance of the business and affairs of the Company, against receipt by the Company of appropriate vouchers or other proof of the Executive's expenditures and otherwise in accordance with such expense reimbursement policy as may, from time to time, be adopted by the Board of Directors of the Company. (d) Other Benefits. The Company shall provide to Executive paid medical (including for the benefit of the dependents of Executive), long-term disability and life insurance up to $1,000,000. In addition, the Company shall maintain in full force and effect, and the Executive shall be entitled to participate in, all of its employee benefit plans and arrangements in effect on the date hereof or plans or arrangements providing the Executive with at least equivalent benefits thereunder (including, without limitation, each pension and retirement plan and arrangement, supplemental pension and retirement plan and arrangement, stock option plan, life insurance and health and accident plan and arrangement, medical insurance plan, disability plan, survivor income plan, relocation plan and vacation plan). The Company shall not make any changes in such plans or arrangements which would adversely affect the Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executives of the Company and does not result in a proportionately greater reduction in the rights of or benefits to the Executive as compared with any other executive of the Company. The Executive shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company in the future to its executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to the Executive pursuant to paragraph (a) of this Section. (e) Vacations. The Executive shall be entitled to four (4) weeks of paid vacation in each year of his employment or whatever period is provided for by the Company's written policy, whichever is greater. The Executive shall also be entitled to all paid holidays given by the Company to its executives. (f) Services Furnished. The Company shall furnish the Executive with office space, stenographic assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. (g) Options. From time to time, at the discretion of the Board, or the appropriate committee thereof, the Executive may be granted options, in addition to those previously granted, to purchase shares of the Company's common stock. 6. Offices The Executive agrees to serve without additional compensation, if elected or appointed thereto, as a Director of any of the Company's subsidiaries and in one or more executive offices of any of the Company's subsidiaries, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided by Article VII of the Company's By-Laws. Executive agrees that, upon termination of his employment with the Company for any reason whatsoever, he will resign from all positions as an executive officer and Director of the Company and all of its subsidiaries. 7. Confidential Information Executive covenants and agrees that he will not (except as required in the course of his employment), while in the employment of the Company or thereafter, communicate or divulge to, or use for the benefit of himself, or any other person, firm, association or corporation, without the consent of the Company, any information concerning any inventions, discoveries, improvements; processes, formulas, apparatus, equipment, methods, trade secrets, research, secret data, costs or uses or purchasers of the Company's products, research activities, or services, or other confidential matters possessed, owned, or used by the Company that may be communicated to, acquired by, or learned of by the Executive in the course of, or as a result of, his employment with the Company. Provided, however, that Confidential Information shall not include information that is or becomes generally known to others in the industry by any means other than a violation of this section by Executive. All records, files, memoranda, reports, price lists, customer lists, drawings, plans, sketches, documents, equipment, and the like, relating to the business of the Company, which the Company shall use or prepare or come into contact with, shall remain the sole property of the Company and shall be surrendered by the Executive to the Company upon termination of his employment or upon request of the Board. 8. Inventions Discovered by Executive The Executive shall promptly disclose to the Company any invention, improvement, discovery, process, formula, or method or other intellectual property, whether or not patentable or copyrightable (collectively, "Inventions"), conceived or first reduced to practice by the Executive, either alone or jointly with others, while performing services hereunder (or, if based on any Confidential Information, within one (1) year after the Term), (a) which pertain to any line of business activity of the Company, whether then conducted or then being actively planned by the Company, with which the Executive was or is involved, (b) which is developed using time, material or facilities of the Company, whether or not during working hours or on the Company premises, or (c) which directly relates to any of the Executive's work during the Term, whether or not during normal working hours. The Executive hereby assigns to the Company all of the Executive's right, title and interest in and to any such Inventions. During and after the Term, the Executive shall execute any documents necessary to perfect the assignment of such Inventions to the Company and to enable the Company to apply for, obtain and enforce patents, trademarks and copyrights in any and all countries on such Inventions, including, without limitation, the execution of any instruments and the giving of evidence and testimony, without further compensation beyond the Executive's agreed compensation during the course of the Executive's employment. All such acts shall be done without cost or expense to Executive. Executive shall be compensated for the giving of evidence or testimony after the term of Executive's employment at the rate of $2,000/day. Without limiting the foregoing, the Executive further acknowledges that all original works of authorship by the Executive, whether created alone or jointly with others, related to the Executive's employment with the Company and which are protectable by copyright, are "works made for hire" within the meaning of the United States Copyright Act, 17 U.S.C. (S) 101, as amended, and the copyright of which shall be owned solely, completely and exclusively by the Company. If any Invention is considered to be work not included in the categories of work covered by the United States Copyright Act, 17 U. S. C. (S) 101, as amended, such work is hereby assigned or transferred completely and exclusively to the Company. The Executive hereby irrevocably designates counsel to the Company as the Executive's agent and attorney-in-fact to do all lawful acts necessary to apply for and obtain patents and copyrights and to enforce the Company's rights under this Section. This Section 5 shall survive the termination of this Agreement. Any assignment of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights" (collectively "Moral Rights"). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, the Executive hereby waives such Moral Rights and consents to any action of the Company that would violate such Moral Rights in the absence of such consent. The Executive agrees to confirm any such waivers and consents from time to time as requested by the Company. 9. Competition (a) During the period of the Executive's employment by the Company, and for a period of six (6) months after such employment (regardless of the reasons for termination of employment), Executive will not (i) engage in; (ii) have any interest in any person, firm, or corporation that engages in; or (iii) perform any services for any person, firm, or corporation that engages in competition with the Company, or any of its subsidiaries in the development, research relating to, manufacture, processing, marketing, distribution, or sale of any products that were the subject of research activities, developed, licensed, manufactured, processed, distributed, or sold by the Company, or any of its subsidiaries, at any time during the period of his employment by the Company, in any geographic area in which such business shall be carried on. (b) Executive will not, directly or Indirectly, employ, solicit for employment, or advise or recommend to any other person that they employ or solicit for employment, any employee of the Company during the period of Executive's employment by the Company and for a period of two (2)years thereafter. (c) Executive represents that his experience and capabilities are such that the provisions of this Section 8 will not prevent him from earning a livelihood. 10. Termination (a) Notwithstanding any provision of this Agreement to the contrary, Executive's employment shall terminate upon his death, and the Company at any time may terminate his employment by giving him written notice of such termination (i) for cause, as hereinafter defined; (ii) if Executive shall violate any of the provisions of Sections 7 or 8 hereof, or (iii) if Executive shall become physically or mentally incapacitated and by reason thereof unable to perform his duties hereunder with or without reasonable accommodation for a period of ninety (90) consecutive days. For the purpose of clause (i) of this Section 10, "for cause" shall mean any of the following events: (x) conviction in a court of law of any crime or offense involving money or other property of the Company, or any of its subsidiaries, or any felony, (y) violation of specific written directions issued in good faith by the Board of Directors of the Company, provided, however, no discharge shall be deemed "for cause" under this clause (y) unless Executive shall have first received written notice from the Board of Directors of the Company advising of the acts or omissions that constitute such violation, and such violation continues uncured for a period of thirty (30) days after Executive shall have received such notice, or (z) gross negligence or intentional misconduct by the Executive that could cause material harm to the Company. (b) Executive agrees that in the event of his voluntary resignation other than for Good Reason as defined in Section 11, he will offer the board at least 60 days written notice. If Executive terminates his Employment with the Company pursuant to this section 10(b), the Executive shall only be entitled to any unpaid compensation earned through the last day of Executive's employment. 11. Compensation Upon Termination In the event Executive's employment hereunder is terminated other than for cause (as defined in Section 10), disability (as defined in Section 10) or death, or Executive terminates his employment for "Good Reason," he shall be entitled to the following severance benefits: (i) his base salary for six (6) months immediately following such termination (the "Severance Period") (plus, the bonus provided for in Section 5(b) attributable to the year in which termination of employment occurs, provided that such bonus payment shall be pro- rated based on the proportion of the objectives achieved during the portion of the bonus year worked by the Executive) to be paid according to the Company's regular payroll practices, and base salary for an additional six (6) month period commencing six (6) months following such termination (the "Additional Severance Period"), paid according to the Company's regular payroll practices, provided that such additional severance pay shall be reduced by the gross amount of any earnings from employment or consulting received by Executive and during the Additional Severance Period (Executive agrees to provide the Company with an accurate account of such earnings received before the issuance of each monthly check during the Additional Severance Period); (ii) continuation medical coverage pursuant to COBRA, at the Company's expense, until the expiration of the Additional Severance Period or until Executive obtains alternative coverage from another source, whichever occurs first (the "Benefits Period"); (iii) during the Benefits Period, a monthly cash payment equal to the Company's cost of providing an individual policy term life insurance and group disability coverage for Executive on the terms existing at the time of such termination, plus, during the Severance Period only, a "gross up" payment in the amount necessary to make the receipt of such cash payment tax-neutral to the Executive; (iv) any stock options granted by the Company to the Executive, under this Agreement or otherwise, that are unvested at the time of such termination, at the discretion of the Board Of Directors, shall vest and become exercisable; and (v) Executive shall have up to one (1) year after the effective date of such termination to exercise his stock options (granted under this Agreement or otherwise) (Executive acknowledges that any stock options not exercised within ninety (90) days after such effective date will have been converted to non- qualified options.) "Good Reason" shall be defined as any termination by the Executive within thirty (30) days of the occurrence of any of the following events (i) a material breach of this Agreement by the Company; (ii) a relocation of the Executive's primary worksite to a location 40 miles or more from its then current location; or (iii) within 30 days of a "Change of Control," as defined below, a material reduction in the Executives duties or responsibilities, or a reduction in the Executive's then current salary, bonus or benefit levels, provided that a change in the Executive's titles shall not be considered Good Reason as long as he maintains his title as Chief Executive Officer. The Executive shall give the Company 30 days' written notice and opportunity to cure prior to any termination for Good Reason. As used herein, a "Change of Control" shall be deemed to occur if. (i) there shall be consummated (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which the stock of the Company would be converted into cash, securities or other property, other than a merger or consolidation of the Company in which the holders of the Company's stock immediately prior to the merger or consolidation hold more than fifty percent (50%) of the stock or other forms of equity of the surviving corporation immediately after the merger, or (y) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company, or (ii) the Board approves any plan or proposal for liquidation or dissolution of the Company. 12. Successors; Binding Agreement (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12, or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement, and all rights of the Executive hereunder, shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees If the Executive should die while any amounts are earned but unpaid, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisees, legatees, or other designee or, if there be no such designee, to the Executive's estate. 13. Notice For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Michael S. Rosen 94 East Louis Avenue Lake Forest, IL 60045 If to the Company: Endorex Corporation 28101 Ballard Drive, Suite F Lake Forest, IL 60045 Attention: Board of Directors or to such other address as any party may have furnished to the others in writing in accordance herewith' except that notices of change of address shall be effective only upon receipt. 14. Miscellaneous No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the parties hereto. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. 15. Validity The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 16. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. 17. Arbitration Subject to the specific limitation set forth below, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Chicago, Illinois, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The expense of such arbitration shall be borne by the Company except that each party shall bear its own attorneys' fees. This section shall not affect the Company's right to seek equitable relief in connection with Executive's violations or threatened violations of Sections 7, 8 and/or 9 of this Agreement. The parties agree that the exclusive venue for the resolution of such proceedings for equitable relief shall be in the federal and/or state courts located in Lake County, Illinois, and the parties consent to the jurisdiction of such courts. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. Endorex Corporation ________________________________ By: ____________________________ Attest Name: Title: ___________________________________ Michael S. Rosen EX-10.2 4 0004.txt CONSULTING AGREEMENT Exhibit 10.2 CONSULTATION AGREEMENT THIS AGREEMENT (the "Agreement"), made and entered into this 17th day of May, 2000, by and between Endorex Corporation, a Delaware corporation authorized to do business in Illinois, (hereinafter termed the "Company"); and Kenneth Tempero, M.D., Ph.D., (hereinafter termed "Chairman of the Board" or "Chairman"). W I T N E S S E T H: WHEREAS, the Company is engaged in, among other things, the development and marketing of drug delivery systems, WHEREAS, Chairman is ready, willing, and able to provide certain services in addition to his normal duties as Chairman of the Board of the Company in the area of directing the Company's Board of Directors (the "Board") and review of Endorex's management's actions and strategies upon the following terms and conditions, and WHEREAS, both parties understand that it is the policy of the Company to respect the secret or confidential information of third parties, and should Chairman possess secret or confidential information of third parties, such information will not be disclosed to the Company. NOW, THEREFORE, for and in consideration of the terms and conditions hereinafter set forth, the Parties hereto agree as follows: 1. TERM The term of this Agreement will be from the 17th day of May, 2000, until the Board meeting following the 2001 shareholders' meeting, unless earlier terminated (i) upon mutual agreement of the parties, (ii) by either party upon thirty (30) days written notice to the other party, or (iii) pursuant to Section 4 (b) herein. However, it is mutually agreed that this agreement shall, if determined to be needed and so requested by the Board, be modified as appropriate and/or extended by mutual agreement. This agreement replaces the existing consultation agreement date May 13, 1999 by and between the Company and Chairman. 2. COMPENSATION (a) Endorex agrees to pay Chairman a sum of $5,600 per month, equivalent to four (4) consulting days per month (8 hours per day) at $175 per hour, during the term of this Agreement for services herein described, to be paid in monthly installments. Such compensation rate shall begin as of June 1, 2000. The Company agrees to reimburse Chairman for all out-of-pocket incurred by Chairman in connection with this Agreement, subject to prior approval of the Company. All such expenses will be reimbursed within 30 days of submission with appropriate vouchers and upon approval of the Company. (b) In recognition of his additional duties and activities beyond normal board service, the Chairman will be granted options to purchase 12,000 shares of Endorex Corporation Common Stock at an exercise price of $3.25 per share which will vest 25 percent (or 3,000 share options) per quarter from the date hereof. (c) The Company also agrees to provide an allowance for the Chairman for healthcare costs up to a maximum of $10,606 per year. 3. SERVICES Chairman, as an independent contractor and not as an employee of the Company, will devote a minimum of thirty-two (32) hours per month to the Company and shall keep accurate records of the time devoted to performing Services (as defined below) under this Agreement. Chairman agrees, on a non-exclusive basis, to assist and advise the Company in its business and research and development activities. It is agreed that the time commitment and compensation herewith may be adjusted from time to time upon mutual agreements of the parties. However, for all time beyond the thirty-two (32) hours per month devoted beyond normal board service, the Chairman will be compensated at a rate of $215 per hour. "Services" will include but not be limited to the following (and are further defined on Appendix A attached hereto. Such services shall be rendered at times and in places agreeable to the Company and to the Chairman. a. Conduct all Board of Directors meetings and participate as a member ex- officio of all board committees. b. Evaluate and/or advise the Company on matters related to licensing opportunities and agreements. c. Advise the Company on product development strategy. d. Identify and assist the Company in developing corporate partners. e. Advise the Company in the design of pertinent clinical trials and research programs. f. Other duties and/or tasks as assigned by the Board and agreed to by Chairman. 2 4. NO CONFLICTS (a) Chairman represents and warrants that, to the best of his knowledge, he has no direct or indirect interest, which is, or may appear to be, incompatible with his services under this Agreement. (b) Chairman agrees to refrain from any activity during the term of this Agreement, which is or could be interpreted as constituting a conflict of interest. In such a situation, Chairman agrees to undertake to notify the Company in advance of acceptance of a consulting that might reasonably produce a conflict. The Board will review the situation and within ten (10) business days notify Chairman, in writing (from the CEO), of its opinion regarding the potential conflict and either grant or withhold permission for Chairman to accept the consulting assignment. If the Board withholds permission to accept the assignment, the Chairman may elect to: a) resign from the position of Chairman (in which case the ex-Chairman may be in a position to accept the assignment providing such assignment does not otherwise conflict with Chairman's fiduciary duties as a director of the Company, or b) decline the assignment (in which case the Company will undertake to pay the Chairman, for a period not to exceed two (2) months, the amount that the Chairman would have reasonably expected to receive in the performance of the assignment. Such payments shall be over and above payments otherwise associated with this contract. (c) Chairman represents and warrants that his agreement to perform the Services pursuant to this Agreement does not violate any agreement or obligation between Chairman and any third party. Appendix B lists the current consulting agreements to which Chairman is a party as of the date hereof. Chairman will promptly notify the company regarding any changes in his private interest which might result, or appear to result, in a conflict of interest. 5. DATA AND CONFIDENTIAL INFORMATION (a) With respect to "Data", which term shall include, but is not limited to writings, drawings, pictures, statistical information, graphic representation, and computer software, Chairman agrees that: (1) All Data first originated, developed, or reduced to normal communicable form in collaboration with the Company personnel pursuant to this Agreement shall owned by, and become the sole and exclusive property of the Company; and Chairman shall be reimbursed by the Company for the cost or reproduction and delivery of any Data requested by the Company. (2) With respect to Data subject to a copyright owned by Chairman or a third party which is delivered to the Company pursuant to this Agreement, and to the extent Chairman may have, or may acquire, prior to expiration or termination of this Agreement. Chairman hereby grants or agrees to grant to the Company a non-exclusive and irrevocable license throughout the world to publish, translate, reproduce, use in any manner and deliver the Data. 3 (3) Chairman shall not deliver Data subject to proprietary rights, or Data subject to copyright owned by a third party, unless such Data is licensed pursuant to paragraph 5 subsections (1) and (2), above. (4) Chairman shall not be required to deliver or disclose to the Company any Data created by Chairman prior to the date of this Agreement, or developed other than in conjunction with this Agreement. (b) Chairman recognizes and acknowledges that the Company possesses certain confidential information that constitutes a valuable, special, and unique asset. As used herein, the term "confidential information" includes all information and materials belonging to, used by, or in the possession of the Company relating to its products, methods, processes, services, technology, inventions, scientific developments, patents, ideas, internal specifications and reports, anticipated procurements, possible new projects or programs, contracts, financial information, developments, business strategies, pricing, current and prospective customers, marketing plans, and trade secrets of every kind and character, but shall not include (i) information that was already within the public domain at the time the information is acquired by Chairman, or (ii) information that subsequently becomes public through no act or omission of the Chairman. Chairman agrees that all of the confidential information is and shall continue to be the exclusive property of the Company, whether or not prepared in whole or in part by Chairman and whether or not disclosed to or entrusted to Chairman's custody. Chairman agrees that Chairman shall not, at any time following the execution of this Agreement, use or disclose in any manner any confidential information of the Company. (c) To the extent any inventions, technologies, reports, memoranda, studies, writings, articles, plans, designs, specifications, exhibits, software code, or other materials prepared by Chairman in the performance of services under this Agreement include material subject to copyright protection, such materials have been specially commissioned by the Company and they shall be deemed "work for hire" as such term is defined under U.S. copyright law. To the extent any such materials do not qualify as "work for hire" under applicable law, and to the extent they include material subject to copyright, patent, trade secret, or other proprietary rights protection, Chairman hereby irrevocably and exclusively assigns to the Company, its successors, and assigns, all right, title, and interest in and to all such materials. To the extent any of Chairman rights in the same, including without limitation any moral rights, are not subject to assignment hereunder, Chairman hereby irrevocably and unconditionally waives all enforcement of such rights. Chairman shall execute and deliver such instruments and take such other actions as may be required to carry out and confirm the assignments contemplated by this paragraph and the remainder of this Agreement. All documents, magnetically or optically encoded media, and other tangible materials created by Chairman, as part of its services under this Agreement shall be owned by the Company. (d) Chairman agrees that upon termination of this Agreement, Consultant will upon request, at company expense, return to the Company all drawings, blueprints, notes, memoranda, specifications, designs, writings, software, devices, documents and any other material containing or disclosing any confidential or proprietary information of the Company. After the Company requests return of materials, Chairman will not retain any copies or originals of such material. 4 6. ASSIGNMENT/ENTIRE AGREEMENT Neither party may assign its rights or obligations under this Agreement without the written consent of the other party. Neither this Agreement nor any provision hereof may be changed, waived, discharged, or terminated other than by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is being asserted. This Agreement constitutes the entire Agreement between the parties and supersedes any prior or contemporaneous written or oral agreements, representations and warranties between them with respect to the subject matter hereof. If any provision of this Agreement is held unenforceable or inoperative by any court either or whole or in part the remaining provisions shall be deemed severable and unaffected and shall continue in full force and effect. 7. MISCELLANEOUS (a) Indemnity. Chairman agrees to indemnify, defend, and hold the Company and its successors, officers, directors, agents and employees harmless from any and all actions, causes of action, claims, demands, cost, liabilities, expenses and damages (including attorneys' fees) arising out of, or in connection with any breach of Sections 4 and 5 of this Agreement by Chairman. (b) Relationship of Parties. Chairman is an independent contractor of the Company. Nothing in this Agreement shall be construed as creating an employer-employee relationship, as a guarantee of future employment or engagement, or as a limitation upon the Company' s sole discretion to terminate this Agreement at any time without cause. Chairman further agrees to be responsible for all of Chairman's federal and state taxes, withholding, social security, insurance, and other benefits except as otherwise expressly set forth herein. (c) Other Activities. Chairman is free to engage in other independent contracting activities, provided that Chairman does not engage in any such activities which are inconsistent with or in conflict with any provisions hereof, or that so occupy Chairman's attention as to interfere with the proper and efficient performance of Chairman's Services hereunder. Chairman agrees not to induce or attempt to influence, directly or indirectly, any employee at the Company to terminate his/her employment and work for Chairman or any other person. (d) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to conflict of law principles. 5 (e) Remedy for Breach. The parties hereto agree that, in the event of breach or threatened breach of any covenants of Chairman, the damage or imminent damage to the value and the goodwill of the Company's business shall be inestimable, and that therefore any remedy at law or in damages shall be inadequate. Accordingly, the parties hereto agree that the Company shall be entitled to injunctive relief against Chairman in the event of any breach or threatened breach of any of such provisions by Chairman, in addition to any other relief (including damages) available to the Company under this Agreement or under law. (f) Survival. Sections 5, 7(a), 7(e) and 7(f) shall survive termination of this Agreement. IN WITNESS WHEREOF, the Parties hereto set their hands this 17th day of May 2000. ENDOREX CORPORATION By:______________________________________ Michael S. Rosen, President/CEO CHAIRMAN: By: _____________________________________ Kenneth Tempero, M.D., Ph.D. 6 APPENDIX A ---------- Endorex Job Description Position: Non-Executive Chairman of the Board - --------- Key Responsibilities: - --------------------- 1. Corporate Strategy a. Works with CEO and key management to formulate, codify in writing, and periodically update a Board-approved long-range strategy statement. b. Oversees management's generation and periodic updates of the corporate business plan. 2. Board Function a. Sets agendas, oversees generation of Board books, and chairs Board meetings. b. Determines membership and maintains an oversight function with regards to Board committees. c. Analyzes profiles of expertise among Board members, observes functionality and works with Board, management and major shareholders to augment and evolve Board membership and skills as needed for corporate success. d. Serves as interim CEO in the event of disability or conflict incapacitating CEO. 3. Interaction with Management a. Assumes primary responsibility for communication of Board's performance evaluations, suggestions regarding functionality, etc. of CEO to the CEO and, further, assumes responsibility of working with CEO to generate and carry out development plans to meet the Board's desires and guidance. b. Reviews (on a regular and frequent basis) with CEO and key management (as appropriate) progress against corporate objectives and the business plan and, further, relates same to the long-range strategy. Maintains awareness and oversight with regards to adjustments management undertakes to keep the above "in sync" and ascertains that Board is aware of same in an adequate and timely manner. c. By consulting with the corporate Scientific Advisory Boards, corporate management and corporate joint venture partners on a periodic basis, forms a "board level" evaluation of their sense of progress, concerns (if any), frustration, etc. and communicates same directly to the Board. This may involve, among other activities, occasional attendance of joint venture working and/or management meetings. d. Works with CEO to create and maintain a succession program (acceptable to the Board) for key corporate positions. 7 e. Makes himself/herself available to consult with management regarding business development issues or joint venture activities or to meet with potential investors and/or owners of intellectual property for which the company is negotiating on an "on call" basis. 4. Other Any other duties or responsibilities assigned by the Board of Directors. Time Commitment - --------------- Estimated to initially require four (4) days per month, but expected to average seven (7) days per month. Compensation - ------------ A package will be designed to recognize time and effort while maintaining independent status for the Chairman. Expenses incurred in association with these duties will be reimbursed (directly and/or, where more practical, via allowance). Term of Office - -------------- To be set by the Board. 8 EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet and consolidated statement of operations and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 10,170,382 4,030,281 0 0 0 14,379,141 1,150,228 (723,389) 15,012,487 2,111,497 0 9,344,530 9,667,159 12,861 (6,394,699) 15,012,487 0 320,965 0 (1,449,714) (1,578,855) 0 (23,020) (2,730,624) 0 (2,730,624) 0 0 0 (2,730,624) (0.29) (0.29)
EX-99.1 6 0006.txt RISK FACTORS RISK FACTORS An investment in our shares involves a high degree of risk and if any of the risks discussed below come to fruition you may lose all or part of your investment. In deciding whether to purchase shares of our common stock, you should carefully consider the following risk factors, in addition to other information contained in this 10-QSB, in our most recent annual report on Form 10-KSB, and in any other documents incorporated by reference from other SEC filings. This 10-QSB also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here or incorporated by reference. Factors that could cause or contribute to differences in our actual results include those discussed in this section, as well as those discussed elsewhere in this 10QSB and in other documents incorporated by reference. If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued. We will require additional funding to sustain our research and development efforts, provide for future clinical trials, and continue our operations until we are able to generate sufficient revenue from the sale and/or licensing of our products. We cannot be certain whether we will be able to obtain additional funding on terms satisfactory to us, if at all. In addition, we have expended, and will continue to expend, substantial funds on the preclinical development of our product candidates and on preparing for clinical trials. We currently have commitments to expend additional funds for the development of the Orasome/TM/ oral delivery system, the MEDIPAD(R) infusion pump for iron chelation therapy, license contracts, severance arrangements, employment agreements, and consulting agreements. If we are unable to raise additional funds when necessary, we may have to reduce or discontinue development, commercialization or clinical testing of some or all of our product candidates or enter into financing arrangements on terms that we would not otherwise accept. We have had significant losses and anticipate future losses. We are a development stage company, have experienced significant losses since inception and have a significant accumulated deficit. We expect to incur significant additional operating losses in the future and expect cumulative losses to substantially increase due to expanded research and development efforts, preclinical studies and clinical trials. All of our products are currently in research and development, preclinical studies or clinical trials (cancer products), and we have not generated revenues from product sales or licensing. There can be no guarantee that we will ever generate product revenues sufficient to become profitable or to sustain profitability. We may not be able to successfully sell our cancer products business. On March 1, 2000 we announced our decision to exit and/or divest our oncology business and related products to focus on our drug delivery business and products. We cannot assure you that we will be able to implement this new business strategy or that it will be successful if implemented. Furthermore, we cannot assure you that we will be able to divest our oncology business on terms acceptable to us, if at all. We are dependent on our joint ventures with Elan Corporation and any future joint ventures or corporate partnerships. Our strategy for research, development and commercialization of certain of our products is to rely on arrangements with corporate partners. As a result, our products are dependent upon the success of third parties in performing preclinical studies and clinical trials, obtaining regulatory approvals, manufacturing and marketing. In connection with our two joint ventures with Elan, we are obligated to fund research and development activities in proportion to our ownership interest in each joint venture, currently 80.1% of each joint venture, based on the research and development plan and budget that we mutually agree upon with Elan. If we do not have sufficient resources to meet our funding obligations under each of the two Elan joint ventures, we may have to terminate the venture prior to commercialization or renegotiate the terms of the joint venture with Elan, or our interest in the venture may be diluted. Newco, our MEDIPAD(R) iron chelator joint venture with Elan, has licensed its first product on a worldwide basis to Schein Pharmaceutical, which is expected to be acquired by Watson Laboratories. Schein Pharmaceutical will develop and market this product in the United States, and Newco and Schein will jointly seek partners for marketing the product outside of the United States. We cannot assure you that Schein and Newco will successfully develop, market or commercialize this product in the United States or internationally. We have also signed an exclusive research and option agreement with Novo Nordisk to license our Orasome(TM) oral delivery system for their human growth hormone product, Norditropin(R). We cannot assure you that Novo Nordisk will license and develop this technology for this product. We intend to pursue additional collaborations in the future; however, the terms available may not be acceptable to us and the collaborations may not be successful. In addition, the amount and timing of resources that our collaborators devote to these activities are not within our control. Problems in product development may cause our cash depletion rate to increase. We have limited experience with clinical trials and if we encounter unexpected difficulties with our operations or clinical trials, we may have to expend additional funds, which would increase our cash depletion rate. Our ability to manage expenses and our cash depletion rate are keys to the continued development of product candidates and the completion of ongoing clinical trials. Our cash depletion rate will vary substantially from quarter to quarter as we fund non-recurring items associated with clinical trials, product development, patent legal fees and consulting fees. Our product development and commercialization efforts may not be successful. Our product candidates, which have not received regulatory approval, are generally in the research and development and preclinical stages of development. If the initial results from any future clinical trials are poor, those results will adversely affect our ability to raise additional capital, which will affect our ability to continue full-scale research and development for our oral delivery technology. In addition, product candidates resulting from our research and development efforts, if any, are not expected to be available commercially for several years, if at all. Our products, if approved, may not be immediately used by doctors unfamiliar with our product applications. We or our marketing partner may be required to implement an aggressive education and promotion plan with doctors in order to gain market recognition, understanding and acceptance of our products. Any such effort may be time consuming and might not be successful. Accordingly, we cannot guarantee that our product development efforts, including clinical trials, or commercialization efforts will be successful or that any of our products, if approved, can be successfully marketed. Our technology and products may prove ineffective or harmful, or be too expensive to market successfully. Our future success is significantly dependent on our ability to develop and test workable products for which we will seek approval from the U.S. Food and Drug Administration, or FDA, and/or from the FDA's equivalents in other countries, to market to certain defined patient groups. Although we are involved in developing oral versions of injectable drugs and vaccines that have already been approved by the FDA, the oral products we are currently developing will require significant additional laboratory and clinical testing and investment for the foreseeable future. Our product candidates may not show sufficient efficacy in animal models to justify continuing research into clinical testing stages or may not prove to be effective in clinical trials or they may cause harmful side effects during clinical trials. In addition, our product candidates, if approved, may prove impracticable to manufacture in commercial quantities at a reasonable cost and/or with acceptable quality. Any of these factors could negatively affect our financial position and results of operations. Our product development and commercialization efforts may be reduced or discontinued due to difficulties or delays in clinical trials. We may encounter unanticipated problems, including development, manufacturing, distribution, financing and marketing difficulties, during the product development, approval and commercialization process. Our product candidates may take longer than anticipated to progress through clinical trials. In addition, patient enrollment in the clinical trials may be delayed or prolonged significantly, thus delaying the clinical trials and causing increased costs. If we experience any such difficulties or delays, we may have to reduce or discontinue development, commercialization or clinical testing of some or all of our product candidates. Our dependence on a limited number of suppliers may negatively impact our ability to complete clinical trials and market our products. We do not have the capacity to manufacture our potential products and, accordingly, prior to commercial distribution of any of our products, if approved, we will be required to identify and contract with a commercial supplier or manufacturer or build an FDA-certified manufacturing facility. We cannot guarantee that these suppliers or manufacturers will be able to qualify their facilities under regulations imposed by the FDA or that they will be able to label and supply us with drugs in a timely manner, if at all. Accordingly, any change in our existing or future contractual relationships with, or an interruption in supply from, any third-party service provider or supplier could negatively impact our ability to complete clinical trials and to market our products, if approved. Should we deem it necessary to build or buy our own manufacturing facility, we cannot assure you that we will have the funds available to do so or that the FDA will certify such facility. We do not have a sales force to market our products. If and when we receive approval from the FDA for our initial product candidates, the marketing of these products will be contingent upon our ability to either license these products or enter into marketing agreements with partner companies or our ability to recruit, develop, train and deploy our own sales force. We currently intend to sell our products in the United States and internationally in collaboration with one or more marketing partners. However, we presently have only one agreement for the licensing or marketing of our product candidates, and we cannot assure you that we will be able to enter into any such additional agreements in a timely manner or on commercially favorable terms, if at all. Additionally, we do not presently have a sales force, or possess the resources or experience necessary to market any of our product candidates, if and when they are approved. Development of an effective sales force requires significant financial resources, time and expertise. We cannot assure you that we will be able to obtain the financing necessary to establish such a sales force in a timely or cost effective manner, if at all, or that such a sales force will be capable of generating demand for our product candidates, if and when they are approved. We maintain only limited product liability insurance and may be exposed to claims if our insurance coverage is insufficient. The manufacture and sale of our products involves an inherent risk of product liability claims. We currently have product liability insurance with limits of liability of $10 million. Because product liability insurance is expensive and difficult to obtain, we cannot assure you that we will be able to maintain existing insurance or obtain additional product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Our inability to obtain sufficient insurance coverage on acceptable terms or to otherwise protect against potential product liability claims in excess of our insurance coverage, if any, could negatively impact our financial position and results of operations. We use hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper handling, storage, or disposal of these materials could be time consuming and costly. Our research and development processes involve the controlled use of hazardous materials, including hazardous chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handling, and disposal of these materials. We believe that our current operations comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, we could be sued for injury or contamination that results from our use or the use by third parties or our collaborators of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or commercialization efforts. We may not be able to compete with our competitors in the biotechnology industry. The biotechnology industry is intensely competitive, subject to rapid change and sensitive to new product introductions or enhancements. Virtually all of our existing competitors have greater financial resources, larger technical staffs, and larger research budgets than we have, as well as greater experience in developing products and conducting clinical trials. Our competitors in the vaccine delivery field include: Aviron, which is developing a nasal flu vaccine that is in Phase III clinical trials; BioVector Therapeutics, which is in Phase I trials with an intranasal flu vaccine, and other specialized biotechnology firms, universities, and governmental agencies. Our competitors in the liposomal formulation field include The Liposome Company (owned by Elan Corporation), Gilead Sciences, Inc. and ALZA Corporation. Our competitors in the field of the oral delivery of protein and peptide-based drugs include Emisphere Technologies, which has started Phase III trials for oral heparin and (through its collaborator Novartis) Phase I trials with oral calcitonin; Unigene Laboratories, which has an oral calcitonin product in Phase I/II trials; and Nobex Corp. (formerly known as Protein Delivery) which has an oral insulin in Phase II clinical trials. In addition, there may be other companies which are currently developing competitive technologies and products or which may in the future develop technologies and products which are comparable or superior to our technologies and products. Accordingly, we cannot assure you that we will be able to compete successfully with our existing and future competitors or that competition will not negatively affect our financial position or results of operations in the future. We may not be successful if we are unable to obtain and maintain patents and licenses to patents. Our success depends, in large part, on our ability to obtain and maintain a proprietary position in our products through patents, trade secrets and orphan drug designations. We have been granted several United States patents and have submitted several United States patent applications and numerous corresponding foreign patent applications, and have also obtained licenses to patents or patent applications owned by other entities. However, we cannot assure you that any of these patent applications will be granted or that our patent licensors will not terminate any of our patent licenses. We also cannot guarantee that any issued patents will provide competitive advantages for our products or that any issued patents will not be successfully challenged or circumvented by our competitors. Further, the laws of certain countries may not protect our proprietary rights to the same extent as U.S. law. We are dependent upon our license of oral delivery technology from MIT, and licenses from Elan in connection with our two joint ventures with Elan. We cannot assure you that the technology underlying such licenses will be profitable, or that we will be able to retain licenses for such technologies or that we will obtain patent protection outside the United States. To the extent that we rely on trade secret protection and confidentiality agreements to protect our technology, others may develop similar technology, or otherwise obtain access to our findings or research materials embodying those findings. The application of patent law to the field of biotechnology is relatively new and has resulted in considerable litigation. There is a substantial risk in the rapidly developing biotechnology industry that patents and other intellectual property rights held by us could be infringed by others or that products developed by us or their method of manufacture could be covered by patents owned by other companies. Although we believe that our patents and our licensors' patents do not infringe on any third party's patents, we cannot be certain that we can avoid litigation involving such patents or other proprietary rights. Patent and proprietary rights litigation entails substantial legal and other costs, and we may not have the necessary financial resources to defend or prosecute our rights in connection with any litigation. Responding to, defending or bringing claims related to patents and other intellectual property rights may require our management to redirect our human and monetary resources to address these claims and may take years to resolve. Our product development and commercialization efforts may be reduced or discontinued due to delays or failure in obtaining regulatory approvals. We will need to do substantial additional development and clinical testing prior to seeking any regulatory approval for commercialization of our product candidates. Testing, manufacturing, commercialization, advertising, promotion, export and marketing, among other things, of our proposed products are subject to extensive regulation by governmental authorities in the United States and other countries. The testing and approval process requires substantial time, effort and financial resources and we cannot guarantee that any approval will be granted on a timely basis, if at all. At least initially, we intend, to the extent possible, to rely on licensees to obtain regulatory approval for marketing our products. The failure by us or our licensees to adequately demonstrate the safety and efficacy of any of our product candidates under development could delay, limit or prevent regulatory approval of the product, which may require us to reduce or discontinue development, commercialization or clinical testing of some or all of our product candidates. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in conducting advanced human clinical trials, even after obtaining promising results in earlier trials. Furthermore, the United States Food & Drug Administration may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Also, even if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Accordingly, we may experience difficulties and delays in obtaining necessary governmental clearances and approvals to market our products, and we may not be able to obtain all necessary governmental clearances and approvals to market our products. Our products, if approved, may not be commercially viable due to health care changes and third-party reimbursement limitations. Recent initiatives to reduce the federal deficit and to change health care delivery are increasing cost-containment efforts. We anticipate that Congress, state legislatures and the private sector will continue to review and assess alternative benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, price controls on pharmaceuticals, and other fundamental changes to the health care delivery system. Any such changes could negatively impact the commercial viability of our products, if approved. Our ability to successfully commercialize our product candidates, if and when they are approved, will depend in part on the extent to which appropriate reimbursement codes and authorized cost reimbursement levels of such products and related treatment are obtained from governmental authorities, private health insurers and other organizations, such as health maintenance organizations. In the absence of national Medicare coverage determination, local contractors that administer the Medicare program, within certain guidelines, can make their own coverage decisions. Accordingly, there can be no assurance that any of our product candidates, if approved and when commercially available, will be included within the then current Medicare coverage determination or the coverage determination of state Medicaid programs, private insurance companies and other health care providers. In addition, third- party payers are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care and the growth of health maintenance organizations in the United States may all result in lower prices for our products, if approved and when commercially available, than we currently expect. The cost containment measures that health care payers and providers are instituting and the effect of any health care changes could negatively affect our financial performance, if and when one or more of our products are approved and available for commercial use. Our operations and financial performance could be negatively affected if we cannot attract and retain key personnel. Our success is dependent, in part, upon a limited number of key executive officers and technical personnel, including Michael S. Rosen, our President and Chief Executive Officer and Frank C. Reid, our Vice President of Finance and Corporate Development. We also believe that our future success will depend largely upon our ability to attract and retain key executive personnel and highly skilled research and development and technical personnel. Although we maintain and are the beneficiary of key man insurance on Mr. Rosen, we do not believe the proceeds would be adequate to compensate us for his loss. We face intense competition in our recruiting activities, including competition from larger companies with greater resources. We cannot assure you that we will be successful in attracting or retaining skilled personnel. The loss of certain key employees or our inability to attract and retain other qualified employees could negatively affect our operations and financial performance. Our stock price is highly volatile and our common stock is thinly traded. The market price of our common stock, like that of many other development- stage public pharmaceutical and biotechnology companies, has been highly volatile and may continue to be so in the future. Factors such as disclosure of results of preclinical and clinical testing, adverse reactions to products, governmental regulation and approvals, and general market conditions may have a significant effect on the market price of the common stock and our other equity securities. Since it commenced trading on the American Stock Exchange on August 6, 1998, our common stock has been thinly traded. We cannot guarantee that a more active trading market will develop in the future. Investors may suffer substantial dilution. Endorex has a number of agreements or obligations that may result in dilution to investors. These include: . warrants to purchase 2,012,622 shares of common stock at $2.54375 per share, subject to adjustment, issued in connection with our October 1997 private placement of common stock; . warrants to purchase 230,770 shares of common stock at $10.00 per share, subject to adjustment, held by Elan; . warrants to purchase 43,334 shares of common stock at $2.3125 per share, subject to adjustment, held by the Aries Master Fund and warrants to purchase 23,334 shares of common stock at $2.3125 per share, subject to adjustment, held by the Aries Domestic Fund, L.P.; . warrants to purchase 452,383 shares of common stock at $5.91 per share, subject to adjustment, held by certain investors pursuant to the April 2000 private placement of our common stock; . warrants to purchase 226,190 shares of common stock at $5.25 per share, subject to adjustment, issued in connection with the April 2000 private placement of our common stock; . conversion rights and dividend rights of preferred stock held by Elan, consisting of 92,973, subject to adjustment, shares of Series B Convertible Preferred Stock ($8.0 million original liquidation value) bearing an 8% cumulative payment-in-kind dividend and convertible at liquidation value into common stock at $7.38 per share, subject to adjustment, and 91,218, subject to adjustment, shares of Series C Exchangeable Convertible Preferred Stock ($8.4 million original liquidation value) bearing a 7% cumulative payment-in- kind dividend and which is exchangeable for part of Endorex's interest in the second joint venture or convertible at liquidation value into common stock at $8.86 per share, subject to adjustment; . options to purchase approximately 1.6 million shares of common stock outstanding to participants in our stock option plan with a weighted average exercise price of approximately $2.78; and . anti-dilution rights under the above warrants and preferred, which can permit purchase of additional shares and/or lower exercise/conversion prices under certain circumstances. To the extent that anti-dilution rights are triggered, or warrants or conversion rights are exercised, our stockholders will experience substantial dilution and the Company's stock price may decrease. Future sales of common stock by our existing stockholders could adversely affect our stock price. The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. We have not paid cash dividends. We have never paid cash dividends on our common stock and we do not anticipate paying any dividends in the foreseeable future. We currently intend to retain earnings, if any, for the development of our business. We have certain interlocking relationships that may present potential conflicts of interest. Lindsay A. Rosenwald, M.D., is the Chairman and sole stockholder of Paramount Capital Asset Management, Inc. ("PCAM"), Paramount Capital, Inc. ("Paramount"), and Paramount Capital Investment LLC ("PCI"), a merchant banking and venture capital firm specializing in biotechnology companies. PCAM is the investment manager of The Aries Master Fund II, a Cayman Island exempted company, and the general partner of each of the Aries Domestic Fund, L.P. and the Aries Domestic Fund II, L.P., each of which is a significant stockholder of Endorex. In addition, certain officers, employees and/or associates of Paramount and/or its affiliates own securities in a subsidiary of Endorex. In the regular course of its business, PCI identifies, evaluates and pursues investment opportunities in biomedical and pharmaceutical products, technologies and companies. Generally, Delaware corporate law requires that any transactions between Endorex and any of its affiliates be on terms that, when taken as a whole, are substantially as favorable to us as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction. Nevertheless, neither such affiliates nor PCI is obligated pursuant to any agreement or understanding with us to make any additional products or technologies available to us. We do not expect and you should not expect, that any biomedical or pharmaceutical product or technology identified by such affiliates or PCI in the future will be made available to us. In addition, certain of the current officers and directors of Endorex or any officers or directors of the company hereafter appointed may from time to time serve as officers, directors or consultants of other biopharmaceutical or biotechnology companies. There can be no assurance that such other companies will not have interests in conflict with us. Certain directors and stockholders have significant influence. Our directors, executive officers and principal stockholders and certain of their affiliates have the ability to influence the election of directors and most other stockholder actions. In particular, pursuant to a placement agency agreement, Paramount may propose up to three persons for nomination as directors until October 2000. In addition, our Board of Directors cannot exceed six persons without the prior written consent of Paramount until October 2000. These arrangements may discourage or prevent any proposed takeover of Endorex, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market prices. Such stockholders may influence corporate actions, including influencing elections of directors and significant corporate events. -----END PRIVACY-ENHANCED MESSAGE-----