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, 1997
[ ] 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)
(781) 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 27, 1998
was approximately $255,240,000. As of February 27, 1998, 22,194,865 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 1998 Annual Meeting of Stockholders presently intended to be
filed with the Securities and Exchange Commission by April 30, 1998, are
incorporated by reference into Part III of this Form 10-K.
Part III identifies the pages, paragraphs or captions of the Proxy
Statement which contain information that is incorporated by reference.
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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 of pharmaceutical products
for commercialization by applying SEPA(R) (Soft Enhancer of Percutaneous
Absorption), its patented topical drug delivery technology. SEPA compounds, when
properly combined with drugs, provide 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, etc.), 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 MacroDermTM, for cosmetic use and the topical delivery of
pharmaceuticals. The Company has developed, tested and evaluated prototypes of
MacroDerms and is determining the full market opportunities for this technology.
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, 1997, no asserted liability claims existed against
the Company. However, in the future, incidents could give rise to claims which
could exceed the Company's insurance coverage and resources.
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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,
other lump-sum payments and running royalty 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 addition,
Cytopharm must pay a minimum royalty of $100,000 per year beginning January 22,
2002, subject to U.S. regulatory approval of the
formulation.
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. 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, 1998, the Company had 20 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 $2,084,800, $1,736,600 and
$1,238,100 during the years ended December 31, 1997, 1996 and 1995,
respectively. The Company is also dependent upon third parties to conduct
clinical studies, obtain U.S. Food and Drug Administration ("FDA") and other
regulatory approvals and manufacture and market a finished product.
The Company anticipates incurring significant development expenditures in
the future as it 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.
<PAGE>
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 in
the stomach, intestines or liver, resulting in the therapeutic availability of a
lower amount of effective drug. 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 an orally administered drug is 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.
TOPICAL DRUG DELIVERY
Topical drug delivery is the process of delivering drugs into the skin
(dermal delivery) so that they can be effective in the treatment of
dermatological conditions and diseases, or through the skin (transdermal
delivery) 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
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. Since other drugs move through the skin with difficulty, the
transdermal system must be formulated to increase a 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 its own facility for the IN VITRO testing of drug
formulations containing SEPA, and therefore is 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.
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, for use in cosmetics and in the superficial dermal delivery of
pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents. The Company has synthesized, tested and
evaluated prototypes of MacroDerms and is determining the full market
opportunities for this technology.
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(R), 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 preventive 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, 1998, the Company had 20 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 New Drug Applications
(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 Investigational New Drug (IND) exemption 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 safety, chemistry, manufacturing and stability and clinical studies
developed under the IND are compiled into an NDA or Abbreviated New Drug
Application (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, 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
During 1997, the Company filed five U.S. patent applications, four foreign
patent applications and one International PCT application. All of the foreign
applications and two of the U.S. applications relate to the Company's MacroDerm
polymers. Other applications filed in 1997 relate to the use of SEPA enhancers
in the following: compositions and methods for treating penile erectile
dysfunction; non-steroidal anti-inflammatory drug formulations for topical
application to the skin; and hormone replacement therapy (HRT) drug formulations
for topical application to the skin.
Allowable subject matter was indicated by the U.S. Patent and Trademark
Office for the Company's 1996 patent application for cationic MacroDerm
polymers. The Company expects that the application will be allowed and that the
patent will issue during 1998.
In 1997, two U.S. patents issued: U.S. 5,620,980 - Method for treating hair
loss by the application of minoxidil and SEPA enhancers (once a day treatment
for baldness); and U.S. 5,631,336 - Chain-terminated N-vinyl lactam polymers and
graft-copolymers and methods for making same.
The Company's pending European application relating to the use of
iontophoretic current in combination with SEPA enhancers was allowed in October,
1997 and will be registered in nine European countries.
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. See "Financial
Statements and Supplementary Data." At December 31, 1997, the Company's
accumulated deficit was approximately $21.7 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 at
least the next 12 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 or 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 of its licensees 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 might be adversely affected.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSE
ARRANGEMENTS
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 HAVE NOT GENERATED SUSTAINED REVENUES OR ANY PROFITS
Since its 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 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 hairman of the Board of Directors and Scientific Director,
Alvin J. Karloff, its Chief Executive Officer and President and Dr. Stephen J.
Riggi, its Chief Operating Officer. 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.
RISKS OF PRODUCT LIABILITY CLAIMS; LACK OF PRODUCT LIABILITY INSURANCE; EXPENSE
AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE COVERAGE
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, is
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
biomedical 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 succeeds 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, 1997, 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 Company's Common Stock is traded on NASDAQ under the symbol "MCHM." 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 WARRANT CLASS X WARRANTS
MCHM MCHML MCHMM MCHMN
YEAR ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
DECEMBER 31, 1997
First Quarter 7 3/4 4 15/16 4 3/4 2 3 1/2 1 1/4 5 1/2 3 1/2
Second Quarter 7 7/16 4 1/4 4 1/4 1 1/2 3 15/16 5 1/2 3
Third Quarter 9 1/2 4 3/4 6 5/8 2 5 1 1/8 4 1/4 3 1/4
Fourth Quarter 14 3/4 6 3/16 11 3/8 3 1/4 10 3/8 1 5/8 --- ---
</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, 1997, there were 390 record holders of the
Company's Common Stock. The Class A and Class AA Warrants expired on December
15, 1997 and the Class X Warrants expired on September 2, 1997.
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 1997, the Company issued the following securities which were not
registered under the Securities Act of 1933 at the time the securities were
issued:
- On June 5, 1997, 16,000 shares of the Company's Common Stock were
issued to its investment banker in consideration of services to
the Company.
- On August 15, 1997, 25,000 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>
TRANSITION
PERIOD FROM
APRIL 1 TO
DECEMBER 31, YEARS ENDED DECEMBER 31,
- ----------------------------------------------- ------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ----- ----
STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Total revenue $ 123,819 $ 44,710 $ 17,493 $ 129,786 $ 120,350
Net loss (1,465,454) (1,969,442) (2,465,837) (3,139,796) (3,569,113)
Basic and diluted net
loss per share (0.13) (0.17) (0.20) (0.21) (0.21)
Shares used to compute
basic and diluted net
loss per share 10,874,172 11,558,105 12,331,560 15,239,080 16,638,401
BALANCE SHEET DATA:
Working capital $ 5,321,837 $ 3,615,608 $ 4,532,623 $ 7,127,252 $24,756,904
Current assets 5,633,155 3,955,357 4,962,562 7,495,715 25,069,804
Total assets 5,956,850 4,437,600 5,462,625 8,063,750 25,623,836
Current liabilities 311,318 339,749 429,939 368,463 312,900
Capitalized lease obligations -0- 59,715 91,861 57,038 18,408
Total liabilities 324,188 387,792 486,198 386,871 312,900
Stockholders' equity 5,632,662 4,049,808 4,976,427 7,676,879 25,310,936
</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 of pharmaceutical products
for commercialization by applying SEPA(R) (Soft Enhancer of Percutaneous
Absorption), its patented drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
solutions, etc.) that enhance the transdermal delivery of drugs into the skin or
into the bloodstream. The Company currently derives no significant revenue from
product sales, royalties or license fees. The Company plans to develop specific
SEPA 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, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, the Company's net loss was
approximately $3,569,100 as compared to a loss of $3,139,800 for the previous
year, a 14% increase. For 1997 and 1996, the Company realized operating revenues
of approximately $120,400 and $129,800, respectively, which were primarily from
the completion of feasibility studies.
Marketing, general and administrative expenses for 1997 aggregated
approximately $1,992,200, an increase of $99,600, or 5%, from 1996's total of
$1,892,600, reflecting increased securities registration expenses offset in part
by a reduction in general consulting expenses. The Company expects that
marketing, general and administrative expenses will increase in 1998 resulting
from increased patent costs and routine compensation adjustments.
Research and development costs increased approximately $348,200 from
$1,736,600 in 1996 to $2,084,800 in 1997, a 20% increase. This increase reflects
the Company's continued acceleration of clinical testing of its products and
increased internal research and development efforts. The Company expects that
research and development costs will continue to increase substantially in 1998,
reflecting increased clinical testing efforts.
Other income increased from a net amount of $371,600 in 1996 to $417,500 in
1997. This increase reflects the increased cash which resulted primarily from
the exercise of Class A and Class AA warrants. With the exception of outstanding
stock options, at December 31, 1997 the Company does not have any outstanding
equity instruments which may provide a source of funds in the future.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
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 (SFAS 123)". Adoption of SFAS 123 increased expenses approximately
$491,200, of which approximately $433,100 was attributable to the grant of a
warrant to an investment banker for services to the Company.
Research and development costs increased by approximately $498,500 from
$1,238,100 in 1995 to $1,736,600 for 1996, representing 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.
Other income increased from a net amount of $203,300 in 1995 to $371,600 in
1996. This increase reflected 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.
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 1997, the Company
received aggregate net proceeds of approximately $20.8 million from the exercise
of stock options, stock warrants, and unit purchase options, compared to
approximately $5.3 million in 1996. At December 31, 1997 working capital was
approximately $24.8 million, compared to $7.1 million at December 31, 1996. The
increase in the Company's working capital, from the receipt of the 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, 1997. 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 operating activities.
Capital expenditures and additional patent development costs for the year
ended December 31, 1997 were approximately $112,000. The Company anticipates
capital expenditures of approximately $420,000 during the fiscal year ending
December 31,1998.
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 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.
YEAR 2000 REMEDIATION
The Company believes that it will be able to manage the year 2000 computer
transition without a material effect on its business, operations or financial
condition.
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 22 through 36
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, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 1998
<PAGE>
<TABLE>
<CAPTION>
MACROCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------ ---- ---- ------------------------------------- ---- ----
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $24,952,121 $7,329,881 Current portion of capitalized lease
Marketable securities --- 21,824 obligations $ 18,408 $ 38,630
Accounts receivable --- 43,977 Accounts payable and accrued expenses 204,352 241,338
Prepaid expenses and other Deferred compensation and related
current assets 117,683 100,033 accrued interest 90,140 87,481
---------- --------- Deferred rent --- 1,014
---------- ----------
TOTAL CURRENT LIABILITIES 312,900 368,463
TOTAL CURRENT ASSETS 25,069,804 7,495,715 CAPITALIZED LEASE OBLIGATIONS, Net of
---------- --------- current portion --- 18,408
---------- ----------
PROPERTY AND EQUIPMENT (NET) 281,216 345,343
---------- ---------
TOTAL LIABILITIES 312,900 386,871
---------- ----------
OTHER ASSETS:
Patents, net 268,356 218,232
Deposits 4,460 4,460 COMMITMENTS & CONTINGENCIES (Note 7)
---------- ---------
TOTAL OTHER ASSETS 272,816 222,692 STOCKHOLDERS' EQUITY:
---------- --------- Preferred stock --- ---
Common stock, $.01 par value; authorized
60,000,000 shares; issued and outstanding,
22,182,865 shares and 15,601,274 shares
at December 31, 1997 and 1996,
respectively 221,829 156,013
Additional paid-in capital 46,923,677 25,839,675
Unearned compensation ( 169,322) ( 222,674)
Accumulated deficit (21,665,248) (18,096,135)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 25,310,936 7,676,879
---------- ----------
TOTAL LIABILITIES AND
TOTAL ASSETS $25,623,836 $8,063,750 STOCKHOLDERS' EQUITY $ 25,623,836 $ 8,063,750
========== ========= ========== ===========
See notes to financial statements.
</TABLE>
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
REVENUES
Research contracts $ 120,350 $ 129,786 $ 17,493
---------- ---------- ----------
OPERATING EXPENSES
Marketing, general and
administrative 1,992,157 1,892,572 1,412,537
Research and development 2,084,826 1,736,561 1,238,070
Consulting fees with related
parties 30,000 12,000 36,000
---------- ---------- ----------
TOTAL OPERATING EXPENSES 4,106,983 3,641,133 2,686,607
---------- ---------- ----------
LOSS FROM OPERATIONS ( 3,986,633) ( 3,511,347) ( 2,669,114)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 424,742 383,596 246,018
Interest expense ( 7,222) ( 12,045) ( 42,644)
Other --- --- ( 97)
---------- ---------- ----------
TOTAL OTHER INCOME 417,520 371,551 203,277
---------- ---------- ----------
NET LOSS $( 3,569,113) $( 3,139,796) $( 2,465,837)
========== ========== ==========
BASIC AND DILUTED NET
LOSS PER SHARE $( .21) $( .21) $( .20)
========== ========== ==========
SHARES USED TO COMPUTE BASIC
AND DILUTED NET LOSS PER SHARE 16,638,401 15,239,080 12,331,560
========== ========== ==========
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
--------------------- ADDITIONAL
NUMBER OF PAR PAID-IN UNEARNED ACCUMULATED
SHARES VALUE CAPITAL COMPENSATION DEFICIT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Stock based compensation 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
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 based compensation 925 9 770,381 (222,674) --- 547,716
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
Exercise of common stock warrants 4,491,590 44,916 16,938,240 --- --- 16,983,156
Exercise of common stock options 291,501 2,915 692,087 --- --- 695,002
Exercise of unit purchase options 1,757,500 17,575 3,058,050 --- --- 3,075,625
Stock based compensation 41,000 410 395,625 53,352 --- 449,387
Net loss --- --- --- --- ( 3,569,113) ( 3,569,113)
---------- ------- ---------- ------- ---------- ----------
BALANCE, DECEMBER 31, 1997 22,182,865 $221,829 $46,923,677 $(169,322) $(21,665,248) $25,310,936
========== ======= ========== ======= ========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 3,569,113) $(3,139,796) $(2,465,837)
---------- --------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 123,888 116,967 79,475
(Gain) loss on disposal of equipment 1,800 --- ( 3,925)
Abandoned patent costs --- --- 22,592
Stock-based compensation 448,977 547,716 16,312
Amortization of discounts on
marketable securities --- ( 70,845) ( 152,316)
Increase (decrease) in cash from:
Accounts receivable 43,977 ( 43,977) ---
Prepaid expenses and other current assets ( 17,650) 12,258 ( 21,767)
Accounts payable and accrued expenses ( 36,986) ( 11,396) 126,773
Deferred compensation and related accrued
interest 2,659 ( 47,180) ( 54,585)
Deferred rent ( 1,014) ( 5,928) ( 5,928)
Deposits --- --- ( 150)
---------- --------- ---------
Total adjustments 565,651 497,615 6,481
---------- --------- ---------
Net cash used by operating activities ( 3,003,462) (2,642,181) (2,459,356)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 100 --- 4,800
Purchases of marketable securities --- (5,743,755) (3,516,801)
Purchase of certificates of deposit --- ( 734,732) ( 287,000)
Proceeds from maturities of
marketable securities 21,824 6,771,000 5,977,000
Proceeds from maturities of certificates
of deposit --- 1,015,000 ---
Expenditures for property and equipment ( 48,991) ( 136,306) ( 54,916)
Additions to patents ( 62,794) ( 48,633) ( 16,558)
---------- --------- ----------
Net cash provided (used) by
investing activities ( 89,861) 1,122,574 2,106,525
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease ( 38,630) ( 34,823) ( 16,992)
Proceeds from issuance of common stock 410 --- 2,750,000
Proceeds from exercise of common stock options 695,002 445,406 533,269
Proceeds from exercise of common stock warrants 16,983,156 2,235,251 90,875
Proceeds from exercise of unit purchase options 3,075,625 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 20,715,563 5,257,709 3,359,152
---------- --------- ---------
</TABLE>
(Continued)
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
NET INCREASE IN CASH AND
CASH EQUIVALENTS $17,622,240 $3,738,102 $3,006,321
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 7,329,881 3,591,779 585,458
---------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $24,952,121 $7,329,881 $3,591,779
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $4,563, $9,226 and $5,022, respectively,
for the years ended December 31, 1997, 1996 and 1995. The Company did not
pay any income taxes during those periods.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired pursuant to
a capital lease obligation $ --- $ --- $ 49,138
========== ========= =========
See notes to financial statements. (Concluded)
<PAGE>
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 1997, the Company's accumulated deficit
was approximately $21.7 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 at least 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.
CASH EQUIVALENTS - Cash equivalents consist of short-term, highly liquid
investments with a maturity of three months or less when purchased.
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 $59,600 and
$47,000, respectively, at December 31, 1997 and 1996.
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 - In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share", which is
effective for financial statements issued for periods ending after December
15, 1997. This statement required the adoption of new calculation
methodologies and enhanced disclosures of basic and diluted earnings per
share computations. As required, the Company has adopted SFAS No. 128 in
the fourth quarter of 1997. The computation of the basic net loss per share
in accordance with SFAS No. 128 did not require a restatement of the prior
years' net loss per share to conform to SFAS No. 128. Due to the net losses
of the Company, diluted earnings per share are not presented as the results
would be anti-dilutive. Potential dilutive securities consist of the
Company's outstanding stock options, warrants and unit purchase options
which aggregate 3,557,504, 10,090,126 and 11,494,509 for the years ended
December 31, 1997, 1996 and 1995, respectively.
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 fixed assets and 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 the financial position or the results of operations.
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.
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 from the 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.
RECLASSIFICATION - Certain 1996 and 1995 amounts have been reclassified to
conform with the 1997 presentation.
2. MARKETABLE SECURITIES
The Company had no marketable securities at December 31, 1997. However, as
of December 31, 1996, marketable securities were classified as "held to
maturity securities" and carried at amortized cost. The maturities of
marketable securities held at December 31, 1996 were 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
========= ======== =========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
1997 1996
---- ----
Laboratory equipment $589,398 $562,183
Office equipment 167,331 158,929
Leasehold improvements 107,256 96,882
------- -------
Total 863,985 817,994
Less: accumulated depreciation
and amortization (582,769) (472,651)
------- -------
Property and equipment, net $281,216 $345,343
======= =======
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31:
1997 1996
---- ----
Accounts payable $ 17,154 $ 58,179
Payroll taxes --- 19,313
Accrued professional fees 173,814 130,046
Accrued clinical trial costs 13,384 33,800
------- -------
$204,352 $241,338
======= =======
<PAGE>
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:
1997 1996
---- ----
Laboratory equipment $ 113,758 $ 113,758
Less: accumulated amortization ( 62,219) ( 39,468)
-------- --------
$ 51,539 $ 74,290
======== ========
Future minimum lease payments under capital leases are as follows:
Total payments for 1998 $ 19,653
Less: imputed interest (approximately 11%) ( 1,245)
-------
Present value of minimum lease payments $ 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 22,182,865 shares are issued
and 5,284,279 are reserved for issuance upon exercise of common stock
warrants and options at December 31, 1997. Authorized and unissued
preferred stock totals 6,000,000 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 own
approximately 7.5% and 4.9%, respectively, 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 were exercisable for 118 and one-third of these Units at
a price of $52,500 per Unit. 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. All the remaining
Units were exercised prior to the expiration date in December 1997.
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
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 was exercisable for one share of common stock
at a price per share, subject to adjustment, of $3.00 and $4.50,
respectively. In December 1997, the remaining Class A and Class AA common
stock warrants which had not been exercised, expired.
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. The remaining unexercised
warrants expired in September 1997.
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
exercise prices of $3.00, $4.00, and $5.00. 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 paid J-M a monthly fee of $5,000 for consulting
services from December 1996 through April 1997.
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 4,000,000 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
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
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, 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
Granted 247,500 7.027
Exercised ( 291,501) 2.384
Expired ( 10,000) 4.250
Canceled ( 87,820) 5.682
---------
Outstanding December 31, 1997 3,411,704 3.126
=========
Exercisable at December 31: 1997 2,867,204 $2.582
=========
1996 2,312,501 $1.610
=========
1995 2,161,841 $1.216
=========
The weighted average fair values of options granted during 1997, 1996 and
1995 were $5.83, $2.37 and $4.93, respectively.
All options granted during the three year period ended December 31, 1997
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.35%-7.14% 5.25% 5.25%
Expected life of option grants 10 years 5-10 years 5-10 years
Expected volatility of underlying stock 65.3%-87.7% 59.3%-99.2% 48.2%-112.5%
Expected dividend payment rate,as a
percentage of the stock price on
the date of grant --- --- ---
</TABLE>
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
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, 1997:
<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 Exercisable Outstanding Life Exercisable
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.43 1,315,080 1,315,080 $ .43 3.17 $ .43
$1.50-$2.00 109,499 84,499 $1.82 6.58 $1.80
$2.75-$4.00 646,600 601,600 $3.18 6.42 $3.14
$4.875-$5.875 1,118,025 846,025 $5.59 8.15 $5.50
$6.064-$8.25 222,500 20,000 $7.08 8.52 $6.49
</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 basic and
diluted net loss per share would have been as follows:
1997 1996 1995
---- ---- ----
Net loss as reported ($3,569,113) ($3,139,796) ($2,465,837)
Compensation costs:
Employee ( 2,495,545) ( 2,560,760) ( 108,735)
Non-Employee ( 31,785) ( 58,273) ( 100,278)
---------- ---------- ----------
Proforma net loss ($6,096,443) ($5,758,829) ($2,674,850)
========== ========== ==========
Proforma basic and
diluted net loss
per share ($ 0.37) ($ 0.38) ($ 0.22)
========== ========== ==========
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
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 may be understated in
relation to future years since these proforma charges do not reflect the
financial impact of options granted prior to 1995.
UNEARNED COMPENSATION - The following table sets forth the changes to the
Company's reported compensation for the years ended December 31, 1997 and
1996:
1997 1996
---- ----
Balance, January 1 $ 222,674 $ 0
Common stock granted to non-employees
below fair market value 286,071 4,509
Options and warrants granted to
non-employees at fair market value 378,422 765,881
Amortization of unearned compensation ( 448,977) ( 547,716)
Unearned compensaton forfeited ( 268,868) ---
-------- --------
Balance, December 31 $ 169,322 $ 222,674
======== ========
STOCK AND STOCK ISSUANCES - 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. During 1997, the Company issued 41,000 common
shares and recorded unearned compensation of $286,071 at the date of
issuance.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company has a lease expiring on February 28, 2000
for its operating facility. At December 31, 1997, future minimum lease
payments under this lease agreement are as follows: 1998, $174,816, 1999,
$174,816, and 2000, $29,136. Total rental expense under all operating
leases was approximately $162,500, $106,000 and $104,000 for the years
ended December 31, 1997, 1996, and 1995, 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 $659,000. 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, 1997, 1996 and 1995, 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 1997, 1996 and 1995.
CLINICAL TRIAL LIABILITY INSURANCE - A clinical liability policy was
obtained as of November, 1995 and renewed in 1996 and 1997.
<PAGE>
8. 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, 1997, the Company has available net operating loss carryforwards of
approximately $20.3 million for federal income tax purposes, expiring
through 2011 and $11.6 million for state income tax purposes, expiring
through 2001. In addition, the Company, for federal and state income tax
purposes, has unused investment and research and development tax credits
aggregating $10,000 and $383,000, respectively. The use of the federal net
operating loss may be restricted due to changes in ownership in accordance
with definitions as stated in the Internal Revenue Code.
Deferred income taxes consist of the aggregate operating loss and tax
credit carryforwards 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, 1997 and December 31, 1996 are as follows:
1997 1996
---- ----
Deferred Tax Assets:
Net operating loss carryforwards $ 8,000,000 $ 6,700,000
Tax credit carryforwards 393,000 330,000
Other --- 23,000
---------- ----------
8,393,000 7,053,000
Valuation allowance (8,393,000) (7,053,000)
--------- ---------
Deferred tax asset, net $ --- $ ---
========= =========
For the years ended December 31, 1997, 1996 and 1995, the valuation
allowance was increased by approximately $1,340,000, $1,313,000, and
$660,000, respectively, due to the uncertainty of future realization of
currently generated net operating loss and tax credit carryforwards.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
"Proposal No. 1 - Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
"Report of Compensation Committee" and "Employment Contracts, Termination of
Employment and Change-In-Control Arrangements" in the Company's Proxy Statement.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
"Beneficial Ownership of Voting Securities" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
"Employment Contracts, Termination of Employment and Change-In-Control
Arrangements" and "Certain Transactions" in the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) The following Financial Statements as of December 31, 1997 and 1996 and
for the three years in the period ended December 31, 1997 are filed herewith:
Page
----
Independent Auditors' Report 22
Balance Sheets 23
Statements of Operations 24
Statements of Stockholders' Equity 25
Statements of Cash Flows 26-27
Notes to Financial Statements 28-36
<PAGE>
(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:
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 14, 1997*
The following exhibit required to be filed herewith is incorporated by
reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997:
3a Certificate of Incorporation as amended.
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 December 31, 1996:
4 Stock Purchase Warrant
10.10.2 1984 Non-Qualified 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*
The following exhibit required to be filed herewith is incorporated by
reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997:
10.10.3 1984 Incentive Stock Option Plan as amended November 15, 1996*
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):
3b Bylaws
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 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 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, 1997.
- --------------------------
*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 23, 1998 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 .
/S/ALVIN J. KARLOFF Chief Executive Officer, President,
Alvin J. Karloff Principal Financial Officer and Director
/S/CARLOS M. SAMOUR, PH.D. Chairman of the Board of Directors
Carlos M. Samour, Ph.D. and Scientific Director
/S/STEPHEN J. RIGGI, PH.D. Vice President, Operations and
Stephen J. Riggi, Ph.D. Director
/S/WILLARD M. BRIGHT, PH.D. Director
Willard M. Bright, Ph.D.
/S/PETER G. MARTIN Director
Peter G. Martin
/S/MICHAEL A. DAVIS, M.D. Director
Michael A. Davis, M.D.
MACROCHEM CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC LOSS PER SHARE WAS CALCULATED AS FOLLOWS:
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Total loss used for basic
loss per share $( 3,569) $( 3,140) $( 2,466)
====== ====== ======
Shares used to compute basic
loss per share 16,638 15,239 12,332
====== ====== ======
Basic loss per share $( 0.21) $( 0.21) $( 0.20)
====== ====== ======
Diluted earnings per share are not presented since the results
would be anti-dilutive.
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,
(iii) Registration Statement No. 333-28967 on Form S-8, (iv) Registration
Statement No. 33-82298 on Form S-3, and (v) Registration Statement No. 333-34533
on Form S-3 of our report dated March 5, 1998, appearing in this Annual Report
on Form 10-K of MacroChem Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 20, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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 in its entirety by reference
to such financial statements.
</LEGEND>
<NAME> MacroChem Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 24,952,121
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,069,804
<PP&E> 863,985
<DEPRECIATION> 582,769
<TOTAL-ASSETS> 25,623,836
<CURRENT-LIABILITIES> 312,900
<BONDS> 0
0
0
<COMMON> 221,829
<OTHER-SE> 25,089,107
<TOTAL-LIABILITY-AND-EQUITY> 25,623,836
<SALES> 0
<TOTAL-REVENUES> 120,350
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,222
<INCOME-PRETAX> (3,569,113)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,569,113)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,569,113)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
As amended
November 14, 1997
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
4,000,000. 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 period as the Committee may determine), and shall thereupon
terminate; provided, however, that an Option granted to a Participant who at the
date of grant is an employee may be exercised at any time following such
Participant's death. 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.
