MACROCHEM CORPORATION
110 HARTWELL AVENUE
LEXINGTON, MASSACHUSETTS 02421
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 18, 2006
----------------------------
The Annual Meeting of Stockholders of MacroChem Corporation ("MacroChem" or
the "Company"), a Delaware corporation, will be held on Thursday, May 18, 2006
at 10:00 a.m. at the offices of Ropes & Gray LLP, One International Place, 36th
Floor, Boston, Massachusetts, for the following purposes:
1. To elect seven members of the Board of Directors to serve for the
ensuing year and until their successors are elected and qualified.
2. To ratify the appointment of Vitale, Caturano & Company, Ltd. as
independent registered public accounting firm for the Company for the
fiscal year ending December 31, 2006.
3. To approve a proposal to amend the Company's 2001 Incentive Plan to
increase the number of shares of Common Stock authorized for issuance
under the Incentive Plan by 1,250,000.
4. To transact other business properly coming before the meeting.
Stockholders owning shares of MacroChem common stock at the close of
business on April 7, 2006 are entitled to attend and vote at the meeting.
We hope that all stockholders will be able to attend the meeting. To assure
that a quorum is present at the meeting, please date, sign and promptly return
the enclosed proxy whether or not you expect to attend the meeting. IF YOU PLAN
TO ATTEND THE MEETING, PLEASE MARK THE APPROPRIATE BOX ON THE ENCLOSED PROXY. A
postage-prepaid envelope has been enclosed for your convenience. If you attend
the meeting, you may vote your shares in person.
By Order of the Board of Directors,
Glenn E. Deegan, Esq.
VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
Lexington, Massachusetts
April 19, 2006
MACROCHEM CORPORATION
110 HARTWELL AVENUE
LEXINGTON, MASSACHUSETTS 02421
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PROXY STATEMENT
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ANNUAL MEETING OF STOCKHOLDERS
MAY 18, 2006
The enclosed proxy is solicited by the Board of Directors of MacroChem
Corporation (the "Company") for use at the Annual Meeting of Stockholders to be
held on Thursday, May 18, 2006, and at any adjournment thereof.
The Company's Annual Report on Form 10-K for the year ended December 31,
2005 is being mailed together with this Proxy Statement to all stockholders
entitled to vote at the meeting. This Proxy Statement and the accompanying proxy
card were first mailed to stockholders on or about April 19, 2006.
On December 30, 2005 we implemented a 1-for-7 reverse stock split of our
common stock and on February 9, 2006 we implemented a subsequent 1-for-6 reverse
stock split of our common stock. Unless otherwise noted, data used throughout
this Proxy Statement has been adjusted to reflect these reverse splits.
Stockholders of record at the close of business on April 7, 2006 will be
entitled to vote at the meeting. On that date, 996,909 shares of common stock of
the Company were issued and outstanding. Each share of common stock entitles the
holder to one vote with respect to all matters submitted to stockholders at the
meeting. In addition, as of April 7, 2006, 825.5 shares of our Series C
Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") were
issued and outstanding. The Series C Preferred Stock is convertible into shares
of common stock and votes together with the common stock on an as-if-converted
to common stock basis. Unless a holder of Series C Preferred Stock elects
otherwise, its ability to convert its Series C Preferred Stock into common stock
or to vote on an as-if-converted to common stock basis is restricted to the
extent that such conversion would result in the holder owning more than 4.95% of
our issued and outstanding common stock or voting together with the common stock
on an as-if-converted to common stock basis in respect of more than 4.95% of our
issued and outstanding common stock. Three holders of our Series C Preferred
Stock have elected not to be governed by these restrictions, although we have
entered into an agreement with one such holder whereby that holder's ability to
convert or vote its shares of Series C Preferred Stock will be subject to a
beneficial ownership cap of 9.95% instead of 4.95%. Consequently, giving effect
to the beneficial ownership cap restrictions, the Series C Preferred Stock
issued and outstanding as of April 7, 2006 is convertible into 4,057,882 shares
of common stock and the holders of the Series C Preferred Stock vote on an
as-converted basis with the holders of our common stock. The Company has no
other voting securities.
Execution of a proxy will not in any way affect a stockholder's right to
attend the meeting and vote in person. A stockholder may revoke a proxy at any
time before it is exercised by written notice to the Company's Secretary prior
to the meeting, or by giving to the Company's Secretary a duly executed proxy
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bearing a later date than the proxy being revoked at any time before such proxy
is voted, or by appearing at the meeting and voting in person. The shares
represented by all properly executed proxies received in time for the meeting
will be voted as specified therein. If a stockholder does not specify in the
proxy how the shares are to be voted, they will be voted in favor of the
election as Directors of those persons named in the Proxy Statement, the
ratification of the appointment of Vitale, Caturano & Company, Ltd. as the
Company's independent registered public accounting firm for the fiscal year
ending December 31, 2006, the approval of an amendment to the Company's 2001
Incentive Plan to increase the number of shares of common stock available for
issuance under the Incentive Plan by 1,250,000, and otherwise in accordance with
the discretion of the named attorneys-in-fact and agents on any other matters
that may properly come before the meeting.
Expenses in connection with the solicitation of proxies will be paid by the
Company. Proxies are being solicited primarily by mail, but, in addition,
officers and regular employees of the Company, who will receive no extra
compensation for such services, may solicit proxies by telephone, telecopy,
facsimile, or personal calls.
The Board of Directors knows of no other matter to be presented at the
meeting. If any other matter should be properly presented at the meeting upon
which a vote may be taken, such shares represented by all proxies received by
the Board of Directors will be voted with respect thereto in accordance with the
judgment of the persons named as the proxies therein.
QUORUM, REQUIRED VOTES, AND METHOD OF TABULATION
Consistent with Delaware law and under the Company's bylaws, a majority of
the shares entitled to be cast on a particular matter, present in person or
represented by proxy, constitutes a quorum as to such matter. Votes cast by
proxy or in person at the meeting will be counted by persons appointed by the
Company to act as election inspectors for the meeting.
The seven nominees for election as Directors at the meeting who receive the
greatest number of votes properly cast for the election of Directors shall be
elected the Directors of the Company.
The election inspectors will count the total number of votes cast "for"
approval of Proposal Nos. 2 and 3 for purposes of determining whether sufficient
affirmative votes have been cast. The election inspectors will count shares
represented by proxies that withhold authority to vote for a nominee for
election as a Director or that reflect abstentions and "broker non-votes" (i.e.,
shares represented at the meeting held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have the authority to
vote on a particular matter) only as shares that are present and entitled to
vote on the matter for purposes of determining the presence of a quorum. Neither
abstentions nor broker non-votes have any effect on the outcome of voting on
Proposal Nos. 1, 2 and 3.
2
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Board of Directors has set the number of Directors to be elected for
the ensuing year at seven. The seven Directors will be elected to serve until
the Annual Meeting of Stockholders to be held in 2007 and until their successors
are elected and qualified. Vacancies and newly created directorships resulting
from any increase in the number of authorized Directors may be filled by a
majority vote of the Directors then remaining in office. Officers are elected by
and serve at the pleasure of the Board of Directors.
Shares represented by all proxies received by the Board of Directors and
not marked so as to withhold authority to vote for an individual Director, or
for all Directors, will be voted (unless one or more nominees are unable or
unwilling to serve) for the election of the nominees named below. The Board of
Directors knows of no reason why any such nominee should be unwilling to serve,
but if such should be the case, proxies will be voted for the election of some
other person or for fixing the number of Directors at a lesser number.
All of the nominees are currently Directors: Dr. John L. Zabriskie, Robert
J. DeLuccia, Dr. Michael A. Davis, Jeffrey B. Davis, Paul S. Echenberg, Howard
S. Fischer and Peter G. Martin. The following table and subsequent biographies
set forth the year each nominee was elected a Director and the age, positions,
and offices presently held by each nominee with the Company:
NAME AGE POSITION WITH MACROCHEM
- ----------------------------- ----- ----------------------------------------------------
John L. Zabriskie, Ph.D. 66 Chairman of the Board of Directors
Robert J. DeLuccia 60 President, Chief Executive Officer and Vice Chairman
of the Board of Directors
Michael A. Davis, M.D., Sc.D. 64 Director
Jeffrey B. Davis 42 Director
Paul S. Echenberg 62 Director
Howard S. Fischer 43 Director
Peter G. Martin 57 Director
- -----------------------------------------------------------------------------------------------
BACKGROUND
The following is a brief summary of the background of each nominee for
election as a Director of the Company:
JOHN L. ZABRISKIE, PH.D., has served as a Director of MacroChem since 2000
and was elected Chairman of the Board of Directors in 2001. Since 2001, he has
been a co-founder and Director of PureTech Ventures, LLC. From 1997 to 2000, he
was Chairman, President and Chief Executive Officer of NEN Life Science
Products, which was sold to Perkin Elmer. In 1994, Dr. Zabriskie became
Chairman, President and Chief Executive Officer of Upjohn; he was responsible
for Upjohn's merger with Pharmacia, and became Chief Executive Officer of the
merged company. Before his appointment at Upjohn, he spent nearly 30 years with
Merck & Company, rising to Executive Vice President and President of Merck
Manufacturing Division. He is a member of the Board of Directors of PureTech
Ventures, LLC (since 2000) and the following publicly traded companies: Array
Biopharma (since 2001) and Kellogg Company (since 1995). Dr. Zabriskie received
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a B.S. in chemistry from Dartmouth College and a Ph.D. in organic chemistry from
the University of Rochester.
ROBERT J. DELUCCIA has served as our President and Chief Executive Officer
and Vice Chairman of the Board of Directors since June 2003 and as a Director
since 2000. From 1998 to 1999, Mr. DeLuccia served as President and Chief
Executive Officer of Immunomedics, Inc., a Nasdaq-listed biopharmaceutical
company focused on the development and commercialization of antibody diagnostic
imaging and therapeutic products for cancer and infectious diseases. Prior to
Immunomedics, he was President of Sterling Winthrop Pharmaceuticals, the U.S.
subsidiary of Sanofi (now Sanofi-Aventis). Mr. DeLuccia began his career as a
pharmaceutical sales representative for Pfizer and progressed to Vice President
Marketing and Sales Operations for Pfizer's Roerig Division. He is also a member
of the board of directors of IBEX Technologies, a publicly traded (TSX)
pharmaceutical company specializing in the development of biological markers for
diagnosis, monitoring and treatment of cancer and arthritis, and TOPIGEN
Pharmaceuticals, Inc., a privately held biopharmaceutical company and developer
of anti-inflammatory respiratory products. Mr. DeLuccia holds both a B.S. and an
M.B.A. in marketing from Iona College.
MICHAEL A. DAVIS, M.D., SC.D., has served as a Director of MacroChem since
1997 and provided medical and pharmaceutical consulting services to MacroChem
from 1991 to 2003. He currently is Medical Director of E-Z-EM, Inc., a public
company engaged in supplying oral radiographic contrast media and medical
devices. Dr. Davis served as a Director of E-Z-EM from 1995 to 2004 and
currently holds the designation of Director Emeritus. In November of 2004 he was
elected a Director and Chairman of the Executive Committee of OmniCorder
Technologies, Inc. (renamed Advanced BioPhotonics, Inc.), a public company
engaged in infrared imaging of perfusion. In January 2006, he was appointed
Research Professor of Radiology at SUNY/Stony Brook. From 1980 to 2002, Dr.
Davis was Professor of Radiology and Nuclear Medicine and Director of the
Division of Radiologic Research at the University of Massachusetts Medical
School. From 1986 to 2002, he was Affiliate Professor of Biomedical Engineering
at Worcester Polytechnic Institute. From 1982 to 1997, Dr. Davis was Adjunct
Professor of Surgery at Tufts University School of Veterinary Medicine. In
addition, from February to November 1999 he was President and Chief Executive
Officer of Amerimmune Pharmaceuticals, Inc., a public company, and its wholly
owned subsidiary, Amerimmune Inc., which is engaged in developing drugs relating
to the immune system. From February 1999 to March 2003, Dr. Davis served as a
Director of both Amerimmune Pharmaceuticals, Inc. and Amerimmune Inc. Dr. Davis
received a B.S. and M.S. from Worcester Polytechnic Institute, an S.M. and Sc.D.
from the Harvard School of Public Health, an M.B.A. from Northeastern University
and an M.D. from the University of Massachusetts Medical School.
JEFFREY B. DAVIS has served as a Director of MacroChem since 2005. Since
1997, Mr. Davis has been president of SCO Securities LLC. Prior to joining SCO
Securities LLC, from 1995 to 1997, Mr. Davis served as senior vice president and
chief financial officer of HemaSure, Inc., a publicly traded development stage
healthcare technology company. From 1990 to 1995, he was vice president,
corporate finance, at Deutsche Morgan Grenfell, both in the U.S. and Europe.
Prior to that, he served in senior marketing and product management positions at
AT&T Bell Laboratories, where he was also a member of the technical staff, and
he was involved in marketing and product management at Philips Medical Systems
North America. Mr. Davis served previously on the board of Bioenvision, Inc.
(Nasdaq: BIVN) and currently is a member of the board of directors of Virium
Pharmaceuticals, Inc. and Access Pharmaceuticals, Inc., private biotechnology
companies. Mr. Davis was initially elected to the Board of Directors as the
4
designee of SCO Capital Partners LLC, who purchased three hundred shares of our
Series C Cumulative Convertible Preferred Stock in a private placement closing
in December 2005 and February 2006. SCO Capital Partners LLC has the right to
designate two individuals to serve on our board of directors for as long as at
least 20% of the shares of Series C Preferred Stock issued in that private
placement remain outstanding. Mr. Davis holds a BS in biomedical engineering
from Boston University and an MBA degree from The Wharton School, University of
Pennsylvania.
PAUL S. ECHENBERG has served as a Director of MacroChem since 2000. Since
1997, he has been the President and Chief Executive Officer of Schroders &
Associates Canada, Inc. and a director of Schroder Ventures Limited. These firms
provide merchant banking advisory services to a number of Canadian buy-out
funds. He is a director of the following publicly traded companies: E-Z-EM,
Inc., AngioDynamics, Inc. and Benvest Capital Inc., a merchant bank that he
co-founded. From 1989 to the present, Mr. Echenberg has also served as President
of Eckvest Equity, Inc., a private merchant bank providing consulting and
personal investment services that he founded. From 1970 to 1989, he was
President and Chief Executive Officer of Twinpak, Inc., a manufacturer of
plastic packaging, and from 1982 to 1989 he was Executive Vice President of CB
Pak, Inc., a publicly traded plastic, glass and packaging company. Mr. Echenberg
received a B.Sc. from McGill University and an M.B.A. from Harvard Business
School.
HOWARD S. FISCHER has served as a Director of MacroChem since 2005. Since
December 2005, Mr. Fischer has been a Managing Director of SCO Securities LLC.
Prior to that, from January 2005 to September 2005 he was an investment manager
and research analyst for Silverback Asset Management's life sciences fund. From
2001 to 2004, he was President of an independent healthcare advisory business,
providing consulting services to a number of venture capital firms and their
portfolio companies, private equity groups and public and private corporations;
in addition, he served as a valuation expert in arbitration proceedings. From
1997 to 2001 Mr. Fischer was Executive Director at UBS/PaineWebber Global
Healthcare Investment Banking and a Director at Prudential Securities Healthcare
Investment Banking. He began his investment banking career at Furman Selz LLC in
1986. Mr. Fischer was initially elected to the Board of Directors as the
designee of SCO Capital Partners LLC, who purchased three hundred shares of our
Series C Cumulative Convertible Preferred Stock in a private placement closing
in December 2005 and February 2006. SCO Capital Partners LLC has the right to
designate two individuals to serve on our board of directors for as long as at
least 20% of the shares of Series C Preferred Stock issued in that private
placement remain outstanding. Mr. Fischer holds an MBA from the University of
Chicago's Graduate School of Business and a BS degree from the Wharton School,
University of Pennsylvania.
PETER G. MARTIN has served as a Director of MacroChem since 1995. Since
1990, Mr. Martin has been an independent investment banker and venture
capitalist and currently an advisor to Enzo Biochem. Prior to 1990, he was a
commercial banker. Mr. Martin was initially elected to the Board of Directors as
the designee of David Russell, who privately purchased one million shares of our
Common Stock in 1995. Mr. Russell is no longer entitled to designate a Director
of MacroChem. Mr. Martin received a B.A. and J.D. from Fordham University and an
M.B.A. from Columbia University.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE DIRECTOR NOMINEES NAMED
ABOVE.
5
THE BOARD AND ITS COMMITTEES
BOARD MEETINGS
The Board of Directors held twenty one (21) meetings during 2005. All of
the Company's Directors attended at least 75 percent of the 2005 meetings of the
Board of Directors that they were eligible to attend and of those committees
that they were eligible to attend. In addition, all members of the Company's
Board of Directors attended the 2005 Annual Meeting of Stockholders. Although
the Company has no formal policies regarding director attendance at annual
meetings, it does expect all members of the Board of Directors to attend the
2006 Annual Meeting.
COMMITTEES OF THE BOARD OF DIRECTORS
There are three standing committees of the Board of Directors: an Audit
Committee, a Compensation Committee and a Nominating and Corporate Governance
Committee.
AUDIT COMMITTEE
Mr. Martin (Chairman), Dr. Davis and Mr. Echenberg serve as members of the
Audit Committee, which was established to assist the Board of Directors by (1)
reviewing our financial results and recommending the selection of our
independent registered public accounting firm; (2) reviewing the effectiveness,
quality and integrity of our accounting policies and practices, financial
reporting and internal controls; and (3) reviewing the scope of the audit, the
fees charged by the independent registered public accounting firm and any
transactions which may involve a potential conflict of interest. The Board of
Directors has determined that Mr. Echenberg is the "audit committee financial
expert." Each member of the Audit Committee is an independent director as
defined in National Association of Securities Dealers Marketplace Rule
4200(a)(15) and as required by the established criteria of the SEC. The Audit
Committee met four times during 2005.
COMPENSATION COMMITTEE
Dr. Davis (Chairman), Mr. Davis and Dr. Zabriskie serve on the Company's
Compensation Committee. The Compensation Committee was established for the
purposes of (i) determining the compensation of the Company's executive
officers, (ii) making awards under the Company's stock option plans, and (iii)
making recommendations to the Board of Directors with regard to the adoption of
new employee benefit plans. The Compensation Committee met six times during
2005.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Mr. Echenberg (Chairman), Dr. Zabriskie, Dr. Davis and Mr. Martin serve on
the Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee was established on May 6, 2004, and its charter is
available on the Company's website at WWW.MACROCHEM.COM. Prior to the formation
of the Nominating and Corporate Governance Committee, its functions were carried
out by the independent directors of the Board. The purposes of the Nominating
and Corporate Governance Committee are (i) to identify individuals qualified to
become members of the Board, (ii) to select, or to recommend that the Board
6
select, the director nominees for the next annual meeting of shareholders and
(iii) to develop and recommend to the Board a set of corporate governance
principles applicable to the Company. The Company does not currently pay any
third party a fee to assist in the process of identifying and evaluating
candidates for director. The Company has not received any nominees for director
from a stockholder or stockholder group that beneficially owns more than 5% of
the Company's common stock. SCO Capital Partners LLC, a stockholder that
beneficially owns more than 5% of the Company's Series C Preferred Stock, has
the right, pursuant to the amended and restated securities purchase agreement
entered into in connection with the private placement of our Series C Preferred
Stock that closed in December 2005 and February 2006, to designate two
individuals to serve on our board of directors for as long as at least 20% of
the shares of Series C Preferred Stock issued in that private placement remain
outstanding, and, as noted above, SCO Capital Partners LLC has designated
Jeffrey B. Davis and Howard S. Fischer. The Nominating and Corporate Governance
Committee conducted their activities during one meeting of the full Board. Each
member of the Nominating and Corporate Governance Committee is an independent
director as defined in National Association of Securities Dealers Marketplace
Rule 4200(a)(15) and as required by the established criteria of the SEC.
The Company's Nominating and Corporate Governance Committee may consider
nominees for director of the Company submitted in writing to the Chairman of the
Committee, which are submitted by executive officers of the Company, current
directors of the Company, search firms engaged by the Committee, and by others
in its discretion and, in the circumstances provided below, shall consider
nominees for director proposed by a stockholder. Information with respect to the
proposed nominee shall have been provided in writing by the stockholder to the
Company's Secretary at MacroChem Corporation, 110 Hartwell Avenue, Lexington, MA
02421, not less than 60 nor more than 90 days prior to the anniversary date of
the prior year's annual meeting, provided that if the current year's annual
meeting is not scheduled within 30 days of the anniversary date of the prior
year's annual meeting, notice from a stockholder shall be considered timely if
it is provided not later than the tenth day following which the notice of the
annual meeting was mailed or public disclosure of the date of the annual meeting
was made, whichever occurs first. The information shall include the name of the
nominee, and information with respect to the nominee as would be required under
the rules and regulations of the Securities and Exchange Commission to be
included in the Company's Proxy Statement if the proposed nominee were to be
included therein. In addition, the stockholder's notice shall also include the
class and number of shares the stockholder owns, a description of all
arrangements and understandings between the stockholder and the proposed
nominee, a representation that the stockholder intends to appear in person or by
proxy at the meeting to nominate the person named in its notice, a
representation as to whether the stockholder intends to deliver a proxy
statement to or solicit proxies from shareholders of the Company and information
with respect to the stockholder as would be required under the rules and
regulations of the Securities and Exchange Commission to be included in the
Company's Proxy Statement.
The Nominating and Corporate Governance Committee generally identifies
potential candidates for director by seeking referrals from the Company's
management and members of the Board of Directors and their various business
contacts. Candidates are evaluated based upon factors such as independence,
knowledge, judgment, integrity, character, leadership, skills, education,
experience, financial literacy, standing in the community and ability to foster
a diversity of backgrounds and views and to complement the Board's existing
strengths. There are no differences in the manner in which the Committee will
evaluate nominees for director based on whether the nominee is recommended by a
stockholder.
7
PROPOSAL NO. 2
ACCOUNTING MATTERS AND RATIFICATION OF AUDITORS
Unless otherwise directed by the stockholders, the persons named in the
enclosed proxy will vote to ratify the selection of Vitale, Caturano & Company,
Ltd. as our independent registered public accounting firm for the fiscal year
ending December 31, 2006. A representative of Vitale, Caturano & Company, Ltd.
is expected to be present at the meeting, and will have the opportunity to make
a statement and answer appropriate questions from stockholders.
On January 24, 2006, Deloitte & Touche LLP ("Deloitte") resigned as our
independent registered public accounting firm.
Deloitte's report relating to the financial statements of the Company for
the year ended December 31, 2004 did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to audit scope or
accounting principles, except the report contained an explanatory paragraph
relating to the Company's ability to continue as a going concern. Deloitte's
report relating to the financial statements of the Company for the year ended
December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's fiscal years ended December 31, 2003 and December 31,
2004, and through January 24, 2006, the date which Deloitte resigned, the
Company had no disagreement with Deloitte on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to Deloitte's satisfaction, would have caused Deloitte to
make reference to the subject matter of the disagreement in connection with its
reports for such periods. During the Company's fiscal years ended December 31,
2003 and December 31, 2004, and through January 24, 2006, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
On February 14, 2006 and effective the same date, on the recommendation of
the Company's Audit Committee, the Company engaged Vitale, Caturano & Company
Ltd. ("Vitale") as its independent registered public accounting firm to audit
the Company's financial statements as of and for the fiscal year ending December
31, 2005 and to perform procedures related to the financial statements included
in the Company's quarterly reports on Form 10-Q, beginning with the quarter
ended March 31, 2006.
During the two most recent fiscal years and through February 14, 2006, the
Company has not consulted with Vitale on any matter which was the subject of any
disagreement or any reportable event as defined in Regulation S-K Item
304(a)(1)(iv) and Regulation S-K Item 304(a)(1)(v), respectively, or on the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, relating to which either a written report
was provided to the Company or oral advice was provided that Vitale concluded
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL NO. 2.
8
PROPOSAL NO. 3
APPROVAL OF THE AMENDMENT TO THE 2001 INCENTIVE PLAN
The MacroChem Corporation 2001 Incentive Plan (the "Incentive Plan") is
designed to enhance the ability of the company to attract, retain and motivate
high-quality personnel and others in a position to make significant
contributions to MacroChem's success by allowing them to become owners of
MacroChem common stock. Since the inception of the Incentive Plan, a total of
123,809 shares have been reserved for issuance under the Incentive Plan. As of
the record date, there were outstanding options to purchase 50,431 shares of
MacroChem common stock and 73,117 shares remained available for grant. The
benefits or amounts that will be granted in the future under the 2001 Plan are
not determinable.
On April 5, 2006, the Board of Directors voted, subject to stockholder
approval, to increase the number of shares of MacroChem common stock reserved
for issuance under the Incentive Plan by 1,250,000 shares resulting in a total
amount of 1,323,117 shares available for grant as of the record date. The Board
of Directors believes that equity awards are and will continue to be an
important part of employee compensation and that this increase is necessary both
to attract new personnel as the Company grows and to retain existing personnel.
The material features of the Incentive Plan are described below under
"Summary of the Incentive Plan." The summary is qualified in its entirety by
reference to the express provisions of the Incentive Plan, a copy of which was
included as Exhibit 99 to the Company's Form S-8 filed on August 8, 2001 (File
No. 333-67080) and may be obtained from the Company free of charge upon request
to the Secretary of the Company.
SUMMARY OF THE INCENTIVE PLAN
The purpose of the Incentive Plan is to advance the interests of the
Company by giving stock-based incentives or incentives based on performance
criteria to selected employees, directors and other persons or entities who
provide services to the Company or any affiliate.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors. Shares reserved for issuance under the Incentive Plan are
subject to adjustment for stock dividends and similar events. The Incentive Plan
provides for the grant by the Compensation Committee of stock options (both
incentive stock options and nonstatutory options), stock appreciation rights,
restricted stock, unrestricted stock, deferred stock, convertible securities and
performance awards, as well as loans or cash payments intended to help defray
the cost of other awards. Awards under the Incentive Plan may also include
provision for the payment of dividend equivalents with respect to the shares
subject to the awards. All key employees of the Company and other persons or
entities (including non-employee directors of the Company) who, in the opinion
of the Compensation Committee, are in a position to make a significant
contribution to the success of the Company are eligible to participate in the
Incentive Plan. There are currently 3 executive officers, 6 directors who are
not executive officers and approximately 2 employees who are not executive
officers who are eligible to participate in the Incentive Plan. The maximum
number of shares with respect to which stock options and stock appreciation
rights may be granted to any one participant in any calendar year is, in the
case of each type of award, 600,000 shares. No more than $1 million may be paid
to any individual with respect to a cash performance award; in applying this
limit, cash performance awards to the same individual that are determined by
reference to one year or shorter performance periods ending in the same fiscal
9
year are aggregated, as are multiple awards determined by reference to
multi-year performance periods ending in the same fiscal year. The maximum award
opportunity under a non-cash performance award other than a stock option or
stock appreciation right is 600,000 shares or their equivalent value in cash.
The exercise price of stock options will be determined by the Compensation
Committee, but in the case of an incentive stock option may not be less than
100% (110% in the case of a stockholder who beneficially owns 10% or more of the
Company's common stock) of the fair market value of the shares at the time of
grant. The term of each option will be set by the Compensation Committee and
each option will be exercisable at such time or times as the Compensation
Committee specifies. The option price may be paid in cash or check acceptable to
the Company or, if permitted by the Compensation Committee and subject to
certain additional limitations, by tendering shares held for at least six
months, for employees who are not executive officers or directors by using a
promissory note, by delivering to the Company an undertaking by a broker to
deliver promptly sufficient funds to pay the exercise price, or by a combination
of the foregoing.
Under the terms of the Incentive Plan, stock appreciation rights, or SARs,
are rights entitling the holder upon exercise to receive cash or common stock,
as the Compensation Committee determines, equal to a function (as determined by
the Compensation Committee) of the amount by which the common stock has
appreciated in value since the date of grant. Restricted stock awards consist of
common stock subject to restrictions that require that the shares be redelivered
to the Company if specified conditions are not satisfied. A deferred stock award
consists of a promise to deliver common stock or other securities in the future
on specified terms. A performance award is an award subject to performance
criteria. Performance awards may consist of awards intended to qualify for the
performance-based exception under Section 162(m) of the Internal Revenue Code
and awards that are not intended to qualify for that exception. In the case of a
performance award intended to qualify for the exception, the performance
criteria to which the award is subject must consist of objectively determinable
measures of performance relating to any of the following (determined on a
consolidated basis or, as the context permits, on a divisional, subsidiary, line
of business, project or geographical basis or in combinations thereof): (i)
sales; revenues; assets; expenses; earnings before or after deduction for all or
any portion of interest, taxes, depreciation, amortization or other items,
whether or not on a continuing operations or an aggregate or per share basis;
return on equity, investment, capital or assets; one or more operating ratios;
borrowing levels, leverage ratios or credit rating; market share; capital
expenditures; cash flow; stock price; stockholder return; technology licensing;
licensing of particular products; or any combination of the foregoing; or (ii)
acquisitions and divestitures (in whole or in part); joint ventures and
strategic alliances; spin-offs, split-ups and the like; reorganizations;
recapitalizations, restructurings, financings (issuance of debt or equity) and
refinancings; transactions that would constitute a change of control; or any
combination of the foregoing. A performance criterion measure and targets with
respect thereto determined by the Compensation Committee need not be based upon
an increase, a positive or improved result or avoidance of loss.
Except as otherwise provided by the Compensation Committee, if a
participant dies, options and SARs exercisable immediately prior to death may be
exercised during a period of one year following such death (or for the remainder
of their original term, if less) and options and SARs not exercisable at a
participant's death terminate.
10
In the case of termination of a participant's association with the Company
for reasons other than death, options and SARs generally remain exercisable, to
the extent they were exercisable immediately prior to termination, for six
months (or for the remainder of the original term, if less). If a participant's
employment terminates as a result of retirement at or after age 65, retirement
at or after age 55 and with at least ten years of continuous employment, or as a
result of disability as determined by the Company, or if the services of a
non-employee director who is a participant are terminated, the exercisable
portion of the option will continue to be exercisable for the original term of
the option. If any such association is terminated due to the participant's
discharge for cause which in the opinion of the Compensation Committee casts
such discredit on the participant as to justify immediate termination of any
award under the Incentive Plan, such participant's options and SARs shall
terminate immediately on cessation of association.
Except as otherwise provided by the Compensation Committee, outstanding
awards of restricted shares must be transferred to the Company upon a
participant's death or other termination of employment and, similarly, deferred
share grants, performance awards and supplemental awards to which a participant
is not irrevocably entitled will be forfeited.
In the event of certain acquisitions of the Company or its assets or a
liquidation of the Company, all outstanding awards will terminate as of the
effective date of the transaction, unless assumed. Prior to the effective date
of the transaction, each outstanding option and SAR that is not being assumed
(or for which a substitute award is not being guaranteed) in the transaction
will become exercisable in full. The Compensation Committee may in its sole
discretion remove certain conditions on outstanding awards in connection with
such transaction or place restrictions on amounts delivered or paid in
connection with such transaction with respect to stock subject to restrictions
under the Incentive Plan.
Awards may generally be transferred only by will or by the laws of descent
and distribution. However, options awarded to employees or Directors which are
not incentive stock options may be transferred (for no consideration) by a
participant to the spouse, children or grandchildren of the participant, a trust
or trusts for the exclusive benefit of such family members, or a partnership in
which such family members are the only partners, provided there is no
consideration for any such transfer. Any subsequent transfer would be similarly
restricted.
No award may be granted under the Incentive Plan after March 22, 2011, but
awards previously granted may be extended beyond that date. Subject to a
requirement that stockholder approval be obtained for certain actions requiring
stockholder approval under the Internal Revenue Code's incentive stock option
rules and rules limiting deductions for non-performance based compensation, the
Compensation Committee may extend or terminate the Incentive Plan at any time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax consequences
associated with stock option grants under the Incentive Plan under law as in
effect on the date of this Proxy Statement. The summary does not purport to
cover federal employment tax or other federal tax consequences that may be
associated with the Incentive Plan, nor does it cover state, local or non-U.S.
taxes.
11
INCENTIVE STOCK OPTIONS. In general, an optionee realizes no taxable income
for regular income tax purposes upon the grant or exercise of an incentive stock
option, or ISO, within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "IRC"). However, the exercise of an ISO may result in
an alternative minimum tax liability to the optionee. With certain exceptions, a
disposition of shares purchased under an ISO within two years from the date of
grant or within one year after exercise produces ordinary income to the optionee
(with a deduction available to the Company) equal to the value of the shares at
the time of exercise less the exercise price. In the case of a sale to an
unrelated party for a price less than the value of the shares at the time of
exercise, this ordinary income is normally capped by the gain on the sale, if
any. Any gain recognized in the disposition in excess of the ordinary income
amount is treated as a capital gain for which the Company is not entitled to a
deduction. If the optionee does not dispose of the shares until after the
expiration of these one- and two-year holding periods, any gain or loss
recognized upon a subsequent sale is treated as a long-term capital gain or loss
for which the Company is not entitled to a deduction.
In general, an ISO that is exercised more than three months after
termination of employment (other than termination by reason of death) is treated
as a nonstatutory option (see below). A special rule applies in the case of
termination of employment by reason of permanent disability. ISOs are also
treated as nonstatutory options to the extent they first become exercisable by
an individual in any calendar year for shares having a fair market value
(determined as of the date of the grant) in excess of $100,000.
NONSTATUTORY STOCK OPTIONS. In general, in the case of a nonstatutory
option (i) the optionee has no taxable income at the time of grant but realizes
income in connection with exercise of the option in an amount equal to the
excess (at time of exercise) of the fair market value of the shares acquired
upon exercise over the exercise price; (ii) a corresponding deduction is
available to the Company; and (iii) upon a subsequent sale or exchange of the
shares, any recognized gain or loss after the date of exercise is treated as
capital gain or loss for which the Company is not entitled to a deduction.
MISCELLANEOUS. Under the so-called "golden parachute" provisions of the
IRC, the grant, vesting or accelerated exercisability of awards in connection
with a change of control of the Company may be required to be valued and taken
into account in determining whether participants have received compensatory
payments, contingent on the change of control, in excess of certain limits. If
these limits are exceeded, a substantial portion of amounts payable to the
participant, including payments associated with the grant, vesting or exercise
of awards under the Incentive Plan, may be subject to an additional 20% federal
tax and may be nondeductible to the Company.
The Company's ability to claim a deduction in connection with awards under
the Incentive Plan may be further limited by Section 162(m) of the IRC, which
restricts to $1 million the amount a public corporation may deduct for certain
remuneration paid in any year to any of its top five officers. Certain forms of
remuneration are eligible for a performance-based exception to the $1 million
limit, including compensation associated with the exercise of non-discounted
stock options, or with payments or distributions under performance awards, that
are granted pursuant to shareholder-approved plans and that meet certain other
requirements.
The foregoing description of tax consequences presupposes stock options
that are exercisable for unrestricted stock. Under Section 83 of the IRC, an
optionee who exercises a nonstatutory option for restricted stock will generally
have taxable income only when the restricted stock vests. The taxable income
12
will equal the fair market value of the stock at that time less the exercise
price. However, the optionee may make a so-called "83(b) election" in connection
with the exercise to recognize taxable income at the time of exercise equal to
the fair market value of the stock at the time of exercise less the exercise
price. Assuming no other applicable limitations, the amount and timing of the
deduction available to the Company will correspond to the income recognized by
the optionee. The application of Section 83 to ISOs exercisable for restricted
stock is less clear.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy at the meeting will be required to approve the
amendment to the Incentive Plan to increase the number of shares of Common Stock
that are authorized for issuance under the plan by 1,250,000.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL NO. 3.
13
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The following table sets forth, as of April 13, 2006 (except as noted),
information concerning ownership of our voting securities by (1) each person
known by us to be the beneficial owner of more than five percent (5%) of our
voting securities, (2) each of our directors, (3) each of the executive officers
named in the Summary Compensation Table under "Executive Officers' Compensation"
above and (4) all directors and executive officers as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated. There were a total of
996,909 shares of our common stock, and 825.5 shares of our Series C Preferred
Stock, outstanding on April 13, 2006.
In a private placement to institutional investors closing in part on
December 23, 2005 and in part on February 13, 2006, we issued an aggregate of
825.5 shares of our Series C Cumulative Convertible Preferred Stock and warrants
to purchase 7,861,912 shares of our common stock for approximately $8,255,000 in
gross proceeds ($7,391,043 net of issuance costs and, with respect to the
February 13, 2006 closing, before legal and accounting fees). The Series C
Preferred Stock is convertible into shares of common stock and votes together
with the common stock on an as-if-converted to common stock basis. Unless a
holder of Series C Cumulative Convertible Preferred Stock elects otherwise, its
ability to convert its Series C Cumulative Convertible Preferred Stock into
common stock or to vote on an as-if-converted to common stock basis is
restricted to the extent that such conversion would result in the holder owning
more than 4.95% of our issued and outstanding common stock or voting together
with the common stock on an as-if-converted to common stock basis in respect of
more than 4.95% of our issued and outstanding common stock. The warrants issued
in the private placement are subject to a similar restriction on their exercise.
SCO Capital Partners LLC, Beach Capital LLC and Perceptive Life Sciences Master
Fund Ltd. ("Perceptive") have elected not to be governed by these restrictions,
although we have entered into an agreement with Perceptive whereby Perceptive's
ability to convert or vote their shares of Series C Preferred Stock will be
subject to a beneficial ownership cap of 9.95% instead of 4.95%. Consequently,
giving effect to the beneficial ownership cap restrictions, the Series C
Preferred Stock acquired by the investors is convertible into 4,057,882 shares
of common stock and the holders of the Series C Preferred Stock vote on an
as-converted basis with the holders of our common stock, and therefore hold
approximately 80.28% of the voting power of our outstanding securities.
Consequently, the private placement resulted in a change of control of the
Company. Assuming both the conversion of the Series C Preferred Stock and the
exercise of all of the Warrants acquired by the investors, in each case without
regard to the beneficial ownership cap restrictions, the investors would hold
approximately 94% of the outstanding common stock of the Company. In addition,
for so long as 20% of the Series C Preferred Stock issued in the private
placement remains outstanding, SCO Capital Partners LLC has the right to
designate two members to our board of directors. Jeffrey B. Davis and Howard S.
Fischer are currently serving on our board of directors as the designees of SCO
Capital Partners LLC.
We have determined the number of shares beneficially owned by each
stockholder under rules promulgated by the SEC. The information is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting or investment power and any shares as to
which the individual or entity has the right to acquire beneficial ownership
within 60 days after April 13, 2006 through the exercise of any stock option,
14
warrant or other right. The inclusion in the following table of those shares,
however, does not constitute an admission that the named stockholder is a direct
or indirect beneficial owner.
Name and Address Number of Shares Percentage
Class of Stock of Beneficial Owner Beneficially Owned of Class
FIVE PERCENT STOCKHOLDERS
Series C Preferred Stock Stephen S. Rouhandeh (1).............. 350 42.40%
Series C Preferred Stock Jeffrey B. Davis (2) 50 6.06%
Series C Preferred Stock Joseph Edelman (3) 150 18.17%
Series C Preferred Stock Whalehaven Capital Fund Limited (4) 75 9.09%
DIRECTORS AND EXECUTIVE OFFICERS (5)
Series C Preferred Stock Robert J. DeLuccia (5)................ 0 *
Series C Preferred Stock Bernard R. Patriacca (5).............. 0 *
Series C Preferred Stock Melvin A. Snyder (5)(6)............... 0 *
Series C Preferred Stock Thomas C.K. Chan (5)(6)............... 0 *
Series C Preferred Stock Glenn E. Deegan (5)................... 0 *
Series C Preferred Stock Peter G. Martin (5)................... 0 *
Series C Preferred Stock Michael A. Davis (5).................. 0 *
Series C Preferred Stock Paul S. Echenberg (5)................. 0 *
Series C Preferred Stock John L. Zabriskie (5)................. 0 *
Series C Preferred Stock Jeffrey B. Davis (2)(7)............... 50 6.06%
Series C Preferred Stock Howard S. Fischer (7)................. 0 *
Series C Preferred Stock All directors and officers as a
group (11 persons)................ 50 6.06%
FIVE PERCENT STOCKHOLDERS
Common Stock Stephen S. Rouhandeh (1).............. 7,138,378 87.75%
Common Stock Joseph Edelman (3) 110,152 9.95%
Common Stock Galleon Management L.P. (8)........... 74,541 7.44%
Common Stock Arnold H. Snider (9).................. 68,585 6.88%
DIRECTORS AND EXECUTIVE OFFICERS (3)
Common Stock Robert J. DeLuccia (5)(10)............ 219,171 19.30%
Common Stock Bernard R. Patriacca (5)(10)(11)...... 71,489 6.70%
Common Stock Melvin A. Snyder (5)(6)(10)(11)....... 11,728 1.16%
Common Stock Thomas C.K. Chan (5)(6)(10)(11)....... 12,533 1.24%
Common Stock Glenn E. Deegan (5)(10)(11)........... 57,395 5.45%
Common Stock Peter G. Martin (5)(10)............... 18,625 1.83%
Common Stock Michael A. Davis (5)(10).............. 18,499 1.82%
Common Stock Paul S. Echenberg (5)(10)(12)......... 19,548 1.93%
Common Stock John L. Zabriskie (5)(10)(13)......... 36,747 3.60%
Common Stock Jeffrey B. Davis (2)(7)(14)........... 51,916 4.95%
Common Stock Howard S. Fischer (7)(15)............. 51,916 4.95%
All directors and officers as a
Common Stock group (11 persons) (8)(9)......... 524,567 40.08%
- ------------------
<FN>
* Less than one percent (1%).
(1) According to a Schedule 13D/A dated February 13, 2006, filed jointly by SCO
Capital Partners LLC, SCO Securities LLC, Beach Capital LLC and Steven H.
Rouhandeh, SCO Capital Partners LLC is the record owner of 300 shares of
Series C Convertible Preferred Stock and Beach Capital LLC is the record
owner of 50 shares of Series C Convertible Preferred Stock. Mr. Rouhandeh,
as Chairman and sole member of SCO Capital Partners LLC and managing member
of Beach Capital LLC, has sole dispositive and voting power with respect to
all shares listed in the table. The shares of common stock listed as
beneficially owned by Mr. Rouhandeh include 3,805,046 shares of common
stock issuable upon the exercise of warrants exercisable within 60 days and
3,333,332 shares of common stock issuable upon the conversion of Series C
Preferred Stock convertible within 60 days. The address of SCO Capital
Partners LLC, Beach Capital LLC and Mr. Rouhandeh is 1285 Avenue of the
Americas, 35th Floor, New York, New York 10019.
15
(2) Lake End Capital LLC is the record owner of the securities listed in the
table. Mr. Jeffrey Davis, as managing member of Lake End Capital LLC, has
sole dispositive and voting power with respect to all shares held of record
by Lake End Capital LLC. The shares of common stock listed as beneficially
owned by Jeffrey Davis include the shares of common stock issuable upon the
conversion of the Series C Preferred Stock held by Lake End Capital LLC and
upon exercise of the warrants held by Lake End Capital LLC within 60 days.
The Series C Preferred Stock and the warrants held by Lake End Capital LLC
are subject to restrictions on their conversion and exercise, respectively,
such that as a result of their conversion or exercise, Lake End Capital
LLC, together with its affiliates, cannot hold more than 4.95% of the
issued and outstanding common stock of the Company. The address of Lake End
Capital LLC is 33 Tall Oaks Drive, Summit, New Jersey 07501.
(3) According to a Schedule 13G dated February 16, 2006, Mr. Edelman has sole
dispositive and voting power with respect to the shares listed in the
table. The shares reported as beneficially owned by Mr. Edelman are held of
record by Perceptive Life Sciences Master Fund, Ltd., a Cayman Islands
company of which the investment manager is Perceptive Advisors LLC, a
Delaware limited liability company of which Mr. Edelman is the managing
member. The shares of common stock listed as beneficially owned by Mr.
Edelman include the shares of common stock issuable upon the conversion of
the Series C Preferred Stock beneficially owned by Mr. Edelman and upon
exercise of the warrants beneficially owned by Mr. Edelman within 60 days.
The Series C Preferred Stock and the warrants beneficially owned by Mr.
Edelman are subject to restrictions on their conversion and exercise,
respectively, such that as a result of their conversion or exercise, Mr.
Edelman, together with his affiliates, cannot hold more than 9.95% of the
issued and outstanding common stock of the Company. The address of Mr.
Edelman is c/o First New York Securities, LLC, 850 Third Avenue, 8th Floor,
New York, NY 10022.
(4) The address of Whalehaven Capital Fund Limited is 14 Par-La-Ville Road, 3rd
Floor, Hamilton HM08 Bermuda. The Series C Preferred Stock and the warrants
held by Whalehaven Capital Fund Limited are subject to restrictions on
their conversion and exercise, respectively, such that as a result of their
conversion or exercise, Whalehaven Capital Fund Limited, together with its
affiliates, cannot hold more than 4.95% of the issued and outstanding
common stock of the Company.
(5) The address of Mr. DeLuccia, Mr. Patriacca, Mr. Snyder, Dr. Chan, Mr.
Deegan, Mr. Martin, Dr. Davis, Mr. Echenberg and Dr. Zabriskie, is c/o
MacroChem, 110 Hartwell Avenue, Lexington, Massachusetts 02421.
(6) As of November 30, 2005, Mr. Snyder and Dr. Chan are no longer employed by
the Company. Other than with respect to the options and/or warrants held by
Mr. Snyder or Dr. Chan as described in note (10) below, the share ownership
of Mr. Snyder and Dr. Chan reflected in the table is as of November 30,
2005.
(7) On December 29, 2005, Mr. Jeffrey Davis and Mr. Fischer were appointed to
the Company's board of directors. Mr. Davis and Mr. Fischer were designated
by SCO Capital Partners LLC in accordance with terms and provisions of the
Purchase Agreement and constitute the "SCO Designated Directors" (as
defined in the Purchase Agreement). The address of Mr. Davis and Mr.
Fischer is 1285 Avenue of the Americas, 35th Floor, New York, New York
10019.
(8) According to a Schedule 13-G/A dated December 30, 2005, filed jointly by
Galleon Management, L.P. ("Galleon"), Raj Rajaratnam, Galleon Management,
L.L.C., Galleon Advisors, L.L.C., Galleon Captains Partners, L.P., Galleon
Captains Offshore, Ltd., Galleon Healthcare Partners, L.P., and Galleon
Healthcare Offshore, Ltd. (collectively, the "Galleon Entities"), Mr.
Rajaratnam, Galleon Management, L.L.C. and Galleon Management, L.P. have
shared dispositive and voting power with respect to all shares listed in
the table, Galleon Advisors, L.L.C. has shared dispositive and voting power
with respect to 10,953 of the shares listed in the table, Galleon Captains
Partners, L.P. has shared dispositive and voting power with respect to
7,120 of the shares listed in the table, Galleon Captains Offshore, Ltd.
has shared dispositive and voting power with respect to 28,480 of the
shares listed in the table, Galleon Healthcare Partners, L.P. has shared
dispositive and voting power with respect to 3,833 of the shares listed in
the table and Galleon Healthcare Offshore, Ltd. has shared dispositive and
voting power with respect to 29,500 of the shares listed in the table. The
shares listed as beneficially owned by Galleon include the following
numbers of shares issuable upon the exercise of warrants exercisable within
60 days: Galleon Captain's Offshore, Ltd.-678 shares; Galleon Captain's
Partners, LP-169 shares; Galleon Healthcare Offshore, Ltd.-4,214 shares;
and Galleon Healthcare Partners, LP-547 shares. The address of the
principal place of business of Galleon Management L.P. is 135 East 57th
Street, 16th Floor, New York, NY 10022.
(9) According to a Schedule 13-G/A dated December 31, 2005, filed jointly by
Arnold H. Snider, Deerfield Capital, L.P. ("Deerfield Capital"), Deerfield
Partners, L.P. ("Deerfield Partners"), Deerfield Management Company, L.P.
("Deerfield Management") and Deerfield International Limited ("Deerfield
International", and collectively with Arnold H. Snider, Deerfield Capital,
Deerfield Partners, Deerfield Management and Deerfield International, the
"Deerfield Entities"), Arnold H. Snider has shared dispositive and voting
power with respect to all shares listed in the table, Deerfield Capital and
Deerfield Partners have shared dispositive and voting power with respect to
29,629 of the shares listed in the table and Deerfield Management and
Deerfield International have shared dispositive and voting power with
respect to 38,956 of the shares listed in the table. The address of the
16
principal place of business of Deerfield International is c/o Hemisphere
Management (B.V.I.) Limited, Bison Court, Columbus Centre, P.O. Box 3460,
Road Town, Tortola, BVI. The address of the principal place of business of
each of the other entities is 780 Third Avenue, 37th Floor, New York, NY
10017.
(10) Includes the following numbers of shares issuable upon the exercise of
stock options and/or warrants exercisable within 60 days: Mr. Martin-18,571
shares; Dr. Davis-18,357 shares; Mr. DeLuccia-138,606 shares; Mr.
Echenberg-18,072 shares; Dr. Zabriskie-23,149 shares; Mr. Davis-15,000: Mr.
Fischer-15,000; Mr. Patriacca-70,042 shares; Mr. Snyder-11,093 shares; Dr.
Chan-10,624 shares; and Mr. Deegan-56,789 shares.
(11) Does not include the following numbers of vested shares in our 401(k) Plan
contributed by us to match portions of cash contributions by the following
Plan participants: Mr. Patriacca-545 shares; Mr. Snyder- 516 shares; Dr.
Chan-551 shares; and Mr. Deegan-560 shares.
(12) Includes 1,382 shares and 691 shares issuable upon the exercise of warrants
exercisable within 60 days that, in each case, are held by Eckvest Equity
Inc., of which Mr. Echenberg is the President and sole equity owner.
(13) Includes 11,061 shares and 5,530 shares issuable upon the exercise of
warrants exercisable within 60 days that, in each case, are held by Lansing
Brown Investments LLC, of which Dr. Zabriskie and his wife are the managers
and sole equity holders.
(14) Includes 36,916 shares of common stock issuable upon the conversion of
Series C Preferred Stock or the exercise of a warrant held of record by
Lake End Capital LLC as described in Note 2 above that is exercisable
within 60 days.
(15) Includes 36,916 shares of common stock issuable upon the exercise of a
warrant that is exercisable within 60 days.
</FN>
17
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their positions with
the Company are as follows:
NAME AGE POSITION WITH MACROCHEM
- -------------------- ---- -------------------------------------------
Robert J. DeLuccia 60 President, Chief Executive Officer and Vice
Chairman of the Board of Directors
Glenn E. Deegan 39 Vice President and General Counsel
Bernard R. Patriacca 62 Vice President, Chief Financial Officer and
Treasurer
The following is a brief summary of the backgrounds of Mr. Deegan and Mr.
Patriacca. The background of our other executive officer, Mr. DeLuccia, is
summarized above.
GLENN E. DEEGAN, ESQ., has served as our Vice President, General Counsel
and Secretary since July 2003. From June 2001 until July 2003, Mr. Deegan served
as our Director of Legal Affairs and as General Counsel and Secretary. Prior to
joining MacroChem, he served as Assistant General Counsel of Summit Technology,
Inc. from 1999 to 2001. Earlier in his career, Mr. Deegan was engaged in the
private practice of law in Boston at Holland & Knight LLP from 1997 to 1999 and
at Nutter, McClennen & Fish, LLP from 1993 to 1997. Mr. Deegan also served as
law clerk to the Honorable Francis J. Boyle in the United States District Court
for the District of Rhode Island from 1992 to 1993. Mr. Deegan holds a B.S. from
Providence College and a J.D. from Boston College.
BERNARD R. PATRIACCA, C.P.A., has served as our Vice President, Chief
Financial Officer and Treasurer since April 2001. From 1997 to 2001, he served
as Vice President and Controller of Summit Technology, Inc. From 1994 to 1997,
he served as Vice President of Errands Etc., Inc., a privately held homeowners'
personal service company. From 1991 to 1994, Mr. Patriacca held senior financial
management positions at several privately held consumer services companies. From
1973 to 1991, he was employed in various capacities at Dunkin Donuts, Inc.,
including Chief Financial Officer and Director. Mr. Patriacca received an M.B.A.
and a B.S. from Northeastern University.
COMPENSATION OF OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth the compensation earned by or paid or
awarded to Mr. DeLuccia, Mr. Patriacca, Dr. Chan, Mr. Deegan and Mr. Snyder
during each of the three fiscal years ended December 31, 2005:
18
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) ($)(2) (#)(3) ($)(4)
- -------------------------- ---- ---------- --------- ------------ ------------ ---------- ------------
Robert J. DeLuccia (5) 2005 192,000 --- 19,188 --- 9,423 48,000
President, Chief 2004 288,000 58,752 17,688 --- 6,472 -----
Executive Officer 2003 195,000 54,720 6,516 54,720 11,904 -----
Bernard R. Patriacca (6) 2005 133,333 --- 1,188 --- 4,951 198,808
Vice President, Chief 2004 193,750 32,400 1,188 --- 3,452 49,500
Financial Officer and 2003 185,000 29,360 1,032 29,360 1,142 28,000
Treasurer
Thomas C.K. Chan (7) 2005 136,667 --- 414 --- 7,982 203,969
Vice President, Research 2004 196,667 40,590 270 --- 4,102 49,500
& Development, Chief 2003 182,716 30,359 360 30,359 1,809 27,481
Technology Officer
Glenn E. Deegan (8) 2005 120,000 --- 162 --- 4,780 183,667
Vice President, 2004 165,156 30,240 162 --- 3,066 26,500
General Counsel and 2003 138,763 22,913 360 22,913 1,330 16,000
Secretary
Melvin A. Snyder (9) 2005 129,500 --- 1,188 --- 4,304 190,632
Vice President, Market 2004 194,250 24,242 1,188 --- 2,828 48,805
Development 2003 194,250 24,010 1,584 24,010 1,190 27,160
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes amounts paid for taxable group term life insurance. Also
includes, for Mr. DeLuccia, a monthly automobile allowance of $1,000 for
2003 and a portion of 2004 and $1,500 for the remainder of 2004 and for
2005.
(2) Although the restricted stock reflected in this table was earned in 2003,
the awards were made in January 2004. The values in this table are as of
the date of the grant. As of December 31, 2005, the following number of
shares of restricted stock were held by the individuals listed in the
table: Mr. DeLuccia - 1,447, Mr. Patriacca - 776, Mr. Deegan - 606, Dr.
Chan - 803, and Mr. Snyder - 635. The value of those shares of restricted
stock as of December 31, 2005 were as follows: Mr. DeLuccia - $1,823.22,
Mr. Patriacca - $977.76, Mr. Deegan - $763.56, Dr. Chan - $1,011.78, and
Mr. Snyder - $800.01.
(3) Total stock option grants reported in the table for 2004 include the
following stock option awards which, although earned in 2004, were
granted on March 23, 2005: Mr. DeLuccia - 4,662; Mr. Patriacca - 2,571;
Dr. Chan - 3,221; Mr. Deegan - 2,400; and Mr. Snyder - 1,924. These
options were granted at an exercise price of $17.22 per share. The
options expire ten years from the date of grant and vested fully on the
date of grant.
(4) Represents the dollar value of MacroChem's contributions to our 401(k)
Retirement Plan, which are made in our common stock, as well as, for a
portion of fiscal year 2005, in cash. For fiscal year 2004, also
represents the following retention payments payable as of July 2, 2004:
Mr. Patriacca - $43,000; Dr. Chan - $43,000; Mr. Deegan - $20,000; and
Mr. Snyder - $43,000. For fiscal year 2005, also represents the following
payments made pursuant to Transition Agreements: Mr. DeLuccia - $48,000;
Mr. Patriacca - $191,808; Dr. Chan - $197,969; Mr. Deegan - $176,677; and
Mr. Snyder - $185,472.
(5) Mr. DeLuccia's employment commenced on July 1, 2003. Of total salary in
2003, $51,000 related to a consulting contract in connection with his
role as interim CEO. As part of Mr. DeLuccia's 2003 compensation, he
received an award of 1,447 shares of restricted stock on January 7, 2004,
all of which vested six months from the date of grant.
(6) Mr. Patriacca's employment commenced on April 23, 2001. As part of Mr.
Patriacca's 2003 compensation, he received an award of 776 shares of
restricted stock on January 7, 2004, all of which vested six months from
the date of grant.
(7) Dr. Chan was appointed Vice President, Research and Technology on
September 24, 2001. As part of Dr. Chan's 2003 compensation, he received
an award of 803 shares of restricted stock on January 7, 2004, all of
which vested six months from the date of grant. Dr. Chan's employment
with the Company terminated effective November 30, 2005.
(8) Mr. Deegan was appointed Vice President, General Counsel and Secretary on
July 10, 2003. As part of Mr. Deegan's 2003 compensation, he received an
award of 606 shares of restricted stock on January 7, 2004, all of which
vested six months from the date of grant.
19
(9) As part of Mr. Snyder's 2003 compensation, he received an award of 635
shares of restricted stock on January 7, 2004, all of which vested six
months from the date of grant. Mr. Snyder's employment with the Company
terminated effective November 30, 2005.
</FN>
STOCK OPTIONS
The following table provides information concerning the grant of stock
options during 2005 to Mr. DeLuccia, Dr. Chan, Mr. Deegan, Mr. Patriacca and Mr.
Snyder:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE POTENTIAL REALIZABLE VALUE
UNDERLYING EMPLOYEES OR BASE AT ASSUMED ANNUAL RATES OF
OPTIONS IN FISCAL PRICE EXPIRATION STOCK PRICE APPRECIATION
NAME GRANTED (#) YEAR ($/SH) DATE FOR OPTION TERM
5%($) 10%($)
- -------------------- ------------- ---------- --------- ---------- ----------------------------
Robert J. DeLuccia 4,662 (1) 11.9 17.22 3/23/15 $ 50,487 $ 127,945
Robert J. DeLuccia 4,761 (1) 12.0 10.50 7/20/15 31,439 79,672
Bernard R. Patriacca 2,571 (2) 6.5 17.22 3/23/15 27,843 70,559
Bernard R. Patriacca 2,380 (2) 6.1 10.50 7/20/15 15,716 39,828
Thomas C.K. Chan 3,221 (3) 8.3 17.22 3/23/15 34,882 88,398
Thomas C.K. Chan 4,761 (3) 12.0 10.50 7/20/15 31,439 79,672
Glenn E. Deegan 2,400 (4) 6.1 17.22 3/23/15 25,991 65,866
Glenn E. Deegan 2,380 (4) 6.1 10.50 7/20/15 15,716 39,828
Melvin A. Snyder 1,924 (5) 4.6 17.22 3/23/15 20,836 52,803
Melvin A. Snyder 2,380 (5) 6.1 10.50 7/20/15 15,716 39,828
<FN>
(1) A portion of the options granted to Mr. DeLuccia were granted in March
2005 at an exercise price of $17.22 per share. The options expire ten
years from the date of grant and vested fully on the date of grant. A
portion of the options granted to Mr. DeLuccia were granted in July 2005
at an exercise price of $10.50 per share. The options expire ten years
from the date of grant and vest over the next three years.
(2) A portion of the options granted to Mr. Patriacca were granted in March
2005 at an exercise price of $17.22 per share. The options expire ten
years from the date of grant and vested fully on the date of grant. A
portion of the options granted to Mr. Patriacca were granted in July 2005
at an exercise price of $10.50 per share. The options expire ten years
from the date of grant and vest over the next three years.
(3) A portion of the options granted to Dr. Chan were granted in March 2005
at an exercise price of $17.22 per share. The options expire ten years
from the date of grant and vested fully on the date of grant. A portion
of the options granted to Dr. Chan were granted in July 2005 at an
exercise price of $10.50 per share. The options, which were to expire ten
years from the date of grant and vest over the next three years, were
cancelled effective November 30, 2005, the date Dr. Chan's employment
with the Company terminated.
(4) A portion of the options granted to Mr. Deegan were granted in March 2005
at an exercise price of $17.22 per share. The options expire ten years
from the date of grant and vested fully on the date of grant. A portion
of the options granted to Mr. Deegan were granted in July 2005 at an
exercise price of $10.50 per share. The options expire ten years from the
date of grant and vest over the next three years.
(5) A portion of the options granted to Mr. Snyder were granted in March 2005
at an exercise price of $17.22 per share. The options expire ten years
from the date of grant and vested fully on the date of grant. A portion
of the options granted to Mr. Snyder were granted in July 2005 at an
exercise price of $10.50 per share. The options, which were to expire ten
years from the date of grant and vest over the next three years, were
cancelled effective November 30, 2005, the date Mr. Snyder's employment
with the Company terminated.
</FN>
20
The following table provides information concerning option exercises during
the fiscal year ended December 31, 2005 and unexercised options held by Mr.
DeLuccia, Mr. Patriacca, Mr. Snyder, Dr. Chan, and Mr. Deegan, as of December
31, 2005:
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT YEAR END FISCAL YEAR-END ($)(1)
SHARES ACQUIRED ON VALUE REALIZED EXERCISEABLE / EXERCISEABLE /
NAME EXERCISE (#) ($) UNEXERCISEABLE UNEXERCISEABLE
Robert J. DeLuccia --- --- 19,073/5,697 NA/NA
Bernard R. Patriacca --- --- 10,840/3,348 NA/NA
Thomas C.K. Chan --- --- 10,065/0 NA/NA
Glenn E. Deegan --- --- 6,342/3,268 NA/NA
Melvin Snyder --- --- 11,089/0 NA/NA
<FN>
(1) The value of Mr. DeLuccia's, Mr. Patriacca's, Dr. Chan's, Mr. Deegan's
and Mr. Snyder's in-the-money unexercised options at the end of fiscal
year ended December 31, 2005 was determined by multiplying the number of
options held by the difference between the market price of common stock
underlying the options on December 31, 2005 ($1.26 per share) and the
exercise price of the options granted.
</FN>
DIRECTORS' COMPENSATION
Each of our non-employee Directors receives compensation of $12,000
annually, $1,000 per regular committee meeting attended for the chairman of each
committee, $1,000 per regular board meeting attended, $500 for each special,
telephone or committee meeting attended and reimbursement of travel expenses in
connection with attending meetings of the Board of Directors. During a portion
of 2005, our non-employee directors voluntarily waived their right to receive
fees for attending telephonic meetings of the Board of Directors. No stock
options were granted to non-employee Directors during 2005.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We entered into an employment agreement of indefinite length effective as
of February 13, 2006 with Robert J. DeLuccia. The agreement currently provides
for annual compensation of $288,000 and for the payment of nine months' salary
plus, if applicable, the continuation of medical, dental and group life
insurance benefits for up to nine months in the event he is terminated without
cause or twelve month's salary and bonus plus, if applicable, the continuation
of medical, dental and similar benefits for up to twelve months in the event he
is terminated as a result of a change of control. The agreement also provides
for a monthly automobile allowance of $1,500. In addition, the agreement
precludes Mr. DeLuccia from competing with the Company during his employment and
for a period of two years thereafter, and from disclosing confidential
information. Prior to entering into Mr. DeLuccia's current employment agreement,
we entered into a transition agreement with Mr. DeLuccia on September 16, 2005
which terminated his then existing employment agreement including the severance
pay provisions. The transition agreement, which originally provided that Mr.
DeLuccia would remain employed by the Company until November 30, 2005, was
subsequently amended to extend his employment through February 2006. During
2005, Mr. DeLuccia received compensation totaling $258,000 pursuant to the
employment and transition agreements then in effect.
21
We entered into an employment agreement of indefinite length effective as
of February 13, 2006 with Glenn E. Deegan. The agreement currently provides for
annual base compensation of $180,000, and precludes Mr. Deegan from competing
with the Company during his employment and for a period of two years thereafter,
and from disclosing confidential information. In addition, on February 13, 2006,
we entered into a Severance Agreement with Mr. Deegan. The Severance Agreement
provides for the payment of six months' salary plus the continuation of medical,
dental and similar benefits for up to six months in the event he is terminated
without cause or nine month's salary and 75% of his bonus plus the continuation
of medical, dental and similar benefits for up to nine months in the event he is
terminated in connection with or following a change of control, as defined in
the agreement. Prior to entering into Mr. Deegan's current employment and
severance agreements, we entered into a transition agreement with Mr. Deegan on
September 12, 2005 which terminated his then existing employment and severance
agreements. The transition agreement, which originally provided that Mr. Deegan
would remain employed by the Company until November 30, 2005, was subsequently
amended to extend his employment through February 2006. During 2005, Mr. Deegan
received compensation totaling $296,667 pursuant to the employment and
transition agreements then in effect.
We entered into an employment agreement of indefinite length effective as
of February 13, 2006 with Bernard Patriacca. The agreement currently provides
for annual base compensation of $200,000, and precludes Mr. Patriacca from
competing with the Company during his employment and for a period of two years
thereafter, and from disclosing confidential information. In addition, on
February 13, 2006, we entered into a Severance Agreement with Mr. Patriacca. The
Severance Agreement provides for the payment of six months' salary plus the
continuation of medical, dental and similar benefits for up to six months in the
event he is terminated without cause or nine month's salary and 75% of his bonus
plus the continuation of medical, dental and similar benefits for up to nine
months in the event he is terminated in connection with or following a change of
control, as defined in the agreement. Prior to entering into Mr. Patriacca's
current employment and severance agreements, we entered into a transition
agreement with Mr. Patriacca on September 12, 2005 which terminated his then
existing employment and severance agreements. The transition agreement, which
originally provided that Mr. Patriacca would remain employed by the Company
until November 30, 2005, was subsequently amended to extend his employment
through February 2006. During 2005, Mr. Patriacca received compensation totaling
$325,141 pursuant to the employment and transition agreements then in effect.
On September 13, 2005, we entered into a transition agreement with Thomas
C.K. Chan which terminated his then existing employment and severance
agreements. The transition agreement provided that Dr. Chan would remain
employed by the Company until November 30, 2005. In addition, the transition
agreement precludes Dr. Chan from competing with us for a period of two years
and from disclosing confidential information. During 2005, Dr. Chan received
compensation totaling $334,636 pursuant to the employment and transition
agreements then in effect.
On September 12, 2005, we entered into a transition agreement with Melvin
A. Snyder which terminated his then existing employment and severance
agreements. The transition agreement provided that Mr. Snyder would remain
employed by the Company until November 30, 2005. In addition, the transition
agreement precludes Mr. Snyder from competing with us for a period of two years
and from disclosing confidential information. During 2005, Mr. Snyder received
compensation totaling $314,972 pursuant to the employment and transition
agreements then in effect.
22
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee consists of Dr. Michael Davis (Chairman), Dr.
John Zabriskie and Mr. Jeffrey Davis.
23
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors for 2005 consisted of
Dr. Davis (Chairman) and Dr. Zabriskie. The Committee's responsibilities include
determining the compensation of the Company's executive officers, making awards
under the Company's stock option plans and making recommendations to the Board
of Directors with regard to the adoption of new employee benefit plans. No
member of the Committee was an officer or employee of the Company during the
year ended December 31, 2005.
The primary goals of the Company's executive compensation program
administered by the Compensation Committee are to attract, retain and motivate
superior executives and to compensate these executives in a manner that both
recognizes their individual performance and aligns their interests with the
interests of MacroChem's stockholders. The Company's executive compensation
program reflects input from the Company's Chief Executive Officer. The
Compensation Committee reviews his proposals concerning executive compensation
and makes a final determination or recommendation concerning the scope and
nature of compensation arrangements. The action or recommendation of the
Committee is reported to the Company's entire Board of Directors.
The Committee's decisions and activities during 2005 were guided, to a
significant extent, by the Company's financial condition and outlook during the
year. Accordingly, given the Company's lack of financial resources during 2005,
the conservation of cash resources was a priority for the Committee.
COMPONENTS OF EXECUTIVE COMPENSATION
For 2005, the executive compensation program consisted of three principal
components: base salary, stock options and payments under the transition
agreements described below.
BASE SALARY. From January 1, 2005 through August 31, 2005, when these
transition agreements became effective, each executive officer received base
salary under his employment agreement then in effect.
In view of the Company's financial condition and outlook, the 2005 base
salary of each executive remained the same as each executive's base salary for
2004. In general, in determining base salaries for executives the Compensation
Committee takes into account (i) the executive's individual performance and
contribution to the management team; (ii) the performance of MacroChem over the
evaluation period by reference to corporate objectives jointly formulated by the
Chief Executive Officer and the officers; and (iii) base salaries of executives
in comparable positions in comparable companies. In setting base salary, the
Committee also takes into account all components of an executive officer's
compensation package. In determining base salary, the Committee reviews the
foregoing factors as they relate to each executive individually and applies each
factor subjectively, without reference to specific criteria. The Committee does
not weigh any one factor more or less heavily than any other and considers the
input of the Chief Executive Officer and, as necessary, outside experts in
reaching its determinations.
STOCK OPTIONS. The Compensation Committee views grants of stock options as
a major component of an executive's compensation, believing that the grant of
options aligns the interests of the executives with the interests of the
stockholders by providing a direct correlation between an increase in the value
24
of MacroChem's stock and executive compensation and that this method of
compensation allows MacroChem to conserve cash resources.
In determining the size of a stock option award for an individual executive
officer, the Committee considers the same factors used for determining base
salary and applies each factor subjectively, without reference to specific
criteria. The Committee does not weigh any one factor more or less heavily than
any other and considers the input of the Chief Executive Officer and, as
necessary, outside experts, in reaching its determinations. The size of previous
option grants is not an important factor in determining current awards. Options
are typically exercisable at the market price on the date of the grant. In 2005,
in addition to the factors described above, stock option grants to executives
reflected, in part, an effort to retain those executives during a period of
financial uncertainty.
TRANSITION AGREEMENTS. Because of insufficient capital resources, in August
2005, the Company discontinued its research and development activities and
terminated substantially all its non-management personnel. In addition, in
September 2005, the Company entered into transition agreements with each of its
executive officers to assure their availability to the Company during a period
of uncertainty and to reduce possible termination pay liability to these
officers. These agreements terminated the then existing employment and severance
agreements with each of the executive officers and provided that each officer
would remain employed until November 30, 2005 in order to assist the Company in
winding down and selling its assets, in exchange for a reduced termination
payment. The terminated employment agreements of each of Messrs. Chan, Deegan,
Patriacca and Snyder provided for a lump sum payment equal to base salary and
bonus, health insurance and other payments in the event he was terminated
without cause following a change in control, which included a liquidation or
dissolution or sale of all or substantially all of the Company's assets. Under
the transition agreements, each of these officers received a reduced termination
payment equal to nine months of base salary and benefit payments equal to twelve
months of health insurance coverage. Because of improved prospects for funding,
the Company thereafter entered into amendments to the transition agreements with
Messrs. Patriacca and Deegan, which provided that each would remain employed by
the Company until February, 2006 at a rate of pay equal to one-half the base
salary in effect for each executive prior to August 31, 2005.
CEO COMPENSATION
The compensation for Mr. DeLuccia for 2005 results from his employment
agreement then in effect, stock options and payments under his transition
agreement.
From January 1, 2005 through August 31, 2005, when his transition agreement
became effective, Mr. DeLuccia received base salary under his employment
agreement then in effect at the annual rate of $288,000. Again, in view of the
financial condition and outlook for the Company, Mr. DeLuccia's base salary for
2005 remained the same as his 2004 base salary.
Mr. DeLuccia's transition agreement terminated his then existing employment
agreement and provided that he would remain employed by the Company until
November 30, 2005 at a base salary equal to one-half his base salary in effect
prior to August 31, 2005, plus a monthly automobile allowance of $1,500 and
reimbursement of health insurance costs. Because of improved prospects for
funding, Mr. DeLuccia's transition agreement was amended to extend his
employment until February 2006 on the same terms. The terminated employment
agreement of Mr. DeLuccia provided for a lump sum payment of 150% of his base
salary and bonus, health insurance and certain benefits for 18 months and
25
additional payments in the event he was terminated without cause or if he
terminated his employment for good reason, in each case following a change in
control, which included a liquidation or dissolution of the corporation or a
sale of substantially all of the Company's assets. Mr. DeLuccia's transition
agreement did not include any termination pay provisions.
Dated: April 13, 2006 COMPENSATION COMMITTEE
Dr. Michael A. Davis
Dr. John L. Zabriskie
26
PERFORMANCE GRAPH
The following five-year performance graph compares the cumulative total
shareholder return (assuming reinvestment of dividends) on $100 invested in the
Company's common stock for the five-year period from December 31, 2000 through
December 31, 2005 with similar investments in the Nasdaq Stock Market (U.S.)
Index of companies and a Peer Group of four companies that provide services
similar to those provided by the Company: Cellegy Pharmaceuticals, Inc., NexMed,
Inc., VIVUS, Inc. and Bentley Pharmaceuticals, Inc.
Cumulative Total Return
--------------------------------------------------------
12/00 12/01 12/02 12/03 12/04 12/05
MACROCHEM CORPORATION 100.00 119.02 19.94 33.17 28.49 1.17
NASDAQ STOCK MARKET (U.S.) 100.00 79.53 56.34 83.81 91.33 93.30
PEER GROUP 100.00 116.14 70.20 103.81 82.47 77.92
27
REPORT OF AUDIT COMMITTEE
The Audit Committee of the Board of Directors currently consists of three
directors, Mr. Martin (Chairman), Dr. Davis and Mr. Echenberg, all of whom are
independent directors as defined in National Association of Securities Dealers
Marketplace Rule 4200(a)(15). The responsibilities of the Audit Committee are
(i) to review with management and the independent registered public accounting
firm the scope and results of any and all audits, the nature of any other
services provided by the independent registered public accounting firm, changes
in the accounting principles applied to the presentation of MacroChem's
financial statements, and any comments by the independent registered public
accounting firm on MacroChem's policies and procedures with respect to internal
accounting, auditing and financial controls and (ii) to make recommendations to
the board of directors on the engagement of the independent registered public
accounting firm. The Board of Directors has adopted a written charter of the
Audit Committee.
Consistent with its duties, the Audit Committee has reviewed and discussed
with the Company's management the audited financial statements for the year
ended December 31, 2005. Vitale, Caturano & Company, Ltd. issued their
unqualified report dated March 20, 2006 on MacroChem's financial statements.
The Audit Committee has also discussed with Vitale, Caturano & Company,
Ltd. the matters required to be discussed by AICPA Statement on Auditing
Standards No. 61, "COMMUNICATION WITH AUDIT COMMITTEES." The Audit Committee has
received the written disclosures and the letter from Vitale, Caturano & Company
Ltd. required by Independence Standards Board Standard No. 1 and has discussed
with Vitale, Caturano & Company, Ltd. its independence as an auditor. The Audit
Committee has also considered whether Vitale, Caturano & Company Ltd.'s
provision of non-audit services is compatible with its independence.
Based on these reviews and discussions, the Audit Committee recommended to
the Board of Directors that MacroChem's audited financial statements for the
year ended December 31, 2005 be included in the Annual Report on Form 10-K for
the fiscal year then ended.
Dated: April 13, 2006 AUDIT COMMITTEE
Peter G. Martin
Dr. Michael A. Davis
Paul S. Echenberg
28
AUDIT AND RELATED FEES
Vitale, Caturano & Company, Ltd. is the Company's independent registered
public accounting firm. Prior to January 24, 2006, Deloitte & Touche LLP served
as the Company's independent registered public accounting firm. The following
table sets forth the estimated aggregate fees billed to the Company for the
fiscal year ended December 31, 2005 by Vitale, Caturano & Company, Ltd. and
Deloitte & Touche LLP, and for the fiscal year ended December 31, 2004 by
Deloitte & Touche LLP:
VITALE, CATURANO
& COMPANY, LTD. DELOITTE & TOUCHE LLP
2005 2005 2004
Audit Fees $ 60,000 $ 69,100 $ 188,000
Audit-Related Fees -- -- --
Tax Fees -- -- --
All Other Fees -- -- --
---------- ---------- ----------
Total $ 60,000 $ 69,100 $ 188,000
========== ========== ==========
AUDIT FEES
Audit fees were for professional services rendered for the audit of the
Company's annual financial statements, review of financial statements included
in the Company's quarterly reports on Form 10-Q and services that were provided
in connection with statutory and regulatory filings or engagements.
AUDIT-RELATED FEES
Audit-Related Fees refer to assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
consolidated financial statements and are not reported under "Audit Fees." The
Company did not pay any Audit-Related Fees during 2005 or 2004.
TAX FEES
Tax Fees refer to fees for professional services rendered regarding tax
compliance, tax advice or tax planning. The Company did not pay any Tax Fees to
Vitale, Caturano & Company, Ltd. or to Deloitte & Touche LLP during 2005 or
2004.
ALL OTHER FEES
All Other Fees refer to fees for services other than those described above.
The Company did not pay to Vitale, Caturano & Company, Ltd. or to Deloitte &
Touche LLP fees for any other services during 2005 or 2004.
PRE-APPROVAL POLICIES AND PROCEDURES
It is the policy of the Company that all services provided by the Company's
independent registered public accounting firm shall be pre-approved by the Audit
29
Committee. The Company's independent registered public accounting firm will
provide the Audit Committee with an engagement letter outlining the scope of the
audit services proposed to be performed during the fiscal year and the estimated
fees for such services. Pre-approval of audit and permitted non-audit services
may be given by the Audit Committee at any time up to one year before the
commencement of such services by the Company's independent registered public
accounting firm. Pre-approval must be detailed as to the particular services to
be provided. Pre-approval may be given for a category of services, provided that
(i) the category is narrow enough and detailed enough that management of the
Company will not be called upon to make a judgment as to whether a particular
proposed service by the Company's independent registered public accounting firm
fits within such pre-approved category of services and (ii) the Audit Committee
also establishes a limit on the fees for such pre-approved category of services.
During 2005, one hundred percent (100%) of the services provided by the
Company's independent registered public accounting firm were pre-approved by the
Audit Committee.
NO INCORPORATION BY REFERENCE
In the Company's filings with the SEC, information is sometimes
"incorporated by reference". This means that the Company is referring you to
information that has previously been filed with the SEC, so the information
should be considered as part of the filing you are reading. Based on SEC
regulations, the Report of the Compensation Committee, the Performance Graph of
this Proxy Statement and the Report of Audit Committee specifically are not
incorporated by reference into any other filings with the SEC.
This Proxy Statement is sent to you as part of the proxy materials for the
2006 Annual Meeting of Stockholders. You may not consider this Proxy Statement
as material for soliciting the purchase or sale of the Company's Common Stock.
SHAREHOLDER COMMUNICATIONS WITH DIRECTORS
The Board will give appropriate attention to written communications on
issues that are submitted by stockholders, and will respond if and as
appropriate. Absent unusual circumstances or as contemplated by committee
charters, the Chairman of the Audit Committee will, with the assistance of our
Corporate Secretary, (1) be primarily responsible for monitoring communications
from stockholders and (2) provide copies or summaries of such communications to
the other directors as he or she considers appropriate.
Communications will be forwarded to all directors if they relate to
substantive matters and include suggestions or comments that the Chairman of the
Audit Committee considers to be important for the directors to know. In general,
communications relating to corporate governance and long-term corporate strategy
are more likely to be forwarded than communications relating to personal
grievances and matters as to which we tend to receive repetitive or duplicative
communications.
Stockholders who wish to send communications on any topic to the Board
should address such communications to the Chairman of Audit Committee, c/o the
Corporate Secretary, MacroChem Corporation, 110 Hartwell Avenue, Lexington, MA
02421-3134.
30
STOCKHOLDER PROPOSALS
In order for the Company to consider stockholder proposals for inclusion in
the proxy material for the Annual Meeting to be held in 2007, the Company must
receive them on or before December 20, 2006. The Company suggests that
proponents submit their proposals by certified mail, return receipt requested,
addressed to the Secretary of the Company at MacroChem Corporation, 110 Hartwell
Avenue, Lexington, MA 02421-3134.
Under the Company's Bylaws, stockholders who wish to make a proposal at the
Annual Meeting to be held in 2007, other than one that will be included in the
proxy materials, must notify the Company no earlier than February 16, 2007 and
no later than March 19, 2007. If a stockholder who wishes to present a proposal
fails to notify the Company by March 19, 2007, any proxy that management
solicits for the Annual Meeting in 2007 will confer on the holder of the proxy
discretionary authority to vote on any such proposal properly presented at the
meeting.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 23, 2005 and February 13, 2006, we issued an aggregate of 825.5
shares of our Series C Preferred Stock and warrants to purchase 7,861,900 shares
of our common stock in a private placement to institutional investors.
SCO Capital Partners LLC acquired a total of 300 shares of our Series C
Preferred Stock and warrants to purchase 2,857,142 shares of our common stock
for an aggregate purchase price of $3,000,000, and Beach Capital LLC acquired a
total of 50 shares of our Series C Preferred Stock and warrants to purchase
47,620 shares of our common stock for an aggregate purchase price of $500,000.
Mr. Stephen S. Rouhandeh is the sole member of SCO Capital Partners LLC and the
managing member of Beach Capital LLC, and as such has sole dispositive and
voting power with respect to the shares owned by SCO Capital Partners LLC and
Beach Capital LLC. The Series C Preferred Stock and warrants beneficially owned
by Mr. Rouhandeh are convertible and exercisable into approximately 87.75% of
our common stock. In addition, for so long as 20% of the Series C Preferred
Stock issued in the private placement remains outstanding, SCO Capital Partners
LLC has the right to designate two members to our board of directors. On
December 28, 2005, SCO Capital Partners LLC informed us that the initial SCO
director designees were Jeffrey B. Davis and Howard S. Fischer, and our board of
directors appointed them to our board on December 29, 2005.
Mr. Rouhandeh is also the Chairman of SCO Securities LLC, which acted as
the placement agent in connection with the private placement and which acts as a
financial advisor to us for a monthly fee of $12,500. In exchange for its
services as placement agent, SCO Securities LLC received a fee equal to 7% of
the gross proceeds, or $577,850, and six-year warrants to purchase 786,189
shares of our common stock at an exercise price of $1.05 per share. SCO
Securities LLC assigned its warrants to the following four persons in the
amounts listed: (i) warrants to purchase 471,713 shares of common stock to SCO
Capital Partners LLC; (ii) warrants to purchase 157,238 shares of common stock
to Lake End Capital LLC, (iii) warrants to purchase 78,619 shares of common
stock to Mark Alvino and (iv) warrants to purchase 78,619 shares of common stock
to Howard Fischer. We also paid SCO Securities LLC $82,550 for out-of-pocket
expenses incurred in connection with the transaction.
Mr. Jeffrey Davis, who was elected to our Board of Directors on December
29, 2005 as the designee of SCO Capital Partners LLC, is the managing member of
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Lake End Capital LLC, an entity which purchased 50 shares of our Series C
Preferred Stock and warrants to purchase 476,190 shares of our common stock for
an aggregate purchase price of $500,000. As noted above, Lake End Capital LLC
also received warrants to purchase an additional 157,238 shares of our common
stock as a designee of SCO Securities LLC, the placement agent in our recent
private placement. Mr. Davis is the President of SCO Securities LLC. Subject to
conversion and exercise restrictions on the securities held by Lake End Capital
LLC as described in Item 12 of this Annual Report on Form 10-K, the Series C
Preferred Stock and warrants beneficially owned by Mr. Davis are convertible and
exercisable into 4.95% of our common stock.
Mr. Howard S. Fischer, who was elected to our Board of Directors on
December 29, 2005 as the designee of SCO Capital Partners LLC, is a Managing
Director of SCO Securities LLC. As noted above, Mr. Fischer received warrants to
purchase 78,619 shares of our common stock as a designee of SCO Securities LLC.
Subject to conversion and exercise restrictions on the warrants held by Mr.
Fischer, the warrants beneficially owned by Mr. Fischer are exercisable for
4.95% of our common stock.
FINANCIAL INFORMATION
The audited financial statements and related financial and business
information of the Company as of December 31, 2005 and 2004 and each year in the
three-year period ended December 31, 2005 are contained in the Company's Annual
Report on Form 10-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than 10 percent of the
Company's Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Based solely on its review of the
copies of such reports received by it, and written representations from certain
reporting persons that no Form 5s were required for those persons, the Company
believes that during 2005 all filing requirements applicable to its officers,
directors, and such 10 percent beneficial owners were complied with.
DELIVERY OF DOCUMENTS TO STOCKHOLDERS SHARING AN ADDRESS
We have adopted a procedure approved by the Securities and Exchange
Commission called "householding." Under this procedure, we will deliver only one
copy of our annual report to stockholders, which includes a copy of our Annual
Report on Form 10-K for the year ended December 31, 2005, without exhibits, and
this proxy statement, to multiple stockholders who share the same address (if
they appear to be members of the same family) unless one or more of these
shareholders notifies us that they wish to continue receiving individual copies.
We believe this procedure provides greater convenience for our shareholders and
saves money by reducing the number of duplicate documents. Stockholders who
participate in householding will continue to receive separate proxy cards.
If you and other shareholders of record with whom you share an address
currently receive multiple copies of our Annual Report and Proxy Statement and
wish to receive only a single copy of the Annual Report and Proxy Statement,
please contact ADP-ICS, Householding Department, 51 Mercedes Way, Edgewood, NY
11717, or call toll-free (800) 542-1061. If you participate in householding and
wish to receive additional copies of the current Annual Report and Proxy
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Statement, or if you wish to revoke your consent and receive separate copies of
future Annual Reports and Proxy Statements, please contact ADP as described
above.
MISCELLANEOUS
Management does not know of any other matters that may come before the
meeting. However, if any other matters are properly presented to the meeting, it
is the intention of the persons named in the accompanying proxy to vote, or
otherwise act, in accordance with their judgment on such matters.
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K, EXCLUSIVE OF EXHIBITS, IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN REQUEST TO: MACROCHEM CORPORATION, 110 HARTWELL AVENUE, LEXINGTON,
MASSACHUSETTS 02421, ATTENTION: DIRECTOR, INVESTOR RELATIONS.
By Order of the Board of Directors,
Lexington, Massachusetts Glenn E. Deegan, Esq.
April 19, 2005 VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
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MANAGEMENT HOPES THAT THE STOCKHOLDERS WILL ATTEND THE MEETING. WHETHER OR NOT
YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION WILL BE
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK PERSONALLY
EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
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