<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarter Ended December 31, 1996
Comission file number 1-9613
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XYTRONYX, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3258753
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(State of incorporation) (I.R.S. Employer Identification No.)
6555 Nancy Ridge Drive, Suite 200, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
(619) 550-3900
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(Registrant's Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of February 13, 1997, there were 8,132,279 shares of the registrant's Common
Stock, $.02 par value outstanding.
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
INDEX
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1995. . . . . . . . . . . . . . . . . . . . . . . . .1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
December 31, 1996 and March 31, 1996 . . . . . . . . . . . . . .2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
December 31, 1996 and 1995 and from
September 23, 1983 (Inception) to
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Stockholders' Equity -
Nine Months Ended December 31, 1996 and 1995 . . . . . . . . . .4
Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1996 and 1995
and from September 23, 1983 (Inception) to
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . 10
PART II - OTHER INFORMATION
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
the "Notes to Consolidated Financial Statements", as well as oral statements
that may be made by the Company or by officers, directors or employees of the
Company acting on the Company's behalf, that are not historical fact constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including, but not limited to, the risk that the Company may not be able to
obtain additional financing, if necessary; the risk that the Company may not be
able to maintain its listing on the American Stock Exchange; and the risk that
the Company may not be able to continue the necessary development of its
operations on a profitable basis. In addition, the Company's business,
operations and financial condition are subject to reports and statements filed
from time to time with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K, for the fiscal year ended March 31, 1996
and this Quarterly Report on Form 10-Q.
1
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XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 March 31, 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,932,616 $409,651
Short-term investments - 1,288,106
Accounts receivable, net of allowance 2,615 2,668
Inventory 72,195 40,907
Prepaid expenses 274,886 95,945
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Total current assets 3,282,312 1,837,277
Property and equipment, net of accumulated depreciation 102,582 135,234
Patent costs, net of accumulated amortization 165,804 190,159
Other assets - 11,798
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TOTAL ASSETS $3,550,698 $2,174,468
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $835,987 $214,310
Accrued expenses 232,319 378,927
Note payable 74,904 -
Line of credit 509,700 -
Current portion of capitalized leases 4,598 12,512
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Total current liabilities 1,657,508 605,749
Other liabilities 14,267 20,670
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value, 300,000 shares
authorized; 16,725 issued and outstanding at December 31, 1996 418,125 -
Common stock, $.02 par value, 30,000,000 shares authorized;
8,132,279 and 8,051,029 shares issued and outstanding at
December 31 and March 31, 1996, respectively 162,646 161,021
Capital in excess of par value 32,292,365 29,680,590
Deficit accumulated during the development stage (30,994,213) (28,293,562)
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Total stockholders' equity 1,878,923 1,548,049
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,550,698 $2,174,468
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</TABLE>
See Notes to Consolidated Financial Statements.
2
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XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31, September 23, 1983
----------------------- ------------------------ (inception) to
1996 1995 1996 1995 December 31, 1996
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<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 8,294 $ 700 $ 20,991 $ 11,730 $1,870,737
License fees and royalties 836 - 836 - 480,836
Contract research 17,500 - 39,172 45,000 268,063
Marketing rights - 175,000 - 205,000 1,306,500
Interest and other 3,562 26,055 25,123 80,933 1,535,920
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Total revenues 30,192 201,755 86,122 342,663 5,462,056
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COSTS AND EXPENSES
Cost of product sales 29,642 34,094 50,810 94,508 2,953,545
Product development 482,872 458,976 1,772,293 1,160,699 14,171,157
General and administrative 219,667 269,738 773,717 961,749 15,383,700
Business development
and marketing 9,677 80,893 139,560 342,198 3,407,243
Interest and other 33,622 13,628 50,393 24,763 540,624
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Total costs and expenses 775,480 857,329 2,786,773 2,583,917 36,456,269
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Net loss ($745,288) ($655,574) ($2,700,651) ($2,241,254) ($30,994,213)
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Net loss per share
of common stock ($0.09) ($0.10) ($0.33) ($0.40)
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Weighted average
shares outstanding 8,131,736 6,323,681 8,087,737 5,617,865
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</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Capital During the
------------------ -------------------- in Excess Development
Shares Par Value Shares Par Value of Par Value Stage Total
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 5,263,029 $105,261 $26,816,207 ($25,037,659) $1,883,809
Private placement of common stock
November 1995 2,788,000 55,760 2,867,777 2,923,537
Net loss (2,241,254) (2,241,254)
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Balance at December 31, 1995 8,051,029 $161,021 $29,683,984 ($27,278,913) $2,566,092
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Balance at March 31, 1996 8,051,029 $161,021 $29,680,590 ($28,293,562) $1,548,049
Exercise of Warrants 81,250 1,625 74,750 76,375
Issuance of Warrants 45,000 45,000
Private Placement of Preferred Stock -
December 1996 16,725 418,125 2,492,025 2,910,150
Net Loss (2,700,651) (2,700,651)
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BALANCE AT DECEMBER 31, 1996 16,725 $418,125 8,132,279 $162,646 $32,292,365 ($30,994,213) $1,878,923
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</TABLE>
See Notes to Consolidated Financial Statements.
4
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XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, September 23, 1983
----------------- (inception) to
1996 1995 December 31, 1996
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<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($2,700,651) ($2,241,254) ($30,994,213)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 82,794 88,863 1,556,807
Non-cash expense upon issuance of common stock
options, common stock and warrants 45,000 - 520,296
Net book value of disposal of property and equipment 2,648 5,507 150,900
Option income from retirement of stock
or amounts previously advanced by customer - - (400,000)
Changes in assets and liabilities:
Accounts receivable 53 5,308 (2,616)
Inventory (31,288) 6,529 (72,198)
Prepaid expenses and other assets (167,143) (121,705) (274,063)
Accounts payable 621,677 (119,179) 835,986
Accrued expenses (146,608) 405,048 88,296
Customer advances - (30,888) 140,863
Other liabilities (2,976) (8,921) -
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Net cash (used) by operating activities (2,296,494) (2,010,692) (28,449,942)
INVESTING ACTIVITIES
Purchases of short-term investments - (1,422,357) (5,480,432)
Maturities of short-term investments 1,288,106 992,326 5,480,432
Capital expenditures (4,927) (12,765) (826,590)
Patent costs (23,508) (45,822) (904,136)
Other - - (996)
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Net cash provided (used) by investing activities 1,259,671 (488,618) (1,731,722)
FINANCING ACTIVITIES
Issuance of notes payable 218,966 325,426 1,878,367
Repayment of notes payable (144,062) (214,948) (1,584,719)
Issuance of line of credit 509,700 - 509,700
Repayment of capital lease obligations (11,341) (28,306) (186,323)
Long-term customer advances - - 100,000
Issuance of common and preferred stock 2,986,525 2,923,537 32,334,755
Issuance of stock warrants - - 62,500
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Net cash provided by financing activities 3,559,788 3,005,709 33,114,280
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Net increase in cash
and cash equivalents 2,522,965 506,399 2,932,616
Cash and cash equivalents at beginning of period 409,651 827,752 -
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Cash and cash equivalents at end of period $2,932,616 $1,334,151 $2,932,616
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</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Xytronyx, Inc. and
its wholly owned subsidiaries, Perio Test, Inc. and XYX Acquisition Corp.
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
The Company has not earned significant revenues from planned principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial Accounting
Standards Board Statement No. 7 ("FAS 7"). Among the disclosures required by FAS
7 are that the Company's financial statements be identified as those of a
development stage enterprise, and that certain consolidated financial statements
disclose activity since the date of the Company's inception.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms and covenants of its financing agreements and business
contracts, to obtain additional financing or refinancing as may be required, and
ultimately to attain successful operations. Management anticipates that without
significant revenues its currently available resources will allow planned
operations to continue through December 1997. Unanticipated expenses, however,
could shorten that period. Accordingly, the Company will require additional
financing from time-to-time until it begins to generate positive cash flow from
operations (See Note 6). There can be no assurance that the Company will be
successful in obtaining financing, or that it will attain positive cash flow
from operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial statements
contain all of the adjustments, consisting only of normal recurring adjustments
and accruals, necessary to present fairly the financial position of the Company
as of December 31, 1996 and March 31, 1996, results of operations for the three
months and nine months ended December 31, 1996 and 1995 and from September 23,
1983 (inception) to December 31, 1996 and cash flows for the nine months ended
December 31, 1996 and 1995 and from September 23, 1983 (inception) to December
31, 1996. The results of operations for the three months and nine months ended
December 31, 1996 are not necessarily indicative of the results to be expected
in subsequent periods or for the year as a whole. For further information,
refer to the consolidated financial
6
<PAGE>
statements and footnotes thereto as set forth in the Company's Annual Report
on Form 10-K for the year ended March 31, 1996.
The Company has been informed that it is out of compliance with certain
listing requirements of the American Stock Exchange because of its record of
losses, cash outflows, reduced shareholders' equity and impaired financial
condition. The company is in discussions with the Exchange regarding the
Company's condition, however, there can be no assurance that the listing will
be continued.
2. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
On June 4, 1996 the Company entered into an agreement with Binary Therapeutics,
Inc. ("BTI") under which the Company was granted an option to acquire BTI, a
development stage company with certain technologies in the area of Photodynamic
Therapy ("PDT") for cancer. The agreement gives the Company the right to
acquire BTI at anytime prior to April 30, 1997 by a merger of BTI into a wholly
owned subsidiary of the Company. The Board of Directors voted to approve the
merger, however the merger is also subject to shareholder approval for the
issuance of additional shares of Common Stock or securities convertible into
Common Stock if the issuance of such securities (i) is in connection with the
acquisition of a company and the shares of Common Stock or securities
convertible into Common Stock could result in an increase in the number of
outstanding shares of Common Stock of 20% or more, (ii) is in connection with
the acquisition of a company where a director, officer or substantial
shareholder of the Company has a 5% or greater interest in such company and the
issuance of the securities could result in an increase in outstanding Common
Stock of 5% or more.
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued will be determined based upon
the market value of the Company's common stock prior to the date of exercise,
although the value of the common stock cannot be less than $2.00 or more than
$6.00 per share. The agreement has been approved by a majority of the
stockholders of BTI.
Under the agreement, the Company will assist BTI during the option period in
preparing one or more PDT products for advancement into human clinical trials.
In order to exercise its rights to consummate the merger, the Company will have
to satisfy certain conditions, including funding up to $1,250,000 in expenses
budgeted to be incurred by BTI during the option period. These expenses
represent the majority of BTI's budgeted expenditures for the period and are
expected to be comprised primarily of product development costs. Under the terms
of the agreement, the Company is also required to advance to BTI funds to repay
$285,000 in indebtedness in the event that the Company completes an equity
financing with net proceeds of $2,500,000 or more, and to advance to BTI funds
to repay an additional $243,000 in indebtedness in the event the Company
completes an equity financing with net proceeds of $5,000,000 or more. BTI and
the debtholders have agree to defer any of the scheduled payments until the
Company completes the final closing of its equity financing. Certain holders of
such indebtedness are shareholders of the Company. In exchange for such funding
BTI will issue convertible notes to the Company which may be converted into BTI
equity at the Company's option. The Company has elected to record all
7
<PAGE>
advances to BTI as product development expense in the period incurred due to
uncertainties regarding the ultimate value to be realized from the
convertible notes. During the quarter ended December 31, 1996 and for the
nine month period then ended, the Company advanced $206,000 and $635,000
respectively, to BTI and such advances are included in product development
expense. In the event that the Company terminates the agreement, the Company
would remain obligated to continue funding such product development expenses
incurred during the period ending 90 days from such termination, up to the
$1,250,000 discussed above.
3. LICENSE AGREEMENT WITH WOUND HEALING OF OKLAHOMA
On May 8, 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which the Company acquired
an exclusive world-wide license to a certain technology, Photodynamic
Immunotherapy-TM- ("PDIT-TM-") treatment for cancer. Under the agreement, the
Company granted WHO a ten-year warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.25 per share and must pay a
minimum royalty of $50,000 per year. The first year is payable in two stages, 1)
$25,000 due upon execution of the agreement and 2) $25,000 due upon submission
of an IND application to the FDA. Based upon the negotiated terms of the
agreement, the warrants were valued at $25,000. During the nine months ended
December 31, 1996 the Company recorded $50,000 in product development expense
related to the agreement which included a $25,000 royalty payment and $25,000
related to the issuance of the warrants.
4. NOTE PAYABLE
The note payable is an insurance premium finance agreement with principal and
interest, at an annual rate of 10.50%, payable in monthly installments of
$25,406, due in full on March 15, 1997.
5. LINE OF CREDIT
On September 30, 1996 the Company entered into a line of credit agreement with
two shareholders under which the Company may borrow up to $500,000. The
agreement calls for interest at the rate of 12% per annum. Principal and
accrued interest are due and payable not later than February 28, 1997. As of
December 31, 1996, the line of credit balance is $500,000 plus accrued interest
of $9,700.
In connection with the line of credit agreement discussed above, the Company
granted the two shareholders five-year warrants to purchase 150,000 shares of
the Company's common stock at an exercise price of $0.96, which was the initial
conversion price of the Series A Convertible Preferred Stock sold in the Private
Placement discussed in Note 6. The warrants are valued at $20,000, all of which
was recorded as interest expense in the quarter ended December 31, 1996.
6. PRIVATE PLACEMENT
On December 19, 1996, the Company completed an initial closing on $3,345,000
(net proceeds to the Company of $2,910,150) of 33.45 Premium Preferred Units at
a price per Unit of $100,000, each Unit consisting of 500 shares of Preferred
Stock, par value $25.00 per share, stated value $200.00 per share, and 50,000
Common Stock Purchase Warrants, to accredited individuals and institutional
investors pursuant to Regulation D under the Securities Act of 1933,
8
<PAGE>
as amended. The placement agent for the Private Placement received an
aggregate dollar commission of $434,850 for the initial closing. The
placement agent is affiliated with certain significant shareholders of the
Company. Each share of Preferred Stock may be converted at the option of the
holder at the lowest of 80% of the average closing bid price of the Company's
Common Stock on the American Stock Exchange for the thirty consecutive
trading days immediately preceding the date of any closing in the Private
Placement. In addition, the conversion price is subject to further
adjustment on the date which is twelve months after the final closing date if
the average closing bid price of the Common Stock for the thirty consecutive
trading days immediately preceding that date is less than 130% of the
conversion price as adjusted, subject to a limit on the number of shares that
may be issued pursuant to such reset. Each Warrant entitles the holder to
purchase one share of Common Stock at a price of $1.00 per share and may be
exercised until November 26, 2005. The maximum offering amount of the
Private Placement is 100 Units which would represent aggregate proceeds of
$10,000,000, subject to an additional overallotment option of 25 units. The
Company expects the Private Placement to be completed no later than March,
1997; however, there can no assurance that the Company will be able to
successfully sell further Units. The securities sold in the initial closing
and the securities which are to be offered under the Private Placement have
not been registered under the Securities Act and may not be offered or sold
in the United States without registration or an applicable exemption from
registration requirements. In accordance with the terms of the Private
Placement, the Company has agreed to file a registration statement with
respect to resale of certain of the securities to be offered. Holders of the
Preferred stock will be entitled to receive dividends as, when and if
declared by the Board of Directors. The Company does not intend to pay cash
dividends on the Convertible Preferred Stock or the underlying Common Stock
for the foreseeable future. Liquidating rights for preferred shareholders are
$260.00 per share plus accrued, but unpaid dividends.
7. EQUITY INCENTIVE PLANS
In December, 1996, the Board of Directors approved a new form of Equity
Incentive Plan to provide long-term performance incentives to key employees and
consultants to the Company in the form of stock options, stock appreciation
rights, restricted stock and other awards, including cash-based awards. In
addition, the Board of Directors approved a Stock Option Plan for Non-Employee
Directors which provides for grants of stock options to non-employee members of
the Company's Board of Directors. Each plan provides up to 3,000,000 shares of
the Company's common stock to be granted for this purpose. The Board intends
that the plans be submitted to stockholders for approval; however, the Company
may issue awards under the plans prior to stockholder approval. The Board of
Directors awarded 675,000 stock options at market value on the date of the grant
to H. Laurence Shaw, its President and Chief Executive Officer which are
intended to the extent possible to qualify as incentive stock options. Of the
initial grant, 525,000 stock options shall vest quarterly over a period of two
years and 150,000 stock options shall vest quarterly over a two year period
commencing on the first anniversary of the effective date of his employment
agreement.
9
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues aggregated $30,000 for the quarter ended December 31, 1996, a 85%
decrease from revenues of $202,000 recorded during the same period of the prior
year. Current quarter revenues relate to product sales and contract research for
the use of the Company's Kephra-TM- reversible color change technology in
various applications. Prior year revenues for the quarter included $175,000 of
marketing rights income. No such revenues were earned in the current quarter.
Cost of product sales decreased $4,000, or 13%, from the prior year. This
decrease is consistent with the decrease in product sales.
Total revenues for the nine month period ending December 31, 1996 totaled
$86,000, a decrease of $257,000, or 75%, from the same period of the prior
year. Prior year revenues for this nine month period included approximately
$205,000 in marketing rights income. No such revenues were earned in the
current year. Cost of product sales for the nine month period ending December
31, 1996 decreased $44,000, or 46%, from the prior year, consistent with the
decrease in product sales.
Product development costs totaled $483,000 for the quarter, an increase of
$24,000 or 5% over the prior year costs of $459,000. The majority of the
increase resulted from the initiation of work on two projects in the cancer
therapy area, including: (i) $206,000 in funding of product development
expenses in accordance with the Agreement and Plan of Merger with Binary
Therapeutics, Inc. ("BTI"), the holder of certain technologies in the area of
Photodynamic Therapy ("PDT") for the treatment of cancer, and (ii) $104,000 in
expenses related to the acquisition of the Photodynamic Immunotherapy-TM-
("PDIT-TM-") technology for the treatment of cancer, expenses incurred in
association with a related research agreement and expenses incurred related to
in-house product development of the PDIT-TM- technology. No such costs were
incurred in the prior year.
For the nine months ended December 31, 1996, product development costs increased
$612,000, or 53%, over the same period of the prior year to $1,772,000. The
initiation of work on the two projects discussed above generated expenses of $
1,123,000 for the nine month period. No such costs were incurred in the same
period of the prior year. This increase was offset by a reduction in
expenditures for the nine month period related to the completion of the U.S. FDA
clinical trials for the Periodontal Tissue Monitor ("PTM").
Business development costs for the current quarter totaled $10,000, a decrease
of $71,000, or 88%, from the same quarter of the prior year. The decrease is
the result of management concentrating its efforts on the initial closing of a
private placement financing which occurred on December 19, 1996 (See Part II,
Item 2 of this 10-Q). General and administrative expenses for the three month
period ended December 31, 1996 decreased 19% to $220,000 from the same period
of the prior year. The decrease is largely the result of personnel attrition.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Business development costs for the nine month period ended December 31, 1996
decreased $203,000, or 59%, from the same period of the prior year to 140,000.
General and administrative expenses for the nine month period ended December 31,
1996 decreased $188,000, or 20%, from the same period of the prior year to
$774,000. Both decreases are the result of management concentrating its efforts
in the product development area related to PDT and PDIT discussed above and the
initial closing of the private placement.
Net loss for the quarter ended December 31, 1996 totaled $745,000, a 14%
increase over the prior year's second quarter loss of $656,000. This increase
is a result of the increase in product development efforts discussed above and
increased interest expense offset by lower business development and general and
administrative expenses. Net loss per share of common stock for the quarter
ended December 31, 1996 was $.09, a 10% decrease from the prior year's third
quarter loss of $.10 per share primarily due to a 1,808,000 increase in the
weighted average number of shares outstanding.
Net loss for the nine months ended December 31, 1996 totaled $2,701,000, an
increase of $460,000, or 21%, over the same period of the prior year. This
increase is a result of the increase in product development efforts offset by a
reduction in other expenditures. Net loss per share of common stock for the
nine months ended December 31, 1996 was $.33, a 17% decrease from the loss of
$.40 per share for the same period of the prior year. The decrease is primarily
a result of a 2,469,000 increase in the weighted average number of shares
outstanding for the nine month period.
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments at December 31, 1996 totaled
$2,933,000, an increase of $1,235,000 from the March 31, 1996 balances.
Working capital at December 31, 1996 increased by 32% from March 31, 1996 to
$1,625,000. These increases were primarily due to the initial closing of the
private placement financing in which the Company raised a net amount of
$2,910,000 through the sale of Premium Preferred Units (See Part II, Item 2 of
this 10-Q). Prepaid expenses increased by $179,000 as a result of the prepayment
of annual insurance premiums and costs associated with the private placement.
Notes payable and line of credit increased by $585,000 as a result of obtaining
a $500,000 line of credit proceeds used as bridge financing prior to the initial
closing of the private placement and financing insurance premiums. Accounts
payable and accrued expenses increased a net $475,000 for the nine-month period.
Since inception, the Company has experienced negative cash flow from operations,
and the Company considers it prudent to anticipate that negative cash flow from
operations will continue for the foreseeable future, and that outside sources of
funding will continue to be required. As described in Note 6 of the Notes to
Consolidated Financial Statements the Company expects the proceeds from the sale
of the Premium Preferred Units will be sufficient to meet its cash needs until
December 31, 1997. Unanticipated expenses or working capital requirements could,
however, shorten that period.
In March 1996 the Company completed a 12-month U.S. clinical trial of PTM at
three universities. The Company has compiled and analyzed the data generated
from the clinical studies. In September 1996 the Company submitted a Premarket
Approval application ("PMA") to the Food and Drug Administration ("FDA") and is
currently awaiting a response from the FDA. The completion of the clinical
studies have resulted in the reduction or elimination of certain product
development expenses.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In May 1996 the Company entered into an agreement with Hawe-Neos Dental to
distribute the PTM in Europe. In September 1996, the Company received the
initial purchase order for $75,000 associated with the European launch of the
PTM from Hawe Neos. The order is expected to be delivered in the fourth quarter
of Fiscal 1997. In January 1995 the Company entered into an agreement with
Shofu Dental Company for distribution of the PTM in Japan. Shofu is currently
conducting Japanese clinical trials of the PTM. The Company is in the process
of identifying marketing partners for the PTM for the U.S. and other markets.
In the event the Company begins selling material quantities of the PTM, the
Company may need additional working capital, and additional personnel and space,
both of which may cause an increase in the net utilization of cash. However,
there can be no assurance that FDA PMA approval or any other required regulatory
approvals will be forthcoming, that the Company will complete any new marketing
agreements, or that any of its existing or future marketing partners will order
the PTM products in increased quantities.
In May 1996 the Company entered into an agreement with Wound Healing of Oklahoma
("WHO"), a privately held corporation, under which it acquired an exclusive
license to certain proprietary technology in the PDIT treatment of cancer. The
Company expects to fund certain product development efforts associated with the
commercialization of the licensed technology, including the commencement of
human clinical trials, which will increase the Company's net utilization of
cash. However, there can be no assurance that FDA and other regulatory approval
required to commence such trials will be forthcoming.
In June 1996 the Company entered into an agreement which granted the Company the
option to acquire Binary Therapeutics, Inc. ("BTI"). BTI is a privately held,
development stage enterprise holding certain technologies for the PDT treatment
of cancer. Under the agreement the Company expects to fund certain product
development expenses incurred by BTI, which will increase the Company's net
utilization of cash.
The Company has been informed that it is out of compliance with certain
listing requirements of the American Stock Exchange because of its record of
losses, cash outflows, reduced shareholders' equity and impaired financial
condition. The company is in discussions with the Exchange regarding the
Company's condition, however, there can be no assurance that the listing will
be continued.
The Company continues to be engaged in efforts to obtain additional financing
and to seek strategic partners to aid in the development and marketing of its
products. The continued existence of the Company is dependent upon receiving
additional financing from time-to-time until it begins to generate positive cash
flow from operations. If and as orders for the Company's products are placed in
increasing quantities, the Company expects to seek equity and/or debt financing
as a function of availability and cost. No assurance can be given that the
Company will be successful in obtaining additional equity and/or debt financing
or locating new strategic partners, or that it will be able to generate positive
cash flow from operations.
12
<PAGE>
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On December 19, 1996, the Company completed an initial closing on $3,345,000
(net proceeds to the Company of $2,910,150) of 33.45 Premium Preferred Units
at a price per Unit of $100,000, each Unit consisting of 500 shares of
Preferred Stock, par value $25.00 per share, stated value $200.00 per share,
and 50,000 Common Stock Purchase Warrants, to accredited individuals and
institutional investors pursuant to Regulation D under the Securities Act of
1933, as amended. The placement agent for the Private Placement, whose name
will be disclosed upon completion of the Private Placement, received an
aggregate dollar commission of $434,850 for the initial closing. Each share
of Preferred Stock may be converted at the option of the holder at the lowest
of 80% of the average closing bid price of the Company's Common Stock on the
American Stock Exchange for the thirty consecutive trading days immediately
preceding the date of any closing in the Private Placement. In addition, the
conversion price is subject to further adjustment on the date which is twelve
months after the final closing date if the average closing bid price of the
Common Stock for the thirty consecutive trading days immediately preceding
that date is less than 130% of the conversion price as adjusted, subject to a
limit on the number of shares that may be issued pursuant to such reset.
Each Warrant entitles the holder to purchase one share of Common Stock at a
price of $1.00 per share and may be exercised until November 26, 2005. The
maximum offering amount of the Private Placement is 100 Units which would
represent aggregate proceeds of $10,000,000, subject to an additional
Overallotment option of 25 units. The Company expects the Private Placement
to be completed no later than March, 1997; however, there can no assurance
that the Company will be able to successfully sell further Units. The
securities sold in the initial closing and the securities which are to be
offered under the Private Placement have not been registered under the
Securities Act and may not be offered or sold in the United States without
registration or an applicable exemption from registration requirements. In
accordance with the terms of the Private Placement, the Company has agreed to
file a registration statement with respect to resale of certain of the
securities to be offered.
ITEM 5. OTHER INFORMATION
On December 11, 1996, the Board of Directors of the Company approved, among
other matters, the following changes to the Company and its management,
conditioned upon a closing or closings of at least $3,000,000 of gross proceeds
in the Private Placement by December 31, 1996:
A. The hiring of Dr. H. Laurence Shaw as Chief Executive Officer and
President of the Company;
B. The appointment of Dr. Jerry A. Weisbach as a Director of the Company,
a scientific advisor and consultant to the Company; and
C. The appointment of Dr. David Golde as Chairman of the Company's newly
formed Scientific Advisory Board.
On December 19, 1996, following the initial closing of the Company's Private
Placement, the Company accepted resignations from the Board of Directors of each
of H. Laurence Garrett, III, William L. Jorgenson, John M. Kolbas, Morris S.
Weeden and Larry Bymaster. The current Board of Directors consists of Jack H.
Halperin, H. Laurence Shaw, M.D., Elliott H. Vernon,
13
<PAGE>
Jerry A. Weisbach, Ph.D. and Michael S. Weiss. Larry Bymaster remains as an
employee of the Company.
In December, 1996, the Board of Directors approved a new form of Equity
Incentive Plan to provide long-term performance incentives to key employees
and consultants to the Company in the form of stock options, stock
appreciation rights, restricted stock and other awards, including cash-based
awards. In addition, the Board of Directors approved a Stock Option Plan for
Non-Employee Directors which provides for grants of stock options to members
of the Company's Board of Directors. The Board intends that the plans be
submitted to stockholders for approval; however, the Company may issue awards
under the plans prior to stockholder approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
4.6 Certificate of Designations of Series A Convertible
Preferred Stock of Xytronyx, Inc.
10.45 Xytronyx, Inc. Equity Incentive Plan.
10.46 Xytronyx, Inc. Stock Option Plan for Non-Employee Directors.
10.47 Employment Agreement between Xytronyx, Inc. and H. Laurence
Shaw dated December 16, 1996.
b.) REPORTS ON FORM 8-K
Date of Report Item Reported Financial Statements Filed
- --------------- ------------- --------------------------
December 19,1996 Item 5 - Other Events None
News Release dated December 19,
1996 announcing that the Company
had an initial closing of a
private placement of equity
securities to accredited
individuals and institutional
investors pursuant to Regulation
D under the Securities Act of
1933, as amended, that the Company
had hired Dr. H. Laurence Shaw to
serve as the Company's new Chief
Executive and President, that Jerry
A. Weisbach has agreed to join the
Company's Board of Officer Directors
and Scientific Advisory Board, and
that David W. Golde, M.D. has agreed
to join the Company as Chairman of the
Scientific Advisory Board filed as
Exhibit 99.1 hereto, is hereby
incorporated into this Report by
reference.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Xytronyx, Inc.
Date: February 13, 1997 /s/ H. Laurence Shaw
-----------------------------
H. Laurence Shaw
President and Chief Executive Officer
(Principal Accounting Officer and Officer
duly authorized to sign this report on
behalf of the registrant)
<PAGE>
CERTIFICATE OF DESIGNATIONS
of
SERIES A CONVERTIBLE PREFERRED STOCK
of
XYTRONYX, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
XYTRONYX, INC., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), does hereby certify that, pursuant to
the authority conferred on the Board of Directors of the Corporation by the
Certificate of Incorporation of the Corporation and in accordance with Section
151 of the General Corporation Law of the State of Delaware, the Board of
Directors of the Corporation adopted the following resolution establishing a
series of 78,125 shares of Preferred Stock of the Corporation designated as
"Series A Convertible Preferred Stock":
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of this Corporation by the Certificate of Incorporation, as
amended, a series of Preferred Stock, par value $25.00 per share, of the
Corporation is hereby established and created, and that the designation and
number of shares thereof and the voting and other powers, preferences and
relative, participating, optional or other rights of the shares of such
series and the qualifications, limitations and restrictions thereof are as
follows:
SERIES A CONVERTIBLE PREFERRED STOCK
1. DESIGNATION AND AMOUNT. There shall be a series of Preferred
Stock designated as "Series A Convertible Preferred Stock" and the number of
shares constituting such series shall be 78,125. Such series is referred to
herein as the "Series A Preferred Stock". Such number of shares may be
increased prior to the Final Closing Date (as defined below) or decreased by
resolution of the Board of Directors of the Corporation; PROVIDED, HOWEVER, that
no decrease shall reduce the number of shares of Series A Preferred Stock to
less than the number of shares then issued and outstanding.
2. DIVIDENDS AND DISTRIBUTIONS. (a) Subject to the prior and
superior rights of the holders of any shares of any series or class of capital
stock ranking prior and superior to the shares of Series A Preferred Stock with
respect to dividends, the holders of shares of Series A Preferred Stock shall be
entitled to receive, as, when and if declared by the Board of Directors of the
Corporation, out of assets legally available for that purpose, dividends or
distributions in cash, stock or otherwise.
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<PAGE>
(b) If and when the Corporation shall declare any dividend or
distribution on any Junior Stock (as defined below), the Corporation shall,
concurrently with the declaration of such dividend or distribution on the Junior
Stock, declare a like dividend or distribution, as the case may be, on the
Series A Preferred Stock in an amount per share equal to (x) the amount of the
dividend or distribution per share of Common Stock multiplied by (y) the number
of shares of Common Stock into which one share of Series A Preferred Stock is
then convertible.
(c) No dividend or distribution, as the case may be, may be
declared on any Junior Stock unless a dividend or distribution, as the case may
be, is declared on the Series A Preferred Stock in accordance with Section 2(b)
above. Notwithstanding the foregoing, the Corporation shall not declare any
dividend or distribution on any Junior Stock unless and until a special dividend
or distribution of $260.00 per share (subject to appropriate adjustment to
reflect any stock split, combination, reclassification or reorganization of the
Series A Preferred Stock) has been declared on the Series A Preferred Stock.
(d) Any dividend or distribution payable to the holders of the
Series A Preferred Stock pursuant to this Section 2 shall be paid to such
holders at the same time as the dividend or distribution on the Junior Stock by
which it is measured is paid.
(e) All dividends or distributions declared upon the Series A
Preferred Stock shall be declared pro rata per share.
(f) Any reference to "distribution" contained in this Section 2
shall not be deemed to include any distribution made in connection with or in
lieu of any Liquidation Event (as defined below).
(g) "Junior Stock" shall mean the Common Stock and any shares of
preferred stock of any series or class of the Corporation, whether presently
outstanding or hereafter issued, which are junior to the shares of Series A
Preferred Stock with respect to (i) the distribution of assets on any voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, (ii)
dividends and (iii) voting.
3. LIQUIDATION PREFERENCE. (a) In the event of a (i) liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
(ii) a sale or other disposition of all or substantially all of the assets of
the Corporation or (iii) any consolidation, merger (other than pursuant to the
Agreement and Plan of Merger dated as of June 4, 1996, among the Corporation,
XYX Acquisition Corp. and Binary Therapeutics, Inc. (the "BTI Agreement")),
combination, reorganization or other transaction in which the Corporation is not
the surviving entity or the shares of Common Stock constituting in excess of 50%
of the voting power of the Corporation are exchanged for or changed into stock
or securities of another entity, cash and/or any other property (a "Merger
Transaction") (clauses (i), (ii) and (iii) being collectively referred to as a
"Liquidation Event"), after payment or provision for payment of debts and other
liabilities of the Corporation, the holders of the Series A Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its shareholders, whether such assets are capital,
surplus, or earnings, before any payment or declaration and set-
-2-
<PAGE>
ting apart for payment of any amount shall be made in respect of any Junior
Stock, an amount equal to $260.00 per share plus an amount equal to all
declared and unpaid dividends thereon; provided, however, in the case of a
Merger Transaction, such $260.00 per share may be paid in cash, property
(valued as provided in Section 3(b)) and/or securities (valued as provided in
Section 3(b)) of the entity surviving such Merger Transaction. In the case
of property or in the event that any such securities are restricted, the
value of such property or securities shall be determined by agreement between
the Corporation and a majority of the Series A Preferred Stock then
outstanding. If upon any Liquidation Event, whether voluntary or
involuntary, the assets to be distributed to the holders of the Series A
Preferred Stock shall be insufficient to permit the payment to such
shareholders of the full preferential amounts aforesaid, then all of the
assets of the Corporation to be distributed shall be so distributed ratably
to the holders of the Series A Preferred Stock on the basis of the number of
shares of Series A Preferred Stock held. A consolidation or merger of the
Corporation with or into another corporation, other than in a transaction
described in Section 3(a) above, shall not be considered a liquidation,
dissolution or winding up of the Corporation or a sale or other disposition
of all or substantially all of the assets of the Corporation and accordingly
the Corporation shall make appropriate provision to ensure that the terms of
this Certificate of Designations survive any such transaction. All shares of
Series A Preferred Stock shall rank as to payment upon the occurrence of any
Liquidation Event senior to the Common Stock as provided herein and, unless
the terms of such series shall provide otherwise, senior to all other series
of the Corporation's preferred stock.
(b) Any securities or other property to be delivered to the holders of
the Series A Preferred Stock pursuant to Section 3(a) hereof shall be valued as
follows:
(i) Securities not subject to an investment letter or other similar
restriction on free marketability:
(A) If traded on a securities exchange or on Nasdaq (as defined
below), or if actively traded over-the-counter, the value shall
be deemed to be the Market Price (as defined below) of the
securities as of the third day prior to the date of valuation.
(B) If there is no such active public market for the securities,
the value shall be the Fair Market Value (as defined below) of
the securities.
"Market Price" of a security shall mean the average Closing Bid Price
of such security, for thirty (30) consecutive trading days, ending
with the day prior to the date as of which the Market Price is being
determined.
"Fair Market Value" of any asset (including any security) means the
fair market value thereof as mutually determined by the Corporation
and the holders of a majority (measured in terms of voting power) of
the outstanding Series A Preferred Stock.
The "Closing Bid Price" for any security for each trading day shall be
the reported closing bid price of such security on the national
securities exchange on which
-3-
<PAGE>
such security is listed or admitted to trading, or, if such security
is not listed or admitted to trading on any national securities
exchange, shall mean the reported closing bid price of such security
on the Nasdaq SmallCap Market or the Nasdaq National Market System
(collectively referred to as, "Nasdaq") or, if such security is not
listed or admitted to trading on any national securities exchange or
quoted on Nasdaq, shall mean the reported closing bid price of such
security on the principal securities exchange on which such security
is listed or admitted to trading (based on the aggregate dollar
value of all securities listed or admitted to trading) or, if such
security is not listed or admitted to trading on a national
securities exchange, quoted on Nasdaq or listed or admitted to
trading on any other securities exchange, shall mean the closing bid
price in the over-the-counter market as furnished by any NASD member
firm selected from time to time by the Corporation for that purpose.
"Trading day" shall mean a day on which the securities exchange or
NASDAQ used to determine the Closing Bid Price is open for the
transaction of business or the reporting of trades or, if the Closing
Bid Price is not so determined, a day on which such securities
exchange is open for the transaction of business.
(ii) For securities for which there is an active public market but
which are subject to investment letter or other restrictions on free
marketability, the value shall be the Fair Market Value thereof,
determined by discounting appropriately the Market Price thereof.
(iii) For all other securities, the value shall be the Fair Market
Value thereof.
If the holders of a majority of the Series A Preferred Stock and the Corporation
are unable to reach agreement on any valuation matter, such valuation shall be
submitted to and determined by a nationally recognized independent investment
banking firm selected by the Board of Directors of the Corporation and the
holders of a majority of the Series A Preferred Stock (or, if such selection
cannot be agreed upon promptly, or in any event within ten days, then such
valuation shall be made by a nationally recognized independent investment
banking firm selected by the American Arbitration Association in New York City
in accordance with its rules).
4. CONVERSION.
(a) RIGHT OF CONVERSION. The shares of Series A Preferred Stock
shall be convertible, in whole or in part, at the option of the holder thereof
and upon notice to the Corporation as set forth in Section 4(b) below, into
fully paid and nonassessable shares of Common Stock and such other securities
and property as hereinafter provided. The shares of Series A Preferred Stock
shall be convertible initially at the rate of 208.33333 shares of Common Stock
for each full share of Series A Preferred Stock (the "Conversion Rate") and
shall be subject to adjustment as provided herein. The initial conversion price
per share of Common Stock is $.96 (the "Conversion Price") and shall be subject
to adjustment as provided herein. For purposes of this resolution, the
Conversion Rate shall be determined by dividing the then existing Conversion
Price into $200.00.
-4-
<PAGE>
Subject to adjustment pursuant to the provisions of Section 4(c)
below, in the event that the Conversion Price in effect at the time of each
Interim Closing Date (as defined below) and the Final Closing Date (as defined
below) is greater than 80% of the Market Price (as defined in Section 3(B)) of
the Common Stock as of (x) any interim closing date of the issuance and sale of
the Series A Preferred Stock (each an "Interim Closing Date") or (y) the final
closing date of the issuance and sale of the Series A Preferred Stock (the
"Final Closing Date"), then the Conversion Price shall be adjusted to equal 80%
of the lesser of any such Market Price. If there is any change in the
Conversion Price as a result of the preceding sentence, then the Conversion Rate
shall be changed accordingly as set forth above.
The Board of Directors of the Corporation, or a committee designated
by it for such purpose, may specify an initial conversion price applicable to
the shares of Series A Preferred Stock issued at any closing lower than the
initial conversion price that would otherwise obtain pursuant to the preceding
paragraphs and, in the event an initial conversion price is so specified, it
shall be applicable to all shares of the Series A Preferred Stock.
The Corporation shall prepare a certificate signed by the Chairman or
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Corporation setting forth the Conversion Rate as of
the Final Closing Date, showing in reasonable detail the facts upon which such
adjusted Conversion Rate is based, and such certificate shall forthwith be filed
with the transfer agent of the Series A Preferred Stock. A notice stating that
the Conversion Rate has been adjusted pursuant to the second preceding
paragraph, or that no adjustment is necessary, and setting forth the Conversion
Rate in effect as of the Final Closing Date shall be mailed as promptly as
practicable after the Final Closing Date by the Corporation to all record
holders of the Series A Preferred Stock at their last addresses as they shall
appear in the stock transfer books of the Corporation.
The Conversion Price (subject to adjustments pursuant to the
provisions of Section 4(c) below) in effect immediately prior to the date that
is 12 months after the Final Closing Date of the issuance and sale of the Series
A Preferred Stock (the "Reset Date") shall be adjusted and reset effective as of
the Reset Date if the Market Price as of the Reset Date (the "12-Month Trading
Price") is less than 130% of the then applicable Conversion Price (a "Reset
Event"). Upon the occurrence of a Reset Event, the Conversion Price shall be
reduced to be equal to the greater of (A) the 12-Month Trading Price divided by
1.3, and (B) 50% of the Conversion Price in effect immediately prior to the
Reset Date. If there is any change in the Conversion Price as a result of the
preceding sentence, then the Conversion Rate shall be changed accordingly as set
forth above. The Corporation shall prepare a certificate signed by the
principal financial officer of the Corporation setting forth the Conversion Rate
as of the Reset Date, showing in reasonable detail the facts upon which such
Conversion Rate is based, and such certificate shall forthwith be filed with the
transfer agent of the Series A Preferred Stock. A notice stating that the
Conversion Rate has been adjusted pursuant to this paragraph, or that no
adjustment is necessary, and setting forth the Conversion Rate in effect as of
the Reset Date shall be mailed as promptly as practicable after the Reset Date
by the Corporation to all record holders of the Series A Preferred Stock at
their last addresses as they shall appear in the stock transfer books of the
Corporation.
-5-
<PAGE>
(b) CONVERSION PROCEDURES. Any holder of shares of Series A
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates evidencing such shares of Series A
Preferred Stock at the office of the transfer agent for the Series A Preferred
Stock, which certificate or certificates, if the Corporation shall so require,
shall be duly endorsed to the Corporation or in blank, or accompanied by proper
instruments of transfer to the Corporation or in blank, accompanied by
irrevocable written notice to the Corporation that the holder elects so to
convert such shares of Series A Preferred Stock and specifying the name or names
(with address) in which a certificate or certificates evidencing shares of
Common Stock are to be issued. The Corporation need not deem a notice of
conversion to be received unless the holder complies with all the provisions
hereof. The Corporation will instruct the transfer agent (which may be the
Corporation) to make a notation of the date that a notice of conversion is
received, which date shall be deemed to be the date of receipt for purposes
hereof.
The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Series A Preferred Stock accompanied by the
written notice and compliance with any other conditions herein contained,
deliver at such office of such transfer agent to the person for whose account
such shares of Series A Preferred Stock were so surrendered, or to the nominee
or nominees of such person, certificates evidencing the number of full shares of
Common Stock to which such person shall be entitled as aforesaid, together with
a cash adjustment of any fraction of a share as hereinafter provided. Subject
to the following provisions of this paragraph, such conversion shall be deemed
to have been made as of the date of such surrender of the shares of Series A
Preferred Stock to be converted, and the person or persons entitled to receive
the Common Stock deliverable upon conversion of such Series A Preferred Stock
shall be treated for all purposes as the record holder or holders of such Common
Stock on such date; PROVIDED, HOWEVER, that the Corporation shall not be
required to convert any shares of Series A Preferred Stock while the stock
transfer books of the Corporation are closed for any purpose, but the surrender
of Series A Preferred Stock for conversion during any period while such books
are so closed shall become effective for conversion immediately upon the
reopening of such books as if the surrender had been made on the date of such
reopening, and the conversion shall be at the conversion rate in effect on such
date. No adjustments in respect of any dividends on shares surrendered for
conversion or any dividend on the Common Stock issued upon conversion shall be
made upon the conversion of any shares of Series A Preferred Stock.
In the event that any holder of Preferred Stock shall surrender such
Preferred Stock for conversion in accordance with the foregoing provisions of
this Section 4(b) and as of the date such conversion is deemed to occur the
Corporation shall have insufficient authorized, unissued and unreserved shares
of Common Stock remaining to permit the issuance to such holder of the full
number of shares of Common Stock otherwise issuable upon such conversion
("Conversion Shares") (including, without limitation, shares of Common Stock
issuable upon conversion of the Series A Preferred Stock in the case of a Reset
Event), the Corporation shall instead deliver to such holder a notice that in
the absence of revocation of such conversion as hereinafter provided such holder
shall receive upon conversion of the Series A Preferred Stock tendered for
conversion (x) a number of Conversion Shares equal to the remaining number of
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<PAGE>
authorized, unissued and unreserved shares of Common Stock and (y) in lieu of
the Conversion Shares in excess of such number (the "Excess Shares"), either (i)
cash in the amount of (A) the Closing Bid Price on the day prior to the date of
conversion multiplied by (B) such number of Excess Shares (the "Cash Equivalent
Conversion Amount") or (ii) if the Company has no cash or cash equivalents, a
secured demand promissory note (each a "Secured Note") of the Corporation in the
principal amount of such Cash Equivalent Conversion Amount bearing interest at a
rate six percentage points in excess of the prime lending rate most recently
announced by Citibank, N.A. prior to the date of issuance of such promissory
note (the actual consideration to be delivered in lieu of such Excess Shares to
be specified in such notice). Such holder shall have until the 20th day from
the date of such notice (which shall also be the date of its mailing) to revoke
the conversion of such Series A Preferred Stock, or any portion thereof, by
notice to the Corporation (it being understood that any partial revocation shall
be applied first to the Series A Preferred Stock upon conversion of which such
Excess Shares would have been issuable). To the extent the Corporation does not
receive notice of such revocation by the end of such 20-day period, the
Corporation shall deliver the consideration specified to such holder in the
aforementioned notice within three business days thereafter. Prior to the
initial issuance of any such Secured Note, the Corporation shall at its expense
appoint a perfection agent for the purpose of perfecting a blanket security
interest in the Company's assets for the benefit of holders of Secured Notes at
the time a Secured Note is issued.
Except as set forth in the preceding paragraph, all notices of
conversion shall be irrevocable; PROVIDED, HOWEVER, that if the Corporation has
sent notice of an event pursuant to Section 4(f) hereof, a holder of Series A
Preferred Stock may, at its election, provide in its notice of conversion that
the conversion of its shares of Series A Preferred Stock shall be contingent
upon the occurrence of the record date or effectiveness of such event (as
specified by such holder), provided that such notice of conversion is received
by the Corporation prior to such record date or effective date, as the case may
be.
(c) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON
STOCK.
(i) Except as otherwise provided herein, in the event the Corporation
shall, at any time or from time to time after the date hereof, (1) sell or
issue any shares of Common Stock for a consideration per share less than either
(i) the Conversion Price in effect on the date of such sale or issuance or
(ii) the Market Price of the Common Stock as of the date of the sale or
issuance, (2) issue any shares of Common Stock as a stock dividend to the
holders of Common Stock, or (3) subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale, issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Conversion Price in effect
immediately prior to such Change of Shares shall be changed to a price (rounded
to the nearest cent) determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
sale or issuance of such additional shares or such subdivision or combination
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Section 4(c)(v)(F) below) for the issuance
of such additional shares would purchase at the greater of (i) the Conversion
Price in effect on the date of such issuance or (ii) the Market Price as of such
date, and the denominator
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of which shall be the number of shares of Common Stock outstanding
immediately after the sale or issuance of such additional shares or such
subdivision or combination. Such adjustment shall be made successively
whenever such an issuance is made.
(ii) In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock, or in case of any consolidation or
merger of the Corporation with or into another corporation (other than a
consolidation or merger in which the Corporation is the continuing corporation
and which does not result in any reclassification, capital reorganization or
other change of outstanding shares of Common Stock other than the number
thereof), or in case of any sale or conveyance to another corporation of the
property of the Corporation as, or substantially as, an entirety (other than a
sale/leaseback, mortgage or other financing transaction), the Corporation shall
cause effective provision to be made so that each holder of a share of Series A
Preferred Stock shall be entitled to receive, upon conversion of such share of
Series A Preferred Stock, the kind and number of shares of stock or other
securities or property (including cash) receivable upon such reclassification,
capital reorganization or other change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock into which such
share of Series A Preferred Stock was convertible immediately prior to such
reclassification, capital reorganization or other change, consolidation, merger,
sale or conveyance. Any such provision shall include provision for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4(c). The Corporation shall not effect any such
consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the successor (if other than the Corporation) resulting
from such consolidation or merger or the corporation purchasing assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the transfer agent for the Series A Preferred Stock (the
"Transfer Agent"), the obligation to deliver to the holder of each share of
Series A Preferred Stock such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holders may be entitled to
purchase and the other obligations under this Agreement. The foregoing
provisions shall similarly apply to successive reclassifications, capital
reorganizations and other changes of outstanding shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(iii) If, at any time or from time to time, the Corporation shall
issue or distribute to the holders of shares of Common Stock evidence of its
indebtedness, any other securities of the Corporation or any cash, property or
other assets (excluding an issuance or distribution governed by one of the
preceding subsections of this Section 4(c) and also excluding cash dividends or
cash distributions paid out of net profits legally available therefor in the
full amount thereof (any such non-excluded event being herein called a "Special
Dividend")), then in each case the holders of the Series A Preferred Stock shall
be entitled to a proportionate share of any such Special Dividend as though they
were the holders of the number of shares of Common Stock of the Corporation into
which their shares of Series A Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such Special Dividend.
(iv) After each adjustment of the Conversion Price pursuant to this
Section 4(c), the Corporation will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the
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Corporation setting forth: (i) the Conversion Price as so adjusted, (ii) the
Conversion Rate corresponding to such Conversion and (iii) a brief statement
of the facts accounting for such adjustment. The Corporation will promptly
file such certificate with the Transfer Agent and cause a brief summary
thereof to be sent by ordinary first class mail to Paramount and to each
registered holder of Series A Preferred Stock at his last address as it shall
appear on the registry books of the Transfer Agent. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity of such adjustment. The affidavit of an officer of the Transfer
Agent or the Secretary or an Assistant Secretary of the Corporation that
such notice has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. The Transfer Agent may rely on the
information in the certificate as true and correct and has no duty or
obligation to independently verify the amounts or calculations set forth
therein.
(v) For purposes of Section 4(c)(i) hereof, the following provisions
(A) to (F) shall also be applicable:
(A) The number of shares of Common Stock deemed outstanding at
any given time shall include all shares of capital stock convertible
into or exchangeable for Common Stock and all shares of Common Stock
issuable upon the exercise of any convertible debt, warrants
outstanding on the date hereof and options outstanding on the date
hereof.
(B) No adjustment of the Conversion Price shall be made unless
such adjustment would require an increase or decrease of at least $.01
in such price; provided that any adjustments which by reason of this
clause (B) are not required to be made shall be carried forward and
shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment(s) so carried forward,
shall require an increase or decrease of at least $.01 in the
Conversion Price then in effect hereunder.
(C) In case of (1) the sale by the Corporation (including as a
component of a unit) of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or any
securities convertible into or exchangeable for Common Stock (such
securities convertible, exercisable or exchangeable into Common Stock
being herein called "Convertible Securities"), or (2) the issuance by
the Corporation, without the receipt by the Corporation of any
consideration therefor, of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, whether or not such rights, warrants or
options, or the right to convert or exchange such Convertible
Securities, are immediately exercisable, and the consideration per
share for which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum
aggregate consideration, as set forth in the instrument relating
thereto without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such amount, payable
to the Corporation upon the exercise of such rights, warrants or
options, plus the consideration received by the Corporation for the
issuance or sale of such
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rights, warrants or options, plus, in the case of such Convertible
Securities, the minimum aggregate amount, as set forth in the
instrument relating thereto without regard to any antidilution or
similar provisions contained therein for a subsequent adjustment of
such amount, of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number, as set forth in the
instrument relating thereto without regard to any antidilution or
similar provisions contained therein for a subsequent adjustment of
such amount, of shares of Common Stock issuable upon the exercise of
such rights, warrants or options or upon the conversion or exchange
of such Convertible Securities issuable upon the exercise of such
rights, warrants or options) is less than the Conversion Price or
the Market Price of the Common Stock as of the date of the issuance
or sale of such rights, warrants or options, then such total maximum
number of shares of Common Stock issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of
such Convertible Securities (as of the date of the issuance or sale
of such rights, warrants or options) shall be deemed to be
outstanding shares of Common Stock for purposes of Section 4(c)(i)
hereof and shall be deemed to have been sold for an amount equal to
such consideration per share and shall cause an adjustment to be
made in accordance with Section 4(c)(i).
(D) In case of the sale by the Corporation of any Convertible
Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, and the price per share for
which Common Stock is issuable upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the total amount of
consideration received by the Corporation for the sale of such
Convertible Securities, plus the minimum aggregate amount, as set
forth in the instrument relating thereto without regard to any
antidilution or similar provisions contained therein for a subsequent
adjustment of such amount, of additional consideration, if any, other
than such Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number, as set forth in the
instrument relating thereto without regard to any antidilution or
similar provisions contained therein for a subsequent adjustment of
such amount, of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the Conversion
Price or the Market Price of the Common Stock as of the date of the
sale of such Convertible Securities, then such total maximum number of
shares of Common Stock issuable upon the conversion or exchange of
such Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be "Common Stock" for
purposes of Section 4(c)(i) hereof and shall be deemed to have been
sold for an amount equal to such consideration per share and shall
cause an adjustment to be made in accordance with Section 4(c)(i).
(E) In case the Corporation shall modify the rights of
conversion, exchange or exercise of any of the securities referred to
in (C) and (D) above or any other securities of the Corporation
convertible, exchangeable or exercisable for shares of Common Stock,
for any reason other than an event that would
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require adjustment to prevent dilution, so that the consideration
per share received by the Corporation after such modification is
less than the Conversion Price or the Market Price as of the date
prior to such modification, then such securities, to the extent not
theretofore exercised, converted or exchanged, shall be deemed to
have expired or terminated immediately prior to the date of such
modification and the Corporation shall be deemed for purposes of
calculating any adjustments pursuant to this Section 4(c) to have
issued such new securities upon such new terms on the date of
modification. Such adjustment shall become effective as of the date
upon which such modification shall take effect. On the expiration
or cancellation of any such right, warrant or option or the
termination or cancellation of any such right to convert or exchange
any such Convertible Securities, (a) the Conversion Price then in
effect hereunder shall forthwith be readjusted to such Conversion
Price as would have obtained had the adjustments made upon the
issuance or sale of such rights, warrants, options or Convertible
Securities been made upon the basis of the issuance of only the
number of shares of Common Stock theretofore actually delivered (and
the total consideration received therefor) upon the exercise of such
rights, warrants or options or upon the conversion or exchange of
such Convertible Securities and (b) the Conversion Price in effect
for all transactions which were affected by any adjustment of the
Conversion Price pursuant to the first sentence of this Section
4(c)(v)(E) shall be readjusted to such Conversion Price as would
have obtained had such adjustment of the Conversion Price been made
as described in clause (a) of this Section 4(c)(v)(E).
(F) In case of the sale of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Corporation
therefor shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Corporation or
any underwriting discounts or commissions or concessions paid or
allowed by the Corporation in connection therewith. In the event that
any securities shall be issued in connection with any other securities
of the Corporation, together comprising one integral transaction in
which no specific consideration is allocated among the securities,
then each of such securities shall be deemed to have been issued for
such consideration as the Board of Directors of the Corporation
determines in good faith; provided, however that if holders of in
excess of 10% of the then outstanding Series A Preferred Stock
disagrees with such determination, the Corporation shall retain an
independent investment banking firm for the purpose of obtaining an
appraisal.
(vi) Notwithstanding any other provision hereof, no adjustment to the
Conversion Price will be made
(A) upon the exercise of any of the options presently
outstanding under the Corporation's existing stock option plans as
described in the Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, filed by the Corporation (collectively, the "Plan");
or
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(B) upon the issuance or exercise of options which may hereafter
be granted with the approval of the Board of Directors, or exercised,
under the Plan or under any other employee benefit plan of the
Corporation to officers, directors or employees, but only with respect
to such options as are exercisable at prices no lower than the Closing
Bid Price (or, if the prices referenced in the definition of Closing
Bid Price cannot be determined, the Fair Market Value) of the Common
Stock as of the date of grant thereof; or
(C) upon the sale of any shares of Common Stock, warrants to
purchase Common Stock or Convertible Securities in a firm commitment
underwritten public offering, including, without limitation, shares
sold upon the exercise of any overallotment option granted to the
underwriters in connection with such offering; or
(D) upon issuance or exercise of the Placement Warrants or the
Advisory Options (in each case as defined in the Placement Agency
Agreement between the Company and Paramount Capital, Inc. dated as of
September 27, 1996, or the Placement Agency Agreement between the
Company and Paramount Capital, Inc. dated as of September 11, 1995, as
the case may be), or upon the issuance, conversion or exercise, as the
case may be, of the Preferred Stock or Class A Warrants included in
the Premium Preferred Units of the Company issued (i) on or prior to
the Final Closing Date (including the Class A Warrants of the Company
outstanding as of the date of filing of this Certificate of
Designations) or (ii) pursuant to the exercise of the Placement
Warrants, the Advisory Warrants or the Advisory Common Stock Warrants,
or
(E) upon the issuance of any shares of Common Stock pursuant to
the BTI Agreement, or
(F) upon the issuance or sale of Common Stock or Convertible
Securities pursuant to the exercise of any rights, options or warrants
to receive, subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, whether or not such
rights, warrants or options were outstanding on the date of the
original sale of the Series A Preferred Stock or were thereafter
issued or sold, provided that an adjustment was either made or not
required to be made in accordance with Section 4(c) (other than this
subsection 4(c)(vi)) in connection with the issuance or sale of such
securities or any modification of the terms thereof; or
(G) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, provided that any adjustments
required to be made upon the issuance or sale of such Convertible
Securities or any modification of the terms thereof were so made, and
whether or not such Convertible Securities were outstanding on the
date of the original sale of the Series A Preferred Stock or were
thereafter issued or sold;
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provided that Section 4(c)(v)(E) shall nevertheless apply to any modification of
the rights of conversion, exchange or exercise of any of the securities referred
to in (A) through (D) above.
(vii) As used in this Section 4(c), the term "Common Stock" shall
mean and include the Corporation's Common Stock authorized on the date of the
original issue of the Units and shall also include any capital stock of any
class of the Corporation thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the voluntary
liquidation, dissolution or winding up of the Corporation; provided, however,
that the shares issuable upon conversion of the Series A Preferred Stock shall
include only shares of such class designated in the Corporation's Certificate of
Incorporation as Common Stock on the date of the original issue of the Units or
(i), in the case of any reclassification, change, consolidation, merger, sale or
conveyance of the character referred to in Section 4(c)(ii) hereof, the stock,
securities or property provided for in such section or (ii), in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon conversion of the Series A Preferred Stock as a result of a subdivision or
combination or consisting of a change in par value, or from par value to no par
value, or from no par value to par value, such shares of Common Stock as so
reclassified or changed.
(viii) Any determination as to whether an adjustment in the
Conversion Price in effect hereunder is required pursuant to Section 4(c), or as
to the amount of any such adjustment, if required, shall be binding upon the
holders of the Series A Preferred Stock and the Corporation if made in good
faith by the Board of Directors of the Corporation.
(d) NO FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Series A
Preferred Stock. If more than one certificate evidencing shares of Series A
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A Preferred
Stock so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable upon conversion of any shares of Series A Preferred
Stock, the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to the same fraction of the Market Price as of the
close of business on the day of conversion.
(e) RESERVATION OF SHARES; TRANSFER TAXES; ETC. The Corporation
shall at all times reserve and keep available, out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series A Preferred Stock, such number of shares of its Common
Stock free of preemptive rights as shall be sufficient to effect the conversion
of all shares of Series A Preferred Stock from time to time outstanding
(including, without limitation, shares of Common Stock issuable upon conversion
of the Series A Preferred Stock in the case of a Reset Event). The Corporation
shall use its best efforts from time to time, in accordance with the laws of the
State of Delaware, to increase the authorized number of shares of Common Stock
if at any time the number of shares of authorized, unissued and unreserved
Common Stock shall not be sufficient to permit the conversion of all the
then-outstanding shares of Series A Preferred Stock.
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The Corporation shall pay any and all issue or other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Series A Preferred Stock. The Corporation shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issue or delivery of Common Stock (or other securities or
assets) in a name other than that in which the shares of Series A Preferred
Stock so converted were registered, and no such issue or delivery shall be made
unless and until the person requesting such issue has paid to the Corporation
the amount of such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(f) PRIOR NOTICE OF CERTAIN EVENTS. In case:
(i) the Corporation shall declare any dividend (or any other
distribution); or
(ii) the Corporation shall authorize the granting to the
holders of Common Stock of rights or warrants to subscribe for or purchase
any shares of stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change in
par value, or from par value to no par value, or from no par value to par
value); or
(iv) of any consolidation or merger (including, without
limitation, a Merger Transaction) to which the Corporation is a party and
for which approval of any stockholders of the Corporation shall be
required, or of the sale or transfer of all or substantially all of the
assets of the Corporation or of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or other property; or
(v) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation (including, without limitation, a Liquidation
Event);
then the Corporation shall cause to be filed with the transfer agent for the
Series A Preferred Stock, and shall cause to be mailed to the holders of record
of the Series A Preferred Stock, at their last addresses as they shall appear
upon the stock transfer books of the Corporation, at least 20 days prior to the
applicable record date hereinafter specified, a notice stating (x) the date on
which a record (if any) is to be taken for the purpose of such dividend,
distribution or granting of rights or warrants or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution, rights or warrants are to be determined and a
description of the cash, securities or other property to be received by such
holders upon such dividend, distribution or granting of rights or warrants or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding up or other
Liquidation Event is expected to become effective, the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such exchange, dissolution, liquidation or winding up or other Liquidation Event
and the consideration,
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including securities or other property, to be received by such holders upon
such exchange; PROVIDED, HOWEVER, that no failure to mail such notice or any
defect therein or in the mailing thereof shall affect the validity of the
corporate action required to be specified in such notice.
(g) OTHER CHANGES IN CONVERSION RATE. The Corporation from time to
time may increase the Conversion Rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the Conversion Rate is so increased, the Corporation shall
mail to holders of record of the Series A Preferred Stock a notice of the
increase at least 15 days before the date the increased Conversion Rate takes
effect, and such notice shall state the increased Conversion Rate and the period
it will be in effect.
The Corporation may make such increases in the Conversion Rate, in
addition to those required or allowed by this Section 4, as shall be determined
by it, as evidenced by a resolution of the Board of Directors, to be advisable
in order to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
Notwithstanding anything to the contrary herein, in no case shall
the Conversion Price be adjusted to an amount less than $.02 per share, the
current par value of the Common Stock into which the Series A Preferred Stock
is convertible.
(h) AMBIGUITIES/ERRORS. The Board of Directors of the Corporation
shall have the power to resolve any ambiguity or correct any error in the
provisions relating to the convertibility of the Series A Preferred Stock, and
its actions in so doing shall be final and conclusive.
5. MANDATORY CONVERSION. At any time on or after the Reset Date,
the Corporation, at its option, may cause the Series A Preferred Stock to be
converted in whole, or in part, on a PRO RATA basis, into fully paid and
nonassessable shares of Common Stock at the then effective Conversion Rate and
such other securities and property as herein provided if the Closing Bid Price
of the Common Stock (or, if the prices referenced in the definition of Closing
Bid Price cannot be determined, the Fair Market Value (as defined in Section
3(b)) of the Common Stock) shall have exceeded 200% of the then applicable
Conversion Price for at least 20 trading days in any 30 consecutive trading day
period. Any shares of Series A Preferred Stock so converted shall be treated as
having been surrendered by the holder thereof for conversion pursuant to Section
4 on the date of such mandatory conversion (unless previously converted at the
option of the holder). The Corporation shall not be entitled to cause any
Series A Preferred Stock to be converted pursuant to this Section 5 if, as a
result of such conversion, the holder of such Series A Preferred Stock would be
entitled to receive cash or a promissory note of the Corporation as provided in
Section 4(b).
Not more than 60 nor less than 20 days prior to the date of any such
mandatory conversion, notice by first class mail, postage prepaid, shall be
given to the holders of record of the Series A Preferred Stock to be converted,
addressed to such holders at their last addresses as shown on the stock transfer
books of the Corporation. Each such notice shall specify the date
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fixed for conversion, the place or places for surrender of shares of Series A
Preferred Stock, and the then effective Conversion Rate pursuant to Section 4.
Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given by the Corporation on the date deposited in
the mail, whether or not the holder of the Series A Preferred Stock receives
such notice; and failure properly to give such notice by mail, or any defect
in such notice, to the holders of the shares to be converted shall not affect
the validity of the proceedings for the conversion of any other shares of
Series A Preferred Stock. On or after the date fixed for conversion as stated
in such notice, each holder of shares called to be converted shall surrender
the certificate evidencing such shares to the Corporation at the place
designated in such notice for conversion. Notwithstanding that the
certificates evidencing any shares properly called for conversion shall not
have been surrendered, the shares shall no longer be deemed outstanding and
all rights whatsoever with respect to the shares so called for conversion
(except the right of the holders to convert such shares upon surrender of
their certificates therefor) shall terminate.
6. VOTING RIGHTS.
(a) GENERAL. Except as otherwise provided herein, in the Certificate
of Incorporation or the By-laws, the holders of shares of Series A Preferred
Stock, the holders of shares of Common Stock and the holders of any other class
or series of shares entitled to vote with the Common Stock shall vote together
as one class on all matters submitted to a vote of stockholders of the
Corporation. In any such vote, each share of Series A Preferred Stock shall
entitle the holder thereof to cast the number of votes equal to the number of
votes which could be cast in such vote by a holder of the Common Stock into
which such share of Series A Preferred Stock is convertible on the record date
for such vote, or if no record date has been established, on the date such vote
is taken. Any shares of Series A Preferred Stock held by the Corporation or any
entity controlled by the Corporation shall not have voting rights hereunder and
shall not be counted in determining the presence of a quorum.
(b) CLASS VOTING RIGHTS. In addition to any vote specified in Section
6(a), so long as 50% of the shares of Series A Preferred Stock (including those
shares of Series A Preferred Stock issued or issuable upon the exercise of the
warrants issued to Paramount Capital, Inc., the placement agent, or its
designees, in connection with the offer and sale of the Series A Preferred
Stock, shall be outstanding, the Corporation shall not, without the affirmative
vote or consent of the holders of at least 66.67% of all outstanding Series A
Preferred Stock voting separately as a class, (i) amend, alter or repeal any
provision of the Certificate of Incorporation, or the Bylaws of the Corporation
so as adversely to affect the relative rights, preferences, qualifications,
limitations or restrictions of the Series A Preferred Stock, (ii) declare or pay
any dividend or distribution on any securities of the Corporation other than the
Series A Preferred Stock pursuant to and accordance with the provisions of this
Certificate of Designations, or authorize the repurchase of any securities of
the Corporation, or (iii) authorize or issue, or increase the authorized amount
of, any security (A) ranking prior to, or on a parity with, the Series A
Preferred Stock (I) upon a Liquidation Event or (II) with respect to the payment
of any dividends or distributions or (B) having any voting rights separate from,
or other than on a share-equivalent basis with, the holders of Common Stock
(other than voting rights analogous to those
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provided for in this Section 6(b) with respect to any other series of
preferred stock). The vote as contemplated herein shall specifically not be
required for (x) issuances of Common Stock, (y) the authorization, issuance
or increase in the amount of the Series A Preferred Stock prior to the Final
Closing Date or (z) any consolidation or merger of the Corporation with or
into another corporation in which the Corporation is not the surviving
entity, a sale or transfer of all or part of the Corporation's assets for
cash, securities or other property, or a compulsory share exchange.
7. OUTSTANDING SHARES. For purposes of this Certificate of
Designations, all shares of Series A Preferred Stock shall be deemed outstanding
except (i) from the date, or the deemed date, of surrender of certificates
evidencing shares of Series A Preferred Stock, all shares of Series A Preferred
Stock converted into Common Stock, (ii) from the date of registration of
transfer, all shares of Series A Preferred Stock held of record by the
Corporation or any subsidiary of the Corporation and (iii) any and all shares of
Series A Preferred Stock held in escrow prior to delivery of such stock by the
Corporation to the initial beneficial owners thereof.
8. STATUS OF ACQUIRED SHARES. Shares of Series A Preferred Stock
received upon conversion pursuant to Section 4 or Section 5 or otherwise
acquired by the Corporation will be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to class, and may
thereafter be issued, but not as shares of Series A Preferred Stock.
9. PREEMPTIVE RIGHTS. The Series A Preferred Stock is not entitled
to any preemptive or subscription rights in respect of any securities of the
Corporation.
10. NO AMENDMENT OR IMPAIRMENT. The Corporation shall not amend its
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the rights of the holders of the Series A Preferred Stock
against impairment.
11. SEVERABILITY OF PROVISIONS. Whenever possible, each provision
hereof shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change as
shall be necessary to render the provision in question effective and valid under
applicable law.
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IN WITNESS WHEREOF, Xytronyx, Inc. has caused this certificate to be
signed on its behalf by Larry O. Bymaster, its Chairman of the Board,
President and Chief Executive Officer, this 19th day of December, 1996.
XYTRONYX, INC.
By: /s/ LARRY O. BYMASTER
-------------------------------------
Name: Larry O. Bymaster
Title: President and Chief
Executive Officer
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XYTRONYX, INC.
EQUITY INCENTIVE PLAN
Section 1. Purpose of the Plan
The purpose of the Xytronyx, Inc. Equity Incentive Plan (the "Plan") is to
further the interests of Xytronyx, Inc. (the "Company") and its shareholders by
providing long-term performance incentives to those key employees and
consultants of the Company and its Subsidiaries who provide valuable services
contributing to the growth and protection of the business of the Company and its
Subsidiaries.
Section 2. Definitions
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Award" means any Option, SAR (including a Limited SAR),
Restricted Stock, Stock granted as a bonus or in lieu of other awards, other
Stock-Based Award, Tax Bonus or other cash payments granted to a Participant
under the Plan.
(b) "Award Agreement" shall mean the written agreement, instrument or
document evidencing an Award.
(c) "Change of Control" means and includes each of the following:
(i) the acquisition, in one or more transactions, of beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) by any person or
entity or any group of persons or entities who constitute a group (within the
meaning of Section 13(d)(3) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
Subsidiary, of any securities of the Company such that, as a result of such
acquisition, such person, entity or group either (A) beneficially owns (within
the meaning of Rule l3d-3 under the Exchange Act), directly or indirectly, more
than 20% of the Company's outstanding voting securities entitled to vote on a
regular basis for a majority of the members of the Board of Directors of the
Company or (B) otherwise has the ability to elect, directly or indirectly, a
majority of the members of the Board; (ii) a change in the composition of the
Board of Directors of the Company such that a majority of the members of the
Board of Directors of the Company are not Continuing Directors; or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 80% of the
total voting power represented by the voting securities of the Company or such
surviving entity
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outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
or more transactions) all or substantially all of the Company's assets.
Notwithstanding the foregoing, the preceding events shall not be deemed to
be a Change of Control if, prior to any transaction or transactions causing such
change, a majority of the Continuing Directors shall have voted not to treat
such transaction or transactions as resulting in a Change of Control.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(e) A "Continuing Director" means, as of any date of determination,
any member of the Board of Directors of the Company who (i) was a member of such
Board on the effective date of the Plan or (ii) was nominated for election or
elected to such Board with the affirmative vote of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(g) "Fair Market Value" means, with respect to Stock, Awards, or
other property, the fair market value of such Stock, Awards, or other property
determined by such methods or procedures as shall be established from time to
time by the Committee in good faith and in accordance with applicable law.
Unless otherwise determined by the Committee, the Fair Market Value of Stock
shall mean the mean of the high and low sales prices of Stock on the relevant
date as reported on the stock exchange or market on which the Stock is primarily
traded, or if no sale is made on such date, then the Fair Market Value is the
weighted average of the mean of the high and low sales prices of the Stock on
the next preceding day and the next succeeding day on which such sales were
made, as reported on the stock exchange or market on which the Stock is
primarily traded.
(h) "ISO" means any Option designated as an incentive stock option
within the meaning of Section 422 of the Code.
(i) "Limited SAR" means an SAR exercisable only for cash upon a
Change of Control or other event, as specified by the Committee.
(j) "Option" means a right granted to a Participant pursuant to
Section 6(b) to purchase Stock at a specified price during specified time
periods. An Option may be either an ISO or a nonstatutory Option (an Option not
designated as an ISO).
(k) "Restricted Stock" means Stock awarded to a Participant pursuant
to Section 6(d) that may be subject to certain restrictions and to a risk of
forfeiture.
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1. (l) "Stock-Based Award" means a right that may be denominated or
payable in, or valued in whole or in part by reference to the market value
of, Stock, including, but not limited to, any Option, SAR (including a
Limited SAR), Restricted Stock, Stock granted as a bonus or Awards in lieu of
cash obligations.
(m) "SAR" or "Stock Appreciation Right" means the right granted to a
Participant pursuant to Section 6(e) to be paid an amount measured by the
appreciation in the Fair Market Value of Stock from the date of grant to the
date of exercise of the right, with payment to be made in cash, Stock or as
specified in the Award, as determined by the Committee.
(n) "Subsidiary" shall mean any corporation, partnership, joint
venture or other business entity of which 50% or more of the outstanding voting
power is beneficially owned, directly or indirectly, by the Company.
(o) "Tax Bonus" means a payment in cash in the year in which an
amount is included in the gross income of a Participant in respect of an
Award of an amount equal to the federal, foreign, if any, and applicable
state and local income and employment tax liabilities payable by the
Participant as a result of (i) the amount included in gross income in respect
of the Award and (ii) the payment of the amount in clause (i) and the amount
in this clause (ii). For purposes of determining the amount to be paid to the
Participant pursuant to the preceding sentence, the Participant shall be
deemed to pay federal, foreign, if any, and state and local income taxes at
the highest marginal rate of tax imposed upon ordinary income for the year in
which an amount in respect of the Award is included in gross income, after
giving effect to any deductions therefrom or credits available with respect
to the payment of any such taxes.
Section 3. Administration of the Plan
The Plan shall be administered by the Compensation Committee of the Board
of Directors of the Company (the "Committee"). No member of the Committee while
serving as such shall be eligible for participation in the Plan. Any action of
the Committee in administering the Plan shall be final, conclusive and binding
on all persons, including the Company, its Subsidiaries, employees,
Participants, persons claiming rights from or through Participants and
stockholders of the Company.
Subject to the provisions of the Plan, the Committee shall have full and
final authority in its discretion (a) to select the key employees and
consultants who will receive Awards pursuant to the Plan ("Participants"), (b)
to determine the type or types of Awards to be granted to each Participant, (c)
to determine the number of shares of Stock to which an Award will relate, the
terms and conditions of any Award granted under the Plan (including, but not
limited to, restrictions as to transferability or forfeiture, exercisability or
settlement of an Award and waivers or accelerations thereof, and waivers of or
modifications to performance conditions relating to an Award, based in each case
on such considerations as the Committee shall deter-
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mine) and all other matters to be determined in connection with an Award; (d)
to determine whether, to what extent, and under what circumstances an Award
may be settled, or the exercise price of an Award may be paid, in cash,
Stock, other Awards or other property, or an Award may be canceled,
forfeited, or surrendered; (e) to determine whether, and to certify that,
performance goals to which the settlement of an Award is subject are
satisfied; (f) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan, and to adopt, amend and rescind such rules and
regulations as, in its opinion, may be advisable in the administration of the
Plan; and (g) to make all other determinations as it may deem necessary or
advisable for the administration of the Plan. The Committee may delegate to
officers or managers of the Company or any Subsidiary or to unaffiliated
service providers the authority, subject to such terms as the Committee shall
determine, to perform administrative functions and to perform such other
functions as the Committee may determine, to the extent permitted under Rule
16b-3, and applicable law.
Section 4. Participation in the Plan
Participants in the Plan shall be selected by the Committee from among the
key employees and consultants of the Company and its Subsidiaries.
Section 5. Plan Limitations; Shares Subject to the Plan
Subject to the provisions of Section 8(a) hereof, the aggregate number of
shares of common stock, $0.02 par value, of the Company (the "Stock") available
for issuance as Awards under the Plan shall not exceed 3,000,000 shares.
No Award may be granted if the number of shares to which such Award
relates, when added to the number of shares previously issued under the Plan and
the number of shares which may then be acquired pursuant to other outstanding,
unexercised Awards, exceeds the number of shares available for issuance pursuant
to the Plan. If any shares subject to an Award are forfeited or such Award is
settled in cash or otherwise terminates for any reason whatsoever without an
actual distribution of shares to the Participant, any shares counted against the
number of shares available for issuance pursuant to the Plan with respect to
such Award shall, to the extent of any such forfeiture, settlement, or
termination, again be available for Awards under the Plan; provided, however,
that the Committee may adopt procedures for the counting of shares relating to
any Award to ensure appropriate counting, avoid double counting, and provide for
adjustments in any case in which the number of shares actually distributed
differs from the number of shares previously counted in connection with such
Award.
Section 6. Awards
(a) GENERAL. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award
or the exercise thereof, at the date of grant or thereafter (subject to
Section 8(a)), such additional terms and
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conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine, including terms requiring forfeiture of Awards in
the event of termination of employment by the Participant; provided, however,
that the Committee shall retain full power to accelerate or waive any such
additional term or condition as it may have previously imposed. All Awards
shall be evidenced by an Award Agreement.
(b) OPTIONS. The Committee may grant Options to Participants on
the following terms and conditions:
(i) Exercise Price. The exercise price of each Option shall be
determined by the Committee at the time the Option is granted, but (except as
provided in Section 7(a)) the exercise price of any Option shall not be less
than the Fair Market Value of the shares covered thereby at the time the Option
is granted.
(ii) Time and Method of Exercise. The Committee shall determine
the time or times at which an Option may be exercised in whole or in part,
whether the exercise price shall be paid in cash or by the surrender at Fair
Market Value of Stock, or by any combination of cash and shares of Stock,
including, without limitation, cash, Stock, other Awards, or other property
(including notes or other contractual obligations of Participants to make
payment on a deferred basis, such as through "cashless exercise" arrangements,
to the extent permitted by applicable law), and the methods by which Stock will
be delivered or deemed to be delivered to Participants.
(iii) Incentive Stock Options. The terms of any Option granted
under the Plan as an ISO shall comply in all respects with the provisions of
Section 422 of the Code, including, but not limited to, the requirement that no
ISO shall be granted more than ten years after the effective date of the Plan.
(c) RESTRICTED STOCK. The Committee is authorized to grant
Restricted Stock to Participants on the following terms and conditions:
(i) Restricted Period. Restricted Stock awarded to a
Participant shall be subject to such restrictions on transferability and
other restrictions for such periods as shall be established by the Committee,
in its discretion, at the time of such Award, which restrictions may lapse
separately or in combination at such times, under such circumstances, or
otherwise, as the Committee may determine.
(ii) Forfeiture. Restricted Stock shall be forfeitable to the
Company upon termination of employment during the applicable restricted
periods. The Committee, in its discretion, whether in an Award Agreement or
anytime after an Award is made, may accelerate the time at which restrictions
or forfeiture conditions will lapse or remove any such restrictions,
including upon death, disability or retirement, whenever the Committee
determines that such action is in the best interests of the Company.
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(iii) Certificates for Stock. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of the
Participant, such certificates may bear an appropriate legend referring to the
terms, conditions and restrictions applicable to such Restricted Stock.
(iv) Rights as a Shareholder. Subject to the terms and
conditions of the Award Agreement, the Participant shall have all the rights of
a stockholder with respect to shares of Restricted Stock awarded to him or her,
including, without limitation, the right to vote such shares and the right to
receive all dividends or other distributions made with respect to such shares.
If any such dividends or distributions are paid in Stock, the Stock shall be
subject to restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which the Stock has been distributed.
(d) STOCK APPRECIATION RIGHTS. The Committee is authorized to
grant SARs to Participants on the following terms and conditions:
(i) Right to Payment. An SAR shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof, the excess of (A)
the Fair Market Value of one share of Stock on the date of exercise over (B) the
grant price of the SAR as determined by the Committee as of the date of grant of
the SAR, which grant price (except as provided in Section 7(a)) shall not be
less than the Fair Market Value of one share of Stock on the date of grant.
(ii) Other Terms. The Committee shall determine the time or
times at which an SAR may be exercised in whole or in part, the method of
exercise, method of settlement, form of consideration payable in settlement,
method by which Stock will be delivered or deemed to be delivered to
Participants, whether or not an SAR shall be in tandem with any other Award, and
any other terms and conditions of any SAR. Limited SARs may be granted on such
terms, not inconsistent with this Section 6(e), as the Committee may determine.
Limited SARs may be either freestanding or in tandem with other Awards.
(e) BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS. The
Committee is authorized to grant Stock as a bonus, or to grant Stock or other
Awards in lieu of Company or Subsidiary obligations to pay cash or deliver
other property under other plans or compensatory arrangements; provided that,
in the case of Participants subject to Section 16 of the Exchange Act, such
cash amounts are determined under such other plans in a manner that complies
with applicable requirements of Rule 16b-3 so that the acquisition of Stock
or Awards hereunder shall be exempt from Section 16(b) liability. Stock or
Awards granted hereunder shall be subject to such other terms as shall be
determined by the Committee.
(f) OTHER STOCK-BASED AWARDS. The Committee is authorized, subject
to limitations under applicable law, to grant to Participants such other
Stock-Based Awards in addition to those provided
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in this Section 6, as deemed by the Committee to be consistent with the
purposes of the Plan. The Committee shall determine the terms and conditions
of such Awards. Stock delivered pursuant to an Award in the nature of a
purchase right granted under this Section 6(f) shall be purchased for such
consideration and paid for at such times, by such methods, and in such forms,
including, without limitation, cash, Stock, other Awards, or other property,
as the Committee shall determine.
(g) CASH PAYMENTS. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants Tax Bonuses and
other cash payments, whether awarded separately or as a supplement to any
Stock-Based Award. The Committee shall determine the terms and conditions of
such Awards.
Section 7. Additional Provisions Applicable to Awards
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution for, any
other Award granted under the Plan or any award granted under any other plan of
the Company or any Subsidiary, or any business entity acquired by the Company or
any Subsidiary, or any other right of a Participant to receive payment from the
Company or any Subsidiary. If an Award is granted in substitution for another
Award or award, the Committee shall require the surrender of such other Award or
award in consideration for the grant of the new Award. Awards granted in
addition to, or in tandem with other Awards or awards may be granted either as
of the same time as, or a different time from, the grant of such other Awards or
awards. The per share exercise price of any Option, grant price of any SAR, or
purchase price of any other Award conferring a right to purchase Stock:
(i) granted in substitution for an outstanding Award or award,
shall be not less than the lesser of (A) the Fair Market Value of a share of
Stock at the date such substitute Award is granted or (B) such Fair Market Value
at that date, reduced to reflect the Fair Market Value at that date of the Award
or award required to be surrendered by the Participant as a condition to receipt
of the substitute Award; or
(ii) retroactively granted in tandem with an outstanding Award
or award, shall not be less than the lesser of the Fair Market Value of a share
of Stock at the date of grant of the later Award or at the date of grant of the
earlier Award or award.
(b) EXCHANGE AND BUY OUT PROVISIONS. The Committee may at any time
offer to exchange or buy out any previously granted Award for a payment in
cash, Stock, other Awards (subject to Section 7(a)), or other property based
on such terms and conditions as the Committee shall determine and communicate
to a Participant at the time that such offer is made.
(c) PERFORMANCE CONDITIONS. The right of a Participant to exercise
or receive a grant or settlement of any Award, and the timing
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thereof, may be subject to such performance conditions as may be specified by
the Committee.
(d) TERM OF AWARDS. The term of each Award shall, except as
provided herein, be for such period as may be determined by the Committee;
provided, however, that in no event shall the term of any ISO, or any SAR
granted in tandem therewith, exceed a period of ten years from the date of
its grant (or such shorter period as may be applicable under Section 422 of
the Code).
(e) FORM OF PAYMENT. Subject to the terms of the Plan and any
applicable Award Agreement, payments or transfers to be made by the Company
or a Subsidiary upon the grant or exercise of an Award may be made in such
forms as the Committee shall determine, including, without limitation, cash,
Stock, other Awards, or other property (and may be made in a single payment
or transfer, in installments, or on a deferred basis), in each case
determined in accordance with rules adopted by, and at the discretion of, the
Committee. (Such payments may include, without limitation, provisions for
the payment or crediting of reasonable interest on installments or deferred
payments.) The Committee, in its discretion, may accelerate any payment or
transfer upon a change in control as defined by the Committee. The Committee
may also authorize payment upon the exercise of an Option by net issuance or
other cashless exercise methods.
(f) LOAN PROVISIONS. With the consent of the Committee, and
subject at all times to laws and regulations and other binding obligations or
provisions applicable to the Company, the Company may make, guarantee, or
arrange for a loan or loans to a Participant with respect to the exercise of
any Option or other payment in connection with any Award, including the
payment by a Participant of any or all federal, state, or local income or
other taxes due in connection with any Award. Subject to such limitations,
the Committee shall have full authority to decide whether to make a loan or
loans hereunder and to determine the amount, terms, and provisions of any
such loan or loans, including the interest rate to be charged in respect of
any such loan or loans, whether the loan or loans are to be with or without
recourse against the borrower, the terms on which the loan is to be repaid
and the conditions, if any, under which the loan or loans may be forgiven.
(g) CHANGE OF CONTROL. In the event of a Change of Control of the
Company, all Awards granted under the Plan that are still outstanding and not
yet vested or exercisable or which are subject to restrictions shall become
immediately 100% vested in each Participant or shall be free of any
restrictions, as of the first date that the definition of Change of Control
has been fulfilled, and shall be exercisable for the remaining duration of
the Award. All Awards that are exercisable as of the effective date of the
Change of Control will remain exercisable for the remaining duration of the
Award.
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Section 8. Adjustments upon Changes in Capitalization; Acceleration in
Certain Events
(a) In the event that the Committee shall determine that any stock
dividend, recapitalization, forward split or reverse split, reorganization,
merger, consolidation, spin-off, combination, repurchase or share exchange, or
other similar corporate transaction or event, affects the Stock or the book
value of the Company such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Stock which may thereafter be issued in
connection with Awards, (ii) the number and kind of shares of Stock issuable in
respect of outstanding Awards, (iii) the aggregate number and kind of shares of
Stock available under the Plan, and (iv) the exercise price, grant price, or
purchase price relating to any Award or, if deemed appropriate, make provision
for a cash payment with respect to any outstanding Award; provided, however, in
each case, that no adjustment shall be made which would cause the Plan to
violate Section 422(b)(1) of the Code with respect to ISOs.
(b) In addition, the Committee is authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards in recognition
of unusual or nonrecurring events (including, without limitation, events
described in the preceding paragraph) affecting the Company or any Subsidiary,
or in response to changes in applicable laws, regulations, or accounting
principles.
Section 9. General Provisions
(a) CHANGES TO THE PLAN AND AWARDS. The Board of Directors of the
Company may amend, alter, suspend, discontinue, or terminate the Plan or the
Committee's authority to grant Awards under the Plan without the consent of the
Company's stockholders or Participants, except that any such amendment,
alteration, suspension, discontinuation, or termination shall be subject to the
approval of the Company's stockholders within one year after such Board action
if such stockholder approval is required by any federal or state law or
regulation or the rules of any stock exchange or automated quotation system on
which the Stock may then be listed or quoted, and the Board may otherwise, in
its discretion, determine to submit other such changes to the Plan to the
stockholders for approval; provided, however, that without the consent of an
affected Participant, no amendment, alteration, suspension, discontinuation, or
termination of the Plan may materially and adversely affect the rights of such
Participant under any Award theretofore granted and any Award Agreement relating
thereto. The Committee may waive any conditions or rights under, or amend,
alter, suspend, discontinue, or terminate, any Award theretofore granted and any
Award Agreement relating thereto; provided, however, that without the consent of
an affected Participant, no such amendment, alteration, suspension,
discontinuation, or termination of any Award may materially and adversely affect
the rights of such Participant under such Award.
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The foregoing notwithstanding, any performance condition specified in
connection with an Award shall not be deemed a fixed contractual term, but shall
remain subject to adjustment by the Committee, in its discretion at any time in
view of the Committee's assessment of the Company's strategy, performance of
comparable companies, and other circumstances.
Notwithstanding the foregoing, if the Plan is ratified by the stockholders
of the Company at the Company's 1997 Annual Meeting of Stockholders or at any
Special Meeting of the Stockholders, then unless approved by the stockholders of
the Company, no amendment will: (i) change the class of persons eligible to
receive Awards; (ii) materially increase the benefits accruing to Participants
under the Plan, or (iii) increase the number of shares of Stock subject to the
Plan.
(b) NO RIGHT TO AWARD OR EMPLOYMENT. No employee or other person
shall have any claim or right to receive an Award under the Plan. Neither the
Plan nor any action taken hereunder shall be construed as giving any employee
any right to be retained in the employ of the Company or any Subsidiary.
(c) TAXES. The Company or any Subsidiary is authorized to withhold
from any Award granted, any payment relating to an Award under the Plan,
including from a distribution of Stock or any payroll or other payment to a
Participant amounts of withholding and other taxes due in connection with any
transaction involving an Award, and to take such other action as the
Committee may deem advisable to enable the Company and Participants to
satisfy obligations for the payment of withholding taxes and other tax
obligations relating to any Award. This authority shall include authority to
withhold or receive Stock or other property and to make cash payments in
respect thereof in satisfaction of a Participant's tax obligations.
(d) LIMITS ON TRANSFERABILITY; BENEFICIARIES. No Award or other
right or interest of a Participant under the Plan shall be pledged, encumbered,
or hypothecated to, or in favor of, or subject to any lien, obligation, or
liability of such Participants to, any party, other than the Company or any
Subsidiary, or assigned or transferred by such Participant otherwise than by
will or the laws of descent and distribution, and such Awards and rights shall
be exercisable during the lifetime of the Participant only by the Participant or
his or her guardian or legal representative. Notwithstanding the foregoing, the
Committee may, in its discretion, provide that Awards or other rights or
interests of a Participant granted pursuant to the Plan (other than an ISO) be
transferable, without consideration, to immediate family members (I.E.,
children, grandchildren or spouse), to trusts for the benefit of such immediate
family members and to partnerships in which such family members are the only
partners. The Committee may attach to such transferability feature such terms
and conditions as it deems advisable. In addition, a Participant may, in the
manner established by the Committee, designate a beneficiary (which may be a
person or a trust) to exercise the rights of the Participant, and to receive any
distribution, with respect to any Award upon the death of the Participant. A
beneficiary, guardian, legal representative or other person claiming any
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rights under the Plan from or through any Participant shall be subject to all
terms and conditions of the Plan and any Award Agreement applicable to such
Participant, except as otherwise determined by the Committee, and to any
additional restrictions deemed necessary or appropriate by the Committee.
(e) NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant
shall have any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Participants. No Award shall
confer on any Participant any of the rights of a stockholder of the Company
unless and until Stock is duly issued or transferred to the Participant in
accordance with the terms of the Award.
(f) DISCRETION. In exercising, or declining to exercise, any grant
of authority or discretion hereunder, the Committee may consider or ignore
such factors or circumstances and may accord such weight to such factors and
circumstances as the Committee alone and in its sole judgment deems
appropriate and without regard to the affect such exercise, or declining to
exercise such grant of authority or discretion, would have upon the affected
Participant, any other Participant, any employee, the Company, any
Subsidiary, any stockholder or any other person.
(g) EFFECTIVE DATE. The effective date of the Plan is December 17,
1996.
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XYTRONYX, INC.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose. The purpose of the Xytronyx, Inc. Stock Option Plan for
Non-Employee directors (the "Plan") is to promote the interests of Xytronyx,
Inc. (the "Company") and its stockholders by strengthening the Company's ability
to attract and retain the services of experienced and knowledgeable non-employee
directors and by encouraging such directors to acquire an increased proprietary
interest in the Company.
2. Shares Subject to the Plan. Subject to adjustment as provided in
Article 7, the total number of shares of common stock (the "Common Stock") of
the Company for which options may be granted under the Plan shall be
3,000,000 shares of Common Stock (the "Shares"). The Shares shall be shares
currently authorized but unissued or currently held or subsequently acquired
by the Company as treasury shares, including shares purchased in the open
market or in private transactions. If any option granted under the Plan
expires or terminates for any reason without having been exercised in full,
the Shares subject to, but not delivered under, such options may become
available for that grant of other options under the Plan. No shares
delivered to the Company in full or partial payment of an option exercise
price payable pursuant to Section 6.3 shall become available for the grant of
other options under the Plan.
3. Administration of the Plan. The Plan shall be administered by the
Compensation Committee of the Company's Board of Directors (the "Committee"),
subject to Articles 10 and 11. Subject to the terms of the Plan, the
Committee shall have the power to construe the provisions of the Plan, to
determine all questions arising thereunder, and to adopt and amend such rules
and regulations for administering the Plan as the Committee deems desirable.
4. Participation in the Plan. Each member of the Company's Board of
Directors (a "Director") who is not otherwise an employee of the Company or
any subsidiary of the Company (an "Eligible Director") shall be eligible to
participate in the Plan.
5. Nonstatutory Stock Options. All options granted under the Plan shall
be nonstatutory options not intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended.
6. Option Terms. Each option granted to an Eligible Director under the
Plan and the issuance of Shares thereunder shall be subject to the following
terms:
6.1 Option Agreements. Each option granted under the Plan shall be
evidenced by an option agreement (an "Agreement") duly executed on behalf of
the Company and by the Eligible Director to whom such option is granted and
dated as of the applicable date of grant. Each Agreement shall be signed on
behalf of the Company by an officer or officers delegated such authority by
the Committee using either manual or
<PAGE>
facsimile signature. Each Agreement shall comply with and be subject to the
terms and conditions of the Plan. Any Agreement may contain such other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Committee.
6.2. Option Grant Size and Grant dates.
6.2.1 Initial Grants. An option to purchase 50,000 Shares as
adjusted pursuant to Article 7 (an "Initial Grant") shall be granted to:
a. each Director who is an Eligible Director on the Effective
Date (as hereinafter defined), and
b. each other Eligible Director immediately following the Annual
Meeting at which such Director is first elected to be a Director or at the close
of business on the day upon which such Eligible Director is first appointed by
the Board to be a Director, whichever first occurs; provided, that if an
Eligible Director who previously received an Initial Grant terminates service as
a Director and is subsequently elected or appointed to the Board, such Director
shall not be eligible to receive a second Initial Grant, but shall be eligible
to receive only Annual Grants as provided in Section 6.2.2.
6.2.2 Annual Grants. An option to purchase 10,000 Shares as adjusted
pursuant to Article 7 (an "Annual Grant"), shall be granted automatically each
year, immediately following the Annual Meeting, to each Director who is an
Eligible Director at such time.
6.3 Option Exercise Price. Each Agreement shall state the exercise price
per share of the shares of Common Stock to which it relates. The exercise price
per share of Common Stock subject to an option shall not be less than 100% of
the fair market value ("Fair Market Value") per share of such Common Stock at
the close of business on the day of the grant of the option. For purposes of
this Plan, Fair Market Value on any date shall be the mean of the high and low
sales prices per share of Common Stock on the relevant date as reported on the
stock exchange or market on which the Common Stock is primarily traded, or if no
sale is made on such date, then the Fair Market Value is the weighted average of
the mean of the high and low sales prices per share of Common Stock on the next
preceding day and the next succeeding day on which such sales were made, as
reported on the stock exchange or market on which the Common Stock is primarily
traded.
6.4 Exercisability. Subject to Section 6.7, an option shall incrementally
vest and become exercisable in twelve equal portions (subject to necessary
rounding) for each quarter of each year of the three year period beginning the
day on which such option was granted, if the optionee has continued to serve as
a Director until that day.
6.5 Time and Manner of Option Exercise. Any vested and exercisable option
is exercisable in whole or in part at any time or from time to time during the
term of the option period by giving written
<PAGE>
notice, signed by the person exercising the option, to the Company stating
the number of Shares with respect to which the option is being exercised,
accompanied by payment in full of the option exercise price for the number of
Shares to be purchased and by the payment or making provision satisfactory to
the Company for the payment of any taxes which the Company is obligated to
collect with respect to the issue or transfer of the Shares upon such
exercise. The date both such notice and payment are received by the office
of the Secretary of the Company shall be the date of exercise for the stock
option as to such number of Shares. No option may at any time be exercised
with respect to a fractional Share.
6.6 Payment of Exercise Price. Payment of the option exercise price may
be in cash or payment may be in whole or part by
a. transfer to the Company of shares of Common Stock having a
Fair Market Value equal to the option exercise price at the time of such
exercise, or
b. delivery of instructions to the Company to withhold Shares,
that would otherwise be issued on such exercise of the option, having a Fair
Market Value at the time of such exercise equal to the total option exercise
price of the options being exercised.
If the Fair Market Value of the number of whole shares transferred or the
number of whole option Shares surrendered is less than the total exercise price
of the option being exercised, the shortfall must be made up in cash.
6.7 Terms of Options. Each option shall expire ten years from its date of
grant, but shall be subject to earlier termination as follows:
a. In the event of the termination of an optionee's services as
a Director by reason of voluntary mid-term retirement, declining to stand for
re-election, becoming a full time employee of the Company or a subsidiary of the
Company or becoming disabled, all options granted pursuant to this Plan but
unexercisable pursuant to Section 6.4 shall automatically expire and shall not
be exercisable and all options exercisable pursuant to Section 6.4 but
unexercised shall continue to be exercisable until the stated expiration date of
such options.
b. In the event of the death of an optionee or total disability
while the optionee is a Director, the then outstanding options of such optionee
that have vested pursuant to Section 6.4 shall be exercisable for one year from
the date of the death of the optionee or until the stated grant expiration date,
whichever is earlier, by his/her successors in interest, in accordance with the
paragraph below. However, all options which have been granted, but have not
become exercisable pursuant to Section 6.4, shall automatically expire.
c. In the event of the termination of an optionee's service as a
Director by the Board of Directors for cause or the failure
<PAGE>
of such Director to be re-elected (other than for the reasons set forth in
Section 6.7 (a) or (b)), the Committee in its sole discretion can cancel the
then-outstanding options of such optionee, including those options which are
exercisable and such options shall automatically expire and become
non-exercisable on the effective date of such termination.
Exercise of a deceased optionee's options that are still exercisable shall
be by the estate of such optionee or by a person or persons whom the optionee
has designated in writing filed with the Company, or, if no such designation has
been made, by the person or persons to whom the optionee's rights have passed by
will or the laws of descent and distribution.
6.8 Transferability. The right of any optionee to exercise an option
granted under the Plan shall, during the lifetime of such optionee, be
exercisable only by the optionee and shall not be assignable or transferable by
such optionee other than by will or the laws of descent and distribution.
6.9 Limitation of Rights.
6.9.1 Limitation as to Shares. Neither the recipient of an option
under the Plan nor an optionee's successor or successors in interest shall have
any rights as a stockholder of the Company with respect to any Shares subject to
an option granted to such person until the date of issuance of a stock
certificate for such Shares.
6.9.2 Limitation as to Directorship. Neither the Plan, nor the
granting of an option, nor any other action taken pursuant to the Plan shall
constitute or be evidence of any agreement or understanding, express or implied,
that an Eligible Director has a right to continue as a Director for any period
of time or at any particular rate of compensation.
6.10 Regulatory Approval and Compliance. The Company shall not be
required to issue any certificate or certificates for Shares upon the exercise
of an option granted under the Plan or to record as a holder of record of Shares
the name of the individual exercising an option under the Plan, without
obtaining to the complete satisfaction of the Committee the approval of all
regulatory bodies deemed necessary by the Committee and without complying, to
the Committee's complete satisfaction, with all rules and regulations under
federal, state, or local law deemed applicable by the Committee.
7. Capital Adjustments. The aggregate number and class of Shares subject
to and authorized by the Plan, the number of class of Shares with respect to
which an option may be granted to an Eligible Director under the Plan as
provided in Article 6, the number and class of Shares subject to each
outstanding option, and the exercise price per share specified in each such
option shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a split-up or
consolidation of shares or any like capital
<PAGE>
adjustment or the payment of any stock dividend, or other increase or
decrease in the number of such Shares effected without receipt of
consideration by the Company.
8. Effectiveness of the Plan. The Plan shall be effective as of December
19, 1996 (the "Effective Date"), subject to the approval by the Company's
stockholders. All options issued prior to the date of the approval of the Plan
by the Company's stockholders shall be issued subject to such approval. The
Plan shall continue in effect until it is terminated by action of the Board or
the Company's stockholders, but such termination shall not affect the terms of
any then outstanding options.
9. Termination and Amendment of the Plan. The Board may amend, terminate
or suspend the Plan at any time, in its sole and absolute discretion; provided,
however, that if required to qualify the Plan under Rule 16b-3 promulgated under
Section 16, of the Securities Exchange Act of 1934, as amended ("Rule 16b-3"),
no amendment shall be made more than once every six months that would change the
amount, price or timing of the Initial and Annual Grants, other than to comport
with changes in the Internal Revenue Code of 1986, as amended, or the rules and
regulations promulgated thereunder; and provided, further, that if required to
qualify the Plan under the Rule 16b-3, no amendment that would
a. materially increase the number of Shares that may be issued
under the Plan,
b. materially modify the requirements as to eligibility for
participation in the Plan, or
c. otherwise materially increase the benefits accruing to
participants under the Plan shall be made without the approval of the Company's
stockholders.
10. Compliance with Rule 16b-3. Other provisions of the Plan
notwithstanding, neither the Committee nor any other person (other than an
Eligible Director acting in conformity with the terms of the Plan) shall have
any discretionary authority to make determinations regarding the Plan required
by Rule 16b-3 to be afforded exclusively to "disinterested persons" as defined
thereunder.
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
This Agreement, dated December 16, 1996 by and between XYTRONYX, INC. (the
"Corporation"), a Delaware corporation and H. LAURENCE SHAW, an individual
residing at 86 Druid Hill Road, Summit, NJ 07901 (the "Executive")
WITNESSETH:
WHEREAS, the Corporation desires to employ the Executive as Chief Executive
Officer and President of the Corporation and the Executive desires to be
employed by the Corporation, all pursuant to the terms and conditions
hereinafter set forth;
NOW THEREFORE, in consideration of the foregoing and the mutual promises
and covenants herein contained, it is agreed as follows:
1. EMPLOYMENT DUTIES
(a) From the date hereof until the Effective Date (as defined below), the
Corporation engages and employs the Executive as an employee of the Corporation
to analyze and review the Company's current products under development and to
review potential product acquisition candidates;
(b) Upon the Effective Date, the Corporation engages and employs the
Executive, and the Executive hereby accepts engagement and employment, as the
Chief Executive Officer and President and Director of the Corporation, to
direct, supervise and have responsibilities for the daily operations of the
Corporation, including, but not limited to: (i) directing and supervising the
business and research and development efforts of the Corporation; (ii) managing
the other executives and personnel of the Corporation; (iii) evaluating,
negotiating, structuring and implementing business transactions with the
Corporation's customers, partners and suppliers, and to perform such other
services and duties as the Board of Directors of the Corporation shall
determine. The Executive acknowledges and agrees that the performance by the
Executive of his duties hereunder may require significant domestic and
international travel by the Executive, including, without limitation, to San
Diego, CA.
(b) If it is agreed by both parties that a permanent relocation is
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required at some time in the future, the Corporation will reimburse Executive
for reasonable costs incurred in connection with such relocation, including,
without limitation, (i) the purchase of the Executive's Summit, New Jersey home,
at a MAI appraised value in the event that the Executive has not sold the same
within four (4) months of its listing after a mutual agreement to relocate by
the Board of Directors of the Corporation, (ii) in the event that the Summit,
New Jersey, home of the Executive is sold for less than the MAI appraisal, the
relocation cost would include the difference in that sale price versus the
purchase proceeds, net of commissions and closing costs and (iii) the financing
costs incidental to the acquisition of the replacement home. Recognizing that
certain relocation items are taxable without offsetting deductions, such items
will be grossed up to fifty percent (50%).
(c) The Executive shall devote substantially all of his gainful time to
the discharge of his duties and responsibilities under this Agreement.
2. TERM
The Executive's employment hereunder shall be for a term of two (2) years
commencing on the Effective Date (as defined below) and continuing through the
second anniversary of the Effective Date (the "Initial Term"), with successive
two year renewals thereafter (the "Renewal Terms") unless sooner terminated as
hereinafter provided, or by notice of either party not less than one hundred and
twenty (120) days prior to the expiration of each term. The Executive's
appointment as Chief Executive Officer and President and Director of the Company
is conditioned upon and will become effective on January 1, 1997, if prior to
December 31, 1996, the Corporation consummates the closing or closings of an
offering of equity securities of the Corporation in the amount of at least
$3,000,000 in gross proceeds (the "Effective Date").
3. COMPENSATION
(a) As compensation for the performance of his duties on behalf of the
Corporation, the Executive shall be compensated as follows:
(i) Upon the next meeting of the Corporation's Board of Directors,
the Corporation will grant (the "Initial Grant") the Executive options to
purchase 675,000 shares of the common stock of the Corporation at an exercise
price equal to the fair market value of the Common Stock on the date of such
grant, which options shall be exercisable for a period of 10 years from the date
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of issuance. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (I) the total number and/or class of securities subject to such
options and (ii) the Exercise Price in order to reflect such change and thereby
preclude a dilution or enlargement under such options.
(ii) Of the Initial Grant, 525,000 stock options shall vest
quarterly over a period of two years while this Agreement is still in effect and
150,000 stock options shall vest quarterly over a two year period commencing on
the first anniversary of the Effective Date but immediate vesting shall occur
with respect to all 675,000 options upon a change of control of the Corporation
as described in paragraph 6(iii)C below.
(iii) The Executive shall be entitled to an annual grant of
subsequent stock options each of which shall have the same antidilution
protection as described in Section 3 paragraph (a)(i) above.
(iv) The Corporation shall pay the Executive an annual base salary
("Base Salary") of $250,000 payable in accordance with the usual payroll period
of the Corporation. Beginning on the first day of the second year of the
Employment Term, and on the first day of each year of the Employment Term
thereafter, the Base Salary shall be increased by an amount at least equal to
the higher of five per cent (5%) of the current Base Salary or the product
obtained by multiplying the annual base salary for such Employment Year by the
percentage by which the Consumer Price Index for Urban Wage Earners and Clerical
Workers, of the United States Department of Labor, Bureau of Labor Statistics
(in the area where the Corporation's principal office is located) (hereafter
referred to as the "Consumer Price Index" or "CPI"), for such Employment Year
exceeds the Consumer Price Index for the prior year. The CPI adjustment amount
shall never be a negative amount and shall never reduce the amount of Base
Salary or any other amounts payable hereunder. Following the close of each
Employment Year where CPI adjustment amount was used to increase Base Salary,
the Corporation shall furnish the Executive a statement showing (x) the Consumer
Price Index for the Base Year; (y) the Consumer Price Index for such Employment
Year; and (z) the amount of CPI Adjustment amount to be added to the Executive's
compensation for such Employment Year. Such increases shall be cumulative.
(v) The Corporation shall pay the Executive a signing bonus of
$25,000, which shall be payable within 2 weeks of the Effective Date. In
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addition, the Corporation shall pay the Executive bonuses, the amount of which
shall be in the sole discretion of the Board of Directors but based upon an
annual Base Bonus of 50% of Base Salary. This bonus will be paid upon
achievement of mutually agreed upon performance goals agreed upon within 60 days
of the Effective Date by the Board of Directors and the Executive. In no year,
shall this bonus be less than $25,000 (the "Base Bonus") and following the close
of each Employment Year where CPI was used to increase Base Salary, the Base
Bonus shall be increased at least by a similar product obtained by multiplying
the annual Base Bonus for such Employment Year by the percentage by which the
Consumer Price Index, for such Employment Year exceeds the Consumer Price Index
for the prior year. The CPI adjustment amount shall never be a negative amount
and shall never reduce the amount of Base Bonus or any other amounts payable
hereunder.
(vi) The Corporation shall withhold all applicable federal, state
and local taxes, social security and workers' compensation contributions and
such other amounts as may be required by law or agreed upon by the parties with
respect to the compensation payable to the Executive pursuant to Section 3(a)
hereof.
(b) The Corporation shall reimburse the Executive for all normal, usual
and necessary expenses incurred by the Executive in furtherance of the business
and affairs of the Corporation, including travel and entertainment, against
receipt by the Corporation of appropriate vouchers or other proof of the
Executive's expenditures and otherwise in accordance with such Expense
Reimbursement Policy as may from time to time be adopted by the Board of
Directors of the Corporation.
(c) The Executive shall be, during the term of this Agreement, entitled to
four (4) weeks of paid vacation per year as well as all statutory holidays.
(d) (i) The Corporation shall make available to the Executive and his
dependents, such medical, disability, and such other health benefits as the
Corporation may from time to time make available to its executives of
substantially the same authority and compensation as the Executive. This shall
include a complete physical examination of the Executive by a physician of his
choice. The Executive shall be entitled to term life insurance equal to 300% of
his Base Salary. During any time interval between the date of this Agreement
and the time the Executive and his dependents are eligible for health insurance
coverage provided by the Corporation, the Corporation agrees to reimburse the
Executive for costs incurred by him in purchasing continuing "COBRA" coverage
for himself and his dependents under any existing group health insurance plan.
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(ii) The Corporation will provide the Executive's with disability
policies that provide for payment of 70% of the Executive's Base salary during
the time that the Executive is totally disabled. For the purpose of this
Agreement, the term "Total Disability" shall mean the inability of the Executive
to perform at least seventy percent (70%) of is duties hereunder for physical
reasons for a period of 90 consecutive days or for 120 days during any
twelve-month period. The Executive shall continue to receive his total
compensation from the Corporation until such date as the disability insurer
commences disability insurance payments. The Corporation may immediately
terminate the Executive upon a medical finding of the Executive's total and
permanent inability to perform the duties required as a result of a total
disability, provided, that all granted stock options shall thereupon fully vest.
In the event such medical finding determines that the Executive is not totally
and permanently unable to perform the services required herein, then, the
Corporation may not terminate the Executive before the expiration of one hundred
eighty (180) consecutive days of the Executive's disability unless the Executive
is otherwise terminated for cause. If, following a period of total disability,
the Executive shall be able to engage in and discharge the duties required
herein and does so engage in such practice in accordance with the provisions of
the Employment Agreement for a continuous period of six (6) months or more, any
subsequent total disability shall be regarded as a new period of total
disability and his rights under this section shall commence again. If, because
of temporary or partial disability, the Executive fails to devote to his
employment at least seventy percent (70%) of the time required by a full
schedule, his compensation for the period of such disability shall not be
reduced until such date as partial disability payments are receivable by the
disability insurer. The Corporation shall be in no way responsible for any
disability payments to the Executive which are not covered by the Corporation
disability policy as a result of a preexisting condition of the Executive or as
a result of a claim by an insurance provider that the Executive is only
partially disabled.
(E) The Corporation hereby agrees that it shall adopt as part of the
Corporation's Bylaws a broad form indemnity of all actions taken in good faith
by the officers and directors of the Corporation.
(F) Subject to Section 10(c) below, the Executive must be an employee of
the Corporation at the time any compensation is due in order to receive such
compensation. In addition, no options shall vest after the termination of this
Agreement.
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4. REPRESENTATIONS AND WARRANTIES
BY THE EXECUTIVE AND THE CORPORATION
The Executive hereby represents and warrants to the Corporation as follows:
(a) Neither the execution and delivery of this Agreement nor the
performance by the Executive of his duties and other obligations hereunder
violate any statute, law, determination or award, or conflict with or constitute
a default under (whether immediately, upon the giving of notice or lapse of time
or both) any prior employment agreement, contract, or other instrument to which
the Executive is a party or by which he is bound.
(b) The Executive has the full right, power and legal capacity to enter
and deliver this Agreement and to perform his duties and other obligations
hereunder. This Agreement constitutes the legal, valid and binding obligation
of the Executive enforceable against him in accordance with its terms. No
approvals or consents of any persons or entities are required for the Executive
to execute and deliver this Agreement or perform his duties and other
obligations hereunder.
The Corporation hereby represents and warrants to the Executive as follows:
(a) The Corporation is duly organized, validly existing and in good
standing under the laws of the State of Delaware, with all requisite corporate
power and authority to own its properties and conduct its business in the manner
presently described.
(b) The Corporation has the full power and authority to enter into this
Agreement and to incur and perform its obligations hereunder.
(c) The execution, delivery and performance by the Corporation of this
Agreement does not conflict with or result in a breach or violation of or
constitute a default under (whether immediately, or upon the giving of notice or
lapse of time or both) the certificate of incorporation or by-laws of the
Corporation, or any agreement or instrument to which the Corporation is a party
or by which the Corporation or any of its properties may be bound or affected.
(d) The Corporation shall be duly licensed to do business in California or
in any State of the United States in which it may relocate its Principal place
of business.
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5. CONFIDENTIAL INFORMATION
(a) The Executive agrees that during the course of his employment and for
a period of two (2) years after termination, he will not disclose or make
accessible to any other person, the Corporation's products, services and
technology, both current and under development, promotion and marketing
programs, lists, trade secrets and other confidential and proprietary business
information of the Corporation or any of its clients. The Executive agrees: (I)
not to use any such information for himself or others; and (ii) not to take any
such material or reproductions thereof from the Corporation's facilities at any
time during his employment by the Corporation , except as required in the
Executive's duties to the Corporation. The Executive agrees immediately to
return all such material and reproductions to the best of his knowledge in his
possession to the Corporation upon request and in any event upon termination of
employment. Nothing in the foregoing shall be construed to prevent the
Executive from disclosing or using any information which the Executive can show
by written documentation was in the public domain or enters into the public
domain through no improper act on the Executive's part or on the part of any of
the Corporation's employees or was in his possession prior to his joining the
Corporation or disclosed properly to the Executive after leaving the
Corporation.
(b) Except with prior written authorization by the Corporation, the
Executive agrees not to disclose or publish any of the confidential, technical
or business information or material of the Corporation, its clients or any other
party to whom the Corporation owes an obligation of confidence, at any time
during or for a period of two (2) years after his employment with the
Corporation.
6. NON-COMPETITION
(a) The Executive understands and recognizes that his services to the
Corporation are special and unique and agrees that, during the term of this
Agreement, and for a period of twelve months from the date of termination of his
employment hereunder if terminated by the Company for cause or the CEO without
cause, he shall not in any manner, directly or indirectly, on behalf of himself
or any person, firm, partnership, joint venture, corporation or other business
entity ("Person"), enter into or engage in any business directly competitive
with the Corporation's business, either as an individual for his own account, or
as a partner, joint venturer, Executive, agent, consultant, salesperson,
officer, director or shareholder of a Person operating or intending to
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operate within the area that the Corporation is, at the date of termination,
conducting its business (the "Restricted Businesses"); provided, however,
that nothing herein will preclude the Executive from holding one percent (1%)
or less of the stock of any publicly traded Corporation or from holding a
position with a Person who does not engage in a business directly competitive
with the Restrictive Businesses so long as the Executive works in a division
of such Person which carries on a bona fide business which is not directly
competitive with the Restricted Businesses.
(b) For a period of twelve months after the termination of this Agreement,
the Executive shall not interfere with or disrupt or attempt to disrupt the
Corporation's business relationship with any of its customers, or solicit any of
the employees of the Corporation.
(c) In the event that the Executive breaches any provisions of this
Section 6 or there is a threatened breach, then, in addition to any other rights
which the Corporation may have, the Corporation shall be entitled, without the
posting of a bond or other security, to injunctive relief to enforce the
restrictions contained herein. In the event that an actual proceeding is
brought in equity to enforce the provisions of this Section 6, the Executive
shall not argue as a defense that there is an adequate remedy at law nor shall
the Corporation be prevented from seeking any other remedies which may be
available.
7. OWNERSHIP OF PROPRIETARY INFORMATION
(a) The Executive agrees that all information that has been created,
discovered or developed by the Corporation, its subsidiaries, affiliates,
successors or assigns (collectively, the "Affiliates") (including, without
limitation, information relating to the development of the Corporation's
business created, discovered, developed or made known to the Corporation or the
Affiliates by Executive during the Term and information relating to the
Corporation's customers, suppliers, consultants, and licensees) and/or in which
property rights have been assigned or otherwise conveyed to the Corporation or
the Affiliates, shall be the sole property of the Corporation or the Affiliates,
as applicable, and the Corporation or the Affiliates, as the case may be, shall
be the sole owner of all patents, copyrights and other rights in connection
therewith, including but not limited to the right to make application for
statutory protection. All of the aforementioned information is hereinafter
called "Proprietary Information." By way of illustration, but not limitation,
Proprietary Information includes trade secrets, processes, discoveries,
structures, inventions, designs, ideas, works of authorship, copyrightable
works, trademarks, copyrights, formulas, data, know-
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how, show-how, improvements, inventions, product concepts, techniques,
information or statistics contained in, or relating to, marketing plans,
strategies, forecasts, blueprints, sketches, records, notes, devices,
drawings, customer lists, patent applications, continuation applications,
continuation-in-part applications, file wrapper continuation applications and
divisional applications and information about the Corporation's or the
Affiliates' employees and/or consultants (including, without limitation, the
compensation, job responsibility and job performance of such employees and/or
consultants).
(b) The Executive further agrees that at all times, both during the
Term and after the termination of this Agreement, he will keep in confidence and
trust all Proprietary Information, and he will not use or disclose any
Proprietary Information or anything directly relating to it without the written
consent of the Corporation or the Affiliates, as appropriate, except as may be
necessary in the ordinary course of performing his duties hereunder and except
for academic, non-commercial research purposes with the prior written approval
of the Board of Directors. Executive acknowledges that the Proprietary
Information constitutes a unique and valuable asset of the Corporation and each
Affiliate acquired at great time and expense, which is secret and confidential
and which will be communicated to Executive, if at all, in confidence in the
course of his performance of his duties hereunder, and that any disclosure or
other use of the Proprietary Information other than for the sole benefit of the
Corporation or the Affiliates would be wrongful and could cause irreparable harm
to the Corporation or the Affiliates, as the case may be.
Notwithstanding the foregoing, the parties agree that, at all such
times, Executive is free to use (i) information in the public domain not as a
result of a breach of this Agreement, (ii) information lawfully received from a
third party and (iii) Executive's own skill, knowledge, know-how and experience
to whatever extent and in whatever way he wishes, in each case consistent with
his obligations as Executive and that, at all times, Executive is free to
conduct any non-commercial research not relating to the Corporation's business.
8. DISCLOSURE AND OWNERSHIP OF INVENTIONS
(a) During the Term, Executive agrees that he will promptly
disclose to the Corporation, or any persons designated by the Corporation, all
improvements, inventions, designs, ideas, works of authorship, copyrightable
works, discoveries, trademarks, copyrights, trade secrets, formulas, processes,
structures, product concepts, marketing plans, strategies, customer lists,
information about the Corporation's or the Affiliates' employees and/or
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consultants (including, without limitation, job performance of such employees
and/or consultants), techniques, blueprints, sketches, records, notes, devices,
drawings, know-how, data, whether or not patentable, patent applications,
continuation applications, continuation-in-part applications, file wrapper
continuation applications and divisional applications, made or conceived or
reduced to practice or learned by him, either alone or jointly with others,
during the Term (all said improvements, inventions, designs, ideas, works of
authorship, copyrightable works, discoveries, trademarks, copyrights, trade
secrets, formulas, processes, structures, product concepts, marketing plans,
strategies, customer lists, information about the Corporation's or the
Affiliates' employees and/or consultants, techniques, blueprints, sketches,
records, notes, devices, drawings, know-how, data, patent applications,
continuation applications, continuation-in-part applications, file wrapper
continuation applications and divisional applications shall be collectively
hereinafter called "Inventions").
(b) The Executive agrees that all Inventions made while performing
his duties as Executive or useful in the business of the Corporation shall be
the sole property of the Corporation to the maximum extent permitted by
applicable law and to the extent permitted by law shall be "works made for hire"
as that term is defined in the United States Copyright Act (17 USCA, Section
101). The Corporation shall be the sole owner of all patents, copyrights, trade
secret rights, and other intellectual property or other rights in connection
therewith. Executive hereby assigns to the Corporation all right, title and
interest he may have or acquire in all Inventions. Executive further agrees to
assist the Corporation in every proper way (but at the Corporation's expense) to
obtain and from time to time enforce patents, copyrights or other rights on said
Inventions in any and all countries, and to that end the Executive will execute
all documents necessary:
(i) to apply for, obtain and vest in the name of the
Corporation alone (unless the Corporation otherwise directs) letters patent,
copyrights or other analogous protection in any country throughout the world and
when so obtained or vested to renew and restore the same; and
(ii) to defend any opposition proceedings in respect of such
applications and any opposition proceedings or petitions or applications for
revocation of such letters patent, copyright or other analogous protection.
(c) The Executive's obligation to assist the Corporation in
obtaining and enforcing patents and copyrights for the Inventions in any and all
countries shall continue beyond the Term, but the Corporation agrees to
compensate the Executive at his normal and usual rate after the expiration of
10
<PAGE>
the Term for time actually spent by the Executive at the Corporation's request
on such assistance.
9. NON-SOLICITATION
During the Term, and for twelve (12) months thereafter, Executive shall
not, directly or indirectly, without the prior written consent of the
Corporation:
(a) solicit or induce any employee of the Corporation or any
Affiliate to leave the employ of the Corporation or any Affiliate or hire for
any purpose any employee of the Corporation or any Affiliate or any employee who
has left the employment of the Corporation or any Affiliate within six months of
the termination of said employee's employment with the Corporation; or
(b) solicit or accept the business of any customer or supplier of
the Corporation or any Affiliate with respect to products similar to those
supplied by the Corporation.
10. TERMINATION
(a) This Executive's employment hereunder shall begin on the Effective
Date and shall continue for the period set forth in Section 2 hereof unless
sooner terminated upon the first to occur of the following events:
(i) (A) The death of the Executive; or
(B) the total disability of the Executive
(ii) Termination by the Board of Directors of the
Corporation for just cause. Any of the following actions by the Executive shall
constitute just cause:
(A) Material breach by the Executive of Sections 5, 6,
7, 8, or 9 of this Agreement; or
(B) Material breach by the Executive of any provision
of this Agreement other than Sections 5, 6, 7, 8
or 9 which is not cured by the Executive within
thirty (30) days of notice from the Corporation;
or in the event the breach is not curable within
thirty (30)
11
<PAGE>
days; the commencement of action(s) to
cure within said thirty (30) days the diligent
pursuit of the cure thereafter, provided such
breach may be completely cured; or
(C) Any action by the Executive constituting gross
negligence or willful misconduct in respect of the
Executive's obligation to the Corporation which
has or is likely to result in material, economic
damage to the Corporation.
(iii) Termination by the Executive for just cause. Any of
the following actions or omissions by the Corporation shall constitute just
cause.
(A) Material breach by the Corporation of any
provision of this Agreement which is not cured by
the Corporation within thirty (30) days of notice
thereof from the Executive; or
(B) A failure to elect or reelect the Executive to the
office of Chief Executive Officer, President and
Director of the Corporation or other change by the
Corporation of the Executive's function, duties or
responsibilities such that the Executive is no
longer the highest ranking Officer of the
Corporation; or
(C) Reduction in the Executive's base salary or
incentives or other fringe benefits of a material
economic effect; or
(D) Upon written notice to the Corporation within 30
days of the Final Closing Date (as defined below),
if the gross proceeds at the final closing date
(the "Final Closing Date") of the current private
placement of Premium Preferred Stock and Warrants
being conducted by Paramount Capital, Inc. is less
than $7,500,000; or
(E) Termination of the CEO's employment other than for
the reasons set forth in Section 10(a)(i) or
10(a)(ii); or
12
<PAGE>
(F) A "change in control," which shall mean a merger
or consolidation in which either more than fifty
percent of the voting power of the Corporation is
transferred or the Corporation is not the
surviving entity, or sale or other disposition of
all or substantially all the assets of the
Corporation; or
(G) Relocation to a geographic area without the
Executive's prior consent.
(b) Upon termination pursuant to subparagraphs (i) or (ii) of paragraph
(a) above, the Executive (or his estate in the event of termination pursuant to
subparagraph (i)), shall be entitled to receive the Base Salary accrued but
unpaid and the pro rata portion of the Base Bonus accrued but unpaid as of the
date of termination paid in a lump sum within thirty (30) days of the event
causing the termination.
(c) Upon termination by the Corporation for any reason other than the
reasons set forth in subparagraph (i) or (ii) of paragraph (a) above, or upon
termination by the Executive for any reason set forth in subparagraph (iii) of
paragraph (a) above, then the Corporation shall pay the Executive, as the
Executive's sole damages for such termination, the Executive's Base Salary at
the rate in effect at the date of termination and the Base Bonus at the rate in
effect at the date of termination until twelve (12) months from the date of
termination, subject to annual increases for both the Base Salary and Base
Bonus, as described in Section 3 paragraph (a) subparagraph (iv) and
subparagraph (v). These payments will not be subject to either full or partial
reduction in consideration of compensation received from other part time or full
time employment engaged in by the Executive during any time following the
termination. In addition, the stock options granted to the Executive pursuant
to Section 3(a)(i) above, shall continue to vest according to the provisions of
Section 3(a)(i) during such the six months following termination pursuant to
this Section 10(c). In addition to any other remedies at law or equity, the
Corporation shall have the absolute right to cease making the payments set forth
in this Section 10 (c) upon a material breach of any of the provisions of
Sections 5, 6, 7, 8 or 9, which provisions shall survive the termination of this
Agreement in accordance with their terms.
13
<PAGE>
11. NOTICES
Any notice or other communication under this Agreement shall be in writing
and shall be deemed to have been given: when delivered personally against
receipt thereof; one (1) business day after being sent by Federal Express or
similar overnight delivery; or three (3) business days after being mailed
registered or certified mail, postage prepaid, return receipt requested, to
either party at the address set forth above, or to such other address as such
party shall give by notice hereunder to the other party.
12. SEVERABILITY OF PROVISIONS
If any provision of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or incapable of being enforced in
whole or in part, the remaining conditions and provisions or portions thereof
shall nevertheless remain in full force and effect and enforceable to the extent
they are valid, legal and enforceable, and no provision shall be deemed
dependent upon any other covenant or provision unless so expressed herein.
13. LEGAL FEES
The Corporation agrees to pay the legal fees incurred by the Executive
incident to the negotiation of the Employment Agreement in an amount not to
exceed the sum of $4,000.
14. ENTIRE AGREEMENT; MODIFICATION
This Agreement and that certain letter agreement by and between the parties
hereto dated December 16, 1996, contains the entire agreement of the parties
relating to the subject matter hereof, and the parties hereto have made no
agreements, representations or warranties relating to the subject matter of this
Agreement which are not set forth herein. No modification of this Agreement
shall be valid unless made in writing and signed by the parties hereto.
15. BINDING EFFECT
The rights, benefits, duties and obligations under this Agreement shall
inure to, and be binding upon, the Corporation, its successors and assigns, and
upon the Executive and his legal representatives. This Agreement constitutes a
14
<PAGE>
personal service agreement, and the performance of the Executive's obligations
hereunder may not be transferred or assigned by the Executive.
16. NON-WAIVER
The failure of either party to insist upon the strict performance of any of
the terms, conditions and provisions of this Agreement shall not be construed as
a waiver or relinquishment of future compliance therewith, and said terms,
conditions and provisions shall remain in full force and effect. No waiver of
any term or condition of this Agreement on the part of either party shall be
effective for any purpose whatsoever unless such waiver is in writing and signed
by such party.
17. GOVERNING LAW
This Agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of New Jersey without regard to
principles of conflicts of law. Any litigation commenced pursuant to the terms
of the Agreement shall only be prosecuted and defended in Union County, New
Jersey. Additionally, the prevailing party in any litigation shall be entitled
to an additional award of the recoupment of its attorney fees, cost and
expenses.
18. HEADINGS
The headings of paragraphs are inserted for convenience and shall not
affect any interpretation of this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EXECUTIVE:
--------------------------
H. Laurence Shaw, M.D.
XYTRONYX, INC.
------------------------
By:
Its:
16
<PAGE>
XYTRONYX, INC.
6555 NANCY RIDGE DRIVE
SAN DIEGO, CA 92121
December 16, 1996
VIA FACSIMILE
(908) 598-9606
Dr. H. Laurence Shaw
Dear Dr. Shaw:
In connection with your Employment Agreement with Xytronyx, Inc., dated
the date hereof, the Corporation hereby agrees to indemnify you for up to
$65,500 of your costs (including settlement, judgements and legal fees)
incurred in connection with the lawsuit filed against you and C.R. Bard by
Hamscor, Inc. (an executive search firm which is claiming an $80,000 fee in
connection with your employment by C.R. Bard). At the Corporation's option,
the Corporation may control your defense and settle such claim with your
prior consent, which consent shall not be unreasonably denied. This
indemnity shall not apply to any settlement by you without the prior consent
of the Corporation. This indemnity shall only cover such costs that are not
subject to any other indemnities, insurance or other arrangements for the
repayment or reimbursement of such costs. The Executive shall use his
reasonable best efforts to have C.R. Bard or such other third party be
responsible for his costs in connection with the aformentioned lawsuit.
Sincerely,
----------------------------
Michael S. Weiss
Director and Asst. Secretary
AGREED AND ACCEPTED:
- --------------------
Dr. H. Laurence Shaw
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The December 31, 1996 Interim Financial Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,932,616
<SECURITIES> 0
<RECEIVABLES> 2,615
<ALLOWANCES> 0
<INVENTORY> 72,195
<CURRENT-ASSETS> 3,282,312
<PP&E> 803,223
<DEPRECIATION> (700,641)
<TOTAL-ASSETS> 3,550,698
<CURRENT-LIABILITIES> 1,657,508
<BONDS> 14,267
0
418,125
<COMMON> 162,396
<OTHER-SE> 1,298,152
<TOTAL-LIABILITY-AND-EQUITY> 3,550,698
<SALES> 20,991
<TOTAL-REVENUES> 86,122
<CGS> 50,810
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,772,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,393
<INCOME-PRETAX> (2,700,651)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,700,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,700,651)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
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