SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12584
SHEFFIELD MEDICAL TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
DELAWARE 13-3808303
- ---------------------------- ----------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organi- Number)
zation)
30 Rockefeller Plaza Suite 4515, New York, New York 10112
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (212) 957-6600
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
(continued next page)
<PAGE>
State the issuer's revenues for its most recent fiscal year: The
issuer's revenues for the fiscal year ended December 31, 1996 were $673,664.
The aggregate market value at March 14, 1997 of shares of the issuer's
Common Stock, $.01 par value per share (based upon the closing price of $3.1875
per share of such stock on the American Stock Exchange on such date), held by
non-affiliates of the issuer was approximately $35,033,000. Solely for the
purposes of this calculation, shares held by directors and officers of the
issuer have been excluded. Such exclusion should not be deemed a determination
or an admission by the issuer that such individuals are, in fact, affiliates of
the issuer.
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: At March 14, 1997,
there were outstanding 11,383,274 shares of the issuer's Common Stock, $.01 par
value per share.
Item 7. FINANCIAL STATEMENTS
See p. F-1
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
See Exhibit 27. Except for the attached Exhibit 27, Item 13 remains
unchanged from the original filing of the issuer's Form 10-KSB for the
fiscal year ended December 31, 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized.
SHEFFIELD MEDICAL TECHNOLOGIES INC.
Dated: April 16, 1997 /s/ George Lombardi
------------------------------------------
Vice President and Chief Financial Officer
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
TABLE OF CONTENTS
PAGE
----
Consolidated Financial Statements
Reports of Independent Auditors .......................................F-2
Consolidated Balance Sheet as of December 31, 1996.....................F-4
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 and for the period from
October 17, 1986 (inception) to December 31, 1996 .... ...........F-5
Consolidated Statements of Stockholders' Equity
(Net Capital Deficiency)
for the period from October 17, 1986 (inception) to
December 31, 1996 ................................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 and for the period from
October 17, 1986 (inception) to December 31, 1996.................F-7
Notes to Consolidated Financial Statements ............................F-8
F-1
<PAGE>
Report of Independent Auditors
To Board of Directors and Stockholders
Sheffield Medical Technologies Inc.
We have audited the accompanying consolidated balance sheet of Sheffield Medical
Technologies Inc. and subsidiaries (a development stage enterprise) as of
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1996 and
1995, and for the period October 17, 1986 (inception) through December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements as of December 31, 1993,
and for the period October 17, 1986 (inception) through December 31, 1993, were
audited by other auditors whose report dated February 11, 1994 expressed an
unqualified opinion on those statements and included an explanatory paragraph
that stated that the Company's "recurring losses and net deficit position raise
substantial doubt about its ability to continue as a going concern. The 1993
financial statements do not include any adjustments that might result from the
outcome of this uncertainty." The consolidated financial statements for the
period October 17, 1986 (inception) through December 31, 1993 include cumulative
net losses of $5,872,416. Our opinion on the consolidated statements of
operations, stockholders' equity and cash flows for the period October 17, 1986
(inception) through December 31, 1996, insofar as it relates to amounts for
prior periods through December 31, 1993, based solely on the report of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, and for the period October 17, 1986
(inception) through December 31, 1993, the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Sheffield Medical Technologies Inc. and
subsidiaries at December 31, 1996, and the consolidated results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
and the period from October 17, 1986 (inception) through December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Sheffield Medical Technologies Inc. and subsidiaries will continue as a
going concern. As more fully described in Note 1, the Company has generated only
minimal operating revenue, has incurred recurring operating losses and requires
additional capital. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Princeton, New Jersey
February 12, 1997, except for Note 9
as to which the date is March 14, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sheffield Medical Technologies Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (net capital deficiency) and cash flows of Sheffield
Medical Technologies Inc. and subsidiary (a development stage enterprise) for
the period from October 17, 1986 (inception) to December 31, 1993 (not included
separately herein). The financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the results of Sheffield Medical Technologies
Inc. and subsidiary's operations and cash flows for the period from October 17,
1986 (inception) to December 31, 1993 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As reflected in the
accompanying consolidated financial statements, the Company's recurring losses
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters were described in note 8 to the
December 31, 1993 financial statements (not included separately herein). The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Houston, Texas
February 11, 1994
F-3
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 1,979,871
Marketable securities 460,768
Prepaid expenses and other current assets 43,975
------------------
Total current assets 2,484,614
------------------
Property and equipment:
Laboratory equipment 185,852
Office equipment 89,019
Leasehold improvements 61,390
------------------
336,261
Less accumulated depreciation 162,007
------------------
Net property and equipment 174,254
------------------
Segregated cash 75,000
Other assets 40,016
------------------
Total assets $ 2,773,884
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 446,965
Sponsored research payable 580,157
Capital lease obligation-current portion 23,719
-----------------
Total current liabilities 1,050,841
Capital lease obligation - non-current portion 27,206
Stockholders' equity:
Preferred stock, $.01 par value. Authorized, 3,000,000 shares; none issued -
Common stock, $.01 par value. Authorized, 30,000,000 shares; issued and
outstanding, 11,388,274 113,883
Notes receivable in connection with sale of stock (110,000)
Additional paid-in capital 28,319,838
Unrealized loss on marketable securities (39,232)
Deficit accumulated during development stage (26,588,652)
-----------------
1,695,837
-----------------
Total liabilities and stockholders' equity $ 2,773,884
=================
</TABLE>
F-4
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Operations
For the years ended December 31, 1996 and 1995 and for the period
from October 17, 1986 (inception) to December 31, 1996
<TABLE>
<CAPTION>
October 17, 1986
Years ended (inception) to
December 31, December 31,
------------------------------ ----------------
1996 1995 1996
---- ---- ----
Revenues:
<S> <C> <C> <C>
Sub-license revenue $510,000 $ 0 $510,000
Interest income 163,664 80,610 396,913
----------- ----------- ------------
Total revenue 673,664 80,610 906,913
Expenses:
Research and development 3,841,818 4,424,154 15,523,197
General and administrative 3,831,204 2,979,437 11,894,692
Interest 9,531 64,736 120,463
------------ ------------ ------------
Total expenses 7,682,553 7,468,327 27,538,352
------------ ------------ ------------
Loss before extraordinary item (7,008,889) (7,387,717) (26,631,439)
Extraordinary item 0 0 42,787
------------- ------------ -------------
Net loss ($7,008,889) ($7,387,717) ($26,588,652)
============= ============ =============
Loss per share of common stock:
Loss before extraordinary item ($0.65) ($0.90) ($6.25)
Extraordinary item 0.00 0.00 0.01
------------- ------------ -------------
Net loss ($0.65) ($0.90) ($6.24)
============= ============ =============
Weighted average common shares outstanding 10,806,799 8,185,457 4,258,177
============ =========== ============
</TABLE>
F-5
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
FOR THE PERIOD FROM OCTOBER 17, 1986 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Notes Unrealized Deficit Total
receivable loss accumulated stockholders'
in connection Additional on during equity
Common with sale paid-in marketable development (Net capital
stock of stock capital securities stage deficiency)
------------ ------------ ----------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balances at October 17, 1986 - - - - - -
Common stock issued $ 11,288,329 - $ 254,864 - - 11,543,193
Common stock options issued - - 75,000 - - 75,000
Net loss - - - - (12,192,046) (12,192,046)
------------- ---------- ------------ -------- -------------- ---------------
Balances at December 31, 1994 11,288,329 - 329,864 - (12,192,046) (573,853)
Reincorporation in Delaware at
$.01 par value (11,220,369) - 11,220,369 - - -
Common stock issued 27,656 - 9,726,277 - - 9,753,933
Net loss - - - - (7,387,717) (7,387,717)
------------- ---------- ------------ -------- -------------- ---------------
Balances at December 31, 1995 95,616 - 21,276,510 - (19,579,763) 1,792,363
Common stock issued 18,267 - 7,043,328 - - 7,061,595
Notes receivable in connection
with sale of stock - (110,000) - - - (110,000)
Unrealized loss on marketable
securities - - - (39,232) - (39,232)
Net loss - - - - (7,008,889) (7,008,889)
------------- ---------- ------------ --------- -------------- ---------------
Balances at December 31, 1996 $ 113,883 $(110,000) $28,319,838 $(39,232) $ (26,588,652) $ 1,695,837
============= ========== ============ ========= ============== ===============
</TABLE>
F-6
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
October 17, 1986
Years ended (inception)dto
December 31, December 31,
------------------------------- ----------------
1996 1995 1996
-------------- ---------------- ----------------
Cash outflows from development stage activities and extraordinary gain:
<S> <C> <C> <C>
Loss before extraordinary item $7,008,889) $(7,387,717) $(26,631,439)
Extraordinary gain on extinguishment of debt - - 42,787
-------------- ----------- ----------------
Net loss (7,008,889) (7,387,717) (26,588,652)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants for services 640,762 357,032 1,541,003
Non-cash interest expense - 50,000 50,000
Issuance of common stock for license - - 5,216
Securities aquired under sub-license agreement (500,000) - (500,000)
Issuance of common stock for intellectual property rights - - 866,250
Amortization of organizational and debt issuance costs - - 77,834
Depreciation 51,189 47,992 141,544
Amortization 20,463 - 20,463
Increase in debt issuance and organizational costs - - (77,834)
Decrease (increase) in prepaid expenses and other current assets 109,810 (88,618) (103,016)
Decrease (increase) in other assets 44,354 (4,387) 19,025
Increase (decrease) in accounts payable, accrued liabilities 245,680 (375,785) (130,105)
Increase (decrease) in sponsored research payable 352,755 (140,454) 1,157,227
-------------- ----------- ----------------
Net cash used by development stage activities $(6,043,876) (7,541,937) (23,521,045)
-------------- ----------- ----------------
Cash flows from investing activities:
Acquisition of laboratory and office equipment (51,136) (24,517) (263,809)
Increase in segregated cash (75,000) - (75,000)
Increase in notes receivable in connection with sale of stock (240,000) - (240,000)
Payments of notes receivable 130,000 - 130,000
-------------- ----------- ----------------
Net cash used by investing activities (236,136) (24,517) (448,809)
-------------- ----------- ----------------
Cash flows from financing activities:
Principal payments under capital lease (21,528) - (21,528)
Conversion of convertible, subordinated notes - - 749,976
Proceeds from issuance of debt - 550,000 550,000
Proceeds from issuance of common stock - 7,699,574 13,268,035
Proceeds from exercise of stock options 471,550 866,127 1,337,677
Proceeds from exercise of warrants 5,949,284 231,200 10,064,481
-------------- ----------- ----------------
Net cash and cash equivalents provided by financing activities 6,399,306 9,346,901 25,948,641
-------------- ----------- ----------------
Net increase in cash and cash equivalents 119,294 1,780,447 1,978,787
Cash and cash equivalents at beginning of period 1,860,577 80,130 1,084
-------------- ----------- ----------------
Cash and cash equivalents at end of period $ 1,979,871 $ 1,860,577 $ 1,979,871
============== =========== ================
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services $ 640,762 $ 357,032$ 1,541,003
Common stock issued for license - - 5,216
Common stock issued for intellectual property rights - - 866,250
Common stock issued to retire debt - 600,000 600,000
Securities acquired under sub-license agreement 500,000 - 500,000
Unrealized depreciation of investments 39,232 - 39,232
Equipment acquired under capital lease 72,453 - 72,453
Notes payable converted to common stock - - 749,976
============== =========== ================
Supplemental disclosure of cash flow information:
Interest paid $ 9,53$ $ 64,73 $ 120,463
============== =========== ================
</TABLE>
F-7
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Sheffield Medical Technologies Inc. ("Sheffield") was incorporated
on October 17, 1986, under the Canada Business Corporations Act. The
Company's wholly-owned subsidiary, U-Tech Medical Corporation
("U-Tech") was incorporated in the state of Texas on January 13,
1992 and is inactive at December 31, 1996. On January 10, 1996, Ion
Pharmaceuticals, Inc., a Delaware corporation ("Ion"), was formed as
a wholly-owned subsidiary of the Company. At that time, Ion acquired
the Company's rights with respect to the anti-proliferative
technology. Unless the context requires otherwise, Sheffield, U-Tech
and Ion are referred to as "the Company". The Company commenced its
biotechnology operations in the United States in January 1992 under
new management and Sheffield became domesticated as a Wyoming
corporation in May 1992. At the Annual Meeting of shareholders of
the Company held on January 26, 1995, the Company's shareholders
approved the proposal to reincorporate the Company in Delaware,
which was effected on June 13, 1995. All significant intercompany
transactions are eliminated in consolidation.
The Company is in the development stage and to date has been
principally engaged in research and licensing efforts. The Company
has generated minimal operating revenue and requires additional
capital which the Company intends to obtain through equity and debt
offerings to continue to operate its business. The Company's ability
to meet its obligations as they become due and to continue as a
going concern must be considered in light of the expenses,
difficulties and delays frequently encountered in starting a new
business, particularly since the Company will focus on research,
development and unproven technology which may require a lengthy
period of time and substantial expenditures to complete. Even if the
Company is able to successfully develop new products or
technologies, there can be no assurance that the Company will
generate sufficient revenues from the sale or licensing of such
products and technologies to be profitable. Management believes that
the Company's ability to meet its obligations as they become due and
to continue as a going concern through December 1997 are dependent
upon obtaining additional financing.
The accompanying consolidated financial statements have been
prepared on a going concern basis which contemplates the realization
of assets and satisfaction of liabilities and commitments in the
normal course of business. The Company has incurred net losses of
$7,008,889 and $7,387,717 during the years ended December 31, 1996,
and 1995 respectively, and has an accumulated deficit of $26,588,652
from inception (October 17, 1986) through December 31,1996.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities generally consist of investments which can be
readily purchased or sold using established markets. The Company's
securities, which are classified as available-for-sale, are carried
at market with unrealized gains and losses reported as a separate
component of stockholders equity.
F-8
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
over three or five year periods using the straight-line method.
Assets under capital leases, consisting primarily of office
equipment and improvements, are amortized over the lesser of the
useful life or the applicable lease terms, whichever is shorter,
which approximate three years.
RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development costs ("R & D costs") are
expensed as incurred, except for fixed assets, to which the Company
has title, which are capitalized and depreciated over their
estimated useful lives. LOSS PER SHARE OF COMMON STOCK
The computation of loss per common share is based on the
weighted-average number of outstanding common shares. Common stock
equivalents are not included because the effect would be
antidilutive. USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
STOCK BASED COMPENSATION
As permitted by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow
Accounting Principal Board Opinion No. 25, "Accounting for Stock
Issued Employees" (APB 25) and related interpretations in accounting
for its stock option plans. Under APB 25, no expense is recognized
at the time of option grant because the exercise price of the
Company's employee stock option equals the fair market value of the
underlying common stock on the date of grant.
3. LEASES
Included in property and equipment are capital leases as follows at
December 31, 1996:
Office equipment $ 51,978
Leasehold improvements 20,475
---------
72,453
Less accumulated amortization (20,463)
---------
$ 51,990
=========
There were no assets under capital leases at December 31, 1995.
The company has sub-leases for office space in four locations which
expire at various times between April, 1997 and December 31, 1998.
The Company also leases certain office equipment under a capital
lease that expires in
F-9
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 1998. The future minimum payments under capital leases and
operating leases at December 31, 1996 are as follows:
Capital Operating
Leases Leases
-------- ---------
1997 $ 29,280 $ 190,524
1998 29,280 166,428
-------- ---------
Total Minimum Lease Payments $ 58,560 $ 356,952
=========
Amounts Representing Interest (7,635)
---------
Present Value of Net Minimum
Lease Payments $ 50,925
=========
Rent expense for the years ended December 31, 1996, 1995 and the period
from October 17, 1986 (inception) to December 31, 1996 was $147,104;
$105,946; and $332,525, respectively.
4. CAPITAL STOCK TRANSACTIONS
The following table represents the issuance of common stock since the
Company's incorporation:
Number of common
shares issued
-------------
Date of incorporation 900,000
Issued during year ended December 31, 1986 990,000
Issued during year ended December 31, 1991 412,500
Issued during year ended December 31, 1992 850,000
Issued during year ended December 31, 1993 2,509,171
Issued during year ended December 31, 1994 1,134,324
Issued during year ended December 31, 1995 2,765,651
Issued during year ended December 31, 1996 1,826,628
----------
Balance outstanding at December 31, 1996 11,388,274
==========
The shares issued during 1993 included (i) 1,666,668 shares related to
the initial public offering; (ii) 272,500 shares related to the exercise
of warrants at a price of Can. $3.50 per share; (iii) 31,250 shares as
consideration for fiscal agency fees; (iv) 10,000 shares related to the
exercise of warrants at a price of Can. $1.00 per share; (v) 524,753
shares related to the conversion of 10% Convertible Notes at an average
price of Can. $1.82 per share; (vi) 4,000 shares to members of the
Scientific Advisory Board, in consideration of their services, at $1.78
per share.
Under the UGIF Technology Option Agreement (the "Option Agreement")
dated November 11, 1992, and approved by the shareholders of the Company
on December 2, 1993, the Company obtained an option from E/J Development
Corporation d/b/a TechSource Development Corporation ("TechSource") to
acquire an exclusive sublicense to the UGIF Technology in exchange for
300,000 shares of Common Stock of the Company (after taking into account
a one-for-two reverse stock split effective on February 11, 1993). Mr.
Douglas R. Eger, who is Chairman of the Company, is a former 50%
shareholder of TechSource. On January 10, 1994, TechSource assigned its
right to receive 215,000 shares of Common Stock pursuant to the Option
Agreement to Mr. Eger and assigned its right to receive 85,000 shares of
Common Stock pursuant to the Option Agreement to Mr. Jenke. Effective
January 10, 1994, the Company issued such shares to Messrs. Eger and
Jenke at approximately $0.02 per share (market value of
F-10
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$4.8125 per share) on January 10, 1994, at which time the Company
recorded the estimated fair market value of $866,250 as an expense. Mr.
Eger sold his interest in TechSource to Mr. A.M. Jenke, a former
director and officer of Sheffield, in September 1994.
In March 1994, a total of $3,121,164 was received from the exercise of
832,324 of the Company's Redeemable Stock Purchase Warrants issued in
connection with the Company's February 1993 initial United States public
offering of 833,334 units, each such unit consisting of two shares of
Common Stock and one Redeemable Common Stock Purchase Warrant
exercisable for one share of Common Stock at a price of $3.75, net of
the buyback of 1,010 warrants at $0.05 per warrant.
In April 1995, gross proceeds of $3,280,600 were received through the
issuance of 410,075 units by private placement at a price of $8.00 per
unit. Each such unit consisted of two shares of the Company's Common
Stock and a warrant to purchase one share of common stock at a price of
$5.00 at any time up until and including February 10, 2000. The warrants
are redeemable by the Company under certain circumstances.
On January 23, 1995, SMT made a 10% loan (the "SMT Loan") to the Company
in the principal amount of $550,000 pursuant to a demand loan agreement
(the SMT Loan Agreement"). Under the terms of the SMT Loan Agreement,
SMT could demand the payment in full of the SMT Loan at any time or
December 31, 1996 whichever came first. To secure the Company's
obligations under the SMT Loan Agreement, the Company granted SMT a
security interest in substantially all of the Company's assets, which
security interest has since been released. The note evidencing the SMT
Loan (the "Original SMT Note") was exchanged pursuant to the terms of
the SMT Loan Agreement for a new note (the "SMT Convertible Note") that
permitted the holder to exchange the SMT Convertible Note (in whole or
in part) into 200,000 shares of Common Stock. In addition, the SMT Loan
Agreement required the Company upon issuance of the SMT Convertible Note
to issue to SMT warrants (the "SMT Warrants") to acquire 200,000 shares
of Common Stock at any time within five years after the date of issue
for a price of $4.00 per share. The SMT Warrants are redeemable by the
Company for $4.00 per share at any time after the price of the Common
Stock exceeds an average of $6.00 per share for 20 business days. SMT
was granted certain registration rights with respect to the Common Stock
issuable to SMT upon conversion of the SMT convertible Note and SMT
Warrants. By letter dated June 1, 1995, SMT exercised its right to
convert the SMT Convertible Note into 200,000 shares of Common Stock and
subsequently assigned the right to such shares to an unaffiliated third
party.
In July 1995, the Company completed a private placement of 1,375,000
units to accredited investors at a price of $4.00 per unit for gross
proceeds of $5,500,000. Each such unit consists of one share of the
Company's Common Stock and a warrant to purchase one share of common
stock at a price of $4.50 at any time up until and including February
10, 2000. The warrants are redeemable by the Company under certain
circumstances.
On April 30, 1996, the Company completed its warrant discount program
through which the Company offered holders of warrants issued in private
placements completed in 1995 the opportunity to exercise such warrants
at up to a 121/2 % discount from the actual exercise prices of such
warrants. A total of $5.6 million was received from the exercise of such
warrants with the related issuance of 1,373,250 shares of common stock.
5. STOCK OPTIONS AND WARRANTS
The 1993 Stock Option Plan was adopted by the Board of Directors in
August 1992 and approved by the shareholders at the annual meeting in
December 1993. An amendment to the Plan received shareholder approval on
March 15, 1995. Under the Stock Option Plan, the maximum aggregate
number of shares which may be optioned and sold is 1,000,000 shares of
common stock. The Stock Option Plan permits the grant to employees and
officers of the Company of both incentive stock options and
non-statutory stock options. The Stock Option Plan is administered by
the Board of Directors or a committee of the Board, which determines the
persons to whom options will be granted and the terms thereof, including
the exercise price, the number of shares subject to each option, and the
exercisability of each option. The exercise price of all options for
common stock granted under the Stock Option
F-11
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan must be at least equal to the fair market value on the date of
grant in the case of incentive stock options and 85% of the fair market
value on the date of grant in the case of incentive stock options and
85% of the fair market value on the date of grant in the case of
non-statutory stock options. Options generally expire five years from
the date of grant and vest upon continuous employment by the Company for
12 months after the date of grant.
The 1993 Restricted Stock Plan under which shares of the Company are
reserved, in such amounts as determined by the Board of Directors, for
issuance as part of the total shares reserved under the Stock Option
Plan described above, was adopted by the Board of Directors in August
1992 and approved by the shareholders at the annual shareholders meeting
in December 1993. The Restricted Stock Plan authorized the grant of a
maximum of 150,000 shares of common stock to key employees, consultants,
researchers and members of the Company's Scientific Advisory Board. The
Restricted Stock Plan is administered by the Board of Directors or a
committee of the Board, which determines the person to whom shares will
be granted and the terms of such share grants. As of the date hereof, no
shares have been granted under the 1993 Restricted Stock Plan.
The 1996 Directors Stock Option Plan was adopted by the Board of
Directors and approved by the shareholders on June 20, 1996. Under the
Stock Option Plan, the maximum aggregate number of shares which may be
optioned and sold is 500,000 shares of common stock. The Directors Stock
Option Plan granted each eligible director 15,000 stock options. To the
extent that shares remain available, any new directors shall receive the
grant of an Option to purchase 25,000 shares. To the extent that Shares
remain available under the plan, on January 1 of each year commencing
January 1, 1997, each eligible director shall be granted an option to
purchase 15,000 shares. The exercise price of all options granted under
the Directors Stock Option Plan shall be the fair market value at the
date of the grant. Options generally expire five years from the date of
grant. As of the December 31, 1996, 45,000 shares have been granted
under the 1996 Directors Stock Option Plan.
At the annual meeting of stockholders of the Company held on January 26,
1995, the company's shareholders approved an increase in the number of
shares of common stock available for issuance pursuant to the Company's
1993 Stock Option Plan from 250,000 shares to 500,000 shares.
On January 23, 1995, the Company granted stock purchase warrants to
purchase 200,000 shares of the Company's common stock issuable upon
conversion of an exchangeable demand note to a financial advisor. In
June 1995, such warrants were exercised for 200,000 shares of the
Company's Common Stock.
On February 13, 1995, the Company granted options to purchase a total of
200,000 shares of the Company's common stock to four new members of the
Board of Directors at an exercise price of $4.00 which approximated fair
market value.
At the annual meeting of stockholders of the Company held on June 20,
1996, the Company's shareholders approved an increase in the number of
shares available for issuance pursuant to the Company's 1993 Stock
Option Plan from 500,000 shares to 1,000,000 shares.
FASB 123 requires pro forma information regarding net income and
earnings per share as if the Company has accounted for its stock options
and warrants granted subsequent to December 31, 1994, under the fair
value method of FASB 123. The fair value of these stock options and
warrants is estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1996
and 1995: risk-free interest of 6.23%, 6.13%, 6.00% and 5.57%; expected
volatility of 0.60; expected option life of one to four years from
vesting and an expected dividend yield of 0.0%.
F-12
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the
stock options and warrants is amortized to expense over the options'
vesting period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Pro forma net loss................................... $ 8,500,149 $ 8,993,554
Pro forma net loss per share of common stock......... $ 0.79 1.10
</TABLE>
Because FASB 123 is applicable only to equity awards granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected
until 1998.
Transactions involving stock options and warrants are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- ------------------------------------
Weighted Average Weighted
Common Stock Exercise Common Stock Average
Options Price Options Exercise Price
------------------- ------------------ ------------------- ----------------- --------------
<S> <C> <C> <C> <C>
Outstanding, January 1.. 14,164,834 4.02 1,792,000 3.33
Granted................. 1,014,922 5.52 3,091,408 4.63
Expired................. 70,000 3.77 0 0
Exercised............... 1,942,501 3.76 345,500 3.51
Canceled................ 133,500 4.53 373,074 4.79
---------- -------- ----
Outstanding December 31,.. 3,033,755 4.49 4,164,834 4.02
---------- ---------
Exercisable at end of year.. 2,094,833 1,727,759
---------- ----------
Weighted average fair value of
options granted during the year.. $ 2.30 $ 2.30
</TABLE>
Stock Options outstanding at December 31, 1996 are summarized as
follows:
Weighted
Average Weighted
Range of Outstanding Remaining Average
Exercise Options at Contractual Exercise
Prices Dec. 31, 1996 Life (Yrs.) Price
------------- -------------- ----------- ------------
$ .73 - $3.00 300,000 1.06 $ 1.95
$3.25 - $5.00 1,879,252 2.35 $ 4.18
$5.06 - $8.25 854,503 3.48 $ 6.07
---------
$ .73 - $8.25 3,033,755 2.54 $ 4.49
=========
F-13
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the period January 1, 1995 through December 31, 1996, the
exercise prices of options and warrants issued by the Company were as
follows:
Number of Exercise
Year Options/Warrants Price
---- ---------------- ------------
1995 3,091,408 $3.25 - 5.00
1995.............. 1,014,922 $3.381-98.25
At December 31, 1996, a total of 829,000 shares were available for
future grants under the 1993 Stock Option Plan, the 1993 Restricted
Stock Plan, and the 1996 Directors Stock Option Plan.
6. RESEARCH AND DEVELOPMENT AGREEMENTS
On May 31, 1996, the Company obtained an exclusive, worldwide right and
license with Baylor College of Medicine. The License Agreement gives the
Company an exclusive license to inventions and discoveries relating to
ps20/Urogenital Sinus Derived Growth Inhibitory Factor. The agreement
requires the Company to pay Baylor College 30% of gross compensation
received for licensed products covered by a valid claim and 10% of gross
compensation not covered by a valid claim for a period of ten years.
On June 1, 1996, the Company entered into a Research Agreement with
Children's Hospital of Boston, MA. Under the agreement, Children's
Hospital has agreed to perform certain scientific research, under the
direction of principal investigator Dr. Wayne I. Lencer, related to the
discovery, manufacturing and novel uses of certain imidazoles, their
metabolites and analogues thereof, and other related compounds. The
agreement requires the Company to pay $200,050 for related research and
related equipment on an agreed upon payment schedule through March 1997,
subject to extensions upon the occurrence of certain events.
This agreement also grants the Company an exclusive option to obtain a
world-wide license under the Background Technology, Research Technology,
Patent Rights and Research Patent rights. Under this agreement the
Company has funded $143,663 through December 31, 1996.
In July of 1996 the Company entered into a sub-license agreement with
SEQUUS Pharmaceuticals, Inc. ("SEQUUS") whereby the Company granted an
exclusive sub-license to SEQUUS for the continued development and
commercialization of the Liposome-CD4 technology. In connection with the
signing of the sub-license agreement, the Company received a license
issue fee payment from SEQUUS in the form of SEQUUS common stock which
is classified as marketable securities in the Company's December 31,
1996 balance sheet. The Company is also entitled to receive milestone
payments and royalty payments based on clinical trial results and future
product sales, if any which utilize the sub-licensed technology.
On August 22, 1996, the Company entered into Amendment #2 to the
Research Agreement, dated August 22, 1994, with The President and
Fellows of Harvard College. Under the agreement, Harvard has agreed to
conduct research under the direction of principal investigator Dr. Jose
A. Halperin to conduct laboratory and animal studies for the potential
use of Clotrimazole and to screen new proprietary analogues and/or drugs
that potentially have the same effect as Clotrimazole. The agreement
requires the Company to pay $992,232 for related research and equipment
on an agreed upon payment schedule through July 1996, subject to
extensions upon the occurrence of certain events. Under this amendment
and its previous agreement the Company has funded $985,404 for the year
ended December 31, 1996.
In October of 1996, the Company entered into an amendment of a Research
and Option License Agreement dated June 17, 1995. The Amendment was
effective as of June 17, 1995 for a two year period through June 17,
1997. The Agreement allows the Company to obtain an exclusive worldwide
license from the French National Institute of Health and Medical
Research ("INSERM") to an HIV-AIDS vaccine being developed by Inserm.
Under this
F-14
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Agreement the Company has agreed to pay $100,000 for related research
through April 1997. In connection with this research, the Company has
entered into an agreement with Association Claude Bernard, also in
October of 1996. The agreement requires the Company to pay $300,000 for
the related research and supplies on an agreed upon payment schedule
through April 1997. Under both agreements, the Company has funded
$300,000 through December 31, 1996.
On November 1, 1996, the Company entered into Amendment #6 to the
Research Agreement, dated June 1, 1995 with Children's Hospital of
Boston, MA. Under the agreement, Children's Hospital has agreed to
perform certain research under the direction of principal investigator
Dr. Carl Brugnara on the study of analogues of Clotrimazole and/or
Clotrimazole metabolites. The agreement requires the Company to pay
$224,468 for related research and equipment on an agreed upon payment
schedule through July 1997, subject to extensions upon the occurrence of
certain events. Also on November 1, 1996, the Company elected to
exercise its option to a license agreement related to the Research
Agreement. This agreement grants the Company the exclusive worldwide
license on the Background Technology and the Research Technology derived
from the agreement. Under this amendment and its previous agreement, the
Company has funded $180,153 for the year ended December 31, 1996.
In 1996, the Company entered into quarterly Research and Consulting
Agreements with Pharm-Eco Laboratories, Inc. for the development and
synthesis of novel compounds related to the Ion Pharmaceuticals
Technologies. The agreements require the Company to pay $175,000 plus
expenses each quarter for related research and consulting. Under these
agreements the Company has funded $773,522 for the year ended December
31, 1996.
7. RELATED PARTY TRANSACTIONS
On January 23, 1995, SMT made a $550,000 loan to the Company pursuant to
a demand loan agreement. In June 1995, SMT exercised its right to
convert the SMT convertible note to 200,000 shares of common stock and
subsequently assigned the right to such shares to an unaffiliated third
party in exchange for repayment of the loan and interest. In addition,
the Company, as required under the Note, issued warrants to acquire
200,000 shares of common stock at any time within five years after the
date of issuance at a price equal to $4.00 per share (See Note 4). Dr.
Stephen Sohn, a member of the Board of Directors of the Company, is also
general partner of SMT.
8. INCOME TAXES
The Company utilizes the liability method to account for income taxes.
Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets
and liabilities and are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax asset at
December 31, 1996 which is considered noncurrent, are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 8,800,000
Capitalized start-up costs for tax purposes 578,000
Deferred tax asset valuation allowance (9,378,000)
-------------
Net deferred tax asset $ -
=============
The valuation allowance for deferred tax assets as of December 31, 1995,
was $6,678,000. The net change in the total valuation allowance for the
year ended December 31, 1996, was an increase of $2,700,000. At December
31, 1996, the Company has net operating loss carryforwards of
approximately $24,400,000 for tax purposes which are available to offset
federal taxable income, if any, through 2011. An ownership change
pursuant to Section 382 of the
F-15
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internal Revenue Code occurred in April 1995 as a result of a private
placement of the Company's common stock and warrants. Accordingly,
utilization of the Company's pre-change net operating loss carryforward
(approximately $13,600,000) is restricted to approximately $2,220,000
per year, and the related deferred tax assets have been fully reserved.
9. SUBSEQUENT EVENTS
On February 28, 1997, the Company closed a private offering of 35,000
shares of 7% Series A Cumulative Convertible Redeemable Preferred Stock
at a purchase price of $100.00 per Share, which raised total gross
proceeds of $3.5 million. Each investor is also entitled to receive
five-year Warrants to purchase Common Stock of the Company equal to 1/3
the number of shares of Common Stock issuable upon conversion of the
Preferred Stock. The Warrants will be issued at 110% of the closing bid
price per share of the common stock on the closing date. Proceeds will
be used for funding research and development, patent prosecution, and
for working capital and general corporate purposes, including the
possible acquisition of rights in new technologies in the Company's
ordinary course of business.
On March 14, 1997, the Company signed a letter of intent to acquire, for
stock, Camelot Pharmacal, L.L.C., a privately held emerging
pharmaceutical company. As part of the contemplated transaction,
Camelot's management team would join the Company. Camelot's product
portfolio consists of late-stage development opportunities. The
acquisition is expected to be completed by the end of May, 1997. As part
of the business combination, Camelot's principals will have the
opportunity to invest in the Company by purchasing up to $5.0 million of
common stock at current market prices.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,979,871
<SECURITIES> 460,768
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,484,614
<PP&E> 336,261
<DEPRECIATION> 162,007
<TOTAL-ASSETS> 2,773,884
<CURRENT-LIABILITIES> 1,050,841
<BONDS> 0
0
0
<COMMON> 113,883
<OTHER-SE> 1,581,954
<TOTAL-LIABILITY-AND-EQUITY> 2,773,884
<SALES> 0
<TOTAL-REVENUES> 673,664
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,673,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,531
<INCOME-PRETAX> (7,008,889)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,008,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,008,889)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
