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Executive Summary

DAMON DISTRIBUTION OF DAMON BIOTECH SHARES VALUED AT $ 30.4 MIL., according to a plan announced Aug. 31. Under the proposal, the 13.5 mil. Damon Biotech common shares owned by Damon would be replaced with a new series of 4.5 mil. shares of convertible preferred stock, to be issued to Damon shareholders as a "virtually tax-free" dividend. Damon shareholders would receive the equivalent of 1.4 Damon Biotech common shares for each share of Damon common stock held. With Damon Biotech stock currently trading in the $ 2.50 per share range, Damon shareholders would receive a dividend worth $ 3.25 for each Damon share held. With 9.36 mil. Damon shares outstanding, the total of the Damon Biotech stock distribution is $ 30.4 mil. Upon completion of the transaction, Damon Biotech will have 9 mil. shares of common stock and the 4.5 mil. shares of preferred convertible stock outstanding. "A separate public trading market is expected to develop for the convertible preferred stock," Damon says. Damon announced its intention to restructure its relationship with Damon Biotech in April but details have been several months in coming. In its news release, Damon heralded the plan as a means to establish Damon Biotech as "an independently owned entity with increased financing." In addition to the larger float, Damon will enhance the value of Damon Biotech by giving its former subsidiary a $ 5.5 mil. building in Needham Heights, Massachusetts which Biotech currently leases from Damon. Damon Biotech also will receive another $ 1 mil. in cash and property. In addition, Damon has agreed to pay off an outstanding $ 3.2 mil. note held by Damon Biotech. Simultaneously with the restructuring announcement, Damon's board rejected the latest Nomad Partners acquisition offer as "inadequate and not in the best interests of Damon or its stockholders." The Damon board believes the Nomad offer "fails to recognize either the current value of the company or the significant long-term value achievable by the company as an independent entity," Damon announced. Nomad is offering $ 24 per share in cash for Damon stock. The tender offer expires on Sept. 15. Damon also said that "the board has authorized management to explore alternatives to Nomad's highly conditioned offer." In addition, Damon has delayed until Sept. 9 the distribution of common stock purchase rights that are designed to deter a hostile takeover. Damon noted in the release that the planned distribution will be "subject to receipt of a favorable tax ruling or opinion of counsel and other conditions," Damon said. There is "a significant risk that it will not be able to receive such a ruling or opinion of counsel if at the time of the distribution to the Damon stockholders there is an outstanding or threatened tender offer for control of Damon," the company said. Damon added that "if shares are accepted by Nomad pursuant to the Nomad offer, Damon will not be able to make a tax-free distribution of the Damon Biotech stock to its stockholders."

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