UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended: March 31, 1999
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[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to
Commission file number: 0-22865
VERSAILLES CAPITAL CORPORATION
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(Name of small business issuer in its charter)
Colorado 84-1044910
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21550 Oxnard Street, Suite 830
Woodland Hills, California 91367
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (818) 676-0404
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Securities to be registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common stock, par value $0.05 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements
for at least the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. [ x ]
Issuer's revenues for its most recent fiscal year: $-0-
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Aggregate market value of voting stock held by non-affiliates as of
May 31, 1999: $22,535,932
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Shares of Common Stock, $.05 par value, outstanding as of
May 31, 1999: 43,042,856
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Documents incorporated by reference: Portions of the Versailles Capital
Corporation Proxy Statement for the 1999 Annual Meeting of Stockholders are
incorporated by reference in Part III hereof. In addition, See Part II,
Item 8 - "Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure" and Part III, Item 13-"Exhibits and Reports other
documents incorporated by reference into this annual report on Form 10-KSB.
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TABLE OF CONTENTS
PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . .1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 14
PART II
Item 5. Market for Common Equity Stock and Related Stockholder . . . . 15
Item 6. Management's Discussion and Analysis or Plan of Operation . . 15
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . 18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . 18
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act . . 18
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . 18
Item 11. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . 18
Item 12. Certain Relationships and Related Transactions. . . . . . . . 18
Item 13. Exhibits, List and Reports on Form 8-K . . . . . . . . . . . 19
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VERSAILLES CAPITAL CORPORATION
FORM 10-KSB
FORWARD-LOOKING STATEMENTS
SOME OF THE STATEMENTS MADE IN THIS FORM 10-KSB AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE THAT ARE NOT HISTORICAL FACTS, SUCH AS
ANTICIPATED RESULTS OF CLINICAL TRIALS, MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS," WHICH FORWARD LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS IN THE FEDERAL SECURITIES LAWS. THESE STATEMENTS OFTEN
CAN BE IDENTIFIED BY THE USE OF TERMS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "SHOULD", "COULD", "EXPERTS", "PLANS",
"BELIEVES", "PREDICTS", "POTENTIAL", OR "CONTINUE," OR THE NEGATIVE
THEREOF. SUCH FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE MADE.
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER
FACTORS BEYOND THE CONTROL OF THE COMPANY THAT COULD CAUSE ACTUAL RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS, AND EVENTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OF OPERATIONS, LEVELS OF ACTIVITY,
PERFORMANCE, ACHIEVEMENTS, AND EVENTS AND ANY FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE, ACHIEVEMENTS AND EVENTS IMPLIED BY SUCH FORWARD-
LOOKING STATEMENTS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION "RISK FACTORS" IN ITEM 1 OF THIS FORM 10-KSB.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, THE COMPANY CANNOT GUARANTEE
FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, ACHIEVEMENTS, OR EVENTS.
MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY
FOR THE ACCURACY OR COMPLETENESS OF SUCH STATEMENTS. THE COMPANY DISCLAIMS
ANY OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENT OR TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
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Versailles Capital Corporation together with its subsidiaries (the
"Company" or the "Registrant") was incorporated under the laws of Colorado
on December 31, 1986. From 1991 through February 22, 1999, the Company was
inactive aside from seeking a business combination candidate.
History
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The Company was incorporated under the name "Man O'War, Inc."
Pursuant to a Registration Statement filed and declared effective by the
Securities and Exchange Commission in 1987, the Company completed an
initial public offering of 30,000,000 Units, each Unit consisting of two
(2) shares of $.0001 par value Common Stock and one (1) Class A Warrant, at
a price of $.02 per Unit.
Effective October 4, 1988, the Company completed the acquisition of
one hundred percent (100%) of the outstanding common stock of Reduction
Technologies, Inc. ("RTI"), a Texas corporation, in exchange for
369,000,000
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shares of its $0.0001 par value common stock. This transaction resulted in
a change of control of the Company. In 1991, RTI sold all of its assets to
a third party for cash and utilized the cash to retire its liabilities. In
1993, RTI was dissolved and ceased to exist. From 1991 through February 22,
1999, the Company did not engage in any business operations or activities.
In 1989, the Company ceased to be a reporting company under Section
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") due to its inability to audit the financial statements of RTI. While
the Company's Common Stock traded for a brief period of time on the over-the-
counter market and was quoted in the "Pink Sheets" published by the
National Quotations Bureau, Inc., no public trading market for the
Company's Common Stock existed from 1989 through February 23, 1999. The
Company had no business operations or activities during that period other
than its efforts to identify and consummate a merger or acquisition. As a
result it was deemed a "blank check" company within the meaning of the
Penny Stock Reform Act of 1990.
On November 5, 1996, the Company amended its charter to (i) change its
name to "Versailles Capital Corporation" and (ii) effect a one-for-five
hundred (1-for-500) reverse split of its Common Stock, changing its par
value to $.05 per share.
British Lion Medical, Inc. ("British Lion") was incorporated in
California in August 1997 and commenced operations on April 10, 1998.
British Lion was engaged in the pharmaceutical research business with the
primary purpose of developing Cytolin(R), a drug designed to protect the
immune system, especially in patients suffering from Human Immunodeficiency
Virus ("HIV"). The Company believes that Cytolin(R) is an important drug
for the growing number of patients who have not been receiving treatment,
for those who are on multi-drug therapy, and for those who have become
resistant to drugs currently used to treat the HIV/AIDS virus.
On February 17, 1999, the Company, British Lion and Amerimmune, Inc.
("Amerimmune"), a wholly owned subsidiary of the Company, entered into an
Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the
Merger Agreement on February 23, 1999, British Lion's then current
shareholders acquired approximately 97% of the issued and outstanding
voting shares of the Company and the Company acquired all of the issued and
outstanding shares of British Lion through a merger of British Lion with
and into Amerimmune, with Amerimmune as the surviving corporation (the
"Transaction"). For financial reporting purposes, the Transaction has been
accounted for as a reverse acquisition whereby British Lion is deemed to
have acquired the Company. In connection with the Transaction, Amerimmune
succeeded to the business of British Lion and became engaged in the
pharmaceutical research business with the primary purpose of developing
Cytolin(R).
Background
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Allen D. Allen, developed a family of monoclonal antibodies, one of
which is called Cytolin(R), that block certain adhesion molecules on one of
the disease fighting cells of the immune system, thereby protecting the
immune system's ability to keep itself functioning effectively. On the
basis of scientific evidence gathered through 1993, Allen discerned that
adhesion molecules appearing on certain white blood cells of individuals
infected with Human Immunodeficiency Virus ("HIV") cause such cells to
destroy CD4 cells, eventually resulting in the syndrome known as Acquired
Immune Deficiency Syndrome ("AIDS"). Adhesion molecules appear in large
numbers on the killer-type T cells of the immune system that proliferate in
HIV-infected persons. In general, killer cells that carry an abundance of
adhesion molecules tend to turn the human immune system against itself.
Cytolin(R) keeps the immune system in check by blocking predetermined
adhesion molecules on killer-type T cells.
AIDS is a disease caused by HIV. First described as an infectious
disease in the early 1980s, HIV has infected over 20 million persons
worldwide and about 900,000 in the United States. This retrovirus infects
some of the body's
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immune system cells and eventually causes the immune system to damage
itself, reducing the ability of the immune system to protect the body
against fungal, bacterial, parasitic and viral organisms, as well as
several types of cancer. The medical community generally believes that most
people who become infected with HIV will eventually develop AIDS and die.
Mr. Allen and his associates formed CytoDyn of New Mexico, Inc., a New
Mexico corporation ("CytoDyn NM"), for the purposes of developing his
theory and a drug which could diminish destruction of CD4 cells. CytoDyn
NM raised and spent approximately $1,200,000 for development and testing of
Cytolin(R). In 1994, Mr. Allen granted CytoDyn NM an exclusive worldwide
license to use the patent rights and technology to Cytolin(R). In
addition, CytoDyn NM obtained a trademark for Cytolin(R).
In August 1998, Mr. Allen and CytoDyn NM entered into a Termination,
Sale and Shareholder Agreement with Three R Associates, Inc., a California
corporation ("Three R"), wherein: (i) CytoDyn NM agreed to relinquish the
exclusive license to Cytolin(R) in exchange for 600,000 shares of British
Lion's stock; and, (ii) Mr. Allen agreed to sell all United States patent
and foreign patent rights and technological know-how underlying the drug,
Cytolin(R), to Three R, in exchange for $1,350,000, payable quarterly over
a fifteen year period, with a provision that Three R could abandon their
patent rights with no further obligations after minimum payments
aggregating $180,000.
In October 1998, Three R entered into a License Agreement with British
Lion, whereby British Lion received: (i) irrevocable, exclusive, worldwide
rights to use all present and future patent rights, know-how and background
technology of Three R, relating to the product Cytolin(R); and, (ii) a
sublicense to the trademark Cytolin(R). British Lion issued Three R
3,075,000 shares of its stock upon execution of the License Agreement, and
agreed to assume Three R's obligations under a consulting agreement between
Three R and Mr. Allen. The License Agreement was contingent upon: (i)
British Lion's entering into a management agreement with Western Center for
Clinical Studies, Inc., a California corporation ("WCCS") for purposes of
assisting British Lion in obtaining Food and Drug Administration (the
"FDA") approval to market Cytolin(R) for commercial use; and, (ii) the
completion of British Lion's merger with a publicly held company. These
conditions have been satisfied. Lois Rezler, Daniel L. Azarnoff and Roy S.
Azarnoff, each of whom is a director of the Company, collectively own 100%
of the issued and outstanding stock of WCCS and Three R. In October 1998,
British Lion entered into a management agreement with WCCS which was
subsequently ratified by a majority of the disinterested directors of the
Company.
In November and December 1998, British Lion sold 200,000 shares of its
stock for a total of $300,000 to certain accredited investors, as that term
is defined under Rule 501(a) of Regulation D of the Act ("accredited
investors"), in a private offering exempt from registration under Section
4(2) of the Act and Rule 506 of Regulation D promulgated thereunder (a
"private offering"). The proceeds of the offering were used as short term
working capital.
In February 1999, British Lion sold 1,070,000 shares of its stock for
a total of $3,210,000 to accredited investors in a private offering. The
offering terminated on February 22, 1999 and funds were held in escrow
until February 23, 1999, the Effective Date (as defined therein) of the
Merger Agreement. The proceeds of this offering will be used for research
of Cytolin(R).
Testing of Cytolin(R)
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Cytolin(R) was tested in toxicology studies where it was found safe to
administer to humans. A number of physicians in the United States
administered Cytolin(R) to their HIV-infected patients over the course of
approximately three years. As results from this initial use became
available, other physicians obtained and administered Cytolin(R) to their
patients as well. Four of these physicians allowed an independent,
professional monitor into their offices to inspect the medical records of
188 patients they had treated with Cytolin(R) once or twice a month over 18
months. Data was recorded
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and summarized and form part of the material presented to the FDA as an
indication of the safety of Cytolin(R).
Overview of the FDA Approval Process
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GENERAL. The manufacturing and marketing of the Company's proposed
products and its research and development activities are and will continue
to be subject to regulation by federal, state and local governmental
authorities in the United States and other countries. In the United
States, pharmaceuticals are subject to rigorous regulation by the FDA's
Center for Biologicals Evaluation and Research, which reviews and approves
the marketing of biological drugs. The Federal Food, Drug and Cosmetic
Act, the regulations promulgated thereunder, and other federal and state
statutes and regulations govern, among other things, the testing,
manufacture, labeling, storage, record keeping, advertising and promotion
of the Company's potential products.
APPROVAL PROCESS. The process of obtaining FDA approval for a new
drug or biological ordinarily takes several years and generally involves
the expenditure of substantial resources. The steps required before a new
drug can be produced and marketed for human use include pre-clinical and
clinical trials and the approval of a New Drug Application ("NDA").
However, the FDA offers an accelerated drug approval program for new drugs
which treat serious or life-threatening illnesses. SEE "Accelerated Drug
Approval".
PRE-CLINICAL TESTING. A compound is subjected to extensive laboratory
and animal testing to determine if it is safe and has the functionality for
which its therapeutic use is intended. All animal safety studies must be
performed under current good laboratory practices.
INVESTIGATIONAL NEW DRUG ("IND"). Before human tests can begin, a
drug sponsor must file an IND application with the FDA, showing how the
drug and drug product(s) are made, the results of animal testing and a
protocol describing the initial study in human beings. If the FDA does not
reject or place an application "on hold" within 30 days, IND status ensues
and permits a sponsor to undertake studies in human volunteer subjects.
HUMAN TESTING ("CLINICAL"). Under an IND, the human clinical testing
program involves three phases. Clinical trials are conducted in accordance
with protocols that detail the objectives of the study, the parameters to
be used to monitor safety, the efficacy criteria to be evaluated and the
type of statistical analysis that will be done. Each protocol is submitted
to the FDA as part of an IND filing or amendment. Each clinical study is
conducted under the auspices of an independent Institutional Review Board
("IRB") for each institution at which a study will be conducted. The IRB
considers, among other things, information on the product, ethical factors,
informed consent documents, the risk to human subjects, and the potential
benefits of therapy relative to risk.
Phase I clinical trials are usually conducted on healthy volunteers to
determine the maximum tolerated dose, adverse effects and pharmacokinetics
of a product. Efficacy endpoints, even if surrogate measures, are also
obtained if possible. Phase II studies are conducted on a statistically
relevant number of patients having a specific disease to determine initial
efficacy in humans for that specific disease, and possible adverse effects
and safety risks. Phase III normally involves the pivotal trials of a
drug, consisting of large-scale studies on patients with the disease for
which the drug is intended, in order to evaluate the overall benefits and
risks of the drug for the treated disease. In addition to a placebo, these
studies may compare a Company's drug product with other available products.
At the present time, two well-controlled clinical trials using a placebo,
when ethical, for some subjects are required to establish efficacy and
safety. Clinical studies are planned for Cytolin(R) to demonstrate safety
and efficacy as required for FDA approval. The FDA continually reviews the
clinical trial plans and results and may suggest design changes or may
discontinue the trials at any time if significant safety or other issues
arise. The data obtained from the IND studies are the basis for the
official label or package insert that tells prescribing physicians about a
drug product and how to use it appropriately.
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NEW DRUG APPLICATION ("NDA"). Upon completion of Phase III, a drug
sponsor may file an NDA containing all pre-clinical, pharmacology,
toxicology and clinical trial data, and chemistry, manufacturing and
control information that has been gathered, as well as all other
information that is known from any other sources. The information must
include essentially all the data collected during the IND phase (e.g.
chemical structure and characterization of the drug, formula and
manufacturing process, stability in the proposed packaging, animal and
laboratory studies, results of all human tests, etc.) and proposed
labeling. Once submitted, the FDA has 90 days to accept an application.
If an application is accepted, the Company must pay the FDA approximately
$200,000 as a user fee in order to continue with the review process.
APPROVAL. Once an NDA is approved, the manufacturer is required to
keep the FDA informed at all times regarding any adverse reactions to the
product. Moreover, contract manufacturers that the Company may use must
adhere at all times to current Good Manufacturing Practices ("GMP")
regulations enforced by the FDA through its facilities inspection program.
These facilities must pass a pre-approval plant inspection before the FDA
will issue a pre-market approval of the product. The FDA may also require
post-marketing testing (Phase IV) to support a conclusion of efficacy and
safety of a product, or answer specific questions that arose during IND
studies. Phase IV can involve significant expense. After FDA approval is
obtained for the initial indication, further clinical trials are necessary
to gain approval for the use of the product for additional indications.
The testing and approval process is likely to require substantial time
and effort, and there can be no assurance that any FDA approval of the
Company's proposed products will be granted on a timely basis, if at all.
The approval process is affected by a number of factors, primarily the
adverse effects of a drug (safety) and its therapeutic benefits (efficacy).
Additional preclinical or clinical trials of the Company's proposed
products may be required during the FDA review period and may delay
marketing approval, if any.
The FDA may propose significant changes in the design, analysis and
reporting of clinical studies conducted under INDs in response to the
results of clinical studies by other companies. If significant changes are
implemented, the costs associated with obtaining market approval of the
Company's proposed products by the FDA are likely to be increased.
Outside the United States, the Company will be subject to foreign
regulatory requirements governing human clinical trials and marketing
approval for its proposed products. Although the requirements governing
the conduct of clinical trials, product licensing, pricing and
reimbursements vary widely from country to country, these differences have
been minimized in Europe and Asia as a result of publication and acceptance
of the International Committee on Harmonization guidelines.
Accelerated Drug Approval
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The FDA allows patients with serious and life-threatening diseases,
such as HIV, to benefit from earlier access to important new drugs through
an "accelerated drug approval" program. To be eligible for this program,
products must treat serious or life-threatening illnesses and provide
meaningful therapeutic benefits beyond existing treatments. Under this
program, a significant new therapy could be approved for marketing at the
earliest possible point at which its safety and effectiveness are
reasonably established under existing law. For example, the approval of a
drug could be accelerated by demonstrating a favorable effect on a well-
documented surrogate endpoint to predict clinical benefit, instead of
requiring that the drug demonstrate actual clinical benefit, which may take
many months or years. Approval would be granted only if a sponsor agrees
to conduct additional post-marketing studies to confirm the product's
effectiveness and/or agrees to restrict distribution of the product. In
addition, if further clinical trials do not bear out the product's
effectiveness or if restricted distribution is inadequate to assure safe
use, approval of the product would be withdrawn.
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The Current Status of FDA Approval/Proposed Research and Development Plan
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The Company believes that the research and development effort invested
in Cytolin(R) undertaken by Mr. Allen and his affiliated company has
produced an existing base of data which, in the view of management, may
reduce the time, risk and cost associated with commercializing this
product. With the FDA's current accelerated drug approval program, the
Company believes that the approval process for Cytolin(R) may be accelerated.
A protocol has been submitted to the FDA, the drug has been
manufactured and the Company may soon commence a tolerability,
pharmacokinetics and dose-ranging study for Cytolin(R). Following the
conclusion of the tolerability study, which the Company anticipates will be
concluded approximately six to eight months after initiation (and assuming
favorable results of such study), the FDA may grant approval to sell
Cytolin(R) to HIV-infected persons while the Phase II/III study is on-going.
Upon completion of the first study and with FDA approval, the
Company will initiate a Phase II/III study to determine if the drug is
effective for a wide range of patients and what side effects, if any,
exist. Additional studies may or may not be required. Should one or more
additional studies be required, these studies will involve more patients at
a number of sites and will be designed to add data about Cytolin(R)'s
effectiveness, side-effects and appropriate use. An NDA will be filed with
the FDA as soon as feasible after all the information is assembled and
analyzed including the last required study. Approval of an NDA will permit
the Company to market Cytolin(R) through normal channels.
Manufacturing
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The Company does not have, and does not intend to establish,
manufacturing facilities to produce its products. The Company plans to
control its initial capital expenditures by using contract manufacturers to
make its products. The Company believes that there are a sufficient number
of high quality contract manufacturers available to fulfill its near-term
production needs for both clinical and commercial uses.
The manufacture of the Company's products by outside contractors will
be subject to rigorous regulations, including the need to comply with the
FDA's current GMP standards. As part of obtaining FDA approval for the
product, each of the manufacturing facilities must be inspected, approved
by and registered with the FDA. In addition to obtaining FDA approval of
the prospective manufacturer's quality control and manufacturing
procedures, domestic and foreign manufacturing facilities are subject to
periodic inspection by the FDA and/or foreign regulatory authorities.
Patents
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Cytolin(R) is protected by the following United States Method Patents:
Patent #5,424,066 granted June 13, 1995 to Mr. Allen; and Patent #5,651,970
granted July 29, 1997 to Mr. Allen, each of which will expire 17 years from
the date of grant. For a description of certain patent risks that the
Company is currently subject to, see Risk Factors "Patent and trade secret
uncertainty."
Employees
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As of March 31, 1999, the Company had one full-time and three part-time
employees at its corporate headquarters in Woodland Hills, California.
The Company believes its employee relations are good.
The WCCS agreement provides that WCCS will undertake and supervise the
clinical testing requirements necessary for purposes of obtaining FDA
approval to market Cytolin(R) for commercial use. Lois Rezler, Daniel L.
Azarnoff and Roy S. Azarnoff are the officers, directors and sole
shareholders of WCCS, as well as directors of the Company.
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Risk Factors
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CLINICAL TRIAL RESULTS INCLUDING RESULTS FOR CYTOLIN(R) ARE UNPREDICTABLE
Before obtaining regulatory approvals for the commercial sale of any
of its products under development, the Company must demonstrate through
preclinical studies and clinical trials that a product is safe and
efficacious for use in each target indication. The Company's development
efforts will be centered on the development of a new drug, Cytolin(R),
which is being tested in patients suffering from HIV. The Company
currently contemplates announcing initiation of its Cytolin(R) clinical
trials during the last half of 1999. No assurance can be given as to the
ability of the Company to complete these trials on a timely basis or at
all. In addition, no assurance can be given as to the results of such
trials with respect to the safety or efficacy of Cytolin(R). Moreover,
the results for the required preclinical studies and initial clinical
trials of Cytolin(R) may not be predictive of results that will be obtained
in large-scale testing. In addition, the Company can provide no assurance
that it will view the results of testing of Cytolin(R) as sufficient to
support continuing development of the proposed drug. Many
biopharmaceutical companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials.
Because Cytolin(R) is the Company's only product in development and its
primary asset, any adverse results from the Company's clinical trials would
significantly adversely affect the Company's prospects and could result in
a complete loss of value in the trading price of the Company's Common Stock.
EARLY STAGE COMPANY WITH NO REVENUES AND A HISTORY OF LOSES
The Company has not yet generated any operating revenues. The Company
has incurred losses since inception and has an accumulated deficit of
$2,182,657 through March 31, 1999, and the Company expects to incur losses
in the future. The Company cannot predict when marketing approvals for
Cytolin(R) will be obtained, if ever. Even if such approvals are obtained,
there can be no assurance that Cytolin(R) will be successfully commercialized.
The Company expects its operating expenses to increase over the next
several years as it funds development, clinical testing and other expenses
of seeking FDA approval. The Company's ability to achieve a profitable
level of operations is dependent in large part on obtaining regulatory
approvals for its product, entering into agreements for product development
and commercialization, and expanding from development into successful
marketing, all of which will require significant amounts of capital. There
can be no assurance that the Company will ever achieve a profitable level
of operations.
PATENT AND TRADE SECRET UNCERTAINTY
Patents, trademarks, copyrights and other proprietary rights are
important to the Company's success and competitive position. Due to the
length of time and expense associated with bringing new pharmaceutical
products to market, there are benefits associated with acquiring products
that are protected by existing patents or for which patent protection can
be obtained. The Company has obtained a license for the exclusive,
irrevocable, worldwide patent rights to develop and market Cytolin(R) from
Three R. However, Three R has not recorded and, under the terms of the
Termination, Sale and Shareholder Agreement between Three R and the
inventor, Three R cannot, prior to September 2001, record its purchase of
the patent rights to the product Cytolin(R) with the United States Patent
and Trademark Office. The effect of this inability to record on the part
of Three R means that the registered owner of the patent, the inventor,
could sell such patent to another purchaser who could record such transfer
and attempt to extinguish Three R's, and therefore the Company's, patent rights.
Patents are not a guarantee of protection from competitors, especially
in an area characterized by rapid advances, and enforcement of patents and
proprietary rights in many countries can be expected to be problematic or
unpredictable.
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There can be no assurance that any patents issued or licensed to the
Company or Three R will not be challenged, invalidated, infringed upon, or
designed around by others or that the claims contained in such patents will
not infringe the patent claims of others. Furthermore, there can be no
assurance that others will not independently develop similar products.
Although management believes that patents provide significant protection
for the Company's product, the Company's business may be adversely affected
by competitors who develop a substantially equivalent product. Patent
litigation can be extremely expensive, and the Company may find that it or
its licensor is unable to fund litigation necessary to defend its rights.
REGULATORY MATTERS COULD AFFECT THE COMPANY'S ABILITY TO CONDUCT ITS BUSINESS
The production and marketing of the Company's products are subject to
rigorous requirements by the FDA, by state regulatory authorities and also
by comparable agencies in other countries. Products developed by the
Company cannot be marketed commercially in any jurisdiction in which they
have not been approved. Approval by United States authorities does not
guarantee, nor at times even facilitate or expedite, approval in other
countries. The process of conducting clinical trials and obtaining
regulatory approval for a product typically takes a number of years and
involves substantial expenditures. In addition, product approvals may be
withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company
may encounter significant delays or excessive costs in its efforts to
secure and maintain necessary approvals or licenses. Future federal,
state, local or foreign legislative or administrative acts could also
prevent or delay regulatory approval of the Company's products. There can
be no assurance that the Company will be able to obtain or maintain the
necessary approvals for manufacturing or marketing the Company's products
for proposed indications or that the data it obtains in clinical trials
will be sufficient to establish the safety and efficacy of its products.
Even if the Company obtains regulatory approval for Cytolin(R),
identification of certain side effects after it is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval or require reformulation, additional testing, and changes in
labeling of the product. The Company's inability to obtain or maintain
requisite governmental approvals, the identification of side effects or
other factors could delay or preclude the Company from further developing
or marketing Cytolin(R), which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to other regulations under numerous
federal, state and local laws regarding, among other things, occupational
safety, laboratory practices, the use and handling of radioisotopes and
hazardous chemicals, prevention of illness and injury, environmental
protection and hazardous substance control. Failure to comply with such
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
THE COMPANY WILL BE REQUIRED TO OBTAIN ADDITIONAL FINANCING
The Company may require substantial and increasing amounts of funds to
conduct necessary research and development and preclinical and clinical
testing of its products, and to market any products which may receive
regulatory approval. The Company's ability to meet its cash obligations as
they become due and payable is expected to depend for at least the next
several years on its ability to obtain equity and/or debt capital. There
can be no assurance that the Company will be successful in raising the
necessary funds on commercially acceptable terms, if at all. The Company's
future capital requirements will depend upon many factors, including
progress with preclinical testing and clinical trials; the time and costs
involved in obtaining regulatory approvals; competing technological and
market developments; the ability of the Company to establish collaborative
arrangements; and effective commercialization and marketing activities. In
any event, the Company may incur negative cash flows and net losses for the
foreseeable future. If the Company raises additional funds through the
issuance of equity securities, the percentage ownership of its then-current
shareholders may be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of common
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<PAGE>
shares. If the Company raises additional funds through the issuance of
debt securities, these new securities would have certain rights,
preferences and privileges senior to those of the holders of common shares.
The Company may require significant capital in order to complete the
FDA approval process and New Drug Application Phase. Additional funds will
be sought, most likely through sale of equity or debt securities. If
adequate funds are not available, the Company may delay, scale back or
eliminate certain programs, or may seek funds through collaborative
arrangements with strategic partners or others. Such arrangements could
require relinquishment of rights to certain technologies, products or
markets which it would not otherwise relinquish.
THE COMPANY COULD SUSPEND OPERATIONS IF SUFFICIENT FUNDS ARE NOT AVAILABLE
The Company may experience cash flow difficulties from time to time
due to its substantial capital needs. For the foreseeable future, the
Company's ability to meet its cash obligations as they become due and
payable will depend on its ability to obtain debt and/or equity funding. In
the event that the Company can not raise sufficient capital when needed to
sustain or expand its operations, the Company would suspend research and
development activities.
THE PHARMACEUTICAL INDUSTRY IS CHARACTERIZED BY INTENSE COMPETITION AND IS
SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE
Rapid technological developments may cause the Company's products to
become obsolete before the Company recoups all or any portion of the
related expenses. The Company's competitors include major pharmaceutical
companies, biotechnology firms and universities and other research
institutions, both in the United States and abroad, which are actively
engaged in research and development of products in the therapeutic areas
being pursued by the Company. Most of the Company's competitors have
substantially greater financial, technical, manufacturing, marketing and
human resource capabilities than the Company. In addition, many of the
Company's competitors have significantly greater experience in testing new
or improved therapeutic products and obtaining regulatory approval of
products. Accordingly, the Company's competitors may succeed in obtaining
regulatory approval for products more rapidly than the Company. If the
Company commences significant commercial sales of its products, it will
also be competing with respect to manufacturing efficiencies and marketing
capabilities, areas in which it has no experience.
THE COMPANY IS DEPENDENT ON PRINCIPAL MEMBERS OF ITS MANAGEMENT TEAM
The Company is significantly dependent on its officers and directors.
If the Company fails to retain the services of one or more of these
individuals, the Company's operations may be adversely affected. The
Company does not have key man insurance on any of its officers or
directors. Companies in the pharmaceutical and health care industries
compete intensely for qualified personnel. The Company's inability to
retain its existing personnel or to hire additional qualified employees
would have a material adverse effect on the Company's business.
THE COMPANY IS DEPENDENT ON KEY CONTRACTS THAT ARE WITH ENTITIES CONTROLLED
BY MEMBERS OF ITS MANAGEMENT TEAM
The Company entered into a management agreement with WCCS for purposes
of assisting the Company in obtaining FDA approval necessary to market the
Company's product, Cytolin(R) for commercial use. Although the Company
believes it could have contracted with other companies for comparable
services, the Termination, Sale and Shareholder Agreement by and among
Three R, Allen D. Allen and CytoDyn of New Mexico which conveys the patents
relating to Cytolin(R) to Three R, required the Company to enter into the
abovementioned management agreement as a condition to Three R's granting
the Company an exclusive worldwide license to develop the product.
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Three R and WCCS are controlled by Directors of the Company, Lois
Rezler, Daniel L. Azarnoff and Roy S. Azarnoff. The Company will be
obligated to provide certain funding, including funding for the development
and testing of the product, at specified times. There can be no assurance
that the Company will be able to meet future payments or funding
obligations under the WCCS agreement, which would have a material adverse
effect on the Company.
CHANGES IN U.S. REGULATION OF PHARMACEUTICALS AND REIMBURSEMENT POLICIES
COULD AFFECT THE COMPANY
Government health administration authorities, together with private
health insurers, increasingly are attempting to contain health care costs
by limiting the price or reimbursement levels for medical products and
services, and private health insurers are increasingly demanding data to
justify the inclusion of new products in their formularies. There can be
no assurance that the Company's products, if and when marketed, will be
included in the formularies of private health insurers or what level of
reimbursement, if any, the Company will receive for its products from such
private health insurers or the government. In certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been a number of
federal and state proposals to implement similar government controls or
otherwise significantly reform the existing health care system. Due to
uncertainties as to the ultimate features of this or any other reform
initiatives that may be enacted, the Company cannot predict which, if any,
of such reform proposals will be adopted, when they may be adopted, or what
impact they may have on the Company. It is possible that any legislation
which is enacted will include provisions resulting in price limits,
utilization controls or other consequences that may adversely affect the
Company.
ADEQUATE PRODUCT LIABILITY INSURANCE MAY NOT BE AVAILABLE
The Company's business will expose it to potential product liability
risks which are inherent in the testing, manufacturing, marketing and sale
of pharmaceutical products, and product liability claims may be asserted
against the Company. The Company currently does not have product liability
insurance. Product liability insurance for the pharmaceutical industry
generally is expensive to the extent that it is available at all. There
can be no assurance that adequate insurance coverage will be available at
acceptable costs, if at all, or that a product liability claim would not
adversely affect the business or financial condition of the Company.
THE COMPANY IS DEPENDENT ON ITS SUPPLIERS
The Company currently is able to purchase certain key components for
its product candidate only from single suppliers. These suppliers are
subject to many strict regulatory requirements. There can be no assurance
that these suppliers will comply, or have complied, with applicable
regulatory requirements or that they will otherwise continue to supply the
Company with the key components for its product candidate. In the event
that suppliers are unable or refuse to supply the Company, or will supply
the Company only at a prohibitive cost, there can be no assurance that the
Company could access additional sources at acceptable prices, on a timely
basis, or at all.
THE COMPANY'S SUCCESS IS DEPENDENT ON LOCATING ADDITIONAL COLLABORATIVE
PARTNERS
The Company's strategy for the research, development and
commercialization of its product candidate has required, and will continue
to require, the Company to enter into various arrangements with corporate
and academic collaborators, licensors, licensees and others, and the
Company will, therefore, be dependent upon the success of these parties in
performing their responsibilities and obligations. There can be no
assurance that the Company will be able to enter into collaborative
arrangements or license agreements that the Company deems necessary or
appropriate to develop and commercialize its product candidate, or that any
or all of the contemplated benefits from such collaborative arrangements or
license agreements will be realized. Failure to obtain such arrangements
or agreements could result in delays in marketing the Company's product
candidate or the inability to proceed with the development, manufacture or
-12-
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sale of the product candidate. Certain of the collaborative arrangements
that the Company currently has or may enter into in the future may place
responsibility on the collaborative partner for preclinical testing,
clinical trials and/or preparation and submission of applications for
regulatory approval of potential pharmaceutical or other products. Should
a collaborative partner fail to develop or commercialize successfully any
product candidate to which it has rights, the Company's business, financial
condition and results of operations could be materially and adversely
affected. There can be no assurance that collaborators will not pursue
alternative technologies or product candidates either on their own or in
collaboration with others, including the Company's competitors, as a means
for developing treatments for the diseases or disorders targeted by the
Company's collaborative arrangements. Collaborative arrangements may also
require the Company to meet certain regulatory, research or other
development milestones and expend minimum levels of funds, and there can be
no assurance that the Company will be successful in doing so. Failure of
the Company to meet its obligations under its collaborative arrangements
could result in a termination of those arrangements and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
THE MARKET PRICE OF THE COMPANY'S SHARES WILL BE HIGHLY VOLATILE
The market price of the Company's common shares has been and is likely
to continue to be highly volatile, and an investment in these securities
involves substantial risks. The market prices for securities of
biotechnology companies (including the Company) have been highly volatile,
and the stock market from time to time has experienced significant price
and volume fluctuations that may be unrelated to the operating performance
of a particular company. A number of factors could result in the Company's
failure to meet the expectations of securities analysts or investors and
may have a significant impact on the price of the Company's common shares.
Such factors include, but are not limited to, announcements by the Company
or its competitors of clinical results, technological innovations, product
sales, new products or product candidates, developments or disputes
concerning patent, license or proprietary rights, regulatory developments
affecting the Company's products, as well as market conditions for emerging
growth companies and biopharmaceutical companies, economic and other
internal and external factors and period-to-period fluctuations in results
of operations.
THE COMPANY HAS NO SALES AND MARKETING EXPERIENCE
The Company intends to sell certain of its products, if successfully
developed and approved, through sales and marketing partnership
arrangements. However, the Company does not expect to establish sales
capability for at least the next few years. The Company has no history or
experience in sales or distribution. To sell its product, the Company must
obtain the assistance of another company. There can be no assurance that
the Company will be able to establish sales and distribution capabilities
or succeed in gaining market acceptance for its product. If the Company
enters into co-promotion agreements with established pharmaceutical
companies, the Company's revenues will be subject to the payment provisions
of such arrangements and dependent on the efforts of third parties. There
can be no assurance that the Company's collaborators will effectively
market the Company's potential product, and the inability of the Company's
collaborators to do so could have a material adverse effect on the business
and financial condition of the Company.
THE COMPANY IS SUBJECT TO ENVIRONMENTAL REGULATIONS
The Company and the third parties that currently manufacture the
Company's proposed products are subject to federal, state and local laws
and regulations governing the use, generation, manufacture, storage,
discharge, handling and disposal of materials and wastes which are
classified as "hazardous." There can be no assurance that the Company or
its third party manufacturers will not be required to incur significant
costs to comply with environmental laws, the Occupational Safety and Health
Act, and state, local and foreign counterparts to such laws, rules and
regulations if its manufacturing and research activities are increased or
that the operations, business and future profitability of the Company will
not be adversely affected by current or future laws, rules and regulations.
The risk of accidental
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<PAGE>
contamination or injury from hazardous materials cannot be eliminated. In
the event of such an accident, and if the Company is held liable for any
damages that result, any such liability could exceed the resources of the
Company. In any event, the cost of defending claims arising from such
contamination or injury could be substantial. In addition, the Company
cannot predict the extent of the adverse effect on its business or the
financial and other costs that might result from any new government
requirements arising out of future legislative, administrative or judicial
actions.
THE COMPANY MAY HAVE LIABILITIES RELATED TO PRIOR OPERATIONS
The Company and its predecessors conducted operations in the 1980's
and early 1990's. The current management has performed only a limited
review of the Company or its subsidiaries operations prior to the
Transaction to determine the existence or extent of any prior liabilities.
Any existing liabilities of the Company at the time of the Transaction
could exceed the Company's current assets and have a material adverse
effect on the Company's ability to continue operations.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's office facilities are located in Woodland Hills,
California. Beginning February 1, 1999, the facilities were rented under
the terms of a three year noncancellable operating lease agreement assigned
to the Company by an affiliate, WCCS. The initial monthly base rent of
$3,040, is scheduled to increase to $3,337 during the term of the lease.
The Company's investment policies are currently limited to research
and development expenditures to obtain FDA approval to market Cytolin(R)
and other immune therapies as well as additional pharmaceutical compounds.
The Company invests excess cash with high quality financial institutions.
All investments are made primarily for income. The Company does not invest
in real estate or related assets. Changes in investment policies are
within the discretion of the Board of Directors.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which management
believes are not routine and incidental to its business or which are
material, and there are no such proceedings which are known to be
contemplated for which the Company anticipates a material risk of loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
- ------------------
The Company's Common Stock began trading on the Electronic Bulletin
Board on February 24, 1999, under the trading symbol "VSCC." The following
table sets forth the high and low bid prices for the Company's Common Stock
from February 24, 1999. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not represent
actual transactions. The information presented has been derived from the
National Quotation Bureau, LLC Library.
High Low
1999 Fiscal Year Bid Bid
- ---------------- --- ---
Fourth Quarter $3.1250 $1.1250
2000 Fiscal Year
- ----------------
First Quarter (through May 31, 1999) $2.5625 $2.1875
On May 31, 1999, the last reported bid and asked prices for the Common
Stock were $2.3750 and $2.6250, respectively.
Holders
- -------
As of May 31, 1999, the Company had approximately 700 holders of
record of the Company's Common Stock.
Dividends
- ---------
The payment of dividends by the Company is within the discretion of
its Board of Directors and depends in part upon the Company's earnings,
capital requirements, debt covenants and financial condition. Since its
inception, the Company has not paid any dividends on its Common Stock and
does not anticipate paying such dividends in the foreseeable future. The
Company intends to retain earnings, if any, to finance its operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION.
Some of the statements made in this Form 10-KSB and the documents
incorporated herein by reference that are not historical facts, such as
anticipated results of clinical trials, may constitute "forward-looking
statements," which forward looking statements are made pursuant to the safe
harbor provisions in the federal securities laws. These statements often
can be identified by the use of terms such as "may," "will," "expect,"
"anticipate," "estimate," "should", "could", "experts", "plans",
"believes", "predicts", "potential", or "continue," or the negative
thereof. Such forward-looking statements speak only as of the date made.
Forward-looking statements are subject to risks, uncertainties and other
factors beyond the control of the Company that could cause actual results,
levels of activity, performance, achievements, and events to differ
materially from historical results of operations, levels of activity,
performance, achievements, and events and any future results, levels of
activity, performance, achievements and events implied by such forward-
looking statements. These risks include, but are not limited to, those
discussed under the caption "Risk Factors" in Item 1 of this Form 10-KSB.
Although the Company believes that the expectations reflected in the
forward-looking
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statements are reasonable, the Company cannot guarantee future results,
levels of activity, performance, achievements, or events. Moreover,
neither the Company nor any other person assumes responsibility for the
accuracy or completeness of such statements. the Company disclaims any
obligation to revise any forward-looking statements to reflect events or
circumstances after the date of such statement or to reflect the occurrence
of anticipated or unanticipated events.
Plan of Operation
- -----------------
The Company (for purposes of this section, the term the "Company"
includes the predecessor entity to its current operations, British Lion) is
a development stage pharmaceutical research company and has not generated
any revenues from operations for the period from April 10, 1998 (the date
that British Lion commenced operations) through March 31, 1999. The
Company is engaged in the pharmaceutical research business with the primary
purpose of developing Cytolin(R), a drug designed to protect the immune
system, especially in patients suffering from Human Immunodeficiency Virus
(HIV). The Company believes that Cytolin(R) is an important drug for the
growing number of patients who have not been receiving treatment, for those
who are on multi-drug therapy, and for those who have become resistant to
drugs currently used to treat the HIV/AIDS virus. The Company intends to
seek governmental approval from the Food and Drug Administration ("FDA")
for Cytolin(R). The Company expects FDA approval for regular sales of
Cytolin(R) to take at least three years. The Company has devoted
substantially all of its resources to the acquisition of a license,
research and development of Cytolin(R), and expenses related to the startup
of its business. The Company has been unprofitable since inception and
expects to incur substantial additional operating losses for the next
twelve months, as well as for the next few years, as it increases
expenditures on research and development and allocates significant and
increasing resources to clinical testing, marketing and other activities.
In November and December 1998, the Company sold 1,426,790 shares of
its stock (at approximately $0.21 per share), for gross proceeds of
$300,000, to certain accredited investors in a private placement. In
December 1998, the Company began another private placement of common stock
to accredited investors, which was completed on February 22, 1999. The
subsequent private placement was made on a minimum/maximum "best efforts"
basis. The Company raised the maximum amount of gross proceeds of
$3,210,000 (7,633,364 shares at approximately $0.42 per share) and paid
cash private placement expenses of $159,698. Net cash proceeds from the
private placement aggregated $3,050,302. The Company believes that its
success in these private placements will enable it to satisfy its cash
requirements without the need to raise additional funds during the next
twelve months. The Company anticipates that it will commence a
tolerability, pharmacokinetic and dose-ranging study for Cytolin(R) now
that a protocol has been submitted to the FDA and the drug has been
manufactured and tested. The Company estimates that it may require
significant additional funding over the next three years to successfully
complete the FDA approval process. The Company does not presently
anticipate any purchase or sale of plant and significant equipment or any
significant changes in the number of employees over the next 12 months.
It is not possible to predict the success of management's efforts to
raise sufficient capital to fund future operations. If management is unable
to achieve its goals, the Company may find it necessary to undertake
actions as may be appropriate to continue operations and meet its financial
commitments.
In October 1998, the Company entered into a three year management
agreement for $585,000 per year with WCCS. The agreement is scheduled to
expire on February 23, 2002. The management agreement provides services by
WCCS to the Company for the purpose of assisting the Company in obtaining
FDA approval to market Cytolin(R) for commercial use.
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Results of Operations
- ---------------------
From April 10, 1998 to March 31, 1999, the Company has incurred
expenses of $422,293, in research and development expenses, $1,769,311 in
general and administrative expenses and $8,947 net in interest income and
other expenses, resulting in a loss of $2,182,657 (which included
significant non-cash, general and administrative expenses aggregating
$1,498,500 related primarily to issuance of securities in exchange for
services) for the period ended March 31, 1999. The expenses incurred
during this period relate primarily to the commencement of business
operations, the acquisition of a license, fundraising activities and merger
expenses.
The Company's activities to date are not as broad in depth or scope as
the activities it must undertake in the future, and the Company's
historical operations and financial information are not indicative of its
future operating results or financial condition or its ability to operate
profitably as a commercial enterprise if and when it succeeds in bringing
any product to market.
Capital Resources and Liquidity
- -------------------------------
From the commencement of operations of April 10, 1998 to March 31,
1999, the Company had no operating revenues and incurred a net loss of
$2,182,657. At March 31, 1999, the Company had working capital of
$2,495,966. The Company requires significant capital to conduct the
research and development and preclinical and clinical testing of Cytolin(R)
that is necessary in order to complete the FDA approval process.
Management of the Company does not expect to generate revenue from
operations within the next year. The Company's continued existence and its
ability to fund its future operations and meet its financial obligations is
dependent on its ability to obtain additional equity or debt financing.
In December 1998, the Company entered into a letter of intent with a
manufacturer to begin the production and testing of the drug Cytolin(R).
The Company advanced the manufacturer $85,000 through March 31, 1999 to
commence the manufacturing process while a contract was being negotiated
and developed between the parties. At March 31, 1999, the agreement had
not been finalized. However, the Company has agreed to pay a total of
$280,000 to the manufacturer (of which $85,000 has already been paid) in
periodic installments through December 31, 1999. The manufacturer has
successfully completed the majority of the work it agreed to perform and
continues to work on the remaining tasks.
In October, 1998, the Company entered into a Patent and Trademark
License Agreement (the "Agreement") with Three R. The Company was granted
an irrevocable, exclusive, worldwide license to use all present and future
patent rights, know-how and background technology owned by Three R relating
to the product, Cytolin(R). In addition, the Agreement granted the Company
a sublicense to the trademark Cytolin(R). The Agreement was consummated
simultaneously with the Company's acquisition of British Lion. The Company
issued 21,936,981 shares of its common stock at $.001 per share to Three R
upon execution of the Agreement, and the Company also agreed to assume
Three R's obligations to pay Mr. Allen $1,350,000, payable quarterly over
a fifteen year period, and fees of $10,000 per year for consulting services
under the agreements discussed above between Three R and Mr. Allen. The
Company could abandon their patent rights with no further obligations after
minimum payments aggregating $180,000 to Allen, with one year's notice
beginning February 23, 2000.
Effect of Inflation and Foreign Currency Exchange
- -------------------------------------------------
The Company has not experienced material unfavorable effects on its
results of operations due to currency exchange fluctuations with any
foreign suppliers or material unfavorable effects upon its results of
operations as a result of domestic inflation.
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Year 2000 Issue
- ---------------
The Company's management believes that the Company will not be
materially adversely affected by the computer software Year 2000 issue.
The Company's systems do not have significant exposure to the Year 2000
issue. The Company's vendors and suppliers may have some exposure to the
issue but at this time, management does not anticipate a material adverse
impact on the Company's operations.
ITEM 7. FINANCIAL STATEMENTS.
The information required by this item is incorporated herein by
reference to the financial statements listed in Item 13. (a) of Part III of
this Form 10-KSB Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information required by this Item was previously reported in the
Company's Form 8-K as filed on March 29, 1999, which is incorporated herein
by reference.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held
on August 6, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 and incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held
on August 6, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 and incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held
on August 6, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 and incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held
on August 6, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 and incorporated herein by reference.
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ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-KSB:
Index to Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheet - March 31, 1999
Consolidated Statement of Operations - For the Period from April 10, 1998
(Inception) Through March 31, 1999
Consolidated Statement of Changes in Stockholders' Equity - For the
Period from April 10, 1998 (Inception) Through March 31, 1999
Consolidated Statement of Cash Flows - For the Period from April 10, 1998
(Inception) Through March 31, 1999
Notes to Consolidated Financial Statements
Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial Statements.
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated February 17, 1999, by and
among Versailles Capital Corporation, Amerimmune, Inc. and
British Lion Medical, Inc. (2)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated By-Laws.(1)
3.3 Articles of Merger, as filed with the Colorado Secretary of State
on February 23, 1999.(2)
10.1 Patent and Trademark License Agreement between British Lion
Medical, Inc. and Three R Associates, Inc., dated October 24, 1998.(2)
10.2 Termination, Sale and Shareholder Agreement by and among Three R
Associates, Inc., Allen D. Allen and CytoDyn(R) of New Mexico,
Inc., dated August 1, 1998. (2)
10.3 Management Agreement between British Lion Medical, Inc. and WCCS,
Inc., dated October 24, 1998. (2)
10.4 Subscription, Share Restriction and Proxy Agreement between
British Lion Medical, Inc. and Allen D. Allen, dated October 23,
1998. (2)
10.5 Versailles Capital Corporation 1998 Omnibus Stock Incentive Plan
as amended and restated through February 23, 1999.
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<PAGE>
16.0 Letter on change in certifying accountant. (3)
27 Financial Data Schedule.
__________________________________________________________________________
(1) Incorporated by reference to the Registrant's Registration Statement
on Form 10-SB, Registration No. 0-22865, as filed with the Commission
on July 22, 1997, and amended on Form 10-SB/A-1, filed with the
Commission on February 25, 1998.
(2) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Current Report on Form 8-K, as amended, dated March 10,
1999.
(3) Incorporated by reference from the like numbered exhibit filed with
the Registrant's Current Report on Form 8-K, dated March 29, 1999.
(b) Reports on Form 8-K.
During the last quarter covered by this report, the Company filed
Current Reports on Form 8-K as follows:
(i) Form 8-K, dated January 12, 1999, reporting under Item 1 of such form.
(ii) Form 8-K, dated February 23, 1999, reporting under Item 5 of such
form.
(iii) Form 8-K, dated March 10, 1999, reporting under Items 1, 2, 5 and 7
of such form.
(iv) Form 8-K, dated March 29, 1999, reporting under Items 4 and 7 of
such form.
(v) Form 8-K/A, dated April 7, 1999 amending Form 8-K dated March 10,
1999, reporting under Items 5 and 7 of such form.
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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.
Date: June 28, 1999 VERSAILLES CAPITAL CORPORATION
By: /s/ O.B. Parrish
----------------
O.B. Parrish,
Chairman of the Board
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 and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ O.B Parrish Chairman of the Board and Director June 28, 1999
- ------------------------
O.B. Parrish
/s/ Michael A. Davis President, Chief Executive Officer, June 28, 1999
- ------------------------ and Director
Michael A. Davis, M.D., Sc.D., M.B.A.
/s/ Wellington A. Ewen Chief Financial Officer June 28, 1999
- ------------------------
Wellington A. Ewen, M.B.A., C.P.A.
/s/ Pamela M. Kapustay Vice-President of Operations June 28, 1999
- ------------------------
Pamela M. Kapustay, R.N., M.N.
/s/ Roy S. Azarnoff Secretary, Treasurer and Director June 28, 1999
- ------------------------
Roy S. Azarnoff, Ph.D.
/s/ Daniel L. Azarnoff Director June 28, 1999
- ------------------------
Daniel L. Azarnoff, M.D.
/s/ Kimberlie L. Cerrone Director June 28, 1999
- ------------------------
Kimberlie L. Cerrone
/s/ Lois Rezler Director June 28, 1999
- ------------------------
Lois Rezler, Ph.D.
-21-
<PAGE>
Versailles Capital Corporation
(A Development Stage Company)
Period from April 10, 1998 (Inception) to March 31, 1999
Index to Consolidated Financial Statements
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet - March 31, 1999. . . . . . . . . . . . . F-3
Consolidated Statement of Operations - For the Period from
April 10, 1998 (Inception) Through March 31, 1999 . . . . . . . .F-4
Consolidated Statement of Changes in Stockholders' Equity - For
the Period from April 10, 1998 (Inception) Through
March 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . .F-5
Consolidated Statement of Cash Flows - For the Period from
April 10, 1998 (Inception) Through March 31, 1999 . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .F-7
F-1
<PAGE>
Report of Independent Auditors
To The Board of Directors and Stockholders
Versailles Capital Corporation
We have audited the accompanying consolidated balance sheet of Versailles
Capital Corporation (a development stage company) as of March 31, 1999, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the period from April 10, 1998 (date of inception) to March
31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on the audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Versailles
Capital Corporation as of March 31, 1999 and the results of its
consolidated operations and its cash flows for the period from April 10,
1998 (date of inception) to March 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Woodland Hills, California
May 25, 1999
F-2
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,614,523
Advances to an affiliate 46,581
Current portion of prepaid management fees
- affiliated corporation 73,125
Other current assets 20,275
---------------
TOTAL CURRENT ASSETS 2,754,504
---------------
PROPERTY AND EQUIPMENT, AT COST
Office furniture and equipment 26,891
Leasehold improvements 3,742
---------------
30,633
---------------
OTHER ASSETS
Prepaid management fees - affiliated corporation 140,156
Deposits 3,040
---------------
143,196
---------------
TOTAL ASSETS $ 2,928,333
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 114,597
Accrued liabilities 143,941
---------------
TOTAL CURRENT LIABILITIES 258,538
---------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY
Preferred stock $0.10 par value, 50,000,000 shares $ -
authorized, no shares issued or outstanding
Common stock $0.05 par value, 100,000,000 shares
authorized, 43,042,856 shares issued and outstanding 4,852,452
Deficit accumulated during the development stage (2,182,657)
---------------
TOTAL STOCKHOLDERS' EQUITY $ 2,669,795
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 2,928,333
===============
F-3
See accompanying notes
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 10, 1998 (Date of Inception)
TO MARCH 31, 1999
COSTS AND EXPENSES
Research and development $ 422,293
General and administrative 1,769,311
---------------
OPERATING LOSS (2,191,604)
OTHER INCOME (EXPENSE)
Interest income 10,188
Interest expense (441)
---------------
9,747
---------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (2,181,857)
PROVISION FOR INCOME TAXES 800
---------------
NET LOSS $ (2,182,657)
===============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.08)
===============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 28,067,000
===============
F-4
See accompanying notes
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 10, 1998 (Date of Inception)
TO MARCH 31, 1999
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
------------ DURING THE
NUMBER DEVELOPMENT
OF SHARES AMOUNT STAGE TOTAL
--------- ------ ----- -----
<S> <C> <C> <C> <C>
Issuance of common stock to founders on
October 24, 1998 at $0.001 per share 24,077,174 $ 3,650 $ - $ 3,650
Fair value of stock and an option issued
on October 24, 1998 in exchange for
services and trademark rights 7,704,696 814,000 - 814,000
Fair value of stock issued to prospective
officers on October 24, 1998 677,728 142,500 - 142,500
Issuance of common stock in a private
placement in November and December
1998 at $0.21 per share 1,426,790 300,000 - 300,000
Fair value of stock and an option
transferred by a principal stockholder
on February 16, 1999 in exchange for
services - 452,000 - 452,000
Issuance of common stock in a private
placement in February 1999 at $0.42 per
share 7,872,352 3,050,302 - 3,050,302
Fair value of stock transferred to a
prospective officer by a principal
stockholder on February 23, 1999 - 90,000 - 90,000
Merger of Versailles Capital Corporation 1,284,116 - - -
Net loss - - (2,182,657) (2,182,657)
----------- ----------- ----------- -----------
Balance, March 31, 1999 43,042,856 $ 4,852,452 $(2,182,657) $ 2,669,795
=========== =========== =========== ===========
</TABLE>
F-5
See accompanying notes
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 10, 1998 (Date of Inception)
TO MARCH 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,182,657)
---------------
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED BY OPERATING ACTIVITIES
Noncash transactions:
Fair value of stock and an option issued in
exchange for services and trademark rights 814,000
Fair value of stock issued to prospective officers 142,500
Fair value of stock transferred to a prospective
officer by a principal stockholder 90,000
Fair value of stock and an option transferred by a
principal stockholder in exchange for services 452,000
Changes in assets and liabilities:
Advances to an affiliate (46,581)
Other current assets (20,275)
Prepaid management fees (213,281)
Deposits (3,040)
Accounts payable and accrued expenses 258,538
---------------
Total adjustment 1,473,861
---------------
NET CASH USED BY OPERATING ACTIVITIES (708,796)
---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment (30,633)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 3,353,952
---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS,
March 31, 1999 $ 2,614,523
===============
SUPPLEMENTAL INFORMATION
Cash paid for income taxes $ 800
F-6
See accompanying notes
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND ORGANIZATION
Versailles Capital Corporation ("Versailles" or the "Company"), a
publicly held company, was incorporated under the laws of Colorado on
December 31, 1986. From 1991 through February 22, 1999, Versailles was
inactive aside from seeking a business combination candidate.
British Lion Medical, Inc. ("British Lion") was incorporated in
California in August 1997 and commenced operations on April 10, 1998.
British Lion was engaged in the pharmaceutical research business with the
primary purpose of developing Cytolin(R), a drug designed to protect the
immune system, especially in patients suffering from Human Immunodeficiency
Virus ("HIV").
On February 17, 1999, Versailles, British Lion and Amerimmune, Inc.
("Amerimmune"), a newly organized, wholly owned subsidiary of Versailles,
entered into an Agreement and Plan of Merger (the "Merger Agreement").
Pursuant to the Merger Agreement on February 23, 1999, each share of
British Lion's issued and outstanding no par value common stock (5,853,500
shares) was exchanged for 7.133978 newly issued shares (41,758,740 shares)
of Versailles' $0.05 par value per share common stock. After the exchange,
former British Lion stockholders acquired approximately 97% of the issued
and outstanding voting shares of Versailles and Versailles acquired all of
the issued and outstanding shares of British Lion through a merger of
British Lion with and into Amerimmune, with Amerimmune as the surviving
legal entity (the "Transaction"). Prior to the Transaction, Versailles had
nominal assets and liabilities. Unless otherwise noted, all references to
the number of common shares in these financial statements are based upon
the equivalent post-exchange number of Versailles' common shares.
For financial reporting purposes, the Transaction has been accounted
for as a reverse acquisition whereby British Lion is deemed to have
acquired Versailles. Since this is a reverse acquisition, the legal
acquiror, Versailles, continues in existence as the legal entity whose
shares represent the outstanding common stock of the combined entities.
The acquisition has been accounted for as a recapitalization of British
Lion based upon historical cost. The recapitalization was given
retroactive effect. In connection with the Transaction, Amerimmune
succeeded to the business of British Lion and became engaged in the
pharmaceutical research business with the primary purpose of developing
Cytolin(R). Versailles has assumed the obligations of British Lion
including all outstanding stock options and warrants to purchase shares of
British Lion's common stock and has agreed to issue equivalent shares of
Versailles common stock under the same terms and conditions.
BASIS OF PRESENTATION AND MANAGEMENT PLAN
The accompanying consolidated financial statements of Versailles and
its
F-7
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subsidiary have been prepared in accordance with generally accepted
accounting principles. All significant intercompany balances and
transactions have been eliminated in consolidation.
Versailles (hereinafter the term "Versailles" or the "Company"
includes the predecessor entity to its current operations, British Lion) is
a development stage pharmaceutical research company and has not generated
any revenues from operations for the period from April 10, 1998 (the date
that British Lion commenced operations) through March 31, 1999. Versailles
has devoted substantially all of its resources to the acquisition of a
license, research and development of Cytolin(R), and expenses related to
the startup of its business. Versailles has been unprofitable since
inception and expects to incur substantial additional operating losses for
the next twelve months, as well as for the next few years, as it increases
expenditures on research and development and allocates significant and
increasing resources to clinical testing, marketing and other activities.
In November and December 1998, the Company sold 1,426,790 shares of
its common stock (at approximately $0.21 per share), for gross proceeds of
$300,000, to certain accredited investors in a private placement. In
December 1998, the Company began a second private placement of common stock
to accredited investors, which was completed on February 22, 1999. The
second private placement was made on a minimum/maximum "best efforts"
basis. The Company raised the maximum amount of gross proceeds of
$3,210,000 (7,633,364 common shares at approximately $.42 per share) and
paid cash offering expenses of $159,698. Net cash proceeds from the
private placement aggregated $3,050,302. Versailles believes that the
funds received in these private placements will enable it to satisfy its
cash requirements without the need to raise additional funds before March
31, 2000. Versailles anticipates that it will commence a tolerability,
pharmacokinetics and dose-ranging study for Cytolin(R) now that a protocol
has been submitted to the FDA and the drug has been manufactured and
tested. Versailles estimates that it may require significant additional
funding over the next three years to successfully complete the FDA approval
process. Versailles does not presently anticipate any purchase or sale of
plant and significant equipment or any significant changes in the number of
employees.
It is not possible to predict the success of management's efforts to
raise sufficient capital to fund future operations. If management is
unable to achieve its goals, Versailles may find it necessary to undertake
actions as may be appropriate to continue operations and meet its financial
commitments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-8
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash
equivalents. At March 31, 1999, substantially all cash and cash
equivalents were on deposit with one financial institution.
PROPERTY AND EQUIPMENT
Office furniture and equipment is recorded at cost. Depreciation commences
as items are placed in service and is computed on a straight-line method
over their estimated useful lives of three to five years.
Leasehold improvements are recorded at cost and amortized over the three-year
term of the lease.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Payments related
to the acquisition of technology rights, for which development work is
in-process, are expensed and considered a component of research and
development costs.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company's employee stock option plan is accounted for under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" which requires the recognition of expense when the option price
is less than the fair value of the stock at the date of grant. The Company
has adopted the disclosure-only provisions of Statements of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The adoption of SFAS 123 disclosure provisions has no effect
on either the Company's balance sheet or its statement of operations.
NET LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No.
128, "Earnings Per Share" ("SFAS 128"), and the Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 98 ("SAB 98"). Basic
earnings per share excludes dilution for common stock equivalents and is
computed by dividing income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were
F-9
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exercised or converted and resulted in the issuance of common stock.
Pursuant to SAB 98, common stock issued for nominal consideration is
required to be included in the calculation of basic and diluted earnings
per share, as if they were outstanding for all periods presented. In
accordance with the SAB 98 requirements, 21,936,981 of the founder's shares
are considered to be nominal issuances and have been considered outstanding
for the entire period presented.
All outstanding stock options and warrants have been excluded from the
calculation of diluted loss per share, because such securities are
antidilutive.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after
December 15, 1997. To date, the Company has not had any transactions that
are required to be reported in comprehensive income.
SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). This statement establishes standards for the way
companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers based on the
provisions of FAS 131. The Company has determined that it does not have
separately reportable operating segments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash is assumed to be its fair value because of the
liquidity of the instrument. Accounts payable and accrued expenses and
amounts due to affiliated corporations approximate fair value because of
the short maturity of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results may differ from those estimates.
F-10
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMON STOCK
INITIAL ISSUANCE OF SHARES
During October 1998, the Company issued 24,077,174 shares of restricted
common stock (at $0.001 per share) to founders for cash in connection with
the execution of patent and license agreements. Another 4,280,387 shares
were issued in exchange for rights to a trademark. The stockholders who
were issued these shares have agreed not to sell any of their shares for a
period of two years from the date of issuance of the shares.
In addition, during October 1998, the Company issued 677,728 shares of
restricted common stock (at $0.001 per share) for cash to prospective
officers. The shares of stock issued were recorded based upon a value of
$0.21 a share, the price of the shares subsequently sold in the initial
private placement. In connection with these transactions, the Company
recorded a non-cash, general and administrative expense of $142,500. These
stockholders agreed not to sell any of their shares for a period of two
years from the date of issuance of the shares.
INITIAL PRIVATE PLACEMENT
In November and December 1998, the Company sold 1,426,790 shares of its
stock, at approximately $0.21 per share for total proceeds of $300,000, to
certain accredited investors in an initial private placement ("Initial
Private Placement").
FEBRUARY 22, 1999 PRIVATE PLACEMENT
As described in Note 1, pursuant to the Merger Agreement, and as a
condition precedent to the Transaction, the Company successfully completed
a private placement of its common stock on February 22, 1999. Through this
private placement, the Company raised net cash proceeds of $3,050,302
(gross proceeds of $3,210,000 less cash private placement expenses of
$159,698). The Company also incurred non-cash expenses of $210,294 in
connection with this private placement. The Company (i) issued 238,988
shares of its restricted common stock with a fair value of approximately
$0.42 per share to an investor for assisting in this private placement of
the Company's common stock ($100,500) and (ii) issued 515,308 warrants at
a price of $0.42 per share to a private placement agent as commissions (the
fair value of these warrants was estimated to be $109,794).
The Company entered into an agreement with a financial consulting firm,
Battersea Capital, Inc., ("Battersea") to assist the Company in private
placements and finding an appropriate public company into which the Company
could merge. In connection with Battersea's consulting agreement with the
Company, LMU & Company ("LMU") acquired the majority ownership of
Versailles prior to the Transaction and facilitated the merger of British
Lion with Versailles. The Company paid LMU a broker's fee of $100,000 from
the proceeds of its second private placement in February 1999 for these
services. Such amounts have been included in the accompanying statement of
operations
F-11
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
as general and administrative expenses.
SHARES ISSUED FOR SERVICES
Shares of common stock issued for other than cash have been assigned
amounts equivalent to the fair value of the assets or services received in
exchange for such shares.
In consideration for Battersea's services described above, the Company
issued 2,140,193 restricted shares of its stock to Battersea in October
1998 and granted Battersea an option, to purchase an additional 1,426,794
shares of stock at a price of $0.42 per share for a five year period. The
shares of stock issued were recorded at $450,000 based upon a value of
$0.21 a share, the price of the shares sold in the Initial Private
Placement. The stock option granted was recorded at $94,000, approximately
$0.065 per share, using the Black-Scholes option pricing model. In
connection with this transaction, the Company recorded a non-cash, general
and administrative expense of $544,000. The shares issued and the shares
underlying the option are covered by certain registration rights.
In October 1998, the Company also issued 1,284,116 restricted shares to an
attorney in exchange for cash of $180 and legal services provided to the
Company. The shares of stock issued were recorded based upon a value of
$0.21 a share, the price of the shares sold in the Initial Private
Placement. In connection with this transaction, the Company recorded a
non-cash, general and administrative expense of $270,000. This stockholder
has also agreed not to sell any shares for a period of two years.
In February 1999, a principal stockholder of the Company transferred
713,397 of its restricted shares of the Company's common stock to Battersea
upon the completion of the Transaction. In addition, the same principal
stockholder granted Battersea an option to purchase 713,397 shares of the
Company's common stock at $0.42 per share from its own holdings. The
shares of stock transferred were recorded at $300,000 based upon a value of
$0.42 per share, the price of the shares sold in the February 22, 1999
private placement. The stock option granted was recorded at $152,000,
approximately $0.21 per share, using the Black-Scholes option pricing
model. In connection with this transaction, the Company recorded a non-cash,
general and administrative expense of $452,000.
In February 1999, the same principal stockholder of the Company transferred
214,019 of its restricted shares of the Company's common stock to a
prospective officer of the Company upon completion of the Transaction. The
shares of stock transferred were recorded at $90,000 based upon a value of
$0.42 per share, the price of the shares sold in the February 22, 1999
private placement. In connection with this transaction, the Company
recorded a non-cash, general and administrative expense of $90,000.
4. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Deferred
F-12
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
As a result of incurred net losses, no provision for income taxes was
recognized other than the state minimum taxes of $800. The Company's
income tax expense (benefit) differs from income tax computed at the U.S.
federal statutory tax rate, because no income tax benefits were recorded
for its losses and certain expenses recorded for financial reporting
purposes are not deductible for income tax reporting purposes.
A reconciliation of the statutory federal income tax rate to the effective
tax rate, as a percentage of loss before income tax is as follows:
Statutory federal income tax (benefit) rate (34) %
Non-deductible expenses 23
Valuation allowance 11
------
- %
======
The components of the Company's deferred tax assets at March 31, 1999 are
as follows:
Deferred tax assets
Net operating loss carryforward $ 208,000
Patent rights 66,000
Valuation allowance (274,000)
------------
Net deferred tax assets $ -
============
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed
a valuation allowance against its otherwise recognizable deferred tax
assets.
At March 31, 1999, the Company had operating loss carryforwards available
to reduce future federal and state income of approximately $500,000, which
expire in 2019 for federal income tax purposes and 2007 for state income
tax purposes.
5. COMMITMENTS AND CONTINGENCIES
TERMINATION, SALE AND SHAREHOLDER AGREEMENT
Allen D. Allen ("Allen") is the present owner of all United States patent
and foreign patent rights to the technology and know-how under the product
Cytolin(R). In 1994, Allen granted CytoDyn of New Mexico, Inc.
("CytoDyn"), of which Allen owns 100% of the voting stock, an exclusive,
worldwide, license to use the patent rights and technology. In addition,
CytoDyn obtained a trademark name for Cytolin(R).
F-13
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 1998, Allen and CytoDyn entered into a Termination, Sale and
Shareholder Agreement ("the Purchase Agreement") with Three R Associates,
Inc. ("Three R"), a corporation affiliated with the Company through its
ownership by three of the Company's officers and directors.
Pursuant to the terms of the Purchase Agreement, CytoDyn agreed to
relinquish the exclusive license to use the technology and patents
previously granted to it by Allen in exchange for 4,280,387 shares of the
Company's common stock. In addition, Allen agreed to sell all United
States Patent rights, foreign patent rights, and all technological know-how
underlying the product, Cytolin(R), to Three R in exchange for $1,350,000,
payable quarterly over a fifteen year period. Payments to Allen commenced
subsequent to the Company's merger with Versailles, and the Company assumed
the obligation to Allen upon completion of the Transaction. The obligation
to pay Allen will be terminated as of the date the consulting agreement
with Allen (described below) is terminated in the event the Company elects
to terminate such consulting agreement. Accordingly, Allen is to be paid,
at a minimum, $180,000 in scheduled quarterly installments through February
23, 2001. If the Company elects to terminate these payments to Allen after
the minimum amounts are paid, it would abandon the rights acquired through
the Purchase Agreement.
CONSULTING AGREEMENT - RESEARCH AND DEVELOPMENT
Allen also entered into a consulting agreement with Three R whereby Allen
agreed to provide the Company with any new and additional similar
technologies, if any, for a period of fifteen years in exchange for a
consulting fee of $10,000 per year. Payments under the consulting
agreement commenced subsequent to completion of the Transaction, and the
Company assumed the obligation to Allen upon completion of the Transaction.
The Company can terminate the consulting agreement with one year's notice
beginning February 23, 2000, one year from the date of the Transaction.
PATENT AND TRADEMARK LICENSE AGREEMENT
In October, 1998, the Company entered into a Patent and Trademark License
Agreement ("the Agreement") with Three R. The Company was granted an
irrevocable, exclusive, worldwide license to use all present and future
patent rights, know-how and background technology of Three R relating to
Cytolin(R), which Three R had previously obtained from Allen and CytoDyn.
In addition, the Agreement granted the Company a sublicense to the
trademark name, Cytolin(R). The Agreement was consummated simultaneously
with the Company's merger with Versailles.
The Company issued 21,936,981 shares of its common stock to Three R upon
execution of the Agreement, and the Company also assumed Three R's
obligations to pay Allen under the agreements discussed above between Three R
and Allen.
During the period ended March 31, 1999, the Company has accrued and recorded
F-14
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
research and development expenses of $166,000 in connection with the
minimum payments due to Allen through February 23, 2001. The payments have
been discounted to their fair value of $166,000 by applying an imputed
interest rate of 8% to future cash outflows.
MANAGEMENT AGREEMENT
In October, 1998, the Company entered into a three year management
agreement for $585,000 per year with Western Center for Clinical Studies,
Inc. ("WCCS"), a corporation that is affiliated with the Company and is
wholly-owned by three of the Company's officers and directors. The
agreement is scheduled to expire on February 23, 2002.
The management agreement provides services by WCCS to the Company for the
purpose of assisting the Company in obtaining FDA approval to market
Cytolin(R) for commercial use. The WCCS agreement was subsequently
ratified by the disinterested directors of Versailles following its merger
with the Company.
MANUFACTURER AGREEMENT
In December 1998, the Company entered into a letter of intent with a
manufacturer to begin the production and testing of the drug Cytolin(R).
The Company advanced the manufacturer $85,000 through March 31, 1999 (which
has been charged to research and development expense) to commence the
manufacturing process while a contract was being negotiated and developed
between the parties. At March 31, 1999, the agreement had not been
finalized. However, the Company has orally agreed to pay a total of
$280,000 to the manufacturer (of which $85,000 has already been paid) in
periodic installments through December 31, 1999.
PLACEMENT AGENT AGREEMENT
On February 9, 1999, in connection with its second private placement, the
Company entered into an agreement with a nonexclusive agent to act on a
"best efforts basis" in the offer and sale of its common stock. The
Company paid the agent commissions of 10% of the proceeds of its sales
($108,350) and issued to the agent warrants to purchase 20% of the total
number shares of common stock sold by the agent at an exercise price of
$0.42 per share for a period of five years from the date of grant. The
shares underlying the warrants are covered by certain registration rights.
At the completion of the Company's private placement on February 22, 1999,
the Company issued 515,308 warrants to the agent which were valued at $0.21
per warrant for a total value of $109,794.
LEASE COMMITMENTS
The Company's office facilities are located in Woodland Hills, California.
Beginning February 1, 1999, the facilities were rented under the terms of
a three year
F-15
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
noncancellable operating lease agreement, assigned to the Company by an
affiliate, WCCS.
The lease is scheduled to expire on January 31, 2002. Rent expense for the
1999 fiscal year was $3,040. Minimum future rental payments required over
the lease term are as follows:
Year Ended March 31
-------------------
2000 $ 36,480
2001 41,896
2002 33,368
------------
$ 111,744
============
6. RELATED PARTY TRANSACTIONS
During the period ended March 31, 1999, the Company incurred expenses of
$42,640 as a result of services performed by an affiliate, WCCS, on behalf
of the Company. The Company also advanced $219,375 to WCCS to commence
certain services in connection with the development of Cytolin(R) to be
performed over a three year period beginning when the management agreement
between the parties became effective.
During the period ended March 31, 1999, the Company paid consulting fees of
$46,359 to Allen for providing scientific expertise regarding the
development of Cytolin(R) and $22,500 pursuant to the Patent and Trademark
License Agreement.
Since inception, the Company has used part of an office facility and
administrative services provided by WCCS at no cost. On February 1, 1999,
the Company was assigned a long-term noncancellable operating lease
agreement with an unrelated party by WCCS.
During the period from February 23, 1999 through March 31, 1999, the
Company advanced an aggregate of $46,581 to CytoDyn, to facilitate payment
by CytoDyn of certain legal and office expenses. The Company has currently
negotiated the conversion of these advances to a secured interest-bearing loan.
F-16
<PAGE>
VERSAILLES CAPITAL CORPORATION
(A DEVELOPMENT STATE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLAN
In December 1998, the Company established an employee stock-based
compensation plan, the 1998 Omnibus Stock Incentive Plan ("the Plan"),
under which the Company may grant options for up to 7,133,970 shares of
common stock. Options granted under the Plan are generally exercisable for
a period of ten years from the date of grant at an exercise price not less
than the fair market value of the shares at the date of grant. Options
granted under the Plans generally vest over a one to three year period from
the date of the grant.
During the period from April 10, 1998 to March 31, 1999, options for
2,432,684 shares to Directors of the Company and employees were granted at
an exercise price of $0.42 per share. No options were exercised or
canceled during this period.
At March 31, 1999, options for 4,701,286 additional shares were available
for future grants under the Plan.
The weighted average remaining contractual life of outstanding options at
March 31, 1999, was 9.8 years. At March 31, 1999, no options were exercisable.
Pro forma information regarding net loss and loss per share shown below was
determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS 123. The fair value of the options was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions: risk-free interest rates
of 6%; dividend yields of 0%; volatility factors of the expected market
price of the Company's common stock of 50%; and expected life of the
options of 3.2 years. These assumptions resulted in weighted average fair
values of $0.17 per share for stock options granted during the period from
April 10, 1998 to March 31, 1999.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have characteristics significantly different from those of traded
options such as vesting restrictions and extremely limited transferability.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option vesting periods. The pro forma effect
on net loss for the period from April 10, 1998 to March 31, 1999 is not
representative of the pro forma effect on net income/(loss) in future
years because the pro forma information in future years will reflect the
amortization of a larger number of stock options granted in several
succeeding years. The Company's pro forma net loss and pro forma loss per
share totaled $2,232,657 and $0.08 for the period from April 10, 1998 to
March 31, 1999.
As of March 31, 1999, in addition to the 2,432,684 Director and employee
stock options, the Company had an additional option for 1,426,794 shares
and an aggregate of 515,308 warrants outstanding to purchase shares of the
Company's common stock which are exercisable at a price of $0.42 per share.
F-17
EXHIBIT 10.5
VERSAILLES CAPITAL CORPORATION
1998 OMNIBUS STOCK INCENTIVE PLAN
AS AMENDED AND RESTATED THROUGH [FEBRUARY 23, 1999]
WHEREAS, the Board of Directors of British Lion Medical, Inc., a
California corporation ("BLM"), adopted the British Lion Medical, Inc.
1998 Omnibus Stock Incentive Plan on December 1, 1998, subject to the
approval of the shareholders of BLM, which approval was obtained on the
same date; and
WHEREAS, Versailles Capital Corporation, a Colorado corporation
("Versailles"), BLM, and Amerimmune, Inc., a Colorado corporation and a
wholly owned subsidiary of Versailles ("Amerimmune"), entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of February
17, 1999, whereby BLM was merged with and into Amerimmune, and Amerimmune
became the surviving corporation (the "Merger"); and
WHEREAS, upon consummation of the Merger, the BLM 1998 Omnibus
Stock Incentive Plan was renamed the Versailles Capital Corporation 1998
Omnibus Stock Incentive Plan; and
WHEREAS, subject to approval of the shareholders of Versailles,
the Board of Directors of Versailles have adopted resolutions amending and
restating the 1998 Omnibus Stock Incentive Plan in the form below (the
"Amendment and Restatement"):
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Versailles Capital Corporation 1998
Omnibus Stock Incentive Plan (the "Plan"). The Plan was adopted by the
Board of Directors of BLM on December 1, 1998, and approved by the
shareholders of BLM on the same date. The Plan was subsequently amended
and restated by the Board of Directors of Versailles on [February 23, 1999]
to enable Versailles to extend the benefits under the Plan to Eligible
Recipients (defined below) of Versailles. The purpose of the Plan is to
enable the Company (defined below) to attract and retain highly qualified
personnel who will contribute to the Company's success and to provide
incentives to Participants (defined below) that are linked directly to
increases in
<PAGE>
shareholder value and will therefore inure to the benefit of all
shareholders of the Company.
For purposes of the Plan, the following terms shall be defined as
set forth below:
(1) "ADMINISTRATOR" means the Board, or if and to the extent the
Board does not administer the Plan, the Committee in accordance with
Section 2 below.
(2) "BOARD" means the Board of Directors of the Company.
(3) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto.
(4) "COMMITTEE" means any committee the Board may subsequently
appoint to administer the Plan. To the extent necessary and desirable, the
Committee shall be composed entirely of individuals who meet the
qualifications referred to in Section 162(m) of the Code and Rule 16b-3
under the Securities Exchange Act of 1934, as amended. If at any time or
to any extent the Board shall not administer the Plan, then the functions
of the Board specified in the Plan shall be exercised by the Committee.
(5) "COMPANY" means Versailles Capital Corporation, a Colorado
corporation or any successor corporation.
(6) "DEFERRED STOCK" means an award made pursuant to Section 7
below of the right to receive Stock at the end of a specified deferral period.
(7) "DISABILITY" means the inability of a Participant to perform
substantially his duties and responsibilities to the Company or any Parent
Corporation or Subsidiary by reason of a physical or mental disability or
infirmity (i) for a continuous period of six months, or (ii) at such
earlier time as the Participant submits medical evidence satisfactory to
the Administrator that the Participant has a physical or mental disability
or infirmity that will likely prevent the Participant from returning to the
performance of the Participant's work duties for six months or longer. The
date of such Disability shall be the last day of such six-month period or
the day on which the Participant submits such satisfactory medical
evidence, as the case may be.
(8) "ELIGIBLE RECIPIENT" means an officer, director, employee,
consultant or advisor of the Company or any Parent Corporation or Subsidiary.
2
<PAGE>
(9) "FAIR MARKET VALUE" means, as of any given date, with
respect to any awards granted hereunder as of a particular date shall mean
the fair market value of the Shares as determined by the Administrator in
its sole discretion; PROVIDED, HOWEVER, that (i) if the Stock is admitted
to quotation on the National Association of Securities Dealers Automated
Quotation ("Nasdaq") System or other comparable quotation system and has
been designated as a National Market System ("NMS") security, fair market
value of the Stock on any date shall be the average of the high and low
sale prices reported for the Stock on such system on such date, or, if no
sale was reported on such date, on the last date preceding such date on
which a sale was reported, (ii) if the Stock is admitted to quotation on
the Nasdaq System has not been designated as an NMS security, fair market
value of the Stock on any date shall be the average of the highest bid and
lowest asked prices of the Stock on such system on such date or, if no bid
and ask prices were reported on such date, on the last date preceding such
date on which both bid and ask prices were reported, provided that if the
Administrator, in its sole discretion, determines that the use of such
preceding date is not reasonable, fair market value of the Stock shall be
determined by the Administrator in its sole discretion, (iii) in the case
of a Limited Stock Appreciation Right, the "Change in Control Price" (as
defined in the agreement evidencing such Limited Stock Appreciation Right)
of the Stock as of the date of exercise, or (iv) the fair market value of
the Stock as otherwise determined by the Administrator in the good faith
exercise of its discretion.
(10) "INCENTIVE STOCK OPTION" means any Stock Option intended to
be designated as an "incentive stock option" within the meaning of Section
422 of the Code.
(11) "LIMITED STOCK APPRECIATION RIGHT" means a Stock
Appreciation Right that can be exercised only in the event of a "Change in
Control" (as defined in the award evidencing such Limited Stock
Appreciation Right).
(12) "NON-QUALIFIED STOCK OPTION" means any Stock Option that is
not an Incentive Stock Option, including any Stock Option that provides (as
of the time such option is granted) that it will not be treated as an
Incentive Stock Option.
(13) "PARENT CORPORATION" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if
each of the corporations in the chain (other than the Company) owns stock
possessing 50% or more of the combined voting power of all classes of stock
in one of the other corporations in the chain.
3
<PAGE>
(14) "PARTICIPANT" means any Eligible Recipient selected by the
Administrator, pursuant to the Administrator's authority in Section 2
below, to receive grants of Stock Options, Stock Appreciation Rights,
Limited Stock Appreciation Rights, Restricted Stock awards, Deferred Stock
awards, Performance Share awards or any combination of the foregoing.
(15) "PERFORMANCE SHARES" means an award of shares of Stock
pursuant to Section 7 below that is subject to restrictions based upon the
attainment of specified performance objectives.
(16) "RESTRICTED STOCK" means an award granted pursuant to
Section 7 below of shares of Stock subject to certain restrictions.
(17) "STOCK" means the common stock, par value $ 0.05 per share,
of the Company.
(18) "STOCK APPRECIATION RIGHT" means the right pursuant to an
award granted under Section 6 below to receive an amount equal to the
excess, if any, of (A) the Fair Market Value, as of the date such Stock
Appreciation Right or portion thereof is surrendered, of the shares of
Stock covered by such right or such portion thereof, over (B) the aggregate
exercise price of such right or such portion thereof.
(19) "STOCK OPTION" means an option to purchase shares of Stock
granted pursuant to Section 5 below.
(20) "SUBSIDIARY" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company, if each of
the corporations (other than the last corporation) in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered in accordance with the
requirements of Section 162(m) of the Code (but only to the extent
necessary and desirable to maintain qualification of awards under the Plan
under Section 162(m) of the Code) and, to the extent applicable, Rule 16b-3
under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"), by
the Board or, at the Board's sole discretion, by the Committee, which
shall be appointed by the Board, and which shall serve at the pleasure of
the Board.
4
<PAGE>
Pursuant to the terms of the Plan, the Administrator shall have
the power and authority to grant to Eligible Recipients pursuant to the
terms of the Plan: (a) Stock Options, (b) Stock Appreciation Rights or
Limited Stock Appreciation Rights, (c) Restricted Stock, (d) Performance
Shares, (e) Deferred Stock or (f) any combination of the foregoing. In
particular, the Administrator shall have the authority:
(a) to select those Eligible Recipients who shall be
Participants;
(b) to determine whether and to what extent Stock Options,
Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted
Stock, Deferred Stock, Performance Shares or a combination of the
foregoing, are to be granted hereunder to Participants;
(c) to determine the number of shares of Stock to be
covered by each such award granted hereunder;
(d) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but
not limited to, (x) the restrictions applicable to Restricted Stock or
Deferred Stock awards and the conditions under which restrictions
applicable to such Restricted or Deferred Stock shall lapse, and (y) the
performance goals and periods applicable to the award of Performance Shares);
(e) to determine the terms and conditions, not inconsistent
with the terms of the Plan, which shall govern all written instruments
evidencing the Stock Options, Stock Appreciation Rights, Limited Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Performance Shares
or any combination of the foregoing granted hereunder to Participants; and
(f) to reduce the exercise price of any Stock Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Stock Option has declined since the date such Stock Option
was granted.
The Administrator shall have the authority, in its sole
discretion, to adopt, alter and repeal such administrative rules,
guidelines and practices governing the Plan as it shall from time to time
deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
5
<PAGE>
All decisions made by the Administrator pursuant to the
provisions of the Plan shall be final, conclusive and binding on all
persons, including the Company and the Participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for
issuance under the Plan shall be 7,133,970 shares (as adjusted to reflect
the Exchange Ratio provided for in the Merger Agreement). Such shares
may consist, in whole or in part, of authorized and unissued shares or
treasury shares. The aggregate number of shares of Stock as to which
Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred
Stock, and Performance Shares may be granted to any individual during any
calendar year may not, subject to adjustment as provided in this Section
3, exceed 100% of the shares of Stock reserved for the purposes of the
Plan in accordance with the provisions of this Section 3.
Consistent with the provisions of Section 162(m) of the Code,
as from time to time applicable, to the extent that (i) a Stock Option
expires or is otherwise terminated without being exercised, or (ii) any
shares of Stock subject to any Restricted Stock, Deferred Stock or
Performance Share award granted hereunder are forfeited, such shares
shall again be available for issuance in connection with future awards
under the Plan. If any shares of Stock have been pledged as collateral
for indebtedness incurred by a Participant in connection with the
exercise of a Stock Option and such shares are returned to the Company in
satisfaction of such indebtedness, such shares shall again be available
for issuance in connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the Stock, an equitable substitution or proportionate
adjustment shall be made in (i) the aggregate number of shares reserved
for issuance under the Plan, (ii) the kind, number and option price of
shares subject to outstanding Stock Options granted under the Plan, and
(iii) the kind, number and purchase price of shares issuable pursuant to
awards of Restricted Stock, Deferred Stock and Performance Shares, in
each case as may be determined by the Administrator, in its sole
discretion. Such other substitutions or adjustments shall be made as may
be determined by the Administrator, in its sole discretion. An adjusted
option price shall also be used to determine the amount payable by the
Company upon the exercise of any Stock Appreciation Right or Limited
Stock Appreciation Right related to any Stock Option. In connection with
any event described in this paragraph, the Administrator may provide, in
its sole discretion, for the cancellation of any outstanding awards and
payment in cash or other property therefor. Notwithstanding
6
<PAGE>
anything to the contrary, upon consummation of the Merger, all
outstanding stock options ("BLM Stock Options") to purchase common stock,
no par value, of BLM ("BLM Common Stock") were assumed by Versailles on
the same terms and conditions as in effect immediately prior to the
Merger, except that (i) shares of Stock ("Versailles Shares") shall be
issuable upon exercise of BLM Stock Options outstanding as of such date,
(ii) the number of Versailles Shares issuable upon exercise of BLM Stock
Options shall be equal to that number of shares of BLM Common Stock
subject to each such BLM Stock Option immediately prior to the
consummation of the Merger multiplied by the Exchange Ratio (as defined
in the Merger Agreement), rounded down to the nearest whole share and
(iii) the per share exercise price payable on exercise of each such BLM
Stock Option shall be equal to the per share exercise price of such BLM
Stock Option divided by the Exchange Ratio, rounded up to the nearest
whole cent.
SECTION 4. ELIGIBILITY.
Officers, directors and employees of the Company or any Parent
or Subsidiary, and consultants and advisors to the Company or any Parent
or Subsidiary, who are responsible for or are in a position to contribute
to the management, growth and/or profitability of the business of the
Company shall be eligible to be granted Stock Options, Stock Appreciation
Rights, Limited Stock Appreciation Rights, Restricted Stock awards,
Deferred Stock awards, Performance Shares or any combination of the
foregoing hereunder. The Participants under the Plan shall be selected
from time to time by the Administrator, in its sole discretion, from
among the Eligible Recipients recommended by the senior management of the
Company, and the Administrator shall determine, in its sole discretion,
the number of shares of Stock covered by each such award.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone or in addition to other
awards granted under the Plan. Any Stock Option granted under the Plan
shall be in such form as the Administrator may from time to time approve,
and the provisions of Stock Option awards need not be the same with
respect to each optionee. Recipients of Stock Options shall enter into a
subscription and/or award agreement with the Company, in such form as the
Administrator shall determine, which agreement shall set forth, among
other things, the exercise price of the option, the term of the option
and provisions regarding exercisability of such option granted thereunder.
The Stock Options granted under the Plan may be of two types:
(i) Incentive Stock Options and (ii) Non-Qualified Stock Options.
7
<PAGE>
The Administrator shall have the authority to grant any officer
or employee of the Company (including directors who are also officers of
the Company) Incentive Stock Options, Non-Qualified Stock Options, or
both types of Stock Options (in each case with or without Stock
Appreciation Rights or Limited Stock Appreciation Rights). Directors who
are not officers of the Company, consultants and advisors may only be
granted Non-Qualified Stock Options (with or without Stock Appreciation
Rights or Limited Stock Appreciation Rights). To the extent that any
Stock Option does not qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option. More than one option
may be granted to the same optionee and be outstanding concurrently hereunder.
Stock Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms
and conditions, not inconsistent with the terms of the Plan, as the
Administrator shall deem desirable:
(1) OPTION PRICE. The option price per share of Stock
purchasable under a Stock Option shall be determined by the Administrator
in its sole discretion at the time of grant but shall not, in the case of
Incentive Stock Options, be less than 100% of the Fair Market Value of
the Stock on such date and shall not, in any event, be less than 85% of
the Fair Market Value of the Stock on such date. If an optionee owns or
is deemed to own (by reason of the attribution rules applicable under
Section 424(d) of the Code) more than 10% of the combined voting power of
all classes of stock of the Company, any Parent Corporation or Subsidiary
and a Stock Option is granted to such optionee, the option price of such
Stock Option (to the extent required at the time of grant by the Code
with respect to Incentive Stock Options or by California "Blue Sky" law
with respect to any Stock Option) shall be no less than 110% of the Fair
Market Value of the Stock on the date such Stock Option is granted.
(2) OPTION TERM. The term of each Stock Option shall be fixed
by the Administrator, but no Stock Option shall be exercisable more than
ten years after the date such Stock Option is granted; provided, however,
that if an employee owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company, any Parent
Corporation or Subsidiary and an Incentive Stock Option is granted to
such employee, the term of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no more than five
years from the date of grant.
(3) EXERCISABILITY. Stock Options shall be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Administrator at or after the time of grant; provided,
however, that (to the extent
8
<PAGE>
required at the time of grant by the California "Blue Sky" law) Stock
Options granted to individuals other than officers, directors or
consultants of the Company shall be exercisable at the rate of at least
20% per year over five years from the date of grant. The Administrator
may provide at the time of grant, in its sole discretion, that any Stock
Option shall be exercisable only in installments, and the Administrator
may waive such installment exercise provisions at any time, in whole or
in part, based on such factors as the Administrator may determine, in its
sole discretion, including but not limited to in connection with any
"change in control" of the Company as defined in any Stock Option agreement.
(4) METHOD OF EXERCISE. Subject to paragraph (3) of this
Section 5, Stock Options may be exercised in whole or in part at any time
during the option period, by giving written notice of exercise to the
Company specifying the number of shares to be purchased, accompanied by
payment in full of the purchase price in cash or its equivalent, as
determined by the Administrator. As determined by the Administrator, in
its sole discretion, payment in whole or in part may also be made (i) by
means of any cashless exercise procedure approved by the Administrator,
(ii) in the form of unrestricted Stock already owned by the optionee
which, (x) in the case of unrestricted Stock acquired upon exercise of an
option, have been owned by the optionee for more than six months on the
date of surrender, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Stock as to which
such Stock Option shall be exercised, or (iii) in the case of the
exercise of a Non-Qualified Stock Option, in the form of Restricted Stock
or Performance Shares subject to an award hereunder (based, in each case,
on the Fair Market Value of the Stock on the date the option is
exercised); provided, however, that in the case of an Incentive Stock
Option, the right to make payment in the form of already owned shares may
be authorized only at the time of grant. If payment of the option
exercise price of a Non-Qualified Stock Option is made in whole or in
part in the form of Restricted Stock or Performance Shares, the shares
received upon the exercise of such Stock Option shall be restricted in
accordance with the original terms of the Restricted Stock or Performance
Share award in question, except that the Administrator may direct that
such restrictions shall apply only to that number of shares equal to the
number of shares surrendered upon the exercise of such option. An
optionee shall generally have the rights to dividends and any other
rights of a shareholder with respect to the Stock subject to the Stock
Option only after the optionee has given written notice of exercise, has
paid in full for such shares, and, if requested, has given the
representation described in paragraph (1) of Section 10 below.
The Administrator may require the surrender of all or a portion
of any Stock Option granted under the Plan as a condition precedent to
the grant of a new
9
<PAGE>
Stock Option. Subject to the provisions of the Plan, such new Stock
Option shall be exercisable at the price, during such period and on such
other terms and conditions as are specified by the Administrator at the
time the new Stock Option is granted. Consistent with the provisions of
Section 162(m), to the extent applicable, upon their surrender, Stock
Options shall be canceled and the shares previously subject to such
canceled Stock Options shall again be available for grants of Stock
Options and other awards hereunder.
(5) LOANS. The Company may make loans available to Stock
Option holders in connection with the exercise of outstanding options
granted under the Plan, as the Administrator, in its sole discretion, may
determine. Such loans shall (i) be evidenced by promissory notes entered
into by the Stock Option holders in favor of the Company, (ii) be subject
to the terms and conditions set forth in this Section 5(5) and such other
terms and conditions, not inconsistent with the Plan, as the
Administrator shall determine, (iii) bear interest at the applicable
Federal interest rate or such other rate as the Administrator shall
determine, and (iv) be subject to Board approval (or to approval by the
Administrator to the extent the Board may delegate such authority). In
no event may the principal amount of any such loan exceed the sum of (x)
the exercise price less the par value (if any) of the shares of Stock
covered by the Stock Option, or portion thereof, exercised by the holder,
and (y) any Federal, state, and local income tax attributable to such
exercise. The initial term of the loan, the schedule of payments of
principal and interest under the loan, the extent to which the loan is to
be with or without recourse against the holder with respect to principal
or interest and the conditions upon which the loan will become payable in
the event of the holder's termination of employment shall be determined
by the Administrator. Unless the Administrator determines otherwise,
when a loan is made, shares of Stock having a Fair Market Value at least
equal to the principal amount of the loan shall be pledged by the holder
to the Company as security for payment of the unpaid balance of the loan,
and such pledge shall be evidenced by a pledge agreement, the terms of
which shall be determined by the Administrator, in its sole discretion;
provided, however, that each loan shall comply with all applicable laws,
regulations and rules of the Board of Governors of the Federal Reserve
System and any other governmental agency having jurisdiction.
(6) NON-TRANSFERABILITY OF OPTIONS. Except under the laws of
descent and distribution, the optionee shall not be permitted to sell,
transfer, pledge or assign any Stock Option, and all Stock Options shall
be exercisable, during the optionee's lifetime, only by the optionee.
10
<PAGE>
(7) TERMINATION OF EMPLOYMENT OR SERVICE. If an optionee's
employment with or service as a director, consultant or advisor to the
Company terminates by reason of death, Disability or for any other
reason, the Stock Option may thereafter be exercised to the extent
provided in the applicable subscription or award agreement, or as
otherwise determined by the Administrator.
(8) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent
that the aggregate Fair Market Value (determined as of the date the
Incentive Stock Option is granted) of shares of Stock with respect to
which Incentive Stock Options granted to an optionee under this Plan and
all other option plans of the Company, any Parent Corporation or
Subsidiary become exercisable for the first time by the optionee during
any calendar year exceeds $100,000, such Stock Options shall be treated
as Non-Qualified Stock Options.
SECTION 6. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
(1) GRANT AND EXERCISE. Stock Appreciation Rights and Limited
Stock Appreciation Rights may be granted either alone ("Free Standing
Rights") or in conjunction with all or part of any Stock Option granted
under the Plan ("Related Rights"). In the case of a Non-Qualified Stock
Option, Related Rights may be granted either at or after the time of the
grant of such Stock Option. In the case of an Incentive Stock Option,
Related Rights may be granted only at the time of the grant of the
Incentive Stock Option.
A Related Right or applicable portion thereof granted in
conjunction with a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option,
except that, unless otherwise provided by the Administrator at the time
of grant, a Related Right granted with respect to less than the full
number of shares covered by a related Stock Option shall only be reduced
if and to the extent that the number of shares covered by the exercise or
termination of the related Stock Option exceeds the number of shares not
covered by the Related Right.
A Related Right may be exercised by an optionee, in accordance
with paragraph (2) of this Section 6, by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender,
the optionee shall be entitled to receive an amount determined in the
manner prescribed in paragraph (2) of this Section 6. Stock Options
which have been so surrendered, in whole or in part, shall no longer be
exercisable to the extent the Related Rights have been so exercised.
11
<PAGE>
(2) TERMS AND CONDITIONS. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the
provisions of the Plan, as shall be determined from time to time by the
Administrator, including the following:
(a) Stock Appreciation Rights that are Related Rights
("Related Stock Appreciation Rights") shall be exercisable only at such
time or times and to the extent that the Stock Options to which they
relate shall be exercisable in accordance with the provisions of Section
5 and this Section 6 of the Plan; PROVIDED, HOWEVER, that no Related
Stock Appreciation Right shall be exercisable during the first six months
of its term, except that this additional limitation shall not apply in
the event of death or Disability of the optionee prior to the expiration
of such six-month period.
(b) Upon the exercise of a Related Stock Appreciation
Right, an optionee shall be entitled to receive up to, but not more than,
an amount in cash or that number of shares of Stock (or in some
combination of cash and shares of Stock) equal in value to the excess of
the Fair Market Value of one share of Stock as of the date of exercise
over the option price per share specified in the related Stock Option
multiplied by the number of shares of Stock in respect of which the
Related Stock Appreciation Right is being exercised, with the
Administrator having the right to determine the form of payment.
(c) Related Stock Appreciation Rights shall be
transferable only when and to the extent that the underlying Stock Option
would be transferable under paragraph (6) of Section 5 of the Plan.
(d) Upon the exercise of a Related Stock Appreciation
Right, the Stock Option or part thereof to which such Related Stock
Appreciation Right is related shall be deemed to have been exercised for
the purpose of the limitation set forth in Section 3 of the Plan on the
number of shares of Stock to be issued under the Plan, but only to the
extent of the number of shares issued under the Related Stock
Appreciation Right.
(e) A Related Stock Appreciation Right granted in
connection with an Incentive Stock Option may be exercised only if and
when the Fair Market Value of the Stock subject to the Incentive Stock
Option exceeds the exercise price of such Stock Option.
(f) Stock Appreciation Rights that are Free Standing
Rights ("Free Standing Stock Appreciation Rights") shall be exercisable
at such time or times and subject to such terms and conditions as shall
be determined by the Administrator
12
<PAGE>
at or after grant; PROVIDED, HOWEVER, that no Free Standing Stock
Appreciation Right shall be exercisable during the first six months of
its term, except that this limitation shall not apply in the event of
death or Disability of the recipient of the Free Standing Stock
Appreciation Right prior to the expiration of such six-month period.
(g) The term of each Free Standing Stock Appreciation
Right shall be fixed by the Administrator, but no Free Standing Stock
Appreciation Right shall be exercisable more than ten years after the
date such right is granted.
(h) Upon the exercise of a Free Standing Stock
Appreciation Right, a recipient shall be entitled to receive up to, but
not more than, an amount in cash or that number of shares of Stock (or
any combination of cash or shares of Stock) equal in value to the excess
of the Fair Market Value of one share of Stock as of the date of exercise
over the price per share specified in the Free Standing Stock
Appreciation Right (which price shall be no less than 100% of the Fair
Market Value of the Stock on the date of grant) multiplied by the number
of shares of Stock in respect of which the right is being exercised, with
the Administrator having the right to determine the form of payment.
(i) Free Standing Stock Appreciation Rights shall be
transferable only when and to the extent that a Stock Option would be
transferable under paragraph (6) of Section 5 of the Plan.
(j) In the event of the termination of employment or
service of a Participant who has been granted one or more Free Standing
Stock Appreciation Rights, such rights shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined
by the Administrator at or after grant.
(k) Limited Stock Appreciation Rights may only be
exercised within the 30-day period following a "Change in Control" (as
defined by the Administrator in the agreement evidencing such Limited
Stock Appreciation Right) and, with respect to Limited Stock Appreciation
Rights that are Related Rights ("Related Limited Stock Appreciation
Rights"), only to the extent that the Stock Options to which they relate
shall be exercisable in accordance with the provisions of Section 5 and
this Section 6 of the Plan.
(l) Upon the exercise of a Limited Stock Appreciation Right,
the recipient shall be entitled to receive an amount in cash equal in
value to the excess of the "Change in Control Price" (as defined in the
agreement evidencing such Limited Stock Appreciation Right) of one share
of Stock as of the date of exercise over (A) the
13
<PAGE>
option price per share specified in the related Stock Option, or (B) in
the case of a Limited Stock Appreciation Right which is a Free Standing
Stock Appreciation Right, the price per share specified in the Free
Standing Stock Appreciation Right, such excess to be multiplied by the
number of shares in respect of which the Limited Stock Appreciation Right
shall have been exercised.
SECTION 7. RESTRICTED STOCK, DEFERRED STOCK AND PERFORMANCE SHARES.
(1) GENERAL. Restricted Stock, Deferred Stock or Performance
Share awards may be issued either alone or in addition to other awards
granted under the Plan. The Administrator shall determine the Eligible
Recipients to whom, and the time or times at which, grants of Restricted
Stock, Deferred Stock or Performance Share awards shall be made; the
number of shares to be awarded; the price, if any, to be paid by the
recipient of Restricted Stock, Deferred Stock or Performance Share
awards; the Restricted Period (as defined in paragraph (3) of this
Section 7) applicable to Restricted Stock or Deferred Stock awards; the
performance objectives applicable to Performance Share or Deferred Stock
awards; the date or dates on which restrictions applicable to Restricted
Stock or Deferred Stock awards shall lapse during the Restricted Period;
and all other conditions of the Restricted Stock, Deferred Stock and
Performance Share awards. Subject to the requirements of Section 162(m)
of the Code, as applicable, the Administrator may also condition the
grant of Restricted Stock, Deferred Stock awards or Performance Shares
upon the exercise of Stock Options, or upon such other criteria as the
Administrator may determine, in its sole discretion. The provisions of
Restricted Stock, Deferred Stock or Performance Share awards need not be
the same with respect to each recipient. In the sole discretion of the
Administrator, loans may be made to Participants in connection with the
purchase of Restricted Stock under substantially the same terms and
conditions as provided in paragraph (5) of Section 5 of the Plan with
respect to the exercise of stock options.
(2) AWARDS AND CERTIFICATES. The prospective recipient of a
Restricted Stock, Deferred Stock or Performance Share award shall not
have any rights with respect to such award, unless and until such
recipient has executed an agreement evidencing the award (a "Restricted
Stock Award Agreement," "Deferred Stock Award Agreement" or "Performance
Share Award Agreement," as appropriate) and delivered a fully executed
copy thereof to the Company, within a period of sixty days (or such other
period as the Administrator may specify) after the award date. Except as
otherwise provided below in this Section 7(2), (i) each Participant who
is awarded Restricted Stock or Performance Shares shall be issued a stock
certificate in respect of such shares of Restricted Stock or Performance
Shares; and (ii) such certificate shall be
14
<PAGE>
registered in the name of the Participant, and shall bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to
such award.
The Company may require that the stock certificates evidencing
Restricted Stock or Performance Share awards hereunder be held in the
custody of the Company until the restrictions thereon shall have lapsed,
and that, as a condition of any Restricted Stock award or Performance
Share award, the Participant shall have delivered a stock power, endorsed
in blank, relating to the Stock covered by such award.
With respect to Deferred Stock awards, at the expiration of the
Restricted Period, stock certificates in respect of such shares of
Deferred Stock shall be delivered to the participant, or his legal
representative, in a number equal to the number of shares of Stock
covered by the Deferred Stock award.
(3) RESTRICTIONS AND CONDITIONS. The Restricted Stock,
Deferred Stock and Performance Share awards granted pursuant to this
Section 7 shall be subject to the following restrictions and conditions:
(a) Subject to the provisions of the Plan and the
Restricted Stock Award Agreement, Deferred Stock Award Agreement or
Performance Share Award Agreement, as appropriate, governing such award,
during such period as may be set by the Administrator commencing on the
grant date (the "Restricted Period"), the Participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock,
Performance Shares or Deferred Stock; awarded under the Plan; provided,
however, that the Administrator may, in its sole discretion, provide for
the lapse of such restrictions in installments and may accelerate or
waive such restrictions in whole or in part based on such factors and
such circumstances as the Administrator may determine, in its sole
discretion, including, but not limited to, the attainment of certain
performance related goals, the Participant's termination of employment or
service, death or Disability or the occurrence of a "Change in Control"
as defined in the agreement evidencing such award.
(b) Except as provided in paragraph (3)(a) of this
Section 7, the Participant shall generally have, with respect to shares
of Restricted Stock or Performance Shares, all of the rights of a
shareholder with respect to such stock during the Restricted Period. The
Participant shall generally not have the rights of a shareholder with
respect to stock subject to Deferred Stock awards during the Restricted
Period; provided, however, that dividends declared during the Restricted
Period with respect to the number of shares covered by a Deferred Stock
award shall be paid to the Participant. Certificates for shares of
unrestricted Stock shall be delivered to the
15
<PAGE>
Participant promptly after, and only after, the Restricted Period shall
expire without forfeiture in respect of such shares of Restricted Stock,
Performance Shares or Deferred Stock, except as the Administrator, in its
sole discretion, shall otherwise determine.
(c) The rights of holders of Restricted Stock, Deferred
Stock and Performance Share awards upon termination of employment or
service for any reason during the Restricted Period shall be set forth in
the Restricted Stock Award Agreement, Deferred Stock Award Agreement or
Performance Share Award Agreement, as appropriate, governing such awards.
SECTION 8. AMENDMENT AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair
the rights of a Participant under any award theretofore granted without
such Participant's consent, or that, without the approval of the
shareholders (as described below), would:
(1) except as provided in Section 3 of the Plan, increase the
total number of shares of Stock reserved for the purpose of the Plan;
(2) change the class of directors, officers, employees,
consultants and advisors eligible to participate in the Plan; or
(3) extend the maximum option period under paragraph (2) of
Section 5 of the Plan.
Notwithstanding the foregoing, shareholder approval under this
Section 8 shall only be required at such time and under such
circumstances as shareholder approval would be required under Section
162(m) of the Code or other applicable law, rule or regulation with
respect to any material amendment to any employee benefit plan of the
Company.
The Administrator may amend the terms of any award theretofore
granted, prospectively or retroactively, but, subject to Section 3 of
Plan, no such amendment shall impair the rights of any holder without his
or her consent.
SECTION 9. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for
incentive compensation. With respect to any payments not yet made to a
Participant by the
16
<PAGE>
Company, nothing contained herein shall give any such Participant any
rights that are greater than those of a general creditor of the Company.
SECTION 10. GENERAL PROVISIONS.
(1) The Administrator may require each person purchasing
shares pursuant to a Stock Option to represent to and agree with the
Company in writing that such person is acquiring the shares without a
view to distribution thereof. The certificates for such shares may
include any legend which the Administrator deems appropriate to reflect
any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as
the Administrator may deem advisable under the rules, regulations, and
other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Stock is then listed, and any applicable federal
or state securities law, and the Administrator may cause a legend or
legends to be placed on any such certificates to make appropriate
reference to such restrictions.
(2) Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
shareholder approval, if such approval is required; and such arrangements
may be either generally applicable or applicable only in specific cases.
The adoption of the Plan shall not confer upon any officer, director,
employee, consultant or advisor of the Company any right to continued
employment or service with the Company, as the case may be, nor shall it
interfere in any way with the right of the Company to terminate the
employment or service of any of its officers, directors, employees,
consultants or advisors at any time.
(3) Each Participant shall, no later than the date as of which
the value of an award first becomes includible in the gross income of the
Participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any
federal, state, or local taxes of any kind required by law to be withheld
with respect to the award. The obligations of the Company under the Plan
shall be conditional on the making of such payments or arrangements, and
the Company shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Participant.
(4) No member of the Board or the Administrator, nor any
officer or employee of the Company acting on behalf of the Board or the
Administrator, shall be personally liable for any action, determination,
or interpretation taken or made in good
17
<PAGE>
faith with respect to the Plan, and all members of the Board or the
Administrator and each and any officer or employee of the Company acting
on their behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(5) To the extent applicable, the provisions of Sections
260.160.41, 260.140.42, 260.140.45 and 260.140.46 of Title 10 of the
California Code of Regulations are incorporated herein by reference.
SECTION 11 EFFECTIVE DATE OF PLAN.
This Amendment and Restatement will become effective as of
[February 23, 1999]; provided, however, that if the Amendment and
Restatement is not approved by the holders of a majority of the voting
power of the outstanding shares of Stock within 12 months from the date
this Amendment and Restatement is adopted by the Board, awards granted
under the Plan subject to or following consummation of the Merger shall
be null and void. Awards granted under the Plan to officers, directors,
employees, consultants or advisors who were employed by BLM or by any
parent (as defined in Code Section 424(e) or subsidiary (as defined in
Code Section 424(f)) of BLM prior to consummation of the Merger will
continue in full force and effect and will not be affected by any such
failure to obtain shareholder approval.
SECTION 12 TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Limited Stock
Appreciation Right, Restricted Stock, Deferred Stock or Performance Share
award shall be granted pursuant to the Plan on or after the tenth
anniversary of the Effective Date, but awards theretofore granted may
extend beyond that date.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-KSB F/Y MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-10-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,614,523
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,754,504
<PP&E> 30,633
<DEPRECIATION> 0
<TOTAL-ASSETS> 143,196
<CURRENT-LIABILITIES> 258,538
<BONDS> 0
0
0
<COMMON> 4,852,452
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,928,333
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,181,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 441
<INCOME-PRETAX> (2,181,857)
<INCOME-TAX> 800
<INCOME-CONTINUING> (2,182,657)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,182,657)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
