**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

 

**FORM 10-K/A**

**(Amendment No. 1)**

 

**ý  ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2001**

 

**OR**

 

o   **TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition periodfrom            to            **

 

**Commission File No. 0-21130**

----

 

**ENCHIRA BIOTECHNOLOGY CORPORATION**

**(Exact name of registrant as specified in its charter)**

** **

| **Delaware**                                              |   | **04-3078857**      |
|-----------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                           |   | (IRS Employer       |
| incorporation or organization)                            |   | Identification No.) |
|                                                      |   |                |
| **4200 Research Forest Drive**                            |   | **77381**           |
| **The Woodlands, Texas**                                  |   | (Zip code)          |
| (Address of principal executive offices)                  |   |                |
|                                                      |   |                |
| **(281) 419-7000**                                        |
| (Registrant’s telephone number, including area code) |

----

 

**Securities Registered Pursuant to Section 12(b) of the Act:None**

 

**Securities Registered Pursuant to Section 12(g) of the Act:**

 

| **Title of Class**                      |
|-----------------------------------------|
| Common Stock, par value  $.01 per share |
| Preferred Stock  Purchase Rights        |

 

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes  ý   No

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulations S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.   o

 

The aggregate market value of the voting stock held bynon-affiliates of the registrant was approximately $3,766,343 as of March 8,2002, based on the closing sales price of the registrant’s common stock on theNasdaq National Market on such date of $0.28 per share and assuming full conversionof the registrant’s Series B Convertible Preferred Stock.  For purposes ofthe preceding sentence only, all directors, executive officers and beneficialowners of ten percent or more of the common stock are assumed to beaffiliates.  As of March 8, 2002, 10,905,173 shares of common stock wereoutstanding.

 

 

**PART III**

 

**Item10.  *Directors and Executive Officers of the Registrant***

 

**Directors**

 

The Company’s directors, and certain additionalinformation with respect to each of them, are as follows:

 
| **Name**                     |   | **Age** |   | **Position with the Company**                            |   | **Year First   Became a Director** |   |
|------------------------------|--------|---------|--------|----------------------------------------------------------|--------|------------------------------------|--------|
| William E.  Nasser           |   | 62      |   | Chairman of the Board                                    |   | 1992                               |   |
| Peter P.  Policastro, Ph.D.  |   | 48      |   | President and Chief  Executive Officer   and Director    |   | 1999                               |   |
| Daniel J.  Monticello, Ph.D. |   | 46      |   | Vice President,  Research and   Development and Director |   | 1994                               |   |
| Thomas E.  Messmore, CFA     |   | 56      |   | Director                                                 |   | 1992                               |   |
| William D. Young             |   | 57      |   | Director                                                 |   | 1994                               |   |

* *

*WilliamE. Nasser.* Mr. Nasserhas served as Chairman of the Board since April 1998 and has been a Directorsince January 1992.  Mr. Nasser servedas President and Chief Executive Officer from April 1998 to June 1999.  Mr. Nasser formerly served as Chairman ofthe Board, President and Chief Executive Officer of Petrolite Corporation from1992 to 1995 and as President of Petrolite from 1988 to 1992.  He retired in November 1995 after over 30years of service.  Mr. Nasser currentlyis a director of Laclede Gas Company. He holds a B.S. degree in Chemical Engineering from the University ofNotre Dame and an M.S. degree from the University of Oklahoma.

 

*PeterP. Policastro, Ph.D.* Dr. Policastro has served as the Company’s President and Chief ExecutiveOfficer since July 1999 after serving as the Company’s Executive Vice Presidentand Chief Operating Officer since January 1999.   He served as Senior Vice President Research and Development inthe Melamine Resins and Derivatives Unit, a division of Borden Chemical, Inc.from 1998 to 1999.  From 1995 to 1998,Dr. Policastro was Senior Vice President of Plastics Manufacturing Company, adivision of Sun Coast Industries, Inc. From 1992 to 1995, Dr. Policastro was Chief Executive Officer and afounder of Med-Genesis, Inc., a surgical products company.  From 1989 to 1992, Dr. Policastro wasPresident of OctaNova Laboratories.  Dr.Policastro received his A.B. degree in Chemistry from Duke University in 1976and his Ph.D. in Organic Chemistry from the Massachusetts Institute ofTechnology in 1983.

* *

*DanielJ. Monticello, Ph.D.* Dr. Monticello was the Company’s first employee.  He joined the Company in July 1990 as VicePresident, Research and Development and became a Director in 1994.  From 1983 to 1990, Dr. Monticello wasemployed by Miles Laboratories where he served in various capacities in the BiotechnologyProducts Division, including Manager of Biochemistry Research.  Dr. Monticello earned his B.S. degree fromthe University of Michigan and his M.S. and Ph.D. in Microbiology from MichiganState University.

* *

*ThomasE. Messmore, CFA.*  Mr.Messmore has been a Director since 1992. Mr. Messmore has been Managing Director of Zurich Centre Resources,Ltd., a subsidiary of Zurich Insurance Group, since 1997 and currently servesas a member of the Executive Staff with their parent company Zurich Insurancein Zurich, Switzerland.  Previously, Mr.Messmore served as President and Chief Executive Officer of UBS AssetManagement (New York), Inc. from 1995 until October 1996.  Mr. Messmore served as Senior VicePresident of The Travelers Insurance Company from 1984 until his resignation inJanuary 1994.  Prior thereto, he servedas Senior Vice President and Chief Financial Officer of the KeystoneMassachusetts Group, an affiliate of The Travelers Insurance Company.  Mr. Messmore received a B.S. degree inEngineering from West Virginia University and an M.B.A. from Harvard BusinessSchool.

* *

*WilliamD. Young.*  Mr. Younghas been a Director since 1994.  Mr.Young has been Chief Executive Officer and Chairman of the Board of ViroLogic,Inc. since October 1999.  Mr. Young wasChief Operating Officer of Genentech, Inc. from March 1997 to October 1999,with responsibility for overseeing Genentech, Inc.’s operations, businessdevelopment and sales and marketing. Prior to joining Genentech, Inc. in 1980, Mr. Young spent 14 years withEli Lilly and Company.  He received hisB.S. degree in Chemical Engineering from Purdue University and an M.B.A. fromIndiana University.  Mr. Young is alsoon the Board of Directors of IDEC Pharmaceuticals, Inc. and is a member of theNational Academy of Engineering.

 

2

----

 

**Executive Officers**

 

Set forth below is certain information concerning theexecutive officers of the Company, including the business experience of each,during the past five years.

 
| **Name**                     |   | **Age** |   | **Position with the Company**                                            |   |
|------------------------------|--------|---------|--------|--------------------------------------------------------------------------|--------|
| William E.  Nasser           |   | 62      |   | Chairman of the Board                                                    |   |
| Peter P.  Policastro, Ph.D.  |   | 48      |   | President and Chief Executive Officer                                    |   |
| Daniel J.  Monticello, Ph.D. |   | 46      |   | Vice President, Research and Development                                 |   |
| Paul G. Brown,  III          |   | 41      |   | Vice President, Finance and Administration   and Chief Financial Officer |   |
| David B. Carpi               |   | 40      |   | Vice President, Business Development                                     |   |

 

Information regarding the business experience ofMessrs. Nasser and Policastro and Dr. Monticello is set forth above under “Item10.  Directors and Executive Officers ofthe Registrant – Directors.”

 

*Paul G.Brown, III.*  Mr. Brownhas served as Vice President, Finance and Administration of the Company sinceSeptember 1993 and Chief Financial Officer since September 1997.  From February 1992 to September 1993, heserved as Corporate Controller of the Company. Mr. Brown spent 10 years with Arthur Andersen & Co. from 1982to 1992, serving most recently as a Tax Manager.  Mr. Brown earned his B.S. degree in Accounting from theUniversity of New Orleans.

 

*DavidB. Carpi.*  Mr. Carpijoined the Company in September 2000 as Vice President, BusinessDevelopment.  He has over thirteen yearsof business development, marketing, and sales experience in the pharmaceuticaland biotechnology industries.  From April1993 to September 2000, he served as Director of Business Development of theLiposome Company.  In 1989, he foundedOragen Inc., a joint venture to develop oral formulations of peptide-basedpharmaceuticals.  Prior to that, Mr.Carpi worked in sales and marketing capacities for Johnson & Johnson andMerck and Co.  Mr. Carpi holds a Masterof Science from the Sloan School of Management, Massachusetts Institute ofTechnology (MIT) and a Bachelor of Science in Molecular Biology fromCarnegie-Mellon University.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934,as amended, requires the Company’s directors and officers, and persons who ownmore than ten percent of the Common Stock, to file initial reports of ownershipand reports of changes in ownership (Forms 3, 4, and 5) of Common Stock withthe Securities and Exchange Commission (the “SEC”) and The Nasdaq StockMarket.  Officers, directors and greaterthan ten percent stockholders are required by SEC regulation to furnish toCompany with copies of all such forms that they file.

 

To the Company’s knowledge, based solely on theCompany’s review of the copies of such reports received by the Company and onwritten representations by certain reporting persons that no reports on Form 5were required, the Company believes that during the fiscal year endedDecember 31, 2001, all Section 16(a) filing requirements applicable to itsofficers, directors and ten percent stockholders were complied with.

 

**Item 11.  *Executive Compensation***

 

**Directors Compensation**

 

Members of the Board of Directors are reimbursed forout-of-pocket expenses incurred in attending Board of Directors and committeemeetings.  Non-employee directorsreceive an option to purchase (i) 300 shares of Common Stock for Board meetingsattended in person, (ii) 100 shares of Common Stock for Board meetings attendedtelephonically and (iii) 100 shares for Committee meetings attended either inperson or telephonically.  Such optionsare to be received in lieu of cash fees to the non-employee directors.  Mr. Nasser received $1,000 for each of twoboard meetings and $500 for one committee meeting attended.  Mr. Young received $1,000 for each of twoboard meetings attended. Directors who are employees of the Company do notreceive any additional compensation for their services as a director.

 

In addition to the options referred to above, underthe Director Plan, each nonemployee director receives an automatic annual grantof non-qualified options to purchase 6,000 shares of Common Stock at anexercise price per share equal to the fair market value per share of CommonStock on the date the option is granted.

 

3

----

 

**Compensation of Executive Officers**

 

*Summary Compensation Table*

 

The following table summarizes certain informationregarding aggregate cash compensation, stock option and restricted stock awardsand other compensation earned by the Company’s President and Chief ExecutiveOfficer and each of the Company’s other executive officers as ofDecember 31, 2001 who earned in excess of $100,000 during 2001.

 
|                                                                                        |   |             |   |    |                      |   |                   | **Long-Term   Compensation**    |                   |                                        |                   |
|---------------------------------------------------------------------------------------------|--------|------------------|--------|---------|---------------------------|--------|------------------------|---------------------------------|------------------------|---------------------------------------------|------------------------|
| **Name and  Principal Position**                                                            |   | **Year**         |   |    |                      |   |                   | **Restricted   Stock   Awards** |                   | **Securities   Underlying   Options   (#)** |                   | **All Other   Compensation(1)** |   |
|                                                                                        |   |             |   |
| **Annual Compensation******                                                                 |   |
| **Salary**                                                                                  |   | **Bonus**        |   |
| Peter P. Policastro, Ph.D.President and Chief Executive Officer                             |   | 20012000  1999   |   | $  $  $ | 250,000  207,500  192,500 |   | $                      | 40,000  —  —          |                   | —  —  —                      |                   | 50,00040,000  140,800 |   | $  $  $ | 13,600  13,600  81,624 | (2) |
|                                                                                        |   |             |   |    |                      |   |                   |                            |                   |                                        |                   |   |   |
| Daniel J. Monticello, Ph.D.  Vice President, Research and Development                       |   | 2001  2000  1999 |   | $  $  $ | 185,000  174,070  171,113 |   | $                      | 15,000  —  —          |                   | —  —  —                      |                   | 20,000  5,000  86,700 |   | $  $  $ | 13,600  281,354  12,800 | (3) |
|                                                                                        |   |             |   |    |                      |   |                   |                            |                   |                                        |                   |   |   |
| Paul G. Brown, III  Vice President,  Finance and Administration and Chief Financial Officer |   | 2001  2000  1999 |   | $  $  $ | 170,000  148,753  135,169 |   | $  $  $                | 15,000  27,501  25,000          |                   | —  —  —                      |                   | 20,000  25,000  61,300 |   | $  $  $ | 13,600  11,900  10,814 |   |
|                                                                                        |   |             |   |    |                      |   |                   |                            |                   |                                        |                   |   |   |
| David B. Carpi   Vice President, Business Development                                       |   | 2001  2000  1999 |   | $  $    | 170,000  52,853  —   |   | —  —  — |                            | —  —  — |                                        | 5,000  100,000  — |   | $  $ | 57,420  20,967  — | (4)  (5) |

 

----

(1)                                  Duringeach of the three years ended December 31, 2001, perquisites for eachindividual named in the Summary Compensation Table aggregated less than 10% ofthe total annual salary and bonus reported for such individuals in the SummaryCompensation Table.  Accordingly, nosuch amounts are included in the Summary Compensation Table.  All amounts listed above represent Companycontributions to the Company’s Simplified Employee Pension Plan (“SEP”) unlessotherwise indicated.

 

(2)                                  Includes $73,624 for relocationexpenses.

 

(3)                                  Includes$267,754 in compensation from stock options exercised.

 

(4)                                  Includes$47,220 in temporary living and commuting expenses.

 

(5)                                  Temporary living and commuting expenses.

 

4

----

 

**Stock Options**

 

The following table sets forth information concerningthe grant of stock options under the Company’s 1997 Stock Option Plan during2001 to the executive officers named in the Summary Compensation Table.

 

**OPTIONGRANTS IN LAST FISCAL YEAR**

 
| **Name**                     |   | **Number****of**** Securities  Underlying  Options  Granted(1)** |   | **Percentage****of Total****Options Granted to  Employees in  Fiscal 2001** |   | **Exercise****Price Per  Share** |   | **Expiration****Date** |     | **Potential  Realizable Value****at Assumed Annual Rates  of Stock Price Appreciation  for Option Term(2)** |   |
|------------------------------|--------|-----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|----------------------------------|--------|------------------------|----------|-------------------------------------------------------------------------------------------------------------|--------|
| **5%**                       |   | **10%**                                                               |
| Peter P.  Policastro, Ph.D.  |   | 50,000                                                                |   | 23.4                                                                        | %      | $                                | 5.47   |                   | 10/01/10 |                                                                                                        | $      | 445,503 |   | $ | 6,320,690 |   |
| Daniel J.  Monticello, Ph.D. |   | 20,000                                                                |   | 9.3                                                                         | %      | $                                | 5.47   |                   | 10/01/10 |                                                                                                        | $      | 178,201 |   | $ | 2,528,276 |   |
| Paul G. Brown,  III          |   | 20,000                                                                |   | 9.3                                                                         | %      | $                                | 5.47   |                   | 10/01/10 |                                                                                                        | $      | 178,201 |   | $ | 2,528,276 |   |
| David B. Carpi               |   | 5,000                                                                 |   | 2.3                                                                         | %      | $                                | 5.47   |                   | 10/01/10 |                                                                                                        | $      | 44,550 |   | $ | 632,069 |   |

 

----

(1)                                  Nostock appreciation rights (“SARs”) or other instruments were granted in tandemwith the options reflected in this table.

 

(2)                                  TheSecurities and Exchange Commission requires disclosure of the potentialrealizable value or present value of each grant.  The disclosure assumes the options will be held for the fullten-year term prior to exercise.  Suchoptions may be exercised prior to the end of such ten-year term.  The actual value, if any, an executiveofficer may realize will depend upon the excess of the stock price over theexercise price on the date the option is exercised.  There is no assurance that the stock price will appreciate at therates shown in the table.  If theassumed annual rate of stock price appreciation of 5% or 10% per year shouldoccur, the market value per share of Common Stock at the end of the ten-yearoption term would be $7.33 and $14.19, respectively, for the options granted at$5.47 to Drs. Policastro and Monticello and Messrs. Brown and Carpi.

* *

*Option Exercises and Holdings*

 

The following table sets forth information concerningoption exercises and the value of unexercised options held by the executiveofficers of the Company named in the Summary Compensation Table.

 

**AGGREGATEDOPTION EXERCISES IN 2001AND OPTION VALUES AT DECEMBER 31, 2001**

 
| **Name**                     |   | **Shares Acquired   on   Exercise** |       | **Value****Realized** |   | **Number of Securities   Underlying Unexercised   Options Held at December   31, 2001 (#)** |   | **Value of Unexercised in-the-  money Options Held at   December 31, 2001(1) ($)** |   |
|------------------------------|--------|------------------------------------------|------------|-----------------------|--------|---------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|
| **(#)**                      |   | **($)**                                  | ** ** | **Exercisable**       |   | **Unexercisable**                                                                           |   | **Exercisable**                                                                    |   | **Unexercisable** | ** ** |
| Peter P.  Policastro, Ph.D.  |   | —                                   |       | —                |   | 113,733                                                                                     |   | 117,067                                                                            |   | — |   | — |   |
| Daniel J.  Monticello, Ph.D. |   | —                                   |       | —                |   | 55,004                                                                                      |   | 68,979                                                                             |   | — |   | — |   |
| Paul G. Brown,  III          |   | —                                   |       | —                |   | 53,070                                                                                      |   | 69,658                                                                             |   | — |   | — |   |
| David B. Carpi               |   | —                                   |       | —                |   | —                                                                                      |   | 105,000                                                                            |   | — |   | — |   |

 

----

(1)                                  Computedbased on the difference between aggregate fair market value and aggregateexercise price.  The fair market valueof the Company’s Common Stock on December 31, 2001, was $0.46 based on theaverage of the high and low prices on the Nasdaq National Market onDecember 31, 2001.

 

**Simplified Employee Pension Plan**

 

In April 1992, the Company adopted a SimplifiedEmployee Pension Plan (the “SEP”) for all employees.  Under the terms of the SEP, employees are eligible to participateafter completion of six months of service. The Company has the discretion to determine how much, if anything, itwill contribute to the employee’s accounts in the SEP each year.  Currently, the Company contributes an amountequal to eight percent of the employees’ monthly compensation to the SEP.  Employees are vested immediately and thereis at present no employee contribution. Total expenses under the SEP were approximately $195,000 for the yearended December 31, 2001.

 

**EmploymentAgreements**

 

In December 1998, Dr. Policastro entered into athree-year employment agreement with the Company as Executive Vice Presidentand Chief Operating Officer (amended to President and Chief Executive Officereffective July 1, 1999).  This agreementis currently effective until December 31, 2002 and automatically renews for oneyear terms unless earlier terminated. Dr. Policastro’s current annual base salary under this agreement wasincreased to $265,000 in January 2002. Salary is to be reviewed no less than annually by the Board ofDirectors.  Pursuant to an amendment tothis agreement dated March 22, 2002, if he is terminated 

 

5

----

 

without cause, as defined in the agreement, or is terminated withintwelve months of a change in control, as defined in the agreement, the Companyis obligated to pay him in cash a lump sum equal to one year of his salary atthe time of termination plus the estimated amount of his bonus, or if notavailable, the last amount he was paid in bonus.  In addition, all of his options not yet exercisable will becomeexercisable, and he will have 90 days following such change in control toexercise such options.

 

In January 1996, the Company entered into an employmentagreement with Dr. Monticello.  Hiscurrent annual base salary under this agreement is $190,000 as of January2002.  Dr. Monticello’s salary is to bereviewed no less than annually by the Board of Directors.  This agreement is currently effective untilApril 2005.  Pursuant to an amendment tothis agreement dated April 2, 2002, if he is terminated without cause, asdefined in the agreement, or is terminated within twelve months of a change incontrol, as defined in the agreement, the Company is obligated to pay him incash a lump sum equal to one year of his salary at the time of termination plusthe estimated amount of his bonus, or if not available, the last amount he waspaid in bonus.  In addition, all of hisoptions not yet exercisable will become exercisable, and he will have 90 daysfollowing such change in control to exercise such options.

 

In July 1995, Mr. Brown entered into a five-yearemployment agreement with the Company, and his agreement is currently in effectthrough July 2005.  His current annualsalary under this agreement is $178,500 as of January 2002.  Mr. Brown’s salary is to be reviewed no lessthan annually by the Board of Directors. Pursuant to an amendment to this agreement dated April 2, 2002, if he isterminated without cause, as defined in the agreement, or is terminated withintwelve months of a change in control, as defined in the agreement, the Companyis obligated to pay him in cash a lump sum equal to one year of his salary atthe time of termination plus the estimated amount of his bonus, or if notavailable, the last amount he was paid in bonus.  In addition, all of his options not yet exercisable will becomeexercisable, and he will have 90 days following such change in control to exercisesuch options.

 

In September 2000, Mr. Carpi entered into anemployment agreement with the Company, which has no term.  Mr. Carpi’s current annual salary under theagreement is $178,500 as of January 2002. Salary is to be reviewed no less than annually by the Board ofDirectors.  Pursuant to an amendment tothis agreement dated April 2, 2002, if he is terminated without cause, asdefined in the agreement, or is terminated within twelve months of a change incontrol, as defined in the agreement, the Company is obligated to pay him incash a lump sum equal to one year of his salary at the time of termination plusthe estimated amount of his bonus, or if not available, the last amount he waspaid in bonus.  In addition, all of hisoptions not yet exercisable will become exercisable, and he will have 90 daysfollowing such change in control to exercise such options.

 

6

----

 

**Performance Graph**

 

The following performance graph compares theperformance of the Company’s Common Stock to the Nasdaq Combined CompositeIndex and an index of Peer Group companies for the period beginning December31, 1996 and ending December 31, 2001. The “Peer Group” is composed of companies in the Nasdaq PharmaceuticalGroup Index. The index of Peer Group companies is weighted according to therespective market capitalization of its component companies as ofDecember 31, 2001.  The graphassumes that the value of the investment in the Company’s Common Stock and eachindex was $100 at December 31, 1996, and that all dividends werereinvested.

 

**COMPARISONOF CUMULATIVE RETURNAMONG ENCHIRA BIOTECHNOLOGY CORPORATION,**

**NASDAQCOMBINED COMPOSITE INDEX ANDPEER GROUP INDEX**

 

 
|                              |   | **12/31/96** |   | **12/31/97** |   | **12/31/98** |   | **12/31/99** |   | **12/31/00** |   | **12/31/01** |   |
|-----------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|
| Enchira Biotechnology Corporation |   | 100          |   | 194          |   | 204          |   | 47           |   | 28           |   | 75           |   |
| Nasdaq Combined Composite Index   |   | 100          |   | 122          |   | 170          |   | 315          |   | 191          |   | 151          |   |
| Peer Group Index                  |   | 100          |   | 105          |   | 151          |   | 329          |   | 376          |   | 315          |   |

 

The foregoing stock price performance comparisonsshall not be deemed incorporated by reference into this Form 10-K or into anyfiling under the Securities Act of 1933, as amended, or the Securities ExchangeAct of 1934, as amended, which incorporates such comparisons by reference, andshall not otherwise be deemed filed under such acts.

 

There can be no assurance that the Company’s stockperformance will continue into the future with the same or similar trendsdepicted in the graph above.  TheCompany will not make or endorse any predictions as to future stockperformance.

 

7

----

 

**Compensation and Option CommitteeInterlocks and Insider Participation**

 

The Compensation Committee of the Board of Directorsof the Company currently consists of Messrs. Comeaux and Messmore.  No member of the Compensation Committee ofthe Board of Directors of the Company was, during 2001, an officer or employeeof the Company, or was formerly an officer of the Company or had anyrelationships requiring disclosure by the Company under Item 404 of RegulationS-K.

 

During fiscal 2001, no executive officer of theCompany served as (i) a member of the compensation committee (or other boardcommittee performing equivalent functions) of another entity, one of whoseexecutive officers served on the Compensation Committee of the Board ofDirectors, (ii) a director of another entity, one of whose executive officersserved on the Compensation Committee of the Board of Directors of the Companyor (iii) a member of the compensation committee (or other board committeeperforming equivalent functions) of another entity, one of whose executiveofficers served as a director of the Company.

 

**REPORT OF THE COMPENSATION AND OPTION COMMITTEE OF THE BOARDOF DIRECTORS**

 

The Compensation Committee (the “Committee”) of theBoard of Directors of the Company currently consists of Messrs. Comeaux andMessmore, none of whom is an officer or employee of the Company.  The Committee is responsible for evaluatingthe performance of management, determining the compensation for certainexecutive officers of the Company and administering the Company’s stock plansunder which grants of stock options and restricted stock may be made toemployees of the Company.  The Committeehas furnished the following report on executive compensation for 2001:

 

Under the supervision of the Committee, the Companyhas developed a compensation policy which is designated to attract and retainkey executives responsible for the success of the Company and motivatemanagement to enhance long-term stockholder value.  The annual compensation package for executive officers primarilyconsists of (i) a cash salary which reflects the responsibilities relating tothe position and individual performance, (ii) variable performance awardspayable in cash or stock and tied to the achievement of certain personal orcorporate goals or milestones and (iii) long-term stock based incentive awardswhich strengthen the mutuality of interests between the executive officers andthe Company’s stockholders.

 

In determining the level and composition ofcompensation of each of the Company’s executive officers, the Committee takesinto account various qualitative and quantitative indicators of corporate andindividual performance.  Although nospecific target has been established, the Committee generally seeks to setsalaries at the median to high end of the range in comparison with peer groupcompanies.  In setting such salaries,the Committee considers its peer group to be certain companies in thebiotechnology industry with market capitalizations under one billiondollars.  Such competitive group doesnot necessarily include the companies comprising the Peer Group Index reflectedin the performance graph in this Proxy Statement.  Because the Company is still in the development stage, the use ofcertain traditional performance standards (*e.g.,*profitability and return on equity) is not currently appropriate in evaluatingthe performance of the Company’s executive officers.  Consequently, in evaluating the performance of management theCommittee takes into consideration such factors as the Company’s achievingspecified milestones or goals under various research or developmentprograms.  In addition, the Committeerecognizes performance and achievements that are more difficult to quantify,such as the successful supervision of major corporate projects, demonstratedleadership ability, and contributions to the industry and communitydevelopment.  For 2001, the Committeeincluded in its evaluation the shift in focus of the Company’s business to thenew field of cancer treatment and the initial advancements of the Company’sresearch and development with its new product, the Anti Cancer LigandTM, and itstechnology, the Drug Candidate Optimization PlatformTM.

 

Base compensation is established through negotiationbetween the Company and the executive officer at the time the executive ishired, and then subsequently adjusted when such officer’s base compensation issubject to review or reconsideration. While the Company has entered into employment agreements with certain ofits executive officers, such agreements provide that base salaries after theinitial year will be determined by the Committee after review.  When establishing or reviewing basecompensation levels for each executive officer, the Committee, in accordancewith its general compensation policy, considers numerous factors, including theresponsibilities relating to the position, the qualifications of the executiveand the relevant experience the individual brings to the Company, strategicgoals for which the executive has responsibility, and compensation levels ofcompanies at a comparable stage of development who compete with the Company forbusiness, scientific, and executive talents. As stated above, such comparable companies are generally those with marketcapitalizations under one billion dollars and are not necessarily among thecompanies comprising the Peer Group Index reflected in the performance graph inthis Proxy Statement.  No predeterminedweights are given to any one of such factors. The base salaries for the executive officers for fiscal 2001 were at themedian level in comparison to the Company’s peer group companies.

 

In addition to each executive officer’s basecompensation, the Committee may award cash bonuses and/or grant awards underthe Company’s stock compensation plans to chosen executive officers dependingon the extent to which certain defined personal and corporate performance goalsare achieved.  Such corporateperformance goals are the same as discussed above.  Because the 

 

8

----

 

Company’s technology is still in the early stages of development, theCompany has granted minimal cash bonuses to its executive officers and hasinstead focused on equity incentives to its executive officers (as furtherdiscussed below) in order to match the goals of the executive officers withthose of the Company’s stockholders. The Company did grant certain cash bonuses to its executive officers in2001 after considering the extraordinary circumstances of the Company’ssituation.

 

All employees of the Company, including its executiveofficers, are eligible to receive long-term stock-based incentive awards underthe Company’s stock compensation plans as a means of providing such individualswith a continuing proprietary interest in the Company.  Such grants further the mutuality ofinterest between the Company’s employees and its stockholders by providingsignificant incentives for such employees to achieve and maintain high levelsof performance.  The Company’s stockcompensation plans enhance the Company’s ability to attract and retain theservices of qualified individuals. Factors considered in determining whether such awards are granted to anexecutive officer of the Company include the executive’s position in theCompany, his or her performance and responsibilities, the amount of stockoptions and restricted stock, if any, currently held by the officer, thevesting schedules of any such options or restricted stock and the executiveofficer’s other compensation.  While theCommittee does not adhere to any firmly established formulas or schedules forthe issuance of awards such as options or restricted stock, the Committee willgenerally tailor the terms of any such grant to achieve its goal as a long-termincentive award by providing for a vesting schedule encompassing several yearsor tying the vesting dates to particular corporate or personal milestones.  For example, Messrs. Brown and Carpi andDrs. Policastro and Monticello were granted options to acquire an aggregate of95,000 shares of Common Stock in 2001 in recognition of their continuingcontributions to the Company, with vesting over four years.  See “See Item 11. ExecutiveCompensation—Compensation of Executive Officers-Option Grants in Last FiscalYear.”

 

**Compensation of Chief Executive Officer**

 

Dr. Policastro’s current employment agreement with theCompany specifies an initial annual base salary of $200,000.  This salary was adjusted in January 2002 toDr. Policastro’s current annual base salary of $265,000.  In setting this current base salary for Dr.Policastro, the Committee evaluated the compensation package for chiefexecutive officers of peer group companies with similar marketcapitalizations.  The Committee expectsthat when it reevaluates Dr. Policastro’s base salary level in the future, itwill consider a variety of factors, including Dr. Policastro’sresponsibilities, his general background and qualifications, his achievement ofvarious corporate and personal milestones set by the Committee from time totime, and compensation levels for executives in Dr. Policastro’s position andwith his background at peer group companies. The Committee has not attached any particular relative weighting to theforegoing factors (or any other factors which the Committee may also considerin reaching compensation decisions for the Company’s executive officers).

 

Dr. Policastro will be eligible to receive suchbonuses as may be determined by the Committee. The Committee will retaindiscretion to determine the amount of any incentive bonus awards to be paid toDr. Policastro, and the Committee expects that it will evaluate a number offactors in reaching this decision, including the Company’s strategic goals forwhich Dr. Policastro has responsibility, his other responsibilities, hisinitiatives and contributions to the Company’s achievement of various corporateand strategic goals, and his own achievement of certain personal milestones asdetermined by the Committee from time to time. A bonus of $40,000 was paid to Dr. Policastro in 2001 in recognition ofhis performance and achievements according to the above factors.

 

On January 1, 2001, Dr. Policastro was granted a stockoption to purchase 50,000 shares of Common Stock at an exercise price of $5.47per share, with vesting over four years. The Committee expects that Dr. Policastro will continue to participatein the Company’s stock compensation plans on the same general terms as otherparticipants in such plans with respect to future stock option grants that hemay be granted from time to time, although the amount of shares underlyingoption grants to Dr. Policastro will be potentially larger than for otheremployees as a result of his position.

 

Section 162(m) of the Internal Revenue Code of 1986,as amended (the “Code”), added by the Revenue Reconciliation Act of 1993,places a $1 million cap per executive on the deductible compensation that canbe paid to certain executives of publicly-traded corporations.  Amounts that qualify as “performance based”compensation under Section 162(m)(4)(c) of the Code are exempt from the cap anddo not count toward the $1 million limit. Generally, stock options will qualify as performance basedcompensation.  The Committee hasdiscussed and considered and will continue to evaluate the potential impact ofSection 162(m) on the Company in making compensation determinations, but hasnot established a set policy with respect to future compensationdeterminations.

 

9

----

 

The foregoing report is given by the following membersof the Compensation Committee:

 

Thomas E. Messmore,Chairman

R. James Comeaux

 

The report of the Compensation Committee shall not be deemedincorporated by reference into this Form 10-K or into any filing under theSecurities Act of 1933, as amended, or under the Securities Exchange Act of1934, as amended, except to the extent that the Company specificallyincorporates this information by reference, and shall not otherwise be deemedfiled under such acts.

 

**Item12.  *Security Ownership of Certain Beneficial Owners andManagement***

 

**SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

The following table sets forth, as of April 10, 2001,certain information with respect to the shares of Common Stock and Series BPreferred Stock beneficially owned by (i) each person known by the Company tobe the beneficial owner of more than five percent of the Common Stock or theSeries B Preferred Stock, (ii) each director of the Company, (iii) each of theexecutive officers of the Company named in “Executive Compensation” and (iv)all directors and executive officers of the Company as a group.

 
| **Name of Beneficial Owner**                                                                    |   | **Amount and Nature****of Beneficial   Ownership of   Common Stock****(1)(2)** |   | **Percent of****Class** |   | **Amount and Nature****of Beneficial   Ownership of Series   B Preferred Stock****(1)** |   | **Percent****of Class** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------------------------------------------------------------------|--------|-------------------------|--------|
| MillenCo, L.P.   c/o Millenium Management, L.L.C.   666 Fifth Avenue New York,   New York 10103 |   | 4,449,075                                                                      | (3)    | 29.0                    | %      | —                                                                                  |   | —                  |   |
| Zesiger Capital  Group LLC   320 Park Avenue, 30th Floor   New York, New York 10022             |   | 1,286,378                                                                      | (4)    | 8.4                     | %      | —                                                                                  |   | —                  |   |
| Kingdon Capital  Management, LLC   152 West 57th Street   New York, New York  10019        |   | 1,200,000                                                                      | (5)    | 7.8                     | %      | —                                                                                  |   | —                  |   |
| Ethyl  Corporation   300 South Fourth Street   Richmond, Virginia 23217                         |   | 1,064,742                                                                      | (6)    | 7.0                     | %      | —                                                                                  |   | —                  |   |
| Keystone, Inc.   200 Crescent Court, Suite 500   Dallas, Texas  75201                      |   | —                                                                         |   | —                  |   | 40,000                                                                                  |   | 75.2                    | %      |
| Peter P.  Policastro, Ph.D.                                                                     |   | 155,150                                                                        |   | 1.0                     | %      | —                                                                                  |   | —                  |   |
| William E.  Nasser                                                                              |   | 77,268                                                                         |   | *                       |   | —                                                                                  |   | —                  |   |
| Daniel J.  Monticello, Ph.D.                                                                    |   | 74,719                                                                         |   | *                       |   | —                                                                                  |   | —                  |   |
| Paul G. Brown,  III                                                                             |   | 81,677                                                                         | (7)    | *                       |   | —                                                                                  |   | —                  |   |
| David B. Carpi                                                                                  |   | 22,935                                                                         |   | *                       |   |                                                                                    |   |                    |   |
| R. James Comeaux                                                                                |   | 19,642                                                                         |   | *                       |   | —                                                                                  |   | —                  |   |
| Thomas E.  Messmore                                                                             |   | 17,955                                                                         |   | *                       |   | —                                                                                  |   | —                  |   |
| William D. Young                                                                                |   | 21,369                                                                         |   | *                       |   | —                                                                                  |   | —                  |   |
| All directors  and executive officers as a group (8 persons)                                    |   | 470,715                                                                        |   | 3.0                     | %      | —                                                                                  |   | —                  |   |

 

----

*                                         Representsless than 1% of the class.

(1)                                  Unlessotherwise indicated, each of the stockholders designated above has sole votingand investment power with respect to the securities shown to be owned by suchstockholder.

(2)                                  Includesthe following amount of shares issuable upon exercise of options exercisablewithin 60 days of April 10, 2002 for the following individuals:

 

10

----

 

| **Director or Officer**                          |   | **Amount of shares   underlying options** |   |
|--------------------------------------------------|--------|-------------------------------------------|--------|
| Peter P.  Policastro, Ph.D.                      |   | 130,150                                   |   |
| William E.  Nasser                               |   | 77,268                                    |   |
| Daniel J.  Monticello, Ph.D.                     |   | 63,338                                    |   |
| Paul G. Brown,  III                              |   | 64,737                                    |   |
| David B. Carpi                                   |   | 1,875                                     |   |
| R. James Comeaux                                 |   | 19,642                                    |   |
| Thomas E.  Messmore                              |   | 17,955                                    |   |
| William D. Young                                 |   | 21,369                                    |   |
| All directors  and executive officers as a group |   | 396,334                                   |   |

 

(3)                                  Basedupon information provided in a Schedule 13G filed on March 11, 2002, MillenCo,L.P. has sole voting and dispositive power with respect to all of the shareslisted above.  The Schedule 13G was alsofiled on behalf of Millenium Management, L.L.C., the general partner ofMillenCo, L.P., and its managing member, Israel A. Englander, both of whomdisclaim beneficial ownership of such shares. MillenCo, L.P. is a registered broker-dealer under Section 15 of theSecurities Exchange Act of 1934, as amended.

(4)                                  Basedupon information provided in a Schedule 13G/A filed on February 12, 2001,Zesiger Capital Group LLC has sole voting power with respect to 885,210 sharesand sole dispositive power with respect to all of the shares listed above.  Zesiger Capital Group LLC is a registeredinvestment advisor under Section 203 of the Investment Advisers Act of 1940 anddisclaims beneficial ownership of all of the shares listed herein.

(5)                                  Basedupon information provided in a Schedule 13G filed on February 23, 2000, KingdonCapital Management LLC has sole voting and dispositive power with respect toall of the shares listed above. Includes 200,000 shares issuable upon exercise of a warrant.

(6)                                  Basedupon information provided in a Schedule 13D/A filed on December 11, 2001, EthylCorporation has sole voting and dispositive power with respect to all of theshares listed above.

(7)                                  Includes 3,000 shares held by a trust for thebenefit of Mr. Brown’s family members and as to which Mr. Brown disclaimsbeneficial ownership.

 

11

----

 

**Item13.  *Certain Relationships and Related Transactions***

 

None.

 

12

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

|   | **ENCHIRA  BIOTECHNOLOGY CORPORATION** |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | By:                                    | /s/ Paul G. Brown, III |
|   |                                   | Paul G. Brown, III, Vice President, Finance   and Administration and Chief Financial Officer |
|        |                                        |  |  |

 

Dated:  April 30, 2002

 

14