SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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.
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(Name of Small Business Issuer in its Charter)
Delaware 13-3808303
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(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organi- Number)
zation)
30 Rockefeller Plaza, New York, New York 10112
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(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
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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)
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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 11,388,274 shares of the issuer's Common Stock, $.01 par
value.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Sheffield Medical Technologies, Inc. (the "Company") is a healthcare
company involved in the development of therapies, delivery systems and devices.
The Company is in the development stage and as such has been principally engaged
in licensing and research and development of certain biomedical technologies.
Under sponsored research agreements with independent companies, universities and
other institutions ("Sponsored Research Agreements"), the Company funds
pharmaceutical, biomedical and medical research and clinical testing in exchange
for license rights to commercialize resulting products and technologies. By
utilizing third party development and distribution resources, the Company
believes that it can effectively avoid the substantial fixed costs traditionally
associated with in-house research, development, production and distribution.
The Company does not intend to manufacture or market its products.
Instead, the Company intends to finance research projects in consideration for
license rights. Thereafter, the Company will attempt to enter into manufacturing
and marketing agreements with one or more established biomedical or
pharmaceutical companies for any products which are developed.
The Company was originally formed in 1986 as Sheffield Strategic
Metals, Inc., a Canadian company, to engage in mineral exploration and
development. It conducted no significant business activities from 1986 until
late 1991. The Company commenced its biotechnology business in the United States
in January 1992 under new management and became domesticated as a Wyoming
Corporation in May 1992. The Company became a Delaware corporation in June 1995
through its merger with and into a wholly-owned Delaware subsidiary. U-Tech
Medical Corporation ("U-Tech") and Ion Pharmaceuticals, Inc. ("Ion") were formed
as wholly-owned subsidiaries of the Company on January 13, 1992 and January 10,
1996, respectively. Unless the context requires otherwise, references to the
"Company" herein are references to Sheffield Medical Technologies Inc. and its
subsidiaries, Ion and U-Tech.
The Company's headquarters are located at 30 Rockefeller Plaza, Suite
4515, New York, New York 10112, and its telephone number is (212) 957-6600.
BUSINESS STRATEGY
COMMERCIALIZATION OF MEDICAL TECHNOLOGIES
The Company acquires the rights to and develops technologies for
commercialization. The Company's strategy is to convert intellectual property
rights for compounds and devices into marketable products by licensing and
managing effective commercialization, rather than by replicating the development
laboratories and sales forces of the mainstream industry. The Company competes
in three of the leading areas of potential value generation in the
pharmaceutical industry today: (i) supporting high technology, (ii) bringing
patient satisfying innovative drugs to market and (iii) developing medical and
diagnostic devices to improve patient care. If Company-sponsored research and
clinical testing are successful, the Company intends to enter into sublicense,
joint venture or other collaborative agreements with one or more pharmaceutical,
biomedical or medical companies to pursue later phase clinical testing and
product manufacturing and marketing. By utilizing third party development and
distribution resources, the Company believes that it can effectively avoid the
substantial fixed costs traditionally associated with in-house research,
development, production and distribution.
The Company is developing a group of diversified technologies having
markedly different time horizons to potential commercialization. The Company
believes that this product portfolio approach diminishes some of the risk of
investing in single-product biotech, pharmaceutical or device companies. Since
the Company neither invests in laboratory facilities nor in salaried research
workers, it has reduced vulnerability and increased flexibility to enter into
technology development programs and exit such programs through a variety of exit
strategies. By investing only in direct development costs, the Company can
immediately divest itself of any program with reduced financial consequences
upon indications that such program is not meeting planned milestones.
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IDENTIFICATION OF RESEARCH PROJECTS
The Company identifies and conducts due diligence regarding new medical
technologies and thereafter assists in the management of research, development,
marketing, commercialization and patent prosecution of technologies and
products. The Company's management has substantial experience in the areas of
technology transfer, licensing, product acquisition and intellectual property
protection and management. Additionally, the Company's management has
established relationships with certain pharmaceutical, biomedical and medical
companies and universities and medical schools.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development under Sponsored
Research Agreements with universities and other research institutions. Under
these agreements, the Company finances the research and development costs of a
project in return for a percentage of the revenues which may result from the
commercial sale of resulting products, if any. Through this arrangement the
Company believes that it saves significant fixed costs associated with research
and development, such as facilities and full-time personnel, which it would
incur if it attempted to independently develop products. The Company manages the
preparation and submission of IND's (Investigational New Drug Applications) and
NDA's (New Drug Applications) and protocols to the U.S. Food and Drug
Administration (the "FDA"), monitors the approval process of such notification
and applications and conducts the initial assessment of commercial markets for
developed products.
TECHNOLOGY TRANSFER
The Company believes that its management strength is in bridging the
gap between research and commercial markets for developed products. Therefore,
management's principal focus is on technology transfer and licensing. The
Company endeavors to identify viable research projects and to negotiate
financing at the appropriate stage of such projects. In addition, the Company
will analyze and attempt to identify the appropriate stage to sell or sublicense
the technology related to such projects in order to maximize the economic return
to the Company. The Company does not intend to establish an in-house research
staff or to construct or operate manufacturing or distribution facilities.
Instead, the Company's strategy is to finance existing research projects in
return for a license agreement, sublicense agreement, royalty or other
arrangement whereby it acquires proprietary rights to the technologies and
products developed in such projects. At an appropriate stage, the Company
anticipates that it will sell, sublicense or enter into a joint venture or other
collaborative agreement with a pharmaceutical or other biomedical company for
the manufacture and marketing of the Company's products.
ALLOCATION OF RESOURCES
The Company has utilized and will continue to utilize the proceeds from
the sales of its securities and, ultimately, will use its operating revenues, to
finance research and development of specific projects. If its research is
successful, the Company may continue to finance the project through subsequent
stages or, depending on market, financial and other considerations, it may
attempt to enter into a collaborative agreement with a third party. In the case
of unsuccessful research projects or where commercialization is impossible or
impractical, the Company may terminate such projects and reallocate its
resources to new projects. Revenues from commercialized projects will be used to
finance additional projects, and the Company may attempt to raise additional
debt or equity to finance existing or new projects.
RELATIONSHIP WITH RESEARCH INSTITUTIONS
The Company's success depends, in part, on its ability to develop and
maintain relationships with leading research institutions. In addition, the
Company relies on principal investigators who are members of the faculties or
staff of research institutions. Such individuals generally are subject to
policies established by their institutions regarding commercial activities. The
Company is not aware of any conflicts between the activities of researchers it
sponsors and the present policies of the respective universities with which they
are associated.
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PROJECTS UNDER DEVELOPMENT
RBC-CD4 ELECTROINSERTION TECHNOLOGY
BACKGROUND. The Company is the worldwide licensee of certain technology
(the "RBC-CD4 Electroinsertion Technology") relating to the electroinsertion of
full-length CD4 protein into red blood cells ("RBC-CD4") for use as a potential
therapeutic in the treatment of human immunodeficiency virus ("HIV") that leads
to Acquired Immune Deficiency Syndrome ("AIDS"). The electroinsertion process
inserts CD4, the protein that serves as the binding site of the HIV virus, into
a red blood cell. This altered cell complex acts as a decoy and is designed to
cleanse the blood of infection by binding to and removing the HIV virus from
circulation before it can infect other cells in the human immune system.
TECHNOLOGY. A number of AIDS research projects have studied CD4, which
is a glycoprotein found on the surface of T4 lymphocytes. T4 lymphocytes are
helper cells that mediate antigen presentation of the immune system. CD4
attaches to a glycoprotein on the surface of HIV known as gp120. HIV binds the
CD4 glycoprotein, which enables it to enter the T4 cells, where it can
replicate. By this process, HIV attacks T4 cells and, as a result, debilitates
the immune system by rendering the immune system incapable of neutralizing HIV.
Eventually, the number of T4 cells decrease and the level of HIV in the blood
increases. This typically leads to the development of AIDS which is
characterized by the ultimate collapse of the immune system. Once the immune
system is destroyed, other germs and viruses that ordinarily would be
successfully neutralized by the immune system lead to opportunistic diseases.
These opportunistic diseases are ultimately the cause of death in AIDS patients.
A number of approaches have been used in the search for a treatment for
AIDS. Scientific efforts have focused principally on the use of compounds or
vaccines with the ability to stop the multiplication or replication of HIV. The
four principal compounds that have been approved by the FDA to date are AZT,
ddI, ddC and d4T.
The use of CD4 as a potential treatment for AIDS is not new. Previous
research by many others focused on the soluble form of CD4. This technique has
proved ineffective because: (i) the half-life of soluble CD4 or hybrid molecules
such as CD4-IgG is short in blood circulation; (ii) the binding of soluble CD4
to HIV appears to tear some of the viral envelope glycoprotein without reducing
infectivity; and (iii) the amounts of soluble CD4 needed to establish
therapeutic concentrations are very large.
The Company's RBC-CD4 Electroinsertion Technology differs from the
traditional focus on compounds and vaccines that inhibit the replication of HIV.
RBC-CD4 Electroinsertion Technology has its basis in studies that indicate that
HIV will bind to red blood cells ("RBC") containing CD4 in its membrane and that
once so internalized into the RBC, may disintegrate. In simplest terms, the
technology focuses on incorporating the full-length CD4 into the RBC membrane.
The technology is intended to slow the spread of HIV in the body of an infected
patient and diminish or eliminate the possibility of HIV infection being spread
to others by contact with the infected person, and to help eliminate cells that
produce HIV from circulation. Because the technology may slow or eliminate the
advancement of HIV infection to AIDS, it is a potential therapeutic, but may not
be a cure.
The Company's RBC-CD4 Electroinsertion Technology was originated in
1987 by Dr. Y. Claude Nicolau and other scientists then associated with The
Texas A&M University System ("TAMUS"). Dr. Nicolau is the principal investigator
for the RBC-CD4 Electroinsertion Technology research sponsored by the Company.
RBC-CD4 Electroinsertion Technology exposes RBC to a pulsed electric field that
allows the incorporation of certain proteins into the cell membrane. Many types
of proteins can be used as therapeutics. Proteins which contain a sequence
called a "hydrophobic membrane spanning sequence" can be attached to RBC by the
electroinsertion technique. The hydrophobic membrane spanning sequence is a
portion of the protein that is not water soluble. This is critical in order for
the protein to immerse itself into the membrane during the electroinsertion
procedure. The electroinsertion process causes a temporary disordering of the
cell membrane lipid bilayer. When this disordering of the membrane occurs in the
presence of a protein with a hydrophobic sequence, the hydrophobic portion of
the protein immerses itself into the membrane at the point of disordering,
resulting in a cell with the protein inserted in the membrane. One such protein
that contains a hydrophobic sequence is "full-length" CD4. Significantly,
full-length CD4 consists of the hydrophobic portion and a soluble extracellular
domain and a cytoplasmic domain. When the hydrophobic sequence is deleted, CD4
is secreted as a soluble protein which, as described below, is the protein that
has been unsuccessful in research for the development of HIV/AIDS therapeutics.
The Company's licensed technology is for insertion of the potentially more
effective "full-length" CD4 into red blood cells for use as a therapeutic for
the treatment of HIV/AIDS. In the research funded by the Company, Dr. Nicolau
has successfully electroinserted full- length CD4 into rabbit, mouse, pig and
human red blood cell membranes to determine the affinity and binding
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strength of the RBC-CD4 with the HIV virus. These tests have shown that RBC-CD4
may overcome the problems associated with soluble CD4, including: (i) RBC-CD4
has shown no immune response in animals or humans; (ii) RBC-CD4 remains in the
body for almost the normal half life span of a RBC, which is 60 days; and (iii)
RBC-CD4 has shown a significantly improved binding affinity and indicates the
capacity to inhibit HIV infection of susceptible cells.
Because infection also occurs in the lymph nodes, the Company is
developing a companion technology, Liposome-CD4, to address the elimination of
HIV in the lymphatic system. In addition, the Company is developing an AIDS
Vaccine for preventing HIV infection.
PROGRESS OF RESEARCH AND DEVELOPMENT. The IND and test protocols were
submitted in 1991 and were approved by the FDA in 1992. Phase I Clinical Trials
with HIV-infected patients began in February 1992 on four patients. Researchers
affiliated with TAMUS, the Center for Blood Research Laboratories, Inc.
("CBRL"), a wholly owned subsidiary of The Center for Blood Research, Inc. (an
affiliate of Harvard Medical School), and Baylor College of Medicine, in
conjunction with the Veterans Affairs Medical Center, completed these Phase I
Clinical Trials in Houston, Texas, in April 1992. The 60-day trial included
meeting three criteria: (i) adequate residence time in the blood stream by
RBC-CD4 (the red blood cells into which the CD4 protein has been inserted that
act as the binding site for HIV) to permit the HIV virus to bind with the cells
and potentially be eliminated from the circulation; (ii) no reduction in the
normal functioning of the red blood cell; and (iii) no adverse immune response
or toxicity.
The completion of Phase I Clinical Trials essentially confirmed that
there are no significant adverse human responses to the process at
sub-therapeutic doses. Results indicated that (i) the red blood cell's normal
functioning is not altered by the electroinsertion procedure; (ii) the life span
of the RBC-CD4 is equal to the life span of normal red blood cells; (iii) the
majority of the electroinserted CD4 remains on the red blood cell surface for
the entire life span and little shedding of CD4 occurs, if any; and (iv) no side
effects or immune responses were observed. The companion studies demonstrated
that RBC-CD4 reproducibly inhibits the transmission of primary "wild type" HIV
strains cultured from HIV-infected patients, or cell-to-cell transmission of the
virus, up to nearly 100 percent. IN VITRO studies also have shown that the
RBC-CD4 loaded with HIV virus does not infect macrophages during phagocytosis,
the process of normally removing foreign particles and red cells at the end of
their life span (approximately 120 days). Phase I Clinical Trials did not
confirm anti-viral activity in humans, which is the purpose of additional
trials.
The IND for Phase I/IIA Clinical Trials was submitted by the Company to
the FDA on August 18, 1994 for approval to conduct Phase I/II human clinical
studies at Johns Hopkins to test the product's safety and anti-viral activity at
various doses, and the Company received approval from the FDA to commence the
trial on July 17, 1995. The Phase I/IIA Clinical Trial consists of a safety
study with two patients at the lowest dose of RBC-CD4 and a safety and activity
study with two parts: (1) five patients being dosed with a middle dose of
RBC-CD4, one of which receives placebo; and (2) 12 patients being dosed at the
highest dose of RBC-CD4, two of which receive placebo. The first patient under
the Phase I/IIA Clinical Trials was dosed on August 8, 1995, the first patient
to be dosed with the middle dose of RBC-CD4 was dosed on November 16, 1995, and
the first patient to be dosed at the highest dose of RBC-CD4 was dosed on
January 29, 1996.
RECENT DEVELOPMENTS The last patient in the trial completed the last
time point for clinical and laboratory assessment in late October 1996. All data
analyses and review has been completed and the medical and statistical report is
expected to be completed during the second quarter of 1997.
LIPOSOME-CD4 TECHNOLOGY
BACKGROUND. The Company is the worldwide licensee of certain technology
(the "Liposome-CD4 Technology") relating to the incorporation of CD4 antigens
into liposome bilayers and their use as a potential therapeutic agent in the
treatment of HIV/AIDS. While RBC-CD4 Electroinsertion Technology is being
developed by the Company to target HIV and HIV-infected cells in the blood,
Liposome-CD4 Technology is being developed by the Company to target infections
in the human lymphatic system, a major reservoir for infection not directly
reached by blood circulation.
TECHNOLOGY. CD4 is a glycoprotein found on the surface of T4
lymphocytes, which are helper cells that mediate antigen presentation of the
immune system. CD4 also acts as the receptor for a glycoprotein on the surface
of the HIV virus known as gp120. HIV binds to the CD4 glycoprotein which enables
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the virus to enter the T4 cells where it can replicate. By this process, HIV
attacks T4 cells and debilitates the immune system, which typically leads to the
development of AIDS. Once the immune system is destroyed, other germs and
viruses that would ordinarily be successfully neutralized by the immune system
lead to opportunistic diseases, which ultimately cause death to AIDS patients.
Lipids consist of two layers (bilayers) of fatty acids surrounded by
water; such bilayers are fluid and very flexible. Liposomes can be formed by
agitating phospholipids in water suspensions at high frequencies to form a
closed vesicle surrounded by a continuous lipid bilayer. Liposomes have
properties that are very similar to those of natural membranes and have been
studied for carrying, in their interior, specific drugs for the purpose of
increasing their potency and safety. Liposomes are eventually broken down and
metabolized by the body, or fuse with their target, at which time the content of
the liposome is released. The Company is researching the use of liposomes in
treating HIV/AIDS because the virus is not only found in the circulatory system,
but the lymphatic system as well, which is an area that liposomes can reach. It
is believed that the lymph nodes, which are a reservoir of HIV infection, could
be targeted for removal of HIV and HIV-infected cells. Liposomes inserted with
CD4 ("Liposome-CD4") would be used in conjunction with the Company's RBC-CD4
Electroinsertion Technology which targets the circulatory system, thereby
providing a treatment package for both the blood stream and the lymph nodes.
The strategy of Liposome-CD4 is to incorporate CD4 in the bilayer of
the liposomes, providing a specific target (I.E., HIV and HIV-infected cells)
for liposome fusion. The Liposome-CD4 may also be loaded with cytotoxic agents,
or agents that will kill the target cell. When the free-floating HIV comes in
contact with Liposome-CD4, the virus fuses with Liposome-CD4 and is inactivated.
The remains of the killed infected T4 cell and inactivated virus fused with
Liposome-CD4 would then be removed by macrophages (white blood cells). The
therapeutic aim, as with RBC-CD4, is to reduce HIV infectivity and slow or
eliminate the advancement of HIV infection to AIDS.
PROGRESS OF RESEARCH AND DEVELOPMENT. The first milestone of the
Liposome-CD4 research, which included IN VITRO studies of Liposome-CD4
interaction with HIV from patient (and simian immunodeficiency virus ("SIV")
from M. Rhesus monkeys) isolate studies with Liposome-CD4 encapsulating a
cytotoxic agent, was completed in August 1994 with the IN VITRO studies
demonstrating promising anti-viral activity. In vitro HIV inactivation results
have shown favorable viral inhibition against HIV patient isolates and a new
SHIV (hybrid virus of SIV containing the HIV envelope) isolate.
RECENT DEVELOPMENTS. On July 17, 1996, the Company entered into a
Sublicense Agreement with SEQUUS Pharmaceuticals, Inc. ("SEQUUS") for the
continued development and commercialization of the Liposome-CD4 Technology.
Under development by SEQUUS, a clinical formulation prototype has been chosen, a
scaleable process to formulate Liposome-CD4 has been developed, CD4 from various
constructs are being produced, and additional feasibility studies are currently
underway.
RBC-CD4 ELECTROINSERTION AND LIPOSOME CD4 TECHNOLOGIES-COMMERCIALIZATION AND
POTENTIAL MARKETS.
The World Health Organization estimated in 1996 that there were
approximately 26.6 million persons worldwide infected with HIV. The Pan American
Health Organization (the "PAHO") estimates that as of November 1996, the total
cases of AIDS reported worldwide is 1,544,067, the total estimated number of
AIDS cases (reported and not reported) worldwide is 8.4 million and the
estimated number of cases of HIV infection worldwide is 20.6 million.
RBC-CD4 could be administered to HIV and AIDS patients either as a
typical pharmaceutical through blood transfusion injections or through
autologous transfusions at licensed treatment centers. In the first method,
recombinant full-length CD4 would be produced on a large scale and
electroinserted in a universal donor blood from public blood supplies. RBC-CD4
could then be sold much like blood for transfusions for treatment in a clinical
setting with periodic infusions as required based on the level of viral burden.
In the second method, the distributor could decentralize the production and
infusion through local treatment centers. The centers would most likely be set
up through a large medical outpatient or hospital management firm.
Liposome-CD4 could be administered to HIV and AIDS patients for
treatment in a clinical setting with periodic treatments as required based on
the level of viral burden. An alternative would be to administer Liposome- CD4
through local treatment centers, perhaps at the same center that RBC-CD4 would
be administered. The centers would most likely be set up through a large medical
outpatient or hospital management firm.
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HIV/AIDS VACCINE
BACKGROUND. The Company holds an exclusive worldwide license to a
potential HIV/AIDS vaccine (the "HIV/AIDS Vaccine") and diagnostic under
development at the French Institute of Health and Medicine ("INSERM"). This
research project is headed by Professor Jean-Claude Chermann, one of the
original Pasteur Institute discoverers of the HIV virus. The vaccine concept
developed by Professor Chermann utilizes a portion of (beta)2 microglobulin (the
epitope), a cellular antigen, that is presented on the HIV viral coating after
the HIV virus has reproduced in a human cell. This cellular antigen does not
appear to vary across the various strains of the virus and may provide a stable
target to develop antibodies that can prevent infection. The Company believes
this approach may also protect against both blood-born and sexual transmission
of HIV. The Company's goal is to develop an oral formulation that would make the
vaccine potentially less costly and easier to distribute to a broad population.
TECHNOLOGY. When the HIV virus infects a cell, it replicates and then
it buds from the infected cell's surface. A protein which is present on the
cell's surface then becomes incorporated in HIV's viral envelope as it leaves
the infected cell. The classical path of vaccine development to date has been
one of raising antibodies against a viral protein in an attempt to neutralize
the pathogen. All these attempts have been largely unsuccessful. The HIV/AIDS
Vaccine encompasses a new and different approach directed toward immunization
against HIV/AIDS. The HIV/AIDS Vaccine is designed to be different than previous
attempts for two basic reasons: (i) it would use a cellular versus a viral
antigenic approach and is therefore, common to all strains of HIV, and (ii) it
would utilize a delivery system that would offer both humoral (blood
transmission) and mucosal (sexual transmission) protection, as opposed to other
vaccines now being investigated as therapeutics for preventing cell to cell
transmission of the virus.
PROGRESS OF RESEARCH AND DEVELOPMENT. Research has been directed toward
HIV/AIDS prevention following isolation of the virus in 1983. Research began in
1988 in this area and in the use of a cellular antigenic approach directed
toward conquering the disease. Preclinical research has demonstrated
neutralization of HIV IN VITRO. The peptide sequence that encodes this portion
of a cellular protein has been identified and sequenced and will be incorporated
in a vaccine to test for production of antibodies against the epitope. The
Company plans to produce a vaccine for humans that will elicit mucosal as well
as humoral immunity and that can be delivered orally. Upon the successful
completion of pre-clinical animal studies, the Company plans to submit an IND
for conducting Human Clinical Trials. The Company entered into an agreement with
an unaffiliated third party in December of 1995 to develop a commercial
diagnostic assay for detection of the antibody. This assay would be used in
animal and human clinical studies for the vaccine and could be sold for research
purposes prior to receiving approval from the FDA. Upon approval from the FDA,
the assay could be sold to physicians and clinical laboratories. In April 1996,
researchers published data on the isolation and characterization of the novel
binding site of the cellular protein and reported that antibodies to this
binding site inhibited replication of several strains of HIV in VITRO studies.
RECENT DEVELOPMENTS. The Company is in the final stage of development
of a commercial diagnostic assay for the detection of the antibody and is
expected to commence large-scale testing in the near future.
COMMERCIALIZATION AND POTENTIAL MARKET. The Company anticipates that
the vaccine would first be used to vaccinate healthy individuals for preventing
HIV infection. The Company also anticipates that, long-term, the vaccine might
be used as a therapeutic vaccine for treating the HIV infected and AIDS patients
by preventing HIV strains that replicate in the body, or additional HIV strains,
from additionally infecting cells. A commercial market may also exist for a
diagnostic assay for detecting the monoclonal antibody in blood for purposes of
following progressors and non-progressors who are HIV infected, as well as
determining the activity and usefulness of the vaccine.
PRINCIPAL INVESTIGATOR. Professor Jean-Claude Chermann is the inventor
of the HIV/AIDS Vaccine technology and the principal investigator for the
research sponsored by the Company. Professor Chermann is Research Director of
INSERM's Research Unit 322 for Retroviruses and Associated Diseases in
Marseilles, France. Professor Chermann was previously Chief of Research at the
Pasteur Institute in Paris where he spent 25 years in research. Professor
Chermann, in conjunction with two other scientists, first isolated the HIV virus
in 1983 at the Pasteur Institute in Paris. In 1987 he was awarded the Louis
Pasteur Medal. A retrovirologist before embarking on AIDS research, Professor
Chermann originally suspected that AIDS was caused by a retrovirus. Since
discovering the HIV virus, Professor Chermann has devoted his research to
discovering a preventive to the disease, along with a therapeutic to help
restore the immune system in HIV-infected patients. Professor Chermann is
published widely with over 200 publications in international journals, including
publications specific to the research sponsored by the Company. Professor
Chermann is a member of the Company's Scientific Advisory Board.
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UGIF TECHNOLOGY - PROSTATE CANCER
BACKGROUND. The Company holds an exclusive worldwide license to a
growth regulatory factor, termed Urogenital Sinus Derived Growth Inhibitory
Factor ("UGIF/ps20"), which could serve as a potential prostate cancer therapy
(the "UGIF Technology").
TECHNOLOGY. Based on studies at Baylor College of Medicine directed at
understanding how one particular tissue type influences the growth of an
adjacent tissue in the development of the prostate gland, UGIF/ps20 was
identified. Specifically, UGIF/ps20 has been isolated and purified from rat
fetal urogenital sinus tissue which differentiates into the mature prostate
gland as a result of tissue-tissue interactions. Since UGIF/ps20 was
demonstrated to be active in human cells, it was believed that UGIF/ps20
isolated from the rat would be essentially identical to human UGIF/ps20.
Commercial application and economic feasibility of UGIF/ps20 is not dependent
upon the availability of either rat or human fetal urogenital sinus tissue, but
rather the successful cloning, expression and testing of recombinant UGIF/ps20.
The discovery of UGIF/ps20 indicates that urogenital sinus tissue, and
more specifically UGIF/ps20, may possibly be effective in altering the phenotype
(state of cell differentiation) of cells that affect the secretion of newly
synthesized proteins. UGIF/ps20 has shown inhibition of the growth of
transformed cells and tumors in culture including human prostate cancer cells
with non-toxic and reversible effects. In addition to the treatment of cancer,
there exists a potential use of UGIF/ps20 or its analogues in the treatment of
other diseases or conditions dealing with abnormalities of the genitourinary
system.
PROGRESS OF RESEARCH AND DEVELOPMENT. A method for successfully
purifying UGIF/ps20 was identified in April 1992 by Dr. David R. Rowley and
biological activity of the factor was demonstrated in mice in May 1992. Research
to date has shown that UGIF/ps20 inhibits the growth of transformed cells and
tumors in culture including human prostate cancer cells with non-toxic and
reversible effects. In addition, in preliminary animal studies, UGIF/ps20 has
shown an ability to inhibit DNA synthesis and cell proliferation of human
prostatic carcinoma cells. Results confirmed that there is a human form of
UGIF/ps20 and that it is a growth factor associated with the prostate gland. The
rat and human genes for UGIF/ps20 were sequenced in late 1995. The rat gene for
UGIF/ps20 has been incorporated into an expression system and recombinant rat
UGIF/ps20 is currently being produced. The human gene for UGIF/ps20 has been
incorporated into an expression system and recombinant human UGIF/ps20 is
currently being produced.
RECENT DEVELOPMENTS Recombinant UGIF/ps20 is currently being tested for
verification of its activity in IN VITRO and IN VIVO studies. Studies to
determine the protein's mechanism of action are also currently underway.
Additional animal studies will be conducted during 1997 to determine the modes
of delivery and biological effects of recombinant UGIF/ps20 on prostate cancer
in "nude" mice. In the event that recombinant UGIF/ps20 is verified in these
studies, additional preclinical studies with a delivery system, and toxicity
tests, will be conducted prior to commencement of human clinical trials.
COMMERCIALIZATION AND POTENTIAL MARKET. The American Cancer Society
estimates that approximately 317,000 new cases of prostate cancer occurred in
the U.S. in 1996 and that approximately 41,400 deaths occurred in the U.S. in
1996 from prostate cancer. As a result of the population aging, prostate cancer
is expected to increase significantly over the next 15 years. Risk factors for
prostate cancer increase with age. More than 80% of all prostate cancers are
diagnosed in men over the age of 65. In addition to age, other factors regarding
the incidence of prostate cancer occurrence include a higher incidence rate
among black Americans, familial association and dietary fat intake.
PRINCIPAL INVESTIGATOR. Dr. David R. Rowley is the principal
investigator for the UGIF Technology project. Dr. Rowley is Associate Professor
in the Department of Cell Biology at Baylor College of Medicine. Dr. Rowley has
studied growth inhibitory factors, mechanism of action in tissue differentiation
and neoplastic disease, and the mechanisms of steroid hormone action in relation
to the prostate gland for over 13 years. Dr. Rowley received a Bachelors and a
Doctorate of Philosophy degree in Anatomy from the University of Iowa and served
as a National Institutes of Health Postdoctoral Fellow at Baylor College of
Medicine. He has lectured and published numerous articles on growth inhibitory
factors, cell differentiation and receptors in the prostate gland.
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MEMBRANE ATTACK COMPLEX (MAC)/COMPLEMENT TECHNOLOGY
BACKGROUND. The Company holds exclusive worldwide license rights to a
certain membrane attack complex ("MAC") complement technology (the
"MAC/Complement Technology"). Through the Company's funding of Dr. Jose
Halperin's laboratory, scientists in Dr. Halperin's lab made certain discoveries
with regard to complement cascade, which consists of a number of proteins and
regulatory polypeptides, and discovered that the MAC pore opens a pathway for
the entry of high molecular weight organic compounds into cells.
TECHNOLOGY. The MAC/Complement Technology consists of five complement
proteins, C5-C9, which assemble in a lipid bilayer, such as a cell membrane or a
virus membrane, to form a pore or a channel of sufficient size to allow many
molecules and growth factors to pass into the cell. If enough channels are
formed in the cell membrane, the cell becomes disabled and is typically lysed or
broken down and eliminated. The size of the pore depends in part on the number
of one of the complement proteins, C9, that form the pore. The number of C9
protein molecules that form the pore is limited or regulated by a complement
regulatory protein called CD59. Dr. Halperin's lab has demonstrated that the
formation of MAC pores by the addition of purified complement proteins creates a
pathway for the entry of molecules of various sizes into various cell types and
that the MAC pore can be used to load target cells with drugs or other molecules
without affecting the viability of the cell. In addition, concentrations of the
complement proteins needed to efficiently load molecules into the cell via the
MAC pore have been demonstrated to be at levels that are not toxic to the cell,
i.e. at concentrations that would not cause lysis of the cell. Therefore, by
exposing a target cell to MAC channel-forming agents and a therapeutic or
diagnostic agent, the desired agents could be selectively delivered into the
target cell or cells. Therapeutic agents such as polypeptides, oligonucleotides,
toxins, antibiotics, antivirals, antiparasitics, antifungals and anti-cancer
agents could be delivered into target cells that otherwise are not taken up by
the cells or are inefficiently taken up by cells. This technology, if
successful, could provide for the selective delivery of such therapeutics or
diagnostic agents to target cells, for example, cancer cells or viruses, without
affecting the surrounding cells that are not meant to be targeted.
As mentioned above, if enough MAC pores are formed in a cell membrane,
the cell becomes disabled. Experimental evidence indicates that this mechanism
may be involved in ridding the body of viruses, bacteria and parasites. Viruses,
bacteria or parasites may become resistant to cell lysing by producing CD59 on
its surface to inhibit the formation of MAC pores. Since CD59 regulates the
number of C9 molecules that form MAC pores, such activity would result in an
insufficient amount of MAC pores being formed to create lysis of the cell.
Consequently, it may be possible to treat such viruses, bacteria and parasites
by inhibiting the formation of CD59.
PROGRESS OF RESEARCH AND DEVELOPMENT. The MAC/Complement Technology was
added to the Company's technology portfolio in late 1996, therefore, research on
this project is in early stages. To date, the functional size of the MAC pore
has been determined using purified complement proteins. Dr. Halperin's lab will
be optimizing the MAC pore size and attempting to load in different cell types
different functional molecules for therapeutic and/or diagnostic purposes.
The active site of CD59 is currently being identified. The role of CD59
in protecting viruses form complement lysis will then need to be confirmed and
the possible protective effect of human CD59 against complement mediated lysis
of virus needs to be analyzed. Once these experiments are completed, the Company
will evaluate the possibility of designing molecules to block the effect of
CD59.
COMMERCIALIZATION AND POTENTIAL MARKET.
The potential market for the MAC/Complement Technology, if successful,
is substantial and includes therapies for bacterial diseases, viral diseases,
hormone deficiency diseases, cancer, artherosclerosis, arteriosclerosis,
diabetes, organ transplants, arthritis and other immune disorders. For example,
the American Diabetics Association estimates that approximately 14 million
people in the U.S. have diabetes and more than 650,000 people are diagnosed each
year as having diabetes. According to the American Heart Association, the
estimated prevalence of artherosclerosis in 1992 was 2.28 million.
PRINCIPAL INVESTIGATORS. Dr. Jose A. Halperin, Associate Professor of
the Department of Medicine at Harvard Medical School, is the principal
investigator for the MAC/Complement Technology research sponsored by the
Company. Dr. Halperin's major research interests have been in membrane
transport, red cell physiology and regulation of ion pumps as they relate to the
mitogenic effect of membrane in proliferative disorders. Dr. Halperin was
educated in Buenos Aires, Argentina, receiving his medical degree (CUM LAUDE) in
1972 from the University of Buenos Aires. In 1983 Dr. Halperin received the
Annual Prize for the best work in Medical Research from
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Venezuela's National Council for Scientific and Technological Research
(CONICIT). Dr. Halperin's postdoctoral training includes internships and
residencies in Buenos Aires and a clinical fellowship at Brigham and Women's
Hospital in Boston. He joined Harvard Medical School's Department of Physiology
in 1984. In 1988 he was named Instructor in Medicine and in 1994 Associate
Professor of Medicine. In 1985 he became associated with Brigham and Women's
Hospital in several capacities and presently serves as Associate Physician for
the hospital.
ION PHARMACEUTICALS, INC. TECHNOLOGIES
BACKGROUND. The Company, through its wholly-owned subsidiary, Ion,
holds exclusive worldwide license rights to certain compounds and their uses for
the treatment of conditions characterized by unregulated cell proliferation or
cell growth and sickle cell anemia and holds an exclusive option to license
certain compounds and their uses for the treatment of gastrointestinal
disorders, such as secretory diarrhea. Ion's intellectual property portfolio
consists of clotrimazole ("CLT"), its metabolites and a number of proprietary
new chemical entities co-owned by Ion termed the Trifens(TM). Such compounds
have demonstrated promise in therapeutic applications for treating a number of
conditions characterized by unregulated cell proliferation, such as cancer
(including multiple drug resistance cases) and certain proliferative
dermatological conditions, as well as sickle cell anemia and secretory diarrhea.
Ion has an ongoing collaborative program with an unaffiliated company to develop
the Trifens(TM). Ion acquired the Company's rights in the anti-proliferative
technologies at the time of Ion's organization as a wholly-owned subsidiary of
the Company in January 1996.
TECHNOLOGY. CLT, its metabolites, and the Trifens(TM) are active
through ion transport modulation and may be applicable for treating, either by
topical, oral, or intravenous administration, a number of diseases and
conditions. CLT is a broad spectrum antimycotic agent used to treat pathogenic
dermatophytes, yeast infections and topical fungal infections. Through research
conducted by Dr. Jose Halperin at Harvard Medical School, new potential uses for
these compounds have been identified based on inhibition of cell proliferation
or the regulation of the growth of cancer cells and other cell types, including
the use of such compounds in treating cancer, proliferative dermatological
conditions, cardiovascular disorders, such as arteriosclerotic conditions, and
diseases caused by neovascularization, such as diabetic retinopathy. In addition
to the compounds ability to inhibit cell proliferation, the compounds have also
been shown to inhibit the Ca++-activated K+ channel in the human red blood cell
membrane. Dr. Carlo Brugnara at Children's Hospital in Boston has studied and is
continuing to study the effects of such compounds in blocking this channel to
prevent the dehydration of sickled red blood cells. Such an approach could
potentially be used in the treatment of sickle cell anemia. In addition, under a
sponsored research and license option agreement between Ion and Children's
Hospital in Boston, Dr. Wayne Lencer is studying the effects of the compounds in
inhibiting intestinal chloride secretion, which is the primary transport event
of secretory diarrhea in both humans and animals.
It is anticipated that CLT, its metabolites and/or the Trifens(TM)
would be formulated in three new formulations: an oral formulation, an
intravenous or injectable formulation and a topical formulation. The new oral
and/or intravenous formulation could be used in the study and potential
treatment of cancers including multiple drug resistant cancers, sickle cell
anemia, diarrhea and atherosclerotic conditions, including restenosis after
balloon angioplasty. The new topical formulation will be used by Ion in the
study and potential treatment of proliferative dermatological conditions, such
as actinic keratosis, certain cancers, such as basal cell carcinoma and Kaposi's
sarcoma and, possibly, other dermatological conditions.
PROGRESS OF RESEARCH AND DEVELOPMENT. An initial human efficacy study
with a preliminary topical formulation of one of the parent compounds at a low
concentration in comparison with a placebo was conducted by the Company in
Kaposi's sarcoma patients which led to inconclusive results. Results showed that
the topical formulation was not optimized. Ion entered into an agreement with an
unaffiliated company to develop an optimal topical formulation at a higher
concentration of drug for use in additional clinical trials for actinic
keratosis and Kaposi's sarcoma.
Dr. Halperin has demonstrated that IN VITRO proliferation of numerous
human cancer cell lines were strongly inhibited by one of the parent compounds
in a dose-dependent manner. Dr. Halperin's group has also studied the effects of
one of the parent compounds in experimental models for lung metastasis and
squamous cell carcinoma, both resulting in favorable results.
For the sickle cell application, IN VITRO studies performed by Dr.
Brugnara have demonstrated that one of the parent compounds blocked ion
transport in homozygous sickle cells, and studies in a transgenic mouse model
for sickle cells have demonstrated that the compound given orally produced
inhibition of the red cell Gardos channel,
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increased red cell potassium content and decreased mean corpuscular hemoglobin
concentration. A pilot Phase I clinical trial has been completed in which four
normal subjects were given the compound orally and the peak inhibition of the
Gardos channel was measured. Results from the first stage of a Phase II Clinical
Trial supported by the National Institutes of Health and the FDA were reported
in March 1996 in which five sickle cell anemia patients were given one of the
parent compounds orally. The administration of the compound resulted in a
reduction of the dehydration and sickling of red blood cells associated with
sickle cell anemia. The next phase of the ongoing Phase II clinical trial will
assess the survival of red blood cells and hemoglobin levels over a longer-term
period. Ion plans to initiate additional laboratory and clinical studies to
assess the use of the Trifens(TM) in the treatment of sickle cell anemia.
A topical formulation of one of the parent compounds has been developed
for Ion pursuant to an agreement with an unaffiliated company. Clinical trial
material has been manufactured under Good Manufacturing Practices ("GMP")
conditions for use in Ion's Phase I/II Clinical Trial for the treatment of
actinic keratosis. The Phase I/II Clinical Trial was initiated in July 1996 at
two clinical sites in Israel.
RECENT DEVELOPMENTS. The actinic keratosis Phase I/II Clinical Trial is
currently ongoing and enrollment was completed in December of 1996. Upon
successful results of this study, Ion plans to either file an IND application
with the FDA for conducting a clinical trial in the U.S. for the treatment of
actinic keratosis or sublicense the technology for further development and
commercialization.
Additional IN VITRO and animal tumor model studies are underway, some
of which are being conducted under contract with an unaffiliated third party, to
test the effects of the Trifens(TM) in the treatment of certain cancers, alone
and in combination with currently used anti-cancer drugs.
The Company is currently participating in discussions with certain
third parties regarding the possibility of partnering or licensing this
technology.
COMMERCIALIZATION AND MARKET POTENTIAL. The American Academy of
Dermatology reports that approximately 5 million Americans have actinic
keratosis. The American Cancer Society estimates that there were 1,359,150 new
cases of cancer in the U.S. in 1996 and 554,740 deaths due to cancer in the U.S.
in 1996. Reuters (09-12-96) reported that drug resistant tumors account for 40%
of all cancer cases and 90% of drug treated cancer patients who have undergone
chemotherapy. The U.S. Department of Health and Human Services estimates that
there are over 50,000 sickle cell anemia patients in the U.S. and according to
NDTI, the national audit source, 246,000 physician visits for sickle cell anemia
were recorded in 1995. In addition to the market for traveller's diarrhea, a
substantial market exists for treatment of infectious diarrhea and AIDS-related
diarrhea. The National Institute of Diabetes and Digestive and Kidney Diseases
reports that in 1980, there were 99 million new cases of infectious diarrhea in
the U.S. and, in 1985, there were 8-12 million physician office visits for
infectious diarrhea. AIDS-related diarrhea occurs in the majority of AIDS
patients and may be caused by drugs, viruses or bacteria.
PRINCIPAL INVESTIGATORS. Dr. Jose A. Halperin, Associate Professor of
the Department of Medicine at Harvard Medical School, is the principal
investigator for the anti-proliferative/growth regulatory research sponsored by
the Company.
Dr. Carlo Brugnara, Associate Professor of Pathology at Harvard Medical
School and Director of the Hematology Laboratory at Children's Hospital in
Boston, is the principal investigator for research related to the sickle cell
anemia application sponsored by the Company. Dr. Brugnara's major research
interests have been in the determinants of cell sickling in sickle cell anemia,
membrane transport in red blood cells, and clinical and laboratory hematology.
Dr. Brugnara was educated in Italy, receiving his medical degree (MAGNA CUM
LAUDE IN MEDICINE AND SURGERY) in 1979 from the University of Padue in Verona,
Italy. Dr. Brugnara's postdoctoral training includes internships and residencies
in Italy and with Brigham and Women's Hospital in Boston. He joined Harvard's
Department of Physiology in 1983 and was named Associate Professor in 1993.
Dr. Wayne I. Lencer, Assistant Professor of Pediatrics at Harvard
Medical School and Assistant Pediatrician at Massachusetts General Hospital and
Children's Hospital in Boston, is the principal investigator for the intestinal
diseases research sponsored by the Company. Dr. Lencer's major research
interests have been in the mechanism of vesicular traffic in the intestinal
epithelia, the mechanism and regulation of salt, water and macromolecular
transport in the intestine, and host and pathogen interactions in the intestine.
Dr. Lencer received a Bachelors degree from the University of Michigan and a
medical degree from Boston University School of Medicine. Dr. Lencer received
the Miles and Shirley Fitterman/American Digestive Health Foundation Basic
Research Award in 1996.
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MARKETING
The Company does not intend to manufacture or market any products.
Instead, the Company intends to enter into joint venture or other collaborative
arrangements with pharmaceutical companies or biomedical companies for the
manufacture and distribution of such products. There can be no assurance that
the Company will be able to enter into such agreements on terms acceptable to
it.
GOVERNMENT REGULATION
The Company's research and development activities and, ultimately, the
production and marketing of its licensed products, are subject to comprehensive
regulation by numerous governmental authorities in the United States and other
countries. Among the applicable regulations in the United States, pharmaceutical
products are subject to the Federal Food, Drug & Cosmetic Act, the Public Health
Services Act, other federal statutes and regulations, and certain state and
local regulations. These regulations and statutes govern the development,
testing, formulation, manufacture, labeling, storage, record keeping, quality
control, advertising, promotion, sale, distribution and approval of such
pharmaceutical products. Failure to comply with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal by the government to approve marketing of the product and
criminal prosecution.
A new drug may not be legally marketed for commercial use in the United
States without FDA approval. In addition, upon approval, a drug may only be
marketed for the indications, in the formulations and at the dosage levels
approved by the FDA. The FDA also has the authority to withdraw approval of
drugs in accordance with applicable laws and regulations. Analogous foreign
regulators impose similar approval requirements relating to commercial marketing
of a drug in their respective countries and may impose similar restrictions and
limitations after approval.
In order to obtain FDA approval of a new product, the Company and its
strategic partners must submit proof of safety, efficacy, purity and stability,
and the Company must demonstrate validation of its manufacturing process. The
testing and application process is expensive and time consuming, often taking
several years to complete. There is no assurance that the FDA will act favorably
or quickly in reviewing such applications. With respect to patented products,
processes or technologies, delays imposed or caused by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them. Such delays could also affect the commercial
advantages derived from proprietary processes. There is no assurance that the
regulatory agencies will find these submissions to be adequate.
As part of the approval process, the FDA reviews the Drug Master File
(the "DMF") for a description of product chemistry and characteristics, detailed
operational procedures for product production, quality control, process and
methods validation, and quality assurance. As process development continues to
mature, updates and modifications of the DMF are submitted.
The FDA approval process for a pharmaceutical product includes review
of (i) chemistry and formulations, (ii) preclinical laboratory and animal
studies to enable FDA approval of an IND application, (iii) initial IND clinical
studies to define safety and dose parameters, (iv) well-controlled IND clinical
trials to demonstrate product efficacy and safety, followed by submission and
FDA approval of an NDA. Preclinical studies involve laboratory evaluation of
product characteristics and animal studies to assess the safety of the product.
Products must be formulated in accordance with GMP requirements and preclinical
tests must be conducted by laboratories that comply with FDA regulations
governing the testing of drugs in animals. The results of the preclinical tests
are submitted to the FDA as part of the IND application and are reviewed by the
FDA prior to granting the sponsor permission to conduct clinical studies in
human subjects. Unless the FDA objects to an IND application, the application
will become effective 30 days following its receipt by the FDA. There can be no
certainty that submission of an IND will result in FDA authorization to commence
clinical studies.
Human clinical trials are typically conducted in three sequential
phases with some amount of overlap allowed. In the most basic terms, the three
phases are intended to answer the following three questions with respect to the
product being tested: Phase I - is it safe?; Phase II - is it effective?; and
Phase III - how effective is it? Phase I trials normally consist of testing the
product in a small number of patient volunteers for establishing safety and
pharmacokinetic parameters using single and multiple dosing regiments. In Phase
II, the continued safety and initial efficacy of the product are evaluated in a
somewhat larger patient population, and appropriate dosage amounts and
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treatment intervals are determined. Phase III trials typically involve more
definitive testing of the appropriate dose for safety ad clinical efficacy in an
expanded patient population at multiple clinical testing centers. A clinical
plan, or "protocol," accompanied by the approval of the institution
participating in the trials, must be submitted to the FDA prior to commencement
of each clinical trial phase. Each clinical study must be conducted under the
auspices of an Institutional Review Board ("IRB") at the institution performing
the clinical study. An IRB may require changes in a protocol, and there can be
no assurance that an IRB will permit any given study to be initiated or
completed. In addition, the FDA may order the temporary or permanent
discontinuation of clinical trials at any time. In light of this process, the
Company must necessarily rely on other persons and institutions to conduct
studies.
All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. The information contained in the
DMF is also incorporated into the NDA. Submission of an NDA does not assure FDA
approval for marketing. The application review process takes more than two years
on average to complete. However, the process may take substantially longer if
the FDA has questions or concerns about a product or studies regarding the
product. In general, the FDA requires at least two adequate and controlled
clinical studies demonstrating efficacy with sufficient levels of statistical
assurance. However, additional support may be required. The FDA also may request
additional information relating to safety or efficacy, such as long-term
toxicity studies. In responding to an NDA, the FDA may grant marketing approval,
require additional testing and/or information, or deny the application.
Accordingly, there can be no assurance about any specific time frame for
approval, if any, of products by the FDA or foreign regulatory agencies.
Continued compliance with all FDA requirements and conditions relative to an
approved application, including product specification, manufacturing process,
labeling and promotional material, and record keeping and reporting
requirements, is necessary throughout the life of the product. In addition,
failure to comply with FDA requirements, the occurrence of unanticipated adverse
effects during commercial marketing or the result of future studies could lead
to the need for product recall or other FDA-initiated actions that could delay
further marketing until the products or processes are brought into compliance.
The facilities of each pharmaceutical manufacturer must be registered
with and approved by the FDA as compliant with United States GMP. Continued
registration requires compliance with standards for United States GMP. In
complying with United States GMP, manufacturers must continue to expend time,
money and effort in production, record keeping and quality control to ensure
technical compliance. In addition, manufacturers must comply with the United
States Department of Health and Human Services and similar state and local
regulatory authorities if they handle controlled substances, and they must be
registered with the United States Environmental Protection Agency and similar
state and local regulatory authorities if they generate toxic or dangerous waste
streams. Other regulatory agencies such as the Occupational Safety and Health
Administration also monitor a manufacturing facility for compliance. Each of
these organizations conducts periodic establishment inspections to confirm
continued compliance with its regulations. Failure to comply with any of these
regulations could mean fines, interruption of production and even criminal
prosecution.
For foreign markets, a pharmaceutical company is subject to regulatory
requirements, review procedures and product approvals which, generally, may be
as extensive, if not more extensive, as those in the United States. Although the
technical descriptions of the clinical trials are different, the trials
themselves are often substantially the same as those in the United States.
Approval of a product by regulatory authorities of foreign countries must be
obtained prior to commencing commercial product marketing in those countries,
regardless of whether FDA approval has been obtained. The time and cost required
to obtain market approvals in foreign countries may be longer or shorter than
required for FDA approval and may be subject to delay. There can be no assurance
that regulatory authorities of foreign countries will grant approval. The
Company has no experience in manufacturing or marketing in foreign countries nor
in matters such as currency regulations, import-export controls or other trade
laws.
PATENTS AND PROPRIETARY RIGHTS
RBC-CD4 ELECTROINSERTION TECHNOLOGY PATENTS
Under its license agreement for the RBC-CD4 Electroinsertion
Technology, the Company is responsible for financing and prosecuting patent
applications for the benefit of the owners and licensors of this technology. To
date, one U.S. patent has issued, one U.S. patent application is pending, eight
foreign patents have issued and three foreign patent applications are pending.
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LIPOSOME-CD4 TECHNOLOGY PATENTS
Under its license agreement for the Liposome-CD4 Technology, the
Company is responsible for financing and prosecuting patent applications for the
benefit of the owners and licensors of this technology. Currently, one U.S.
patent application is pending, two foreign patent applications are pending and
four foreign patent applications have issued.
HIV/AIDS VACCINE PATENTS
Under its license agreement for the AIDS Vaccine, the Company is
responsible for financing and jointly prosecuting patent applications for the
benefit of the licensor of this technology. Currently, one U.S. patent
application is pending, one international patent application is pending and one
European patent application has issued.
UGIF TECHNOLOGY PATENTS
Under its license agreement for the UGIF Technology, the Company is
responsible for financing and prosecuting patent applications for the benefit of
the licensor of this technology. Currently, two U.S. patents have issued, one
U.S. patent application is pending, one international patent application is
pending and one Canadian patent has issued.
MEMBRANE ATTACK COMPLEX (MAC)/COMPLEMENT TECHNOLOGY PATENTS
Under its license agreement for the MAC/Complement Technology, the
Company is responsible for financing and jointly prosecuting patent applications
for the benefit of the licensor of this technology. To date, one U.S. patent
application is pending.
ION PHARMACEUTICALS, INC. PATENTS
Under its license agreement for the anti-proliferative/growth
regulatory technology, the Company is responsible for financing and jointly
prosecuting patent applications for the benefit of the owners of this
technology. To date, four U.S. patents have issued, seven U.S. patent
applications are pending and 12 foreign patent applications are pending.
Under its license agreement for the sickle cell technology, the Company
is responsible for financing and jointly prosecuting patent applications for the
benefit of the owners of this technology. To date, two U.S. patents have issued,
three U.S. patent applications are pending and two international application are
pending.
Under its research and license option agreement for the intestinal
disorders technology, the Company is responsible in certain cases for financing
the prosecution of patent applications and is responsible for jointly
prosecuting all patent applications for the benefit of the owners of this
technology. To date, one U.S. patent application and one international patent
application is pending.
COMPETITION
The biopharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Research on AIDS and cancer, the areas in
which the Company has particular interests, is being conducted by numerous
highly skilled scientists at prestigious universities, research institutions and
governmental agencies throughout the world. Accordingly, the competition to
develop and commercialize medical products and processes must be regarded as
intense. Further, competition in the medical field is likely to intensify. Many
of the Company's competitors have substantially greater financial and other
resources, large in-house research, development, manufacturing and marketing
staffs and significantly greater experience with regulatory approval procedures.
The Company does not have such resources and does not intend to compete with
major pharmaceutical companies in drug manufacturing or marketing.
Colleges, universities, governmental agencies and other public and
private research organizations continue to conduct research and are becoming
more active in seeking patent protection and licensing arrangements to collect
royalties for use of technology that they have developed, some of which may be
directly competitive with that of the Company. The Company expects technological
development to occur at a rapid rate and expects competition to intensify as
advances occur in the development of pharmaceutical products of biologic origin.
However, the
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Company intends to obtain, in consideration for research funding, sublicenses or
other rights to technologies from such entities and to pay royalties upon any
successful commercial development of products derived therefrom. To such extent,
such entities may be considered to be assisting the Company rather than
competing with it.
Although the principal investigators under the Company's existing and
proposed Sponsored Research Agreements are not aware of other researchers
conducting substantially similar research to that encompassed by their projects,
no assurance can be given in this regard. The scientific community and the
medical field of research regarding AIDS and prostate cancer is relatively
small, and the number of approaches and scientific theories may be narrowing.
Accordingly, there can be no assurance that others are not contemporaneously
conducting the same or similar research to that of the Company and, accordingly,
that others might not complete and commercialize their research prior to the
time that the Company does so. The Company would likely be adversely impacted if
competitors complete and commercialize their research prior to the Company if
such resulting therapeutic or diagnostic pharmaceutical is effective,
notwithstanding that the product may not infringe upon any of the Company's
proprietary rights.
COMPETITION
The biopharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Research on AIDS and cancer, the areas in
which the Company has particular interests, is being conducted by numerous
highly skilled scientists at prestigious universities, research institutions and
governmental agencies throughout the world. Accordingly, the competition to
develop and commercialize medical products and processes must be regarded as
intense. Further, competition in the medical field is likely to intensify. Many
of the Company's competitors have substantially greater financial and other
resources, large in-house research, development, manufacturing and marketing
staffs and significantly greater experience with regulatory approval procedures.
The Company does not have such resources and does not intend to compete with
major pharmaceutical companies in drug manufacturing or marketing.
Colleges, universities, governmental agencies and other public and
private research organizations continue to conduct research and are becoming
more active in seeking patent protection and licensing arrangements to collect
royalties for use of technology that they have developed, some of which may be
directly competitive with that of the Company. The Company expects technological
development to occur at a rapid rate and expects competition to intensify as
advances occur in the development of pharmaceutical products of biologic origin.
However, the Company intends to obtain, in consideration for research funding,
sublicenses or other rights to technologies from such entities and to pay
royalties upon any successful commercial development of products derived
therefrom. To such extent, such entities may be considered to be assisting the
Company rather than competing with it.
EMPLOYEES
As of March 14, 1997, the Company employed 11 persons, four of whom are
executive officers.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located at 30 Rockefeller
Plaza, Suite 4515, New York, New York 10112. These premises consist of
approximately 3,900 square feet subleased until December 31, 1998. The annual
rent for these premises is $166,428. The Company also maintains small offices at
5100 Westheimer, Suite 200, Houston, Texas (for a monthly rent of $900), 37 S.
Main Street, Pittsford, New York (for a monthly rent of $800) and 124 Mount
Auburn Street, Cambridge, Massachusetts (for a monthly rent of $3,024). Each of
the leases on the Houston, Pittsford and Cambridge offices expires in less than
a year. The Company maintains no laboratory, research or other facilities, but
conducts research and development in outside laboratories under contracts with
universities. The Company believes that its existing office arrangements will be
adequate to meet its reasonably foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material threatened or pending
litigation.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the high and low closing sale prices of
the Company's Common Stock on the American Stock Exchange (the "AMEX") for the
periods indicated.
1997: HIGH LOW
---- ---
First Quarter (through March 14, 1997)........... $3.75 $2.75
1996:
Fourth Quarter................................... $4.125 $4.125
Third Quarter.................................... $4.625 $3.0625
Second Quarter................................... $6.50 $3.0625
First Quarter.................................... $6.8125 $3.5625
1995:
Fourth Quarter................................... $4.3125 $3.00
Third Quarter.................................... $5.6875 $3.875
Second Quarter................................... $5.125 $3.50
First Quarter.................................... $5.750 $3.125
The closing sale price for the Company's Common Stock on the AMEX on
March 14, 1997 was $3.1875 per share. At March 14, 1997, there were
approximately 350 holders of record of the Company's Common Stock. The Company
has never paid dividends on its Common Stock and does not intend to pay cash
dividends on its Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The Company was originally formed in 1986 as Sheffield Strategic
Metals, Inc., a Canadian company, to engage in mineral exploration and
development. It conducted no significant business activities from 1986 until
late 1991. Between December 1991 and February 1992 the Company changed its
strategic direction to focus on the acquisition, development and
commercialization of promising biomedical technologies and raised capital in
private placements of its common stock. In April 1992, the Company changed its
name to Sheffield Medical Technologies Inc. to reflect the nature of its new
business and listed its common stock on the NASDAQ Small Cap Market. In November
1993, the Company commenced trading of its Common Stock on the AMEX.
Since its inception in 1986, the Company has been a development stage
enterprise. The Company has incurred a net loss in each of the fiscal years
since its inception and has had to rely on outside sources of funds to maintain
its liquidity. Substantial operating losses are expected to be incurred for the
next several years as the Company expends its resources for product acquisition,
sponsored research and development and preclinical and clinical testing. The
Company has financed its technology development activities and operations
primarily through public and private offerings of securities. The Company's
operating results have fluctuated significantly during each quarter since its
change of strategic direction in 1992, and the Company anticipates that such
fluctuations, largely attributable to varying sponsored research and development
commitments and expenditures, will continue into the foreseeable future.
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<PAGE>
FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
In 1996, the Company signed its first sub-license agreement for its
Liposome-CD4 technology and earned a sub-license fee, which is included in
sub-license fee revenue. Interest income was $163,664 in 1996 and $80,610 in
1995, and a total of $396,913 since the Company's inception in 1986. The
increase in 1996 interest income of $83,054, compared to 1995, was due primarily
to the increase in the amount of funds available for investment as the result of
the completion of the Company's warrant discount program completed in 1996,
which raised total gross proceeds of $5.6 million.
Research and product development expenses for 1996 decreased by
$582,336 to $3,841,818 compared with 1995 expenses of $4,424,154. The lower
research and development costs were attributable to negotiating extensions of
two major Sponsored Research Agreements signed in October 1996 and the winding
down of the RBC-CD4 Electroinsertion Technology project, partially offset by the
increased development of the Ion Anti-Proliferative technology projects. In
1996, the Company entered into five (5) major research and development
agreements. See Note 6 to the consolidated financial statements. The funds
expended for these new projects totaled $892,694 in 1996.
General and administrative expenses for 1996 were $3,831,204, an
increase of $851,767 compared with expenses of $2,979,437 for 1995, primarily
resulting from the one-time cashless exercise of options and warrants by a
former employee of the Company, totaling $562,912, and private placement
professional fees relating to Ion.
Interest expense for 1996 was $9,531, a decrease of $55,205 compared
with interest expense for 1995 of $64,736. The decrease was due to satisfaction
in full of the Company's $550,000 loan from SMT Investment Partnership in 1995.
See Notes 4 and 7 to the consolidated financial statements.
As a result of the above, net loss for 1996 decreased by $378,828 to
$7,008,889 compared with a net loss of $7,387,717 for 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the sale of securities, from which it has raised an aggregate of
approximately $24.7 million through December 31, 1996. On February 28, 1997, the
Company closed a private offering of 35,000 shares of its 7% Series A Cumulative
Convertible Redeemable Preferred Stock, which raised total gross proceeds of
$3.5 million. See Note 9 to the consolidated financial statements. The proceeds
of this offering will be used to fund 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.
From inception through December 31, 1996, the Company earned $396,913
in interest on cash, cash equivalents and short-term investments. The Company
invests excess cash in cash equivalents and short-term investments in a cash
management account that invests in U.S. government securities and high grade
corporate investments. In addition, in 1996, the Company signed its first
sub-license agreement for its Liposome-CD4 technology and earned a sub-license
fee that is included in sub-license fee revenue.
Net cash used in development stage activities was $6,043,876,
$7,541,937 and $23,521,045 during 1996, 1995, and from inception in 1986 through
1996, respectively. Cash of $6,420,834, $9,346,901 and $25,220,193 was provided
by the issuance of securities in 1996, 1995 and from inception in 1986 through
1996, respectively.
The Company's total assets at December 31, 1996, were $2,773,884, an
increase of $552,834 from the previous year's total assets of $2,221,050,
principally due to an increase in cash and cash equivalents and marketable
securities, reflecting the cash received from the warrant discount program and
sub-license revenue. The Company's liabilities at December 31, 1996, consisting
of accounts payable, sponsored research and capital lease obligations, totaled
$1,078,047 compared to $428,687 at December 31, 1995.
The Company spent approximately $15.5 million through December 31, 1996
to fund certain ongoing technology research projects and expects to incur
additional costs in the future, including costs relating to its ongoing
sponsored research and development activities, preclinical and clinical testing
of its product candidates and the hiring of additional personnel. The Company
may also bear considerable costs in connection with filing, prosecuting,
defending and/or enforcing its patent and other intellectual property claims.
Therefore, the Company will need substantial additional capital before it will
recognize significant cash flow from operations, which is contingent on
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<PAGE>
the successful commercialization of the Company's technologies by third parties
through licenses, joint ventures or other arrangements. There can be no
assurance that any of the technologies to which the Company currently has or may
acquire rights to can or will be commercialized or that any revenues generated
from such commercialization will be sufficient to fund existing and future
research and development activities.
While the Company does not believe that inflation has had a material
impact on its results of operations, there can be no assurance that inflation in
the future will not impact financial markets which, in turn, may adversely
affect the Company's valuation of its securities and, consequently, its ability
to raise additional capital, either through equity or debt instruments, or any
off-balance sheet refinancing arrangements, such as collaboration and licensing
agreements with other companies.
The Company expects that its existing capital resources, including the
current private placement offering noted above, will enable it to fund its
operations for at least the next 12 months. Because the Company does not expect
to generate significant cash flows from operations for at least several years,
the Company believes it will require additional funds to meet future costs.
The Company will attempt to meet the balance of its capital
requirements with existing cash balances and through additional public or
private offerings of its securities, debt financing, and collaboration and
licensing arrangements with other companies. There can be no assurance that the
Company will be able to obtain such additional funds or enter into such
collaborative and licensing arrangements on terms favorable to the Company, if
at all. The Company's sponsored research and technology development program may
be curtailed if future financings are not completed.
ITEM 7. FINANCIAL STATEMENTS
See page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 10, 1995, KPMG Peat Marwick LLP ("KPMG") resigned as
independent accountants to the Company. KPMG's accountant's report on the
financial statements of the Company for the past two years did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope, or accounting principles, except that KPMG's report
dated February 11, 1994 on the consolidated balance sheet as of December 31,
1993, and the consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1993 and 1992 and the period from
October 17, 1986 (inception) to December 31, 1993 contained a separate paragraph
stating that the Company's "recurring losses and net deficit position raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 8. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty." There were no disagreements on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of KPMG,
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports. On March 2, 1995, Ernst & Young
LLP was engaged as the new independent accountants to the Company.
-17-
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their positions
with the Company are set forth below.
Name Age Position
- ---- --- --------
Douglas R. Eger 35 Chairman, Chief Executive Officer
and Director
Thomas M. Fitzgerald 47 President and Chief Operating
Officer and Director
Michael Zeldin 59 Chief Scientific Officer and Director
Anthony B. Alphin, Jr. 51 Director
Dr. Stephen Sohn 52 Director
Bernard Laurent 45 Director
George Lombardi 53 Vice President, Chief Financial
Officer, Treasurer and Secretary
DOUGLAS R. EGER. Mr. Eger has been a Director of the Company since
November 1991, served as President of the Company from March 1992 through June
1994 and has served as Chairman of the Company since June 1994. On February 13,
1995, Mr. Eger was elected Co-Chief Executive Officer of the Company and was
elected Chief Executive Officer in February 1996. From 1987 to 1990, Mr. Eger
was the owner of Eger Innovation Group, a privately held company engaged in a
variety of technology development and venture capital activities. Mr. Eger was a
founder of Eger Innovation Group, Inc. and a successor company, TechSource
Development Corporation, a company founded in 1990 to assist universities in the
development and commercialization of promising scientific discoveries.
THOMAS M. FITZGERALD. Mr. Fitzgerald has been a Director of the Company
since September, 1996, has served as Chief Operating Officer of the Company
since June 1996 and has served as President of the Company since February 1997.
From 1989 to 1996 Mr. Fitzgerald was the Vice President and General Counsel of
Fisons Corporation, an operating unit of Fisons Group plc, a U.K.-based ethical
pharmaceutical company ("Fisons"). Mr. Fitzgerald was Assistant General Counsel
of SmithKline Beecham prior to joining Fisons.
MICHAEL ZELDIN, PH.D. Mr. Zeldin has been a Director of the Company
since May 1996, served as the Chief Operating Officer and Executive Vice
President - Corporate Development of the Company from March 1996 to June 1996
and has served as Chief Scientific Officer of the Company since June 1996. From
1989 to March 1996, Mr. Zeldin was President of Cambridge Biomedical Management,
a management assistance firm specializing in the biomedical and pharmaceutical
industries. From 1985 to 1989, Mr. Zeldin was President and Director of Research
of Procept, Inc., a developer of immunotherapeutic technologies and products.
ANTHONY B. ALPHIN, JR. Mr. Alphin has been a Director of the Company
since November 1993. Mr. Alphin has been Chairman and Chief Executive Officer of
Moneywatch Investments, Inc., a real estate investment and development company,
since 1981. Mr. Alphin has been a director of Norcross & Co., Inc., the managing
underwriter of the Company's February 1993 public offering, since 1991.
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<PAGE>
DR. STEPHEN SOHN. Dr. Sohn has been a Director of the Company since
January 1995. Dr. Sohn has been on the plastic and reconstructive surgery staff
of the Brigham & Women's Hospital since 1974. From 1974 to 1990 Dr. Sohn was a
Clinical Instructor in surgery at the Harvard University Medical School.
BERNARD LAURENT. Mr. Laurent has been a Director of the Company since
May 1995. Mr. Laurent has been the owner of B. Laurent & Co., an investment firm
based in London, England, since 1990. Prior to 1990, Mr. Laurent served in
various positions at Charterhouse Bank Limited (London), Dillon Read Limited and
Bear Stearns & Co. Mr. Laurent is a director of International CHS Resources
Corporation (Canada), International Telepresence (Canada) Inc. and Global
Equities S.A. (Paris).
GEORGE LOMBARDI. Mr. Lombardi has been the Vice President and Chief
Financial Officer of the Company since September 1995. From October 1994 until
September 1995, Mr. Lombardi was Vice President and Chief Financial Officer and
Director of Fidelity Medical Inc. From 1993 to 1994, Mr. Lombardi was the Senior
Financial Executive for the New Jersey and New England operations of National
Health Laboratories Inc. From 1986 until 1992, Mr. Lombardi was Vice President,
Finance and Administration for Henley Chemicals, Inc., a subsidiary of
Boehringer Engleheim Pharmaceutical Company. From 1976 until 1986, Mr. Lombardi
held various financial positions with the Revlon Healthcare Group in New York.
MEETINGS AND COMMITTEES
The Board of Directors of the Company held five meetings during the
fiscal year ended December 31, 1996. From time to time during such fiscal year,
the members of the Board acted by unanimous written consent. The Company has
standing Stock Option, Compensation, Audit and Scientific Review Committees. The
Stock Option Committee reviews, analyzes and approves grants of stock options
and stock to eligible persons under the Company's 1993 Stock Option Plan and the
Company's 1993 Restricted Stock Plan. The current members of the Stock Option
Committee (appointed in June 1996) are Anthony B. Alphin, Jr. and Stephen Sohn.
The Stock Option Committee did not hold any formal meetings in 1996, but
approved certain actions by written consent. The Compensation Committee reviews,
analyses and makes recommendations to the Board of Directors regarding
compensation of Company directors, employees, consultants and others, including
grants of stock options (other than stock option grants under the Company's 1993
Stock Option Plan). The current members of the Compensation Committee (appointed
in June 1996) are Anthony B. Alphin, Jr., Stephen Sohn and Bernard Laurent. The
Compensation Committee did not hold any formal meeting in 1996, but approved
certain actions by written consent. The Audit Committee reviews, analyzes and
makes recommendations to the Board of Directors with respect to the Company's
compensation and accounting policies, controls and statements and coordinates
with the Company's independent public accountants. The current members of the
Audit Committee (appointed in June 1996) are Anthony B. Alphin, Jr. and Bernard
Laurent. The Audit Committee held one formal meeting in 1996. The Scientific
Review Committee was established to discuss the science and potential
commercialization, clinical development and business development of existing and
future technologies of the Company. The current members of the Scientific Review
Committee (appointed in June 1996) are Douglas R. Eger, Dr. Stephen Sohn and Dr.
Michael Zeldin. The Scientific Review Committee held no formal meetings in 1996.
The Company does not have a standing nominating committee or a committee which
serves nominating functions.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to the chief executive officer of the
Company ("CEO") and the executive officers of the Company (other than the CEO)
who were executive officers of the Company during the fiscal year ended December
31, 1995 and whose salary and bonus exceeded $100,000 with respect to the fiscal
years ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------- -----------------
Other annual
Name and Compensation
Principal Position Year Salary($) Bonus($) ($)(1) Options(#)
------------------ ---- --------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Douglas R. Eger, Chairman 1996 $230,000 $25,000 0 0
and Chief Executive Officer........ 1995 $172,500 0 0 80,000
1994 $ 96,000 0 0 0
Michael Zeldin, Chief Scientific
Officer............................ 1996 $131,250 0 0 250,000
General Lombardi, Chief Financial
Officer, Treasurer 1996 $122,652 0 0 0
and Secretary 1995 $32,500 0 0 100,000
</TABLE>
- ---------------------
(1) Perquisites and other personal benefits, securities or property
delivered to each executive officer did not exceed the lesser of
$50,000 or 10% of such executive's salary and bonus.
The following table sets forth certain information regarding stock
option grants made to Messrs. Fitzgerald and Zeldin during the fiscal year ended
December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------------
% of Total
Options
Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/sh) Date
---- ---------- ----------- ------ ----
<S> <C> <C> <C> <C>
Thomas M. Fitzgerald, 50,000 11% $5.25 5/31/01
President and Chief 50,000 11% $6.75 5/31/01
Executive Officer 50,000 11% $8.25 5/31/01
Michael Zeldin, Chief 75,000 16% $5.25 2/28/01
Scientific Officer 100,000 21% $6.75 2/28/01
75,000 16% $8.25 2/28/01
</TABLE>
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<PAGE>
The following table sets forth certain information regarding stock
options held by Messrs. Eger, Fitzgerald, Zeldin and Lombardi as of December 31,
1996.
AGGREGATED OPTION EXERCISES
DURING THE MOST RECENTLY COMPLETED
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
No. of
Securities
Shares Value (1) of
Underlying Unexercised In-
Unexercised The-Money
Options at fY- Options at FY-
Shares End (#) End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Douglas R. Eger 50,000 $ 171,875 475,000/25,000 365,850/46,250
Chairman, Chief Executive Officer
Thomas M. Fitzgerald, President -- -- 0/150,000 --
and Chief Operating Officer
Michael Zeldin, -- -- 75,000/175,000 --
Chief Scientific Officer
George Lombardi, -- -- 50,000/50,000 --
Vice President, Chief Financial
Officer, Treasurer and Secretary
</TABLE>
- ------------------
(1) Represents the total gain that would be realized if all-in-the-money
options held at December 31, 1996 were exercised, determined by
multiplying the number of shares underlying the options by the
difference between the per share option exercise price and the closing
sale price of Common Stock of $3.75 per share reported by AMEX for
December 31, 1996. An option is in-the-money if the fair market value
of the underlying shares exceeds the exercise price of the option.
BOARD OF DIRECTORS COMPENSATION
The Company does not currently compensate directors who are also
executive officers of the Company for their service on the Board of Directors.
Under current Company policy, each non-employee Director of the Company receives
a fee of $750 for each Board meeting attended and $400 for each Board committee
meeting attended. Directors are reimbursed for their expenses incurred in
attending meetings of the Board of Directors.
LONG-TERM INCENTIVE AND PENSION PLANS
The Company does not have any long-term incentive or defined benefit
pension plans.
OTHER
No director or executive officer is involved in any material legal
proceeding in which he is a party adverse to the Company or has a material
interest adverse to the Company.
EMPLOYMENT AGREEMENTS
In October 1995, the Company entered into a two-year agreement with
Douglas R. Eger, pursuant to which Mr. Eger serves as the Company's Chairman and
Chief Executive Officer. The term of the agreement is automatically extended for
an additional one year term from year to year unless either party notifies the
other of its
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<PAGE>
intention to terminate at least 60 days prior to the end of the then current
term. Mr. Eger is required to devote such time, attention and energy to the
Company as required for performance of his duties under the agreement. The
agreement includes confidentiality and non-compete provisions. Mr. Eger's annual
base salary under the agreement is currently $230,000.
In September 1995, the Company entered into a two-year employment
agreement with George Lombardi pursuant to which Mr. Lombardi agreed to serve as
Vice President and Chief Financial Officer of the Company. Such agreement
automatically renews for successive one-year terms unless either party provides
written notice to the other of his or its intent to terminate at least 90 days
prior to the initial day of new term. If Mr. Lombardi's employment is terminated
other than for cause, he is entitled to receive a severance payment of $65,000
payable in six $10,833 installments. The agreement contains non-compete and
confidentiality provisions. Mr. Lombardi's annual base salary under the
agreement is currently $130,000.
In March 1996, the Company entered into a two-year employment agreement
with Michael Zeldin pursuant to which Mr. Zeldin agreed to serve as Chief
Scientific Officer of the Company. The Agreement automatically renews for
successive one year terms unless wither party provides written notice to the
other of his or its intent to terminate at least 90 days prior to the end of the
current term. The agreement contains non-compete and confidentiality provisions.
Mr. Zeldin's annual base salary under the agreement is currently $175,000.
In June 1996, the Company entered into a three-year employment
agreement with Thomas M. Fitzgerald pursuant to which Mr. Fitzgerald agreed to
serve as Chief Operating Officer of the Company. Such agreement automatically
renews for successive one-year terms unless either party provides written notice
to the other of his or its intent to terminate at least six months prior to the
end of the then current term. If Mr. Fitzgerald's employment is terminated other
than for cause, he is entitled to receive a severance payment of $87,500,
payable in six equal monthly installments. The agreement contains non-compete
and confidentiality provisions. Mr. Fitzgerald's annual base salary under the
agreement is currently $175,000.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and greater than ten percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
all Section 16(a) forms that were required to be filed during the fiscal year
ended December 31, 1996 were filed in compliance with the applicable
requirements of Section 16(a).
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The voting securities of the Company outstanding on March 14, 1997
consisted of 11,388,274 shares of Common Stock. The following table sets forth
information concerning ownership of the Company's Common Stock, as at March 14,
1997, by (i) each director, (ii) each executive officer, (iii) all directors and
executive officers as a group, and (iv) each person who, to the knowledge of
management, owned beneficially more than 5% of the Common Stock.
Shares Percent of
Beneficially Outstanding
Beneficial Owner(1) Owned (2) Common Stock(2)
------------------- --------- ---------------
Douglas R. Eger................... 827,456(3) 7.0%
Thomas M. Fitzgerald.............. 9,972 *
Michael Zeldin.................... 80,118(5) *
Anthony B. Alphin, Jr. ........... 75,000(6) *
Dr. Stephen Sohn ................. 286,000(7) 2.5%
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<PAGE>
Shares Percent of
Beneficially Outstanding
Beneficial Owner(1) Owned (2) Common Stock(2)
------------------- --------- ---------------
Bernard Laurent .................. 157,472(8) 1.4%
George Lombardi................... 109,972(9) 1.0%
All Directors and Executive Officers
as a Group (7 persons)................. 1,545,990 12.3%
- ------------------
* Less than 1%.
(1) The persons named in the table, to the Company's knowledge, have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes hereunder.
(2) Calculations assume that all options and warrants held by each
director, director nominee and executive officer and exercisable within
60 days after March 14, 1997 have been exercised.
(3) Includes 475,000 shares of Common Stock issuable upon exercise of
options and warrants exercisable within 60 days of March 14, 1997. Mr.
Eger's address is c/o Sheffield Medical Technologies Inc., 30
Rockefeller Plaza, Suite 4515, New York, New York 10112.
(4) Mr. Fitzgerald's address is c/o Sheffield Medical Technologies, Inc.,
30 Rockefeller Plaza, Suite 4515, New York, New York 10112.
(5) Includes 75,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 14, 1997. Mr. Zeldin's
address is c/o Sheffield Medical Technologies Inc., 30 Rockefeller
Plaza, Suite 4515, New York, New York 10112.
(6) Includes 65,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 14, 1997. Mr. Alphin's
address is 2692 Richmond Road, Lexington, Kentucky 40509.
(7) Represents (i) 65,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 14, 1997, (ii) 191,000
shares of Common Stock issuable upon exercise of a warrant issued to
SMT Investment Partnership, a Massachusetts limited partnership ("SMT")
and (iii) 30,000 shares of Common Stock subject to a warrant issued to
The Fort Hill Group, Inc. ("Fort Hill"). Dr. Sohn is a general partner
of SMT and a former officer of Fort Hill. Dr. Sohn disclaims beneficial
ownership of (a) any shares of Common Stock that SMT has the right to
acquire and (b) any shares of Common Stock that Fort Hill has the right
to acquire (other than 10,000 shares issuable upon exercise of the
above-mentioned warrant issued to Fort Hill that Dr. Sohn has the right
to receive upon issuance). Dr. Sohn's address is 170 Commonwealth
Avenue, Boston, Massachusetts 02116.
(8) Includes (i) 110,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 14, 1997, (ii) 25,000
shares of Common Stock owned by Global Equities and (iii) 12,500 shares
of Common Stock issuable upon exercise of warrants exercisable within
60 days after March 14, 1997 held by Global Equities. Mr. Laurent is a
director of Global Equities. Mr. Laurent disclaims beneficial ownership
of any shares of Common Stock that Global Equities has the right to
acquire. Mr. Laurent's address is 168 Sloan Street, London, England
SW1X9QF.
(9) Includes 100,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 14, 1997. Mr. Lombardi's
address is c/o Sheffield Medical Technologies Inc., 30 Rockefeller
Plaza, Suite 4515, New York, New York 10112.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SMT LOAN
On January 23, 1995, SMT made a 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. 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, but not 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 the 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.
As a condition to making the SMT Loan, the Board of Directors was
expanded by the election of John R. Lakian, George R. Begley, Andrew Monness and
Dr. Stephen Sohn, all nominees of SMT. Messrs. Lakian and Monness resigned as
directors of the Company as of May 24, 1995 and Mr. Begley resigned as a
director as of July 6, 1995.
All the time of the making of the SMT Loan, Messrs. Begley and Lakian
and Dr. Stephen Sohn were general partners of SMT. In addition, Messrs. Begley
and Lakian and Dr. Stephen Sohn were executive officers of The Fort Hill Group,
Inc. ("Fort Hill"), a former financial adviser to the Company, at such time.
Fort Hill served as financial advisor to the Company in connection with
the Company's private placement of units (each consisting of two shares of
Common Stock and one warrant to purchase an additional share of Common Stock)
that was consummated in April 1995 (the "First 1995 Unit Private Placement").
For its financial advisory services, Fort Hill was paid $177,470 in fees and
commissions. In addition, the Company issued Fort Hill a five year warrant to
purchase 30,000 shares of Common Stock with an exercise price of $3.25 per
share.
Global Equities, an investment firm headquartered in Paris, France, was
paid commissions totalling $45,440 for services provided in connection with the
First 1995 Unit Private Placement. In addition, the Company issued Global
Equities units consisting of 25,000 shares of Common Stock and warrants to
purchase 12,500 additional shares of Common Stock at an exercise price of $5.00
per share. Bernard Laurent, a Director of the Company, and Patrick Piard, a
former Director of the Company, are also principals of Global Equities.
CONSULTING ARRANGEMENTS
Dr. Stephen Sohn and Bernard Laurent received fees of $16,667 and
$72,000, respectively, in 1996 from the Company in consideration of scientific
and financial consulting services rendered to the Company by them.
OTHER TRANSACTIONS
In connection with Arthur M. Jenke's resignation as Director and Chief
Financial Officer of the Company in September 1994, the Company entered into a
consulting agreement with Mr. Jenke. Pursuant to the consulting agreement, Mr.
Jenke agreed to provide advice to the Company in connection with various Company
matters, including periodic filings and registration statements with the
Commission. Mr. Jenke received approximately $5,300 per month for his services
under the consulting agreement, and was reimbursed for his related expenses. In
addition, the consulting agreement provides that the Company shall permit Mr.
Jenke to effect a "cashless" exercise of all of his outstanding options and
warrants. Mr. Jenke's services to the Company as a consultant concluded in
January 1995. The Company issued Mr. Jenke 162,877 shares of Common Stock in
September, 1996 in satisfaction of its obligation to effect a cashless exercise
of Mr. Jenke's outstanding options and warrants.
-24-
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits:
No. Reference
--- ---------
3.1 Certificate of Incorporation of the Company,
as amended (1)
3.2 By-Laws of the Company (2)
4.1 Form of Common Stock Certificate (2)
4.2 Certificate of Designation defining the powers, (1)
designations, rights, preferences, limitations
and restrictions applicable to the Company's
Series A Cumulative Convertible Redeemable
Preferred Stock
10.1 Employment Agreement dated as of October 1, 1995 (2)
between the Company and Douglas R. Eger
10.2 Employment Agreement dated as of September 7, 1995 (2)
between the Company and George Lombardi
10.3 Amendment dated as of September 22, 1996 to Employment (1)
Agreement dated as of September 7, 1995 between the
Company and George Lombardi
10.4 Employment Agreement dated as of March 28, 1996 between (2)
the Company and Michael Zeldin
10.5 Amendment dated June 6, 1996 to Employment Agreement (1)
dated as of March 28, 1996 between the Company and Michael
Zeldin
10.6 Employment Agreement dated as of June 6, 1996 between the (3)
Company and Thomas M. Fitzgerald
10.7 Agreement of Sublease dated as of November 17, 1995 (2)
between the Company and Brumbaugh Graves Donohue &
Raymond relating to 30 Rockefeller Plaza, Suite 4515, New
York, New York
10.8 1993 Stock Option Plan, as amended (1)
10.9 1993 Restricted Stock Plan, as amended (2)
10.10 1996 Directors Stock Option Plan (1)
10.11 Demand Loan Agreement dated January 23, 1995 between the (4)
Company and SMT Investment Partnership, a Massachusetts
general partnership
10.12 Demand Note dated January 23, 1995 payable to SMT (4)
Investment Partnership, a Massachusetts general partnership
16.1 Letter of KPMG Peat Marwick LLP dated February 1, 1995 (2)
21 Subsidiaries of Registrant (2)
23.1 Consent of Ernst & Young LLP (1)
23.2 Consent of KMPG Peat Marwick LLP (1)
27 Financial Data Schedule (1)
-25-
<PAGE>
- ----------------------------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1995 filed with the Securities
and Exchange Commission.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1996 filed with the Securities
and Exchange Commission.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1994 filed with the Securities
and Exchange Commission.
(b) Reports on Form 8-K:
None.
-26-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SHEFFIELD MEDICAL TECHNOLOGIES INC.
Dated: March 28, 1997 /s/ Douglas R. Eger
--------------------
Douglas R. Eger
Chairman and Chief Executive Officer
In accordance with the Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Douglas R. Eger Director, Chairman and Chief Executive March 28, 1997
- ---------------------------------- Officer
Douglas R. Eger
/s/ Thomas M. Fitzgerald Director, President and Chief Operating March 28, 1997
- ---------------------------------- Officer
Thomas M. Fitzgerald
/s/ Michael Zeldin, Ph.D. Director and Chief Scientific Officer March 28, 1997
- ----------------------------------
Michael Zeldin
/s/ Anthony B. Alphin, Jr. Director March 28, 1997
- ----------------------------------
Anthony B. Alphin, Jr.
/s/ Stephen Sohn, M.D. Director March 28, 1997
- ----------------------------------
Stephen Sohn, M.D.
/s/ Bernard Laurent Director March 28, 1997
- ---------------------------------
Bernard Laurent
/s/ George Lombardi Vice President, Treasurer and March 28, 1997
- ---------------------------------- Chief Financial Officer (Principal
George Lombardi Financial and Accounting Officer)
</TABLE>
-27-
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
Consolidated Financial Statements
<S> <C>
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
</TABLE>
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, is 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.
/s/ ERNST & YOUNG LLP
- ---------------------
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
- -------------------------
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
12/31/96
--------------
Current Assets:
<S> <C>
Cash and cash equivalents $ 1,979,871
Investments 460,768
Prepaid expenses and other current assets 43,975
==============
Total current assets 2,484,614
==============
Property and Equipment:
Laboratory equipment 185,852
Leashold Improvements 61,390
Office equipment 89,019
--------------
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 shares 113,883
Notes receivable in connection with sale of stock (110,000)
Additional paid-in capital 28,319,838
Unrealized loss on maketable 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 - 510,000
Interest income 63,664 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 - - 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 - - 0.01
------------ ----------- -------------
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 Deficit Total
receivable Unrealized accumulated stockholders'
in connection Additional loss during equity
Common with sale paid-in on 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 - - - (39,232) - (39,232)
securities
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 MEDIAL 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) to
December 31, December 31,
------------------------------------------ -----------------
1996 1995 1996
----------------- -------------------- -----------------
<S> <C> <C> <C>
Cash outflows from development stage activities and
extraordinary gain: 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 acquired 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 organization costs - - (77,834)
Decrease (increase) in prepaid expenses and other current 109,810 (88,618) (103,016)
assets
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 $ 9,531 $ 64,736 $ 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:
1996 1995
---- ----
Pro forma net loss.......................... $ 8,500,149 $ 8,993,554
Pro form net loss per share of common stock... $ 0.79 $ 1.10
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 Weighted
Average Common Average
Common Stock Exercise Stock Exercise
Options Price Options Price
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding, January 1........... 4,164,834 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....................... 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:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range of Outstanding Remaining Average
Exercise Options at Contractual Life Exercise
Prices Dec. 31, 1996 (Yrs.) Price
--------------- --------------- ----------------- -----------
<S> <C> <C> <C> <C>
$ .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
=========
</TABLE>
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
1996.............. 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
EXHIBIT 3.1 TO FORM 10-KSB
Certificate of Incorporation of the Company, as Amended
<PAGE>
CERTIFICATE OF INCORPORATION
OF
SHEFFIELD MERGER CO.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions of subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter sometimes called the
"Corporation") is Sheffield Merger Co.
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 32 Loockerman
Square, Suite L-100, City of Dover 19901, County of Kent; and the name of the
registered agent of the Corporation in the State of Delaware at such address is
The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have the authority to issue is (i) 15,000,000 shares of Common Stock, $.01 par
value ("Common Stock") and (ii) 1,000,000 shares of Preferred Stock, $.01 par
value ("Preferred Stock").
A. COMMON STOCK.
1. GENERAL. The voting, dividend and liquidation rights of the
holders of Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
2. VOTING. The holders of Common Stock are entitled to one vote for
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
3. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any
<PAGE>
preferential dividend rights of any then outstanding Preferred Stock.
4. LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders after payment of creditors and subject to any preferential
and/or participating rights of any then outstanding Preferred Stock.
B. PREFERRED STOCK.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent not or hereafter permitted by the General
Corporation Law of Delaware. Without limiting the generality of the foregoing,
the resolutions providing for issuance of any series of Preferred Stock may
provide that such series shall be superior or rank equally or junior to the
Preferred Stock of any other series to the extent permitted by law. Except as
expressly provided elsewhere in this Article FOURTH, no vote of the holders of
the Preferred Stock or Common Stock shall be required in connection with the
designation or the issuance of any shares of any series of any Preferred Stock
authorized by and complying with the conditions herein, the right to have such
being vote being expressly waived by all present and future holders of the
capital stock of the Corporation.
FIFTH: The name and the mailing address of the incorporator is as
follows:
Gary Weston
Olshan Grundman Frome & Rosenzweig
505 Park Avenue
New York, New York 10022
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the
-2-
<PAGE>
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
ss.291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of ss.279 of Title 8 of the Delaware Code order a meeting of the
creditors or class of creditors, and/or the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
EIGHTH: For the management of the business and for the conduct of
the affairs of the Corporation, and in further definition, limitation and
regulation of the powers of the Corporation and of its directors and its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the
affairs of the Corporation shall be vested in its Board of
Directors. The number of directors which shall constitute
the whole Board of Directors shall be fixed by, or in the
manner provided in, the By-Laws. The phrase "whole Board"
and the phrase "total number of directors" shall be deemed
to have the same meaning, to wit, the total number of
directors which the Corporation would have if there were no
vacancies. No election of directors need be by written
ballot.
2. After the original or other By-laws of the Corporation
have been adopted, amended, or repealed, as the case may
be, in accordance with the provisions of ss.109 of the
General Corporation Law of the State of Delaware, and,
after the Corporation has received any payment for any of
its stock, the power to adopt, amend, or repeal the By-laws
of the Corporation may be exercised by the Board of
Directors of the Corporation; provided, however, that any
provision for the classification of directors of the
Corporation for staggered terms pursuant to the provisions
of subsection (d) of ss.141 of the General Corporation Law
of the State of Delaware shall be set forth in an initial
By-law or
-3-
<PAGE>
in a By-law adopted by the stockholders entitled to vote of
the Corporation unless provisions for such classification
shall be set forth in this Certificate of Incorporation.
3. Whenever the Corporation shall be authorized to issue
only one class of stock, each outstanding share shall
entitle the holder thereof to notice of, and the right to
vote at, any meeting of stockholders. Whenever the
Corporation shall be authorized to issue more than one
class of stock, no outstanding share of any class of stock
which is denied voting power under the provisions of the
Certificate of Incorporation shall entitle the holder
thereof to the right to vote at any meeting of stockholders
except as the provisions of paragraph (2) of subsection (b)
of ss.242 of the General Corporation Law of the State of
Delaware shall otherwise require; provided, that no share
of any such class which is otherwise denied voting power
shall entitle the holder thereof to vote upon the increase
or decrease in the number of authorized shares of said
class.
NINTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of subsection
(b) of ss.102 of the General Corporation Law of the State of Delaware, as same
may be amended and supplemented.
TENTH: The Corporation shall, to the fullest extent permitted by ss.145
of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ELEVENTH: From time to time any of the provisions of this Certificate
of Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the
-4-
<PAGE>
manner and at the time prescribed by said laws, and all rights at any time
conferred upon the stockholders of the Corporation by this Certificate of
Incorporation are granted subject to the provisions of this Article ELEVENTH.
Signed on September 20, 1993
/s/ Gary Weston
-------------------------
Gary Weston, Incorporator
-5-
<PAGE>
Certificate of Amendment
of
Certificate of Incorporation
of
SHEFFIELD MERGER CO.
Under Section 242 of the General Corporation Law
It is hereby certified that:
1. The name of the corporation is Sheffield Merger Co. (the
"Corporation").
2. The certificate of incorporation of the Corporation is hereby
amended by striking out Article FOURTH thereof and by substituting in lieu of
said Article the following new Article FOURTH:
"FOURTH: The total number of shares of stock which the
Corporation shall have the authority to issue is (i) twenty
million (20,000,000) shares of Common Stock, $.01 par value
("Common Stock") and (ii) 3,000,000 shares of Preferred Stock,
$.01 par value ("Preferred Stock").
COMMON STOCK.
GENERAL. The voting, dividend and liquidation rights of the
holders of Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
VOTING. The holders of Common Stock are entitled to one
vote for each share held at all meetings of stockholders (and
written actions in lieu of meetings). There shall be no cumulative
voting.
DIVIDENDS. Dividends may be declared and paid on the Common
Stock from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation
<PAGE>
available for distribution to its stockholders after payment of creditors and
subject to any preferential and/or participating rights of any outstanding
Preferred Stock.
PREFERRED STOCK.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, option or other special rights and qualifications,
limitations or restrictions thereof, including without limitation thereof,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated and expressed in such resolutions, all to the
full extent now or hereafter permitted by the General Corporation Law of
Delaware. Without limiting the generality of the foregoing, the resolutions
providing for issuance of any series of Preferred Stock may provide that such
series shall be superior or rank equally or junior to the Preferred Stock of any
other series to the extent permitted by law. Except as expressly provided
elsewhere in this Article FOURTH no vote of the holders of the Preferred Stock
or Common Stock shall be required in connection with the designation or the
issuance of any shares of any series of any Preferred Stock authorized by and
complying with the conditions herein, the right to have such vote being
expressly waived by all present and future holders of the capital stock of the
Corporation."
3. The amendment of the certificate of incorporation herein certified
has been duly adopted in accordance with the provisions of Sections 228 and 242
of the General Corporation Law of the State of Delaware.
Signed on January 25, 1995. SHEFFIELD MERGER CO.
By: /s/ Douglas R. Eger
-----------------------------
Douglas R. Eger, Chairman
Attest:
/s/ Harvey L. Lellman
- ----------------------------
Harvey L. Kellman, Secretary
-2-
<PAGE>
CERTIFICATE OF MERGER
OF
SHEFFIELD MEDICAL TECHNOLOGIES INC.
INTO
SHEFFIELD MERGER CO.
(Under Section 252 of the
General Corporation Law of the State of Delaware)
-----------------------------------
Sheffield Merger Co., a Delaware corporation, hereby certifies as
follows:
FIRST: The name and state of incorporation of each of the constituent
corporations of the merger is as follows:
Name State of Incorporation
---- ----------------------
Sheffield Medical Technologies Inc. Wyoming
Sheffield Merger Co. Delaware
SECOND: An Agreement of Merger has been approved, adopted, certified,
executed and acknowledged by each of the constituent corporations in accordance
with Section 252(c) of the General Corporation Law of the State of Delaware.
THIRD: The name of the surviving corporation (the "Surviving
Corporation") is Sheffield Merger Co.
FOURTH: The Certificate of Incorporation of the Surviving Corporation
is hereby amended by striking out Article FIRST thereof and by substituting in
lieu of said Article the following new Article FIRST as follows:
FIRST: The name of the corporation (hereinafter sometimes
called the "Corporation") is Sheffield Medical Technologies Inc.
FIFTH: An executed copy of the Agreement of Merger is on file at the
principal place of business of the Surviving Corporation, 666 Fifth Avenue, New
York, New York 10103, and a copy of the Agreement of Merger will be furnished by
the Surviving Corporation, on request and without cost, to any stockholder of
either of the constituent corporations.
SIXTH: The authorized capital stock of Sheffield Medical Technologies
Inc., a Wyoming corporation, consists of
<PAGE>
50,000,000 shares of common stock, no par value, and 10,000,000 shares of
preferred stock, no par value.
SEVENTH: This Certificate of Merger shall be effective upon filing with
the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, Sheffield Merger Co. has caused this Certificate of
Merger to be executed in its corporate name by its Chairman of the Board and
attested by its Secretary this 12th day of June, 1995.
SHEFFIELD MERGER CO.
By: /s/ Douglas R. Eger
-------------------------
Douglas R. Eger
Chairman of the Board
[SEAL]
Attest:
By: /s/ Kathleen Rawlinson
----------------------
Kathleen Rawlinson
Secretary
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
of
CERTIFICATE OF INCORPORATION
of
SHEFFIELD MEDICAL TECHNOLOGIES INC.
Under Section 242 of the General Corporation Law
It is hereby certified that:
1. The name of the corporation is Sheffield Medical Technologies Inc.
(the "Corporation").
2. The certificate of incorporation of the Corporation is hereby
amended to increase the authorized shares of common stock of the Corporation by
striking out Article FOURTH thereof and by substituting in lieu of said Article
FOURTH the following new Article FOURTH:
"FOURTH: The total number of shares of stock that the
Corporation shall have the authority to issue is (i) thirty
million (30,000,000) shares of Common Stock, $.01 par value
("Common Stock"), and (ii) three million (3,000,000) shares of
Preferred Stock, $.01 par value ("Preferred Stock").
COMMON STOCK.
GENERAL. The voting, dividend and liquidation rights of the
holders of Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
VOTING. The holders of Common Stock are entitled to one vote
for each share held at all meetings of stockholders (and written actions in lieu
of meetings). There shall be no cumulative voting.
DIVIDENDS. Dividends may be declared and paid on the Common
Stock from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation
<PAGE>
available for distribution to its stockholders after payment of creditors and
subject to any preferential and/or participating rights of any outstanding
Preferred Stock.
PREFERRED STOCK.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, option or other special rights and qualifications,
limitations or restrictions thereof, including without limitation thereof,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated and expressed in such resolutions, all to the
full extent now or hereafter permitted by the General Corporation Law of
Delaware. Without limiting the generality of the foregoing, the resolutions
providing for issuance of any series of Preferred Stock may provide that such
series shall be superior or rank equally or junior to the Preferred Stock of any
other series to the extent permitted by law. Except as expressly provided
elsewhere in this Article FOURTH no vote of the holders of the Preferred Stock
or Common Stock shall be required in connection with the designation or the
issuance of any shares of any series of any Preferred Stock authorized by and
complying with the conditions herein, the right to have such vote being
expressly waived by all present and future holders of the capital stock of the
Corporation."
3. The amendment of the certificate of incorporation herein certified
has been duly adopted in accordance with the provisions of Sections 228 and 242
of the General Corporation Law of the State of Delaware.
Signed on February 5, 1997 SHEFFIELD MEDICAL TECHNOLOGIES INC.
By: /s/ George Lombardi
-------------------
George Lombardi
Vice President and Chief
Financial Officer
Attest:
/s/ Jacqueline Bova
- -------------------
Jacqueline Bova
Assistant Secretary
-2-
<PAGE>
CERTIFICATE OF DESIGNATION
OF
SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE
PREFERRED STOCK
OF
SHEFFIELD MEDICAL TECHNOLOGIES INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
---------------------
Sheffield Medical Technologies Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation (the "Board of Directors")
by the provisions of the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), there hereby is created, out of the 3,000,000
shares of preferred stock of the Corporation authorized in Article FOURTH of the
Certificate of Incorporation (the "Preferred Stock"), a series of Preferred
Stock consisting of 40,800 shares, which series shall have the following powers,
designations, preferences and relative, participating, optional or other rights,
and the following qualifications, limitations and restrictions (in addition to
the powers, designations, preferences and relative, participating, optional or
other rights, and the qualifications, limitations and restrictions, set forth in
the Certificate of Incorporation which are applicable to the Preferred Stock).
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Cumulative Convertible Redeemable Preferred Stock" (the
"Series A Preferred Stock") and the authorized number of shares constituting
such series shall be 40,800. The par value of the Series A Preferred Stock shall
be $.01 per share.
Section 2. DIVIDENDS.
Subject to Section 4(d), the holders of shares of the Series A
Preferred Stock will be entitled to receive, when, as and if declared by the
Board of Directors, cumulative stock dividends on the shares of the Series A
Preferred Stock, payable in shares of the Corporation's common stock, $.01 par
value per share ("Common Stock"), at the rate per share of 7.0% per annum
<PAGE>
of the original $100.00 purchase price per share of the Series A Preferred
Stock, and no more. Such stock dividends shall be cumulative from the date of
the initial issuance of shares of Series A Preferred Stock (the "Closing Date")
or the most recent date on which the full amount of accrued stock dividends have
been paid, as the case may be, on the Series A Preferred Stock by the
Corporation. Subject to, and as provided in, Section 4, the Corporation shall
pay all cumulative stock dividends on the shares of Series A Preferred Stock
held by a holder on the Conversion Date (as defined below) in respect of such
holder's election to convert Series A Preferred Stock. The number of shares of
Common Stock to be issued as cumulative stock dividends on any such Conversion
Date shall equal the cash value of such cumulative dividends divided by the
current market price per share of Common Stock (determined as provided in
Section 5) as of such Conversion Date. The cash value of stock dividends payable
on shares of Series A Preferred Stock for any full annual dividend period shall
be computed by multiplying the original $100.00 purchase price per share by
7.0%. The cash value of dividends payable on shares of the Series A Preferred
Stock for any period less than a full annual dividend period shall be computed
on the basis of a 360-day year of twelve 30-day months and the actual number of
days elapsed in the period for which payable.
If stock dividends are not paid in full, or declared in full, upon the
shares of the Series A Preferred Stock and shares of any other preferred stock
ranking on a parity as to payment of stock dividends with the Series A Preferred
Stock, all dividends declared upon shares of the Series A Preferred Stock and
any other preferred stock ranking on a parity as to payment of dividends with
the Series A Preferred Stock shall be paid or declared PRO RATA so that in all
cases the amount of dividends paid or declared per share on the Series A
Preferred Stock and such other shares of preferred stock ranking on a parity as
to payment of dividends with the Series A Preferred Stock shall bear to each
other the same ratio that accumulated stock dividends per share, including
dividends accrued or in arrears, if any, on the shares of the Series A Preferred
Stock and such other shares of preferred stock bear to each other. Except as
provided in the preceding sentence, unless full cumulative stock dividends on
the shares of the Series A Preferred Stock have been paid or declared in full,
no dividends (other than dividends in shares of Common Stock, or in shares of
any other capital stock of the Corporation ranking junior to the Series A
Preferred Stock as to payment of dividends and distribution of assets upon
liquidation) shall be paid or declared and set aside for payment or other
distribution upon the Common Stock or, except as provided above, on any other
capital stock of the Corporation ranking junior to or on a parity with the
Series A Preferred Stock as to dividends, nor shall any shares of Common Stock
or shares of any other capital stock of the Corporation ranking junior to or on
a parity with the Series A Preferred Stock as to dividends be redeemed,
purchased or otherwise acquired for any consideration (or any payment made to or
available for a sinking fund for the redemption of any such
-2-
<PAGE>
shares) by the Corporation or any subsidiary of the Corporation (except by
conversion into or exchange for shares of capital stock of the Corporation
ranking junior to the Series A Preferred Stock as to dividends and distribution
of assets upon liquidation). Holders of shares of the Series A Preferred Stock
shall not be entitled to any dividends, whether payable in capital stock, cash
or property, in excess of full accrued and cumulative stock dividends as herein
provided. No interest or sum of money in lieu of interest shall be payable in
respect of any stock dividend payment or payments on the shares of the Series A
Preferred Stock that may be in arrears; provided, however, that if, on an
applicable Conversion Date (as defined herein), stock dividends that would have
been payable on such date are not paid solely due to the failure of the
Corporation's Board of Directors to declare such dividends, then the rate of
conversion of the Series A Preferred Stock to be converted on such Conversion
Date shall be adjusted so that the holders would receive the same amount of
shares of Common Stock on such Conversation Date as such holder would have
received if the Corporation's Board of Directors had timely declared such stock
dividends.
The terms "accrued dividends," "dividends accrued" and "dividends in
arrears," whenever used herein with reference to shares of preferred stock shall
be deemed to mean an amount which shall be equal to dividends thereon at the
applicable annual dividend rates per share for the respective series thereof
from the date or dates on which such dividends commence to accrue to the
applicable payment date less the amount of all dividends paid, or declared in
full and sums set aside for the payment thereof, upon such shares of preferred
stock.
Section 3. LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or otherwise, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
holders of shares of the Series A Preferred Stock shall be entitled to receive,
in cash, out of the remaining net assets of the Corporation (whether from
capital or from earnings available for distribution to shareholders), the amount
of One Hundred Dollars ($100.00) for each share of the Series A Preferred Stock,
plus the cash value determined in accordance with Section 2 above of all stock
dividends accrued and unpaid at the applicable rate on each such share up to the
date fixed for distribution, before any distribution shall be made to the
holders of shares of Common Stock or any other capital stock of the Corporation
ranking (as to any such distribution) junior to the Series A Preferred Stock. If
upon any liquidation, dissolution or winding up of the Corporation, the assets
distributable among the holders of shares of the Series A Preferred Stock and
all other classes and series of preferred stock ranking (as to any such
distribution) on a parity with the Series A Preferred Stock are insufficient to
permit the payment in full to the holders of all such shares of
-3-
<PAGE>
all preferential amounts payable to all such holders, then the entire assets of
the Corporation thus distributable shall be distributed ratably among the
holders of the shares of the Series A Preferred Stock and such other classes and
series of preferred stock ranking (as to any such distribution) on a parity with
the Series A Preferred Stock in proportion to the respective amounts that would
be payable per share if such assets were sufficient to permit payment in full.
(b) For purposes of this Section 3, a distribution of assets in any
dissolution, winding up or liquidation shall not include (i) any consolidation
or merger of the Corporation with or into any other corporation or other entity,
(ii) any dissolution, liquidation, winding up or reorganization of the
Corporation immediately followed by reincorporation of another corporation or
other entity or (iii) a sale or other disposition of all or substantially all of
the Corporation's assets to another corporation or other entity; PROVIDED,
HOWEVER, that, in each case, effective provision is made in the certificate of
incorporation of the resulting and surviving corporation or otherwise for the
protection of the relative rights of the holders of shares of the Series A
Preferred Stock.
(c) After the payment of the full preferential amounts provided for
herein to the holders of shares of the Series A Preferred Stock or funds
necessary for such payment have been set aside in trust for the holders thereof,
such holders shall be entitled to no other or further participation in the
distribution of the assets of the Corporation.
Section 4. CONVERSION AND REDEMPTION OF SERIES A PREFERRED STOCK.
(a) Each holder of Series A Preferred Stock shall have the right,
exercisable at any time and from time to time during the period commencing on
the date that is ninety (90) days after the Closing Date and ending on the date
that is two years after the Closing Date (the "Mandatory Conversion Date"), to
convert any or all of the Series A Preferred Stock owned by such holder for
shares of Common Stock, at a conversion rate determined by multiplying the
number of shares of Series A Preferred Stock to be converted by a fraction, the
numerator of which shall equal one hundred (100) and the denominator of which (a
"Denominator") shall equal (i) the current market price per share of the Common
Stock (determined as provided in Section 5) as of the Closing Date (such current
market price being referred to herein as the "Closing Price"), if the applicable
Conversion Date (as defined below) occurs on or before the 119th day following
the Closing Date, (ii) the lessor of (A) 100% of the Closing Price or (B) the
current market price per share of Common Stock (determined as provided in
Section 5) as of the applicable Conversion Date, if the applicable Conversion
Date occurs on or after the 120th day after the Closing Date and on or before
the 179th day after the Closing Date or (iii) the lesser of (A) 100% of the
Closing Price
-4-
<PAGE>
and (ii) 85% of the current market price per share of Common Stock (determined
as provided in Section 5) as of the applicable Conversion Date for any
Conversion Date occurring on or after the 180th day after the Closing Date,
subject to adjustment and the conditions described herein.
(b) (i) Any holder of shares of the Series A Preferred Stock
electing to convert shares thereof pursuant to Section 4(a) shall (A)
transmit by facsimile, for receipt on the proposed date of conversion,
a copy of a fully completed and executed notice of conversion ("Notice
of Conversion") to the Corporation at the office of the Corporation or
its designated transfer agent (the "Transfer Agent"), in the form
attached as Exhibit A hereto, and (B) surrender to a common carrier for
delivery to the office of the Corporation or the Transfer Agent, the
original certificates representing the Series A Preferred Stock being
converted (the "Preferred Stock Certificates"), duly endorsed for
cancellation. The Corporation shall, upon the timely written request of
a holder of shares of the Series A Preferred Stock, promptly provide in
writing to such holder, via facsimile transmission, the appropriate
numbers for the Corporation and the Transfer Agent to be used to effect
an election in accordance with this subparagraph (i).
(ii) Upon receipt by the Corporation of transmission of a
facsimile copy of such Notice of Conversion, the Corporation shall as
soon as practicable (but in no event later than 12:00 noon on the next
business day after receipt thereof) send, via facsimile, a confirmation
of receipt of such Notice of Conversion to such holder, which shall
specify that the Notice of Conversion has been received and the name
and telephone number of a contact person at the Corporation whom the
holder should contact regarding information related to such conversion.
Upon receipt by the Corporation or the Transfer Agent of the
certificate(s) representing the shares of Series A Preferred Stock to
be converted pursuant to such Notice of Conversion (or an
indemnification undertaking in form and substance reasonably
satisfactory to the Corporation with respect to such shares in the case
of their loss, theft or destruction) together with the originally
executed and completed Notice of Conversion (such date of the
Corporation's receipt of all such documents being referred to herein as
the "Final Receipt Date"), the Corporation or Transfer Agent (as
applicable) shall, as soon as possible on or after the applicable Final
Receipt Date, but in any event within two (2) business days after the
applicable Final Receipt Date, issue and surrender to a common carrier
for either overnight delivery (if delivery is to be made inside the
United States) or two (2) day delivery (if delivery is to be made
outside the United States) to such holder at the address specified in
the Notice of Conversion, a certificate for the number of shares of
Common Stock to which such holder shall be entitled as in respect of
the related conversion. In the
-5-
<PAGE>
event of a partial conversion of shares of Series A Preferred Stock
represented by certificate(s) delivered to the Corporation in respect
of any conversion, the Corporation will return to the applicable holder
a certificate representing such holder's remaining shares of Series A
Preferred Stock that were not so converted. In the case of any dispute
between the Corporation and such holder as to the calculation of the
applicable Conversion Price evidenced by a notice to such effect (a
"Dispute Notice") delivered to the Corporation by such holder prior to
the Final Receipt Date, the Corporation shall promptly issue to such
holder the number of shares of Common Stock that is not disputed and
shall submit the disputed calculations to its outside accountant within
two (2) business days after the Final Receipt Date. The Corporation
shall cause such accountant to perform the calculations and notify the
Corporation and the holder of the results no later than two (2)
business days after the date that such outside accountant is delivered
a copy of such holder's Dispute Notice by the Corporation pursuant to
the preceding sentence. Such accountant's calculation shall be deemed
conclusive and binding on the Corporation and such holder absent
manifest error.
(iii) The effective date of a particular conversion (the
"Conversion Date") other than pursuant to Section 4(c) shall be deemed
to be the date on which the advance copy of the related Notice of
Conversion in respect of such conversion is received by either the
Corporation or the Transfer Agent by facsimile transmission as provided
in paragraph (ii) above, provided that (A) such advance copy of the
Notice of Conversion is transmitted by facsimile to and received by the
Corporation before 11:59 p.m., New York City time, on such date and (B)
the original certificates representing the Series A Preferred Stock to
be converted (or an indemnification undertaking in form and substance
reasonably satisfactory to the Corporation with respect to such shares
in the case of their loss, theft or destruction), together with the
originally executed and completed Notice of Conversion, are surrendered
by depositing such certificates and Notice of Conversion with a common
carrier, as provided above, and received by the Corporation or the
Transfer Agent on or before the second (2nd) business day following the
date that the related advance copy of the related Notice of Conversion
is received by the Corporation or the Transfer Agent. In the event that
all such documents are not received within two (2) business days after
such date, such Notice of Conversion shall be deemed null and void and
no conversion of Series A Preferred Stock shall be effected thereby.
(iv) As of any Conversion Date, the person or persons entitled
to receive the shares of the Common Stock issuable upon the related
conversion of shares of Series A Preferred Stock pursuant to this
Section 4 shall be treated
-6-
<PAGE>
for all purposes as the record holder or holders of the shares of
Common Stock issuable in respect of such conversion on said date. From
and after the Conversion Date in respect of such shares of Series A
Preferred Stock, all such shares of Series A Preferred Stock shall be
deemed to have been converted into shares of Common Stock at the
applicable conversion rate, all stock dividends on such shares of the
Series A Preferred Stock shall cease to accrue, and all rights of the
holders thereof as holders of Series A Preferred Stock, except the
right to receive all accrued and unpaid stock dividends to such
Conversion Date at the applicable rate for such shares of Series A
Preferred Stock and the right to receive certificates representing
shares of Common Stock issuable upon conversion of such shares
(including, without limitation, with respect to such stock dividends),
shall cease and terminate, such shares of Series A Preferred Stock
shall not thereafter be transferred (except with the consent of the
Corporation) on the books of the Corporation and such shares shall not
be deemed to be outstanding for any purpose whatsoever. The rights of a
holder to elect to convert shares of Series A Preferred Stock under
this Section 4(a) and 4(b) shall cease and terminate immediately after
the Mandatory Conversion Date.
(c) Subject to Section 4(d), to the extent that any shares of Series A
Preferred Stock held by a holder thereof have not been converted pursuant to
Sections 4(a) and 4(b) as of the Mandatory Conversion Date, such holder shall be
deemed to have elected to convert such remaining shares of Series A Preferred
Stock as of the Mandatory Conversion Date (without any action required by such
holder) and the Corporation shall issue shares of Common Stock to such holder
and satisfy its other obligations under Section 4(a) and (b) as if such holder
had elected to convert such remaining shares of Series A Preferred Stock
pursuant to Sections 4(a) and 4(b) as of the Mandatory Conversion Date.
(d) Notwithstanding anything herein to the contrary, in the event that
(i) a holder of Series A Preferred Stock elects (or is deemed to have elected)
to convert shares of Series A Preferred Stock pursuant to Sections 4(a) and 4(b)
or pursuant to Section 4(c) for which a Denominator that is less than the
Closing Price is utilized in the calculation (pursuant to Section 4(a)) of the
number of shares of Common Stock to be issued in such conversion and (ii) such
conversion would result in such holder receiving, as a result of such
conversion, a number of shares of Common Stock that, together with other shares
of Common Stock issued to such holder (or any affiliate of such holder) in any
prior conversion(s) of Series A Preferred Stock that utilized a Denominator that
was less than the Closing Price in the calculation (pursuant to Section 4(a)) of
the number of shares of Common Stock to be issued in such conversion, would
equal or exceed twenty percent (20%) of the shares of Common Stock of the
Corporation outstanding on the Closing Date (the "Threshold Amount"), the
Corporation shall (i) issue to such holder the
-7-
<PAGE>
number of shares of Common Stock otherwise required to be issued to such holder
as a result of such conversion (including any shares of Common Stock
representing cumulative stock dividends accrued to the applicable Conversion
Date pursuant to Section 2) LESS the number of shares of Common Stock otherwise
issuable to such holder pursuant to such conversion in excess of the Threshold
Amount (the "Excess Shares") and (ii) shall remit to such holder, in lieu of the
Excess Shares, an amount of cash equal to the number of Excess Shares multiplied
by the current market price per share of Common Stock (determined as provided in
Section 5) determined as of such Conversion Date. Upon such issuance of Common
Stock and payment of such cash to the holder in lieu of the Excess Shares, the
Corporation's obligations to such holder arising as a result of such conversion
(including the Corporation's obligation to pay cumulative stock dividends
through the applicable Conversion Date) shall be deemed fully satisfied.
(e) No fractional shares of Common Stock or scrip representing
fractional shares shall be issued upon conversion of shares of the Series A
Preferred Stock pursuant to this Section 4. If more than one share of the Series
A Preferred Stock shall be surrendered for conversion by the same holder, the
number of full shares of Common Stock which shall be issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of the
Series A Preferred Stock so surrendered. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon conversion of any shares of
the Series A Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fraction in an amount equal to the same fraction of the closing
bid price for Common Stock determined as of the last business day preceding the
Conversion Date in respect of such shares. The closing bid price for such day
shall be the last reported bid price on the American Stock Exchange, or if
Common Stock is not listed or admitted to trading on such exchange, on the
principal national securities exchange on which Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, the closing bid price of Common Stock on NASDAQ or any
comparable system. If Common Stock is not quoted on NASDAQ or any comparable
system, the Board of Directors of the Corporation shall in good faith determine
the current market price on such basis as it considers appropriate.
(f) When shares of Series A Preferred Stock are converted (or deemed
converted) by a holder pursuant to this Section 4, the Corporation shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of Common
Stock upon such conversion.
(g) The Corporation shall reserve at all times out of the Corporation's
authorized but unissued shares of Common Stock a sufficient number of shares of
Common Stock to permit the conversion of the then outstanding shares of the
Series A Preferred Stock pursuant to this Section 4 and such reserved
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<PAGE>
shares shall not be used for any other purpose. All shares of Common Stock which
may be issued upon conversion of shares of the Series A Preferred Stock pursuant
to this Section 4 shall be validly issued, fully paid and nonassessable. In
order that shares of Common Stock may be issued upon conversion of shares of the
Series A Preferred Stock, the Corporation shall comply with all applicable
Federal and State securities laws and use its best efforts to list such shares
of Common Stock to be issued upon conversion on each securities exchange on
which Common Stock is listed.
(h) The conversion rate (and the components thereof) in effect at any
time for conversion of Series A Preferred Stock into Common Stock pursuant to
this Section 4 shall be subject to adjustment from time to time as follows:
(i) In the event that the Corporation shall (1) pay a dividend
in shares of Common Stock to holders of Common Stock, (2) make a
distribution in shares of Common Stock to holders of Common Stock, (3)
subdivide the outstanding shares of Common Stock into a greater number
of shares of Common Stock, (4) combine the outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (5) otherwise
increase or decrease the number of outstanding shares of Common Stock
through reclassification or any other event similar to the events
described in clauses (1) through (4) above, the conversion rate (and
the components thereof) in effect pursuant to this Section 4
immediately prior to such action shall be adjusted to the extent
required to give effect to the impact of any such event so that the
holder of any shares of the Series A Preferred Stock thereafter
surrendered for conversion pursuant to this Section 4 shall be entitled
to receive the number of shares of Common Stock which he would have
owned immediately following such action had such shares of the Series A
Preferred Stock been converted immediately prior thereto. Such
adjustment shall be made whenever any event listed above shall occur
and shall become effective (A) immediately after the record date in the
case of a dividend or a distribution or other applicable event for
which a record date is used and (B) immediately after the effective
date in the case of a subdivision or combination or other applicable
event for which a record date is not used.
(ii) In case the Corporation shall distribute to all holders
of the Common Stock shares of any class of capital stock other than
Common Stock, evidences of indebtedness or other assets (other than
non-extraordinary cash dividends out of current or retained earnings),
or shall distribute to substantially all holders of Common Stock rights
or warrants to subscribe for securities, then in each such case the
number of shares of the Common Stock into which each share of the
Series A Preferred Stock shall be converted shall be adjusted (and
appropriate adjustments shall be made to the component parts of the
applicable
-9-
<PAGE>
conversion rate) so that such number shall equal the number determined
by multiplying the number of shares of Common Stock into which such
share of the Series A Preferred Stock was convertible immediately prior
to the date of such distribution by a fraction of which the numerator
shall be the current market price of Common Stock (determined as
provided in Section 5) on the record date mentioned below, and of which
the denominator shall be such current market price of Common Stock,
less the then fair market value (as determined in good faith by the
Board of Directors of the Corporation, whose determination shall be
conclusive evidence of such fair market value) of the portion of the
assets so distributed or of such subscription rights or warrants
applicable to one share of Common Stock. Such adjustment shall become
effective immediately after the record date for the determination of
the holders of Common Stock entitled to receive such distribution.
(iii) The Corporation shall provide at least 10 business days
advance notice to holders of Series A Preferred Stock of any record
date or other applicable date for determining shareholders entitled to
participate in any of the events described in this Section 4(h) or
other similar events not described in this Section 4(h) which would
have a dilutive effect on the Series A Preferred Stock or the Common
Stock into which the Series A Preferred Stock is convertible.
(i) No adjustment in the conversion rate (or its component parts) under
this Section 4 shall be required until cumulative adjustments result in a
concomitant change of 1% or more of the conversion rate as in effect prior to
the last adjustment of the conversion rate; PROVIDED, HOWEVER, that any
adjustments which by reason of this Section 4(i) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 4 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. No adjustment to the
conversion rate shall be made for non-extraordinary cash dividends.
(j) In the event that, as a result of an adjustment made pursuant to
Section 4(h), the holder of any share of the Series A Preferred Stock thereafter
surrendered for conversion shall become entitled to receive any shares of
capital stock of the Corporation other than shares of Common Stock, thereafter
the number of such other shares so receivable upon conversion of any shares of
the Series A Preferred Stock shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in this Section 4.
(k) The Corporation may make such increases in the conversion rate, in
addition to those required by Sections 4(h)(i) and (ii), as it considers to be
advisable in order that any event treated for Federal income tax purposes as a
dividend
-10-
<PAGE>
of stock or stock rights shall not be taxable to the recipients thereof.
(l) Whenever the conversion rate (or any components thereof) is
adjusted pursuant to this Section 4, the Corporation shall promptly mail to all
holders of record of shares of the Series A Preferred Stock a notice of the
adjustment and shall cause to be prepared a certificate signed by the chief
financial officer of the Corporation or, if requested in writing by holders of a
majority of the shares of Series A Preferred Stock then outstanding, the
Corporation's outside accountants or a reputable investment banking firm
selected by the Corporation setting forth the adjusted conversion rate (and the
component parts thereof) and a brief statement of the facts requiring such
adjustment and the computation thereof. Such certificate shall forthwith be
filed with each transfer agent for the shares of the Series A Preferred Stock.
(m) If any of the following shall occur: (i) any reclassification or
change of outstanding shares of Common Stock issuable upon conversion of shares
of the Series A Preferred Stock (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), (ii) any consolidation or merger to which the
Corporation is a party other than a merger in which the Corporation is the
continuing corporation and which does not result in any reclassification of, or
change (other than a change in name, or par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination) in, outstanding shares of Common Stock or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Corporation as an entirety, then the Corporation, or such successor or
purchasing corporation, as the case may be, shall, as a condition precedent to
such reclassification, change, consolidation, merger, sale or conveyance,
provide in its certificate of incorporation or other charter document that each
share of the Series A Preferred Stock shall be convertible under this Section 4
into the kind and amount of shares of capital stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock deliverable upon conversion of such share of the Series A Preferred
Stock immediately prior to such reclassification, change, consolidation, merger,
sale or conveyance. Such certificate of incorporation or other charter document
shall provide for adjustments and protection which shall be as nearly equivalent
as may be practicable to the adjustments provided for in this Section 4. If, in
the case of any such consolidation, merger, sale or conveyance, the stock or
other securities and property (including cash) receivable thereupon by a holder
of Common Stock includes shares of capital stock or other securities and
property of a corporation other than the successor purchasing corporation, as
the case may be, in such consolidation, merger, sale or conveyance, then the
certificate of incorporation or other charter document of such other
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<PAGE>
corporation shall contain such additional provisions to protect the interests of
the holders of shares of the Series A Preferred Stock as the Board of Directors
of the Corporation shall reasonably consider necessary by reason of the
foregoing. The provision of this Section 4(m) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(n) No sooner than fifteen (15) business days nor later than five (5)
business days prior to the consummation of a transaction referred to in clauses
(ii) or (iii) of Section 4(m) (a "Major Transaction"), but not prior to the
public announcement of such Major Transaction, the Corporation shall deliver
written notice (a "Notice of Major Transaction") to each holder of Series A
Preferred Stock, which Notice of Major Transaction shall be deemed to have been
delivered to the holder one (1) business day after the Corporation's sending of
such notice (for overnight delivery) by a common carrier, if such delivery is to
be made in the United States, or two (2) business days after the Corporation's
sending of such notice (for two (2) day delivery) by common carrier, if such
notice is to be delivered outside the United States. Such Notice of Major
Transaction shall indicate the amount and type(s) of consideration (the "Major
Transaction Consideration") the holders of Series A Preferred Stock would
receive for their shares of Series A Preferred Stock in the related Major
Transaction. Such holder may elect to redeem all or a portion of such holder's
shares of Series A Preferred Stock for an amount in cash equal to $125 per share
of Series A Preferred Stock held by such holder to be so redeemed in lieu of the
Major Transaction Consideration or other securities and/or property that would
otherwise be payable to such holder pursuant to Section 4(m). A holder may
exercise such election by delivering written notice of such election to the
Corporation, together with certificates for the shares of Series A Preferred
Stock to be redeemed in connection with such election, within five (5) business
days of the holder's receipt of the related Notice of Major Transaction, which
notice shall be deemed given one (1) business day after the holder sends such
notice (together with such certificates) from the United States by common
carrier for overnight delivery or two (2) business days after the holder sends
such notice (together with such certificates) from outside the United States by
common carrier for two (2) day delivery. In the event that such Major
Transaction is not completed within fifteen (15) business days after the
Corporation is given a holder's related notice of election pursuant to the prior
sentence, such election shall be null and void and the Corporation shall
promptly return the certificate(s) representing the Series A Preferred Stock
delivered by such holder to such holder; provided, that the Corporation will
comply with the notice provisions of this Section 4(n) with respect to any later
consummation of such Major Transaction. This Section 4(n) shall not apply in
respect of any Major Transaction that occurs after the second anniversary of the
Closing Date.
(o) (i) After the occurrence of a Change in Control (as defined below),
other than in connection with a Major
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<PAGE>
Transaction, each holder of Series A Preferred Stock shall have the
right, at such holder's option, to require the Corporation to redeem
all or a portion of such holder's Series A Preferred Stock for an
amount per share in cash equal to the greater of (A) $125 and (B) the
product of the aggregate number of shares of Common Stock into which a
share of Series A Preferred Stock is convertible (assuming such
conversion were to occur on the last day preceding the effective date
for the Change of Control) multiplied by the current market price per
share of Common Stock (determined as provided in Section 5) as of the
last date preceding the effective date of such Change of Control. As
used in this Section 4(o), a "Change in Control" shall be deemed to
have occurred at such time as either Douglas R. Eger or Thomas M.
Fitzgerald cease to be either a director or officer of the Corporation.
The rights of holders of Series A Preferred Stock under this Section
4(o) shall not apply in respect of any Change of Control that occurs
after the first anniversary of the Closing Date.
(ii) The Corporation shall provide each holder of Series A
Preferred Stock with written notice of the occurrence of any Change of
Control (a "Change of Control Notice") within two (2) business days
after the occurrence of such Change of Control. Each holder may require
the Corporation to redeem all or a portion of such holder's shares of
Series A Preferred Stock pursuant to this Section 4(o) by delivering
written notice (a "Notice of Redemption at Option of Holder") to the
Corporation to such effect within ten (10) business days after receipt
of the applicable Change of Control Notice, which Notice of Redemption
at Option of Holder shall be deemed to have been delivered one (1)
business day after such holder's sending, if such notice is sent within
the United States for overnight delivery by a common carrier, or two
(2) business days after such holder's sending, if such notice is sent
from outside the United States by two (2) day delivery by a common
carrier. Each such Notice of Redemption at Option of Holder shall
indicate the number of shares of Series A Preferred Stock that have
been selected by such holder for redemption.
(iii) Each holder submitting certificate(s) representing
shares of Series A Preferred Stock for redemption under this Paragraph
4(o) shall send such holder's Preferred Stock Certificates to be
redeemed to the Corporation or its Transfer Agent and the Corporation
shall pay the applicable redemption price to that holder within thirty
(30) business days after the Corporation's receipt of such holder's
Notice of Redemption at Option of Holder; provided that such holder's
certificate(s) representing shares of Series A Preferred Stock to be
redeemed (or an indemnification undertaking with respect to such shares
in the case of their loss, theft or destruction) shall have been so
delivered to the Corporation or its Transfer Agent.
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<PAGE>
(p) As used herein, "business day" means a day of the year on which
banks are not required or authorized to close in New York City, New York.
(q) It is understood that the restrictions on any holder's ability to
convert such holder's shares of Series A Preferred Stock contained herein may be
supplemented by separate written agreement between such holder and the
Corporation.
Section 5. CALCULATIONS OF CURRENT MARKET PRICE OF COMMON STOCK. For
purposes of calculations relating to the Series A Preferred Stock that refer to
the current market price per share of Common Stock, the current market price per
share of Common Stock on or as of any day shall be deemed to be the average of
the closing bid prices for the ten (10) consecutive trading days ending the last
trading day before the day in question. The closing bid price for each day shall
be the last reported bid price on the American Stock Exchange, or if Common
Stock is not listed or admitted to trading on such exchange, on the principal
national securities exchange on which Common Stock is listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, the closing bid price of Common Stock on NASDAQ or any comparable
system, or if Common Stock is not quoted on NASDAQ or any comparable system, the
closing bid price as furnished by any two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Corporation for that
purpose. If Common Stock is not so quoted on NASDAQ or any comparable system,
the Board of Directors of the Corporation shall reasonably and in good faith
determine the current market price on such basis as it considers appropriate.
For example, in the event that the current market price per share of Common
Stock is to be determined as of a Conversion Date, the current market price per
share of Common Stock shall equal the average of the last reported bid price as
reported by the American Stock Exchange for the ten (10) consecutive trading
days ending the last trading day before such Conversion Date (assuming that the
Common Stock is listed and admitted for trading on the American Stock Exchange
and a reported bid price for Common Stock is placed on the American Stock
Exchange on each such trading day).
Section 6. LIMITATIONS. (a) In addition to any other rights provided by
applicable law, so long as any shares of the Series A Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote, or the
written consent as provided by law, of the holders of at least two-thirds (2/3)
of the outstanding shares of the Series A Preferred Stock, voting as a separate
class,
(i) create, authorize or issue any class or series of capital
stock, or rights to subscribe to or acquire, or any security
convertible into, any class or series of capital stock ranking as to
payment of dividends, distribution of assets upon liquidation or
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<PAGE>
voting rights, prior to the Series A Preferred Stock;
or
(ii) amend, alter or appeal, whether by merger, consolidation
or otherwise, any of the provisions of the Certificate of Incorporation
(including this Certificate of Designation) that would change the
preferences, rights or powers with respect to the Series A Preferred
Stock so as to affect the Series A Preferred Stock adversely.
(b) In addition to any other rights provided by applicable law, so long
as any shares of the Series A Preferred Stock are outstanding, the Corporation
shall not, without the affirmative vote, or the written consent as provided by
law, of the holders of at least two-thirds (2/3) of the outstanding shares of
the Series A Preferred Stock, voting as a separate class, issue or agree to
issue any Common Stock or any security convertible or otherwise exchangeable,
directly or indirectly, for Common Stock if such shares of Common Stock are to
be issued, or such convertible securities are to be converted to or exchanged
for shares of Common Stock, at a price per share less than the current market
price for the Common Stock (determined as provided in Section 5) as of the day
immediately preceding the date of the issuance of such Common Stock or such
convertible or exchangeable security (as the case may be); provided, however,
that the restrictions contained in this paragraph (b) shall not apply (i) to the
issuance of any such convertible or exchangeable securities that are convertible
or exchangeable at a fixed price (and not a floating price) per share equal to
or greater than the current market price for the Common Stock (determined as
provided in Section 5) as of the date of issuance of such convertible or
exchangeable security, (ii) to the issuance of Common Stock and other securities
of the Corporation issuable upon the exercise or conversion of options, warrants
on other rights to purchase securities of the Corporation outstanding as of the
date hereof, (iii) to the issuance of any securities to officers, directors or
employees of the Corporation or any of its subsidiaries, (iv) to the issuance of
any securities of the Corporation in an underwritten public offering or (v) to
any other issuance of securities after the date that is 90 days after the
Closing Date if the holders of Series A Preferred Stock are first delivered a
written notice (a "Right of First Refusal Notice") from the Corporation offering
such holders on a PRO RATA basis the right to purchase all or a portion of the
related securities at the same price (and on the same terms and conditions,
offered to other proposed investors (which notice shall set forth such price,
terms and conditions). In the event that the Corporation delivers a Right of
First Refusal Notice to any holder of Series A Preferred Stock, the failure by
such holder to commit in writing to purchase such holder's pro rata portion of
the securities identified in such Right of First Refusal Notice within five (5)
business days of delivery thereof may be deemed by the Corporation to constitute
such holder's determination not to so purchase such securities and the
Corporation shall then be
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<PAGE>
permitted to sell such securities to other investors at the price and on the
terms and conditions set forth in such notice. The rights of holders of Series A
Preferred Stock under this paragraph (b) shall terminate on the first
anniversary of the Closing Date.
(c) Notwithstanding the foregoing, except as otherwise required by
applicable law, nothing herein contained shall require a vote or consent of the
holders of Series A Preferred Stock in connection with any increase in the total
number of authorized shares of Common Stock. The holders of Series A Preferred
Stock shall not be entitled to vote on any matter except (i) as provided in this
Section 6 and (ii) as required by law.
Section 7. LOST OR STOLEN CERTIFICATES. Upon (i) receipt by the
Corporation from a holder of evidence satisfactory to the Corporation of the
loss, theft, destruction of any certificate(s) representing shares of Series A
Preferred Stock and of an indemnification undertaking by the holder to the
Corporation that is reasonably satisfactory to the Corporation or (ii) upon
surrender and cancellation of certificate(s) representing shares of Series A
Preferred Stock that have been mutilated, the Corporation shall execute and
deliver to such holder new certificate(s) representing shares of Series A
Preferred Stock of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost, stolen, destroyed or mutilated certificate(s)
representing shares of Series A Preferred Stock if such holder contemporaneously
requests the Corporation to convert such shares of Series A Preferred Stock into
shares of Common Stock or otherwise redeem such shares pursuant to the terms
hereof.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by Douglas R. Eger, its Chairman and Chief Executive
Officer, and attested by George Lombardi, its Secretary, this day of February,
1997.
SHEFFIELD MEDICAL TECHNOLOGIES INC.
By: /s/ Douglas R. Eger
-------------------
Douglas R. Eger
Chairman and Chief Executive
Officer
Attested:
By: /s/ George Lombardi
-------------------
George Lombardi
Secretary
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<PAGE>
EXHIBIT A
TO CERTIFICATE
OF DESIGNATION
NOTICE OF CONVERSION
(To be completed, executed and delivered upon
conversion of shares of Series A Preferred Stock)
TO: Sheffield Medical Technologies Inc.
Attention: Chief Financial Officer
The undersigned holder of shares of Series A Cumulative Convertible
Redeemable Preferred Stock ("Series A Preferred Stock") of Sheffield Medical
Technologies Inc. (the "Company") hereby converts ________ shares of Series A
Preferred Stock into Common Stock of the Company at the applicable conversion
rate on the terms and conditions specified in the Certificate of Designation for
the Series A Preferred Stock. The undersigned surrenders herewith certificate(s)
representing such number of shares of Series A Preferred Stock to be converted
and all right, title and interest therein to the Company and directs that the
Common Stock deliverable upon the conversion of such shares of Series A
Preferred Stock be registered or placed in the name and at the address specified
below and delivered thereto.
-------------------------------------------------
-------------------------------------------------
[Insert Common Stock Registration Information]
In the event that the certificate(s) surrendered represent a number of
shares of Series A Preferred Stock in excess of the shares of Series A Preferred
Stock converted pursuant to this notice, you are advised to issue and deliver to
the undersigned holder a certificate representing the remaining balance of
shares of Series A Preferred Stock represented by the surrendered certificate(s)
not so converted.
Date: _____________________.
Your Signature: -----------------------------------------------
(Sign exactly as your name appears on the
certificate representing the Shares of Series A
Preferred Stock being converted)
-18-
Exhibit 4.2 to
Form 10-KSB
CERTIFICATE OF DESIGNATION
OF
SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE
PREFERRED STOCK
OF
SHEFFIELD MEDICAL TECHNOLOGIES INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
---------------------
Sheffield Medical Technologies Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation (the "Board of Directors")
by the provisions of the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), there hereby is created, out of the 3,000,000
shares of preferred stock of the Corporation authorized in Article FOURTH of the
Certificate of Incorporation (the "Preferred Stock"), a series of Preferred
Stock consisting of 40,800 shares, which series shall have the following powers,
designations, preferences and relative, participating, optional or other rights,
and the following qualifications, limitations and restrictions (in addition to
the powers, designations, preferences and relative, participating, optional or
other rights, and the qualifications, limitations and restrictions, set forth in
the Certificate of Incorporation which are applicable to the Preferred Stock).
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Cumulative Convertible Redeemable Preferred Stock" (the
"Series A Preferred Stock") and the authorized number of shares constituting
such series shall be 40,800. The par value of the Series A Preferred Stock shall
be $.01 per share.
<PAGE>
Section 2. DIVIDENDS.
Subject to Section 4(d), the holders of shares of the Series A
Preferred Stock will be entitled to receive, when, as and if declared by the
Board of Directors, cumulative stock dividends on the shares of the Series A
Preferred Stock, payable in shares of the Corporation's common stock, $.01 par
value per share ("Common Stock"), at the rate per share of 7.0% per annum of the
original $100.00 purchase price per share of the Series A Preferred Stock, and
no more. Such stock dividends shall be cumulative from the date of the initial
issuance of shares of Series A Preferred Stock (the "Closing Date") or the most
recent date on which the full amount of accrued stock dividends have been paid,
as the case may be, on the Series A Preferred Stock by the Corporation. Subject
to, and as provided in, Section 4, the Corporation shall pay all cumulative
stock dividends on the shares of Series A Preferred Stock held by a holder on
the Conversion Date (as defined below) in respect of such holder's election to
convert Series A Preferred Stock. The number of shares of Common Stock to be
issued as cumulative stock dividends on any such Conversion Date shall equal the
cash value of such cumulative dividends divided by the current market price per
share of Common Stock (determined as provided in Section 5) as of such
Conversion Date. The cash value of stock dividends payable on shares of Series A
Preferred Stock for any full annual dividend period shall be computed by
multiplying the original $100.00 purchase price per share by 7.0%. The cash
value of dividends payable on shares of the Series A Preferred Stock for any
period less than a full annual dividend period shall be computed on the basis of
a 360-day year of twelve 30-day months and the actual number of days elapsed in
the period for which payable.
If stock dividends are not paid in full, or declared in full, upon the
shares of the Series A Preferred Stock and shares of any other preferred stock
ranking on a parity as to payment of stock dividends with the Series A Preferred
Stock, all dividends declared upon shares of the Series A Preferred Stock and
any other preferred stock ranking on a parity as to payment of dividends with
the Series A Preferred Stock shall be paid or declared PRO RATA so that in all
cases the amount of dividends paid or declared per share on the Series A
Preferred Stock and such other shares of preferred stock ranking on a parity as
to payment of dividends with the Series A Preferred Stock shall bear to each
other the same ratio that accumulated stock dividends per share, including
dividends accrued or in arrears, if any, on the shares of the Series A Preferred
Stock and such other shares of preferred stock bear to each other. Except as
provided in the preceding sentence, unless full cumulative stock dividends on
the shares of the Series A Preferred Stock have been paid or declared in full,
no dividends (other than dividends in shares of Common Stock, or in shares of
any other capital stock of the Corporation
-2-
<PAGE>
ranking junior to the Series A Preferred Stock as to payment of dividends and
distribution of assets upon liquidation) shall be paid or declared and set aside
for payment or other distribution upon the Common Stock or, except as provided
above, on any other capital stock of the Corporation ranking junior to or on a
parity with the Series A Preferred Stock as to dividends, nor shall any shares
of Common Stock or shares of any other capital stock of the Corporation ranking
junior to or on a parity with the Series A Preferred Stock as to dividends be
redeemed, purchased or otherwise acquired for any consideration (or any payment
made to or available for a sinking fund for the redemption of any such shares)
by the Corporation or any subsidiary of the Corporation (except by conversion
into or exchange for shares of capital stock of the Corporation ranking junior
to the Series A Preferred Stock as to dividends and distribution of assets upon
liquidation). Holders of shares of the Series A Preferred Stock shall not be
entitled to any dividends, whether payable in capital stock, cash or property,
in excess of full accrued and cumulative stock dividends as herein provided. No
interest or sum of money in lieu of interest shall be payable in respect of any
stock dividend payment or payments on the shares of the Series A Preferred Stock
that may be in arrears; provided, however, that if, on an applicable Conversion
Date (as defined herein), stock dividends that would have been payable on such
date are not paid solely due to the failure of the Corporation's Board of
Directors to declare such dividends, then the rate of conversion of the Series A
Preferred Stock to be converted on such Conversion Date shall be adjusted so
that the holders would receive the same amount of shares of Common Stock on such
Conversation Date as such holder would have received if the Corporation's Board
of Directors had timely declared such stock dividends.
The terms "accrued dividends," "dividends accrued" and "dividends in
arrears," whenever used herein with reference to shares of preferred stock shall
be deemed to mean an amount which shall be equal to dividends thereon at the
applicable annual dividend rates per share for the respective series thereof
from the date or dates on which such dividends commence to accrue to the
applicable payment date less the amount of all dividends paid, or declared in
full and sums set aside for the payment thereof, upon such shares of preferred
stock.
Section 3. LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or otherwise, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
holders of shares of the Series A Preferred Stock shall be entitled to receive,
in cash, out of the remaining net assets of the Corporation (whether from
capital or from earnings available for distribution to
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<PAGE>
shareholders), the amount of One Hundred Dollars ($100.00) for each share of the
Series A Preferred Stock, plus the cash value determined in accordance with
Section 2 above of all stock dividends accrued and unpaid at the applicable rate
on each such share up to the date fixed for distribution, before any
distribution shall be made to the holders of shares of Common Stock or any other
capital stock of the Corporation ranking (as to any such distribution) junior to
the Series A Preferred Stock. If upon any liquidation, dissolution or winding up
of the Corporation, the assets distributable among the holders of shares of the
Series A Preferred Stock and all other classes and series of preferred stock
ranking (as to any such distribution) on a parity with the Series A Preferred
Stock are insufficient to permit the payment in full to the holders of all such
shares of all preferential amounts payable to all such holders, then the entire
assets of the Corporation thus distributable shall be distributed ratably among
the holders of the shares of the Series A Preferred Stock and such other classes
and series of preferred stock ranking (as to any such distribution) on a parity
with the Series A Preferred Stock in proportion to the respective amounts that
would be payable per share if such assets were sufficient to permit payment in
full.
(b) For purposes of this Section 3, a distribution of assets in any
dissolution, winding up or liquidation shall not include (i) any consolidation
or merger of the Corporation with or into any other corporation or other entity,
(ii) any dissolution, liquidation, winding up or reorganization of the
Corporation immediately followed by reincorporation of another corporation or
other entity or (iii) a sale or other disposition of all or substantially all of
the Corporation's assets to another corporation or other entity; PROVIDED,
HOWEVER, that, in each case, effective provision is made in the certificate of
incorporation of the resulting and surviving corporation or otherwise for the
protection of the relative rights of the holders of shares of the Series A
Preferred Stock.
(c) After the payment of the full preferential amounts provided for
herein to the holders of shares of the Series A Preferred Stock or funds
necessary for such payment have been set aside in trust for the holders thereof,
such holders shall be entitled to no other or further participation in the
distribution of the assets of the Corporation.
Section 4. CONVERSION AND REDEMPTION OF SERIES A PREFERRED STOCK.
(a) Each holder of Series A Preferred Stock shall have the right,
exercisable at any time and from time to time during the period commencing on
the date that is ninety (90) days after the Closing Date and ending on the date
that is two years after
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<PAGE>
the Closing Date (the "Mandatory Conversion Date"), to convert any or all of the
Series A Preferred Stock owned by such holder for shares of Common Stock, at a
conversion rate determined by multiplying the number of shares of Series A
Preferred Stock to be converted by a fraction, the numerator of which shall
equal one hundred (100) and the denominator of which (a "Denominator") shall
equal (i) the current market price per share of the Common Stock (determined as
provided in Section 5) as of the Closing Date (such current market price being
referred to herein as the "Closing Price"), if the applicable Conversion Date
(as defined below) occurs on or before the 119th day following the Closing Date,
(ii) the lessor of (A) 100% of the Closing Price or (B) the current market price
per share of Common Stock (determined as provided in Section 5) as of the
applicable Conversion Date, if the applicable Conversion Date occurs on or after
the 120th day after the Closing Date and on or before the 179th day after the
Closing Date or (iii) the lesser of (A) 100% of the Closing Price and (ii) 85%
of the current market price per share of Common Stock (determined as provided in
Section 5) as of the applicable Conversion Date for any Conversion Date
occurring on or after the 180th day after the Closing Date, subject to
adjustment and the conditions described herein.
(b) (i) Any holder of shares of the Series A Preferred Stock
electing to convert shares thereof pursuant to Section 4(a) shall (A)
transmit by facsimile, for receipt on the proposed date of conversion,
a copy of a fully completed and executed notice of conversion ("Notice
of Conversion") to the Corporation at the office of the Corporation or
its designated transfer agent (the "Transfer Agent"), in the form
attached as Exhibit A hereto, and (B) surrender to a common carrier for
delivery to the office of the Corporation or the Transfer Agent, the
original certificates representing the Series A Preferred Stock being
converted (the "Preferred Stock Certificates"), duly endorsed for
cancellation. The Corporation shall, upon the timely written request of
a holder of shares of the Series A Preferred Stock, promptly provide in
writing to such holder, via facsimile transmission, the appropriate
numbers for the Corporation and the Transfer Agent to be used to effect
an election in accordance with this subparagraph (i).
(ii) Upon receipt by the Corporation of transmission of a
facsimile copy of such Notice of Conversion, the Corporation shall as
soon as practicable (but in no event later than 12:00 noon on the next
business day after receipt thereof) send, via facsimile, a confirmation
of receipt of such Notice of Conversion to such holder, which shall
specify that the Notice of Conversion has been received and the name
and telephone number of a contact person at the Corporation whom the
holder should contact regarding information related to such conversion.
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Upon receipt by the Corporation or the Transfer Agent of the
certificate(s) representing the shares of Series A Preferred Stock to
be converted pursuant to such Notice of Conversion (or an
indemnification undertaking in form and substance reasonably
satisfactory to the Corporation with respect to such shares in the case
of their loss, theft or destruction) together with the originally
executed and completed Notice of Conversion (such date of the
Corporation's receipt of all such documents being referred to herein as
the "Final Receipt Date"), the Corporation or Transfer Agent (as
applicable) shall, as soon as possible on or after the applicable Final
Receipt Date, but in any event within two (2) business days after the
applicable Final Receipt Date, issue and surrender to a common carrier
for either overnight delivery (if delivery is to be made inside the
United States) or two (2) day delivery (if delivery is to be made
outside the United States) to such holder at the address specified in
the Notice of Conversion, a certificate for the number of shares of
Common Stock to which such holder shall be entitled as in respect of
the related conversion. In the event of a partial conversion of shares
of Series A Preferred Stock represented by certificate(s) delivered to
the Corporation in respect of any conversion, the Corporation will
return to the applicable holder a certificate representing such
holder's remaining shares of Series A Preferred Stock that were not so
converted. In the case of any dispute between the Corporation and such
holder as to the calculation of the applicable Conversion Price
evidenced by a notice to such effect (a "Dispute Notice") delivered to
the Corporation by such holder prior to the Final Receipt Date, the
Corporation shall promptly issue to such holder the number of shares of
Common Stock that is not disputed and shall submit the disputed
calculations to its outside accountant within two (2) business days
after the Final Receipt Date. The Corporation shall cause such
accountant to perform the calculations and notify the Corporation and
the holder of the results no later than two (2) business days after the
date that such outside accountant is delivered a copy of such holder's
Dispute Notice by the Corporation pursuant to the preceding sentence.
Such accountant's calculation shall be deemed conclusive and binding on
the Corporation and such holder absent manifest error.
(iii) The effective date of a particular conversion (the
"Conversion Date") other than pursuant to Section 4(c) shall be deemed
to be the date on which the advance copy of the related Notice of
Conversion in respect of such conversion is received by either the
Corporation or the Transfer Agent by facsimile transmission as provided
in paragraph (ii) above, provided that (A) such advance copy of the
Notice of Conversion is transmitted by facsimile to and
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received by the Corporation before 11:59 p.m., New York City time, on
such date and (B) the original certificates representing the Series A
Preferred Stock to be converted (or an indemnification undertaking in
form and substance reasonably satisfactory to the Corporation with
respect to such shares in the case of their loss, theft or
destruction), together with the originally executed and completed
Notice of Conversion, are surrendered by depositing such certificates
and Notice of Conversion with a common carrier, as provided above, and
received by the Corporation or the Transfer Agent on or before the
second (2nd) business day following the date that the related advance
copy of the related Notice of Conversion is received by the Corporation
or the Transfer Agent. In the event that all such documents are not
received within two (2) business days after such date, such Notice of
Conversion shall be deemed null and void and no conversion of Series A
Preferred Stock shall be effected thereby.
(iv) As of any Conversion Date, the person or persons entitled
to receive the shares of the Common Stock issuable upon the related
conversion of shares of Series A Preferred Stock pursuant to this
Section 4 shall be treated for all purposes as the record holder or
holders of the shares of Common Stock issuable in respect of such
conversion on said date. From and after the Conversion Date in respect
of such shares of Series A Preferred Stock, all such shares of Series A
Preferred Stock shall be deemed to have been converted into shares of
Common Stock at the applicable conversion rate, all stock dividends on
such shares of the Series A Preferred Stock shall cease to accrue, and
all rights of the holders thereof as holders of Series A Preferred
Stock, except the right to receive all accrued and unpaid stock
dividends to such Conversion Date at the applicable rate for such
shares of Series A Preferred Stock and the right to receive
certificates representing shares of Common Stock issuable upon
conversion of such shares (including, without limitation, with respect
to such stock dividends), shall cease and terminate, such shares of
Series A Preferred Stock shall not thereafter be transferred (except
with the consent of the Corporation) on the books of the Corporation
and such shares shall not be deemed to be outstanding for any purpose
whatsoever. The rights of a holder to elect to convert shares of Series
A Preferred Stock under this Section 4(a) and 4(b) shall cease and
terminate immediately after the Mandatory Conversion Date.
(c) Subject to Section 4(d), to the extent that any shares of Series A
Preferred Stock held by a holder thereof have not been converted pursuant to
Sections 4(a) and 4(b) as of the Mandatory Conversion Date, such holder shall be
deemed to have elected to convert such remaining shares of Series A Preferred
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Stock as of the Mandatory Conversion Date (without any action required by such
holder) and the Corporation shall issue shares of Common Stock to such holder
and satisfy its other obligations under Section 4(a) and (b) as if such holder
had elected to convert such remaining shares of Series A Preferred Stock
pursuant to Sections 4(a) and 4(b) as of the Mandatory Conversion Date.
(d) Notwithstanding anything herein to the contrary, in the event that
(i) a holder of Series A Preferred Stock elects (or is deemed to have elected)
to convert shares of Series A Preferred Stock pursuant to Sections 4(a) and 4(b)
or pursuant to Section 4(c) for which a Denominator that is less than the
Closing Price is utilized in the calculation (pursuant to Section 4(a)) of the
number of shares of Common Stock to be issued in such conversion and (ii) such
conversion would result in such holder receiving, as a result of such
conversion, a number of shares of Common Stock that, together with other shares
of Common Stock issued to such holder (or any affiliate of such holder) in any
prior conversion(s) of Series A Preferred Stock that utilized a Denominator that
was less than the Closing Price in the calculation (pursuant to Section 4(a)) of
the number of shares of Common Stock to be issued in such conversion, would
equal or exceed twenty percent (20%) of the shares of Common Stock of the
Corporation outstanding on the Closing Date (the "Threshold Amount"), the
Corporation shall (i) issue to such holder the number of shares of Common Stock
otherwise required to be issued to such holder as a result of such conversion
(including any shares of Common Stock representing cumulative stock dividends
accrued to the applicable Conversion Date pursuant to Section 2) LESS the number
of shares of Common Stock otherwise issuable to such holder pursuant to such
conversion in excess of the Threshold Amount (the "Excess Shares") and (ii)
shall remit to such holder, in lieu of the Excess Shares, an amount of cash
equal to the number of Excess Shares multiplied by the current market price per
share of Common Stock (determined as provided in Section 5) determined as of
such Conversion Date. Upon such issuance of Common Stock and payment of such
cash to the holder in lieu of the Excess Shares, the Corporation's obligations
to such holder arising as a result of such conversion (including the
Corporation's obligation to pay cumulative stock dividends through the
applicable Conversion Date) shall be deemed fully satisfied.
(e) No fractional shares of Common Stock or scrip representing
fractional shares shall be issued upon conversion of shares of the Series A
Preferred Stock pursuant to this Section 4. If more than one share of the Series
A Preferred Stock shall be surrendered for conversion by the same holder, the
number of full shares of Common Stock which shall be issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of the
Series A Preferred Stock so
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surrendered. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of any shares of the Series A Preferred
Stock, the Corporation shall pay a cash adjustment in respect of such fraction
in an amount equal to the same fraction of the closing bid price for Common
Stock determined as of the last business day preceding the Conversion Date in
respect of such shares. The closing bid price for such day shall be the last
reported bid price on the American Stock Exchange, or if Common Stock is not
listed or admitted to trading on such exchange, on the principal national
securities exchange on which Common Stock is listed or admitted to trading or,
if not listed or admitted to trading on any national securities exchange, the
closing bid price of Common Stock on NASDAQ or any comparable system. If Common
Stock is not quoted on NASDAQ or any comparable system, the Board of Directors
of the Corporation shall in good faith determine the current market price on
such basis as it considers appropriate.
(f) When shares of Series A Preferred Stock are converted (or deemed
converted) by a holder pursuant to this Section 4, the Corporation shall pay any
documentary, stamp or similar issue or transfer tax due on the issue of Common
Stock upon such conversion.
(g) The Corporation shall reserve at all times out of the Corporation's
authorized but unissued shares of Common Stock a sufficient number of shares of
Common Stock to permit the conversion of the then outstanding shares of the
Series A Preferred Stock pursuant to this Section 4 and such reserved shares
shall not be used for any other purpose. All shares of Common Stock which may be
issued upon conversion of shares of the Series A Preferred Stock pursuant to
this Section 4 shall be validly issued, fully paid and nonassessable. In order
that shares of Common Stock may be issued upon conversion of shares of the
Series A Preferred Stock, the Corporation shall comply with all applicable
Federal and State securities laws and use its best efforts to list such shares
of Common Stock to be issued upon conversion on each securities exchange on
which Common Stock is listed.
(h) The conversion rate (and the components thereof) in effect at any
time for conversion of Series A Preferred Stock into Common Stock pursuant to
this Section 4 shall be subject to adjustment from time to time as follows:
(i) In the event that the Corporation shall (1) pay a dividend
in shares of Common Stock to holders of Common Stock, (2) make a
distribution in shares of Common Stock to holders of Common Stock, (3)
subdivide the outstanding shares of Common Stock into a greater number
of shares of Common Stock, (4) combine the outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (5)
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otherwise increase or decrease the number of outstanding shares of
Common Stock through reclassification or any other event similar to the
events described in clauses (1) through (4) above, the conversion rate
(and the components thereof) in effect pursuant to this Section 4
immediately prior to such action shall be adjusted to the extent
required to give effect to the impact of any such event so that the
holder of any shares of the Series A Preferred Stock thereafter
surrendered for conversion pursuant to this Section 4 shall be entitled
to receive the number of shares of Common Stock which he would have
owned immediately following such action had such shares of the Series A
Preferred Stock been converted immediately prior thereto. Such
adjustment shall be made whenever any event listed above shall occur
and shall become effective (A) immediately after the record date in the
case of a dividend or a distribution or other applicable event for
which a record date is used and (B) immediately after the effective
date in the case of a subdivision or combination or other applicable
event for which a record date is not used.
(ii) In case the Corporation shall distribute to all holders
of the Common Stock shares of any class of capital stock other than
Common Stock, evidences of indebtedness or other assets (other than
non-extraordinary cash dividends out of current or retained earnings),
or shall distribute to substantially all holders of Common Stock rights
or warrants to subscribe for securities, then in each such case the
number of shares of the Common Stock into which each share of the
Series A Preferred Stock shall be converted shall be adjusted (and
appropriate adjustments shall be made to the component parts of the
applicable conversion rate) so that such number shall equal the number
determined by multiplying the number of shares of Common Stock into
which such share of the Series A Preferred Stock was convertible
immediately prior to the date of such distribution by a fraction of
which the numerator shall be the current market price of Common Stock
(determined as provided in Section 5) on the record date mentioned
below, and of which the denominator shall be such current market price
of Common Stock, less the then fair market value (as determined in good
faith by the Board of Directors of the Corporation, whose determination
shall be conclusive evidence of such fair market value) of the portion
of the assets so distributed or of such subscription rights or warrants
applicable to one share of Common Stock. Such adjustment shall become
effective immediately after the record date for the determination of
the holders of Common Stock entitled to receive such distribution.
(iii) The Corporation shall provide at least 10 business days
advance notice to holders of Series A
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Preferred Stock of any record date or other applicable date for
determining shareholders entitled to participate in any of the events
described in this Section 4(h) or other similar events not described in
this Section 4(h) which would have a dilutive effect on the Series A
Preferred Stock or the Common Stock into which the Series A Preferred
Stock is convertible.
(i) No adjustment in the conversion rate (or its component parts) under
this Section 4 shall be required until cumulative adjustments result in a
concomitant change of 1% or more of the conversion rate as in effect prior to
the last adjustment of the conversion rate; PROVIDED, HOWEVER, that any
adjustments which by reason of this Section 4(i) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 4 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. No adjustment to the
conversion rate shall be made for non-extraordinary cash dividends.
(j) In the event that, as a result of an adjustment made pursuant to
Section 4(h), the holder of any share of the Series A Preferred Stock thereafter
surrendered for conversion shall become entitled to receive any shares of
capital stock of the Corporation other than shares of Common Stock, thereafter
the number of such other shares so receivable upon conversion of any shares of
the Series A Preferred Stock shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in this Section 4.
(k) The Corporation may make such increases in the conversion rate, in
addition to those required by Sections 4(h)(i) and (ii), as it considers to be
advisable in order that any event treated for Federal income tax purposes as a
dividend of stock or stock rights shall not be taxable to the recipients
thereof.
(l) Whenever the conversion rate (or any components thereof) is
adjusted pursuant to this Section 4, the Corporation shall promptly mail to all
holders of record of shares of the Series A Preferred Stock a notice of the
adjustment and shall cause to be prepared a certificate signed by the chief
financial officer of the Corporation or, if requested in writing by holders of a
majority of the shares of Series A Preferred Stock then outstanding, the
Corporation's outside accountants or a reputable investment banking firm
selected by the Corporation setting forth the adjusted conversion rate (and the
component parts thereof) and a brief statement of the facts requiring such
adjustment and the computation thereof. Such certificate shall forthwith be
filed with each transfer agent for the shares of the Series A Preferred Stock.
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(m) If any of the following shall occur: (i) any reclassification or
change of outstanding shares of Common Stock issuable upon conversion of shares
of the Series A Preferred Stock (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), (ii) any consolidation or merger to which the
Corporation is a party other than a merger in which the Corporation is the
continuing corporation and which does not result in any reclassification of, or
change (other than a change in name, or par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination) in, outstanding shares of Common Stock or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Corporation as an entirety, then the Corporation, or such successor or
purchasing corporation, as the case may be, shall, as a condition precedent to
such reclassification, change, consolidation, merger, sale or conveyance,
provide in its certificate of incorporation or other charter document that each
share of the Series A Preferred Stock shall be convertible under this Section 4
into the kind and amount of shares of capital stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock deliverable upon conversion of such share of the Series A Preferred
Stock immediately prior to such reclassification, change, consolidation, merger,
sale or conveyance. Such certificate of incorporation or other charter document
shall provide for adjustments and protection which shall be as nearly equivalent
as may be practicable to the adjustments provided for in this Section 4. If, in
the case of any such consolidation, merger, sale or conveyance, the stock or
other securities and property (including cash) receivable thereupon by a holder
of Common Stock includes shares of capital stock or other securities and
property of a corporation other than the successor purchasing corporation, as
the case may be, in such consolidation, merger, sale or conveyance, then the
certificate of incorporation or other charter document of such other corporation
shall contain such additional provisions to protect the interests of the holders
of shares of the Series A Preferred Stock as the Board of Directors of the
Corporation shall reasonably consider necessary by reason of the foregoing. The
provision of this Section 4(m) shall similarly apply to successive
consolidations, mergers, sales or conveyances.
(n) No sooner than fifteen (15) business days nor later than five (5)
business days prior to the consummation of a transaction referred to in clauses
(ii) or (iii) of Section 4(m) (a "Major Transaction"), but not prior to the
public announcement of such Major Transaction, the Corporation shall deliver
written notice (a "Notice of Major Transaction") to each holder of Series A
Preferred Stock, which Notice of Major Transaction shall be deemed to have been
delivered to the holder one (1) business day
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after the Corporation's sending of such notice (for overnight delivery) by a
common carrier, if such delivery is to be made in the United States, or two (2)
business days after the Corporation's sending of such notice (for two (2) day
delivery) by common carrier, if such notice is to be delivered outside the
United States. Such Notice of Major Transaction shall indicate the amount and
type(s) of consideration (the "Major Transaction Consideration") the holders of
Series A Preferred Stock would receive for their shares of Series A Preferred
Stock in the related Major Transaction. Such holder may elect to redeem all or a
portion of such holder's shares of Series A Preferred Stock for an amount in
cash equal to $125 per share of Series A Preferred Stock held by such holder to
be so redeemed in lieu of the Major Transaction Consideration or other
securities and/or property that would otherwise be payable to such holder
pursuant to Section 4(m). A holder may exercise such election by delivering
written notice of such election to the Corporation, together with certificates
for the shares of Series A Preferred Stock to be redeemed in connection with
such election, within five (5) business days of the holder's receipt of the
related Notice of Major Transaction, which notice shall be deemed given one (1)
business day after the holder sends such notice (together with such
certificates) from the United States by common carrier for overnight delivery or
two (2) business days after the holder sends such notice (together with such
certificates) from outside the United States by common carrier for two (2) day
delivery. In the event that such Major Transaction is not completed within
fifteen (15) business days after the Corporation is given a holder's related
notice of election pursuant to the prior sentence, such election shall be null
and void and the Corporation shall promptly return the certificate(s)
representing the Series A Preferred Stock delivered by such holder to such
holder; provided, that the Corporation will comply with the notice provisions of
this Section 4(n) with respect to any later consummation of such Major
Transaction. This Section 4(n) shall not apply in respect of any Major
Transaction that occurs after the second anniversary of the Closing Date.
(o) (i) After the occurrence of a Change in Control (as
defined below), other than in connection with a Major Transaction, each
holder of Series A Preferred Stock shall have the right, at such
holder's option, to require the Corporation to redeem all or a portion
of such holder's Series A Preferred Stock for an amount per share in
cash equal to the greater of (A) $125 and (B) the product of the
aggregate number of shares of Common Stock into which a share of Series
A Preferred Stock is convertible (assuming such conversion were to
occur on the last day preceding the effective date for the Change of
Control) multiplied by the current market price per share of Common
Stock (determined as provided in Section 5) as of the last date
preceding the effective date of such Change of Control. As used in this
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Section 4(o), a "Change in Control" shall be deemed to have occurred at
such time as either Douglas R. Eger or Thomas M. Fitzgerald cease to be
either a director or officer of the Corporation. The rights of holders
of Series A Preferred Stock under this Section 4(o) shall not apply in
respect of any Change of Control that occurs after the first
anniversary of the Closing Date.
(ii) The Corporation shall provide each holder of Series A
Preferred Stock with written notice of the occurrence of any Change of
Control (a "Change of Control Notice") within two (2) business days
after the occurrence of such Change of Control. Each holder may require
the Corporation to redeem all or a portion of such holder's shares of
Series A Preferred Stock pursuant to this Section 4(o) by delivering
written notice (a "Notice of Redemption at Option of Holder") to the
Corporation to such effect within ten (10) business days after receipt
of the applicable Change of Control Notice, which Notice of Redemption
at Option of Holder shall be deemed to have been delivered one (1)
business day after such holder's sending, if such notice is sent within
the United States for overnight delivery by a common carrier, or two
(2) business days after such holder's sending, if such notice is sent
from outside the United States by two (2) day delivery by a common
carrier. Each such Notice of Redemption at Option of Holder shall
indicate the number of shares of Series A Preferred Stock that have
been selected by such holder for redemption.
(iii) Each holder submitting certificate(s) representing
shares of Series A Preferred Stock for redemption under this Paragraph
4(o) shall send such holder's Preferred Stock Certificates to be
redeemed to the Corporation or its Transfer Agent and the Corporation
shall pay the applicable redemption price to that holder within thirty
(30) business days after the Corporation's receipt of such holder's
Notice of Redemption at Option of Holder; provided that such holder's
certificate(s) representing shares of Series A Preferred Stock to be
redeemed (or an indemnification undertaking with respect to such shares
in the case of their loss, theft or destruction) shall have been so
delivered to the Corporation or its Transfer Agent.
(p) As used herein, "business day" means a day of the year on which
banks are not required or authorized to close in New York City, New York.
(q) It is understood that the restrictions on any holder's ability to
convert such holder's shares of Series A Preferred Stock contained herein may be
supplemented by separate written agreement between such holder and the
Corporation.
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Section 5. CALCULATIONS OF CURRENT MARKET PRICE OF COMMON STOCK. For
purposes of calculations relating to the Series A Preferred Stock that refer to
the current market price per share of Common Stock, the current market price per
share of Common Stock on or as of any day shall be deemed to be the average of
the closing bid prices for the ten (10) consecutive trading days ending the last
trading day before the day in question. The closing bid price for each day shall
be the last reported bid price on the American Stock Exchange, or if Common
Stock is not listed or admitted to trading on such exchange, on the principal
national securities exchange on which Common Stock is listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, the closing bid price of Common Stock on NASDAQ or any comparable
system, or if Common Stock is not quoted on NASDAQ or any comparable system, the
closing bid price as furnished by any two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Corporation for that
purpose. If Common Stock is not so quoted on NASDAQ or any comparable system,
the Board of Directors of the Corporation shall reasonably and in good faith
determine the current market price on such basis as it considers appropriate.
For example, in the event that the current market price per share of Common
Stock is to be determined as of a Conversion Date, the current market price per
share of Common Stock shall equal the average of the last reported bid price as
reported by the American Stock Exchange for the ten (10) consecutive trading
days ending the last trading day before such Conversion Date (assuming that the
Common Stock is listed and admitted for trading on the American Stock Exchange
and a reported bid price for Common Stock is placed on the American Stock
Exchange on each such trading day).
Section 6. LIMITATIONS. (a) In addition to any other rights provided by
applicable law, so long as any shares of the Series A Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote, or the
written consent as provided by law, of the holders of at least two-thirds (2/3)
of the outstanding shares of the Series A Preferred Stock, voting as a separate
class,
(i) create, authorize or issue any class or series of capital
stock, or rights to subscribe to or acquire, or any security
convertible into, any class or series of capital stock ranking as to
payment of dividends, distribution of assets upon liquidation or voting
rights, prior to the Series A Preferred Stock; or
(ii) amend, alter or appeal, whether by merger, consolidation
or otherwise, any of the provisions of the Certificate of Incorporation
(including this Certificate of Designation) that would change the
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preferences, rights or powers with respect to the Series A Preferred
Stock so as to affect the Series A Preferred Stock adversely.
(b) In addition to any other rights provided by applicable law, so long
as any shares of the Series A Preferred Stock are outstanding, the Corporation
shall not, without the affirmative vote, or the written consent as provided by
law, of the holders of at least two-thirds (2/3) of the outstanding shares of
the Series A Preferred Stock, voting as a separate class, issue or agree to
issue any Common Stock or any security convertible or otherwise exchangeable,
directly or indirectly, for Common Stock if such shares of Common Stock are to
be issued, or such convertible securities are to be converted to or exchanged
for shares of Common Stock, at a price per share less than the current market
price for the Common Stock (determined as provided in Section 5) as of the day
immediately preceding the date of the issuance of such Common Stock or such
convertible or exchangeable security (as the case may be); provided, however,
that the restrictions contained in this paragraph (b) shall not apply (i) to the
issuance of any such convertible or exchangeable securities that are convertible
or exchangeable at a fixed price (and not a floating price) per share equal to
or greater than the current market price for the Common Stock (determined as
provided in Section 5) as of the date of issuance of such convertible or
exchangeable security, (ii) to the issuance of Common Stock and other securities
of the Corporation issuable upon the exercise or conversion of options, warrants
on other rights to purchase securities of the Corporation outstanding as of the
date hereof, (iii) to the issuance of any securities to officers, directors or
employees of the Corporation or any of its subsidiaries, (iv) to the issuance of
any securities of the Corporation in an underwritten public offering or (v) to
any other issuance of securities after the date that is 90 days after the
Closing Date if the holders of Series A Preferred Stock are first delivered a
written notice (a "Right of First Refusal Notice") from the Corporation offering
such holders on a PRO RATA basis the right to purchase all or a portion of the
related securities at the same price (and on the same terms and conditions,
offered to other proposed investors (which notice shall set forth such price,
terms and conditions). In the event that the Corporation delivers a Right of
First Refusal Notice to any holder of Series A Preferred Stock, the failure by
such holder to commit in writing to purchase such holder's pro rata portion of
the securities identified in such Right of First Refusal Notice within five (5)
business days of delivery thereof may be deemed by the Corporation to constitute
such holder's determination not to so purchase such securities and the
Corporation shall then be permitted to sell such securities to other investors
at the price and on the terms and conditions set forth in such notice. The
rights of holders of Series A Preferred Stock under this paragraph (b) shall
terminate on the first anniversary of the Closing Date.
(c) Notwithstanding the foregoing, except as otherwise required by
applicable law, nothing herein contained shall require a vote or consent of the
holders of Series A Preferred Stock in connection with any increase in the total
number of authorized shares of Common Stock. The holders of Series A Preferred
Stock shall not be entitled to vote on any matter except (i) as provided in this
Section 6 and (ii) as required by law.
Section 7. LOST OR STOLEN CERTIFICATES. Upon (i) receipt by the
Corporation from a holder of evidence satisfactory to the Corporation of the
loss, theft, destruction of any certificate(s) representing shares of Series A
Preferred Stock and of an indemnification undertaking by the holder to the
Corporation that is reasonably satisfactory to the Corporation or (ii) upon
surrender and cancellation of certificate(s) representing shares of Series A
Preferred Stock that have been mutilated, the Corporation shall execute and
deliver to such holder new certificate(s) representing shares of Series A
Preferred Stock of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost, stolen, destroyed or mutilated certificate(s)
representing shares of Series A Preferred Stock if such holder contemporaneously
requests the Corporation to convert such shares of Series A Preferred Stock into
shares of Common Stock or otherwise redeem such shares pursuant to the terms
hereof.
-16-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by Douglas R. Eger, its Chairman and Chief Executive
Officer, and attested by George Lombardi, its Secretary, this day of February,
1997.
SHEFFIELD MEDICAL TECHNOLOGIES INC.
By: /s/ Douglas R. Eger
-----------------------------
Douglas R. Eger
Chairman and Chief Executive
Officer
Attested:
By: /s/ George Lombardi
-------------------
George Lombardi
Secretary
-17-
<PAGE>
EXHIBIT A
TO CERTIFICATE
OF DESIGNATION
NOTICE OF CONVERSION
(To be completed, executed and delivered upon
conversion of shares of Series A Preferred Stock)
TO: Sheffield Medical Technologies Inc.
Attention: Chief Financial Officer
The undersigned holder of shares of Series A Cumulative Convertible
Redeemable Preferred Stock ("Series A Preferred Stock") of Sheffield Medical
Technologies Inc. (the "Company") hereby converts ________ shares of Series A
Preferred Stock into Common Stock of the Company at the applicable conversion
rate on the terms and conditions specified in the Certificate of Designation for
the Series A Preferred Stock. The undersigned surrenders herewith certificate(s)
representing such number of shares of Series A Preferred Stock to be converted
and all right, title and interest therein to the Company and directs that the
Common Stock deliverable upon the conversion of such shares of Series A
Preferred Stock be registered or placed in the name and at the address specified
below and delivered thereto.
-------------------------------------------
-------------------------------------------
[Insert Common Stock Registration Information]
In the event that the certificate(s) surrendered represent a number of
shares of Series A Preferred Stock in excess of the shares of Series A Preferred
Stock converted pursuant to this notice, you are advised to issue and deliver to
the undersigned holder a certificate representing the remaining balance of
shares of Series A Preferred Stock represented by the surrendered certificate(s)
not so converted.
Date: _____________________.
Your Signature: _______________________________________________
(Sign exactly as your name appears on the
certificate representing the Shares of Series A
Preferred Stock being converted)
-19-
Exhibit 10.3 to
Form 10-KSB
AMENDED EMPLOYMENT AGREEMENT
AGREEMENT made as of the 22nd day of September, 1996 and effective
September 25, 1996, by and between Sheffield Medical Technologies Inc., a
Delaware corporation with its principal offices at 30 Rockefeller Plaza, Suite
4515, New York, New York 10112 (the "Corporation"), and George Lombardi residing
at 106 Byrd Avenue, Bloomfield, New Jersey 07003 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Corporation entered into an employment agreement dated as
of September 7, 1995 (the "Employment Agreement") with the Executive relating to
the employment of the Executive as Vice President and Chief Financial Officer of
the Corporation; and
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree that the Employment
Agreement is hereby amended as follows:
1. COMPENSATION. The Corporation and the Executive hereby agree to
amend and restate clause (i) of Paragraph 4(a) of the Employment Agreement by
substituting therefore the following: "(i) a salary at the rate of $13,000 per
annum, payable in equal installments in accordance with the normal payroll
practices of the Corporation but in no event less frequently than semi-monthly"
and
2. TERMINATION OF AGREEMENT; DEATH; SEVERANCE; SURVIVAL. The
Corporation and the Executive hereby agree to amend and restate the first
sentence of paragraph 11(b) of the Employment Agreement by substituting therefor
the following: "In the event of the termination of the Executive's employment by
the Corporation other than for Cause, the Executive shall be paid a severance
payment of $65,000 payable in six equal installments of $10,833.33 with the
first installment being payable on the date falling two weeks after the date of
such termination and each additional installment being paid every two weeks
after such date until such severance is paid in full."
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SHEFFIELD MEDICAL TECHNOLOGIES, INC.
By: /s/ Douglas R. Eger
------------------------------
Douglas R. Eger, Chairman
/s/ George Lombardi
-------------------------------
George Lombardi, Vice President
Exhibit 10.5 to
Form 10-KSB
SHEFFIELD MEDICAL TECHNOLOGIES INC.
30 Rockefeller Plaza, Suite 4515
New York, New York 10112
LETTER AMENDMENT
June 6, 1996
To: Michael Zeldin
2 Clinton Street
Cambridge, Massachusetts 01219
Dear Michael:
Reference is made to the Employment Agreement dated as of March 28,
1996 (the "Agreement") by and between you and Sheffield Medical Technologies
Inc. (the "Company"). Unless otherwise referred herein, the terms defined in the
Agreement shall be used herein as therein defined.
It has been determine by you and the Company that it is in the best
interests of you and the Company that you assume the office of Chief Scientific
Officer of the Company in lieu of continuing to serve as Chief Operating Officer
and Executive Vice President - Corporate Development of the Company.
Therefore, it is hereby agreed between you and the Company that,
effective as of the date first above written, the Agreement is hereby amended as
follows:
(a) All references in the Agreement to "Chief Operating
Officer and Executive Vice President - Corporate Development" are
hereby replaced with references to "Chief
Scientific Officer."
You hereby aknowledge that you have resigned as Chief Operating Officer
and Executive Vice President - Corporate Development of the Company effective as
of the date of this Letter Amendment.
On and after the effective date of this Letter Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "hereof" or words
of like import referring to the Agreement shall mean and be a reference to the
Agreement as amended by this Letter Amendment. The Agreement, as amended by
<PAGE>
this Letter Amendment, is and shall continue to be in full force and effect and
is hereby in all respects ratified and confirmed.
If you agree to the terms and provisions hereof, please evidence your
agreement by executing at least two copies of this Letter Amendment. This Lease
Letter Amendment shall become effective as of the date first above written when
and if copies of this Lease Letter Agreement shall have been executed by Lessee
and each of you.
Very truly yours,
SHEFFIELD MEDICAL TECHNOLOGIES INC.
By: /S/ Douglas R. Eger
-------------------
Douglas R. Eger
Chairman & CEO
Agreed as of the date
first above written:
/s/ Michael Zeldin
- ------------------
Michael Zeldin
-2-
Exhibit 10.8 to
Form 10-KSB
SHEFFIELD MEDICAL TECHNOLOGIES INC.
1993 STOCK OPTION PLAN
(as amended through June 20, 1996)
1. PURPOSES OF THE PLAN. The purposes of this 1993 Stock Option Plan
are to attract and retain the best available personnel for positions of
responsibility within the Company, to provide additional incentive to Employees
of the Company, and to promote the success of the Company's business through the
grant of options to purchase shares of the Company's Common Stock.
Options granted hereunder may be either Incentive Stock or
Non-Statutory Stock Options, at the discretion of the Board. The type of options
granted shall be reflected in the terms of written Stock Option agreements.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Board of Directors of the Company
or, when appropriate, the Committee administering the Plan, if one has
been appointed.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
(c) "COMMON STOCK" shall mean the common stock of the Company
described in the Company's Certificate of Incorporation, as amended.
(d) "COMPANY" shall mean SHEFFIELD MEDICAL TECHNOLOGIES INC.,
a Delaware corporation, and shall include any parent or subsidiary
corporation of the Company as defined in Sections 425(e) and (f),
respectively, of the Code.
(e) "COMMITTEE" shall mean the Committee appointed by the
Board in accordance with paragraph (a) of Section 4 of the Plan, if one
is appointed.
(f) "EMPLOYEE" shall mean any person, including salaried
officers and directors, employed by the Company. The payment of a
director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
<PAGE>
(g) "EXCHANGE ACT" shall mean the Securities and Exchange Act
of 1934, as amended.
(h) "FAIR MARKET VALUE" shall mean, with respect to the date a
given Option is granted or exercised, the value of the Common Stock
determined by the Board in such manner as it may deem equitable for
Plan purposes but, in the case of an Incentive Stock Option, no less
than is required by applicable laws or regulations; provided, however,
that where there is a public market for the Common Stock, the Fair
Market Value per Share shall be the mean of the bid and asked prices of
the Common Stock on the date of grant, as reported in the WALL STREET
JOURNAL (or, if not so reported, as otherwise reported in the National
Association of Securities Dealers Automated Quotation System) or, in
the event the Common Stock is listed on the New York Stock Exchange or
the NASDAQ Stock Market, the American Stock Exchange, the
NASDAQ/National Market System, the Fair Market Value per Share shall be
the closing price on such exchange on the date of grant of the Option,
as reported in the WALL STREET JOURNAL.
(i) "INCENTIVE STOCK OPTION" shall mean an Option which is
intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
(j) "OPTION" shall mean a stock option granted under the Plan.
(k) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(l) "OPTIONEE" shall mean an Employee of the Company who has
been granted one or more Options.
(m) "NONSTATUTORY STOCK OPTION" shall mean an Option which is
not an Incentive Stock Option.
(n) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 425(e) of the Code.
(o) "PLAN" shall mean this 1993 Stock Option Plan.
(p) "SHARE" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
(q) "STOCK OPTION AGREEMENT" shall mean the written agreement
between the Company and the Optionee relating to the grant of an
Option.
-2-
<PAGE>
(r) "SUBSIDIARY" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 425(f) of the
Code.
(s) "TAX DATE" shall mean the date an Optionee is required to
pay the Company an amount with respect to tax withholding obligations
in connection with the exercise of an option.
3. COMMON STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 11 of the Plan, the maximum aggregate number of shares which may be
optioned and sold under the Plan is One Million (1,000,000) Shares of Common
Stock. The Shares may be authorized, but unissued, or previously issued Shares
acquired by the Company and held in treasury.
If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares covered by
such Option shall, unless the Plan shall have been terminated, be available for
future grants of Options.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) The Plan shall be administered by the Board in accordance
with Rule 16b-3 under the Exchange Act ("Rule 16b-3"); provided,
however, that the Board may appoint a Committee to administer the
Plan at any time or from time to time, and, provided further, that
if the Board is not "disinterested" within the meaning of Rule
16b-3, the Plan shall be administered by a Committee in accordance
with Rule 16b-3.
(ii) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause), appoint new members
in substitution therefor, and fill vacancies however caused:
provided, however, that at no time may any person serve on the
Committee if that person's membership would cause the Committee not
to satisfy the "disinterested administration" requirements of Rule
16b-3.
(b) POWERS OF THE BOARD. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion: (i) to grant
Incentive Stock Options and Nonstatutory Stock Options; (ii) to
determine, upon review of relevant information and in accordance
with Section 2 of the Plan, the Fair Market Value of the
-3-
<PAGE>
Common Stock; (iii) to determine the exercise price per Share of
Options to be granted, which exercise price shall be determined in
accordance with Section 8(a) of the Plan; (iv) to determine the
Employees to whom, and the time or times at which, Options shall be
granted and the number of Shares to be represented by each Option;
(v) to interpret the Plan; (vi) to prescribe, amend and rescind
rules and regulations relating to the Plan; (vii) to determine the
terms and provisions of each Option granted (which need not be
identical) and, with the consent of the Optionee thereof, modify or
amend each Option; (viii) to accelerate or defer (with the consent
of the Optionee) the exercise date of any Option; (ix) to authorize
any person to execute on behalf of the Company any instrument
required to effectuate the grant of an Option previously granted by
the Board; (x) to accept or reject the election made by an Optionee
pursuant to Section 17 of the Plan; and (xi) to make all other
determinations deemed necessary or advisable for the administration
of the Plan.
(c) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all
Optionees and any other holders of any Options granted under the
Plan.
5. ELIGIBILITY.
(a) Consistent with the Plan's purposes, Options may be granted only
to Employees of the Company as determined by the Board. An Employee who has been
granted an Option may, if he is otherwise eligible, be granted an additional
Option or Options. Incentive Stock Options may be granted only to those
Employees who meet the requirements applicable under Section 422 of the Code.
(b) All Options granted to Employees of the Company under the Plan
will be subject to forfeiture until such time as the Optionee has been
continuously employed by the Company for one year after the date of the grant of
the Options, and may not be exercised prior to such time. At such time as the
Optionee has been continuously employed by the Company for one year, the
foregoing restriction shall lapse and the Optionee may exercise the Options at
any time otherwise consistent with the Plan.
(c) With respect to Incentive Stock Options, the aggregate Fair
Market Value (determined at the time the Incentive Stock Option is granted) of
the Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by the employee during any calendar year (under all employee
benefit plans of the Company) shall not exceed One Hundred Thousand Dollars
($100,000).
-4-
<PAGE>
6. STOCKHOLDER APPROVAL AND EFFECTIVE DATES. The Plan became effective
upon approval by the Board. No Option may be granted under the Plan after August
30, 2003 (ten years from the effective date of the Plan); provided, however that
the Plan and all outstanding Options shall remain in effect until such Options
have expired or until such Options are canceled.
7. TERM OF OPTION. Unless otherwise provided in the Stock Option
Agreement, the term of each Option shall be five (5) years from the date of
grant thereof. In no case shall the term of any Option exceed ten (10) years
from the date of grant thereof. Notwithstanding the above, in the case of an
Incentive Stock Option granted to an Employee who, at the time the Incentive
Stock Option is granted, owns ten percent (10%) or more of the Common Stock as
such amount is calculated under Section 422(b)(6) of the Code ("Ten Percent
Stockholder"), the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter time as may be provided in the
Stock Option Agreement.
8. EXERCISE PRICE AND PAYMENT.
(a) EXERCISE PRICE. The per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be
determined by the Board, but in the case of an Incentive Stock
Option shall be no less than one hundred percent (100%) of the Fair
Market Value per share on the date of grant, and in the case of a
Nonstatutory Stock Option shall be no less than eighty-five percent
(85%) of the Fair Market Value per share on the date of grant.
Notwithstanding the foregoing, in the case of an Incentive Stock
Option granted to an Employee who, at the time of the grant of such
Incentive Stock Option, is a Ten Percent Stockholder, the per Share
exercise price shall be no less than one hundred ten percent (110%)
of the Fair Market Value per Share on the date of grant.
(b) PAYMENT. The price of an exercised Option and the
Employee's portion of any taxes attributable to the delivery of
Common Stock under the Plan, or portion thereof, shall be paid:
(i) In United States dollars in cash or by check, bank
draft or money order payable to the order of the Company; or
(ii) At the discretion of the Board, through the delivery
of shares of Common Stock with an aggregate Fair Market Value
equal to the option price and withholding taxes, if any; or
-5-
<PAGE>
(iii) At the election of the Optionee pursuant to Section
17 and with the consent of the Board pursuant to Section
4(b)(x), by the Company's retention of such number of shares
of Common Stock subject to the exercised Option which have an
aggregate Fair Market Value on the exercise date equal to the
Employee's portion of the Company's aggregate federal, state,
local and foreign tax withholding and FICA and FUTA
obligations with respect to income generated by the exercise
of the Option by Optionee;
(iv) By a combination of (i), (ii) and (iii) above; or
(v) In the manner provided in subsection (c) below.
The Board shall determine acceptable methods for tendering
Common Stock as payment upon exercise of an Option and may impose such
limitations and prohibitions on the use of Common Stock to exercise an Option as
it deems appropriate.
(c) FINANCIAL ASSISTANCE TO OPTIONEES. The Board may assist
Optionees in paying the exercise price of Options granted under this
Plan in the following manner:
(i) The extension of a loan to the Optionee by the
Company; or
(ii) Payment by the Optionee of the exercise price in
installments; or
(iii) A guaranty by the Company of a loan obtained by
the Optionee from a third party.
The terms of any loans, installment payments or guarantees,
including the interest rate and terms of repayment, and collateral requirements,
if any, shall be determined by the Board, in its sole discretion. Subject to
applicable margin requirements, any loans, installment payments or guarantees
authorized by the Board pursuant to the Plan may be granted without security,
but the maximum credit available shall not exceed the exercise price for the
Shares for which the Option is to be exercised, plus any federal and state
income tax liability incurred in connection with the exercise of the Option.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the
-6-
<PAGE>
Optionee, and as shall be permissible under the terms of the Plan. Unless
otherwise determined by the Board at the time of grant, an Option may be
exercised in whole or in part. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares to which the Option
is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE. If an Employee's
employment by the Company is terminated for cause, then any Option held by the
Employee shall be immediately canceled upon termination of employment and the
Employee shall have no further rights with respect to such Option. Unless
otherwise provided in the Stock Option Agreement (which may reduce but not
increase the time period described below), if an Employee's employment by the
Company is terminated for reasons other than cause, and does not occur due to
death or disability, then the Employee may, with the consent of the Board, but
only within ninety (90) days after the date he ceases to be an Employee of the
Company, exercise his Option to the extent that he was entitled to exercise it
at the date of such termination. To the extent that he was not entitled to
exercise the Option at the date of such termination, or if he does not exercise
such Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) DISABILITY. Unless otherwise provided in the Stock Option
Agreement (which may reduce but not increase the time period described below),
notwithstanding the provisions of Section 9(b) above, in the event an Employee
is unable to continue his employment with the Company as a result of his
permanent and total disability (as defined in Section 22(e)(3) of
-7-
<PAGE>
the Code), he may, but only within twelve (12) months from the date of
termination, exercise his Option to the extent he was entitled to exercise it at
the date of such termination. To the extent that he was not entitled to exercise
the Option at the date of termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the Option
shall terminate.
(d) DEATH. Unless otherwise provided in the Stock Option Agreement
(which may reduce but not increase the time period described below), if an
Employee dies during the term of the Option and is at the time of his death an
Employee of the Company who shall have been in continuous status as an Employee
since the date of grant of the Option, the Option may be exercised at any time
within twelve (12) months following the date of death (or such other period of
time as is determined by the Board) by the Employee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent that an Employee was entitled to exercise the Option on the date of
death. To the extent the Employee was not entitled to exercise the Option on the
date of death, or if the Employee's estate, or person who acquired the right to
exercise the Option by bequest or inheritance, does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the Option
shall terminate.
10. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution, or pursuant to a "qualified
domestic relations order" under the Code and ERISA, and may be exercised, during
the lifetime of the Optionee, only by the Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to
any required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly
-8-
<PAGE>
provided herein, no issuance by the company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect and no
adjustment by reason thereof, shall be made with respect to the number or price
of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, the Option shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger
of`sale of assets, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of sixty (60) days from the date of such notice
(but not later than the expiration of the term of the Option under the Option
Agreement), and the Option will terminate upon the expiration of such period.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee to whom
an Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or
terminate the Plan from time to time in such respects as the Board may
deem advisable; provided, however, that the following revisions or
amendments shall require approval of the Stockholders of the Company,
to the extent required by law, rule or regulation:
(i) Any material increase in the number of Shares subject
to the Plan, other than in connection with an adjustment under
Section 11 of the Plan;
-9-
<PAGE>
(ii) Any material change in the designation of the
Employees eligible to be granted Options; or
(iii) Any material increase in the benefits accruing to
participants under the Plan.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and
such Options shall remain in full force and effect as if this Plan had
not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Board, which agreement must be in writing
and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
In the case of an Incentive Stock Option, any Optionee who
disposes of Shares of Common Stock acquired upon the exercise of an Option by
sale or exchange (a) either within two (2) years after the date of the grant of
the Option under which the Common Stock was acquired or (b) within one (1) year
after the acquisition of such Shares of Common Stock shall notify the Company of
such disposition and of the amount realized upon such disposition.
-10-
<PAGE>
15. RESERVATION OF SHARES. The Company will at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
16. OPTION AGREEMENT. Options shall be evidenced by Stock Option
Agreements in such form as the Board shall approve.
17. WITHHOLDING TAXES. Subject to Section 4(b)(x) of the Plan and prior
to the Tax Date, the Optionee may make an irrevocable election to have the
Company withhold from those Shares that would otherwise be received upon the
exercise of any Option, a number of Shares having a Fair Market Value equal to
the minimum amount necessary to satisfy the Company's federal, state, local and
foreign tax withholding obligations and FICA and FUTA obligations with respect
to the exercise of such Option by the Optionee.
An Optionee who is also an officer of the Company must make the
above described election:
(a) at least six months after the date of grant of the Option
(except in the event of death or disability); and
(b) either:
(i) six months prior to the Tax Date, or
(ii) prior to the Tax Date and during the period
beginning on the third business day following the date the
Company releases its quarterly or annual statement of sales
and earnings and ending on the twelfth business day following
such date.
18. MISCELLANEOUS PROVISIONS.
(a) PLAN EXPENSE. Any expense of administering this Plan shall be
borne by the Company.
(b) USE OF EXERCISE PROCEEDS. The payment received from Optionees
from the exercise of Options shall be used for the general corporate
purposes of the Company.
(c) CONSTRUCTION OF PLAN. The place of administration of the Plan
shall be in the State of Wyoming, and the validity, construction,
interpretation, administration and effect of the Plan and of its rules
and regulations, and rights relating to the Plan, shall be determined
in accordance with the laws of the State of Wyoming without regard to
conflict of law principles and, where applicable, in accordance with
the Code.
-11-
<PAGE>
(d) TAXES. The Company shall be entitled if necessary or desirable
to pay or withhold the amount of any tax attributable to the delivery
of Common Stock under the Plan from other amounts payable to the
Employee after giving the person entitled to receive such Common Stock
notice as far in advance as practical, and the Company may defer making
delivery of such Common Stock if any such tax may be pending unless and
until indemnified to its satisfaction.
(e) INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board, the members
of the Board shall be indemnified by the Company against all costs and
expenses reasonably incurred by them in connection with any action,
suit or proceeding to which they or any of them may be party by reason
of any action taken or failure to act under or in connection with the
Plan or any Option, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a
judgment in any such action, suite or proceeding, except a judgment
based upon a finding of bad faith; provided that upon the institution
of any such action, suit or proceeding a Board member shall, in
writing, give the Company notice thereof and an opportunity, at its own
expense, to handle and defend the same before such Board member
undertakes to handle and defend it on her or his own behalf.
(f) GENDER. For purposes of this Plan, words used in the masculine
gender shall include the feminine and neuter, and the singular shall
include the plural and vice versa, as appropriate.
(g) NO EMPLOYMENT AGREEMENT. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment with the
Company, nor shall it interfere in any way with his right or the
Company's right to terminate his employment at any time.
-12-
Exhibit 10.10 to
Form 10-KSB
SHEFFIELD MEDICAL TECHNOLOGIES INC.
1996 DIRECTORS STOCK OPTION PLAN
ARTICLE I
PURPOSE
The purpose of the Sheffield Medical Technologies Inc. 1996 Directors
Stock Option Plan (the "Plan") is to secure for Sheffield Medical Technologies
Inc. and its stockholders the benefits arising from stock ownership by its
Directors. The Plan will provide a means whereby such Directors may purchase
shares of the common stock, $.01 par value, of Sheffield Medical Technologies
Inc. pursuant to options granted in accordance with the Plan.
ARTICLE II
DEFINITIONS
The following capitalized terms used in the Plan shall have the
respective meanings set forth in this Article:
2.1 "AMEX" shall mean the American Stock Exchange.
2.2 "Board" shall mean the Board of Directors of Sheffield Medical
Technologies Inc.
2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.4 "Company" shall mean Sheffield Medical Technologies Inc. and any of
its Subsidiaries.
2.5 "Director" shall mean any person who is a member of the Board of
Directors of the Company.
2.6 "Eligible Director" shall be any Director who is not a full or
part-time Employee of the Company.
<PAGE>
2.7 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2.8 "Exercise Price" shall mean the price per Share at which an Option
may be exercised.
2.9 "Fair Market Value" shall mean the closing price of publicly traded
Shares on the national securities exchange on which Shares are listed (if the
Shares are so listed) or on the Nasdaq Stock Market System (if the Shares are
regularly quoted on the Nasdaq Stock Market System), or, if not so listed or
regularly quoted, the average of the closing bid and asked prices of publicly
traded Shares in the over-the-counter market, or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Board.
2.10 "Grant Date" shall mean the Initial Grant Date and any Subsequent
Grant Date.
2.11 "Initial Grant Date" shall mean June 30, 1996 with respect to each
Eligible Director that is a member of the Board on such date.
2.12 "New Director Grant Date" shall mean, with respect to an Eligible
Director first elected a member of the Board after June 30, 1996, the date such
Eligible Director is first elected a member of the Board.
2.13 "Option" shall mean an Option to purchase Shares granted pursuant
to the Plan.
2.14 "Option Agreement" shall mean the written agreement described in
Article VI herein.
2.15 "Permanent Disability" shall mean the condition of an Eligible
Director who is unable to participate as a member of the Board by reason of any
medically determined physical or mental impairment that can be expected to
result in death or which can be expected to last for a continuous period of not
less than 12 months.
2.16 "Purchase Price" shall be the Exercise Price multiplied by the
number of whole Shares with respect to which an Option may be exercised.
2.17 "Securities Act" shall mean the Securities Act of 1933, as
amended.
2.18 "Shares" shall mean shares of common stock, $.01 par value, of the
Company.
2.19 "Subsequent Grant Date" shall mean any Grant Date other than the
Initial Grant Date.
-2-
<PAGE>
2.20 "Subsidiaries" shall have the meaning provided in Section 425(f)
of the Code.
ARTICLE III
ADMINISTRATION
3.1 GENERAL. The Plan shall be administered by the Board in accordance
with the express provisions of the Plan.
3.2 POWERS OF THE BOARD. The Board shall have full and complete
authority to adopt such rules and regulations and to make all such other
determinations not inconsistent with the Plan as may be necessary for the
administration of the Plan.
ARTICLE IV
SHARES SUBJECT TO PLAN
Subject to adjustment in accordance with Article IX, an aggregate of
500,000 Shares is reserved for issuance under the Plan. Shares sold under the
Plan may be either authorized but unissued Shares or reacquired Shares. If an
Option, or any portion thereof, shall expire or terminate for any reason without
having been exercised in full, the unpurchased Shares covered by such Option
shall be available for future grants of Options.
ARTICLE V
GRANTS
5.1 INITIAL GRANTS. On June 30, 1996, each Eligible Director on such
date shall receive the grant of an Option to purchase 15,000 Shares. If an
Eligible Director is granted an option under the Plan prior to the date of
approval of the Plan by the Company's stockholders, such option shall not become
effective until the Company's stockholders approve the Plan.
5.2 NEW DIRECTOR GRANTS. To the extent that Shares remain available for
the grant of Options under the Plan, on the New Director Grant Date with respect
to an Eligible Director, such Eligible Director shall receive the grant of an
Option to purchase 25,000 Shares.
5.3 SUBSEQUENT GRANTS. To the extent that Shares remain available for
the grant of Options 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.
-3-
<PAGE>
5.4 ADJUSTMENT OF GRANTS. The number of Shares set forth in Section
5.1, 5.2 and 5.3 as to which Options shall be granted shall be subject to
adjustment as provided in Section 9.1 hereof.
5.5 COMPLIANCE WITH RULE 16B-3. The terms for the grant of Options to
an Eligible Director may only be changed if permitted under Rule 16b-3 under the
Exchange Act and, accordingly, the formula for the grant of Options may not be
changed or otherwise modified more than once in any six month period, other than
to comport with changes in the Code, the Employee Retirement Income Security
Act, or the rules and regulations thereunder.
ARTICLE VI
TERMS OF OPTION
Each Option shall be evidenced by a written Option Agreement executed
by the Company and the Eligible Director which shall specify the Grant Date, the
number of Shares subject to the Option, the Exercise Price and shall also
include or incorporate by reference the substance of all of the following
provisions and such other provisions consistent with the Plan as the Board may
determine.
6.1 TERM. The term of each Option shall be 5 years from the Grant Date
thereof, subject to earlier termination in accordance with Articles VI and X.
6.2 RESTRICTION ON EXERCISE. Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by the
Board at grant; PROVIDED, HOWEVER, that in the case of the Eligible Director's
death or Permanent Disability, the Options held by him will become immediately
exercisable, unless a longer vesting period is otherwise determined by the Board
at grant. The Board may waive any installment exercise provision at any time in
whole or in part based on performance and/or such other factors as the Board may
determine in its sole discretion; PROVIDED, HOWEVER, that no Option shall be
exercisable until at least than six months have elapsed from the Grant Date and,
PROVIDED, FURTHER, that no Option will be exercisable until the requisite
approval of the Plan by the Company's stockholders shall have been obtained.
6.3 EXERCISE PRICE. The Exercise Price for each Share subject to an
Option shall be the Fair Market Value of the Share as determined in Section 2.9
herein.
6.4 MANNER OF EXERCISE. An Option shall be exercised in accordance with
its terms, by delivery of a written notice of exercise to the Company and
payment of the full purchase price of the Shares being purchased. An Eligible
Director may exercise an Option with respect to all or less than all of the
Shares for which the Option may then be exercised, but an Eligible Director must
exercise the Option in full Shares.
-4-
<PAGE>
6.5 PAYMENT. The Purchase Price of Shares purchased pursuant to an
Option or portion thereof, may be paid:
(a) in United States Dollars, in cash or by check, bank draft or
money order payable to the Company; or
(b) at the discretion of the Board by delivery of Shares already
owned by an Eligible Director with an aggregate Fair Market Value on the date of
exercise equal to the Purchase Price, subject to the provisions of Section 16(b)
of the Exchange Act.
6.6 TRANSFERABILITY. No Option shall be transferable otherwise than by
will or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder. An Option shall be exercisable
during the Eligible Director's lifetime only by the Eligible Director, his
guardian or legal representative.
6.7 TERMINATION OF MEMBERSHIP ON THE BOARD. If an Eligible Director's
membership on the Board terminates for any reason, an Option held on the date of
termination may be exercised in whole or in part at any time within one (1) year
after the date of such termination (but in no event after the term of the Option
expires) and shall thereafter terminate.
ARTICLE VII
GOVERNMENT AND OTHER REGULATIONS
7.1 DELIVERY OF SHARES. The obligation of the Company to issue or
transfer and deliver Shares for exercised Options under the Plan shall be
subject to all applicable laws, regulations, rules, orders and approvals which
shall then be in effect.
7.2 HOLDING OF STOCK AFTER EXERCISE OF OPTION. The Option Agreement
shall provide that the Eligible Director, by accepting such Option, represents
and agrees, for the Eligible Director and his permitted transferees hereunder
that none of the Shares purchased upon exercise of the Option shall be acquired
with a view to any sale, transfer or distribution of the Shares in violation of
the Securities Act and the person exercising an Option shall furnish evidence
satisfactory to that Company to that effect, including an indemnification of the
Company in the event of any violation of the Act by such person. Notwithstanding
the foregoing, the Company in its sole discretion may register under the Act the
Shares issuable upon exercise of the Options under the Plan.
-5-
<PAGE>
ARTICLE VIII
WITHHOLDING TAX
The Company may, in its discretion, require an Eligible Director to pay
to the Company, at the time of exercise of an Option an amount that the Company
deems necessary to satisfy its obligations to withhold federal, state or local
income or other taxes (which for purposes of this Article includes an Eligible
Director's FICA obligation) incurred by reason of such exercise. When the
exercise of an Option does not give rise to the obligation to withhold federal
income taxes on the date of exercise, the Company may, in its discretion,
require an Eligible Director to place Shares purchased under the Option in
escrow for the benefit of the Company until such time as federal income tax
withholding is required on amounts included in the Eligible Director's gross
income as a result of the exercise of an Option. At such time, the Company, in
its discretion, may require an Eligible Director to pay to the Company an amount
that the Company deems necessary to satisfy its obligation to withhold federal,
state or local taxes incurred by reason of the exercise of the Option, in which
case the Shares will be released from escrow upon such payment by an Eligible
Director.
ARTICLE IX
ADJUSTMENTS
9.1 PROPORTIONATE ADJUSTMENTS. If the outstanding Shares are increased,
decreased, changed into or exchanged into a different number or kind of Shares
or securities of the Company through reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
similar transaction, an appropriate and proportionate adjustment shall be made
to the maximum number and kind of Shares as to which Options may be granted
under the Plan. A corresponding adjustment changing the number or kind of Shares
allocated to unexercised Options or portions thereof, which shall have been
granted prior to any such change, shall likewise be made. Any such adjustment in
the outstanding Options shall be made without change in the Purchase Price
applicable to the unexercised portion of the Option with a corresponding
adjustment in the Exercise Price of the Shares covered by the Option.
Notwithstanding the foregoing, there shall be no adjustment for the issuance of
Shares on conversion of notes, preferred stock or exercise of warrants or Shares
issued by the Board for such consideration as the Board deems appropriate.
9.2 DISSOLUTION OR LIQUIDATION. Upon the dissolution or liquidation of
the Company, or upon a reorganization, merger or consolidation of the Company
with one or more corporations as a result of which the Company is not the
surviving corporation, or upon a sale of substantially all of the property or
more than 80% of the then outstanding Shares of the Company to another
corporation, the Company shall give to each Eligible Director at the time of
adoption of the plan for liquidation, dissolution, merger or sale either (1) a
reasonable time thereafter within which to exercise the Option prior to the
effective date of such liquidation or
-6-
<PAGE>
dissolution, merger or sale, or (2) the right to exercise the Option as to an
equivalent number of Shares of stock of the corporation succeeding the Company
or acquiring its business by reason of such liquidation, dissolution, merger,
consolidation or reorganization.
-7-
<PAGE>
ARTICLE X
AMENDMENT OR TERMINATION OF PLAN
10.1 AMENDMENTS. The Board may at any time amend or revise the terms of
the Plan, provided no such amendment or revision shall, unless appropriate
approval of such amendment or revision by the Company's stockholders is
obtained:
(a) increase the maximum number of Shares which may be sold
pursuant to Options granted under the Plan, except as permitted under the
provisions of Article IX;
(b) change the minimum Exercise Price set forth in Article VI;
(c) increase the maximum term of Options provided for in Article
VI; or
(d) permit the granting of Options to anyone other than as provided
in Article V.
10.2 TERMINATION. The Board at any time may suspend or terminate the
Plan. The Plan, unless sooner terminated, shall terminate on the tenth (10th)
anniversary of its adoption by the Board. Termination of the Plan shall not
affect Options previously granted thereunder. No Option may be granted under the
Plan while the Plan is suspended or after it is terminated.
10.3 CONSENT OF HOLDER. No amendment, suspension or termination of the
Plan shall, without the consent of the holder of Options, alter or impair any
rights or obligations under any Option theretofore granted under the Plan.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 PRIVILEGE OF STOCK OWNERSHIP. No Eligible Director entitled to
exercise any Option granted under the Plan shall have any of the rights or
privileges of a stockholder of the Company with respect to any Shares issuable
upon exercise of an Option until certificates representing the Shares shall have
been issued and delivered.
11.2 PLAN EXPENSES. Any expenses incurred in the administration of the
Plan shall be borne by the Company.
11.3 USE OF PROCEEDS. Payments received from an Eligible Director upon
the exercise of Options shall be used for general corporate purposes of the
Company.
-8-
<PAGE>
11.4 GOVERNING LAW. The Plan has been adopted under the laws of the
State of New York. The Plan and all Options which may be granted hereunder and
all matters related thereto, shall be governed by and construed and enforceable
in accordance with the laws of the State of New York as it then exists.
ARTICLE XII
STOCKHOLDER APPROVAL
The Plan is subject to approval of the Company's stockholders, at a
duly held meeting of the Company's stockholders, within 12 months after the date
the Board approves the Plan, by the affirmative vote of holders of a majority of
the voting Shares of the Company represented in person or by proxy and entitled
to vote at the meeting. Options may be granted, but not exercised, before such
stockholder approval is obtained. If the stockholders fail to approve the Plan
within the required time period, any Options granted under the Plan shall be
void, and no additional Options may thereafter be granted.
-9-
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement (Form S-3 No. 33-95732) of Sheffield Medical Technologies
Inc. and in the related Prospectus, in Amendment No. 1 to the Registration
Statement (Form S-8 No. 33-95262) pertaining to the 1993 Stock Option Plan of
Sheffield Medical Technologies Inc., the 1993 Restricted Stock Plan of Sheffield
Medical Technologies Inc. and Options granted to directors, officers, employees,
consultants and advisors of the Company pursuant to other employee benefit plans
of Sheffield Medical Technologies Inc. and in the Registration Statement (Form
S-8 No. 333-14867) pertaining to the 1993 Stock Option Plan of Sheffield Medical
Technologies Inc., the 1996 Directors Stock Option Plan of Sheffield Medical
Technologies Inc. and Options granted to directors, officers, employees,
consultants and advisors of the Company pursuant to other employee benefit plans
of Sheffield Medical Technologies Inc. of our report dated February 12, 1997,
except for Note 9 as to which the date is March 14, 1997, with respect to the
consolidated financial statements of Sheffield Medical Technologies Inc. and
subsidiaries included in this Annual Report (Form 10-KSB) for the year ended
December 31, 1996.
/s/ Ernst & Young LLP
- ---------------------
ERNST & YOUNG LLP
Princeton, New Jersey
March 24, 1997
Exhibit 23.2
The Board of Directors
Sheffield Medical Technologies Inc.:
We consent to incorporation by reference in the Registration Statement (Form S-3
No. 33-95732, Form S-8 No. 33-95262 and Form S- 8 No.333-14867) of Sheffield
Medical Technologies Inc. of our report dated February 11, 1994, relating to the
consolidated financial statement of Sheffield Medical Technologies Inc. and
subsidiary included in the Annual Report (Form 10-KSB) for the year ended
December 31, 1996.
Our report dated February 11, 1994, contains an explanatory paragraph that
states that the Company's recurring losses and net deficit position raise
substantial doubt about its 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.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Houston, Texas
March 25, 1997
<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>
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<PERIOD-END> DEC-31-1996
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