<PAGE> 1
NEOPHARM, INC.
225 EAST DEERPATH
SUITE 250
LAKE FOREST, ILLINOIS 60045
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 16, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of NeoPharm,
Inc., a Delaware corporation, will be held at The Northern Trust Bank, 265 East
Deerpath Road, Lake Forest, Illinois, on May 16, 1997, at 10:00 a.m., local
time, for the following purposes:
1. To elect five directors to serve until the 1998 Annual Meeting of
Stockholders.
2. To ratify an amendment to the Company's 1995 Stock Plan to provide
for an increase in the number of shares available for issuance thereunder.
3. To transact such other business as may properly come before the
meeting.
Only stockholders of record on April 4, 1997 will be entitled to notice of
and to vote at this meeting.
TO ASSURE THAT YOUR INTERESTS WILL BE REPRESENTED, WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING, YOU ARE URGED TO SIGN AND DATE THE ENCLOSED PROXY CARD
AND PROMPTLY RETURN IT IN THE PRE-ADDRESSED ENVELOPE PROVIDED, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. THE ENCLOSED PROXY IS REVOCABLE AND WILL
NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
By Order of the Board of Directors,
David E. Riggs
DAVID E. RIGGS,
Secretary
Lake Forest, Illinois
April 25, 1997
<PAGE> 2
NEOPHARM, INC.
225 EAST DEERPATH
SUITE 250
LAKE FOREST, ILLINOIS 60045
------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 16, 1997
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of NeoPharm, Inc., a Delaware corporation (the
"Company"), to be used at the Annual Meeting of Stockholders of the Company
("the "Annual Meeting") to be held at The Northern Trust Bank, 265 East Deerpath
Road, Lake Forest, Illinois on May 16, 1997 at 10:00 a.m. for the purposes set
forth in the accompanying Notice of Annual Meeting of Stockholders and in this
Proxy Statement. This Proxy Statement and the enclosed form of proxy were first
sent or given to stockholders on or about April 25, 1997.
Only stockholders of record at the close of business on April 4, 1997 (the
"Record Date") will be entitled to vote at the meeting or any adjournment
thereof. As of the close of business on the Record Date, there were 8,130,268
shares of the Company's common stock, par value $.0002145 per share ("Common
Stock"), outstanding.
The presence, either in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of Common Stock is necessary to
constitute a quorum at the Annual Meeting. In the election of directors, each
share is entitled to one vote for each director to be elected; cumulative voting
is not permitted. For all matters except the election of directors, each share
is entitled to one vote. Directors are elected by a plurality of the votes cast
by the holders of shares of Common Stock at a meeting at which a quorum is
present. A majority of the votes cast in person or by proxy is necessary to
approve the amendments to the 1995 Stock Plan. Abstentions and broker non-votes
are counted for purposes of determining the presence or absence of a quorum for
the transaction of business. Abstentions and broker non-votes are not counted
for purposes of determining whether a proposal presented to stockholders has
been approved.
A proxy may be revoked at any time before it is exercised by giving a
written notice to the Secretary of the Company bearing a later date than the
proxy, by submitting a later-dated proxy or by voting the shares represented by
the proxy in person at the Annual Meeting. Unless revoked, the shares
represented by each duly executed, timely delivered proxy will be voted in
accordance with the specifications made. If no specifications are made, such
shares will be voted FOR the election of directors as proposed in this Proxy
Statement and FOR the amendment to the 1995 Stock Plan. The Board of Directors
does not intend to present any other matters at the Annual Meeting. However,
should any other matters properly come before the Annual Meeting, it is the
intention of the proxy holders to vote the proxy in accordance with their best
judgement.
The expenses of soliciting proxies will be paid by the Company. In addition
to solicitation by mail, officers, directors and employees of the Company, who
will receive no extra compensation therefor, may solicit proxies personally or
by telephone, telecopy or telegram. The Company will reimburse brokerage houses,
custodians, nominees and fiduciaries for their expenses in mailing proxy
materials to principals.
<PAGE> 3
ELECTION OF DIRECTORS
Five directors, constituting the entire Board of Directors, are to be
elected at the Annual Meeting. Each director will hold office until the 1998
Annual Meeting of stockholders and until his or her successor has been elected
and qualified. The nominees named below have been selected by the Board of
Directors of the Company. The Board believes that all of its present nominees
will be available for election at the meeting and will serve if elected. If, due
to circumstances not now foreseen, any of the nominees named below will not be
available for election, the proxies will be voted for such other person or
persons as the Board of Directors may select. Each of these nominees is
currently a director of the Company.
Pursuant to the By-laws, the Board of Directors by resolution increased the
number of directors from four to five and, effective as of April 1, 1997,
appointed Mr. Erick E. Hanson to fill the newly created vacancy until the 1997
Annual Meeting.
There follows information as to each nominee for election as a director at
the Annual Meeting, including his age, present principal occupation, other
business experience during the last five years, directorships of other
publicly-held companies and period of service as a director of the Company.
THE PERSONS NAMED IN THE ACCOMPANYING FORM OF PROXY WILL VOTE FOR THE
ELECTION OF THE NOMINEES UNLESS STOCKHOLDERS SPECIFY OTHERWISE IN THEIR PROXIES.
Nominees for Director. The following information has been provided by the
respective nominees for election to the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
William C. Govier, M.D., Ph.D. ........... 60 Dr. Govier has been President, Chief Executive
Officer and Director of the Company since joining
the Company in December 1993. Dr. Govier was a
founder of Aegis Technology, Inc., a developer of
pharmaceuticals for pulmonary disease therapy, and
has been its President since June 1990. Prior to
that time, Dr. Govier was Executive Vice President
and Director of Research and Medical Affairs at
Medco Research, Inc., a developer of drugs aimed at
treating heart diseases.
John N. Kapoor, Ph.D. .................... 53 Dr. Kapoor has been a Director and Chairman of the
Board since July 1990. Prior to forming the
Company, Dr. Kapoor formed EJ Financial
Enterprises, Inc., a health care consulting and
investment company, in March 1990, of which Dr.
Kapoor is currently President. Dr. Kapoor is
presently Chairman and Chief Executive Officer of
Option Care, Inc., an outpatient and home infusion
health care company; Chairman of Unimed
Pharmaceuticals, Inc., a developer and marketer of
pharmaceuticals for cancer, endocrine disorders and
infectious diseases; and Chairman of Akorn, Inc., a
manufacturer, distributor and marketer of generic
ophthalmic products.
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Aquilur Rahman, Ph.D. .................... 54 Dr. Rahman has been a Director and Chief Scientific
Officer, since joining the Company in July 1990.
Dr. Rahman became a full time employee in March
1996. Prior to joining the Company on a full time
basis, Dr. Rahman was an associate professor of
pathology and pharmacology at Georgetown University
and has more than 15 years of research experience
in developing methods of chemotherapy treatment for
cancer.
Anatoly Dritschilo, M.D. ................. 52 Dr. Dritschilo joined the Company as a Member of
the Board of Directors in July 1990. Since August
1979, Dr. Dritschilo has been Chairman of the
Department of Radiation Medicine and Medical
Director of the Georgetown University Medical
Center in Washington, D.C.
Erick E. Hanson........................... 50 Mr. Hanson joined the Company as a Member of the
Board of Directors in April 1997. Since April 1995,
Mr. Hanson has been associated with Option Care,
Inc., a provider of home healthcare, were he
currently holds the positions of Director,
President and Chief Executive Officer. Prior to
joining Option Care, Mr. Hanson held a variety of
executive positions with Caremark, Inc., including
Vice President Sales and Marketing. Mr. Hanson
served as President and Chief Operating Officer of
Clinical Partners Inc. in Boston, MA from 1989 to
1991 and prior to 1989 was associated with Blue
Cross and Blue Shield of Indiana for over twenty
years. Mr. Hanson presently serves on the Board of
Directors for Condell Medical Centers.
</TABLE>
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held two meetings and took action by written consent
in lieu of meetings on two occasions in 1996. During 1996, each of the directors
participated in at least 75% of the total number of such meetings of the Board
and meetings of committees of the Board on which he served.
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Company's bylaws provide that each such committee shall
have one or more members, who serve at the pleasure of the Board of Directors.
The Company does not have a standing nominating committee, however, the Board of
Directors will consider director nominations which are submitted by stockholders
in writing addressed to: Corporate Secretary, NeoPharm, Inc., 225 East Deerpath,
Suite 250, Lake Forest, Illinois 60045.
Compensation Committee. The Compensation Committee is responsible for
administering incentive compensation and benefit plans under the Company's 1995
Stock Plan (the "Stock Option Plan") and the Company's 1995 Director Option Plan
(the "Director Plan") and reviewing and making recommendations to the Board of
Directors with respect to the administration of the salaries, incentives and
other compensation of directors, officers, and other employees of the Company,
including the terms and conditions of their employment and other compensation
matters. The Board of Directors has appointed Messrs. Kapoor and Dritschilo to
the Compensation Committee. During fiscal 1996, there were two meetings of the
Compensation Committee.
Audit Committee. The Audit Committee is responsible for making an annual
recommendation, based on a review of qualifications, to the Board of Directors
for the appointment of independent
3
<PAGE> 5
public accountants to audit the financial statements of the Company and to
perform such other duties as the Board of Directors may from time to time
prescribe. The Audit Committee is also responsible for reviewing and making
recommendations to the Board of Directors with respect to (i) the scope of
audits conducted by the Company's independent public accountants and internal
auditors and (ii) the accounting methods and the system of internal controls
used by the Company. In addition, the Audit Committee reviews reports from the
Company's independent public accountants and internal auditors concerning
compliance by management with governmental laws and regulations and with the
Company's policies relating to ethics, conflicts of interest and disbursements
of funds. The Board of Directors has appointed Messrs. Rahman and Govier to the
Audit Committee. During fiscal 1996, there was one meeting of the Audit
Committee.
Compensation Committee Interlocks and Insider Participation. As noted
above, the Compensation Committee of the Board consists of Messrs. Kapoor and
Dritschilo, each of whom is a non-employee director of the Company. In 1996, the
Company paid EJ Financial Enterprises, Inc. ("EJ") $125,000 pursuant to a
Consulting Agreement for certain business and financial services, plus
reimbursement of expenses. Dr. Kapoor, the Company's Chairman, is the president
and a director of EJ. Dr. Mahendra Shah, Vice President of the Company, is also
a Vice President of EJ. The Company believes the charges provided for in the
Consulting Agreement are reasonable and accurately reflect the cost of the
services provided. The Consulting Agreement expires in 1997. In addition, Dr.
Aquilur Rahman, a Director and the Company's Chief Scientific Officer, was,
until March 1, 1996, employed by Georgetown University as an associate
professor. Dr. Anatoly Dritschilo, a Director of the Company, is currently
employed by Georgetown University as Chairman of the Department of Radiation
Medicine and Medical Director of the Georgetown University Medical Center in
Washington, D.C. The Company has previously entered into license and sponsored
research agreements with Georgetown University which were conducted in the
laboratory of Dr. Rahman. As of April 27, 1996, the Company's obligation to fund
further research pursuant to its agreements with Georgetown terminated. See
"Certain Transactions" for additional information.
COMPENSATION OF DIRECTORS
Directors are not paid any compensation for attendance at directors'
meetings or for serving on any committee of the Board. Directors are reimbursed
for reasonable out-of-pocket expenses incurred in connection with attendance at
such meetings.
Non-employee directors are eligible to participate in the Director Plan
which provides for the grant of nonstatutory stock options to non-employee
directors of the Company who are not stockholders holding more than 5% of the
Company's outstanding Common Stock ("Outside Directors") pursuant to an
automatic, non-discretionary grant mechanism providing for a total of 100,000
shares of Common Stock. Currently two directors are eligible to participate in
the Director Plan. Each Outside Director is automatically granted an option to
purchase 2,000 shares of Common Stock of the Company upon his or her initial
election as a director. Subsequently, each Outside Director is granted an
additional option to purchase 1,000 shares of Common Stock on January 1 of each
year thereafter (if, on such date, he or she has served as a director for at
least six (6) months), so long as he or she remains an Outside Director.
4
<PAGE> 6
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation of Executive Officers. The
following table sets forth certain summary compensation information for the
fiscal year ended December 31, 1996, for services rendered by the chief
executive officer and for each executive officer of the Company who received
more than $100,000 in salary and bonus in 1996 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------------------- -----------------------
ANNUAL OTHER RESTRICTED
NAME AND FISCAL COMPENSATION ANNUAL STOCK
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION AWARDS($) OPTIONS(#)
------------------ ----------- --------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William C. Govier, 1996 $121,000 $39,600 $0 0 50,000(1)
Chief Executive Officer 1995 0 0 0 0 0
and President 1994 0 0 0 0 0
Aquilur Rahman, 1996 $144,100 $45,000 $0 0 50,000(1)
Chief Scientific Officer 1995 0 0 0 0 0
1994 0 0 0 0 0
</TABLE>
- ---------------
(1) The stock option becomes exercisable 25% on August 13, 1997 and an
additional 25% on each anniversary of such date thereafter until exercisable
in full.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of
options to purchase Common Stock granted to the Named Executive Officers during
the fiscal year ended December 31, 1996:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION
OPTIONS GRANTED EXERCISE FOR OPTION TERM
GRANTED TO EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME OPTIONS(#) FISCAL YEAR SHARE DATE 5% 10%
---- ---------- --------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William C. Govier 50,000 33.33 $7.00 8/13/06 $220,113 $557,810
Aquilur Rahman 50,000 33.33 7.00 8/13/06 220,113 557,810
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR, AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to stock options
exercised during the fiscal year ended December 31, 1996, and the value at
December 31, 1996, of exercised stock options held by the Named Executive
Officers:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-
OPTIONS AT FISCAL MONEY AT FISCAL
YEAR-END YEAR-END*
VALUE EXERCISABLE/ EXERCISABLE/
SHARES ACQUIRED REALIZED UNEXERCISABLE UNEXERCISABLE
NAME ON EXERCISE # $ # $
---- --------------- -------- ----------------- ---------------
<S> <C> <C> <C> <C>
William C. Govier................... 0 0 0/50,000 0/50,000
Aquilur Rahman...................... 0 0 0/50,000 0/50,000
</TABLE>
- ---------------
* Represents the fair market value at December 31, 1996, of the Common Stock
underlying the options minus the exercise price.
5
<PAGE> 7
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors, consisting of
directors Dr. John N. Kapoor and Dr. Anatoly Dritschilo, neither of whom is an
employee of the Company, annually reviews and makes recommendations to the Board
of Directors regarding executive compensation. It is the philosophy of the
Committee that the total executive compensation package should align the
financial interests of the Company's executives with the short-term and
long-term goals of the Company and consequently enhance stockholder value. The
key elements of the Company's current compensation program include a base
salary, an annual bonus and equity participation through a long term incentive
plan.
Base Salary. As a development stage company, with only one full time
employee, it is difficult to compare salaries to any particular peer group.
Rather, the Committee takes into consideration the responsibilities, experience
level, individual performance levels and amount of time devoted to the Company's
needs. Salaries are reviewed annually by the Committee based on the foregoing
criteria and are adjusted, if warranted, by the Committee.
Annual Bonus. The Committee recommends to the Board the amount of bonus
awards, including who should receive them based upon its evaluations. The awards
are intended to reward excellent individual and team performance in the
achievement of the Company's financial and operational goals. The Board of
Directors reviews the Committee's bonus recommendations and makes its bonus
determinations based on the Committee's report. Bonuses were first paid to
employees for the fiscal year 1996 and amounted to 30% of base salary.
Long-term Incentives. The Company adopted the 1995 Stock Plan in January
1995. The purpose of the plan is to create an opportunity for employees,
including executive officers and consultants to the Company, to share in the
enhancement of stockholder value. As with annual bonus payments, the
Compensation Committee annually recommends to the Board the grant of incentive
awards based upon its evaluation of individual contributions towards the
Company's past and future success. After reviewing the recommendation of the
Committee, including the executive's individual performance and level of
responsibility together with the Company's achievement with respect to
profitability and growth, the Board grants incentive awards. The 1996 fiscal
year marked the first time the Committee has made such recommendations to the
Board.
Compensation Committee
Dr. John N. Kapoor
Dr. Anatoly Dritschilo
6
<PAGE> 8
SECURITY OWNERSHIP
The following table sets forth certain information regarding beneficial
ownership of shares of the Common Stock as of April 4, 1997 by (i) all those
known by the Company to be beneficial owners of more than 5% of its outstanding
Common Stock, (ii) each director of the Company and each nominee for director,
(iii) each of the executive officers named in the Summary Compensation Table and
(iv) all Executives, directors and nominees for director as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME BENEFICIAL OWNERSHIP CLASS (1)
---- -------------------- ----------
<S> <C> <C>
John N. Kapoor.............................. 2,096,628(2) 24.47%
EJ Financial Enterprises, Inc.
225 East Deerpath
Suite 250
Lake Forest, IL 60045
John N. Kapoor 1994-A....................... 1,554,234(3) 18.14%
Annuity Trust
225 East Deerpath
Suite 250
Lake Forest, IL 60045
Aquilur Rahman.............................. 865,540 10.10%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
Anatoly Dritschilo.......................... 233,136 2.72%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
William C. Govier........................... 233,134 2.72%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
Erick E. Hanson............................. 0 *
100 Corporate North, Suite 212
Bannockburn, IL 60015
All officers and directors as a group
(7 persons)............................... 5,170,154(4) 60.34%
</TABLE>
- ---------------
* Indicates ownership of less than 1%.
(1) Based on 8,130,268 shares of Common Stock outstanding as of April 4, 1997,
plus 437,004 shares subject to warrant and options that are considered to be
beneficially owned by the persons listed. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission (the
"Commission") and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options or warrants
exercisable or convertible within 60 days are deemed outstanding for
computing the percentage of the person or group holding such options or
warrants.
(2) Includes 1,509,624 shares held by the John N. Kapoor Trust, dtd 9/20/89 (the
"JNK Trust"), of which Dr. Kapoor is the sole trustee and sole beneficiary.
The address of the Trust is 225 East Deerpath, Suite 250, Lake Forest,
Illinois 60045. The Trust also owns Warrants to purchase 287,004 shares of
Common Stock, which are assumed to have been exercised for purposes of
disclosing the ownership indicated. The amount shown also includes 300,000
shares which are held by the John N. Kapoor Charitable Trust (the
"Charitable Trust") of which Dr. Kapoor and his spouse are co-trustees. Dr.
Kapoor disclaims beneficial ownership of the shares held by the Charitable
Trust.
(3) The sole trustee of the John N. Kapoor 1994-A Annuity Trust (the "Annuity
Trust") is Editha Kapoor, Dr. Kapoor's spouse, who also serves as trustee
for four trusts which have been established for their children (the
"Children's Trusts") and which collectively own 310,848 shares
7
<PAGE> 9
and as co-trustee with Dr. Kapoor of the Charitable Trust. The shares held
by the Childrens' Trusts and the Charitable Trust are not included in the
reported shares.
(4) Does not include shares held by family members or trusts established for
family members of officers and directors as to which shares such officers
and directors do not have or share voting or investment power and as to
which they have disclaimed beneficial ownership.
PROPOSAL TO APPROVE AMENDMENT TO
NEOPHARM, INC. 1995 STOCK PLAN
In January 1995, the Board of Directors (the "Board") and the stockholders
of the Company approved the 1995 Stock Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the granting to employees (including officers and
employee directors) and consultants of "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the granting to officers, employees, directors, and consultants of
nonstatutory stock options.
The Stock Option Plan was amended by the Board in March 1997, subject to
approval of the stockholders. The amendments increased from 900,000 to 1,400,000
the number of shares of Common Stock reserved for issuance under the Stock
Option Plan. Assuming the amendment is approved, the 674,000 shares of Common
Stock underlying the options issuable under the Stock Option Plan would have a
market value of $5,139,250 on March 31, 1997, based upon the Closing Price of
the Common Stock as reported by AMEX on that date. The Stock Option Plan and the
reason for the proposed amendment is discussed below.
From its inception, the purpose of the Stock Option Plan has been to
attract and retain the best available personnel to the Company and to encourage
stock ownership by employees, officers, directors and consultants of the Company
by giving them a greater personal stake in the success of the Company. As of
March 31, 1997, a total of 174,000 shares of Common Stock remained for issuance
under the Stock Option Plan. The Board of Directors does not believe that this
represents an adequate number of shares to address the needs of the Company in
the future.
The Stock Option Plan is currently administered by the Board of Directors,
which determines the terms of the options granted under the Stock Option Plan,
including the exercise price, number of shares subject to the option and the
exercisability thereof. Generally, options granted to employees and consultants
under the Stock Option Plan vest and become exercisable at a rate of 25% of the
shares subject to the option one (1) year from the date of grant, but the Board
of Directors of the Company has the discretion to determine the vesting of
shares subject to each option. The terms of incentive stock options and
nonstatutory stock options granted under the Stock Option Plan may not exceed
ten (10) years. No option granted under the Stock Option Plan may be transferred
by the optionee other than by will or the laws of descent or distribution and
each option may be exercised, during the lifetime of the optionee, only by such
optionee. In the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each option
may be assumed or an equivalent option substituted by the successor corporation
or the Administrator, in lieu of assumption or substitution, may provide for the
Optionee to have the right to exercise the Option as to all or a portion of the
covered shares.
In the event any change is made in the Company's capitalization, such as a
stock split or stock dividend, which results in a greater or lesser number of
shares of Common Stock of the Company, appropriate adjustment would be made in
the option price and in the number of shares subject to the options. In the
event of the proposed dissolution or liquidation of the Company, to the extent
that an option has not been previously exercised, it will terminate immediately
prior to the consummation of such proposed action.
8
<PAGE> 10
The exercise price of all incentive stock options granted under the Stock
Option Plan must be at least equal to the fair market value of the shares of
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting rights of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the date of grant. No incentive
stock options may be granted to a participant, that, when aggregated with all
other incentive stock options granted to such participant would have an
aggregate fair market value in excess of $100,000 becoming exercisable in any
calendar year. The exercise price of all nonstatutory stock options granted
under the Stock Option Plan is determined by the Administrator. No options have
been granted to date at prices less than 100% of the fair market value on the
date of grant.
In August 1996, the Board authorized the issuance of options for an
unspecified number of shares of Common Stock at the stock price in effect on
August 13, 1996 to persons whose efforts were considered crucial to the filing
of a new drug application ("NDA") with the U.S. Food and Drug Administration.
The awarding of the options was conditioned upon the NDA being filed no later
than December 31, 1996. On December 30, 1996 the NDA was filed and the Board
thereafter awarded a total of 260,000 shares on the options of those individuals
whose efforts were responsible for the NDA filing. Including the options awarded
in December 1996, options to acquire a total of 726,000 shares have been granted
under the Stock Option Plan.
Eligible officers, employees and consultants to be selected for option
awards under the Stock Option Plan in the future will vary from year to year.
Accordingly, it is not currently possible to determine incentive awards that
will be made in the future.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Options. The Company believes that with respect to incentive
options granted under the Stock Option Plan, no income will be recognized by an
optionee for federal income tax purposes at the time such an option is granted
or at the time it is exercised. However, the amount by which the fair market
value of the shares at the time of exercise exceeds the exercise price will be
an adjustment for purposes of calculating the optionee's alternative minimum
taxable income; accordingly, optionees will be required to include such excess
as alternative minimum income in the taxable year of exercise.
If the optionee makes no disposition of incentive option shares within two
years from the date the incentive option was granted and one year from the
receipt of the option shares pursuant to the exercise of the incentive option
(the "applicable holding period"), any gain recognized upon disposition of the
shares will be long-term capital gain.
If the optionee disposes of shares acquired by exercise of an incentive
option before the expiration of the applicable holding period, the optionee will
recognize ordinary income in an amount equal to the difference between the fair
market value of the shares on the date of exercise less the purchase price paid
for the shares or, if less, the difference between the amount received on
disposition of the shares and the adjusted basis of the shares. Any additional
gain on such disposition will be long-term or short-term capital gain, depending
on the holding period of the shares.
If the optionee holds incentive option shares for the applicable holding
period, the Company will not be allowed a deduction for federal income tax
purposes with respect to an incentive option. However, if the optionee does not
hold his shares for the applicable holding period, the Company will be entitled
to a deduction for the amount received by the optionee to the extent that such
amount is taxable to the optionee as ordinary income.
If an optionee makes payment of the option price by delivering shares of
the Common Stock, he generally will not recognize any gain as a result of such
delivery, but the amount of gain, if any, which is not so recognized will be
excluded from his basis in the new shares received. However, the use by an
optionee of shares previously acquired pursuant to the exercise of an incentive
option to exercise an
9
<PAGE> 11
incentive option will be treated as a taxable disposition if the transferred
shares were not held by the optionee for the applicable holding period.
Non-Qualified Options. The grant of a non-qualified option is not subject
to federal income tax. Upon exercise, the optionee will recognize as ordinary
income, and the Company is entitled to a corresponding deduction for federal
income tax purposes, an amount equal to the difference between the fair market
value of the shares on the date of exercise and the exercise price. As to
options held by employees, this ordinary income will constitute wages subject to
the withholding of income tax and the Company will make arrangements to ensure
that the amount of the tax required is withheld.
When an optionee disposes of shares received on exercise of a non-qualified
option, the optionee will recognize capital gain or loss (long-term or
short-term, depending on the period the optionee holds the shares) in an amount
equal to the difference between the selling price and the optionee's tax basis
in the shares (generally, the amount of ordinary income the optionee previously
recognized with respect to the shares plus the exercise price the optionee paid
for the shares).
If any optionee makes payment of the option price by delivering shares of
Common Stock, he generally will not recognize any gain as a result of such
delivery, but the amount of gain, if any, which is not so recognized will be
excluded from his basis in the new shares received.
The foregoing general discussion of the federal income tax consequences of
the granting and exercise of options under the Stock Option Plan, and the sale
of Common Stock acquired, is based on an analysis of the Code, as currently in
effect, existing laws, judicial decisions and administrative rulings and
regulations, all of which are subject to change. In addition to being subject to
the federal income tax consequences described above, an optionee may also be
subject to state and/or local income tax consequences in the jurisdiction in
which he or she works and/or resides.
APPROVAL OF THE AMENDMENTS TO THE STOCK OPTION PLAN
Each holder of outstanding shares of Common Stock of the Company of record
at the close of business on April 4, 1997, is entitled to one vote per share
held with respect to the adoption of the amendments to the Stock Option Plan.
The affirmative votes of a majority of the votes cast by the holders of shares
of Common Stock of the Company entitled to vote thereon are necessary for
adoption of the amendments to the Stock Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE
AMENDMENTS TO THE 1995 STOCK OPTION PLAN.
10
<PAGE> 12
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in cumulative total
stockholder return on the Company's Common Stock with the cumulative return on
the NASDAQ (US) Stock Market Index and the NASDAQ Pharmaceutical Stock Index
during the period beginning January 25, 1996 (the date on which the Company's
Common Stock began trading publicly on the Nasdaq Small Cap System) through
December 31, 1996. The price of the Common Stock as reflected in the graph has
been adjusted to reflect the two-for-one stock split in the Common Stock in
August 1996. The comparison assumes that $100 was invested on January 1, 1996 in
the Company's Common Stock and in the foregoing indices and assumes the
reinvestment of dividends.
COMPARE 1-YEAR CUMULATIVE TOTAL RETURN AMONG
NEOPHARM, INC., BROAD MARKET AND PEER GROUP
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NEOPHARMACEUTICALS, BROAD MARKET PEER GROUP
(FISCAL YEAR COVERED) INC.
<S> <C> <C> <C>
1995 100.00 100.00 100.00
1996 229.00 123.00 100.00
</TABLE>
ASSUMES $100 INVESTED ON JAN. 1, 1996
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1996
- ---------------
* NeoPharm began trading on NASD Jan. 25, 1996, but a date of Dec. 31, 1995 is
assumed for purposes of the graph and table.
** Traded as "NPRM" on NASD until Nov. 29, 1996. Trading as "NEO" began on AMEX
on Dec. 2, 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's President and Chief Executive Officer ("CEO"), William C.
Govier, has served as a consultant to the Company on clinical trials and NDA
filing matters, both individually and as a consultant with Aegis Technology,
Inc. ("Aegis"), an entity co-founded by Dr. Govier. As the Company's President
and CEO, Dr. Govier received options in December 1993, to purchase 233,134
shares of Company stock at the fair market value on the date of grant, which
were subsequently exercised. His colleague and co-founder of Aegis received
options in December 1993 to purchase 15,542 shares of Company stock at the fair
market value on the date of grant, of which 7,770 options were 100% vested and
7,772 options vest upon future performance of services. The Company has
11
<PAGE> 13
expensed approximately $601,500 since inception through December 31, 1996,
related to work performed and expenses incurred by Dr. Govier, his colleague and
Aegis.
Dr. Aquilur Rahman, the Company's Chief Scientific Officer and member of
the Board of Directors, was, until March 1996, employed by Georgetown University
on a full-time basis, an entity with which the Company had entered into license
and sponsored research agreements providing for the Company's funding of
research which was conducted in Dr. Rahman's laboratory at Georgetown. The
Company's obligation to fund further research at Georgetown ended on April 27,
1996.
A trust of which Dr. John N. Kapoor, Chairman of the Board of the Company,
is the sole beneficiary, previously loaned the Company $1,500,000 pursuant to a
Loan Repayment Note dated June 18, 1990. The principal and accrued interest to
November 30, 1995 under the Loan Repayment Note was converted into Common Stock
and Warrants at the initial public offering price on January 25, 1996, and
$54,834 of remaining unpaid interest accruing from November 30, 1995 through
January 25, 1996 was paid by the Company in cash. An aggregate of 574,008 shares
of Common Stock and 287,004 Warrants were issued upon conversion of the
outstanding $1,500,000 in principal and $523,385 of accrued interest debt.
On July 1, 1994, the Company entered into a Consulting Agreement with EJ
Financial Enterprises, Inc. ("EJ Financial"). The Consulting Agreement provides
that the Company will pay EJ Financial $125,000 per year (paid quarterly) for
certain business and financial services, including having certain officers of EJ
Financial serve as officers of the Company. Dr. John Kapoor, the Company's
Chairman of the Board is the president and a director of EJ Financial. Dr.
Mahendra Shah, Vice President of the Company, is also a Vice President of EJ
Financial. The Company believes that the charges provided for in the Agreement
are reasonable and reflect the cost of the services provided. These charges
reflect the increased need for EJ Financial's services in connection with
operation of NeoPharm as a publicly-held company. The management services
agreement with EJ Financial expires in June 1997.
In connection with the Company's initial public offering, the Company
adopted a policy whereby any further transactions between the Company and its
officers, directors, principal stockholders and any affiliates of the foregoing
persons will be on terms no less favorable to the Company than could reasonably
be obtained in arm's length transactions with independent third parties, and
that any such transactions also be approved by a majority of the Company's
disinterested outside directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity security, to file with the Securities
and Exchange Commission and the applicable stock exchanges reports of ownership
and changes in ownership of common stock and other equity securities of the
Company. Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that, during the 1996 fiscal year, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with except that: (i) Mr. David Riggs, Chief Financial Officer of
the Company, should have filed a Form 3 report with the Securities and Exchange
Commission ("SEC") at the time of the Company's initial public offering in
January 1996; (ii) Dr. Aquilur Rahman failed to file three Form 4 Reports with
the SEC to report a series of eight sale transactions in May, June and August of
1996; and (iii) Dr. John Kapoor failed to file a Form 4 with the SEC to report
his acquisition of Common Stock and warrants as part of the Company's initial
public offering in January 1996. All filings not made, as described in this
paragraph, have now been made.
12
<PAGE> 14
RELATIONSHIP WITH INDEPENDENT AUDITORS
The firm of Arthur Andersen LLP was the Company's independent public
accountant for the 1996 fiscal year. A representative from the Company's
independent public accountants customarily attends the Annual Meeting and has
the opportunity to make a statement if he so desires. This representative also
is available to respond to appropriate questions. The Company has not yet
selected its independent public accountant for the 1997 fiscal year.
OTHER MATTERS
The only matters which management intends to present to the meeting are set
forth in the Notice of Annual Meeting. Management knows of no other matters
which will be brought before the meeting by any other person. However, if any
other matters are properly brought before the meeting, the persons named on the
enclosed form of proxy intend to vote on such matters in accordance with their
best judgement on such matters.
1998 ANNUAL MEETING
Proposals of stockholders intended to be presented at the next Annual
Meeting of Stockholders to be held in 1998 must be received by the Company on or
before December 27, 1997 for inclusion in the Company's Proxy Statement and form
of proxy relating to that Annual Meeting.
1996 ANNUAL REPORT ON FORM 10-K
A copy of the Company's 1996 Annual Report on Form 10-K (the "Form 10-K")
accompanies this Proxy Statement as part of the Company's Annual Report.
Additional copies of the Form 10-K are available to stockholders without charge
on written request to the following address: NeoPharm, Inc., 225 E. Deerpath,
Suite 250, Lake Forest, Illinois 60045.
By Order of the Board of Directors,
William C. Govier
William C. Govier,
President and Chief Executive Officer
April 25, 1997
13
<PAGE> 15
PROXY
NEOPHARM, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS - MAY 16, 1997
The undersigned appoints William C. Govier, David E. Riggs and Christopher
R. Manning, and each of them, as proxies, with full power of substitution and
revocation, to vote, as designated on the reverse side hereof, all the Common
Stock of NeoPharm, Inc. which the undersigned has power to vote, with all powers
which the undersigned would possess if personally present, at the annual meeting
of stockholders thereof to be held on May 16, 1997, or at any adjournment
thereof.
Unless otherwise marked, this proxy will be voted FOR the election of the
nominees named and FOR Proposal No. 2.
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side.)
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/
<TABLE>
<S><C>
1. ELECTION OF DIRECTORS -
Nominees: William C. Govier, John K. Kapoor, For Withhold For All 2. Approval of amendment to For Against Abstain
Aquilur Rahman, Anatoly Dritschilo, All All Except increase Common Shares [ ] [ ] [ ]
Erick E. Hanson [ ] [ ] [ ] under 1995 Stock Option
Plan.
- -----------------------------------------------
(Except Nominee(s) written above)
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS AND OF THE
PROXY STATEMENT.
Dated: , 1997
---------------
Signature(s)
-----------------------------------
------------------------------------------------
Please sign exactly as your name appears. Joint
owners should each sign personally. Where
applicable, indicate your official position or
representation capacity.
</TABLE>
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT!
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
