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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------------
[x] QUARTERLY REPORT PURSUANT SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 1997
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 0-18728
INTERNEURON PHARMACEUTICALS, INC.
(exact name of registrant as specified in its charter)
Delaware 04-3047911
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Ledgemont Center, 99 Hayden Avenue 02173
Lexington, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (781) 861-8444
(Former name, former address and former fiscal year, if changed since last
report): Not Applicable
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class Outstanding at February 6, 1998:
Common Stock $.001 par value 41,293,603 shares
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INTERNEURON PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997
and September 30, 1997........................................................................3
Consolidated Statements of Operations for the Three Months
ended December 31, 1997 and 1996..............................................................4
Consolidated Statements of Cash Flows for the Three Months ended
December 31, 1997 and 1996....................................................................5
Notes to Unaudited Consolidated Financial Statements...................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................21
Item 6. Exhibits and Reports on Form 8-K............................................................22
SIGNATURES............................................................................................23
</TABLE>
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INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $35,497 $55,820
Marketable securities 63,488 64,549
Accounts receivable 1,728 1,297
Inventories 896 735
Prepaids and other current assets 1,519 2,056
------- -------
Total current assets 103,128 124,457
Marketable securities 15,232 19,683
Investment in unconsolidated subsidiary 3,147 4,040
Property and equipment, net 4,775 4,669
Other assets 88 81
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$126,370 $152,930
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 1,909 $ 1,615
Accrued expenses 27,616 39,153
Deferred revenue 500 750
Current portion of notes payable and capital lease obligations 641 710
--- ---
Total current liabilities 30,666 42,228
Long-term portion of notes payable and capital lease obligations 1,599 1,734
Minority interest 12,613 12,959
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, 5,000,000 shares authorized:
Series B, 239,425 shares issued and outstanding at December 31, 1997
and September 30, 1997 (liquidation preference at December 31, 1997 $3,034) 3,000 3,000
Series C, 5,000 shares issued and outstanding at December 31, 1997
and September 30, 1997 (liquidation preference at December 31, 1997 $503) 500 500
Common stock; $.001 par value, 80,000,000 shares authorized; 41,226,293 shares
issued at December 31, 1997 and September 30, 1997, respectively 41 41
Additional paid-in capital 260,077 255,693
Accumulated deficit (181,168) (162,034)
Unrealized net gain on marketable securities 37 85
Treasury stock; at cost, 55,483 and 70,483 shares at December 31, 1997 and
September 30, 1997, respectively (995) (1,276)
---- ------
Total stockholders' equity 81,492 96,009
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$126,370 $152,930
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
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INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended December 31, 1997 and 1996
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended December 31,
-------------------------------
1997 1996
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<S> <C> <C>
Revenues:
Product revenue $ 987 $ 13,711
Contract and license fees 654 3,981
----- ------
Total revenues 1,641 17,692
Costs and expenses:
Cost of product revenue 392 9,904
Research and development 8,549 7,518
Selling, general and administrative 12,841 5,517
Purchase of in-process research and development 500 -
--- ---
Total costs and expenses 22,282 22,939
Net loss from operations (20,641) (5,247)
Investment income, net 1,805 2,589
Equity in net loss of unconsolidated subsidiary (893) -
Minority interest 595 (273)
--- ----
Net loss ($19,134) ($2,931)
========= ========
Net loss per common share - basic ($0.46) ($0.07)
========= =========
Net loss per common share - diluted ($0.46) ($0.07)
========= =========
Weighted average common
shares outstanding 41,166 41,020
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1997 and 1996
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months ended December 31,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($19,134) ($2,931)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 346 318
Minority interest in net income/loss of
consolidated subsidiaries (595) 273
Non-cash compensation 4,801 171
Equity in net loss of unconsolidated subsidiary 893 -
Change in assets and liabilities:
Accounts receivable (431) 1,337
Prepaid and other assets 531 (557)
Inventories (161) 893
Accounts payable 293 (681)
Deferred revenue (250) 1,412
Accrued expenses and other liabilities (11,544) 354
--------- ---------
Net cash (used) provided by operating activities (25,251) 589
--------- ---------
Cash flows from investing activities:
Capital expenditures (433) (438)
Purchase of marketable securities (13,240) (23,124)
Proceeds from maturities and sales of
marketable securities 18,704 4,849
--------- ---------
Net cash (used) provided by investing activities 5,031 (18,713)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common and treasury stock 69 9
Net proceeds from issuance of stock by subsidiaries 52 1
Principal payments of capital lease obligations (221) (167)
Principal payments of notes payable (3) -
------------ ------------
Net cash (used) by financing activities (103) (157)
------------ ------------
Net change in cash and cash equivalents (20,323) (18,281)
Cash and cash equivalents at beginning of period 55,820 145,901
--------- ---------
Cash and cash equivalents at end of period $35,497 $127,620
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
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INTERNEURON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The consolidated financial statements included herein have been
prepared by Interneuron Pharmaceuticals, Inc. without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company. The unaudited consolidated financial statements
included herein should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Form 10-K
for the fiscal year ended September 30, 1997.
The consolidated financial statements include the accounts of
Interneuron Pharmaceuticals, Inc. ("Interneuron" or the "Company") and its
wholly- and majority-owned subsidiaries, Transcell Technologies, Inc.
("Transcell"), Intercardia, Inc. ("Intercardia"), InterNutria, Inc.
("InterNutria") and, for the period ended December 31, 1996, Progenitor, Inc.
("Progenitor") (the "Subsidiaries"). Progenitor, which as of August 1997 is less
than majority but greater than 20% owned, is accounted for using the equity
method of accounting for all periods subsequent to August 1997. All significant
intercompany activity has been eliminated.
B. Significant Accounting Policies
SFAS 128:
As of December 31, 1997, the Company adopted Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 replaced
the previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. All earnings per share amounts for all periods have been
presented to conform to SFAS No. 128 requirements. There was no effect on the
earnings per share disclosures as a result of adoption of SFAS No. 128 due to
the antidilutive effect of the Company's outstanding options, warrants and
convertible securities.
The following table sets forth the computation of basic and diluted earnings per
share:
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<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Numerator for basic and diluted loss available
to common stockholders:
Net loss ($19,134,000) ($2,931,000)
============ ===========
Denominator for basic and diluted:
weighted average shares
outstanding 41,166,000 41,020,000
========== ==========
Net loss per common share - basic ($0.46) ($0.07)
====== ======
Net loss per common share - diluted ($0.46) ($0.07)
====== ======
</TABLE>
During the three month period ended December 31, 1997, securities not
included in the computation of diluted earnings per share for the three month
period ended December 31, 1997 because their exercise price exceeded the average
market price during the period were as follows: (i) options to purchase
4,874,376 shares of Common Stock at prices ranging from $9.50 to $32.00 with
expiration dates ranging up to October 6, 2007; (ii) warrants to purchase
667,500 shares of Common Stock with exercise prices ranging from $10.00 to
$23.25 and with expiration dates ranging up to July 17, 2006; and (iii) call
options sold by the Company for 2,000,000 shares of Common Stock with an
exercise price of $36.00 and expiration dates ranging up to December 31, 1999.
Additionally, during the three month period ended December 31, 1997, securities
not included in the computation of diluted earnings per share for the three
month period ended December 31, 1997, because they would have an anti-dilutive
effect due to the net loss for the period, were as follows: (i) options to
purchase 2,172,573 shares of Common Stock at prices ranging from $1.58 to $8.75
with expiration dates ranging up to May 24, 2005; (ii) warrants to purchase
203,657 shares of Common Stock with exercise prices ranging from $2.75 to $9.00
and with expiration dates ranging up to February 3, 2005; (iii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock; and (iv)
Restricted Stock Awards of 1,328,704 shares of Common Stock granted pursuant to
the Company's 1997 Equity Incentive Plan.
During the three month period ended December 31, 1996, securities not
included in the computation of diluted earnings per share for the three month
period ended December 31, 1996 because their exercise price exceeded the average
market price during the period were options to purchase 8,000 shares of Common
Stock at $32.00 with an expiration date of February 22, 2006. Additionally,
during the three month period ended December 31, 1996, securities equivalents
not included in the computation of diluted earnings per share for the three
month period ended December 31, 1996 , because they would have an anti-dilutive
effect due to the net loss for the period were as follows: (i) options to
purchase 4,891,470 shares of Common Stock at prices ranging from $.83 to $24.25
with expiration dates ranging up to December 18, 2006; (ii) warrants to purchase
877,407 shares of Common Stock with exercise prices ranging from $2.75 to $23.25
and with expiration dates ranging up to July 17, 2006; and (iii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock.
Redux(TM) Revenue:
The Company's revenue recognition policy is to record and recognize as
product revenue royalties from licensed products when the amount of and basis
for such royalties are reported to the Company in accurate and appropriate form
and in accordance with the related license agreements. The Company has not
received any royalties relating to sales of Redux during the three month period
ended September 30, 1997. Due to the market withdrawal of Redux in September
1997 and related events, the Company did not record product revenue relating to
Redux in the three month period ended December 31, 1997.
Recent Accounting Pronouncements:
The Company will adopt SFAS No, 130, "Reporting Comprehensive Income"
("SFAS No. 130"), in the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Management has
not determined the effect of adopting SFAS No. 130.
The Company will adopt SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No 131"), in the fiscal year ending
September 30, 1999. SFAS NO. 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. Management has not determined the effect of adopting SFAS No. 131.
C. Inventories
<TABLE>
<CAPTION>
Inventories consisted of the following: December 31, September 30,
1997 1997
---- ----
<S> <C> <C>
Raw materials $253,000 $221,000
Finished goods 643,000 514,000
-------- --------
$896,000 $735,000
======== ========
</TABLE>
7
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At December 31, 1997 and September 30, 1997, inventories consisted
primarily of PMS Escape(TM). At December 31, 1997 and September 30, 1997, the
Company has fully reserved all Redux-related inventories in connection with the
market withdrawal of Redux.
D. Subsidiaries
On November 5, 1997, Intercardia, Interneuron and Transcell, a
majority-owned subsidiary of Interneuron, entered into a letter of intent
("Letter of Intent") relating to the proposed acquisition by Intercardia of
Transcell and certain related technology rights owned by Interneuron and the
simultaneous contribution by Interneuron to Transcell's capital of Transcell's
indebtedness to Interneuron (the "Proposed Transcell Acquisition"), in exchange
for (i) Intercardia common stock with an aggregate market value as of November
5, 1997 of approximately $15,000,000, of which $3,000,000 is payment to
Interneuron for certain of its technology rights and continued guarantee of
certain Transcell leases, and (ii) the issuance of options to purchase
Intercardia common stock to Transcell employees and consultants, with an
aggregate market value as of November 5, 1997 of approximately $3,000,000 to
$4,000,000. The actual market value of the Intercardia common stock issued in
the transaction may be decreased or increased if Intercardia's common stock is
less than or greater than certain collar limits. In connection with the Proposed
Transcell Acquisition, Intercardia and Interneuron will incur charges to
operations during the period in which the closing occurs currently estimated to
range from approximately $6,000,000 to $8,000,000 (based on Intercardia's
current common stock price of approximately $17.00) and will incur additional
future charges relating to certain stock options to be issued pursuant to the
Proposed Transcell Acquisition. The actual charges could be lower or greater,
depending in part upon Intercardia's stock price at closing. The Company will
allocate a portion of such charges to minority interest. Subject to final due
diligence, execution of definitive agreements and approval by Transcell and
Intercardia stockholders, the Proposed Transcell Acquisition is anticipated to
be consummated in the third quarter of fiscal 1998.
E. Other
As an integral component of a management and employee retention program
designed to motivate, retain and provide incentive to the Company's management
and other employees, the Board of Directors adopted the 1997 Equity Incentive
Plan during the three month period ended December 31, 1997 (the "1997 Plan").
The 1997 Plan provides for the grant of Restricted Stock Awards which entitle
the plan participants to receive up to an aggregate of 1,750,000 shares of the
Company's Common Stock upon satisfaction of specified vesting periods, in
consideration of services rendered to the Company or such other consideration as
the Board of Directors or the Compensation Committee of the Board may determine.
The shares may be sold by the plan participants immediately upon vesting of the
shares. Vesting of the shares was originally scheduled to commence in January
1998; however, pursuant to the 1997 Plan, these dates have been extended.
Restricted Stock Awards to acquire an aggregate of 1,328,704 shares have been
granted to all employees of the Company in consideration of services rendered by
the employee to the Company. The number of shares subject to each employee's
award were based primarily on the employee's base compensation.
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The Company will incur compensation expense from the date of grant over
the vesting period of shares subject to Restricted Stock Awards. The charges
relating to the 1,328,704 shares subject to the outstanding Restricted Stock
Awards are expected to aggregate approximately $15,500,000, of which
approximately $11,000,000 is expected to be incurred in the fiscal year ending
September 30, 1998 and the remainder through the final vesting periods in fiscal
2000. Approximately $4,600,000 of such expense was recognized during the three
month period ended December 31, 1997 and allocated to research and development
and selling, general and administrative expense.
In fiscal 1997, the Company purchased in a private transaction capped
call options in exchange for the issuance by the Company of call options and the
receipt by the Company of $500,000. Call options on 310,000 shares of common
stock which matured on December 31, 1997 expired without exercise.
F. Commitments and Contingencies
In connection with the September 15, 1997 market withdrawal of Redux,
Interneuron has been named, together with other pharmaceutical companies, as a
defendant in approximately 350 legal actions, many of which purport to be class
actions, in federal and state courts involving the use of Redux and other weight
loss drugs. On December 10, 1997, the federal Judicial Panel on Multidistrict
Litigation issued an Order allowing for the transfer or potential transfer of
the federal actions to the Eastern District of Pennsylvania for coordinated or
consolidated pretrial proceedings. The Company has also been named as a
defendant in several lawsuits filed by alleged purchasers of the Company's
common stock, purporting to be class actions, claiming violation of the federal
securities laws. It is not possible for the Company to determine its costs
related to its defense in these or potential future legal actions, monetary or
other damages which may result from such legal actions, or the effect on the
future operations of the Company. The withdrawal of Redux and related events may
materially adversely affect the Company and its financial condition.
G. Subsequent Events
In January 1998, Interneuron sold, subject to repurchase rights, an
aggregate of 10% of its InterNutria common stock to four executive officers of
Interneuron for the par value of the InterNutria shares ($.001 per share) which
the Company believes approximates fair market value of these shares.
On January 21, 1998, the Company's Board of Directors adopted the 1998
Employee Stock Option Plan (the "1998 Plan"). Under the 1998 Plan, options to
purchase up to 1,500,000 shares of the Company's Common Stock may be granted to
employees, directors and consultants except persons who were executives officers
or directors of the Company as of the date of adoption of the 1998 Plan. The
duration of the 1998 Plan is seven years and the term of options granted
thereunder cannot exceed seven years.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
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Statements in this Form 10-Q that are not descriptions of historical
facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth in the
Company's filings under the Securities Act of 1933 and under the Securities
Exchange Act of 1934 under "Risk Factors" and elsewhere including, in
particular, risks relating to withdrawal of Redux and Redux-related litigation;
uncertainties relating to CerAxon; uncertainties relating to regulatory
approvals and clinical trials; risks relating to funding requirements; product
liability; manufacturing and supply and marketing risks; revenue fluctuations;
risks related to contractual obligations; risks relating to product launches and
managing growth; government regulation; patent risks; dependence on third
parties; dependence on key personnel; competition; uncertainties regarding
pharmaceutical prices and reimbursements; and the early stage of products under
development.
The following discussion should be read in conjunction with the
Company's unaudited consolidated financial statements and notes thereto
appearing elsewhere in this report and audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997. Unless the context indicates otherwise,
all references to the Company include Interneuron and its Subsidiaries.
GENERAL
REDUX
On September 15, 1997, the Company announced the withdrawal of the
weight loss medication Redux. On September 12, 1997, the U.S. Food and Drug
Administration ("FDA") provided the Company and Wyeth-Ayerst Laboratories, a
division of American Home Products Corp. ("AHP") and manufacturers and marketers
of phentermine with new, preliminary and summary information, subsequently
updated and revised by the FDA, concerning potential abnormal echocardiogram
findings in patients using these drugs. These patients had been treated with
Pondimin or Redux for up to 24 months, most often in combination with
phentermine. Redux was launched in June 1996.
These observations presented by the FDA reflected a preliminary
analysis of pooled information rather than results of a formal clinical
investigation, and are difficult to evaluate because of the absence of matched
controls and pretreatment baseline data for these patients. Nevertheless, the
Company believes it was prudent, in light of this information, to have withdrawn
Redux from the market.
As reported in the original preliminary information provided by the
FDA, abnormal echocardiogram findings were reported in 92 of 291 subjects
evaluated. As originally reported, 271 of the 291 patients had taken
fenfluramine in combination with phentermine (commonly referred to as the
"fen/phen" combination), 11 had taken Redux alone and nine had taken a
combination of Redux and phentermine. As originally reported, of the 20 who took
Redux alone or in combination with phentermine, six had abnormal
echocardiograms, and two of the six took Redux alone.
The FDA has continued to evaluate the data from the original 291 cases.
In a recent update, the FDA has reported to the Company that, revising the
originally reported data, of the 291 cases, 15
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patients had taken Redux alone and 21 had taken Redux plus phentermine. Of the
15 who had taken Redux alone, two patients had abnormal echocardiograms and of
the 21 who had taken Redux plus phentermine, 13 patients had abnormal
echocardiograms. The FDA-approved prescribing information (the label) for Redux
recommended against using Redux in combination with other appetite suppressants.
The Company believes, based on industry data, that over 90% of prescriptions
written for Redux were for Redux alone (without a combination with another
appetite suppressant).
Additional adverse event reports of abnormal echocardiogram findings in
patients using Redux or fenfluramine alone or in combination with other weight
loss agents continue to be received by Interneuron, Wyeth-Ayerst, and the FDA.
These reports have included symptoms such as shortness of breath, chest pain,
fainting, swelling of the ankles or a new heart murmur.
Additional echocardiogram studies are being supported by Wyeth-Ayerst
to compare patients who had taken either Redux or the "fen/phen" combination
with a matched group of obese patients who did not receive any anti-obesity
drugs. These studies are being conducted and will be analyzed by an independent,
blinded panel of cardiologists to compare the incidence of significant heart
valve abnormalities in treated compared to non-treated groups. In addition,
Interneuron has initiated a separate study which will also be analyzed by an
independent, blinded panel of cardiologists, that is comparing echocardiograms
of patients who took Redux alone to echocardiograms of a control group of
patients who did not take any anti-obesity medication to measure the prevalence
and severity of abnormal echocardiogram observations among the two sets of
patients. Approximately 500 patients will be included in the Company-supported
study, the costs of which are estimated at up to approximately $2,000,000. A
number of other clinical studies relating to the prevalence of abnormal
echocardiogram findings in patients who took Redux (and other anti-obesity
agents) have been and may be conducted by Wyeth-Ayerst and/or others. Results of
these studies are anticipated to become available beginning in the first half of
1998.
On November 13, 1997, the U.S. Department of Health and Human Services
("HHS") issued preliminary recommendations for the medical management of people
who took Pondimin or Redux. HHS recommended, until more complete information is
available, that patients who took either drug should see their physician to
determine whether there are signs or symptoms of heart or lung disease and if
such person has signs or symptoms of heart or lung disease, such as a new heart
murmur or shortness of breath, have an echocardiogram performed; and that
physicians strongly consider performing an echocardiogram before a patient who
has taken either drug has any invasive procedure for which antibiotic
prophylactic treatment is recommended to prevent the development of bacterial
endocarditis.
Interneuron has been named, together with other pharmaceutical
companies, as a defendant in approximately 350 legal actions, many of which
purport to be class actions, in federal and state courts involving the use of
Redux and other weight loss drugs. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings. The Company
has also been named as a defendant in several lawsuits filed by alleged
purchasers of the Company's common stock, purporting to be class actions,
claiming violation of the federal securities laws. See "Legal Proceedings."
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Under certain circumstances, the Company is required to indemnify Les
Laboratoires Servier ("Servier"), Boehringer Ingelheim Pharmaceuticals, Inc.
("Boehringer") (the contract manufacturer of Redux capsules) and AHP, and the
Company is entitled to indemnification by AHP, Servier and Boehringer against
certain claims, damages or liabilities incurred in connection with Redux. The
cross indemnification between the Company and AHP generally relates to the
activities and responsibilities of each company. Although the Company maintains
certain product liability and director and officer liability insurance and
intends to defend these and similar actions vigorously, the Company may be
required to devote significant management time and resources to these actions
and, in the event of successful uninsured or insufficiently insured claims, or
in the event a successful indemnification claim was made against the Company,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, the uncertainties associated with
these legal actions have had, and may continue to have, an adverse effect on the
market price of the Company's common stock, and may impair the Company's ability
to obtain additional financing to satisfy cash requirements, to retain and
attract qualified personnel, to commercialize products on a timely and adequate
basis and to acquire or obtain rights to additional products, any or all of
which may materially adversely affect the Company's business.
A significant portion of Interneuron's revenues had been derived from
Redux sales. Due to the market withdrawal of Redux in September 1997 and
related events, the Company did not record product revenue relating to Redux in
the three month period ended December 31, 1997. The Company does not expect to
realize any future revenues related to Redux. See Note B of Notes to Unaudited
Consolidated Financial Statements.
CERAXON
The Company's principal product under development is CerAxon(TM)
(cytidine-5'-diphosphate choline, sodium or citicoline) and in December 1997 the
Company submitted a New Drug Application ("NDA") to the FDA for CerAxon to treat
ischemic stroke. The NDA has been accepted for filing and was assigned priority
review status. Data in the NDA include the results of two Phase 3 clinical
trials conducted by Interneuron in the U.S., a Japanese Phase 3 clinical trial
conducted by Takeda Chemical Industries, Ltd. and supportive clinical and
post-marketing data from more than 30 countries where citicoline has already
been approved. The Company is unable to predict whether or when the FDA will
grant authorization to market CerAxon in the U.S.
The Company is also conducting several additional stroke clinical
trials which are exploring stroke recovery and reduction in infarct size. The
results of a study of approximately 100 patients are expected in mid 1998 and
the results of two larger studies, which are expected to enroll up to an
aggregate of approximately 800 patients, are expected to be completed in fiscal
1999. The Company may initiate further studies in fiscal 1998 or fiscal 1999 to
explore areas such as post-stroke learning and memory, combination with
thrombolytic therapies and other clinical paradigms such as treatment or
prevention of perioperative strokes and treatment of head trauma.
As of December 31, 1997, the remaining expenditures for CerAxon of all
currently planned clinical trials and related studies for CerAxon are estimated,
based upon current trial protocols, to aggregate approximately $25,000,000. The
Company is unable to predict the costs of any related or
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additional clinical studies which will depend upon the results of the on-going
trials and upon FDA requirements.
The Company is currently developing and initiating the
commercialization strategy for CerAxon, subject to required regulatory
approvals. The Company is currently planning to conduct sole direct marketing of
the product but may consider a combined marketing strategy which includes
contracting with certain companies for the copromotion of the product and/or
establishing a contract sales force for certain market segments. The Company
expects that it will be required to retain a sales force of approximately 200
representatives, to hire additional headquarters-based medical, marketing and
administrative support personnel and to establish distribution arrangements. In
the event the Company markets CerAxon directly, significant funds would be
required for manufacturing, distribution, marketing and selling efforts.
Depending upon the timing of FDA approval and magnitude of the launch, the
Company may be required to obtain additional funds for these efforts. The
Company has begun to incur expenses relating to marketing and distribution and
expects to increase commercialization-related expenditures over the next several
fiscal quarters.
The Company is dependent upon third party suppliers of citicoline bulk
compound, finished product and packaging for manufacturing in accordance with
the Company's requirements and U.S. Good Manufacturing Practices ("GMP")
regulations as well as on third party arrangements for the distribution of
CerAxon. Supplies of citicoline finished product used for clinical purposes have
been produced on a contract basis by a third party manufacturer. The Company has
not finalized an agreement with such manufacturer for supply of commercial
quantities of finished product and there can be no assurance such agreement can
be obtained in terms favorable to the Company or at all, which could adversely
affect the Company's ability to commercialize CerAxon on a timely and
cost-effective basis. The Company is subject to an agreement with Grupo Ferrer
("Ferrer"), a Spanish pharmaceutical company which licensed certain patent
rights relating to citicoline to the Company, requiring the Company to purchase
citicoline bulk compound for commercial purposes at fixed prices, subject to
certain conditions. To date, Ferrer's manufacturing facility has not been
inspected by the FDA for a U.S. marketed product, but is expected to undergo
such an inspection in conjunction with the FDA's review of the CerAxon NDA
submitted by the Company. Ferrer has limited experience in manufacturing under
GMP. There can be no assurance the Company can or will establish on a timely
basis, or maintain, manufacturing capabilities of bulk compound and finished
product required to obtain regulatory approval of CerAxon, or that any
facilities used to produce citicoline will have complied, or will be able to
maintain compliance, with GMP, or that such suppliers will be able to meet
manufacturing requirements on a timely basis or at all.
The Company licensed from Ferrer certain patent and know how rights in
the United States and Canada relating to the use of citicoline in exchange for a
royalty equal to 6% of net sales of citicoline.
LIQUIDITY AND CAPITAL RESOURCES
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
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At December 31, 1997, the Company had consolidated cash, cash
equivalents and marketable securities aggregating $114,217,000 (of which
approximately $28,000,000 is held by Intercardia and is not available to
Interneuron) compared to $140,052,000 at September 30, 1997. This decrease is
primarily due to approximately $25,000,000 used to fund operations, including
$10,000,000 paid by CPEC, Inc. ("CPEC"), a subsidiary of Intercardia, to Astra
Merck, Inc. ("Astra Merck"). A portion of this payment to Astra Merck was funded
by Interneuron, which owns directly approximately 20% of CPEC.
PRODUCT DEVELOPMENT
The Company is expending substantial amounts for the development and
regulatory approval of CerAxon and, in December 1997 submitted an NDA to the FDA
relating to CerAxon. Assuming FDA approval, the Company also expects to devote
significant expenditures to marketing activities relating to CerAxon. See
"CerAxon" above.
The Company is also incurring substantial costs to develop pagoclone
for the treatment of panic disorders and anxiety for which a Phase 2/3 trial
commenced in November 1996. The Company designates a trial as Phase 2/3 if it is
a well-controlled trial which the Company may utilize, depending upon results,
as either a pivotal or supporting trial in an NDA submission. The Company
currently estimates the total costs of certain clinical studies, license fees to
Rhone-Poulenc Rorer Pharmaceuticals, Inc., and NDA preparation for pagoclone to
be approximately $40,000,000, which will be incurred over approximately the next
three years. The Company is unable to predict with certainty the costs of any
related or additional studies which may be required by the FDA, whether any such
clinical trials will be successful or result in FDA approval of the product.
Further, in the event the Company markets pagoclone directly, significant
additional funds would be required for manufacturing, distribution and selling
efforts.
In December 1996, the Company entered into an agreement with Algos
Pharmaceutical Corporation to collaborate in the development and
commercialization of LidodexNS, which combines two drugs that are currently
marketed for other indications. This combination product is in preclinical
development for the acute intra-nasal treatment of migraine headaches and
toxicological studies are ongoing. The development of this and other products,
including those which may be acquired by the Company in the future will require
substantial additional funds.
During the quarter ended December 31, 1997, the Company obtained
an exclusive option to acquire, on specified terms, a private company engaged in
the development of a potential product which is in a Phase 1 clinical trial and
which may have application for diabetes and related disorders. This option which
expires in mid 1998, permits the Company to receive and evaluate the results of
this Phase 1 clinical trial. The Company is unable to predict whether or not it
will exercise this option until it receives and evaluates this data. The Company
recorded the non-refundable cash payment of $500,000 in the quarter ended
December 31, 1997 as a purchase of in-process research and development because
the private company is a development stage enterprise with unproven technology.
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<PAGE> 15
There can be no assurance that results of any on-going current or
future preclinical or clinical trial will be successful, that additional trials
will not be required, that any drug under development will receive FDA approval
in a timely manner or at all, or that such drug could be successfully
manufactured in accordance with good manufacturing practice regulations or
marketed in a timely manner or at all, any of which could materially adversely
affect the Company.
ANALYSIS OF CASH FLOWS
Cash used by operating activities during the first quarter of fiscal
1998 of $25,251,000 consisted primarily of a net loss of $19,134,000 and
$10,000,000 paid by CPEC to Astra Merck for CPEC's contractual liability
pursuant to the Astra Merck Collaboration recorded as of September 30, 1997 and
offset by noncash compensation charges of $4,801,000 consisting primarily of
compensation expense relating to grants of Restricted Stock Awards under the
Company's 1997 Equity Incentive Plan.
Accrued expenses decreased $11,537,000 to $27,616,000 at December 31,
1997 from $39,153,000 at September 30, 1997 primarily due to CPEC's $10,000,000
payment to Astra Merck in December 1997. In addition, included in accrued
expenses at December 31, 1997 and September 30, 1997, were liabilities relating
to clinical trials and sponsored research as well as the Redux withdrawal. These
amounts are reduced when paid.
Cash provided by investing activities of $5,031,000 during the first
quarter of fiscal 1998 consisted primarily of net proceeds from maturities and
sales of marketable securities of $5,464,000.
OTHER
The Company's business strategy includes evaluation of various
technologies, product or company acquisitions, licensing and/or financing
opportunities (including private placements and initial and follow-on equity
offerings) and the Company and certain of its subsidiaries are currently engaged
in discussions relating to such opportunities. Any such initiatives may involve
the issuance of securities of Interneuron or its subsidiaries and/or financial
commitments and would result in increased expenses, on a consolidated basis.
While the Company believes it has sufficient cash for currently planned
expenditures in fiscal 1998, it may seek additional funds through other equity
and/or debt financings and corporate collaborations to provide working capital.
Further, the Company may require additional funds for the manufacturing and
marketing of CerAxon and, if such funds are not available, the Company may be
required to delay product launch, reduce launch and marketing efforts, or enter
into a corporate collaboration, any of which may result in the Company
generating less revenue and eventually, reduced profitability from CerAxon than
if the Company were able to launch the product on a more timely basis and
conduct sole marketing. As a result of the uncertainties and costs associated
with the Redux-related litigation and other factors generally affecting the
ability to raise additional funds, there can be no assurance that the Company
will be able to obtain additional financing to satisfy cash requirements or that
if available, any financing will be on terms favorable to the Company. Also, see
"CerAxon".
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<PAGE> 16
In addition, certain subsidiaries are exploring the possibility of
various financings (including issuances of securities of the subsidiaries, in
public offerings or private placements), collaborations or business
combinations. If such efforts are not successful, certain activities at these
subsidiaries may be reduced.
Although Interneuron may acquire additional equity in subsidiaries
through participation in financings, purchases from third parties, including
open market purchases and conversion of intercompany debt, equity financings by
a subsidiary will likely reduce Interneuron's percentage ownership of that
subsidiary and funds held by the subsidiaries will not be available to
Interneuron. The Company's goal is for its subsidiaries to establish independent
operations and financing through corporate alliances, third-party financings,
mergers or other business combinations, with Interneuron generally retaining an
ongoing equity interest. The nature of any such transaction is expected to vary
depending on the business and capital needs of each subsidiary and the state of
development of their respective technologies or products.
SUBSIDIARIES
Interneuron is currently funding the operations of InterNutria and
Transcell. In the event the Proposed Transcell Acquisition (see "Transcell"
below) is completed, the costs of Transcell's operations will be assumed by
Intercardia. Expenses of the Subsidiaries constitute a significant part of the
Company's overall expenses. The Subsidiaries' portion of consolidated research
and development and selling, general and administrative expenses for the three
month periods ended December 31, 1997 and 1996 was approximately 43% and 39%,
respectively, not including Progenitor for the 1997 three month period.
Intercardia
Pursuant to the Astra Merck Collaboration, CPEC paid Astra Merck
$10,000,000 in December 1997 and CPEC or Intercardia has agreed to pay Astra
Merck up to $11,000,000 for one-third of product launch costs for bucindolol. In
the event Intercardia or CPEC elects not to make any required product launch
payments to Astra Merck, the royalties payable by Astra Merck to Intercardia
would be substantially reduced. There can be no assurance of the success of the
Beta-blocker Evaluation of Survival Trial (the "BEST Study") or that BEXTRA(TM)
(bucindolol) will be successfully commercialized. A substantial portion of the
BEXTRA development costs are being assumed or paid by the National Institutes
of Health, the Department of Veterans Affairs, Astra Merck and BASF Pharma/Knoll
AG ("Knoll").
Pursuant to the Knoll Collaboration, Intercardia is responsible for
approximately 40% of the development and marketing costs of bucindolol in the
Territory, which includes all countries other than the United States and Japan,
subject to certain maximum dollar limitations. Intercardia's portion of
development and clinical trial costs for the Territory is estimated to be up to
$10,000,000 over the next several years. Intercardia is also responsible for
approximately 40% of the once-a-day
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development costs which relate to development solely for the Territory and
approximately 67% of once-a-day development costs which have a worldwide
benefit.
In May 1997, the FDA approved the use in the United States of Coreg(TM)
(carvedilol), a drug being marketed by SmithKline Beecham, for the treatment of
congestive heart failure. SmithKline Beecham is currently marketing Coreg in the
United States and a number of other countries. The Company is unable to predict
the impact of this product on BEXTRA, if BEXTRA is approved by the FDA.
InterNutria
InterNutria commenced a national launch of PMS Escape in September
1997, resulting in product revenue of approximately $1,000,000 and selling and
marketing costs of approximately $4,500,000 in the three month period ended
December 31, 1997. Additional selling and marketing costs associated with this
launch are estimated to be approximately $8,000,000 through mid fiscal 1998 and
are being funded by Interneuron. InterNutria currently has an approximately 43
person sales force, retained on a contract basis, targeting obstetricians and
gynecologists, as well as retail accounts. In addition, Interneuron's sales
force, numbering approximately 25, is currently under contract to InterNutria in
connection with the national marketing of PMS Escape. The Company anticipates
that, at least through fiscal 1998, it will not generate sufficient revenues
from this product to offset related costs. Pending the Company's evaluation of
the ongoing initial stage of the national launch, the Company may modify the
scope of the marketing and distribution of the product. In the event the scope
of marketing and distribution is significantly reduced, the Company may incur
certain related costs. See "Results of Operations."
Transcell
On November 5, 1997, Intercardia, Interneuron and Transcell, a
majority-owned subsidiary of Interneuron, entered into a letter of intent
("Letter of Intent") relating to the proposed acquisition by Intercardia of
Transcell and certain related technology rights owned by Interneuron as well as
Interneuron's contribution to Transcell's capital of Transcell's indebtedness to
Interneuron (the "Proposed Transcell Acquisition"), in exchange for (i)
Intercardia common stock with an aggregate market value as of November 5, 1997
of approximately $15,000,000, of which $3,000,000 is payment to Interneuron for
its technology rights and continued guarantee of certain Transcell leases, and
(ii) the issuance of options to purchase Intercardia common stock to Transcell
employees and consultants, with an aggregate market value as of November 5, 1997
of approximately $3,000,000 to $4,000,000. The actual market value of the
Intercardia common stock issued in the transaction may be decreased or increased
if Intercardia's common stock is less than or greater than certain collar
limits. In connection with the Proposed Transcell Acquisition, Intercardia and
Interneuron will incur charges to operations during the period in which the
closing occurs currently estimated to range from approximately $6,000,000 to
$8,000,000 (based on Intercardia's current common stock price of approximately
$17.00) and will incur additional future charges relating to certain stock
options to be issued pursuant to the Proposed Transcell Acquisition. The actual
charges could be lower or greater depending in part upon Intercardia's stock
price at closing. The Company will allocate a portion of such charges to
minority interest. Subject to final due diligence, execution of definitive
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agreements and approval by Transcell and Intercardia stockholders, the Proposed
Transcell Acquisition is anticipated to be consummated in the third quarter of
fiscal 1998.
Progenitor
In August 1997, Progenitor completed an initial public offering and
simultaneous acquisition of Mercator Genetics, Inc. resulting in Interneuron's
ownership in Progenitor's outstanding capital stock decreasing to approximately
37%. Consequently thereafter, the Company ceased consolidating the financial
statements of Progenitor. The Company's consolidated financial statements for
the three month period ended December 31, 1997 include Progenitor using the
equity method of accounting, whereas, the Company's Consolidated Statements of
Operations and Cash Flows for the three month period ended December 31, 1996
reflect Progenitor on a consolidated basis.
Recent Accounting Pronouncements:
The Company will adopt SFAS No, 130, "Reporting Comprehensive Income"
("SFAS No. 130"), in the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Management has
not determined the effect of adopting SFAS No. 130.
The Company will adopt SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No 131"), in the fiscal year ending
September 30, 1999. SFAS NO. 131 specifies revised guidelines for determining an
entity's operating segments an the type and level of financial information to be
disclosed. Management has not determined the effect of adopting SFAS No. 131.
RESULTS OF OPERATIONS
Total revenues decreased substantially to $1,641,000 in the three month
period ended December 31, 1997 from $17,692,000 in the three month period ended
December 31, 1996 primarily reflecting the $12,724,000 decrease in product
revenue to $987,000 in the three month period ended December 31, 1997 from
$13,711,000 in the three month period ended December 31, 1996. The Company did
not recognize any Redux-related product revenue in the three month period ended
December 31, 1997 (see "Redux" above) compared to approximately $13,600,000 of
Redux-related product revenue recognized in the three month period ended
December 31, 1996. Product revenue of $987,000 in the three month period ended
December 31, 1997 consists primarily of sales of PMS Escape by InterNutria.
Contract revenue decreased $3,327,000, or 84%, to $654,000 in the three
month period ended December 31, 1997 from $3,981,000 in the three month period
ended December 31, 1996. The three month period ended December 31, 1996 included
approximately $2,100,000 of revenue recognized by Intercardia pursuant to a
collaboration agreement with Knoll, revenue recognized by the Company pursuant
to its Copromotion Agreement with Wyeth-Ayerst and contract revenue recognized
by Progenitor, whose results were consolidated with the Company's during the
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1996 period. Contract revenue in the three month period ended December 31, 1997
consists primarily of revenue recognized by the Company from research support
pursuant to the Merck Agreement and by Intercardia pursuant to the Astra Merck
Agreement.
Cost of product revenue decreased $9,512,000 to $392,000 in the three
month period ended December 31, 1997 from $9,904,000 in the three month period
ended December 31, 1996 due to the absence of any Redux-related product revenue.
Cost of sales in the three month period ended December 31, 1997 relates to sales
of PMS Escape.
Research and development expenses increased $1,031,000, or 14%, to
$8,549,000 in the three month period ended December 31, 1997 from $7,518,000 in
the three month period ended December 31, 1996. The increase is primarily due to
an allocation to research and development of the noncash compensation expense
associated with the Company's 1997 Equity Incentive Plan, Intercardia's
increased spending related to its expanding research and development programs,
and Transcell's new facility, offset in part by decreases resulting from the
absence of expense from Progenitor, whose results of operations were not
consolidated with the Company's in the fiscal 1998 three month period a
reduction of Redux-related development programs and a reduction of expenses
related to CerAxon for which the NDA was filed in December 1997.
Selling, general and administrative expenses increased $7,324,000, or
133%, to $12,841,000 in the three month period ended December 31, 1997 from
$5,517,000 in the three month period ended December 31, 1996. This increase
primarily reflects approximately $4,500,000 expended for selling and marketing
activities relating to the national launch of PMS Escape commenced in September
1997, and an allocation to selling, general and administrative expenses of the
noncash compensation expense relating to the Company's 1997 Equity Incentive
Plan.
Investment income, net of interest expense decreased $784,000, or 30%,
to $1,805,000 in the three month period ended December 31, 1997 from $2,589,000
in the three month period ended December 31, 1996 primarily as a result of a
decrease in cash available for investment and used in the operations of the
Company.
Equity in net loss of unconsolidated subsidiary of $893,000 represents
the Company's share of Progenitor's net loss for the three month period ended
December 31, 1997. The results of Progenitor's operations were reflected in the
Company's financial statements on a consolidated basis until Progenitor's IPO in
August 1997 after which Progenitor was included in the Company's financial
statements using the equity method of accounting. The Company's Consolidated
Statement of Operations for the three month period ended December 31, 1996
consolidated the results of Progenitor's operations which resulted in a net loss
of approximately $1,000,000.
Net loss increased $16,203,000 to $19,134,000 in the three month
period ended December 31, 1997 from $2,931,000 in the three month period ended
December 31, 1996 primarily due to expenses in the three month period ended
December 31, 1997 relating to the Company's 1997 Equity Incentive Plan and the
national launch of PMS Escape, lack of revenues from Redux and reduced contract
revenue.
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The Company expects to recognize approximately $11,000,000 of noncash
expense in fiscal 1998 as a result of grants of restricted stock awards under
the Company's 1997 Equity Incentive Plan, of which approximately $4,600,000 was
recognized in the first quarter of fiscal 1998. In addition, the Company will
incur charges to operations in connection with the proposed acquisition by
Intercardia of Transcell, currently estimated to range from approximately
$6,000,000 to $8,000,000 in the period in which the closing occurs, and future
charges relating to certain option grants in connection with the acquisition.
The Company will allocate a portion of such charges to minority interest.
The Company from time to time explores various technology, product or
company acquisitions and/or business combinations or financing opportunities and
is currently engaged in discussions relating to such opportunities. Any such
initiatives may involve the issuance of shares of Interneuron's Common Stock or
other securities and/or cash and financial commitments for licensing fees and/or
to fund product development, either of which may adversely affect the Company's
consolidated financial condition or results of operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named, together with other pharmaceutical
companies, as a defendant in approximately 350 legal actions, many of which
purport to be class actions, in federal and state courts relating to the use of
Redux. The actions generally have been brought by individuals in their own right
or on behalf of putative classes of persons who claim to have suffered injury or
who claim that they may suffer injury in the future due to use of one or more
weight loss drugs including Pondimin (fenfluramine), phentermine and Redux.
Plaintiff's allegations of liability are based on various theories of recovery,
including, but not limited to, product liability, strict liability, negligence,
various breaches of warranty, conspiracy, fraud, misrepresentation and deceit.
These lawsuits typically allege that the short or long-term use of Pondimin
and/or Redux, independently or in combination (including the combination of
Pondimin and phentermine popularly known as "fen/phen"), causes, among other
things, primary pulmonary hypertension, valvular heart disease and/or
neurological dysfunction. In addition, some lawsuits allege emotional distress
caused by the purported increased risk of injury in the future. Plaintiffs
typically seek relief in the form of monetary damages (including economic
losses, medical care and monitoring expenses, loss of earnings and earnings
capacity, other compensatory damages and punitive damages), generally in
unspecified amounts, on behalf of the individual or the class. In addition, some
actions seeking class certification ask for certain types of purportedly
equitable relief, including, but not limited to, declaratory judgments and the
establishment of a research program or medical surveillance fund. On December
10, 1997, the federal Judicial Panel on Multidistrict Litigation issued an Order
allowing for the transfer or potential transfer of the federal actions to the
Eastern District of Pennsylvania for coordinated or consolidated pretrial
proceedings.
The Company and certain directors and/or officers of the Company have
also been named as defendants in several lawsuits filed by alleged purchasers of
the Company's Common Stock, purporting to be class actions, claiming among other
things that the Company publicly disseminated materially false and misleading
statements concerning the prospects and safety of Redux, resulting in the
artificial inflation of the Company's Common Stock price during various periods,
the earliest commencing December 16, 1996 through September 17, 1997, in
violation of the federal securities laws.
Under certain circumstances, the Company is required to indemnify
Servier, Boehringer and AHP, and the Company is entitled to indemnification by
AHP, against certain claims, damages or liabilities incurred in connection with
Redux. The cross indemnification between the Company and AHP generally relates
to the activities and responsibilities of each company. Although the Company
maintains certain product liability and director and officer liability
insurance and intends to defend these and similar actions vigorously, the
Company may be required to devote significant management time and resources to
these actions and, in the event of successful uninsured or insufficiently
insured claims, or in the event a successful indemnification claim was made
against the Company, the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, the
uncertainties associated with these legal actions have had, and may continue to
have, an
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adverse effect on the market price of the Company's common stock, and may impair
the Company's ability to obtain additional financing to satisfy cash
requirements, to retain and attract qualified personnel, to commercialize
products on a timely and adequate basis and to acquire or obtain rights to
additional products, any or all of which may materially adversely affect the
Company's business.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.94 1998 Employee Stock Option Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
During the three month period ended December 31, 1997, the Company filed
reports on Form 8-K dated October 15, 1997, and November 14, 1997 reporting
information under Item 5.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNEURON PHARMACEUTICALS, INC.
Date: February 12, 1998 By: /s/ Glenn L. Cooper
--------------------------------------
Glenn L. Cooper, M.D., President
and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 1998 By: /s/ Thomas F. Farb
--------------------------------------
Thomas F. Farb,
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: February 12, 1998 By: /s/ Dale Ritter
--------------------------------------
Dale Ritter
Vice President, Corporate Controller
(Principal Accounting Officer)
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EXHIBIT 10.94
INTERNEURON PHARMACEUTICALS, INC.
1998 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for INTERNEURON
PHARMACEUTICALS, INC. (the "Company") and its stockholders the benefits arising
from capital stock ownership by employees, officers and directors of, and
consultants to, the Company who are expected to contribute to the Company's
future growth and success. Except where the context otherwise requires, the term
"Company" shall include all present and future subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended or replaced from time to time (the "Code"). Those provisions of the Plan
which make express reference to Section 422 shall apply only to Incentive Stock
Options (as that term is defined in the Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) TYPES OF OPTIONS. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a committee
designated by the Board of Directors, the "Committee") and may be either
incentive stock options ("Incentive Stock Options") meeting the requirements of
Section 422 of the Code or non-statutory options which are not intended to meet
the requirements of Section 422 of the Code.
(b) ADMINISTRATION. The Plan will be administered by the Board of Directors
or the Committee, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The delegation of powers
to the Committee shall be consistent with applicable laws or regulations
(including, without limitation, applicable state law and Rule 16b-3 ("Rule
16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), or any successor rule). The Board of Directors or the Committee may in
its sole discretion grant options to purchase shares of the Company's Common
Stock, $.001 par value per share ("Common Stock") and issue shares upon exercise
of such options as provided in the Plan. The Board of Directors or the Committee
shall have authority, subject to the express provisions of the Plan, to construe
the respective option agreements and the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the terms and
provisions of the respective option agreements, which need not be identical, and
to make all other determinations in the judgment of the Board of Directors or
the Committee necessary or desirable for the administration of the Plan. The
Board of Directors or the Committee may correct any defect or supply any
omission or reconcile any inconsistency in the Plan or in any option agreement
in the manner and to the extent it shall deem expedient to carry the Plan into
effect and it shall be the sole and final judge of such expediency. No director
or person acting pursuant to authority delegated by the Board of Directors or
the Committee shall be liable for any action or determination under the Plan
made in good faith. Subject to adjustment as provided in Section 15 below, the
aggregate number of shares of Common Stock that may be subject to Options
granted to any person in a calendar year shall not exceed 25% of the maximum
number of shares which may be issued and sold under the Plan, as set forth in
Section
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4 hereof, as such section may be amended from time to time.
(c) APPLICABILITY OF RULE 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply to the Company only at such time as
the Company's Common Stock is registered under the Exchange Act, subject to the
last sentence of Section 3(b), and then only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. ELIGIBILITY.
(a) Options may be granted to persons who are, at the time of grant,
employees, officers or directors of, and consultants to, the Company
("Participants") PROVIDED, that Incentive Stock Options may only be granted to
individuals who are employees of the Company (within the meaning of Section
3401(c) of the Code) and PROVIDED FURTHER, that no person who is, as of the date
of adoption of the Plan by the Board of Directors, an executive officer or
director of Interneuron Pharmaceuticals, Inc. shall be eligible to receive an
option grant under the Plan. A person who has been granted an option may, if he
or she is otherwise eligible, be granted additional options if the Board of
Directors or the Committee shall so determine.
(b) GRANT OF OPTIONS TO REPORTING PERSONS. The selection of a director or
an officer who is a Reporting Person (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either by the Board of Directors by
the Committee.
4. STOCK SUBJECT TO PLAN.
The stock subject to options granted under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. Subject to adjustment as
provided in Section 15 below, the maximum number of shares of Common Stock of
the Company which may be issued and sold under the Plan is one million five
hundred thousand (1,500,000) shares. If an option granted under the Plan shall
expire, terminate or is cancelled for any reason without having been exercised
in full, the unpurchased shares subject to such option shall again be available
for subsequent option grants under the Plan.
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient of
an option shall, if requested by the Company, execute an option agreement in
such form not inconsistent with the Plan as may be approved by the Board of
Directors or the Committee. Such option agreements may differ among recipients.
6. PURCHASE PRICE.
(a) GENERAL. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors or the
Committee at the time of grant of such option; PROVIDED, HOWEVER, that in the
case of an Incentive Stock Option, the exercise price shall not be less than
100% of the Fair Market Value (as hereinafter defined) of such stock, at the
time of grant of such option, or less than 110% of such Fair Market Value in
2
<PAGE> 3
the case of options described in Section 11(b). "Fair Market Value" of a share
of Common Stock of the Company as of a specified date for the purposes of the
Plan shall mean the closing price of a share of the Common Stock on the
principal securities exchange (including the Nasdaq National Market) on which
such shares are traded on the day immediately preceding the date as of which
Fair Market Value is being determined, or on the next preceding date on which
such shares are traded if no shares were traded on such immediately preceding
day, or if the shares are not traded on a securities exchange, Fair Market Value
shall be deemed to be the average of the high bid and low asked prices of the
shares in the over-the-counter market on the day immediately preceding the date
as of which Fair Market Value is being determined or on the next preceding date
on which such high bid and low asked prices were recorded. If the shares are not
publicly traded, Fair Market Value of a share of Common Stock (including, in the
case of any repurchase of shares, any distributions with respect thereto which
would be repurchased with the shares) shall be determined in good faith by the
Board of Directors or the Committee. In no case shall Fair Market Value be
determined with regard to restrictions other than restrictions which, by their
terms, will never lapse.
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or by any other means which the Board of Directors or the Committee determines
are consistent with the purpose of the Plan and with applicable laws and
regulations (including, without limitation, the provisions of Rule 16b-3 and
Regulation T promulgated by the Federal Reserve Board).
7. OPTION PERIOD.
Subject to earlier termination as provided in the Plan, each option and all
rights thereunder shall expire on such date as determined by the Board of
Directors or the Committee and set forth in the applicable option agreement,
PROVIDED, that such date shall not be later than seven (7) years after the date
on which the option is granted.
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the option agreement evidencing such option, subject to the provisions
of the Plan. Subject to the requirements in the immediately preceding sentence,
if an option is not at the time of grant immediately exercisable, the Board of
Directors or the Committee may (i) in the agreement evidencing such option,
provide for the acceleration of the exercise date or dates of the subject option
upon the occurrence of specified events, and/or (ii) at any time prior to the
complete termination of an option, accelerate the exercise date or dates of such
option.
9. TRANSFERABILITY OF OPTIONS.
No incentive stock option granted under this Plan shall be assignable or
otherwise transferable by the optionee except by will or by the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
in the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder. The Board of Directors or the Committee may, in its
discretion, authorize all or a portion of any non-statutory options to be
granted to an optionee to be on terms which permit transfer by such optionee to
(i) the spouse, children or grandchildren of the optionee ("Immediate Family
Members"), (ii) a trust or trusts for
3
<PAGE> 4
the exclusive benefit of such Immediate Family Members, or (iii) a partnership
in which such Immediate Family Members are the only partners, provided that (w)
the options must be held by the optionee for a period of at least one month
prior to transfer, (x) there may be no consideration for any such transfer, (y)
the stock option agreement pursuant to which such options are granted must be
approved by the Board of Directors or the Committee, and must expressly provide
for transferability in a manner consistent with this Section, and (z) subsequent
transfers of transferred options shall be prohibited except by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order
as defined in the Code or Title I of the Employee Retirement Income Security
Act, or the rules thereunder. Following transfer, any such options shall
continue to be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that for purposes of the Plan the term
"optionee" shall be deemed to refer to the transferee. The events of termination
of employment of Section 10 hereof shall continue to be applied with respect to
the original optionee. An option may be exercised during the lifetime of the
optionee only by the original optionee. In the event an optionee dies during his
employment by the Company or any of its subsidiaries, or during the three-month
period following the date of termination of such employment, his option shall
thereafter be exercisable, during the period specified in the option agreement,
by his executors or administrators to the full extent to which such option was
exercisable by the optionee at the time of his death during the periods set
forth in Section 10 or 11(d).
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11(d) with respect to Incentive Stock Options
and except as otherwise determined by the Committee at the date of grant of an
Option, and subject to the provisions of the Plan, an optionee may exercise an
option at any time within six (6) months following the termination of the
optionee's employment or other relationship with the Company or within one (1)
year if such termination was due to the death or disability of the optionee but,
except in the case of the optionee's death, in no event later than the
expiration date of the Option. If the termination of the optionee's employment
is for cause or is otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the option shall
expire immediately upon such termination, except as otherwise determined by the
Board of Directors. The Board of Directors shall have the power to determine
what constitutes a termination for cause or a breach of an employment or
confidentiality or non-disclosure agreement, whether an optionee has been
terminated for cause or has breached such an agreement, and the date upon which
such termination for cause or breach occurs. Any such determinations shall be
final and conclusive and binding upon the optionee.
11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the Plan
shall, at the time of grant, be specifically designated as such in the option
agreement covering such Incentive Stock Options.
(b) 10% STOCKHOLDER. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of
4
<PAGE> 5
the Code), then the following special provisions shall be applicable to the
Incentive Stock Option granted to such individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the Fair Market Value
of one share of Common Stock at the time of grant; and
(ii) The option exercise period shall not exceed five years from the
date of grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate Fair Market Value, as of the
respective date or dates of grant, of more than $100,000.
(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), PROVIDED, that the agreement with respect to such option
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory
option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the
period of one year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provisions thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within
the period of one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
5
<PAGE> 6
12. ADDITIONAL PROVISIONS.
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors or the Committee
may, in its sole discretion, include additional provisions in option agreements
covering options granted under the Plan, including without limitation
restrictions on transfer, repurchase rights, rights of first refusal,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors or the Committee;
PROVIDED, that such additional provisions shall not be inconsistent with any
other term or condition of the Plan and such additional provisions shall not
cause any Incentive Stock Option granted under the Plan to fail to qualify as an
Incentive Stock Option within the meaning of Section 422 of the Code.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors or the Committee
may, in its sole discretion, (i) accelerate the date or dates on which all or
any particular option or options granted under the Plan may be exercised or (ii)
extend the dates during which all, or any particular, option or options granted
under the Plan may be exercised; PROVIDED, HOWEVER, that no such extension shall
be permitted if it would cause the Plan to fail to comply with Section 422 of
the Code or with Rule 16b-3 (if applicable).
13. GENERAL RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. The Company may require any optionee, as a
condition of exercising such option, to give written assurances in substance and
form satisfactory to the Company to the effect that such person is acquiring the
Common Stock subject to the option or award, for his or her own account for
investment and not with any present intention of selling or otherwise
distributing the same, and to such other effects as the Company deems necessary
or appropriate in order to comply with federal and applicable state securities
laws, or with covenants or representations made by the Company in connection
with any public offering of its Common Stock, including any "lock-up" or other
restriction on transferability.
(b) COMPLIANCE WITH SECURITIES LAW. Each Option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
or award upon any securities exchange or automated quotation system or under any
state or federal law, or the consent or approval of any governmental or
regulatory body, or that the disclosure of non-public information or the
satisfaction of any other condition is necessary as a condition of, or in
connection with the issuance of shares thereunder, such option may not be
exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification, or to satisfy such condition.
14. RIGHTS AS A STOCKHOLDER.
The holder of an option shall have no rights as a stockholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
6
<PAGE> 7
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS, REORGANIZATIONS AND RELATED
TRANSACTIONS.
(a) RECAPITALIZATIONS AND RELATED TRANSACTIONS. If, through or as a result
of any recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar transaction, (i) the outstanding shares of Common
Stock are increased, decreased or exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other non-cash assets are distributed with respect to such
shares of Common Stock or other securities, an appropriate and proportionate
adjustment shall be made in (x) the maximum number and kind of shares reserved
for issuance under or otherwise referred to in the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment (i) would cause the Plan
to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would
be considered as the adoption of a new plan requiring stockholder approval.
(b) REORGANIZATION, MERGER AND RELATED TRANSACTIONS. All outstanding
Options under the Plan shall become fully exercisable for a period of sixty (60)
days following the occurrence of any Trigger Event, whether or not such Options
are then exercisable under the provisions of the applicable agreements relating
thereto. For purposes of the Plan, a "Trigger Event" is any one of the following
events:
(i) the date on which shares of Common Stock are first purchased
pursuant to a tender offer or exchange offer (other than such an offer by
the Company, any Subsidiary, any employee benefit plan of the Company or of
any Subsidiary or any entity holding shares or other securities of the
Company for or pursuant to the terms of such plan), whether or not such
offer is approved or opposed by the Company and regardless of the number of
shares purchased pursuant to such offer;
(ii) the date the Company acquires knowledge that any person or group
deemed a person under Section 13(d)-3 of the Exchange Act (other than the
Company, any Subsidiary, any employee benefit plan of the Company or of any
Subsidiary or any entity holding shares of Common Stock or other securities
of the Company for or pursuant to the terms of any such plan or any
individual or entity or group or affiliate thereof which acquired its
beneficial ownership interest prior to the date the Plan was adopted by the
Board), in a transaction or series of transactions, has become the
beneficial owner, directly or indirectly (with beneficial ownership
determined as provided in Rule 13d-3, or any successor rule, under the
Exchange Act), of securities of the Company entitling the person or group
to 30% or more of all votes (without consideration of the rights of any
class or stock to elect directors by a separate class vote) to which all
shareholders of the Company would be entitled in the election of the Board
of Directors were an election held on such date;
(iii) the date, during any period of two consecutive years, when
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease for any reason to constitute at least a
majority thereof, unless the election, or the nomination for election by
the stockholders of the Company, of each new
7
<PAGE> 8
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of such period;
and
(iv) the date of approval by the stockholders of the Company of an
agreement (a "reorganization agreement") providing for:
(A) The merger or consolidation of the Company with another
corporation where the stockholders of the Company, immediately prior
to the merger or consolidation, do not beneficially own, immediately
after the merger or consolidation, shares of the corporation issuing
cash or securities in the merger or consolidation entitling such
stockholders to 65% or more of all votes (without consideration of the
rights of any class of stock to elect directors by a separate class
vote) to which all shareholders of such corporation would be entitled
in the election of directors or where the members of the Board of
Directors of the Company, immediately prior to the merger or
consolidation, do not, immediately after the merger or consolidation,
constitute a majority of the Board of Directors of the corporation
issuing cash or securities in the merger or consolidation; or
(B) The sale or other disposition of all or substantially all the
assets of the Company.
(c) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) GENERAL. In the event of a consolidation or merger or sale of all
or substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i) in
the event of a merger under the terms of which holders of the Common Stock of
the Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options, and (ii) in the event the provisions of Section
15 are not applicable, provide that all or any outstanding options shall become
exercisable in full immediately prior to such event and upon written notice to
the optionees, provide that all unexercised options will terminate immediately
prior to the consummation of such transaction unless exercised by the optionee
within a specified period following the date of such notice.
(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan
in substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the
8
<PAGE> 9
acquisition by the Company, or one of its subsidiaries, of property or stock of
the employing corporation. The Company may direct that substitute options be
granted on such terms and conditions as the Board of Directors considers
appropriate in the circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to time,
modify or amend the Plan in any respect; provided, however, that if at any time
the approval of the stockholders of the Company is required under Section 422 of
the Code or any successor provision with respect to Incentive Stock Options, or
under Rule 16b-3, the Board of Directors may not effect such modification or
amendment without such approval; and provided, further, that the provisions of
Section 3(b) hereof shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employer Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
(b) The modification or amendment of the Plan shall not, without the
consent of an optionee, adversely affect his or her rights under an option
previously granted to him or her. With the consent of the optionee affected, the
Board of Directors may amend outstanding option agreements in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to amend
or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option to the extent necessary to ensure the
qualification of the Plan under Rule 16b-3.
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any
kind otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing
9
<PAGE> 10
the Company to withhold shares of Common Stock otherwise issuable pursuant to
the exercise of an option or (ii) by delivering to the Company shares of Common
Stock already owned by the optionee. The shares so delivered or withheld shall
have a Fair Market Value equal to such withholding obligation as of the date
that the amount of tax to be withheld is to be determined. An optionee who has
made an election pursuant to this Section 20(a) may only satisfy his or her
withholding obligation with shares of Common Stock which are not subject to any
repurchase, forfeiture, unfulfilled vesting or other similar requirements.
(b) The acceptance of shares of Common Stock upon exercise of an
Incentive Stock Option shall constitute an agreement by the optionee (i) to
notify the Company if any or all of such shares are disposed of by the optionee
within two years from the date the option was granted or within one year from
the date the shares were issued to the optionee pursuant to the exercise of the
option, and (ii) if required by law, to remit to the Company, at the time of and
in the case of any such disposition, an amount sufficient to satisfy the
Company's federal, state and local withholding tax obligations with respect to
such disposition, whether or not, as to both (i) and (ii), the optionee is in
the employ of the Company at the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting Person
whose options have been granted in accordance with the provisions of Section
3(b) herein, no election to use shares for the payment of withholding taxes
shall be effective unless made in compliance with any applicable requirements of
Rule 16b-3.
21. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by
the Board of Directors, but no Incentive Stock Option granted under the Plan
shall become exercisable unless and until the Plan shall have been approved by
the Company's stockholders. If such stockholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring stockholder approval shall become effective when adopted by
the Board of Directors; amendments requiring stockholder approval (as provided
in Section 19) shall become effective when adopted by the Board of Directors,
but no Incentive Stock Option granted after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with
Section 16, the Plan shall terminate upon the earlier of (i) the close of
business on the day next preceding the tenth anniversary of the date of its
adoption by the Board of Directors, or (ii) the date on which all shares
available for issuance under the Plan shall have been issued pursuant to the
exercise or cancellation of options granted under the Plan. If the date of
termination is determined under (i) above, then options outstanding on such date
shall continue to have force and effect in accordance with the provisions of the
instruments evidencing such options.
10
<PAGE> 11
22. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify awards
or options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
23. GOVERNING LAW.
The provisions of this Plan shall be governed and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflicts of laws.
Adopted by the Board of Directors on January 21, 1998.
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 35,497,000
<SECURITIES> 63,488,000
<RECEIVABLES> 1,728,000
<ALLOWANCES> 0
<INVENTORY> 896,000
<CURRENT-ASSETS> 103,128,000
<PP&E> 7,090,000
<DEPRECIATION> (2,315,000)
<TOTAL-ASSETS> 126,370,000
<CURRENT-LIABILITIES> 30,666,000
<BONDS> 1,599,000
0
3,500,000
<COMMON> 41,000
<OTHER-SE> 77,951,000<F1>
<TOTAL-LIABILITY-AND-EQUITY> 126,370,000
<SALES> 987,000
<TOTAL-REVENUES> 1,641,000
<CGS> 392,000
<TOTAL-COSTS> 22,282,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,000
<INCOME-PRETAX> 0
<INCOME-TAX> (19,134,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,134,000)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
<FN>
<F1>Additional paid-in capital - 260,077,000
Accumulated Deficit - (181,168,000)
FAS 115 Securities Adjustments - 37,000
Treasury Stock - (995,000)
</FN>
</TABLE>
