<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20580
LIFE MEDICAL SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1745197
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
379 THORNALL STREET, EDISON, NEW JERSEY 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(732) 494-0444
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES[ X ] NO[ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE - 7,922,559 SHARES OUTSTANDING AT AUGUST 8,1997
<PAGE>
LIFE MEDICAL SCIENCES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations (unaudited) for the 3
three month and six month periods ended June 30, 1996 and 1997
Condensed Balance Sheets as of December 31, 4
1996 and June 30, 1997 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
six month periods ended June 30, 1996 and 1997
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and reports on Form 8-K 9
Signatures 10
Exhibit Index 11
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Royalty income $ 28,921 $ 23,619 $ 91,126 $ 32,758
------------- ------------- ------------- -------------
Operating expenses:
Research and development expenses 416,217 1,496,398 957,502 2,629,110
General and administrative expenses 480,802 540,631 902,218 1,398,307
------------- ------------- ------------- -------------
Operating expenses 897,019 2,037,029 1,859,720 4,027,417
------------- ------------- ------------- -------------
(Loss) from operations (868,098) (2,013,410) (1,768,594) (3,994,659)
Interest income 121,728 155,967 159,338 323,407
Interest expense (710) (959) (1,446) (1,958)
============= ============= ============= =============
Net (loss) $ (747,080) $ (1,858,402) $ (1,610,702) $ (3,673,210)
============= ============= ============= =============
Net (loss) per share $ (0.11) $ (0.23) $ (0.27) $ (0.46)
============= ============= ============= =============
Weighted average shares outstanding 6,676,765 7,916,861 6,061,575 7,915,846
</TABLE>
3
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LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 31, JUNE 30
----------------- -----------------
1996 1997
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,235,976 $ 5,418,773
Short-term investments 3,041,993 5,844,600
Other current assets 311,330 469,076
----------------- -----------------
Total current assets 14,589,299 11,732,449
Furniture and equipment-at cost (less accumulated
depreciation of $59,830 and $83,138) 182,349 170,077
Deposits 29,190 13,312
================= =================
TOTAL $ 14,800,838 $ 11,915,838
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligation $ 6,798 $ 7,142
Accounts payable 111,265 161,870
Accrued expenses 349,447 653,747
----------------- -----------------
Total current liabilities 467,510 822,759
Capital lease obligation 34,128 30,469
Deferred royalty income 504,877 472,119
----------------- -----------------
Total liabilities 1,006,515 1,325,347
----------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares
authorized - 5,000,000;
none issued
Common stock, $.001 par value; shares authorized -
23,750,000; issued and outstanding - 7,914,820
and 7,922,559 7,915 7,923
Additional paid-in capital 33,951,059 34,420,429
Accumulated deficit (20,164,651) (23,837,861)
----------------- -----------------
Total stockholders' equity 13,794,323 10,590,491
================= =================
TOTAL $ 14,800,838 $ 11,915,838
================= =================
</TABLE>
4
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LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,610,702) $ (3,673,210)
Adjustments to reconcile net (loss) to net cash (used in)
operations:
Depreciation 14,174 23,308
Deferred royalty income (75,803) (32,758)
Fair value of options issued as compensation 515,981
Changes in operating assets and liabilities:
(Increase) in other assets and deposits (242,736) (141,868)
Increase in accounts payable and accrued expenses 103,849 354,905
------------- -------------
Net cash (used in) operating activities (1,811,218) (2,953,642)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (11,464) (11,036)
Proceeds from maturity of investment securities 3,041,993
Purchase of investment securities (5,844,600)
------------- -------------
Net cash (used in) investing activities (11,464) (2,813,643)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capitalized lease (1,181) (3,315)
Proceeds from issuance of common stock, net of expenses 13,675,962
Cost of registration of common stock previously issued (46,603)
------------- -------------
Net cash provided by (used in) financing activities 13,674,781 (49,918)
------------- -------------
Net increase (decrease) in cash and cash equivalents 11,852,099 (5,817,203)
Cash and cash equivalents at beginning of period 3,827,530 11,235,976
------------- -------------
Cash and cash equivalents at end of period $ 15,679,629 $ 5,418,773
============= =============
</TABLE>
5
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying condensed financial statements do not include
all of the information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles, but in the opinion of management, contain all
adjustments (which consist of only normal recurring adjustments)
necessary for a fair presentation of such financial information. Results
of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. These condensed financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1996 included in
the Company's annual report on Form 10-K filed with the Securities and
Exchange Commission.
B) NET (LOSS) PER SHARE
The net loss per share is computed using the weighted average
number of common shares outstanding during each period. Outstanding
options and warrants have not been considered since their effect would
be antidilutive.
C) OPTIONS
The Company applies APB Opinion 25 and related Interpretations in
accounting for its options to employees. Although no compensation cost
has been recognized for its stock option grants to employees, the
Company has included stock based compensation costs associated with
options previously granted under consulting agreements in research and
development expenses and general and administrative expenses of $164,120
and $351,861, respectively, for the six month period ended June 30,
1997. No such expenses were recorded during the corresponding period for
the prior year.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Life Medical Sciences, Inc. (the "Company") is engaged in the
development and commercialization of innovative and cost-effective medical
products for therapeutic applications. The Company's proposed products are
derived from its two proprietary platform technologies: (i) its polymer
technology, and (ii) its in-situ (occurring on or at a body site) tissue
culturing technology. Products currently under development focus on preventing
or reducing post-operative surgical adhesions, wound healing, stimulating hair
regrowth and improving the success rate of autologous fat transplantation.
Since its inception, the Company has been engaged primarily in research
and development of its technologies, commercialization of the Sure-ClosureTM
System ("Sure-Closure") and organizational activities. In September 1993, the
Company began selling its Sure-Closure products. In July 1994, the Company sold
its Sure-Closure product line for initial payments aggregating $4 million plus a
10% royalty on net sales through June 2004. To date, all revenue has been
derived from sales of the Sure-Closure products or royalties thereon.
Certain statements in this Form 10-Q (the "Report") under this Item and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements regarding future cash requirements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: delays in product development;
problems or delays with clinical trials; failure to receive or delays in
receiving regulatory approval; lack of enforceability of patents and proprietary
rights; lack of reimbursement; general economic and business conditions;
industry capacity; industry trends; demographic changes; competition; material
costs and availability; the loss of any significant customers; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and other factors referenced in this Report.
RESULTS OF OPERATIONS
The Company earned revenues from royalties on product sales of
Sure-Closure of $23,619 and $32,758 for the three months and six months ended
June 30, 1997, respectively, which compares to $28,921 and $91,126 for the
corresponding periods of 1996. The royalty income recognized during the three
month period ended June 30, 1997, represents royalties from Sure-Closure product
sales during the first quarter of 1997.
The Company incurred research and development expenses of $1,496,398 and
$416,217 for the three months ended June 30, 1997 and 1996, respectively, and
$2,629,110 and $957,502 for the six months ended June 30, 1997 and 1996,
respectively. The increase in the three month and six month periods ended June
30, 1997 compared to June 30, 1996 is due to increased spending for the
preclinical and clinical studies of the bioresorbable polymer adhesion
prevention products, and the clinical studies of the in-situ tissue culturing
technology products; and increased expenditures supporting the management of the
research and development function. Subsequent to June 30, 1997, the Company
terminated its multi-center venous stasis ulcer trial in Europe on Cariel. The
termination of this trial, which was initiated earlier in 1997, will allow funds
that would have been spent on continued venous stasis ulcer trials to be applied
to advancing other development programs, including the application of Cariel in
possible future clinical trials for diabetic ulcers and burns. Additionally,
non-cash expenses for stock based compensation costs of $164,120 were recorded
during the six month period ended June 30, 1997. Research and development
expenses are expected to continue to increase in future quarters as the Company
continues to develop its bioresorbable polymer technology products and in-situ
tissue culturing technology products and expand clinical trials for these and
other products.
General and administrative expenses, which consist primarily of
compensation for management, professional fees, investor relations expenses and
materials, consulting expenses and travel expenses, were $540,631 and $480,802
for the
7
<PAGE>
three months ended June 30, 1997 and 1996 respectively, and $1,398,307 and
$902,218 for the six months ended June 30, 1997 and 1996, respectively. The
increases are attributable to expenses associated with additional personnel and
increased expenses in connection with the investor relation and business
development efforts. Additionally, non-cash expenses for stock based
compensation costs of $351,861 were recorded during the six month period ended
June 30, 1997. General and administrative expenses are expected to continue to
increase in future quarters as the Company continues to increase its scale of
operations.
Interest income was $155,967 and $121,728 for the three months ended
June 30, 1997 and 1996, respectively and $323,407 and $159,338 for the six
months ended June 30, 1997 and 1996, respectively. The increase for the periods
is primarily attributable to an increased balance in cash and investments.
Interest expense of $959 and $710 for the three months ended June 30,
1997 and 1996, respectively and $1,958 and $1,446 for the six months ended June
30, 1997 and 1996, respectively, was from a capital lease entered into to
acquire office equipment for the Company.
The Company's net loss was $1,858,402 and $747,080 for the three months
ended June 30, 1997 and 1996, respectively, and $3,673,210 and $1,610,702 for
the six months ended June 30, 1997 and 1996, respectively. These increases are
due primarily to the increased scale of operations.
The Company expects to incur additional losses in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and investments available of $11,263,373 and
$14,277,969 at June 30, 1997 and December 31, 1996, respectively. The decrease
in cash and investments from December 31, 1996 to June 30, 1997 results from the
expenditures made for funding the Company's operations which primarily consists
of continued clinical trials, research and development costs, commercialization
of the Company's product portfolio and administrative expenses.
Although the Company believes that the available cash will be sufficient
to meet its cash requirements for the next twelve months, there can be no
assurance that the Company will not require additional financing during that
time or that financing will be available on acceptable terms or at all. The
Company will be required, however, to raise substantial additional funds to
continue the clinical development and commercialization of its products and to
fund the growth that is expected to occur if any of its products are approved
for marketing. The Company plans to seek such additional funding through
collaborative arrangements with strategic partners, licensing arrangements for
certain of its products and additional public or private financing, including
equity financing. Any additional equity financing may be dilutive to
stockholders. There can be no assurance that such arrangements or financing will
be available as needed or on terms acceptable to the Company. Insufficient funds
may require the Company to delay, scale back or eliminate some or all of its
research and development programs and manufacturing and marketing efforts or
require it to license to third parties certain products or technologies that the
Company would otherwise seek to commercialize itself.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of Life Medical Sciences, Inc.
was held on June 3, 1997 (and June 18, 1997 with regards to the
proposal to amend the Company's Amended and Restated 1992 Stock
Option Plan).
(b) The following seven Directors were reelected at the Annual Meeting:
Edward A. Celano Walter R. Maupay
Coy Eklund Dr. Herbert Moskowitz
Joel L. Gold Irwin M. Rosenthal
Robert P. Hickey
(c) The vote was as follows to approve the amendment to increase the
number of shares with respect to which options and SAR's may be
granted under the Company's Amended and Restated 1992 Stock Option
Plan to 1,407,500 shares:
For 4,378,838
Against 568,689
Abstain 72,386
(d) The vote was as follows for the ratification of Richard A. Eisner &
Company, LLP as the Company's independent public accountants:
For 7,017,649
Against 25,700
Abstain 32,231
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated 1992 Stock Option Plan
of Registrant
27 Financial Data Schedule
(b) Reports on Form 8-k
None
9
<PAGE>
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.
LIFE MEDICAL SCIENCES, INC.
(REGISTRANT)
DATE: AUGUST 8, 1997 /S/ DONALD W. FALLON
---------------------
DONALD W. FALLON
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Duly Authorized Officer & Principal
Financial Officer)
10
<PAGE>
EXHIBIT INDEX
10.1 Amended and Restated 1992 Stock Option Plan for Registrant
27 Financial Data Schedule
11
<PAGE>
EXHIBIT 10.13
AMENDED AND RESTATED
1992 STOCK OPTION PLAN
LIFE MEDICAL SCIENCES, INC.
1. Purpose of the Plan.
-------------------
The purpose of the Life Medical Sciences, Inc. 1992 Stock Option Plan
(the "Plan") is to promote the interests of Life Medical Sciences, Inc., a
Delaware corporation (the "Company") and its stockholders by strengthening the
Company's ability to attract and retain competent employees, to make service on
the Board of Directors of the Company more attractive to present and prospective
non-employee directors of the Company and to provide a means to encourage stock
ownership and proprietary interest in the Company by officers, non-employee
directors and valued employees and other individuals upon whose judgment,
initiative, and efforts the financial success and growth of the Company largely
depend. This Plan and the grant of any option or stock appreciation right
hereunder shall be effective upon approval by the Board of Directors and
stockholders of the Company.
2. Stock Subject to the Plan.
-------------------------
a. The total number of shares of the authorized but unissued or
treasury shares of the Common Stock, $.001 par value per share, of the Company
("Common Stock") for which options and stock appreciation rights ("SARs") may be
granted under the Plan shall be 1,407,500, subject to adjustment as provided in
Section 14 hereof.
b. If an option granted or assumed hereunder shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares subject thereto shall again be available for subsequent option grants
under the Plan, provided, however, that shares as to which an option has been
surrendered in connection with the exercise of a related SAR will not again be
available for subsequent option or SAR grants under the Plan.
c. Stock issuable upon exercise of an option or SAR granted under
the Plan may be subject to such restrictions on transfer, repurchase rights or
other restrictions as shall be determined by the Board of Directors.
3. Administration of the Plan.
--------------------------
a. The Plan shall be administered by the Board of Directors of
the Company (the "Board"). No member of the Board shall act upon any matter
exclusively affecting any option or SAR granted or to be granted to himself or
herself under the Plan. The decision of the Board as to all questions of
interpretation and application of the Plan shall be final, binding and
conclusive on all persons. The Board may, in its sole discretion, grant options
to purchase shares of the Company's Common Stock, grant SAR's and issue shares
<PAGE>
upon exercise of such options and SAR's, as provided in the Plan. The Board
shall have authority, subject to the express provisions of the Plan, to construe
the respective option and SAR 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 or SAR agreements, which may but need not be
identical, and to make all other determinations in the judgment of the Board
necessary or desirable for the administration of the Plan. The Board 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 shall be the sole and final judge of such
expediency. No director shall be liable for any action or determination made in
good faith. The Board may, in its discretion, delegate its power, duties and
responsibilities to a committee, consisting of two or more members of the Board,
all of whom are "non-employee directors" (as hereinafter defined). If a
committee is so appointed, all references to the Board herein shall mean and
relate to such committee, unless the context otherwise requires. For the
purposes of the Plan, a director or member of such committee shall be deemed to
be a "non-employee director" only if such person qualified as a "non-employee
directors" within the meaning of paragraph (c)(2) of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
such term is interpreted from time to time.
4. Type of Options.
---------------
Options granted pursuant to the Plan shall be authorized by action of
the Board (or a committee designated by the Board) and may be designated as
either incentive stock options meeting the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified options
which are not intended to meet the requirements of such Section 422 of the Code,
the designation to be in the sole discretion of the Board. Options designated as
incentive stock options that fail to continue to meet the requirements of
Section 422 of the Code shall be redesignated as non-qualified options
automatically on the date of such failure to continue to meet the requirements
of Section 422 of the Code without further action by the Board.
5. Eligibility.
-----------
Options designated as incentive stock options may be granted only to
officers and key employees of the Company or of any subsidiary corporation
(herein called "subsidiary" or "subsidiaries"), as defined in Section 424 of the
Code and the Treasury Regulations promulgated thereunder (the "Regulations").
Directors who are not otherwise employees of the Company or a subsidiary shall
not be eligible to be granted incentive stock options pursuant to the Plan. SARs
and options designated as non qualified options may be granted to (i) officers
and key employees of the Company or of any of its subsidiaries, or (ii) agents,
medical and scientific advisors and directors of and consultants to the Company,
whether or not otherwise employees of the Company.
-2-
<PAGE>
In determining the eligibility of an individual to be granted an option
or SAR, as well as in determining the number of shares to be optioned to any
individual, the Board shall take into account the position and responsibilities
of the individual being considered, the nature and value to the Company or its
subsidiaries of his or her service and accomplishments, his or her present and
potential contribution to the success of the Company or its subsidiaries, and
such other factors as the Board may deem relevant.
6. Restrictions on Incentive Stock Options.
---------------------------------------
Incentive stock options (but not non-qualified options) granted under
this Plan shall be subject to the following restrictions:
a. Limitation on Number of Shares. Ordinarily, the aggregate fair
------------------------------
market value of the shares of Common Stock with respect to which incentive stock
options are granted, (determined as of the date the incentive stock options are
granted), exercisable for the first time by an individual during any calendar
year shall not exceed $100,000. If an incentive stock option is granted pursuant
to which the aggregate fair market value of shares with respect to which it
first becomes exercisable in any calendar year by an individual exceeds such
$100,000 limitation, the portion of such option which is in excess of the
$100,000 limitation, and any such options issued subsequently in the same
calendar year, shall be treated as a non qualified option pursuant to Section
422(d)(1) of the Code. In the event that an individual is eligible to
participate in any other stock option plan of the Company or any parent or
subsidiary of the Company which is also intended to comply with the provisions
of Section 422 of the Code, such $100,000 limitation shall apply to the
aggregate number of shares for which incentive stock options may be granted
under this Plan and all such other plans.
b. Ten Percent (10%) Shareholder. If any employee to whom an
-----------------------------
incentive stock option is granted pursuant to the provisions of this Plan is on
the date of grant the owner of stock (as determined under Section 424(d) of the
Code) possessing more than 10% of the total combined voting power of all classes
of stock of the Company or any parent or subsidiary of the Company, then the
following special provisions shall be applicable to the incentive stock options
granted to such individual:
i. The option price per share subject to such incentive
stock options shall be not less than 110% of the fair market
value of the stock determined at the time such option was
granted. In determining the fair market value under this clause
(i), the provisions of Section 8 hereof shall apply.
ii. The incentive stock option shall have a term expiring
not more than five (5) years from the date of the granting
thereof.
7. Option Agreement.
----------------
-3-
<PAGE>
Each option and SAR shall be evidenced by an agreement (the "Agreement")
duly executed on behalf of the Company and by the grantee to whom such option or
SAR is granted, which Agreement shall comply with and be subject to the terms
and conditions of the Plan. The Agreement may contain such other terms,
provisions and conditions which are not inconsistent with the Plan as may be
determined by the Board, provided that options designated as incentive stock
options shall meet all of the conditions for incentive stock options as defined
in Section 422 of the Code. No option or SAR shall be granted within the meaning
of the Plan and no purported grant of any option or SAR shall be effective until
the Agreement shall have been duly executed on behalf of the Company and the
optionee. More than one option and SAR may be granted to an individual.
8. Option Price.
------------
a. The option price or prices of shares of the Company's Common
Stock for options designated as non-qualified stock options shall be a lawful
consideration as determined by the Board; provided, however, that for the six
month period following the effective date of the initial public offering, such
option price per share shall be not less than the per share initial public
offering price of the Common Stock (without giving any value to warrants which
may be issued in conjunction with Common Stock in the initial public offering).
"Initial public offering" means an underwritten public offering on a firm
commitment basis pursuant to an effective registration statement under the
Securities Act of 1933, as amended ("1933 Act"), covering the offer and sale of
equity securities of and for the account of the Company, and the completion
thereof shall mean the delivery of and payment for such securities pursuant to
such offering.
b. Subject to the conditions set forth in Section 6(b) hereof,
the option price or prices of shares of the Company's Common Stock for incentive
stock options shall be at least the fair market value of such Common Stock at
the time the option is granted as determined by the Board in accordance with the
Regulations promulgated under Section 422 of the Code; provided, however, that
for the six month period following the effective date of the initial public
offering, such option price per share shall not be less than the per share
initial public offering price of the Common Stock (without giving any value to
warrants that may be issued in conjunction with Common Stock in the initial
public offering).
c. If shares of the Company's Common Stock are then listed on any
national securities exchange, the fair market value shall be the mean between
the high and low sales prices, if any, on the largest such exchange on the date
of the grant of the option or, if none,
-4-
<PAGE>
shall be determined by taking a weighted average of the mean between the highest
and lowest sales on the nearest date before and the nearest date after the date
of grant in accordance with Treasury Regulations Section 25.2512-2. If the
shares are not then listed on any such exchange the fair market value of such
shares shall be the mean between the closing "Bid" and the closing "Ask" prices,
if any, as reported in the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") for the date of the grant of the option, or, if
none, shall be determined by taking a weighted average of the means between the
highest and lowest sales on the nearest date before the nearest date after the
date of the grant in accordance with Treasury Regulations Section 25.2512-2. If
the shares are not then either listed on any such exchange or quoted in NASDAQ,
the fair market value shall be the mean between the average of the "Bid"
National Daily Quotation Service for the date of the grant of the option, or, if
none, shall be determined by taking a weighted average of the means between the
highest and lowest sales on the nearest date before and the nearest date after
the date of grant in accordance with Treasury Regulations Section 25.2512-2. If
the fair market value cannot be determined under the preceding three sentences,
it shall be determined in good faith by the Board.
9. Manner of Payment: Manner of Exercise.
-------------------------------------
a. Options granted under the Plan may provide for the payment of
the exercise price by delivery of (i) cash or a check payable to the order of
the Company in an amount equal to the exercise price of such options, (ii)
shares of any class of common stock of the Company owned by the optionee having
a fair market value equal in amount to the exercise price of the options being
exercised, or (iii) any combination of (i) and (ii), provided, however, that
payment of the exercise price by delivery of shares of common stock of the
Company owned by such optionee may be made only upon the condition that such
payment does not result in a charge to earnings for financial accounting
purposes as determined by the Board, unless such condition is waived by the
Board. The fair market value of any shares of the Company's common stock which
may be delivered upon exercise of an option shall be determined by the Board in
accordance with Section 8 hereof.
b. To the extent that the right to purchase shares under an
option has accrued and is in effect, options may be exercised in full at one
time or in part from time to time, by giving written notice, signed by the
person or persons exercising the option, to the Company, stating the number of
shares with respect to which the option is being exercised, accompanied by
payment in full for such shares as provided in subparagraph (a) above. Upon such
exercise, delivery of a certificate for paid-up non-assessable shares shall be
made at the principal office of the Company to the person or persons exercising
the option at such time, during ordinary business hours, after thirty (30) days
but not more than ninety (90) days from the date of receipt of the notice by the
Company, as shall be designated in such notice, or at such time, place and
manner as may be agreed upon by the Company and the person or persons exercising
the option.
10. Exercise of Options and SARs.
----------------------------
Each option and SAR granted under the Plan shall, subject to Section 1
l(b) and Section 13 hereof, be exercisable at such time or times and during such
period as shall be set forth in the Agreement; provided, however, that no option
or SAR granted under the Plan shall have a term in excess of ten (10) years from
the date of grant. To the extent that an option or SAR is not exercised when it
becomes initially exercisable, it shall not expire but shall be carried
-5-
<PAGE>
forward and shall be exercisable, on a cumulative basis, until the expiration of
the exercise period. No partial exercise may be made for less than one hundred
(100) full shares of Common Stock. The exercise of an option shall result in the
cancellation of the SAR to which it relates with respect to the same number of
shares of Common Stock as to which the option was exercised.
11. Term of Options and SARs: Exercisability.
----------------------------------------
a. Term.
----
i. Each option shall expire not more than ten (10) years
from the date of the granting thereof, except as (a) otherwise
provided pursuant to the provisions of Section 6(b) hereof, and
(b) earlier termination as herein provided.
ii. Except as otherwise provided in this Section 11, an
option or SAR granted to any grantee who ceases to perform
services for the Company or one of its subsidiaries shall
terminate on the earlier of the last day of the third month or
ninety days after the date such grantee ceases to perform
services for the Company or one of its subsidiaries, or on the
date on which the option or SAR expires by its terms, whichever
occurs first.
iii. If the grantee ceases to perform services for the
Company because of dismissal for cause or because the grantee is
in breach of any employment agreement, such option or SAR will
terminate on the date the grantee ceases to perform services for
the Company or one of its subsidiaries.
iv. If the grantee ceases to perform services for the
Company because the grantee has become permanently disabled
(within the meaning of Section 22(e)(3) of the Code), such option
or SAR shall terminate on the last day of the twelfth month from
the date such grantee ceases to perform services for the Company,
or on the date on which the option or SAR expires by its terms,
whichever occurs first.
v. In the event of the death of any grantee, any option or
SAR granted to such grantee shall terminate on the last day of
the twelfth month from the date of death, or on the date on which
the option or SAR expires by its terms, whichever occurs first.
b. Exercisability.
--------------
i. Except as provided below, an option or SAR granted to a
grantee who ceases to perform services for the Company or one of
its subsidiaries shall be exercisable only to the extent that
such option or SAR has accrued and is in
-6-
<PAGE>
effect on the date such grantee ceases to perform services for
the Company or one of its subsidiaries.
ii. An option or SAR granted to a grantee who ceases to
perform services for the Company or one of its subsidiaries
because he or she has become permanently disabled, as defined
above, shall be exercisable with respect to the full number of
shares covered by such option or SAR.
iii. In the event of the death of any grantee, the option
or SAR granted to such grantee may be exercised with respect to
the full number of shares covered thereby, whether or not under
the provisions of Section 10 hereof the grantee was entitled to
do so at the date of his or her death, by the estate of such
grantee, or by any person or persons who acquired the right to
exercise such option or SAR by bequest or inheritance or by
reason of the death of such grantee.
12. Options Not Transferable.
------------------------
The right of any grantee to exercise any option or SAR granted to him or
her shall not be assignable or transferable by such grantee other than by will
or the laws of descent and distribution or pursuant to a domestic relations
order as defined in the Code or Title 1 of the Employee Retirement Income
Security Act, or the rules thereunder, and any such option or SAR shall be
exercisable during the lifetime of such grantee only by him. Any option or SAR
granted under the Plan shall be null and void and without effect upon the
bankruptcy of the grantee to whom the option is granted, or upon any attempted
assignment or transfer, except as herein provided, including without limitation,
any purported assignment, whether voluntary or by operation of law, pledge,
hypothecation or other disposition, attachment, trustee process or similar
process, whether legal or equitable, upon such option or SAR.
13. Terms and Conditions of SARs.
----------------------------
a. An SAR may be granted separately or in connection with an
option (either at the time of grant or at any time during the term of the
option).
b. The exercise of an SAR shall result in the cancellation of the
option to which it relates with respect to the same number of shares of Common
Stock as to which the SAR was exercised.
c. An SAR granted in connection with an option shall be
exercisable or transferable only to the extent that such related option is
exercisable or transferable.
d. Upon the exercise of an SAR related to an option, the holder
will be entitled to receive payment of an amount determined by multiplying
-7-
<PAGE>
i. The difference obtained by subtracting the purchase
price of a share of Common Stock specified in the related option
from the fair market value of a share of Common Stock on the date
of exercise of such SAR (as determined by the Board of
Directors), by
ii. The number of shares as to which such SAR is
exercised.
e. An SAR granted without relationship to an option shall be
exercisable as determined by the Board of Directors, but in no event after ten
years from the date of grant.
f. An SAR granted without relationship to an option will entitle
the holder, upon exercise of the SAR, to receive payment of an amount determined
by multiplying:
i. The difference obtained by subtracting the fair market
value of a share of Common Stock on the date the SAR was granted
(which for the six month period following the effective date of
the initial public offering shall not be less than the per share
initial public offering price of the Common Stock without giving
any value to warrants which may be issued in conjunction with
Common Stock in the initial public offering), from the fair
market value of a share of Common Stock on the date of exercise
of such SAR (as determined by the Board), by
ii. The number of shares as to which such SAR is
exercised.
g. Notwithstanding subsections (d) and (f) above, the Board may
limit the amount payable upon exercise of an SAR. Any such limitation shall be
determined as of the date of grant and noted on the instrument evidencing the
SAR granted.
h. At the discretion of the Board, payment of the amount
determined under subsections (d) and (f) above may be made solely in whole
shares of Common Stock valued at their fair market value on the date of exercise
of the SAR (as determined by the Board), or solely in cash, or in a combination
of cash and shares. If the Board decides to make full payment in shares of
Common Stock and the amount payable results in a fractional share, payment for
the fractional share shall be made in cash.
i. Neither an SAR nor an option granted in connection with an SAR
granted to a person subject to Section 16(b) of the Act may be exercised before
six months after the date of grant.
14. Recapitalization, Reorganizations and the Like.
----------------------------------------------
In the event that the outstanding shares of the Common Stock of the
Company are
-8-
<PAGE>
changed into or exchanged for a different number or kind of shares or other
securities of the Company or of another corporation by reason of any
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination of shares, or dividends payable in capital stock,
appropriate adjustment shall be made in the number and kind of shares as to
which options and SARs may be granted under the Plan and as to which outstanding
options and SARs or portions thereof then unexercised shall be exercisable, to
the end that the proportionate interest of the grantee shall be maintained as
before the occurrence of such event; such adjustment in outstanding options and
SARs shall be made without change in the total price applicable to the
unexercised portion of such options and SARs and with a corresponding adjustment
in the exercise price per share.
In addition, unless otherwise determined by the Board in its sole
discretion, in the case of any (i) sale or conveyance to another entity of all
or substantially all of the property and assets of the Company or (ii) Change in
Control (as hereinafter defined) of the Company, the purchaser(s) of the
Company's assets or stock may, in his, her or its discretion, deliver to the
optionee the same kind of consideration that is delivered to the shareholders of
the Company as a result of such sale, conveyance or Change in Control, or the
Board may cancel all outstanding options and SARs in exchange for consideration
in cash or in kind which consideration in both cases shall be equal in value to
the value of those shares of stock or other securities the optionee would have
received had the option been exercised (to the extent then exercisable) and no
disposition of the shares acquired upon such exercise been made prior to such
sale, conveyance or Change in Control, less the exercise price therefor. Upon
receipt of such consideration, the options and SARs shall immediately terminate
and be of no further force and effect. The value of the stock or other
securities the grantee would have received if the option had been exercised
shall be determined in good faith by the Board of the Company, and in the case
of shares of the Common Stock of the Company, in accordance with the provisions
of Section 8 hereof.
The Board shall also have the power and right to accelerate the
exercisability of any options or SARs, notwithstanding any limitations in this
Plan or in the Agreement upon such a sale, conveyance or Change in Control. Upon
such acceleration, any options or portion thereof originally designated as
incentive stock options that no longer qualify as incentive stock options under
Section 422 of the Code as a result of such acceleration shall be redesignated
as non-qualified stock options.
A "Change in Control" shall be deemed to have occurred if any person, or
any two or more persons acting as a group, and all affiliates of such person or
persons, who prior to such time owned less than fifty percent (50%) of the then
outstanding Common Stock of the Company, shall acquire such additional shares of
the Company's Common Stock in one or more transactions, or series of
transactions, such that following such transaction or transactions, such person
or group and affiliates beneficially own fifty percent (50%) or more of the
Company's Common Stock outstanding.
-9-
<PAGE>
Upon dissolution or liquidation of the Company, all options and SARs
granted under this Plan shall terminate, but each grantee (if at such time in
the employ of or otherwise associated with the Company or any of its
subsidiaries) shall have the right, immediately prior to such dissolution or
liquidation, to exercise his or her option or SAR to the extent then
exercisable.
If by reason of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization, or liquidation, the Board shall
authorize the issuance or assumption of a stock option or stock options in a
transaction to which Section 424(a) of the Code applies, then, notwithstanding
any other provision of the Plan, the Board may grant an option or options upon
such terms and conditions as it may deem appropriate for the purpose of
assumption of the old option, or substitution of a new option for the old
option, in conformity with the provisions of such Section 424(a) of the Code and
the Regulations thereunder, and any such option shall not reduce the number of
shares otherwise available for issuance under the Plan.
No fraction of a share shall be purchasable or deliverable upon the
exercise of any option or SAR, but in the event of any adjustment hereunder in
the number of shares covered by the option or SAR shall cause such number to
include a fraction of a share, such fraction shall be adjusted to the nearest
smaller whole number of shares.
15. No Special Employment Rights.
----------------------------
Nothing contained in the Plan or in any option or SAR granted under the
Plan shall confer upon any grantee any right with respect to the continuation of
his or her employment by the Company (or any subsidiary) or interfere in any way
with the right of the Company (or any subsidiary), subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the grantee from the
rate in existence at the time of the grant of an option or SAR. Whether an
authorized leave of absence, or absence in military or government service, shall
constitute termination of employment shall be determined by the Board at the
time.
16. Withholding.
-----------
The Company's obligation to deliver shares upon the exercise of any
non-qualified option or SAR granted under the Plan shall be subject to the
option holder's satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements. The Company and optionee may agree
to withhold shares of Common Stock purchased upon exercise of an option or SAR
to satisfy the above-mentioned withholding requirements; provided, however, no
such agreement may be made by a grantee who is an "officer" or "director" within
the meaning of Section 16 of the Exchange Act, except pursuant to a standing
election to so withhold shares of Common Stock purchased upon exercise of an
option, such election to be made not less than six months prior to such exercise
and which election may be
-10-
<PAGE>
revoked only upon six months prior written notice.
17. Restrictions on Issuance of Shares.
----------------------------------
a. Notwithstanding the provisions of Section 9, the Company
may delay the issuance of shares covered by the exercise of an option or SAR and
the delivery of a certificate for such shares until one of the following
conditions shall be satisfied:
i. The shares with respect to which such option or SAR has
been exercised are at the time of the issue of such shares
effectively registered or qualified under applicable Federal and
state securities acts now in force or as hereafter amended; or
ii. Counsel for the Company shall have given an opinion,
which opinion shall not be unreasonably conditioned or withheld,
that such shares are exempt from registration and qualification
under applicable Federal and state securities acts now in force
or as hereafter amended.
b. It is intended that all exercises of option and SARs shall be
effective, and the Company shall use its best efforts to bring about compliance
with the above conditions within a reasonable time, except that the Company
shall be under no obligation to qualify shares or to cause a registration
statement or a post-effective amendment to any registration statement to be
prepared for the purpose of covering the issue of shares in respect of which any
option may be exercised, except as otherwise agreed to by the Company in
writing.
18. Purchase for Investment; Rights of Holder on Subsequent
-------------------------------------------------------
Registration.
- ------------
Unless the shares to be issued upon exercise of an option or SAR granted
under the Plan have been effectively registered under the 1933 Act, as now in
force or hereafter amended, the Company shall be under no obligation to issue
any shares covered by any option or SAR unless the person who exercises such
option, in whole or in part, shall give a written representation and undertaking
to the Company which is satisfactory in form and scope to counsel for the
Company and upon which, in the opinion of such counsel, the Company may
reasonably rely, that he or she is acquiring the shares issued pursuant to such
exercise of the option or SAR for his or her own account as an investment and
not with a view to, or for sale in connection with, the distribution of any such
shares, and that he or she will make no transfer of the same except in
compliance with any rules and regulations in force at the time of such transfer
under the 1933 Act, or any other applicable law, and that if shares are issued
without such registration, a legend to this effect may be endorsed upon the
securities so issued.
In the event that the Company shall, nevertheless, deem it necessary or
desirable to register under the 1933 Act or other applicable statutes any shares
with respect to which an option or SAR shall have been exercised, or to qualify
any such shares for exemption from the
-11-
<PAGE>
1933 Act or other applicable statutes, then the Company may take such action and
may require from each grantee such information in writing for use in any
registration statement, supplementary registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for such
purpose and may require reasonable indemnity to the Company and its officers and
directors from such holder against all losses, claims, damages and liabilities
arising from such use of the information so furnished and caused by any untrue
statement of any material fact therein or caused by the omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made.
19. Loans.
-----
At the discretion of the Board, the Company may loan to the optionee
some or all of the purchase price of the shares acquired upon exercise of an
option granted under the Plan.
20. Modification of Outstanding Options and SARs.
--------------------------------------------
Subject to limitations contained herein, the Board may authorize the
amendment of any outstanding option or SAR with the consent of the grantee when
and subject to such conditions as are deemed to be in the best interests of the
Company and in accordance with the purposes of the Plan.
21. Approval of Stockholders.
------------------------
The Plan shall be subject to approval by the vote of stockholders
holding at least a majority of the voting stock of the Company voting in person
or by proxy at a duly held stockholders' meeting, or by written consent of
stockholders in accordance with the laws of the State of Delaware, within twelve
(12) months after the adoption of the Plan by the Board and shall take effect as
of the date set forth in Section 1. The Board may grant options and SARs under
the Plan prior to such approval, but any such option shall become effective as
of the date of grant only upon such approval and, accordingly, no such option
may be exercisable prior to such approval.
22. Termination and Amendment of Plan.
---------------------------------
Unless sooner terminated as herein provided, the Plan shall terminate
ten (10) years from the effective date of the Plan, which shall be the date the
Plan is duly adopted by the Board and approved by the stockholders of the
Company. The Board may at any time terminate the Plan or make such modification
or
-12-
<PAGE>
amendment thereof as it deems advisable; provided, however, (i) the Board may
not, without the approval of the stockholders of the Company obtained in the
manner stated in Section 21, increase the maximum number of shares for which
options and SARs may be granted or change the designation of the class of
persons eligible to receive options and SARs under the Plan, and (ii) any such
modification or amendment of the Plan shall be approved by a majority of the
stockholders of the Company to the extent that such stockholder approval is
necessary to comply with applicable provisions of the Code, rules promulgated
pursuant to Section 16 of the Exchange Act, applicable state law, or applicable
NASD or exchange listing requirements. Termination or any modification or
amendment of the Plan shall not, without the consent of an optionee, affect his
or her rights under an option or SAR theretofore granted to him or her.
23. Limitation of Rights in the Underlying Shares.
---------------------------------------------
A holder of an option or SAR shall not be deemed for any purpose to be a
stockholder of the Company with respect to such option or SAR except to the
extent that such option or SAR shall have been exercised with respect thereto
and, in addition, a stock certificate shall have been issued theretofore and
delivered to the holder.
24. Notices.
-------
Any communication or notice required or permitted to be given under the
Plan shall be in writing, and mailed by registered or certified mail or
delivered by hand, if to the Company, to its principal place of business's
attention: President, and, if to the holder of an option or SAR, to the address
as appearing on the records of the Company.
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
*Identify the financial statement(s) to be referenced in the legend:
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 11,263,373 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,732,449 0
<PP&E> 253,215 0
<DEPRECIATION> 83,138 0
<TOTAL-ASSETS> 11,915,838 0
<CURRENT-LIABILITIES> 822,759 0
<BONDS> 0 0
0 0
0 0
<COMMON> 7,923 0
<OTHER-SE> 10,582,568 0
<TOTAL-LIABILITY-AND-EQUITY> 11,915,838 0
<SALES> 0 0
<TOTAL-REVENUES> 32,758 23,619
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,027,417 2,037,029
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,958 959
<INCOME-PRETAX> (3,673,210) (1,858,402)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,673,210) (1,858,402)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,673,210) (1,858,402)
<EPS-PRIMARY> (.46) (.23)
<EPS-DILUTED> 0 0
</TABLE>
