UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2744744
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Hartwell Avenue
Lexington, Massachusetts 02173-3134
(Address of principal executive offices)
(617) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Class A Warrants
(Title of Class)
Class AA Warrants
(Title of Class)
Class X Warrants
(Title of Class)
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 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates, based upon the closing price for such stock on February 28, 1997
was approximately $110,375,000. As of February 28, 1997, 15,767,875 shares of
common stock, $.01 par value, were outstanding.
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Documents Incorporated By Reference
Portions of the registrant's definitive Proxy Statement (the "Proxy
Statement") for its 1997 Annual Meeting of Stockholders presently intended to be
filed with the Securities and Exchange Commission by April 30, 1997 are
incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED
TO IN "RISK FACTORS".
MacroChem's primary business is the development and commercialization of
transdermal drug delivery compounds and systems designed to promote the delivery
of drugs from the surface of the skin into the skin or into the bloodstream.
SEPA(R) compounds, the Company's proprietary transdermal penetration enhancers,
when properly combined with particular drugs, create pharmaceutical formulations
(creams, gels, solutions, etc.) that enhance the transdermal delivery of drugs
into the skin or into the bloodstream. SEPA formulations combined with the
Company's polymers and adhesives can also be used with patch formats to achieve
the transdermal delivery of selected drugs. The Company believes that SEPA
compounds enhance the diffusion of drugs into and through the skin by making the
outer layer of the skin (stratum corneum) more permeable to the drug molecule.
Transdermal delivery provides an alternative to other methods of drug
administration (injection, oral dosage forms, inhalation), and may allow
selected drugs to be administered more effectively, at lower doses, with fewer
adverse events and improved patient compliance.
The Company is developing specific SEPA formulations for use with
non-proprietary and proprietary drugs manufactured by pharmaceutical companies,
and plans to commercialize these products through the formation of partnerships,
strategic alliances and license agreements with those companies. In order to
attract strategic partners, the Company is conducting clinical testing of
certain SEPA-enhanced pharmaceuticals. The Company believes that if the clinical
trials are successful the results will aid the Company in attracting partners to
assist in the promotion of the product. Because of the substantial costs
involved in bringing a new pharmaceutical product or a new formulation of an old
drug to the market, the Company may be required to rely on pharmaceutical
companies to conduct all or part of the clinical trials necessary to gain
regulatory approval to manufacture and to market any resulting product.
The Company has also developed a series of new low molecular weight
polymers, termed MacroDerm,TM for cosmetic use and the topical delivery of
pharmaceuticals.
The Company does not maintain general product liability insurance, since
the Company does not market drug products. The Company recently commenced
clinical studies and obtained specific liability insurance relating to such
studies. As of December 31, 1996, no asserted liability claims exist against the
Company. However, in the future, incidents could give rise to claims which could
exceed the Company's insurance coverage and resources.
BUSINESS AGREEMENTS
On January 22, 1997 the Company signed a license and supply agreement with
Cytopharm, Inc., a California corporation. Cytopharm invented and is the owner
of certain patent rights covering a photo-activated compound for the treatment
of certain dermatological diseases. The Company will make available its enhancer
for use by Cytopharm and its licensee in the agreed to photo-activated
formulation. Cytopharm agrees to pay or cause its licensee to pay royalties to
the Company on all license fees, milestone payments, advance royalty payments
and other lump-sum payments with respect to license and sale of such formulation
for a period equal to the longer of the life of the Company's patent or ten
years from the commencement of commercial marketing of the formulation in each
country where the formulation is marketed.
In September 1990, the Company entered into a license agreement with Ascent
Pharmaceuticals, Inc. ("Ascent") in which Ascent received an exclusive license
to develop, test and market the Company's SEPA compounds in combination with
catecholamine bronchodilators for the treatment of respiratory disorders and, in
combination with cromolyn sodium, to treat allergic disorders. Ascent is in the
clinical stage of its development program. However, no assurances can be given
that the work conducted by Ascent will lead to the marketing of SEPA-containing
products for these indications.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development activities through its
own staff and facilities, as well as through collaborative arrangements with
universities, contract research organizations and independent consultants. As of
March 1, 1997, the Company had 19 full-time employees, 11 of whom are devoted to
research and development and regulatory affairs. In addition, two Company
officers devote approximately 75% of their time to research and development.
Research and developmental expenditures aggregated $1,736,600, $1,238,100 and
$864,100 during the years ended December 31, 1996, 1995 and 1994, respectively.
The Company is also dependent upon third parties to conduct clinical studies,
obtain FDA and other regulatory approvals and manufacture and market a finished
product.
The Company anticipates incurring significant development expenditures in
the future as the Company continues its efforts to develop its present compounds
and new drug formulations and as it begins to research other technologies and to
expand its toxicological and clinical studies of certain drugs. The Company
conducts stability studies, tests its unique formulations and designs
manufacturing processes for its SEPA compounds and adhesive and polymer
technologies at its facility and other facilities. The Company has cGMP (current
Good Manufacturing Practices) facilities for the manufacture of dosage forms for
clinical evaluations.
PRODUCTS AND TECHNOLOGIES
BACKGROUND
To be effective, drugs must reach an intended site in the body, at an
effective concentration, and for an appropriate length of time. Traditional
methods of drug administration, such as oral ingestion, intramuscular and
intravenous injections and inhalation, are effective for a wide variety of
drugs. However, depending upon the given drug, each method may have
disadvantages. For example, in oral administration, a drug must pass through the
gastrointestinal system to be absorbed and may be metabolized or broken down,
resulting in a lower amount of effective drug being therapeutically available.
As a result, higher dosages of the drug must be used to produce the desired
effect, which may cause irritation of the gastrointestinal tract and systemic
toxicity.
In addition, the rate at which orally administered drugs are absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. Although the pharmaceutical industry has investigated a variety
of alternative approaches for dealing with drug adverse events and loss of
efficacy following oral dosing, through enteric coating of tablets, formulating
with various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers, the desired effects of these approaches are not
always reproducible from patient to patient or effective in modifying metabolic
effects produced in the liver.
TRANSDERMAL DRUG DELIVERY
Transdermal drug delivery is the process of delivering drugs into the
skin so that they can be effective in the treatment of dermatological conditions
and diseases or through the skin and into the bloodstream for the treatment of
systemic diseases.
The skin is made up of three layers: the outer layer, the stratum corneum,
the middle layer or viable epidermis, and the inner layer, the dermis. The
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stratum corneum, which serves as the skin's primary barrier to the external
environment, consists of closely packed dead cells and fatty (lipid) material.
The epidermis is composed of several layers of active cells and the dermis
consists, in part, of tissue containing hair follicles, nerve endings and blood
capillaries. Within the stratum corneum, lipid layers bind the dead cells
together to form a protective barrier. Research conducted by MacroChem shows
that SEPA compounds affect drug delivery by acting, in part, upon the stratum
corneum to disrupt the alignment of the lipid molecules within the lipid layers.
This disruption increases the porosity of the lipid-cell layers, allowing drugs
to diffuse through the stratum corneum through the more porous epidermis to the
dermis, where they enter the blood stream through the capillaries. The rate and
amount of drug absorbed can be controlled by varying the formulation used.
THE COMPANY'S DRUG-DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA COMPOUNDS
The delivery of a drug through the skin depends on the drug's physical and
chemical characteristics (molecular size and shape, the drug's solubility in
lipids and water, its melting point and whether it is lipophilic or
hydrophilic).
Since some drugs move through the skin too rapidly, the transdermal system
must retard the rate of drug absorption to ensure optimal efficacy with minimum
toxicity. Other drugs move through the skin with difficulty, so the transdermal
system must be formulated to increase the drug's rate of absorption through the
skin. Common methods of transdermal delivery use common chemicals such as
ethanol or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have proven to be
somewhat effective with specific drugs, such as drugs used for the treatment of
motion sickness or hormone deficiencies, they have caused adverse events, such
as skin irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug necessary to
achieve the desired therapeutic effect, have not been successfully delivered
transdermally to date.
The Company has developed SEPA compounds that are designed to enhance the
transport, penetration and controlled delivery of drugs through the skin. SEPA
compounds are generally colorless, clear liquids that are intended to promote
drug delivery by aiding drug molecules to penetrate the skin, diffuse into or
through the skin layers and become absorbed into the bloodstream.
The Company has set up its own facility for the in vitro testing of drug
formulations containing SEPA, and is currently less dependent on outside
laboratories for this type of testing. The Company is conducting in vitro
studies to evaluate the transdermal enhancing effect of SEPA in combination with
a variety of drugs with differing physical and chemical characteristics,
representing a broad spectrum of potential drug products. Although the Company's
research and development efforts with SEPA are at an advanced stage, the Company
must still conduct substantial additional studies to demonstrate the efficacy
and safety of any SEPA-drug formulation. The Company has found that specific
drugs administered transdermally with SEPA demonstrated increased transdermal
absorption. Some of the drug formulations tested by the Company with SEPA
contain compounds generally recognized as unlikely or difficult candidates for
transdermal delivery because of their physical and chemical properties and
molecular size. As these drug formulations are further developed, the Company
plans to conduct additional studies to investigate the efficacy and safety of
some of these formulations.
Although in vivo testing has been conducted on SEPA compounds, more studies
will be needed to demonstrate the safety and efficacy of SEPA in formulations
with specific drugs. The Company is currently conducting clinical trials with a
topical SEPA formulation of alprostadil, for the treatment of erectile
dysfunction.
The Company intends to begin clinical trials of a topical formulation of
SEPA and testosterone in early 1997 and plans additional clinical studies of
SEPA in a topical gel formulation with ibuprofen for the treatment of muscle
pain.
In addition to the ongoing clinical development programs cited above, the
Company, in association with third parties, is currently conducting pre-clinical
studies with SEPA formulations in combination with specific drugs for a variety
of applications.
The Company believes that SEPA compounds can be used with a broad variety
of new and existing drugs to enhance their commercial value. The improved
therapeutic effectiveness and convenience of a transdermal SEPA product may
substantially expand the existing market for a drug. In addition, a formulation
containing a SEPA compound may prove to be a superior alternative to the
existing methods of administering certain drugs.
MACRODERM(TM) DRUG DELIVERY SYSTEM
The Company has developed a series of new low molecular weight polymers,
termed MacroDerm,TM for use in cosmetics and in the superficial dermal delivery
of pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents.
COMPETITION
The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. The Company believes
that its major competitors in the drug-delivery sector of the health care
industry include ALZA Corporation, Cygnus Therapeutic Systems, Elan Corporation,
plc., Ciba-Geigy Limited and Sandoz Limited. These firms have substantially
greater capital resources, research and development and technical staffs,
facilities and experience in obtaining regulatory approvals, as well as in
manufacturing, marketing and distribution of products, than the Company. Recent
trends in this area are toward further market consolidation of large drug
companies into a smaller number of very large entities, further concentrating
financial, technical and market strength and increasing competitive pressure in
the industry. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies of
their own through joint ventures or other arrangements. In addition, recently
developed technologies or technologies that may be developed in the future may
or could be the basis for competitive products. No assurance can be given that
the Company's competitors will not succeed in developing technologies and
products that are more effective or less costly to use than any that are
currently being developed by the Company.
Alprostadil, a synthetic prostaglandin E1, is the only drug approved for
marketing in the U.S. for erectile dysfunction. It is available in two dosage
forms. Caverject,AE marketed by Pharmacia & Upjohn, is administered by needle
injection directly into the penis. The second product, developed by Vivus, is a
pellet form of the drug administered through a tube inserted into the urethra.
In contrast to the invasive forms now available, MacroChem believes that a
topical gel formulation applied to the penis will be the preferred dosage form
for treatment of this disorder.
The Company expects products approved for sale, if any, to compete
primarily on the basis of product efficacy, safety, patient compliance,
reliability, price and patent position. Generally, the first pharmaceutical
product to reach the market in a therapeutic or preventative area is often at a
significant advantage relative to later entrants to the market. The Company's
competitive position will also depend on its ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, implement production and marketing plans, obtain patent protection and
secure adequate capital resources.
EMPLOYEES
As of March 1, 1997, the Company had 19 full time employees, 11 of whom are
devoted to research and development and regulatory affairs. In addition, two
Company officers devote approximately 75% of their time to research and
development.
GOVERNMENT REGULATION
The production and marketing of the Company's drug delivery systems and
pharmaceutical products are subject to regulation for safety, efficacy and
quality by numerous federal, state and local agencies and comparable agencies in
foreign countries. In the United States, the Federal Food, Drug and Cosmetics
Act, the Public Health Service Act, the Controlled Substances Act and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, advertising and promotion
of the Company's proposed products and technologies.
Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including recalls and criminal prosecutions based
on products, promotional practices, or manufacturing practices that violate
statutory requirements. In addition, administrative remedies can involve
voluntary recalls or cessation of sale of products, administrative detention,
public notice, voluntary changes in labeling, manufacturing or promotional
practices, as well as refusal of the government to approve NDAs. The FDA also
has the authority to withdraw approval of drugs in accordance with statutory
procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
studies to the FDA in an IND application in support of performing clinical
trials. IND allowance is then followed by performance of human clinical trials,
and additional pre-clinical and manufacturing quality control studies,
supporting safety, efficacy and manufacturing quality control. The information
developed under the IND is compiled into an NDA or ANDA and submitted to FDA for
approval to market.
Pre-clinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing of the
product in a small number of normal volunteers primarily for safety. In Phase
II, in addition to safety, the efficacy of the product is evaluated in a small
patient population. Phase III trials typically involve multicenter testing for
safety and clinical efficacy in an expanded population of patients at
geographically dispersed test sites. A clinical plan, or "protocol," accompanied
by the approval of the institutions participating in the trials, must be
submitted to the FDA prior to commencement of each clinical trial. The FDA may
order the temporary or permanent discontinuation of a clinical trial at any time
if adverse events that endanger patients in the trials are observed. In
addition, the FDA may request Phase IV clinical trials, to be performed after
marketing approval, to resolve any lingering questions.
A 30-day waiting period after the filing of each IND application is
required by the FDA prior to the commencement of clinical testing in human
subjects. If the FDA has not commented on or questioned the IND application
within 30 days, initial clinical studies may begin. However, any FDA comments or
questions must be answered to the satisfaction of the FDA before initial
clinical testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the pre-clinical and clinical studies on new drugs are
submitted to the FDA in the form of NDAs for approval to commence commercial
sales. Following extensive review, the FDA may grant marketing approval, require
additional testing or information or deny the application. Continued compliance
with all FDA requirements and the conditions in an approved application,
including product specifications, manufacturing process and labeling
requirements, are necessary for all products. Failure to comply, or the
occurrence of unanticipated adverse events during commercial marketing, could
lead to the need for labeling changes, product recall, seizure, injunctions
against distribution or other FDA-initiated action, which could delay further
marketing until the products are brought into compliance.
In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA
relies on bioequivalency tests that compare the applicant's drug with an already
approved reference drug, rather than on clinical trials. An ANDA may be
available to the Company for a new formulation of a drug which has already been
approved by the FDA in other topical dosage forms. By concentrating on drug
delivery systems employing existing drugs, the Company expects that the time for
regulatory approval of certain products should be shorter than for entirely new
substances.
The NDA itself is a complicated and detailed document and must include the
results of extensive animal, clinical and other testing, the cost of which is
substantial. Although the FDA is required to review applications within 180 days
of filing, in the process of reviewing applications the FDA frequently requests
that additional information be submitted and starts the 180 day regulatory
review period anew when the requested additional information is submitted. The
effect of such requests and subsequent submissions can significantly extend the
time for the NDA review process. Until an NDA is actually approved, no assurance
can be given that the information requested and submitted will be considered
adequate by the FDA to justify approval.
In addition to the above, packaging and labeling of most of the Company's
proposed products are subject to FDA regulation. The Company must get FDA
approval for all labeling and packaging prior to marketing of a regulated
product.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority must be obtained in most foreign countries prior
to the commencement of marketing of the product in that country. The approval
procedure varies from country to country and may involve additional testing, and
the time required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedure and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from foreign regulatory authorities can result after the relevant
applications are filed. After such approvals are obtained, further delays may be
encountered before the products become commercially available.
No assurance can be given that any required FDA or other governmental
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures and furnish
a competitive advantage to the more substantially capitalized companies with
which the Company plans to compete. In addition, the extent of potentially
adverse government regulations that may arise from future administrative action
or legislation cannot be predicted.
PATENTS AND LICENSE RIGHTS
The Company was granted a new U.S. patent in 1996 based on the combination
of various different classes of enhancer compounds in conjunction with
iontophoresis. In addition, the corresponding European application has also been
found allowable and will cover the combination of iontophoresis with SEPA as
well as other enhancer compounds.
The Company's U.S. patent applications filed in 1995 for the use of SEPA
with minoxidil for once-a-day treatment and covering its MacroDerm(TM)
technology were allowed in 1996 and patents are expected to issue in 1997.
Applications covering modified forms of the MacroDerm polymers were filed during
1996. Also allowed in 1996 were the Company's patent applications for low
molecular weight polyvinyl pyrrolidone molecules and their use in stabilizing
enzymes and other types of proteins (U.S.); and for SEPA in Japan. This
technology no longer fits within the product development and technology focus of
the Company, and it intends to sublicense the technology, if possible. No
assurance can be given, however, that a sublicensee can be identified who will
be willing to license the technology.
The Company was granted a U.S. patent in 1994 relating to certain compounds
useful for the treatment of osteoporosis and hypercalcemia. Corresponding
foreign patents have also issued in several European countries and Canada. A
related U.S. patent issued in 1995 for the use of these compounds in the
treatment of hypercalcemia. The Company holds patents on its SEPA compounds in
the United States, Canada, throughout Europe and in Japan. The Company owns a
U.S. patent on a transdermal medicator.
The Company believes that patent protection of its technologies, processes
and products is important to its future operations. The success of the Company's
proposed products may depend, in part, upon the Company's ability to obtain
patent protection.
The Company intends to enforce its patent position and intellectual
property rights vigorously. The cost of enforcing the Company's patent rights in
lawsuits, if necessary, may be significant and could interfere with the
Company's operations.
Although the Company intends to file additional patent applications as
management believes appropriate with respect to any new products or
technological developments, no assurance can be given that any additional
patents will be issued or, if issued, will be of commercial benefit to the
Company. In addition, to anticipate the breadth or degree of protection that any
such patents may afford is impossible. To the extent that the Company relies on
unpatented proprietary technology, no assurance can be given that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets, that any
obligation of confidentiality will be honored or that the Company will be able
to effectively protect its rights to proprietary technology. Further, no
assurance can be given that any products developed by the Company will not
infringe patents held by third parties or that, in such case, licenses from such
third parties would be available on commercially acceptable terms, if at all.
In connection with the prior research and development efforts of the
Company, the Company owns several patents and possesses certain license rights
in connection with other technologies, which it is not currently pursuing.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN
FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO
BELOW.
HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from the commercial sale
of its products and licensing of certain technology. The Company has had no
revenues relating to the sale of any products currently under development. The
Company has incurred net losses every year since its inception and the Company
anticipates that losses may continue for the foreseeable future. At December 31,
1996, the Company's accumulated deficit was approximately $18.1 million. The
Company's ability to continue operations after its current capital resources are
exhausted depends on its ability to obtain additional financing and achieve
profitable operations, as to which no assurance can be given. However, the
Company believes that its financial resources are sufficient to meet planned
operating activities for the next twelve months.
The Company continues to pursue the commercialization of its SEPA
technology through discussion and presentation of its technology to potential
licensees. No assurance can be given that these discussions will lead to any
licenses. No assurance can be given that any license fees will be received by
the Company in the current fiscal year. For the foreseeable future, and until
marketing approvals are obtained, and/or license agreements are entered into, if
ever, the Company anticipates limited licensing revenue and no royalties from
sales of products using SEPA for pharmaceutical purposes.
TECHNOLOGY UNCERTAINTY AND EARLY STAGE DEVELOPMENT
Although several systems have been developed by various pharmaceutical
companies to enhance the transdermal delivery of specific drugs, relatively
limited research has been conducted in the expansion of transdermal delivery
systems to a wider range of pharmaceutical products. Although the Company has
demonstrated in preclinical and clinical studies that its SEPA transdermal
compounds may have applicability with a broad range of drugs, transdermal
delivery systems are currently marketed for only a limited number of products.
In addition, transdermal delivery systems used to date have often demonstrated
adverse side effects for users, such as skin irritation and delivery
difficulties.
The Company's proposed products are in the early development stage, require
significant further research, development, testing and regulatory clearances and
are subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibilities that any
or all of the proposed products may be found to be ineffective or toxic, or
otherwise may fail to receive necessary regulatory clearances; that the proposed
products, although effective, may be uneconomical to market; or that third
parties may market superior or equivalent products. Due to the extended testing
and regulatory review process required before marketing clearance can be
obtained, the Company does not expect to be able to realize revenues from the
sale of any drugs in the near term.
NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING
Before the Company or any licensees of the Company may market any products
based upon the Company's technology, significant additional development efforts
and substantial preclinical and clinical testing will be necessary. Unless
substantial additional financing is obtained, the Company may not have
sufficient working capital to complete clinical studies on any proposed
products. No assurance can be given that the Company will be able to secure such
financing on favorable terms, if at all.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approval for the commercial sale of any of its
pharmaceutical products under development, the Company must demonstrate that the
product is safe and efficacious for use in each proposed indication. The results
of preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be no
assurance that clinical trials of the Company's products will demonstrate the
safety and efficacy of its products or will result in marketable products. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. If the Company were unable to demonstrate the safety and efficacy of
certain of its products, the Company may be adversely affected.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSED AGREEMENTS
The Company intends to rely on licensees and joint venture arrangements to
fund most of the costs relating to product development and clinical trials.
Licensees may be expected to have the legal right to terminate funding a product
at any time for any reason without significant penalty. The resources and
attention devoted by a licensee to a product are not within the Company's
control, and this can result in delays in clinical testing, the preparation and
prosecution of regulatory filings and commercialization efforts. Further, no
assurance can be given that the Company will be able to enter into new
collaborative arrangements or that existing or future collaborative arrangements
will be successful.
PRIOR DEVELOPMENT EFFORTS
Since the Company's inception in 1981, the Company has engaged in research
and development activities with respect to a variety of technologies and
products, including polymers for medical and industrial use, dental adhesives,
osteoporotic drugs and transdermal drug-delivery products. Although the Company
has generated differing levels of revenue over the last several years, none of
the Company's products or technologies has ever generated sustained revenues and
the Company has never had profitable operations. The Company has expended a
substantial amount of its resources in researching and developing technology
relating to these products as well as in connection with the research and
development of its transdermal delivery systems. No assurance can be given that
the Company's development activities with respect to its transdermal delivery
systems will be successful or that these efforts, as well, will not be
eventually abandoned.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR MARKETING
AND DISTRIBUTION OF PRODUCTS
The Company intends to market and distribute its proposed products through
others pursuant to licensing, joint venture, or similar collaborative
arrangements or distribution agreements. The Company has no sales force or
marketing organization. If the Company directly markets and sells any of such
products, it will, among other things, have to attract and retain qualified or
experienced marketing and sales personnel. No assurance can be given that the
Company will be able to attract and retain qualified or experienced marketing
and sales personnel or that any efforts undertaken by such personnel will be
successful. Any contractual arrangements with others may result in a lack of
control by the Company over any or all of the marketing and sales of such
products.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company currently does not have facilities capable of manufacturing any
proposed products in commercial quantities. Accordingly, the Company expects
that it will be dependent to a significant extent on licensees, corporate
partners or contract manufacturers for such manufacturing and for compliance
with regulatory requirements for good manufacturing practices. The Company's
dependence on third parties for manufacturing may adversely affect the Company's
ability to develop and deliver products on a timely and competitive basis. If
the Company decides to establish a commercial manufacturing facility, it will
require substantial additional funds, will be required to hire and retain
significant additional personnel and will be required to comply with extensive
government regulations. No assurance can be given that the Company will be able
to obtain additional capital to conduct such activities directly.
RELIANCE ON KEY EMPLOYEES; LIMITED PERSONNEL; ABILITY TO ATTRACT AND
RETAIN QUALIFIED SCIENTISTS
The success of the Company is dependent on the efforts and abilities of
Dr. Carlos M. Samour, its Chairman of the Board of Directors and Scientific
Director, Alvin J. Karloff, its Chief Executive Officer and President and
Dr. Stephen J. Riggi, its Vice President of Operations. Dr. Samour, Mr. Karloff
and Dr. Riggi are employed by the Company under employment agreements that are
of indefinite length and include non-disclosure and non-competition provisions.
The loss of Dr. Samour, Mr. Karloff or Dr. Riggi could have a material adverse
effect on the Company's business.
The Company's business also depends on access to scientific talent,
competition for which is intense and can be expected to increase. There can be
no assurances that the Company will be able to retain its existing personnel or
to attract additional qualified employees.
COMPETITION, GOVERNMENT REGULATION, PATENTS AND LICENSE RIGHTS
See these sections, above, for a description of risk factors relating to
these matters.
PRODUCT LIABILITY; NO GENERAL INSURANCE
The design, development, manufacture and sale of the Company's products
involve an inherent risk of liability claims and associated adverse publicity.
The Company currently has liability insurance to cover claims that may result
from clinical trials, but does not maintain product liability insurance and may
need to acquire such insurance coverage prior to the commercial introduction of
its products. No assurance can be given that the coverage limits of the
Company's insurance policies will be adequate. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms
or at all. A successful claim brought against the Company if it is uninsured, or
which is in excess of the Company's insurance coverage, if any, could have a
material adverse effect upon the Company and its financial condition.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of, and availability of capital for
bio-medical and pharmaceutical companies may be affected by the continuing
efforts of governmental and third-party payors to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is subject to
government control and to reform in the health care system. In the United
States, there have been, and the Company expects there will continue to be, a
number of federal and state proposals to implement similar government control.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted, the announcement or adoption of such proposals could
have a material adverse effect on the Company's prospects. If the Company or one
of its partners succeeded in bringing one or more of its products, based upon
the Company's technology, to market, there can be no assurance that these
products will be cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company or its partners to sell
such products on a profitable basis.
ITEM 2. PROPERTIES.
The Company leases 9,702 square feet of office and laboratory space in
Lexington, Massachusetts. Details of the lease agreements are set out in Note 7
of the Financial Statements included in Item 8 of this Report and in the forms
of lease and amendment included as exhibits to this Report.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the three
months ended December 31, 1996, through the solicitation of proxies or
otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF SECURITIES AND RELATED MATTERS
The following chart sets forth the range of high and low bid prices for the
Common Stock, Class A Warrants, Class AA Warrants and Class X Warrants for the
periods indicated as obtained from NASDAQ and the NASD Electronic Bulletin
Board:
<TABLE>
<CAPTION>
COMMON STOCK CLASS A WARRANTS CLASS AA WARRANTS CLASS X WARRANTS
MCHM MCHML MCHMM MCHMN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
DECEMBER 31, 1995
First Quarter $2 15/16 $1 1/8 $ 3/4 $ 1/4 $ 5/8 $ 1/8 $1 1/2 $ 1/2
Second Quarter 4 5/16 2 1/16 1 7/8 1/2 1 3/8 1/4 2 1/4 1/2
Third Quarter 6 1/2 3 3/8 3 3/8 1 1/2 2 3/8 7/8 4 1
Fourth Quarter 4 15/16 3 2 1/2 1 1/8 1 5/8 3/4 3 1 3/4
DECEMBER 31, 1996
First Quarter 7 11/16 3 3/4 4 1/2 2 3 1/2 1 5 3 1/2
Second Quarter 6 3/4 4 7/8 4 1/4 2 5/8 3 1/4 1 3/4 4 1/2 3 1/2
Third Quarter 5 3/4 3 11/16 3 5/8 1 3/4 2 3/4 1 1/4 3 1/2 3 1/4
Fourth Quarter 6 5/8 3 1/2 3 1/2 1 5/8 2 1/4 1 1/8 4 3/4 3 1/2
</TABLE>
The above quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not necessarily reflect actual
transactions. As of December 31, 1996, there were 391 record holders of the
Company's Common Stock.
The Company has never paid dividends on its Common Stock and its Board of
Directors does not contemplate declaring any dividends in the foreseeable
future. The Company presently intends to retain earnings, if any, to finance
research, development, and expansion of its business.
RECENT SALES OF UNREGISTERED SECURITIES
During 1996, the Company issued the following securities which were not
registered under the Securities Act of 1933:
-On June 17, 1996, the Company issued a warrant to its investment
banker, expiring June 17, 1999, for the purchase of 145,800 shares of
the Company's Common Stock at a price of $6.075 per share in
consideration of services to the Company.
-On September 3, 1996, 925 shares of the Company's Common Stock were
issued to a consultant in consideration of services to the Company.
The transactions described above were effected in reliance upon the
exemption from the registration requirements of the Securities Act of 1933
provided by section 4(2) thereof on the basis that such transactions did not
involve any public offering.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL TRANSITION
YEAR PERIOD FROM
ENDED APRIL 1 TO
MARCH 31 DECEMBER 31 YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1993 1994 1995 1996
---- ---- ---- ---- ----
(Note)
STATEMENTS OF
OPERATIONS DATA:
Total revenue $1,027,730 $ 123,819 $ 44,710 $ 17,493 $ 129,786
Net loss ( 2,539) (1,465,454) (1,969,442) (2,465,837) (3,139,796)
Net loss per share 0.00 (0.13) (0.17) (0.20) (.21)
Weighted average
common shares
outstanding 7,929,629 10,874,172 11,558,105 12,331,560 15,239,080
BALANCE SHEET DATA:
Working capital $6,508,411 $5,321,837 $3,615,608 $4,532,623 $7,127,252
Current assets 6,664,117 5,633,155 3,955,357 4,962,562 7,495,715
Total assets 6,914,246 5,956,850 4,437,600 5,462,625 8,063,750
Current liabilities 155,706 311,318 339,749 429,939 368,463
Capital lease obligations -0- -0- 59,715 91,861
57,038
Total liabilities 165,378 324,188 387,792 486,198 386,871
Stockholders' equity 6,748,868 5,632,662 4,049,808 4,976,427 7,676,879
<FN>
Note: Effective January 1, 1996, the Company adopted the Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation." As a result, the net loss and net loss per share for the year
ended December 31, 1996 includes approximately $543,000, or $.04 per share, for
non-employee stock option compensation. See Note 6 to the Financial Statements.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations for the Company should be read in conjunction with the accompanying
financial statements and related footnotes.
GENERAL
MacroChem's primary business is the development and commercialization of
transdermal drug delivery compounds and systems designed to promote the delivery
of drugs from the surface of the skin into the skin or bloodstream. The Company
currently derives no significant revenue from product sales, royalties or
license fees. The Company plans to develop specific SEPA(R) formulations for use
with proprietary and non-proprietary drugs manufactured by pharmaceutical
companies, and to commercialize these products through the formation of
partnerships, strategic alliances and license agreements with those companies.
In order to attract strategic partners the Company is conducting limited
clinical testing of certain SEPA-enhanced pharmaceuticals.
The Company's results of operations vary significantly from year to year
and quarter to quarter, and depend, among other factors, on the signing of new
licenses and product development agreements, the timing of revenues recognized
pursuant to license agreements, the achievement of milestones by licensees, the
progress of clinical trials conducted by licensees and the Company, and the
degree of research, marketing and administrative effort. The timing of the
Company's revenues may not match the timing of the Company's associated product
development expenses. To date, research and development expenses have generally
exceeded revenues in any particular period and/or fiscal year.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The Company has continued to incur losses from operations. For the year
ended December 31, 1996, the net loss was approximately $3,139,800 as compared
to a loss of $2,465,800 for the previous year, a 27% increase. For the 1996 and
1995 years, the Company realized operating revenues of approximately $129,800
and $17,500, respectively, which were from the completion of feasibility
studies.
Marketing, general and administrative expenses for 1996 aggregated
approximately $1,892,600, an increase of $480,100 or 34% , from 1995's total of
$1,412,500. The increase was due primarily to the adoption in 1996 of Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation." Adopting this rule increased expenses approximately $491,200, of
which appproximately $433,100 is attributable to the grant of a warrant to the
Company's investment banker.
Research and development costs increased by approximately $498,500 from
$1,238,100 in 1995 to $1,736,600 for 1996, a 40% increase. The Company has
continued its emphasis on research and development of expanded uses of the
Company's proprietary products. 1996 costs increased due to the hiring of a
director of research and development and to increased clinical study costs and
internal research and development efforts. The adoption of SFAS 123 increased
expenses approximately $35,300. The Company expects that research and
development costs will continue to increase in 1997, reflecting increased
clinical testing of the Company's products.
Other income increased from a net amount of $203,300 in 1995 to $371,600 in
1996. This increase reflects greater cash on hand. Interest expense was
approximately $12,000 in 1996, a reduction of $30,600 from 1995, reflecting the
lower capital lease debt outstanding.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
For the year ended 1995, the net loss was approximately $2,465,800 as
compared to a loss of $1,969,400 for the previous year, a 25% increase. For the
1995 and 1994 years the Company realized operating revenues of approximately
$17,500 and $44,700, respectively, which were from the completion of feasibility
studies.
Marketing, general and administrative expenses for 1995 aggregated
approximately $1,413,500, an increase of $122,500 or 9%, from 1994's total of
$1,291,000. During 1995, the Company used outside service providers for certain
administrative functions, incurred increased recruiting expenses for the
replacement of several executive level employees, and increased marketing its
technology to potential licensees and strategic alliance partners.
Research and development costs increased by approximately $374,000 from
$864,100 in 1994 to $1,238,100 for 1995, a 43% increase. The Company has
continued its emphasis on research and development of expanded uses of the
Company's proprietary products. The construction of a pilot scale manufacturing
facility, conforming to the FDA's current Good Manufacturing Practices (cGMP),
during 1995, has increased the Company's internal research and development
capabilities. This facility will allow for improvements in the manufacture and
testing of its chemical compounds.
Other income increased from a net amount of $177,000 in 1994 to $203,300 in
1995. This increase reflected greater cash on hand, offset in part by the effect
of the flattening of US Treasury rates in the latter part of 1995. Interest
expense was approximately $42,600 in 1995, reflecting management's decision to
maximize available cash resources by acquiring new equipment through capital
lease arrangements, rather than outright purchase.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the primary source of funding for the Company's operations
has been the private and public sale of its securities, and to a lesser extent,
the licensing of its proprietary technology and products, government grants and
the limited sales of products and test materials. During 1996, the Company
received aggregate net proceeds of approximately $5.3 million from the exercise
of stock options, stock warrants, and unit purchase options, compared to
approximately $3.4 million in 1995. At December 31, 1996 working capital was
approximately $7.1 million compared to $4.5 million at December 31, 1995. The
increase in the Company's working capital, based upon the receipt of these net
proceeds from the issuance of its securities was somewhat offset by the net cash
used by operating activities for the year ended December 31, 1996. Until such
time as the Company obtains agreements with third-party licensees or partners to
provide funding for the Company's anticipated business activities or the Company
is able to obtain funds through the private or public sale of its securities,
the Company's working capital will be utilized to fund its activities.
Capital expenditures and additional patent development costs for the year
ended December 31, 1996 were approximately $185,000. The Company anticipates
capital expenditures of approximately $55,000 during the fiscal year ended
December 31,1997.
The Company's long term capital requirements will depend upon numerous
factors including the progress of the Company's research and development
programs; the resources that the Company devotes to self-funded early stage
clinical testing of SEPA enhanced compounds, proprietary manufacturing methods
and advanced technologies; the ability of the Company to enter into additional
licensing arrangements or other strategic alliances; the ability of the Company
to manufacture products under those arrangements and the demand for its products
or the products of its licensees or strategic partners if and when approved for
sale by regulatory authorities. In any event substantial additional funds will
be required before the Company is able to generate revenues sufficient to
support its operations. There is no assurance that the Company will be able to
obtain such additional funds on favorable terms, if at all. The Company's
inability to raise sufficient funds could require it to delay, scale back or
eliminate certain research and development programs.
The Company believes that its existing cash and cash equivalents,
marketable securities and other investments will be sufficient to meet its
operating expenses and capital expenditure requirements for at least the next
twelve months. The Company's cash requirements may vary materially from those
now planned because of changes in focus and direction of the Company's research
and development programs, competitive and technical advances, patent
developments or other developments. It is not believed that inflation will have
any significant effect on the results of the Company's operations.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earning Per Share", which will be
effective for fiscal 1997. SFAS No. 128 will require the Company to restate
amounts previously reported as earnings per share to comply with the
requirements of SFAS No. 128; while the Company is in the process of evaluating
the impact of SFAS No. 128, it does not expect that adoption will have a
material effect on previously reported earnings per share.
THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED OR REFERRED TO IN ITEM 1, BUSINESS - "RISK FACTORS".
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this Item 8 is set forth on pages 21 through
37 of this report.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MacroChem Corporation:
We have audited the accompanying balance sheets of MacroChem Corporation as
of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MacroChem Corporation at December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 6, 1997
<PAGE>
<TABLE>
<CAPTION>
MACROCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------ ---- ---- ------------------------------------- ---- ----
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $7,329,881 $3,591,779 Current portion of capitalized lease
Marketable securities 21,824 1,258,492 obligations $ 38,630 $ 36,616
Accounts receivable 43,977 --- Accounts payable and accrued expenses 281,769 290,345
Prepaid expenses and other Deferred compensation 47,050 97,050
current assets 100,033 112,291 Deferred rent 1,014 5,928
--------- --------- ----------- -----------
TOTAL CURRENT LIABILITIES 368,463 429,939
----------- -----------
TOTAL CURRENT ASSETS 7,495,715 4,962,562 CAPITALIZED LEASE OBLIGATIONS, Net of
--------- --------- current portion 18,408 55,245
PROPERTY AND EQUIPMENT (NET) 345,343 307,390
--------- ---------
DEFERRED RENT, Noncurrent portion --- 1,014
----------- -----------
OTHER ASSETS:
Patents, net 218,232 188,213 TOTAL LONG-TERM LIABILITIES 18,408 56,259
----------- -----------
Deposits 4,460 4,460
--------- ---------
TOTAL LIABILITIES 386,871 486,198
----------- -----------
TOTAL OTHER ASSETS 222,692 192,673
--------- ---------
COMMITMENTS & CONTINGENCIES (Notes 6,7,8)
STOCKHOLDERS' EQUITY:
Preferred stock --- ---
Common stock, $.01 par value; authorized
60,000,000 shares; issued and outstanding,
15,601,274 shares and 13,129,321 shares
at December 31, 1996 and 1995, respectively 156,013 131,293
Additional paid-in capital 25,839,675 19,801,473
Unearned compensation ( 222,674) ---
Accumulated deficit (18,096,135) (14,956,339)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 7,676,879 4,976,427
---------- ----------
TOTAL LIABILITIES AND
TOTAL ASSETS $8.063,750 $5,462,625 STOCKHOLDERS' EQUITY $ 8,063,750 $5,462,625
========= ========= ========== ==========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
REVENUES
Research contracts $ 129,786 $ 17,493 $ 44,710
----------- --------- ----------
OPERATING EXPENSES
Marketing, general and administrative 1,892,572 1,412,537 1,291,040
Research and development 1,736,561 1,238,070 864,123
Consulting fees with related parties 12,000 36,000 36,000
----------- ---------- ----------
TOTAL OPERATING EXPENSES 3,641,133 2,686,607 2,191,163
----------- ---------- ----------
LOSS FROM OPERATIONS ( 3,511,347) ( 2,669,114) ( 2,146,453)
----------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 383,596 246,018 170,950
Interest expense ( 12,045) ( 42,644) ( 1,199)
Other --- ( 97) 7,260
----------- ---------- ----------
TOTAL OTHER INCOME 371,551 203,277 177,011
----------- ----------- ----------
NET LOSS $( 3,139,796) $( 2,465,837)$( 1,969,442)
========== =========== ==========
NET LOSS PER SHARE $( .21) $( .20)$( .17)
========== =========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,239,080 12 ,331,560 11,558,105
========== =========== ==========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
--------------- ----------------
Number Number Additional
of Par of Par Paid-In Unearned Accumulated
Shares Value Shares Value Capital Compensation Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 95,000 $ 950 11,123,543 $ 111,235 $ 16,041,537 $ --- $(10,521,060) $5,632,662
Issuance of common stock for services
rendered and in settlement of
accounts payable --- --- 6,600 66 11,709 --- --- 11,775
Conversion of preferred stock to
common stock (95,000) (950) 190,000 1,900 ( 950) --- --- ---
Exercise of common stock warrants --- --- 246,500 2,465 371,035 --- --- 373,500
Exercise of common stock options --- --- 3,000 30 1,283 --- --- 1,313
Net loss --- --- --- --- --- --- ( 1,969,442) (1,969,442)
------ ----- ---------- -------- ---------- ------- ---------- ---------
BALANCE, DECEMBER 31, 1994 --- --- 11,569,643 115,696 16,424,614 --- (12,490,502) 4,049,808
Issuance of common stock --- --- 1,000,000 10,000 2,740,000 --- --- 2,750,000
Issuance of common stock for services
rendered --- --- 4,145 42 16,270 --- --- 16,312
Exercise of common stock warrants --- --- 51,700 517 90,358 --- --- 90,875
Exercise of common stock options --- --- 203,833 2,038 531,231 --- --- 533,269
Exercise of unit purchase options --- --- 300,000 3,000 522,000 --- --- 525,000
Costs associated with issuance of
common stock and warrants --- --- --- --- ( 523,000) --- --- ( 523,000)
Net loss --- --- --- --- --- --- ( 2,465,837) (2,465,837)
------ ----- ---------- --------- ---------- ------- ---------- ---------
BALANCE, DECEMBER 31, 1995 --- --- 13,129,321 131,293 19,801,473 --- (14,956,339) 4,976,427
Issuance of common stock for services
rendered --- --- 925 9 4,500 --- --- 4,509
Exercise of common stock warrants --- --- 726,667 7,267 2,227,984 --- --- 2,235,251
Exercise of common stock options --- --- 251,861 2,519 442,887 --- --- 445,406
Exercise of unit purchase options --- --- 1,492,500 14,925 2,596,950 --- --- 2,611,875
Stock option compensation --- --- --- --- 765,881 (222,674) --- 543,207
Net loss --- --- --- --- --- --- ( 3,139,796) (3,139,796)
------ ----- ---------- --------- ----------- ------- ---------- ---------
BALANCE, DECEMBER 31, 1996 --- $ --- 15,601,274 $ 156,013 $ 25,839,675 $(222,674) $(18,096,135) $7,676,879
====== ===== ========== ========= ========== ======= ========== =========
<CAPTION>
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,139,796) $(2,465,837) $(1,969,442)
--------- --------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 116,967 79,475 60,738
(Gain) loss on disposal of equipment --- ( 3,925) 3,740
Abandoned patent costs --- 22,592 ---
Issuance of common stock in exchange
for services 4,509 16,312 11,775
Stock-based compensation 543,207 --- ---
Amortization of discounts on
marketable securities ( 70,845) ( 152,316) ( 88,108)
Increase (decrease) in cash from:
Accounts receivable ( 43,977) --- 34,000
Prepaid expenses and other current assets 12,258 ( 21,767) ( 46,508)
Accounts payable and accrued expenses ( 8,576) 136,388 ( 22,933)
Deferred compensation ( 50,000) ( 64,200) 32,750
Deferred rent ( 5,928) ( 5,928) ( 5,928)
Deposits --- ( 150) ---
--------- --------- ---------
Total adjustments 497,615 6,481 ( 20,474)
--------- --------- ---------
Net cash used by operating activities (2,642,181) (2,459,356) (1,989,916)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment --- 4,800 ---
Purchases of marketable securities (5,743,755) (3,516,801) (5,491,267)
Purchase of certificates of deposit ( 734,732) ( 287,000) ---
Proceeds from maturities of
marketable securities 6,771,000 5,977,000 2,300,000
Proceeds from maturities of certificates of deposit 1,015,000 --- ---
Expenditures for property and equipment ( 136,306) ( 54,916) ( 130,666)
Additions to patents ( 48,633) ( 16,558) ( 27,740)
--------- --------- ---------
Net cash provided (used) by
investing activities 1,122,574 2,106,525 (3,349,673)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease ( 34,823) ( 16,992) ( 4,905)
Proceeds from issuance of common stock --- 2,750,000 ---
Proceeds from exercise of common stock options 445,406 533,269 1,313
Proceeds from exercise of common stock warrants 2,235,251 90,875 373,500
Proceeds from exercise of unit purchase options 2,611,875 525,000 ---
Costs associated with the registration and
issuance of common stock and warrants --- ( 523,000) ---
--------- --------- ---------
Net cash provided by financing
activities 5,257,709 3,359,152 369,908
--------- --------- ---------
See notes to financial statements. (Continued)
</TABLE>
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $3,738,102 $3,006,321 $(4,969,681)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,591,779 585,458 5,555,139
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $7,329,881 $3,591,779 $ 585,458
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $9,226, $5,022 and $1,199, respectively,
for the years ended December 31, 1996, 1995 and 1994. The Company did not
pay any income taxes during those periods.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired in exchange for
capital lease obligation $ --- $ 49,138 $ 64,620
========= ========= ==========
See notes to financial statements. (Concluded)
<PAGE>
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MACROCHEM
Corporation (the "Company") develops and licenses transdermal drug delivery
compounds and systems intended to promote the delivery of drugs from the
surface of the skin into the skin or the bloodstream.
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from the commercial
sale of its products and licensing of certain technology. The Company has
had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its
inception and the Company anticipates that losses may continue for the
foreseeable future. At December 31, 1996, the Company's accumulated deficit
was approximately $18.1 million. The Company's ability to continue
operations after its current capital resources are exhausted depends on its
ability to obtain additional financing and achieve profitable operations,
as to which no assurances can be given. However, the Company believes that
its financial resources are sufficient to meet planned operating activities
for the next twelve months.
REVENUE RECOGNITION - Revenues are earned and recognized based upon
completion of a contract, upon the sale or licensing of product rights,
upon shipment of product, or upon the attainment of benchmarks specified in
the related agreements.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. Such costs include proprietary research and
development activities and expenses associated with research and
development contracts. In 1996, the Company changed its definition of
research and development to more properly reflect personnel efforts and
other resources previously included in general and administrative expenses.
This change had the effect of increasing research and development and
decreasing general and administrative costs from amounts previously
reported by approximately $129,000 for the year ended December 31, 1995.
This change in definition also had the effect of reducing research and
development and increasing general and administrative costs by
approximately $67,000 for the year ended December 31, 1994.
CASH EQUIVALENTS - Cash equivalents consist of short-term, highly liquid
investments purchased with remaining maturities of three months or less.
MARKETABLE SECURITIES - The Company intends to hold until maturity its
investments and accordingly, such investments are reported at amortized
cost in the accompanying financial statements. The fair market value of
marketable securities is disclosed in a subsequent note.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the related assets which range from five to
ten years.
PATENTS - The Company has filed applications for United States and foreign
patents covering aspects of its technology. Costs and expenses incurred in
connection with pending patent applications are deferred. Costs related to
successful patent applications are amortized over the estimated useful
lives of the patents, not exceeding 20 years, using the straight-line
method. Accumulated costs related to patents or deferred patent application
costs that are considered to have limited future value are charged to
expense. Accumulated amortization aggregated approximately $47,000 and
$28,000, respectively, at December 31, 1996 and 1995.
On an on-going basis, the Company evaluates the recoverability of the net
carrying value of various patents by reference to the patent's expected use
in drug and other research activities as measured by outside interest in
the Company's patented technologies and management's determination of
potential future uses of such technologies. As a result of such
evaluations, during 1995 the Company wrote off approximately $22,600 of
costs associated with patents no longer having value.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes", which requires the use of the
liability method. The objective of this method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities
using tax rates in effect in the year(s) in which the differences are
expected to reverse.
NET LOSS PER COMMON SHARE - Net loss per common share is computed based on
the weighted average number of common shares outstanding during each year.
Common equivalent shares from convertible preferred stock, common stock
options and common stock warrants are excluded from the computations as
their effect is antidilutive.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts 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 reporting period. The primary
estimates underlying the Company's financial statements include the useful
lives of the Company's patents, the valuation allowance established for the
Company's deferred tax assets, and the underlying assumptions to apply the
pricing model to value stock options under SFAS No. 123. Management bases
its estimates on certain assumptions, which it believes are reasonable in
the circumstances, and while actual results could differ from those
estimates, management does not believe that any change in those assumptions
in the near term would have a significant effect on financial position or
the results of operations.
RECENTLY ADOPTED ACCOUNTING STANDARDS - During 1996, the Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and
for long-lived assets and certain identifiable intangibles which are to be
disposed of. The effect of implementing SFAS No. 121 on the Company's
financial position and results of operations was not material.
STOCK-BASED COMPENSATION - During 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 addresses the
financial accounting and reporting standards for stock or other
equity-based compensation arrangements.
The Company has elected to continue to use the intrinsic value based method
to account for employee stock option plans and provide disclosures based on
the fair value method in the notes to the financial statements as permitted
by SFAS No. 123.
Stock or other equity based compensation for non-employees must be
accounted for under the fair value based method as required by SFAS No.
123. Under this method, the equity based instrument is valued at either the
fair value of the consideration received or equity instrument issued on the
date of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which is usually the vesting period. In
1996, the net loss reflects compensation costs of approximately $543,200
associated with the issuance of warrants and stock options to non
employees. In addition, the Company recorded unearned compensation of
approximately $222,700 which will be amortized over the remaining vesting
period of the stock-based compensation arrangements.
RECENT ACCOUNTING PRONOUNCEMENT - In March 1997, the Financial Accounting
Standards Board released SFAS No. 128, " Earnings Per Share", which will be
effective for fiscal 1997. SFAS No. 128 will require the Company to restate
amounts previously reported as earnings per share to comply with the
requirements of SFAS No. 128; while the Company is in the process of
evaluating the impact of SFAS No. 128, it does not expect that adoption
will have a material effect on previously reported earnings per share.
OTHER - Certain items in the financial statements for the periods ended
December 31, 1995 and 1994 have been reclassified to conform with current
presentation.
2. MARKETABLE SECURITIES
As of December 31, 1996, all marketable securities are classified as
investment securities and carried at amortized cost. The maturities of
investment securities held at December 31, 1996 and 1995 are all one year
or less.
The carrying amounts and approximate market value of investment securities
are as follows as of December 31:
Amortized Cost Unrealized Gain Market Value
-------------- ---------------- ------------
1996
U.S. Treasury Securities $ 21,824 --- $ 21,824
========= ====== =========
1995
U.S. Treasury Securities $ 971,492 $2,746 $ 974,238
Certificates of deposit
(bearing interest rates
ranging from 3.5% to 5.4%) 287,000 --- 287,000
--------- ----- ---------
$1,258,492 $2,746 $1,261,238
========= ===== =========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
1996 1995
---- ----
Laboratory equipment $562,183 $448,577
Office equipment 158,929 142,549
Leasehold improvements 96,882 90,564
------- -------
Total 817,994 681,690
Less: accumulated depreciation
and amortization (472,651) (374,300)
------- -------
Property and equipment, net $345,343 $307,390
======= =======
<PAGE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31:
1996 1995
---- ----
Accounts payable $ 58,179 $ 20,863
Payroll taxes 19,313 14,670
Accrued interest expense 40,431 37,612
Insurance payable --- 17,447
Accrued professional fees 130,046 130,339
Accrued clinical trial costs 33,800 69,414
------- -------
$281,769 $290,345
======= =======
5. CAPITALIZED LEASE OBLIGATIONS
Equipment held under capital lease obligations included with owned property
on the balance sheet consists of the following as of December 31:
1996 1995
---- ----
Laboratory equipment $ 113,758 $113,758
Less: accumulated amortization ( 39,468) ( 16,716)
------- ------
$ 74,290 $ 97,042
======= =======
Future minimum lease payments under capital leases are as follows:
1997 $ 43,193
1998 19,653
-------
Total minimum lease payments 62,846
Less: imputed interest (approximately 11%) ( 5,808)
-------
Present value of minimum lease payments 57,038
Less: current portion 38,630
-------
Capital lease obligation, net of current portion $ 18,408
=======
6. STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 60,000,000
shares of $.01 par value common stock of which 15,601,274 shares are issued
and 10,491,581 are reserved for conversion of common stock warrants,
options and unit purchase options at December 31, 1996. Authorized
undesignated preferred stock totals 5,500,000 shares.
STOCK ISSUANCES - On May 30, 1995, the Company sold 1,000,000 shares of
common stock, par value $.01 per share, to a single investor (the
"Investor") in a private placement. The sale price was $2.75 per share.
Pursuant to the Common Stock Purchase Agreement between the Company and the
Investor, the Investor had the right to designate one person to serve on
the Company's Board of Directors. The firm of Janssen-Meyers, L.P. ("J-M")
received a brokers fee of $357,500 from the company for this private
placement. Mr. Janssen and Mr. Meyers are principals of J-M and each own,
or have the rights to acquire, more than 10% of the Company's voting
securities.
In January 1993, the Company completed a private placement offering whereby
142 units (the Units), each consisting of 30,000 shares of common stock,
10,000 Class A common stock warrants and 10,000 Class AA common stock
warrants, were sold, or issued in exchange for certain notes payable, for
$52,500 per Unit.
Additionally, options were issued to affiliates of the placement agent of
the offering which are exercisable for 118 and one-third of these Units at
a price of $52,500 per Unit. These options expire in December 1997. During
1995, options to purchase 10 Units were exercised by an affiliate of the
placement agent, and 49 and three-quarters options to purchase Units were
exercised during 1996. At December 31, 1996, options to purchase 58 and
seven-twelfths of these Units remain outstanding.
WARRANTS - As part of the January 1993 private placement, the Company
issued 1,420,000 Class A and 1,420,000 Class AA common stock warrants. Each
Class A and Class AA warrant is exercisable for one share of common stock
at a price per share, subject to adjustment, of $3.00 and $4.50,
respectively. As of November 9, 1994, under certain circumstances, based
primarily upon the trading price of the Company's common stock, each Class
A and AA common stock warrant is redeemable by the Company at a price of
$.05 per warrant. The Class A and Class AA common stock warrants expire in
December 1997. At December 31, 1996, 1,339,733 and 1,936,400 Class A and
Class AA warrants were outstanding, respectively.
In connection with the issuance of $300,000 of subordinated notes payable
in August 1992 (certain of the notes were issued to affiliates of the
placement agent), of which $155,000 was repaid in January 1993 and $145,000
was converted to Units in the January 1993 offering described above, the
Company issued warrants to purchase 300,000 shares of common stock at an
initial exercise price of $1.75 per share. These warrants expire in
September 1997. At December 31, 1996, exercisable warrants to purchase
185,500 shares of common stock remain outstanding.
In June 1991, the Company sold 350,000 shares of common stock at a price of
$1.25 per share. The price per share also included a warrant to purchase
one share of common stock at a price of $2.50 per share. These warrants
expired March 31, 1995.
Warrants issued in connection with the Company's initial public offering in
1985 expired March 31, 1995.
In July 1995, the Company issued 240,000 four-year warrants to J-M to
permit the holder to acquire 80,000 shares of the Company's common stock at
an exercise price of $3,00, $4.00, and $5.00, respectively. Exercise of
these warrants was permitted only if the Company and J-M entered into a new
consulting agreement on or before April 1, 1996. The warrants expired April
1, 1996.
In June 1996, in connection with services performed for the Company, J-M
received a warrant, exercisable immediately and expiring June 17, 1999, for
the purchase of 145,800 shares of the Company's common stock at a price of
$6.075 per share. The market price per share on the grant date was $5.125.
Effective January 1, 1996, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation" which establishes fair value as the measurement
basis for transactions in which an entity acquires goods or services from
non-employees in exchange for equity instruments As a result, the 1996 net
loss reflects compensation costs of $433,133 associated with the granting
of this warrant. The compensation cost is based upon the fair value method
calculated on the grant date using the Black/Scholes option pricing model.
Key assumptions in applying this pricing model include an expected life of
three years, expected volatility of the underlying stock of approximately
94%, and a risk free interest rate of 5.25%. Pursuant to an informal
understanding, the Company is paying J-M a monthly fee of $5,000 for
consulting services from December 1996 through April 1997.
Class A and Class AA warrants, exclusive of the unexercised Unit Purchase
Options, aggregated 3,461,633 at December 31, 1996.
STOCK OPTION PLANS - The Company has three stock option plans, the 1984
Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option
Plan (Non-qualified Plan) and the 1994 Equity Incentive Plan (1994 Plan).
Under the terms of the 1984 Plans the Company may no longer award any
options. All options previously granted may be exercised at any time up to
ten years from date of award.
Under the terms of the 1994 Plan, the Company may grant options to purchase
up to a maximum of 2,500,000 shares of common stock to certain employees,
directors and consultants. The options may be awarded as incentive stock
options (employees only) and non-incentive stock options (certain
employees, directors and consultants).
The exercise price of options under the ISO Plan and incentive options from
the 1994 Plan may not be less than fair market value at the date of grant.
The exercise price of the Non-Qualified options and the non-incentive
options from the 1994 Plan is determined by the Board of Directors. All
options become exercisable as specified at the date of grant.
The following table presents activity under all stock option plans:
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Outstanding December 31, 1993 2,013,675 $1.178
Granted 848,100 3.360
Exercised ( 3,000) .438
Expired ( 181,000) 3.543
---------
Outstanding December 31, 1994 2,677,775 $1.558
Granted 325,000 3.197
Exercised ( 203,833) 2.616
Expired ( 13,000) 6.023
Canceled ( 141,401) 3.460
---------
Outstanding December 31, 1995 2,644,541 $1.554
Granted 1,180,845 5.573
Exercised ( 251,861) 1.768
Canceled ( 20,000) 4.250
---------
Outstanding December 31, 1996 3,553,525 $2.850
=========
Exerciseable at December 31: 1996 2,312,501 $1.610
=========
1995 2,161,841 $1.216
=========
1994 1,994,276 $1.016
=========
The weighted average fair values of options granted during 1996 and 1995
were $2.37 and $4.93, respectively.
All options granted during the three year period ended December 31, 1996
were granted at the market price of the stock except for 10,000 in 1995
which were issued at an option price higher than market with a weighted
average exercise price of $6.75 and a market price of $3.75.
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this
pricing model are as follows:
<PAGE>
1996 1995
---- ----
Risk-free interest rate 5.25% 5.25%
Expected life of option grants 5-10 years 5-10 years
Expected volatility of underlying stock 59.3%-99.2% 48.2%-112.5%
Expected dividend payment rate, as a
percentage of the stock price on
the date of grant --- ---
It should be noted that the option pricing model used was designed to value
readily tradable stock options with relatively short lives. The options
granted to employees are not tradable and have contractual lives of up to
ten years.
The following table sets forth information regarding options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted Ave. Weighted Ave.
Range of Number of Number Exercise Price- Weighted Ave. Exercise Price-
Exercise Options Currently Options Remaining Currently
Prices Outstanding Exerciseable Outstanding Life Exerciseable
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.43 1,373,080 1,373,080 $ .43 4.17 years $ .43
$1.50-$2.00 182,500 107,501 $1.78 6.05 years $1.76
$2.75-$4.00 808,920 711,920 $3.20 7.09 years $3.13
$4.875-$5.875 1,184,025 115,000 $5.56 9.35 years $5.83
$7.75 5,000 5,000 $7.75 3.83 years $7.75
</TABLE>
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees and, prior to December
15, 1995, to suppliers of goods and services. Had the Company used the fair
value method to measure compensation, the reported net loss and loss per
share would have been as follows:
1996 1995
---- ----
Net loss as reported ($3,139,796) ($2,465,837)
Compensation costs:
Employee ( 2,560,760) ( 108,735)
Non-Employee ( 58,273) ( 100,278)
---------- ----------
Proforma net loss ($5,758,829) ($2,674,850)
========== ==========
Proforma net loss per share ($ 0.38) ($ 0.22)
========== ==========
It should be noted that the proforma amounts presented above are inexact in
that the pricing model was designed to value freely-traded options rather
than employee stock options. Proforma charges for 1996 and 1995 may be
understated in relation to future years since the 1996 and 1995 charges do
not reflect the financial impact of options granted prior to 1995.
OTHER STOCK, STOCK OPTION AND WARRANT ISSUANCES - In May 1993, the Company
issued a warrant to purchase 75,000 shares of common stock at a price of
$1.50 per share. The warrant was issued for services provided in selling
shares of the Company's preferred stock in 1991. These warrants were
exercised during the fiscal year ended December 31, 1994. During 1995, the
Company issued 4,145 common shares and recorded compensation of $16,312 for
services rendered. The Company issued 925 common shares and recorded
compensation of $4,509 for services rendered in 1996.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company has a lease expiring on February 28, 2000
for its operating facility. At December 31, 1996, future minimum lease
payments under this lease agreement are as follows: 1997, $163,416, 1998,
$174,816, 1999, $174,816 and 2000, $29,136. Total rental expense under all
operating leases was approximately $106,000, $104,000 and $107,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has employment and
consulting agreements with various consultants and certain key employees,
with terms ranging from one year to an indefinite period of time. These
agreements provide for annual payments of approximately $654,000. In
addition, certain consulting agreements also provide for additional
payments to certain consultants related to obtaining a financial placement,
sale or licensing of the Company's product or technology to third parties.
During the periods ended December 31, 1996, 1995 and 1994, no such
additional amounts were earned by the related consultants.
ROYALTY AGREEMENTS - The Company has entered into various license
agreements which require the Company to pay royalties based upon a set
percentage of certain product sales and license fee revenue. There were no
such amounts paid in 1996, 1995 and 1994.
CLINICAL TRIAL LIABILITY INSURANCE - A clinical liability policy was
obtained as of November, 1995 and renewed in 1996.
8. AGREEMENT WITH PLACEMENT AGENT
In connection with the January 1993 private placement offering (Note 6),
the placement agent received a fee equal to 13% of the proceeds received by
the Company in the offering. In addition, the Company entered into an
agreement with the placement agent of that offering whereby the Company
granted to the placement agent the right of first refusal with respect to
participating in all future financings by the Company within the five-year
period expiring December 1997. This right of first refusal was terminated
for a fee of $150,000, paid in connection with the issuance of one million
shares of the Company's common stock, in May 1995. The placement agent is
entitled to receive 4% of the proceeds collected (under certain
circumstances) in conjunction with the exercise of the Class A and Class AA
common stock warrants sold in the private placement.
9. INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December
31, 1996, the Company has available net operating loss carryforwards of
approximately $17,200,000 for federal income tax purposes, expiring through
2010 and $8,800,000 for state income tax purposes, expiring through 2000.
In addition, the Company, for federal and state income tax purposes, has
unused investment and research and development tax credits aggregating
$270,000 and $60,000, respectively. The use of approximately $8,300,000 of
the federal net operating losses is restricted to approximately $550,000
per year due to a change in ownership, which occurred in December 1992, in
accordance with definitions as stated in the Internal Revenue Code.
Deferred income taxes consist of the aggregate operating loss and tax
credit carryforward and reflect the net tax effect of differences in the
timing of certain revenue and expense items and the related carrying
amounts of assets and liabilities for financial reporting and tax purposes
are not material and, accordingly, are not displayed in the table below.
The components of the Company's deferred tax assets and liabilities as of
December 31, 1996 and December 31, 1995 are as follows:
<PAGE>
1996 1995
---- ----
Deferred Tax Assets:
Net operating loss carryforwards $6,700,000 $5,400,000
Tax credit carryforwards 330,000 306,000
Other 23,000 34,000
--------- ---------
7,053,000 5,740,000
Valuation allowance (7,053,000) (5,740,000)
--------- ---------
Deferred tax asset, net $ --- $ ---
========= =========
For the years ended December 31, 1996, 1995 and 1994, the valuation
allowance was increased by approximately $1,313,000, $660,000, and
$851,000, respectively, due to the uncertainty of future realization of
currently generated net operating loss carryforwards.
10. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial information for 1996 (in
thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------------------------------------------------
Total revenue $ --- $ 83 $ 3 $ 44 $ 130
Operating expenses 812 1,355 689 785 3,641
Net loss $( 749) $(1,148) $(620) $(623) $(3,140)
===== ===== === === =====
Net loss per share $( .05) $( .07) $(.04) $(.05) $( .21)
===== ===== === === =====
The 1996 quarterly financial information has been restated to reflect
compensation costs associated with non-employee stock based compensation
arrangements. As a result of the adoption of SFAS No. 123, these
compensation costs included in the restated quarterly financial information
are $438,000, $34,000 and $56,000 for the second, third and fourth
quarters, respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
Item 11. EXECUTIVE COMPENSATION.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
<PAGE>
Item 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following Financial Statements as of December 31, 1996 and 1995 and
for the three years in the period ended December 31, 1996 are filed herewith:
Page
Independent Auditors' Report 21
Balance Sheets 22
Statements of Operations 23
Statements of Stockholders' Equity 24
Statements of Cash Flows 25-26
Notes to Financial Statements 27-37
(a)(2) The following Financial Statement Schedules are filed herewith:
None.
Schedules not included herein are omitted because they are not applicable or
the required information appears in the Financial Statements or Notes thereto.
(a)(3) The following exhibits are filed herewith:
3a Certificate of Incorporation as amended.
4 Stock Purchase Warrant
10.10.2 1984 Non-Qualified Stock Option Plan as amended November 15, 1996*
10.10.3 1984 Incentive Stock Option Plan as amended November 15, 1996*
10.11.1 Second Amendment to Lease Agreement between Lexington BGK Associates,
Limited Partnership and MacroChem Corporation for space located at 110
Hartwell Avenue, Lexington, MA 02173
10.13 Form of Employment Agreement between the Company and
Dr. Stephen J. Riggi*
11. Statement of Earnings Per Share
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99.1 1994 Equity Incentive Plan as amended November 15, 1996*
The following exhibits to be filed herewith are incorporated by reference
to the exhibits to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995:
4(b) Amendment to warrant agreement.
10.12 Agreement between the Company and Janssen/Meyers Associates, L.P.
The following exhibit required to be filed herewith is incorporated by
reference to the exhibits to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993:
10.11 Lease agreement between MacroChem Corporation and Phoenix Home Life
Mutual Insurance Company for space located at 110 Hartwell Avenue,
Lexington, MA 02173.
The following exhibits required to be filed herewith are incorporated by
reference to the exhibits to the Company's Registration Statement on Form S-1
(No. 33-62042):
1a Agency Agreement between the Company and D.H. Blair Investment
Banking Corp.
1b Unit Purchase Options
1c M/A Agreement between the Company and D.H. Blair Investment
Banking Corp.
3b Bylaws
3c State of Delaware Certificate of Agreement of Merger
4a Included in exhibits 3a, 3b and 3c
4b Specimen Class X Warrant Certificate
4c Specimen Class A Warrant Certificate
4d Specimen Class AA Warrant Certificate
4e Warrant Agreement among the Company, American Stock Transfer and Trust
Company of New York and D.H. Blair Investment Banking Corp.
10a Form of Employment Agreement between the Company and
Dr. Carlos M. Samour*
10b Form of Employment Agreement between the Company and
Mr. Alvin J. Karloff*
The following exhibits required to be filed herewith are incorporated by
reference to the exhibits to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988:
4.1 Form of Common Stock Certificate
(b) No current reports on Form 8-K were filed in the three-month
period ended December 31, 1996.
--------------------------
*Management contract or compensatory plan or arrangement
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MACROCHEM CORPORATION
Dated: March 28, 1997 By: /s/ Alvin J. Karloff
Alvin J. Karloff
President, Chief Executive Officer
and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 28, 1997.
/s/ Alvin J. Karloff Chief Executive Officer,
Alvin J. Karloff President, Principal Financial Officer
and Director
/s/ Dr. Carlos M. Samour Chairman of the Board of Directors
Dr. Carlos M. Samour and Scientific Director
/s/ Dr. Stephen J. Riggi Vice President, Operations and
Dr. Stephen J. Riggi Director
/s/ D. Ray Taylor Director
D. Ray Taylor
/s/ Dr. Willard M. Bright Director
Dr. Willard M. Bright
/s/ Peter G. Martin Director
Peter G. Martin
<PAGE>
CERTIFICATE OF INCORPORATION
OF
MACROCHEM CORPORATION
*****
1. The name of the Corporation is MacroChem Corporation.
2. The address of its registered office in the State of Delaware is 1209
Orange Street, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is The Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted is:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. The total number of shares of stock which the corporation shall have
authority to issue is sixty-six million (66,000,000) shares, 60,000,000 of which
shall be Common Stock, of the par value of One Cent ($.01) per share; 6,000,000
of which shall be Preferred Stock, of the par value of One Cent ($.01) per
share, 500,000 of which shall be designated as "Series A Convertible Preferred
Stock", of the par value of One Cent ($.01), amounting in the aggregate to Six
Hundred Sixty Thousand and 00/100 Dollars ($660,000.00).
Additional designations and powers, preferences and rights and
qualifications, limitations or restrictions thereof of the shares of stock shall
be determined by the Board of Directors of the Corporation from time to time.
5. The name and mailing address of the Corporation's incorporator is George
A. Stevens, 110 Hartwell Avenue, Lexington, Massachusetts 02173.
6. The names and addresses of the following are to serve as the directors
until the first annual meeting of the stockholders or until his successor are
elected and qualified:
Alvin J. Karloff George A. Stevens
13 Clara Road 66 Fifar Lane
Framingham, MA 01701 Lexington, MA 02173
Carlos M. Samour D. Raymond Taylor
254 Ocean Avenue Docugraphix, Inc.
Newport, RI 02840 1601 Saratoga Sunnyvale Road
Cupertino, CA 95014
7. The Corporation is to have perpetual existence.
8. In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized:
To make, alter or repeal the bylaws of the Corporation,
To authorize and cause to be executed mortgages and liens upon the real and
personal property of the Corporation.
To set apart out of any the funds of the Corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any such
reserve in the manner in which it was created.
By a majority of the whole board, to designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. The bylaws may provide that in the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in place of any such agent or disqualified member. Any such committee,
to the extent provided in the resolution of the board of directors, or in the
bylaws of the Corporation, shall have and may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease, or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
bylaws of the Corporation; and, unless the resolution or bylaws expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
When and as authorized by the stockholders in accordance with statute,
to sell, lease or exchange all or substantially all of the property and assets
of the Corporation, including its goodwill and its corporate franchises, upon
such terms and conditions and for such consideration, which may consist in
whole or in part of money or property, including shares of stock in, and/or
other securities of, any other Corporation or Corporations, as its board of
directors shall deem expedient and for the best interests of the Corporation.
9. To the maximum extent permitted by Section 102(b)(7) of the General
Corporation Law of Delaware, a director of this Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
10. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement to any
reorganization of this Corporation as consequences of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
11. Meetings of the stockholders may be held within or without the State
of Delaware, as the bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation. Elections of directors
need not be by written ballot unless the bylaws of the Corporation shall so
provide.
12. The Corporation reserves the right to amend, alter, change, or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
THE UNDERSIGNED, being the incorporator named hereinbefore, for the
purposes of forming a Corporation pursuant to the General Corporation Law of the
State of Delaware, does make this certificate, hereby declaring and
certifying that this is his act and deed and the facts herein stated are true,
and accordingly, has hereunto set his hand this 14th day of May, 1992.
/s/George A. Stevens
--------------------
George A. Stevens
COMMONWEALTH OF MASSACHUSETTS)
) ss.:
COUNTY OF MIDDLESEX )
BE IT REMEMBERED that on the 14th day of May, 1992, personally came before
me, a Notary Public for the Commonwealth of Massachusetts, George A. Stevens,
the party to the foregoing Certificate of Incorporation, known to me personally
to be such, and acknowledged the said certificate to be his act and deed and
that the facts stated therein are true.
GIVEN under my hand and seal of office this day and year aforesaid.
/s/Jane M. Davenport
---------------------
Notary Public
My commission expires: 03/04/94
JM-4
VOID AFTER 5:00 P.M., New York Time, on June 17, 1999
Warrant to Purchase 145,800 Shares of Common Stock.
THIS WARRANT, AND THE COMMON STOCK ISSUABLE UPON ITS EXERCISE, HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, DISPOSED OF OR OFFERED FOR
SALE, IN WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THAT ACT COVERING THIS WARRANT AND/OR THE COMMON STOCK ISSUABLE UPON
EXERCISE THEREOF, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO MACROCHEM
CORPORATION THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
WARRANT TO PURCHASE COMMON STOCK
OF
MACROCHEM CORPORATION
This is to Certify That, FOR VALUE RECEIVED, JANSSEN-MEYERS ASSOCIATES,
L.P., or assigns ("Holder"), is entitled to purchase, subject to provisions of
this Warrant, from MacroChem Corporation, a Delaware corporation ("Company"),
One Hundred Forty-Five Thousand Eight Hundred (145,800) fully paid, validly
issued and nonassessable shares of Common Stock, $.01 par value, of the Company
("Common Stock") at a price of $6.075 per share. This Warrant is exercisable at
any time or from time to time from the date hereof until 5:00 p.m. New York City
time on June 17, 1999. The number of shares of Common Stock to be received upon
the exercise of this Warrant and the price to be paid for each share of Common
Stock underlying this Warrant may be adjusted from time to time as hereinafter
set forth. The shares of Common Stock deliverable upon exercise of this Warrant,
and as adjusted from time to time, are hereinafter sometimes referred to as
"Warrant Shares" and the exercise price of a share of Common Stock in effect at
any time and as adjusted from time to time is hereinafter referred to as the
"Exercise Price."
(a) EXERCISE OF WARRANT. Provided this Warrant becomes exercisable in
accordance with the terms hereof, this Warrant may be exercised in whole or in
part at any time or from time to time on or after the date hereof until June 17,
1999; provided, however, that (i) if such day is a day on which banking
institutions in the State of New York are authorized by law to close, then on
the next succeeding day which shall not be such a day, and (ii) in the event of
any merger, consolidation or sale of substantially all the assets of the Company
as an entirety, resulting in any distribution to the Company's stockholders, the
Holder shall have the right to exercise this Warrant through June 17, 1999 into
the kind and amount of shares of stock and other securities and property
(including cash) receivable by a holder of the number of shares of Common Stock
into which this Warrant might have been exercisable immediately prior thereto.
This Warrant may be exercised by presentation and surrender hereof to the
Company at its principal office, or, at the Company's option, at the office of
its stock transfer agent, if any, with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price for the number of
Warrant Shares specified in such forms. As soon as practicable after each such
exercise of the Warrant, but not later than seven (7) days from the date of such
exercise, the Company shall issue and deliver to the Holder a certificate or
certificates for the Warrant Shares issuable upon such exercise, registered in
the name of the Holder or its designee. If this Warrant should be exercised in
part only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt
by the Company of this Warrant at its office, or by the stock transfer agent of
the Company at its office, in proper form for exercise, the Holder shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such shares of Common
Stock shall not then be physically delivered to the Holder.
(b) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
this Warrant.
(c) FRACTIONAL SHARES. No fractional shares of scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon exercise hereof, the Company
shall pay to the Holder an amount in cash equal to such fraction multiplied by
the current market value of a share, determined as follows:
(1) If the Common Stock is listed on a National Securities Exchange or
admitted to unlisted trading privileges on such exchange or listed for
trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the
last business day prior to the date of exercise of this Warrant or if no
such sale is made on such day, the average closing bid and asked prices for
such day on such exchange or system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this
Warrant; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount determined in such reasonable
manner as may be prescribed by the Board of Directors of the Company.
(d) TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is not
transferable or assignable without the prior written consent of the Company.
Upon receipt by the Company or evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date. Any such new Warrant executed and
delivered shall constitute an additional contractual obligation on the part of
the Company, whether or not this Warrant so lost, stolen, destroyed, or
mutilated shall be at any time enforceable by anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ADJUSTMENTS. The Exercise Price in effect at any time and the number
and kind of securities purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
(1) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock
into a greater number of shares, or (iii) combine of reclassify its
outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price of this Warrant in effect at the time of the record date for
such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that
the Holder of this Warrant exercised after such date shall be entitled to
receive the aggregate number and kind of shares which, if this Warrant had
been exercised by such Holder immediately prior to such date, he would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification.
(2) All calculations under this Section (f) shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may
be. Anything in this Section (f) to the contrary notwithstanding, the
Company shall be entitled, but shall not be required, to make such changes
in the Exercise Price, in addition to those required by this Section (f),
as it shall determine, in its sole discretion, to be advisable in order
that any dividend or distribution in shares of Common Stock, or any
subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax liability to
the holders of Common Stock or securities convertible into Common Stock
(including Warrants).
(3) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (1) above, the Holder of this Warrant thereafter
shall become entitled to receive any shares of the Company, other than
Common Stock, thereafter the number of such other shares so receivable upon
exercise of this Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Subsections (1)
and (2), above.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as
required by the provisions of the foregoing Section, the Company shall forthwith
file in the custody of its Secretary or an Assistant Secretary at its principal
office and with the stock transfer agent responsible for this Warrant, if any,
an officer's certificate showing the adjusted Exercise Price determined as
herein provided, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason for
and the manner of computing such adjustment. Each such officer's certificate
shall be made available at all reasonable times for inspection by the Holder or
any holder of a Warrant executed and delivered pursuant to Section (a) and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such certificate to the Holder or any such holder. In the event of a
failure by the Company to deliver an officer's certificate within thirty (30)
days of the occurrence of an event requiring an adjustment under the provisions
of the foregoing Section, the Termination Date shall be extended by the length
of time equal to the time between the thirtieth day after the adjustment event
and the date the officer's certificate is delivered.
(h) NOTICES TO THE WARRANT HOLDER. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any share of any class or any
other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least ten days prior to the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up. Notwithstanding the foregoing, the failure to provide the notice
required by this Section shall not invalidate any proceedings or actions taken
by the Company pursuant to a sufficient vote of the stockholders entitled to
vote on any such proceeding or action.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant at any time
prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section (i) shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances. In
the event that in connection with any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, commission, substitution or
payment, in whole or in part, for a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock covered by
the provisions of Subsection (1) of Section (f) hereof.
(j) "PIGGYBACK" REGISTRATION RIGHTS. If, on or after the first anniversary
of the date hereof and prior to the Termination Date, the Company shall
determine to proceed with the actual preparation and filing of a registration
statement under the Securities Act of 1933, as amended (the "Act") in connection
with the proposed offer and sale of any of its securities by it or any of its
security holders (other than a registration statement of Form S-4, S-8 or other
limited purpose form), the Company will give written notice of its determination
to the Holder. Upon the written request from the Holder within twenty (20) days
after receipt of any such notice from the Company, the Company will, except as
herein provided, cause that number of shares of Common Stock then issuable upon
exercise of this Warrant (collectively, the "Registrable Securities") requested
by the Holder to be included in such registration statement to be so included,
all to the extent requisite to permit the sale or other disposition by the
prospective seller or sellers of the Registrable Securities to be so registered;
provided, further, that nothing herein shall prevent the Company from, at any
time, abandoning or delaying any registration. If any registration pursuant to
this section shall be underwritten in whole or in part, the Company may require
that the Registrable Securities requested for inclusion pursuant to this section
be included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters.
Notwithstanding the foregoing, if the managing underwriter determines and
advises in writing that the inclusion of all Registrable Securities proposed to
be included in the underwritten public offering, together with any other issued
and outstanding securities proposed to be included therein by holders other than
the Holder of Registrable Securities, would interfere with the successful
marketing of such securities, then the number of such shares that the managing
underwriter believes may be sold in such underwritten public offering shall be
allocated for inclusion in the registration statement in the following order of
priority: (i) the securities being offered by the Company, (ii) securities being
offered by holders having registration rights senior in right to the
registration rights set forth in this Warrant, (iii) the number of Registrable
Securities then owned by each such holder of such Registrable Securities on a
pro rata basis, based upon the number of Registrable Securities sought to be
registered by each such holder; and (iv) the number of securities held by
holders other than the holders of Registrable Securities, on a pro rata basis,
based upon the number of securities sought to be registered by each such holder.
The securities that are excluded from the underwritten public offering shall be
withheld from the market by the holders thereof for a period, not to exceed 180
days, that the managing underwriter reasonably determines is necessary in order
to effect the underwritten public offering.
The Company shall pay all expenses for registration statements filed
pursuant to this section.
(k) INVESTMENT REPRESENTATIONS. By its acceptance of this Warrant, the
Holder represents and covenants that:
(1) This Warrant and any shares issuable upon exercise of this Warrant
shall be acquired for the Holder's own account for investment and not with
a view toward resale or redistribution in violation of the Act, or any rule
or regulation under the Act;
(2) The Holder has made such investigation and obtained such
information as is necessary to permit the Holder to evaluate the merits and
risks of the Holder's investment in the Company;
(3) The Holder has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the
purchase of shares issuable upon exercise of this Warrant and to make an
informed investment decision with respect to such purchase;
(4) The Holder is able to afford a complete loss of the value of the
shares issuable upon exercise of this Warrant and is able to bear the
economic risk of holding such shares for an indefinite period; and
(5) The Holder understands that (A) the shares acquired by the
exercise of this Warrant will not have been registered under the Act and,
therefore, cannot be sold, transferred or otherwise disposed of unless they
are subsequently registered under the Act or an exemption from registration
is then available and (B) except as provided in paragraph (j) the Company
has no obligation to register the shares under the Act.
(l) LEGEND ON STOCK CERTIFICATE. All stock certificates representing shares
of Common Stock issued upon exercise of this Warrant shall have affixed thereto
a restrictive legend in the following form, in addition to any other legend
required by applicable law:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE OFFERED, SOLD OR
TRANSFERRED UNLESS THEY HAVE BEEN REGISTERED UNDER SUCH ACT OR APPLICABLE
STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
The Holder consents to the Company making a notation on its records and giving
instructions to any transfer agent of the shares in order to implement the
restrictions on transfer established in this Warrant.
(m) RESTRICTION OF TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH THE ACT.
(1) This Warrant and the Warrant Shares shall not be sold, assigned,
transferred or pledged except upon the conditions specified in Section (d)
and in this Section (m). The Holder will cause any proposed purchaser,
assignee, transfere, or pledgee of the Warrant or the Warrant Shares to
agree to take and hold such securities subject to the provisions and upon
the conditions of Section (d) and this Section (m).
(2) The Holder of this Warrant or any certificate representing Warrant
Shares, by acceptance thereof, agrees to comply in all respects with the
provisions of this Section (m). Prior to any proposed sale, assignment,
transfer or pledge of this Warrant or any Warrant Shares (other than a
transfer not involving a change in beneficial ownership) unless there is in
effect a registration statement under the Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of
such holder's intention to effect such transfer, sale, assignment or
pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail, and
shall be accompanied, at such holder's expense by either (i) an unqualified
written opinion of legal counsel, who shall (and whose legal opinion shall)
be reasonably satisfactory to the Company, addressed to the Company, to the
effect that the proposed transfer of the Warrant Shares, as the case may
be, may be effected without registration under the Act, or (ii) a "no
action" letter from the Securities and Exchange Commission to the effect
that the transfer of such securities without registration will not result
in a recommendation by the staff of the Commission that action be taken
with respect thereto, whereupon, if the Company consents, the holder of
such securities shall be entitled to transfer such securities in accordance
with the terms of the notice delivered by the holder to the Company. Each
certificate evidencing the Warrant Shares transferred as above provided
shall bear, except if such transfer is made pursuant to Rule 144 or
pursuant to an effective registration statement under the Act covering the
transfer, the appropriate restrictive legend set forth in Section (l)
above.
MACROCHEM CORPORATION
By: /s/ Alvin J. Karloff
-----------------------
Alvin J. Karloff, President and
Chief Executive Officer
- --------------------------------
[SEAL]
Dated: As of June 17, 1996
Attest:
/s/Pierrette E. Samour
- --------------------------------
Secretary & Treasurer
PURCHASE FORM
Dated __________________, 19____
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing _______________ shares of Common Stock and
hereby makes payment of ____________________ in payment of the actual exercise
price thereof.
-------------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name __________________________________________________________________
(Please typewrite or print in block letters)
Address _______________________________________________________________
Signature _____________________________________________________________
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________________________________________
hereby sells, assigns and transfers unto
Name _______________________________________________________________
(Please typewrite or print in block letters)
Address _______________________________________________________________
pursuant to the within Warrant the right to purchase Common Stock represented by
this Warrant to the extent of ___________ shares as to which such right is
exercisable and does hereby irrevocably constitute and appoint
___________________________Attorney, to transfer the same on the books of the
Company with full power of substitution in the premises.
Date _______________, 19_______
Signature _______________________________________________
As Amended and Approved
by the Board of Directors as
of March 1, 1991, and as
amended November 15, 1996
MacroChem Corporation
1984 NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSE. The purpose of the MacroChem Corporation 1984 Non-Qualified
Stock Option Plan (the "Plan") is to advance the interests of MacroChem
Corporation (the "Company") by enhancing the Company's ability to reward
selected key employees, directors, and consultants of the Company and of any
future subsidiary of the Company, Scientific Sentinels and members of the
Company's Scientific Advisory Council for their contributions to the success of
the Company and to encourage such persons to accept or continue association with
the Company and its subsidiaries. Accordingly, the Company will offer to sell
shares of common stock of the Company, $0.005 par value, (the "Stock") as
hereinafter provided to such persons as are designated in accordance with the
provisions of the Plan.
2. ADMINISTRATION. The Plan shall be administered by the Board of Directors
of the Company (the "Board") which shall (a) determine which of the employees,
directors, and consultants of the Company and its subsidiaries, Scientific
Sentinels and Scientific Advisory Council members shall be granted options; (b)
determine the time or times when options shall be granted and the number of
shares of Stock to be subject to each option; (c) determine the time or times
when each option becomes exercisable and the duration of the exercise period;
(d) prescribe the form or forms of the instruments evidencing any options
granted under the Plan and of any other instruments required under the Plan and
change such forms from time to time; (e) adopt, amend and rescind rules and
regulations for the administration of the Plan; and (f) interpret the Plan and
decide all questions and settle all controversies and disputes which may arise
in connection with the Plan. All decisions, determinations and interpretations
of the Board of Directors shall be binding on all parties concerned.
The Board may, in its discretion, delegate its powers with respect to the
Plan to a Compensation Committee or any other committee (the "Committee"), in
which event all references to the Board hereunder shall be deemed to refer to
the Committee. The Committee shall consist of at least two directors. A majority
of members of the Committee shall constitute a quorum, and all determinations of
the Committee shall be made by a majority of its members. Any determination of
the Committee under the Plan may be made without notice or meeting of the
Committee by a writing signed by a majority of Committee members.
3. PARTICIPANTS. The Participants in the Plan shall be such key employees,
directors and consultants of the Company or of any of its subsidiaries,
Scientific Sentinels and members of the Company's Scientific Advisory Council,
whether or not also directors, as may be selected from time to time by the Board
of Directors in its discretion as being in a post to contribute substantially to
the success of the Company or such subsidiaries.
4. PERIOD OF GRANT. No option shall be granted under the Plan after March
31, 1994 but options previously granted may extend beyond that date.
5. TERMS AND CONDITIONS OF OPTIONS. All options granted under the Plan
shall be subject to the following terms and conditions (except as provided in
Sections 7 and 8 below) and to such other terms and conditions as the Board of
Directors shall determine to be appropriate to accomplish the purpose of the
Plan:
(a) OPTION PRICE. The purchase price for shares issuable upon exercise
of options shall be determined by the Board of Directors.
(b) PERIOD OF OPTIONS. An option, by its terms, shall not be
exercisable after the expiration of 10 years from the date of grant of such
option.
(c) EXERCISE OF OPTIONS.
(1) Each option shall be exercisable at such time or times,
whether or not in installments, as the Board of Directors shall have
prescribed at the time the option was granted. In the case of an
option not immediately exercisable in full, the Board of Directors may
at any time accelerate the time at which all or part of the option may
be exercised.
(2) A person electing to exercise an option shall give written
notice to the Company, as specified by the Board of Directors, of his
election and of the number of shares he has elected to purchase, such
notice to be accompanied by:
(i) the instrument evidencing such option;
(ii) payment for all shares then being purchased thereunder
in full in the form of cash, check or, through the delivery of
shares of Common Stock (duly owned by the holder of the option
and for which the holder has good title free and clear of any
liens and encumbrances) having a fair market value on the last
business day preceding the date of exercise equal to the purchase
price, or a combination of cash and Common Stock or in such other
form as the Board shall designate at the time an option is
granted;
(iii) payment from the appropriate person in (A) cash,
(B)check or, (C) if the Board determines at the time an option is
exercised, through the delivery ofshares of Common Stock (duly
owned by the Participant and for which the Participant has good
title free and clear of any liens and encumbrances), having a
fair market value on the last business day preceding the date of
exercise, of an amount equal to all applicable local, state or
federal withholding taxes, if any, or such other assurance of the
payment to the Company of such amount as shall be satisfactory to
the Board of Directors in their sole discretion (for such
purposes, the participation of a person exercising an option in a
so-called "cashless exercise program", pursuant to which a broker
sells the shares underlying an option, and delivers a portion of
the proceeds after the sale to the Company in payment of the
option exercise price and tax liability shall be deemed to be
sufficient assurance of payment hereunder);
(iv) any other documents required by the Board of Directors.
The date of receipt by the Company of such notice, accompanied by the
instruments, other documents, undertakings and payments referred to in or
required by Sections 5(c) and 5(d) hereof shall be the date of exercise.
(3) A person exercising an option shall execute and deliver to
the Company any shareholder's agreement or other agreements which are
required by the terms of the option being exercised, and, unless and
until such agreements have been executed and delivered, the Company
shall not be obligated to deliver any shares hereunder.
(d) DELIVERY OF STOCK. Stock to be delivered under the Plan may
constitute an original issue of authorized stoic or may consist of
previously issued stock acquired by the Company, as shall be determined by
the Board. The Board and the proper officers of the Company shall take any
appropriate action required for such delivery. The Company shall not be
obligated to deliver any shares unless and until, in the opinion of the
Company's counsel, all applicable federal and state laws and regulations
have been complied with, nor, in the event the Stock is at the time listed
upon any stock exchange, unless and until the shares to be delivered have
been listed or authorized to be added to the list upon official notice of
issuance upon such exchange, nor unless or until all other legal matters in
connection with the issuance and delivery of shares have been approved by
the Company's counsel. Without limiting the generality of the foregoing,
the Company may require from the person exercising an option such
investment representation or such agreement, if any, as counsel for the
Company may consider necessary in order to comply with the Securities Act
of 1933, as amended, and any applicable Blue Sky or state securities laws
and may require that the person agree that any sale of the shares will be
made only on the stock exchange or in such other manner as is permitted by
the Board and that he will notify the Company when he makes any disposition
of the shares whether by sale, gift or otherwise. The Company shall use its
best efforts to effect any such compliance and listing, and the person
exercising the option shall take any action reasonably requested by the
Company in such connection. A person exercising an option shall have the
rights of a shareholder only as to shares actually acquired by him under
the Plan.
(e) NONTRANSFERABILITY OF OPTIONS. Each option, by its terms, shall
not be transferable by the Participant otherwise than by will or by the
laws of descent and distribution, and during the Participant's lifetime the
option shall be exercisable only by him, except that options awarded to
employees or members of the Board of Directors which are not incentive
stock options may be transferred by a participant to (i) the spouse,
children or grandchildren of the participant ("Immediate Family Members"),
(ii) a trust or trusts for the exclusive benefit of such Immediate Family
Members, or (iii) a partnership in which such Immediate Family Members are
the only partners, provided that (x) there may be no consideration for any
such transfer, and (y) subsequent transfers of options shall be prohibited
except those in accordance with Section 5(e) hereof. Following any such
transfer, the transferred option shall continue to be subject to all the
terms and conditions of the instrument evidencing the option, including
without limitation any provisions thereof with respect to exercise of the
option following the death or termination of employment of the participant
to whom the option was originally granted, and the provisions of the Plan,
including Section 5(c) hereof.
6. REPLACEMENT OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of other corporations who
concurrently become employees of the Company or a subsidiary as the result of a
merger or consolidation of another corporation with the Company or subsidiary,
or the acquisition by the Company or a subsidiary of property or stock of
another corporation.
7. MAXIMUM NUMBER OF SHARES. Subject to adjustment as provided in Section 8
of the Plan, the number of shares of the Stock of the Company which may be
delivered under the Plan shall not exceed $1,550,000 in the aggregate. To the
extent that any options granted under the Plan shall lapse or be terminated, the
shares with respect to which the option has lapsed or been terminated shall
thereafter be available for option under the Plan, within the limit specified
above.
8. CHANGES IN STOCK. In the event of a stock dividend, split-up or
combination of shares, recapitalization or merger in which the Company is the
surviving corporation, or other similar capital change, the number and kind of
shares of stock or securities of the Company to be subject to options then
outstanding, the maximum number of shares or securities which may be issued or
sold under the Plan, the option price and other relevant provisions shall be
appropriately adjusted by the Board of Directors of the Company, whose
determination shall be binding on all persons. In the event of a consolidation
or a merger in which the Company is not the surviving corporation, or in the
event of complete liquidation of the Company, the Board of Directors shall make
all outstanding options immediately exercisable or arrange to have any surviving
corporation grant replacement options, of substantially equivalent value to
those replaced, to the Participants.
9. EMPLOYMENT RIGHTS. The adoption of the Plan does not confer upon any
Participant any right to continued association with the Company or a subsidiary,
as the case may be, nor does it interfere in any way with the right of the
Company or a subsidiary to terminate the employment of any of its employees at
any time.
10. AMENDMENTS. The Board of Directors may at any time discontinue granting
options under the Plan and may at any time amend the Plan or any outstanding
options for the purpose of satisfying the requirements of any changes in
applicable laws or regulations or for any other purpose which may at the time be
permitted by law, provided, however, that no such amendment shall adversely
affect the rights of any Participant (without his consent) under any option
theretofore granted.
11. EFFECTIVE DATE. The Plan and any amendments thereto shall become
effective on the date on which it is approved by the Board of Directors of the
Company. The original plan became effective in April, 1984. This Amendment
became effective in March, 1991.
As Amended February 11, 1994
and November 15, 1996
MACROCHEM CORPORATION
1984 INCENTIVE STOCK OPTION PLAN
1. PURPOSE. The purpose of the MacroChem Corporation Incentive Stock Option
Plan (hereinafter referred to as the "Plan") is to provide a special incentive
to selected key employees of MacroChem Corporation (hereinafter referred to as
the "Company") or of any future subsidiary of the Company to improve operations
and to increase profits and to encourage such persons to accept or continue
employment with the Company or any subsidiary of the Company. Accordingly, the
Company will offer to sell shares of common stock of the Company, $0.01 par
value, (the "Stock") as hereinafter provided to such employees of the Company or
of any subsidiary as are designated in accordance with the provisions of the
Plan. For purposes of the Plan, a subsidiary is any corporation in which the
Company owns, directly or indirectly, stock possessing 50% or more of the total
combined voting power of all classes of stock.
2. ADMINISTRATION. The Plan shall be administered by the Board of Directors
of the Company (the "Board") which shall (a) determine which of the employees of
the Company and its subsidiaries shall be granted options; (b) determine the
time or times when options shall be granted and the number of shares of stock to
be subject to each option; (c) determine the exercise price of the shares
subject to each option and the method of payment of such price; (d) determine
the times or times when each option becomes exercisable and the duration of the
exercise period; (e) prescribe the form or forms of the instruments evidencing
any options granted under the Plan and of any other instruments required under
the Plan and change such forms from time to time; (f) adopt, amend and rescind
rules and regulations for the administration of the Plan; and (g) interpret the
Plan and decide all questions and settle all controversies and disputes which
may arise in connection with the Plan. All decisions, determinations and
interpretations of the Board of Directors shall be binding on all parties
concerned.
The Board may, in its discretion delegate its powers with respect to the
Plan to a Compensation Committee or any other committee (the "Committee"), in
which event all references to the Board hereunder shall be deemed to refer to
the Committee. The Committee shall consist of at least two directors. A majority
of members of the Committee shall constitute a quorum, and all determinations of
the Committee shall be made by a majority of its members. Any determination of
the Committee under the Plan may be made without notice or meeting of the
Committee by a writing signed by a majority of Committee members. Following
registration of the Common Stock of the Company under the Securities Exchange
Act of 1934, no person shall serve on the Committee unless he is a non-employee
director within the meaning of Rule 16b-3 under that Act.
3. PARTICIPANTS. The Participants in the Plan shall be key salaried
employees of the Company or of any of its subsidiaries.
4. LIMITATIONS ON GRANTING OF OPTIONS. The granting of options under the
Plan shall be subject to the following limitations:
(a) PERIOD OF GRANT. No option shall be granted under the Plan after
the expiration of 10 years from the earlier of the date on which the Plan
is adopted or the date on which it is approved by the shareholders of the
Company.
(b) QUALIFIED PARTICIPANT. Except as hereinafter provided, no option
shall be granted to a Participant if, at the time of the grant, the
Participant owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of its
subsidiaries. For purposes of determining a Participant's ownership of
stock for purposes of the preceding sentence, the ownership attribution
rules of Section 424(d) of the Internal Revenue Code of 1986, as amended
(the "Code") will apply. The foregoing limitations will not apply if (i)
the option price is at least 110 percent of the fair market value of the
stock subject to the option at the time it is granted and (ii) the period
of the option does not exceed five years from the date of grant.
(c) MAXIMUM ANNUAL LIMIT. The aggregate fair market value, determined
at the time the option is granted, of the stock for which any Participant
may be granted options in any calendar year under the Plan (and under all
other incentive stock option plans of the Company and of its subsidiaries)
may not exceed the sum of (i) $100,000 plus (ii) any unused limit carryover
to such year as determined under the applicable provisions of the Code and
Treasury Regulations for incentive stock options.
5. TERMS AND CONDITIONS OF OPTIONS. All options granted under the Plan
shall be subject to the following terms and conditions (except as provided in
Sections 7 and 8 below) and to such other terms and conditions consistent with
the applicable provisions of the Internal Revenue Code and Treasury Regulations
for incentive stock options as the Board of Directors shall determine to be
appropriate to accomplish the purposes of the Plan.
(a) OPTION PRICE. The option price under each option shall be
determined by the Board of Directors and shall not be less than 100% of the
fair market value per share at the time the option is granted; nor shall
the option price be less, in the case of an original issue of authorized
stock, than par value. However, if at the time of grant, the Participant
owns stock possessing more than 10 percent of the total combined voting
power of all classes of stock of the Company or of its subsidiaries, the
option price shall not be less than 110% of the fair market value of the
stock subject to the option.
(b) PERIOD OF OPTIONS. An option, by its terms, shall not be
exercisable after the expiration of 10 years from the date of grant of such
option. However, if at the time of grant, the Participant owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of its subsidiaries, the option, by its
terms, shall not be exercisable after the expiration of 5 years from the
date of grant of such option.
(c) EXERCISE OF OPTIONS.
(1) Each option shall be made exercisable at such time or times,
whether or not in installments, as the Board of Directors shall
prescribe at the time the option is granted. In the case of an option
not immediately exercisable in full, the Board of Directors may at any
time accelerate the time at which all or any part of the option may be
exercised. However, every option, by its terms, shall not be
exercisable while there is outstanding (within the meaning of Section
422A(c)(7) of the Internal Revenue Code) any incentive stock option
previously granted to the Participant to purchase stock in the Company
or in a corporation which (at the time of grant of such option) is a
parent or subsidiary of the Company, or is a predecessor corporation
of any such corporation.
(2) A person electing to exercise an option shall give written
notice to the Company, as specified by the Board of Directors, of his
election and of the number of shares he has elected to purchase, such
notice to be accompanied by:
(i) the instrument evidencing such option;
(ii) payment for all shares then being purchased thereunder
in full in the form of cash, a certified check or cashier's check
or, unless the Board otherwise determines at the time an option
is granted, through the delivery of shares of Common Stock (duly
owned by the Participant and for which the Participant has good
title free and clear of any liens and encumbrances which have
been held by the Participant for at least six months (or such
shorter period as the Board may determine) having a fair market
value on the last business day preceding the date of exercise
equal to the purchase price, or a combination of cash and Common
Stock or in such other form as the Board shall designate at the
time an option is granted;
(iii) payment in cash or by certified or bank check of an
amount equal to all applicable local, state or federal
withholding taxes, if any, or such other assurance of the payment
to the Company of such amount as shall be satisfactory to the
Board of Directors in their sole discretion, including if the
Board of Directors so determines in the case of an incentive
stock option such provision as the Board deems appropriate for
the payment of any withholding taxes that may be due upon a later
disposition of the stock acquired upon exercise of the option;
and
(iv) any other documents required by the Board of Directors.
(3) A person exercising an option shall execute and deliver to
the Company any shareholder's agreement or other agreements which the
Board of Directors, in its sole discretion, may require at the time of
exercise, and unless and until such agreements have been executed and
delivered, the Company shall not be obligated to deliver any shares
hereunder.
(d) DELIVERY OF STOCK. Stock to be delivered under the Plan may
constitute an original issue of authorized stock or may consist of
previously issued stock acquired by the Company, as shall be determined by
the Board. The Board and the proper officers of the Company shall take any
appropriate action required for such delivery. The Company shall not be
obligated to deliver any shares unless and until in the opinion of the
Company's counsel, all applicable federal and state laws and regulations
have been complied with, nor, in the event the Stock is at the time listed
upon any stock exchange, unless and until the shares to be delivered have
been listed or authorized to be added to the list upon official notice of
issuance upon such exchange, nor unless or until all other legal matters in
connection with the issuance and delivery of shares have been approved by
the Company's counsel. Without limiting the generality of the foregoing,
the Company may require from the person exercising an option such
investment representation or such agreement, if any, as counsel for the
Company may consider necessary in order to comply with the Securities Act
of 1933 and may require that the person agree that any sale of the shares
will be made only on the stock exchange or in such other manner as is
permitted by the Board and that he will notify the Company when he makes
any disposition of the shares whether by sale, gift or otherwise. The
Company shall use its best efforts to effect any such compliance and
listing, and the person exercising the option shall take any action
reasonably requested by the Company in such connection. A person exercising
an option shall have the rights of a shareholder only as to shares actually
acquired by him under the Plan.
(e) NONTRANSFERABILITY OF OPTIONS. Each option, by its terms, shall
not be transferable by the Participant otherwise than by will or by the
laws of descent and distribution, and during the Participant's lifetime the
option shall be exercisable only by him.
(f) TERMINATION OF EMPLOYMENT. Except as otherwise provided in
subparagraphs (g) and (h) below, if the employment of a Participant
terminates for any reason, his option shall expire immediately and he shall
not be entitled to purchase any shares.
(g) DISABILITY AND RETIREMENT. In the event of termination of
employment as a result of disability within the meaning of section
105(d)(4) of the Internal Revenue Code, retirement on or after age 65, or
retirement on or after age 55 after 10 years of continuous employment by
the Company, that portion of a Participant's option that was exercisable
immediately prior to termination will continue to be exercisable for the
original term of the option, and that portion of the option that was not
exercisable immediately prior to termination will expire, unless otherwise
determined by the Board of Directors.
(h) DEATH. If a Participant dies at a time when he is entitled to
exercise an option, then at any time or times within ninety days after his
death such option may be exercised, as to all or any of the shares which
the Participant was entitled to purchase immediately prior to his death, by
his executor or administrator or the person or persons to whom the option
is transferred by will or the applicable laws of descent and distribution,
and except as so exercised such option shall expire at the end of such
period. In no event, however, may any option be exercised after the
expiration of the option period. If any notice of election to exercise an
option is given by the executor or administrator of a deceased Participant,
or by the person or persons to whom the option has been transferred by the
Participant's will or the applicable laws of descent and distribution, the
Company shall be under no obligation to deliver shares pursuant to such
exercise unless and until the Company is satisfied that the person or
persons giving such notice is or are entitled to exercise the option and
unless and until the persons have executed and delivered any other
agreements or documents which the Board of Directors may require.
6. REPLACEMENT OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of other corporations who
concurrently become employees of the Company or a subsidiary as the result of a
merger or consolidation of another corporation with the Company or subsidiary,
or the acquisition by the Company or a subsidiary of property or stock of
another corporation.
7. MAXIMUM NUMBER OF SHARES. Subject to adjustment as provided in Section 8
of the Plan, the number of shares of the Stock of the Company which may be
delivered under the Plan shall not exceed 2,000,000 in the aggregate. To the
extent that any options granted under the Plan shall lapse or be terminated, the
shares with respect to which the option has lapsed or been terminated shall
thereafter be available for option under the Plan, within the limit specified
above. The maximum number of shares (subject to adjustment as provided in
Section 8) for which options may be granted to any individual during the term of
the Plan is ________ shares. The preceding sentence shall be construed
consistent with the regulations under Section 162(m) of the Code.
8. CHANGES IN STOCK. In the event of a stock dividend, split-up or
combination of shares, recapitalization or merger in which the Company is the
surviving corporation, or other similar capital change, the number and kind of
shares of stock or securities of the Company to be subject to options then
outstanding, the maximum number of shares or securities which may be issued or
sold under the Plan, the option price and other relevant provisions shall be
appropriately adjusted by the Board of Directors of the Company, whose
determination shall be binding on all persons. In the event of a consolidation
or a merger in which the Company is not the surviving corporation, or which
results in the acquisition of substantially all the Company's outstanding stock
by a single person or entity or by a group of persons and/or entities acting in
concert or in the event of the sale or transfer of substantially all the
Company's assets or a complete liquidation of the Company, all outstanding
options shall thereupon terminate, provided that the Board of Directors may, in
its discretion, make all outstanding options immediately exercisable or arrange
to have any surviving corporation grant replacement options to the Participants.
9. EMPLOYMENT RIGHTS. The adoption of the Plan does not confer upon any
employee of the Company or a subsidiary any right to continued employment with
the Company or a subsidiary, as the case may be, nor does it interfere in any
way with the right of the Company or a subsidiary to terminate the employment of
any of its employees at any time.
10. AMENDMENTS. The Board of Directors may at any time discontinue granting
options under the Plan and may at any time amend the Plan or any out- standing
options for the purpose of satisfying the requirements of any changes in
applicable laws or regulations or for any other purpose which may at the time be
permitted by law, provided, however, that (except to the extent required or
permitted under Sections 7 or 8) no amendments shall, without the approval of
the shareholders of the Company (a) increase the maximum number of shares
available under the Plan, (b) change the class of employees eligible for
options, (c) reduce the minimum option price of options thereafter to be granted
below the price provided for in Section 5(a), (d) reduce the option price of
outstanding options, (e) extend the time within which options may be granted,
(f) extend the period of an outstanding option beyond ten years from the date of
grant, (g) alter the restriction on exercising subsequent incentive stock
options which is contained in Section 5(c)(1) or (h) alter the maximum annual
limit of option grants contained in Section 4(c), and no such amendment shall
adversely affect the rights of any Participant (without his consent) under any
option theretofore granted.
11. EFFECTIVE DATE. The Plan shall become effective as of April 1, 1984,
subject to the approval of the Board of Directors and subject to the vote of the
holders of at least a majority of the shares of the outstanding voting stock of
the Company.
SECOND AMENDMENT TO LEASE
110 HARTWELL AVENUE, LEXINGTON, MA.
AT PREMISES ON PORTION OF FIRST FLOOR
LEASE DATED JANUARY 17, 1992
DATE OF AMENDMENT: DECEMBER 9, 1996
LANDLORD: LEXINGTON BGK ASSOCIATES, LIMITED PARTNERSHIP
TENANT: MACROCHEM CORPORATION
Whereas pursuant to the Lease of January 17, 1992, as amended on December 21,
1993 (the "Lease"), the Landlord: Lexington BGK Associates, Limited Partnership
and the Tenant: MacroChem Corporation desire to enter into this second amendment
to the Lease;
NOW, THEREFORE, in consideration of the mutual promise herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree that the Lease shall be further
amended as follows:
1. Landlord and Tenant hereby incorporate all terms and provisions of the Lease
herein as it is specifically set forth, except as said terms are modified
herein. Any capitalized term not defined herein and defined in the Lease is used
herein with the meaning set forth in the Lease.
2. Article II, INITIAL TERM shall be modified and amended to extend the
expiration of the Lease term from February 28, 1997 to February 28, 2000.
3. Article III, RENT, Section 3.1 shall be modified and amended as follows.
Basic Annual Rent shall be paid as follows:
March 1, 1997 - February 28, 2000 $17.55/rsf $14,567.96/Month $174,815.55/Yr.
Section 3.2 shall be modified and amended to reflect a Base Year for Real Estate
Taxes of Fiscal Year 1997, with Tenant's prorated share of 18.89% (9,961 rsf as
a percentage of 52,721 total building rentable area).
Section 3.3 shall be modified and amended to reflect a Base Year for Operation
Expenses of the Calendar Year 1997, with Tenant's prorated share of 18.89%
(9,961 rsf as a percentage of 52,721 total building rentable area).
4. Article III, RENT, shall be modified and amended as follows. "In addition to
paying the Basic Annual Rent as specified in Section 3.1 hereof, Tenant shall
pay an additional rent as determined below:
Where Tenant is not separately metered, Tenant shall be responsible for payment
of electricity utilized in `lights and plugs' of the Demised Premises. Use will
be calculated on a building standard rate per month and paid in addition to the
Basic Annual Rent. Currently estimated at $1.00/rsf/yr, electricity costs for
lights and plugs may be adjusted annually to reflect current market conditions
and actual electric expenses."
Article XXI, LANDLORD IMPROVEMENTS, shall be modified and amended to include the
following items of work to be performed at Landlord's expense:
Replacement of the existing carpets,
Replace and repair damaged baseboards and vinyl floor tiles,
Replace and repair damaged window sills,
Repaint existing space with new paint to match,
Provide a sink for the existing lunch room,
Replace water stained or otherwise damaged ceiling tiles.
Landlord improvements will comply with all federal, state and local codes, as
applicable, and be consistent with building standards. All work will be
completed in a timely and workmanlike fashion on or before February 28, 1997.
Tenant will be responsible for the handling of its own possessions and equipment
throughout any improvement work.
In all other respects, the Lease is hereby ratified, confirmed and approved.
In witness whereof, the parties hereto have executed this Second Amendment to
Lease as of the date set forth above.
LANDLORD: TENANT:
LEXINGTON BGK ASSOCIATES, L.P. MACROCHEM CORPORATION
BY: /s/ Cheryl S. Willoughby BY: /s/ Alvin J. Karloff
ITS: Sr. Vice President ITS: President & C.E.O.
KEY EMPLOYEE AGREEMENT
To: Stephen J. Riggi, Ph.D.
58 Skytop Road
Ipswich, MA 01938 March 25, 1996
The undersigned, MacroChem Corporation, a Delaware corporation (the
"Company"), hereby agrees with you as follows:
1. Position and Responsibilities.
1.1 You shall serve as Vice President of Operations for the Company,
(or in such other executive capacity as shall be designated by the Board of
Directors and reasonably acceptable to you) and shall perform the duties
customarily associated with such capacity from time to time and at such
place or places as the Company shall designate are appropriate and
necessary in connection with such employment.
1.2 You will, to the best of your ability, devote your full time and
best efforts to the performance of your duties hereunder and the business
and affairs of the Company. You agree to perform such executive duties as
may be assigned to you by or on authority of the Company's Board of
Directors from time to time.
1.3 You will duly, punctually and faithfully perform and observe any
and all reasonable rules and regulations which the Company may now or shall
hereafter establish governing the conduct of its business.
2. Term of Employment.
2.1 Subject to the provisions hereof, specifically including, without
limitation, Section 2.2, the term of your employment shall be indefinite.
2.2 The Company shall have the right to terminate your employment at
any time under this Agreement in any of the following ways:
(a) on thirty (30) days prior written notice to you upon your
disability (disability shall be defined as your inability to perform
duties under this Agreement for an aggregate of sixty (60) days, which
need not be consecutive, out of any one hundred twenty (120) day
period due to mental or physical disability or incapacity); you shall
be provided benefits under the Company's workers compensation and
disability insurance policies, to the extent and upon the terms and
conditions of such plans that are in effect at the time;
(b) immediately without prior notice to you by the Company for
"Cause", as hereinafter defined, provided however, that prior to any
such termination for Cause, you have had a reasonable opportunity to
be heard thereon;
(c) immediately without prior notice to you in the event of the
bankruptcy or liquidation of the Company or the appointment of a
receiver of the assets of the Company instigated by a creditor of the
Company that is not an affiliate thereof.
(d) at any time without Cause, provided the Company shall be
obligated to pay to you after such termination an amount equal to six
(6) month's Base Salary, plus benefits provided by the Company to you
at the time of such termination for such period, less applicable taxes
and other required withholdings and any amounts you may owe to the
Company. If the financial condition of the Company so warrants, the
Board of Directors of the Company may, in its sole discretion, delay
payment of such amounts due under this paragraph 2.2(d) until such
time as the Board of Directors deems that such monies are available.
2.3 You shall have the right to terminate your employment hereunder
for any reason, upon not less than two (2) weeks' prior written notice to
the Company.
2.4 "Cause" for the purpose of Section 2 of this Agreement shall
include: (i) the falseness or material inaccuracy of any of your warranties
or representations herein; (ii) your willful failure or refusal to comply
with explicit directives of the Board of Directors of the Company or to
render the services required herein; (iii) fraud or embezzlement involving
assets of the Company, its customers, suppliers or affiliates or other
misappropriation of the Company's assets or funds; (iv) your conviction of
a criminal offense carrying a potential sentence of more than twelve months
in jail; (v) the willful breach or habitual neglect of your obligations
under this Agreement or your duties as an employee of the Company; and (vi)
use of non-prescription or illegal drugs affecting your ability to perform
the duties hereunder.
2.5 If your employment is terminated because of your death, all
obligations of the Company hereunder shall cease, except with respect to
amounts and obligations accrued to you, including accrued vacation pay,
insurance, vested stock options, and out-of-pocket expenses, through the
last day of the month during which your death has occurred.
3. Compensation. You shall receive the compensation and benefits set forth
on Exhibit A hereto ("Compensation") for all services to be rendered by you
hereunder and for your transfer of property rights if any, pursuant to an
agreement relating to proprietary information and inventions of even date
herewith attached hereto as Exhibit C between you and the Company (the
"Proprietary Information and Inventions Agreement").
4. Other Activities During Employment.
4.1 You will not, during the term of this Agreement, undertake or
engage in any other employment, occupation or business enterprise, other
than one in which you are an inactive investor, that would interfere with
your obligations to the Company.
4.2 You hereby agree that during your employment hereunder, you will
not, directly or indirectly, engage (a) individually, (b) as an officer,
(c) as a director, (d) as an employee, (e) as a consultant, (f) as an
advisor, (g) as an agent (whether a salesperson or otherwise), (h) as a
broker, or (i) as a partner, coventurer, stockholder or other proprietor
owning directly or indirectly more than five percent (5%) interest in any
firm, corporation, partnership, trust, association, or other organization
which is engaged in the development and licensing of transdermal delivery
products or any other line of business in competition with, or engaged in
or under demonstrable development by the Company (such firm, corporation,
partnership, trust, association, or other organization being hereinafter
referred to as a "Prohibited Enterprise"), without the consent of the
Company, which consent will not be unreasonably withheld. Except as may be
shown on Exhibit B hereto, you hereby represent that you are not engaged in
any of the foregoing capacities (a) through (i) in any Prohibited
Enterprise.
5. Former Employers.
5.1 You represent and warrant that your employment by the Company will
not conflict with and will not be constrained by any prior employment or
relationship whether oral or written. You represent and warrant that you do
not possess confidential information arising out of any such employment or
relationship which, in your best judgment, would be utilized in connection
with your employment by the Company in the absence of Section 5.2.
5.2 If, in spite of the second sentence of Section 5.1, you should
find that confidential information belonging to any former employer might
be usable in connection with the Company's business, you will not
intentionally disclose to the Company or use on behalf of the Company any
such confidential information; but during your employment by the Company
you will use in the performance of your duties all information which is
generally known and used by persons with training and experience comparable
to your own, which is common knowledge in the industry or otherwise legally
in the public domain.
6. Proprietary Information and Inventions. You agree to execute, deliver
and be bound by the provisions of the Proprietary Information and Inventions
Agreement attached hereto as Exhibit C.
7. Post-Employment Activities.
7.1 For a period of two (2) years after the termination or expiration,
for any reason, of your employment with the Company hereunder, absent the
Company's prior written approval, you will not directly or indirectly
engage in activities similar or reasonably related to those in which you
shall have engaged hereunder during the two years immediately preceding
termination or expiration, nor render services similar or reasonably
related to those which you shall have rendered hereunder during such time
to, any person or entity whether now existing or hereafter established
which directly competes with (or proposes or plans to directly compete
with) the Company, or in other areas where the Company carries on a
substantial amount of business ("Direct Competitor"). Nor shall you entice,
induce or encourage any of the Company's other employees to engage in any
activity which, were it done by you, would violate any provision of the
Proprietary Information and Inventions Agreement or this Section 7.
7.2 The provisions of this Section 7 shall be of no force or effect if
the Agreement is terminated as set forth in Section 2.2(c) hereof. No
provision of this Agreement shall be construed to preclude you from
performing the same services which the Company hereby retains you to
perform for any person or entity which is not a Direct Competitor of the
Company upon the expiration or termination of your employment (or any
post-employment consultation) so long as you do not thereby violate any
term of this Agreement or the Proprietary Information and Inventions
Agreement.
8. Remedies. Your obligations under the Proprietary Information and
Inventions Agreement and the provisions of Sections 6, 7, 8 and 9 of this
Agreement (as modified by Section 10, if applicable) shall survive the
expiration or termination of your employment with the Company in accordance with
the terms thereof. You acknowledge that a remedy at law for any breach or
threatened breach by you of the provisions of the Proprietary Information and
Inventions Agreement or Section 7 hereof would be inadequate and you therefore
agree that the Company shall be entitled to injunctive relief in case of any
such breach or threatened breach.
9. Assignment. Subject to Section 2.2(c), this Agreement and the rights and
obligations of the parties hereto shall bind and inure to the benefit of any
successor or successors of the Company by reorganization, merger or
consolidation and any assignee of all or substantially all of its business and
properties, but, except as to any such successor or assignee of the Company,
neither this Agreement nor any rights or benefits hereunder may be assigned by
the Company or by you, except by operation of law or by a further written
agreement by the parties hereto.
10. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or
more of the provisions contained in this Agreement shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect the other provisions of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. MOREOVER, IT IS THE
INTENT OF THE PARTIES THAT if any one or more of the provisions contained in
this Agreement is or becomes or is deemed invalid, illegal or unenforceable or
in case any provision shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
11. Notices. Any notice which the Company is required to or may desire to
give you shall be given by personal delivery or registered or certified mail,
return receipt requested, addressed to you at your address of record with the
Company, or at such other place as you may from time to time designate in
writing. Any notice which you are required or may desire to give to the Company
hereunder shall be given by personal delivery or by registered or certified
mail, return receipt requested, addressed to the Company at its principal
office, or at such other office as the Company may from time to time designate
in writing. The date of personal delivery or five (5) days after the date of
mailing any notice under this Section 11 shall be deemed to be the date of
delivery thereof.
12. Waivers. No waiver of any right under this Agreement shall be deemed
effective unless contained in a writing signed by the party charged with such
waiver, and no waiver of any right arising from any breach or failure to perform
shall be deemed to be a waiver of any future such right or of any other right
arising under this Agreement. If either party should waive any breach of any
provision of this Agreement, he or it shall not thereby be deemed to have waived
any preceding or succeeding breach of the same or any other provision of this
Agreement.
13. Counsel. You acknowledge that you have had the opportunity to read this
Agreement in its entirety and to obtain the advice of counsel regarding its
terms and conditions.
14. Complete Agreement; Amendments. The foregoing including Exhibits A, B
and C attached hereto, is the entire agreement of the parties with respect to
the subject matter hereof, superseding any previous oral or written
communications, representations, understandings, or agreements with the Company
or any officer or representative thereof. Any amendment to this Agreement or
waiver by the Company of any right hereunder shall be effective only if
evidenced by a written instrument executed by the parties hereto, upon
authorization of the Company's Board of Directors.
15. Headings. The headings of the Sections contained in this Agreement are
inserted for convenience and reference only and in no way define, limit, extend
or describe the scope of this Agreement or the intent of any provisions hereof,
and shall not be deemed to constitute a part hereof or to affect the meaning of
this Agreement in any way.
16. Counterparts. This Agreement may be signed in two counterparts, each of
which shall be deemed an original and both of which shall together constitute
one agreement.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massachusetts,
excluding its conflict of law principles.
If you are in agreement with the foregoing, please sign your name below and
also at the bottom of the Proprietary Information and Inventions Agreement,
whereupon both Agreements shall become binding in accordance with their terms.
Please then return this Agreement to the Company. (You may retain for your
records the accompanying counterpart of this Agreement enclosed herewith).
Very truly yours,
MACROCHEM CORPORATION, a
Delaware corporation
By: /s/ Alvin J. Karloff
---------------------
Alvin J. Karloff
President & C.E.O.
Read, Accepted and Agreed:
/s/ Stephen J. Riggi, Ph.D.
- ---------------------------
Stephen J. Riggi, Ph.D.
EXHIBIT A TO KEY EMPLOYEE AGREEMENT
COMPENSATION AND BENEFITS
OF STEPHEN J. RIGGI, Ph.D.
1. Compensation. Your Base Salary shall be $150,000 per year, payable in
accordance with the Company's payroll policies. An increase in your Base Salary
shall be reviewed and adjusted from time to time by the Board of Directors of
the Company.
2. Vacation. You shall be entitled to all state statutory holidays, and
four (4) weeks paid vacation for the first year of employment. Thereafter, any
additional vacation time, over and above the vacation time already referred to
herein shall be determined by the Board of Directors.
3. Insurance and Benefits. You shall be eligible for participation in all
employee benefit plans which have been or may be established by the Company or
which the Company is required to maintain by law. Presently the Company pays 70%
of your premiums under a group medical insurance plan. This percentage shall be
the same percentage as is paid for all employees under such group medical
insurance plan and therefore is subject to change if, in the discretion of the
Board of Directors, the Company changes the percentage paid for all employees.
4. Sick Days and Excused Absence Days. You shall be entitled to
compensation for sick days and excused absence days in accordance with Company
policy.
5. Stock Options. You shall be granted an incentive stock option to
purchase up to 180,000 shares of the Common Stock of the Company, $.01 par value
per share, upon the terms and conditions set forth in the form of stock option
grant letter attached hereto. Future stock options may be granted by the Company
based in part on your performance.
<PAGE>
EXHIBIT B TO KEY EMPLOYEE AGREEMENT
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF STEPHEN J. RIGGI, Ph.D.
NONE
<PAGE>
EXHIBIT C TO KEY EMPLOYEE AGREEMENT
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
OF STEPHEN J. RIGGI, Ph.D.
OMITTED
<TABLE>
<CAPTION>
MacroChem Corporation
Calculation for Weighted Average Number of
Common Shares Outstanding
<S> <C> <C> <C> <C> <C>
Weighted
Common Common Days Average
Share Shares Out- Number of
Date Description Activity Outstanding standing Shares
- -------------------------------------------------------------------------------------------
December 31, 1993 Balance 11,123,543 11,123,543
January 3, 1994 Preferred Stock
Conversion 228,750 11,352,293 363 11,351,040
January 10, 1994 Warrants Exercised 150,000 11,502,293 356 11,497,341
January 14, 1994 Warrants Exercised 1,500 11,503,793 352 11,498,788
January 18, 1994 Preferred Stock
Conversion 56,250 11,560,043 348 11,552,418
February 17, 1994 Options Exercised 3,000 11,563,043 318 11,555,031
July 15, 1994 Issuance 6,600 11,569,643 170 11,558,105
DECEMBER 31, 1994 11,569,643 11,558,105
January 1, 1995 Balance 11,569,643 11,569,643
May 12, 1995 Issuance 1,000,000 12,569,643 234 12,210,739
June 28, 1995 Options Exercised 5,000 12,574,643 187 12,213,301
July 12, 1995 Options Exercised 25,000 12,599,643 173 12,225,150
July 18, 1995 Options Exercised 1,000 12,600,643 167 12,225,607
July 24, 1995 Options Exercised 5,000 12,605,643 161 12,227,813
July 31, 1995 Options Exercised 10,000 12,615,643 154 12,232,032
August 1, 1995 Options Exercised 17,000 12,632,643 153 12,239,158
August 8, 1995 Options Exercised 5,000 12,637,643 146 12,241,158
August 9, 1995 Options Exercised 35,000 12,672,643 145 12,255,062
August 10, 1995 Options Exercised 53,333 12,725,976 144 12,276,103
August 21, 1995 X Warrants Exercised 46,500 12,772,476 133 12,293,047
August 31, 1995 Options Exercised 44,500 12,816,976 123 12,308,043
September 14, 1995 Options Exercised 3,000 12,819,976 109 12,308,939
September 14, 1996 X Warrants Exercised 3,500 12,823,476 109 12,309,984
September 20, 1995 A Warrants Exercised 100 12,823,576 103 12,310,012
September 20, 1995 AA Warrants Exercised 100 12,823,676 103 12,310,040
September 25, 1995 X Warrants Exercised 1,000 12,824,676 98 12,310,309
November 6, 1995 Issuance 4,145 12,828,821 56 12,310,945
November 13, 1995 X Warrants Exercised 500 12,829,321 49 12,311,012
December 7, 1995 Unit Purchase Options
Exercised 300,000 13,129,321 25 12,331,560
DECEMBER 31, 1995 13,129,321 12,331,560
January 1, 1996 Balance 13,129,321 13,129,321
January 22, 1996 Options Exercised 5,000 13,134,321 345 13,134,034
January 31, 1996 Unit Purchase Options
Exercised 810,000 13,944,321 336 13,877,641
February 1, 1996 Unit Purchase Options
Exercised 210,000 14,154,321 335 14,069,854
February 2, 1996 Unit Purchase Options
Exercised 455,000 14,609,321 334 14,485,072
February 2, 1996 A Warrants Exercised 151,667 14,760,988 334 14,623,479
February 2, 1996 Options Exercised 15,000 14,775,988 334 14,637,167
February 5, 1996 Options Exercised 2,861 14,778,849 331 14,639,755
February 7, 1996 A Warrants Exercised 1,000 14,779,849 329 14,640,654
February 8, 1996 Options Exercised 1,000 14,780,849 328 14,640,914
February 9, 1996 AA Warrants Exercised 81,000 14,861,849 327 14,713,283
February 15, 1996 X Warrants Exercised 3,750 14,865,599 321 14,716,572
February 29, 1996 Options Exercised 30,000 14,895,599 307 14,741,736
February 29, 1996 A Warrants Exercised 200,000 15,095,599 307 14,909,498
February 29, 1996 X Warrants Exercised 1,000 15,096,599 307 14,910,337
March 1, 1996 X Warrants Exercised 1,000 15,097,599 306 14,911,173
March 4, 1996 Options Exercised 2,500 15,100,099 303 14,913,243
March 7, 1996 A Warrants Exercised 140,000 15,240,099 300 15,027,997
March 14, 1996 X Warrants Exercised 10,000 15,250,099 293 15,036,002
March 19, 1996 Options Exercised 5,000 15,255,099 288 15,039,937
March 21, 1996 A Warrants Exercised 100,000 15,355,099 286 15,118,079
April 4, 1996 Options Exercised 31,500 15,386,599 271 15,141,402
April 25, 1996 Options Exercised 120,000 15,506,599 250 15,223,370
May 7, 1996 Options Exercised 5,000 15,511,599 238 15,226,621
July 22, 1996 Options Exercised 12,500 15,524,099 162 15,232,154
August 19, 1996 Options Exercised 1,500 15,525,599 134 15,232,703
September 3, 1996 Issuance 925 15,526,524 120 15,233,006
November 5, 1996 Options Exercised 10,000 15,536,524 56 15,234,536
November 14, 1996 X Warrants Exercised 25,000 15,561,524 44 15,237,542
December 3, 1996 X Warrants Exercised 12,250 15,573,774 28 15,238,479
December 19, 1996 Unit Purchase Option
Exercised 17,500 15,591,274 12 15,239,053
DECEMBER 31, 1996 Options Exercised 10,000 15,601,274 1 15,239,080
</TABLE>
INDEPENDENT AUDITORS' CONSENT
MacroChem Corporation:
We consent to the incorporation by reference in (i) Registration Statement
No. 33-48876 on Form S-8, (ii) Registration Statement No. 33-85818 on Form S-8
and (iii) Registration Statement No. 33-82298 on Form S-3 of our report dated
March 6, 1997, appearing in this Annual Report on Form 10-K of MacroChem
Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's balance sheet, statement of operations, statement of stockholder's
equity and statement of cash flows and is qualified it its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000743884
<NAME> MacroChem Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Dec-31-1996
<EXCHANGE-RATE> 1
<CASH> $7,329,881
<SECURITIES> 21,824
<RECEIVABLES> 43,977
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,495,715
<PP&E> 817,994
<DEPRECIATION> 472,651
<TOTAL-ASSETS> 8,063,750
<CURRENT-LIABILITIES> 368,463
<BONDS> 18,408
0
0
<COMMON> 156,013
<OTHER-SE> 7,520,866
<TOTAL-LIABILITY-AND-EQUITY> 8,063,750
<SALES> 0
<TOTAL-REVENUES> 129,786
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,045
<INCOME-PRETAX> (3,139,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,139,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,139,796)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
As amended
November 15, 1996
MACROCHEM CORPORATION
1994 EQUITY INCENTIVE PLAN
1. PURPOSE. The purpose of this 1994 Equity Incentive Plan (the "Plan") is
to advance the interests of MacroChem Corporation (the "Company") by enhancing
its ability to attract and retain employees and other persons or entities who
are in a position to make significant contributions to the success of the
Company and its subsidiaries through ownership of shares of the Company's common
stock ("Stock").
The Plan is intended to accomplish these goals by enabling the Company to
grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock
or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans
or Supplement Grants, or combinations thereof, all as more fully described
below.
2. ADMINISTRATION. Unless otherwise determined by the Board of Directors of
the Company (the "Board"), the Plan will be administered by a Committee of the
Board designated for such purpose (the "Committee"). The Committee shall consist
of at least two directors. A majority of the members of the Committee shall
constitute a quorum, and all determinations of the Committee shall be made by a
majority of its members. Any determination of the Committee under the Plan may
be made without notice or meeting of the Committee by a writing signed by a
majority of the Committee members. So long as the Stock is registered under the
Securities Exchange Act of 1934 (the "1934 Act"), all members of the Committee
shall be non-employee directors within the meaning of Rule 16b-3 under the 1934
Act. The Committee will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under the
Plan, to (a) grant Awards at such time or times as it may choose; (b) determine
the size of each Award, including the number of shares of Stock subject to the
Award; (c) determine the type or types of each Award; (d) determine the terms
and conditions of each Award; (e) waive compliance by a Participant (as defined
below) with any obligations to be performed by the Participant under an Award
and waive any term or condition of an Award; (f) amend or cancel an existing
Award in whole or in part (and if an award is canceled, grant another Award in
its place on such terms as the Committee shall specify), except that the
Committee may not, without the consent of the holder of an Award, take any
action under this clause with respect to such Award if such action would
adversely affect the rights of such holder; (g) prescribe the form or forms of
instruments that are required or deemed appropriate under the Plan, including
any written notices and elections required of Participants, and change such
forms from time to time; (h) adopt, amend and rescind rules and regulations for
the administration of the Plan; and (i) interpret the Plan and decide any
questions and settle all controversies and disputes that may arise in connection
with the Plan. Such determinations and actions of the Committee, and all other
determinations and actions of the Committee made or taken under authority
granted by any provision of the Plan, will be conclusive and will bind all
parties. Nothing in this paragraph shall be construed as limiting the power of
the Committee to make adjustments under Section 7.3 or Section 8.6.
With respect to persons subject to Section 16 of the 1934 Act, transactions
under this plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the 1934 Act. To the extent any action by the
Committee or Board fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
3. EFFECTIVE DATE AND TERM OF PLAN. The Plan will become effective on the
date on which it is approved by the stockholders of the Company. Grants of
Awards under the Plan may be made prior to that date, subject to such approval
of the Plan. No Award may be granted under the Plan after February 11, 2004, but
Awards previously granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN. Subject to the adjustment as provided in
Section 8.6 below, the aggregate number of shares of Stock that may be delivered
under the Plan will be 2,500,000. If any Award requiring exercise for delivery
of Stock terminates without having been exercised in full, or if any Award
payable in Stock or cash is satisfied in cash rather than Stock, the number of
shares of Stock as to which such Award was not exercised or for which cash was
substituted will be available for future grants. The maximum number of shares
(subject to adjustment as provided in Section 8.6 below) with respect to which
Awards may be made to any one Participant during the term of the Plan shall be
750,000 shares. The preceding sentence shall be construed consistent with the
regulations under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
Stock delivered under the Plan may be either authorized but unissued Stock
or previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
5. ELIGIBILITY AND PARTICIPATION. Those eligible to receive Awards under
the Plan ("Participants") will be persons in the employ of the Company or any of
its subsidiaries ("Employees") and other persons or entities (including without
limitation non-Employee directors of the Company or a subsidiary of the Company)
who, in the opinion of the Committee, are in a position to make a significant
contribution to the success of the Company or its subsidiaries. A "subsidiary"
for purposes of the Plan will be a corporation in which the Company owns,
directly or indirectly, stock possessing 50% or more of the total combined
voting power of all classes of stock.
6. TYPES OF AWARDS
6.1. OPTIONS
(a) NATURE OF OPTIONS. An Option is an Award entitling the holder on
exercise thereof to purchase Stock at a specified exercise price.
Both "incentive stock options," as defined in Section 422 of the Code
(any Option intended to qualify as an incentive stock option being
hereinafter referred to as an "ISO"), and Options that are not incentive
stock options, may be granted under the Plan. ISOs shall be awarded only to
Employees.
(b) EXERCISE PRICE. The exercise price of an Option will be determined
by the Board subject to the following:
(1) The exercise price of an ISO shall not be less than 100%
(110% in the case of an ISO granted to a ten-percent stockholder) of
the fair market value of the Stock subject to the Option, determined
as of the time the Option is granted. A "ten-percent stockholder" is
any person who at the time of grant owns, directly or indirectly, or
is deemed to own by reason of the attribution rules of section 424(d)
of the Code, stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any of its
subsidiaries.
(2) In no case may the exercise price paid for Stock which is
part of an original issue of authorized Stock be less than the par
value per share of the Stock.
(3) The Committee may reduce the exercise price of an Option at
any time after the time of grant, but in the case of an Option
originally awarded as an ISO, only with the consent of the
Participant.
(c) DURATION OF OPTIONS. The latest date on which an Option may be
exercised will be the tenth anniversary (fifth anniversary, in the case of
an ISO granted to a ten-percent stockholder) of the day immediately
preceding the date the Option was granted, or such earlier date as may have
been specified by the Committee at the time the Option was granted.
(d) EXERCISE OF OPTIONS. Options granted under any single Award will
become exercisable at such time or times, and on such conditions, as the
Committee may specify. The Committee may at any time and from time to time
accelerate the time at which all or any part of the Option may be
exercised.
Any exercise of an Option must be in writing, signed by the proper
person and delivered or mailed to the Company, accompanied by (1) any
documents required by the Committee and (2) payment in full in accordance
with paragraph (e) below for the number of shares for which the Option is
exercised.
(e) PAYMENT FOR STOCK. Stock purchased on exercise of an Option must
be paid for as follows: (1) in cash or by check (acceptable to the Company
in accordance with guidelines established for this purpose), bank draft or
money order payable to the order of the Company or (2) if so permitted by
the instrument evidencing the Option (or in the case of an Option which is
not an ISO, by the Committee at or after grant of the Option), (i) through
the delivery of shares of Stock which have been outstanding for at least
six months (unless the Committee expressly approves a shorter period) and
which have a fair market value on the last business day preceding the date
of exercise equal to the exercise price, or (ii) by delivery of a
promissory note of the Option holder to the Company, payable on such terms
as are specified by the Committee, or (iii) by delivery of an unconditional
and irrevocable undertaking by a broker to deliver promptly to the Company
sufficient funds to pay the exercise price, or (iv) by any combination of
the permissible forms of payment; provided, that if the Stock delivered
upon exercise of the Option is an original issue of authorized Stock, at
least so much of the exercise price as represents the par value of such
Stock must be paid other than by the Option holder's promissory note.
(f) DISCRETIONARY PAYMENTS. If the market price of shares of Stock
subject to an Option (other than an Option which is in tandem with a Stock
Appreciation Right as described in Section 6.2 below) exceeds the exercise
price of the Option at the time of its exercise, the Committee may cancel
the Option and cause the Company to pay in cash or in shares of Common
Stock (at a price per share equal to the fair market value per share) to
the person exercising the Option an amount equal to the difference between
the fair market value of the Stock which would have been purchased pursuant
to the exercise (determined on the date the Option is canceled) and the
aggregate exercise price which would have been paid. The Committee may
exercise its discretion to take such action only if it has received a
written request from the person exercising the Option, but such a request
will not be binding on the Committee.
6.2. STOCK APPRECIATION RIGHTS.
(a) NATURE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is
an Award entitling the recipient on exercise of the Right to receive an
amount, in cash or Stock or a combination thereof (such form to be
determined by the Committee), determined in whole or in part by reference
to appreciation in Stock value.
In general, a Stock Appreciation Right entitles the Participant to
receive, with respect to each share of Stock as to which the Right is
exercised, the excess of the share's fair market value on the date of
exercise over its fair market value on the date the Right was granted.
However, the Committee may provide at the time of grant that the amount the
recipient is entitled to receive will be adjusted upward or downward under
rules established by the Committee to take into account the performance of
the Stock in comparison with the performance of other stocks or an index or
indices of other stocks. The Committee may also grant Stock Appreciation
Rights providing that following a change in control of the Company, as
determined by the Committee, the holder of such Right will be entitled to
receive, with respect to each share of Stock subject to the Right, an
amount equal to the excess of a specified value (which may include an
average of values) for a share of Stock during a period preceding such
change in control over the fair market value of a share of Stock on the
date the Right was granted.
(b) GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may
be granted in tandem with, or independently of, Options granted under the
Plan. A Stock Appreciation Right granted in tandem with an Option which is
not an ISO may be granted either at or after the time the Option is
granted. A Stock Appreciation Right granted in tandem with an ISO may be
granted only at the time the Option is granted.
(c) RULES APPLICABLE TO TANDEM AWARDS. When Stock Appreciation Rights
are granted in tandem with Options, the following will apply:
(1) The Stock Appreciation Right will be exercisable only at such
time or times, and to the extent, that the related Option is
exercisable and will be exercisable in accordance with the procedure
required for exercise of the related Option.
(2) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option,
except that a Stock Appreciation Right granted with respect to less
than the full number of shares covered by an Option will not be
reduced until the number of shares as to which the related Option has
been exercised or has terminated exceeds the number of shares not
covered by the Stock Appreciation Right.
(3) The Option will terminate and no longer be exercisable upon
the exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right will be transferable only with
the related Option.
(5) A Stock Appreciation Right granted in tandem with an ISO may
be exercised only when the market price of the Stock subject to the
Option exceeds the exercise price of such option.
(d) EXERCISE OF INDEPENDENT STOCK APPRECIATION RIGHTS. A Stock
Appreciation Right not granted in tandem with an Option will become
exercisable at such time or times, and on such conditions, as the Committee
may specify. The Committee may at any time accelerate the time at which all
or any part of the Right may be exercised.
Any exercise of an independent Stock Appreciation Right must be in
writing, signed by the proper person and delivered or mailed to the
Company, accompanied by any other documents required by the Committee.
6.3. RESTRICTED AND UNRESTRICTED STOCK.
(a) NATURE OF RESTRICTED STOCK AWARD. A Restricted Stock Award
entitles the recipient to acquire, for a purchase price equal to par value,
shares of Stock subject to the restrictions described in paragraph (d)
below ("Restricted Stock").
(b) ACCEPTANCE OF AWARD. A Participant who is granted a Restricted
Stock Award will have no rights with respect to such Award unless the
Participant accepts the Award by written instrument delivered or mailed to
the Company accompanied by payment in full of the specified purchase price,
if any, of the shares covered by the Award. Payment may be by certified or
bank check or other instrument acceptable to the Committee.
(c) RIGHTS AS A STOCKHOLDER. A Participant who receives Restricted
Stock will have all the rights of a stockholder with respect to the Stock,
including voting and dividend rights, subject to the restrictions described
in paragraph (d) below and any other conditions imposed by the Committee at
the time of grant. Unless the Committee otherwise determines, certificates
evidencing shares of Restricted Stock will remain in the possession of the
Company until such shares are free of all restrictions under the Plan.
(d) RESTRICTIONS. Except as otherwise specifically provided by the
Plan, Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise encumbered or disposed of, and if the Participant ceases to be an
Employee or otherwise suffers a Status Change (as defined at Section 7.2(a)
below) for any reason, must be offered to the Company for purchase for the
amount of cash paid for the Stock, or forfeited to the Company if no cash
was paid. These restrictions will lapse at such time or times, and on such
conditions, as the Committee may specify. The Committee may at any time
accelerate the time at which the restrictions on all or any part of the
shares will lapse.
(e) NOTICE OF ELECTION. Any Participant making an election under
Section 83(b) of the Code with respect to Restricted Stock must provide a
copy thereof to the Company within 10 days of the filing of such election
with the Internal Revenue Service.
(f) OTHER AWARDS SETTLED WITH RESTRICTED STOCK. The Committee may, at
the time any Award described in this Section 6 is granted, provide that any
or all the Stock delivered pursuant to the Award will be Restricted Stock.
(g) UNRESTRICTED STOCK. The Committee may, in its sole discretion,
approve the sale to any Participant of shares of Stock free of restrictions
under the Plan for a price which is not less than the par value of the
Stock.
6.4. DEFERRED STOCK.
A Deferred Stock Award entitles the recipient to receive shares of
Stock to be delivered in the future. Delivery of the Stock will take place
at such time or times, and on such conditions, as the Committee may
specify. The Committee may at any time accelerate the time at which
delivery of all or any part of the Stock will take place. At the time any
Award described in this Section 6 is granted, the Committee may provide
that, at the time Stock would otherwise be delivered pursuant to the Award,
the Participant will instead receive an instrument evidencing the
Participant's right to future delivery of Deferred Stock.
6.5. PERFORMANCE AWARDS; PERFORMANCE GOALS.
(a) NATURE OF PERFORMANCE AWARDS. A Performance Award entitles the
recipient to receive, without payment, an amount in cash or Stock or a
combination thereof (such form to be determined by the Committee) following
the attainment of Performance Goals. Performance Goals may be related to
personal performance, corporate performance, departmental performance or
any other category of performance deemed by the Committee to be important
to the success of the Company. The Committee will determine the Performance
Goals, the period or periods during which performance is to be measured and
all other terms and conditions applicable to the Award.
(b) OTHER AWARDS SUBJECT TO PERFORMANCE CONDITION. The Committee may,
at the time any Award described in this Section 6 is granted, impose the
condition (in addition to any conditions specified or authorized in this
Section 6 or any other provision of the Plan) that Performance Goals be met
prior to the Participant's realization of any payment or benefit under the
Award.
6.6. LOANS AND SUPPLEMENTAL GRANTS.
(a) LOANS. The Company may make a loan to a Participant ("Loan"),
either on the date of or after the grant of any Award to the Participant. A
Loan may be made either in connection with the purchase of Stock under the
Award or with the payment of any Federal, state and local income tax with
respect to income recognized as a result of the Award. The Committee will
have full authority to decide whether to make a Loan and to determine the
amount, terms and conditions of the Loan, including the interest rate
(which may be zero), whether the Loan is to be secured or unsecured or with
or without recourse against the borrower, the terms on which the Loan is to
be repaid and the conditions, if any, under which it may be forgiven.
However, no Loan may have a term (including extensions) exceeding ten years
in duration.
(b) SUPPLEMENTAL GRANTS. In connection with any Award, the Committee
may at the time such Award is made or at a later date, provide for and
grant a cash award to the Participant ("Supplemental Grant") not to exceed
an amount equal to (1) the amount of any federal, state and local income
tax on ordinary income for which the Participant may be liable with respect
to the Award, determined by assuming taxation at the highest marginal rate,
plus (2) an additional amount on a grossed-up basis intended to make the
Participant whole on an after-tax basis after discharging all the
Participant's income tax liabilities arising from all payments under this
Section 6. Any payments under this subsection (b) will be made at the time
the Participant incurs Federal income tax liability with respect to the
Award.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. DEATH.
If a Participant dies, the following will apply:
(a) All Options and Stock Appreciation Rights held by the Participant
immediately prior to death, to the extent then exercisable, may be
exercised by the Participant's executor or administrator or the person or
persons to whom the Option or Right is transferred by will or the
applicable laws of descent and distribution, and all Options originally
issued to the Participant and transferred pursuant to Section 8.5 hereof
may be exercised by the person or persons to whom the Option has been so
transferred, at any time within the one year period ending with the first
anniversary of the Participant's death (or such shorter or longer period as
the Committee may determine), and shall thereupon terminate. In no event,
however, shall an Option or Stock Appreciation Right remain exercisable
beyond the latest date on which it could have been exercised without regard
to this Section 7. Except as otherwise determined by the Committee, all
Options originally issued to a Participant and all Stock Appreciation
Rights held by a Participant immediately prior to death that are not then
exercisable shall terminate at death.
(b) Except as otherwise determined by the Committee, all Restricted
Stock held by the Participant must be transferred to the Company (and, in
the event the certificates representing such Restricted Stock are held by
the Company, such Restricted Stock will be so transferred without any
further action by the Participant) in accordance with Section 6.3 above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to death will be forfeited and the Award canceled, as of the
time of death, unless otherwise determined by the Committee.
7.2. TERMINATION OF SERVICE (OTHER THAN BY DEATH).
If a Participant who is an Employee ceases to be an Employee for any
reason other than death, or if there is a termination (other than by reason
of death) of the consulting, service or similar relationship in respect of
which a non-Employee Participant was granted an Award hereunder (such
termination of the employment or other relationship being hereinafter
referred to as a "Status Change"), the following will apply:
(a) Except as otherwise determined by the Committee, all Options and
Stock Appreciation Rights originally issued to the Participant that were
not exercisable immediately prior to the Status Change shall terminate at
the time of the Status Change. Any Options or Rights that were exercisable
immediately prior to the Status Change will continue to be exercisable for
a period of six months (or such longer period as the Committee may
determine), and shall thereupon terminate, unless (i) the Award provides by
its terms for immediate termination in the event of a Status Change, (ii)
the Status Change results from (w) retirement of the Participant on or
after age 65, (x) retirement on or after age 55 after 10 years of
continuous employment by the Company, (y) disability (as determined by the
Company), or (z) termination of the Participant's service as a director if
the Participant is a non-Employee director, in which cases that portion of
the Options originally issued to the Participant that was exercisable
immediately prior to the Status Change will continue to be exercisable for
the original term of the Option or (iii) unless the Status Change results
from a discharge for cause which in the opinion of the Committee casts such
discredit on the Participant as to justify immediate termination of the
Award. In no event, however, shall an Option or Stock Appreciation Right
remain exercisable beyond the latest date on which it could have been
exercised without regard to this Section 7. For purposes of this paragraph,
in the case of a Participant who is an Employee, a Status Change shall not
be deemed to have resulted by reason of (i) a sick leave or other bona fide
leave of absence approved for purposes of the Plan by the Committee, so
long as the Employee's right to reemployment is guaranteed either by
statute or by contract, or (ii) a transfer of employment between the
Company and a subsidiary or between subsidiaries, or to the employment of a
corporation (or a parent or subsidiary corporation of such corporation)
issuing or assuming an option in a transaction to which section 424(a) of
the Code applies.
(b) Except as otherwise determined by the Committee, all Restricted
Stock held by the Participant at the time of the Status Change must be
transferred to the Company (and, in the event the certificates representing
such Restricted Stock are held by the Company, such Restricted Stock will
be so transferred without any further action by the Participant) in
accordance with Section 6.3 above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to the Status Change will be forfeited and the Award
canceled as of the date of such Status Change unless otherwise determined
by the Committee.
7.3. CERTAIN CORPORATE TRANSACTIONS.
7.3.1. MERGERS, SALES ETC.
In the event of a consolidation or merger in which the Company is not
the surviving corporation or which results in the acquisition of
substantially all the Company's outstanding Stock by a single person or
entity or by a group of persons and/or entities acting in concert, or in
the event of the sale or transfer of substantially all the Company's assets
or a dissolution or liquidation of the Company (a "covered transaction"),
all outstanding Awards will terminate as of the effective date of the
covered transaction, and the following rules shall apply:
(a) Subject to paragraphs (b) and (c) below, the Committee shall, at
least twenty (20) days prior to the effective date of the covered
transaction, (1) make each outstanding Option and Stock Appreciation Right
exercisable in full, (2) remove the restrictions from each outstanding
share of Restricted Stock, (3) cause the Company to make any payment and
provide any benefit under each outstanding Deferred Stock Award,
Performance Award, and Supplemental Grant which would have been made or
provided with the passage of time had the transaction not occurred and the
Participant not suffered a Status Change (or died), and (4) forgive all or
any portion of the principal of or interest on a Loan.
(b) If an outstanding Award is subject to performance or other
conditions (other than conditions relating only to the passage of time and
continued employment) which will not have been satisfied at the time of the
covered transaction, the Committee may in its sole discretion remove such
conditions. If it does not do so, however, such Award will terminate as of
the date of the covered transaction notwithstanding paragraph (a) above.
(c) With respect to an outstanding Award held by a participant who,
following the covered transaction, will be employed by or otherwise
providing services to a corporation which is a surviving or acquiring
corporation in such transaction or an affiliate of such a corporation, the
Committee may, in lieu of the action described in paragraph (a) above,
arrange to have such surviving or acquiring corporation or affiliate grant
to the Participant a replacement award which, in the judgment of the
Committee, is substantially equivalent to the Award.
7.3.2. LIQUIDATION AND DISSOLUTION.
In the event of a dissolution or liquidation of the Company, all
outstanding Awards will terminate as of the effective date of such
dissolution or liquidation, and the following rules shall apply:
(a) Subject to paragraphs (b) and (c) below, the Committee may, prior
to the effective date of such liquidation or dissolution, (1) make each
outstanding Option and Stock Appreciation Right exercisable in full, (2)
remove the restrictions from each outstanding share of Restricted Stock,
(3) cause the Company to make any payment and provide any benefit under
each outstanding Deferred Stock Award, Performance Award, and Supplemental
Grant which would have been made or provided with the passage of time had
the transaction not occurred and the Participant not suffered a Status
Change (or died), and (4) forgive all or any portion of the principal of or
interest on a Loan.
(b) If an outstanding Award is subject to performance or other
conditions (other than conditions relating only to the passage of time and
continued employment) which will not have been satisfied at the time of
such liquidation or dissolution, the Committee may in its sole discretion
remove such conditions. If it does not do so, however, such Award will
terminate as of the date of such liquidation or dissolution notwithstanding
paragraph (a) above.
(c) With respect to an outstanding Award held by a participant who,
following such liquidation or dissolution, will be employed by or otherwise
providing services to a corporation which is a surviving or acquiring
corporation in such transaction or an affiliate of such a corporation, the
Committee may, in lieu of the action described in paragraph (a) above,
arrange to have such surviving or acquiring corporation or affiliate grant
to the Participant a replacement award which, in the judgment of the
Committee, is substantially equivalent to the Award.
8. GENERAL PROVISIONS
8.1. DOCUMENTATION OF AWARDS.
Awards will be evidenced by such written instruments, if any, as may
be prescribed by the Committee from time to time. Such instruments may be
in the form of agreements to be executed by both the Participant and the
Company, or certificates, letters or similar instruments, which need not be
executed by the Participant but acceptance of which will evidence agreement
to the terms thereof.
8.2. RIGHTS AS A STOCKHOLDER, DIVIDEND EQUIVALENTS.
Except as specifically provided by the Plan, the receipt of an Award
will not give a holder rights as a stockholder; the holder will obtain such
rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Committee
may, on such conditions as it deems appropriate, provide that a holder will
receive a benefit in lieu of cash dividends that would have been payable on
any or all Stock subject to the holder's Award had such Stock been
outstanding. Without limitation, the Committee may provide for payment to
the holder of amounts representing such dividends, either currently or in
the future, or for the investment of such amounts on behalf of the holder.
8.3. CONDITIONS ON DELIVERY OF STOCK.
The Company will not be obligated to deliver any shares of Stock
pursuant to the Plan or to remove restrictions from shares previously
delivered under the Plan (a) until all conditions of the Award have been
satisfied or removed, (b) until, in the opinion of the Company's counsel,
all applicable federal and state laws and regulations have been complied
with, (c) if the outstanding Stock is at the time listed on any stock
exchange, until the shares to be delivered have been listed or authorized
to be listed on such exchange upon official notice of notice of issuance,
and (d) until all other legal matters in connection with the issuance and
delivery of such shares have been approved by the Company's counsel. If the
sale of Stock has not been registered under the Securities Act of 1933, as
amended, the Company may require, as a condition to exercise of the Award,
such representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act and may require that the
certificates evidencing such Stock bear an appropriate legend restricting
transfer.
If an Award is exercised by the Participant's legal representative,
the Company will be under no obligation to deliver Stock pursuant to such
exercise until the Company is satisfied as to the authority of such
representative.
8.4. TAX WITHHOLDING.
The Company will withhold from any cash payment made pursuant to an
Award an amount sufficient to satisfy all federal, state and local
withholding tax requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the
Committee will have the right to require that the Participant or other
appropriate person remit to the Company an amount sufficient to satisfy the
withholding requirements, or make other arrangements satisfactory to the
Committee with regard to such requirements, prior to the delivery of any
Stock. If and to the extent that such withholding is required, the
Committee may permit the Participant or such other person to elect at such
time and in such manner as the Committee provides to have the Company hold
back from the shares to be delivered, or to deliver to the Company, Stock
having a value calculated to satisfy the withholding requirement. The
Committee may make such share withholding mandatory with respect to any
Award at the time such Award is made to a Participant.
If at the time an ISO is exercised the Committee determines that the
Company could be liable for withholding requirements with respect to a
disposition of the Stock received upon exercise, the Committee may require
as a condition of exercise that the person exercising the ISO agree (a) to
inform the Company promptly of any disposition (within the meaning of
section 424(c) of the Code) of Stock received upon exercise, and (b) to
give such security as the Committee deems adequate to meet the potential
liability of the Company for the withholding requirements and to augment
such security from time to time in any amount reasonably deemed necessary
by the Committee to preserve the adequacy of such security.
8.5. TRANSFERABILITY OF AWARDS.
No Award (other than an Award in the form of an outright transfer of
cash or Unrestricted Stock) may be transferred other than by will or by the
laws of descent and distribution, and during an employee's lifetime an
Award requiring exercise may be exercised only by the Participant (or in
the event of the Participant's incapacity, the person or persons legally
appointed to act on the Participant's behalf), except that Options awarded
to Employees or members of the Board which are not ISOs may be transferred
by a Participant to (i) the spouse, children or grandchildren of the
Participant ("Immediate Family Members"), (ii) a trust or trusts for the
exclusive benefit of such Immediate Family Members, or (iii) a partnership
in which such Immediate Family Members are the only partners, provided that
(x) there may be no consideration for any such transfer, and (y) subsequent
transfers of Options shall be prohibited except those in accordance with
Section 8.5 hereof. Following any such transfer, the transferred Option
shall continue to be subject to all the terms and conditions of this Plan,
including without limitation the provisions of Section 7 with respect to
exercise of the Option following the death or termination of employment of
the Participant to whom the Option was originally granted, and Section 8.4
with respect to tax withholding.
8.6. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization,
or other distribution to common stockholders other than normal cash
dividends, after the effective date of the Plan, the Committee will make
any appropriate adjustments to the maximum number of shares that may be
delivered under the Plan, or with respect to which Awards may be made to
any one Participant, under Section 4 above.
(b) In any event referred to in paragraph (a), the Committee will also
make any appropriate adjustments to the number and kind of shares of stock
or securities subject to Awards then outstanding or subsequently granted,
any exercise prices relating to Awards and any other provision of Awards
affected by such change. The Committee may also make such adjustments to
take into account material changes in law or in accounting practices or
principles, mergers, consolidations, acquisitions, dispositions or similar
corporate transactions, or any other event, if it is determined by the
Committee that adjustments are appropriate to avoid distortion in the
operation of the Plan.
8.7. EMPLOYMENT RIGHTS, ETC.
Neither the adoption of the Plan nor the grant of Awards will confer
upon any person any right to continued retention by the Company or any
subsidiary as an Employee or otherwise, or affect in any way the right of
the Company or subsidiary to terminate an employment, service or similar
relationship at any time. Except as specifically provided by the Committee
in any particular case, the loss of existing or potential profit in Awards
granted under the Plan will not constitute an element of damages in the
event of termination of an employment, service or similar relationship even
if the termination is in violation of an obligation of the Company to the
Participant.
8.8. DEFERRAL OF PAYMENTS.
The Committee may agree at any time, upon request of the Participant,
to defer the date on which any payment under an Award will be made.
8.9. PAST SERVICES AS CONSIDERATION.
Where a Participant purchases Stock under an Award for a price equal
to the par value of the Stock the Committee may determine that such price
has been satisfied by past services rendered by the Participant.
9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant will
affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
Employees.
The Committee may at any time or times amend the Plan or any outstanding
Award for any purpose which may at the time be permitted by law, or may at any
time terminate the Plan as to any further grants of Awards, provided that
(except to the extent expressly required or permitted by the Plan) no such
amendment will, without the approval of the stockholders of the Company,
effectuate a change for which stockholder approval is required in order for the
Plan to continue to qualify for the award of ISOs under section 422 of the Code.
