SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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(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, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12584
SHEFFIELD PHARMACEUTICALS, INC.
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(Name of Registrant as Specified in its Charter)
DELAWARE 13-3808303
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(State or Other Jurisdiction (IRS Employer
of Incorporation or Organi- Identification Number)
zation)
425 Woodsmill Road, St. Louis, Missouri 63017
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (314) 579-9899
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Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS Name of Each Exchange
------------------- 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
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
(CONTINUED ON NEXT PAGE)
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/ / Indicate by check mark if disclosure of delinquent filers to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K.
The aggregate market value at March 31, 1998 of the voting
stock of the Registrant held by non-affiliates (based upon the closing price of
$0.6875 per share of such stock on the American Stock Exchange on such date) was
approximately $10,197,487. 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
registrant's classes of common equity, as of the latest practicable date: At
March 31, 1998, there were outstanding 15,742,762 shares of the issuer's Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy
statement to be filed not later than April 30, 1998 pursuant to Regulation 14A
are incorporated by reference in Items 10 through 13 of Part III of this Annual
Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Sheffield Pharmaceuticals, Inc. (the "Company"), formerly known as
Sheffield Medical Technologies Inc., is an emerging pharmaceutical company
developing and commercializing prescription pharmaceutical products to be
promoted by a specialty pharmaceutical sales force. The Company is in the
development stage and as such has been principally engaged in the development of
its proprietary drug delivery system, the Premaire(TM) Metered Solution Inhaler
(the "Premaire(TM) MSI System"). The Company's lead products are four
respiratory drugs for the treatment of asthma and chronic obstructive pulmonary
disease ("COPD"). These drugs will be delivered to the lungs by the Premaire(TM)
MSI System, the world-wide marketing rights to which were in-licensed by the
Company from Siemens AG in March 1997. In addition, the Company is actively
seeking partners for the development of other respiratory and non-respiratory
drugs for delivery via the Premaire(TM) MSI System. Finally, the Company is
seeking to out- license its rights in several early-stage biomedical
technologies.
The Company does not currently have any sales or marketing
capabilities. It intends to build or otherwise acquire a specialty
pharmaceutical sales force in the United States, as well as the attendant
marketing infrastructure, as its lead products near marketing approval.
The Company was originally formed in 1986 and is incorporated in
Delaware. In 1996, the Company formed a wholly owned Delaware subsidiary, Ion
Pharmaceuticals, Inc. ("Ion"), that owns the rights to certain early- stage
biomedical technologies. In 1997, the Company acquired all of Camelot Pharmacal,
L.L.C., a Missouri limited liability corporation that was subsequently
liquidated. Unless the context requires otherwise, references to the "Company"
herein are references to Sheffield Pharmaceuticals, Inc. and its subsidiaries.
The Company's headquarters are located at Suite 270, 425 South
Woodsmill Road, St. Louis, Missouri 63017-3441 and its telephone number is (314)
579-9899.
BUSINESS STRATEGY
The principal elements of the Company's business strategy consist of
the following: (i) marketing its products directly through the Company's future
specialty sales force; (ii) selectively acquiring, in-licensing, co- promoting
or obtaining currently marketed pharmaceutical products in selected markets;
(iii) focusing on certain chronic diseases, such as asthma, requiring long-term
therapy in the large, rapidly growing concentrated respiratory market with a
range of drugs delivered by the Premaire(TM) MSI System, (as further described
below); and (iv) contracting for the manufacture and development of its products
with cost effective, high quality U.S. Food and Drug Administration ("FDA")
compliant companies.
The Company's management consists of individuals who possess
substantial experience in the acquisition, development and commercialization of
pharmaceutical products. Through their experience at such companies as Bock
Pharmacal Company and Fisons plc, members of the Company's management team have
demonstrated the ability to build and manage the operations of successful
pharmaceutical companies. This team provides the Company with extensive industry
contacts together with broad and complementary business and scientific skills,
which are critical to achieving success in the pharmaceutical industry.
PROJECTS UNDER DEVELOPMENT
PREMAIRE(TM) MSI SYSTEM
BACKGROUND
The Company owns the exclusive worldwide rights to the Premaire(TM) MSI
System, a patented, state-of-the- art, multi-dose nebulizer delivery system (the
" Premaire(TM) MSI System") from Siemens AG, the multi-national engineering and
electronics conglomerate. The system is comprised of a hand-held, pocket-sized,
ultrasonic nebulizer, and dosator cartridges containing various medications. The
pharmaceutical formulations currently in development by the Company for use with
the Premaire(TM) MSI System are for the treatment of asthma and COPD. Through
the Premaire(TM) MSI System and the products under development for use in the
Premaire(TM) MSI System, the Company plans to be a significant competitor in the
respiratory category by the year 2001. Siemens AG will
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manufacture and supply the hand-held nebulizer component of the Premaire(TM) MSI
System. The Company is in the development phase for commonly used respiratory
drugs for use with the Premaire(TM) MSI System.
PULMONARY DRUG DELIVERY MARKET ENVIRONMENT
The Premaire(TM) MSI System pulmonary drug delivery system for which
the Company holds exclusive worldwide rights has been developed to meet specific
needs within the respiratory market, particularly for those patients suffering
from asthma and COPD. In 1995, audited industry sources indicated there were
approximately 10 million asthma patients and 3 million COPD patients under
physician care in the U.S. Other sources indicate that there are at least 14
million asthma patients being treated by physicians and that the number of newly
diagnosed patients is growing at a rate of 10% annually. With the aging of the
population, it is believed that COPD is growing at a similar rate. Because the
Company will initially focus its future specialty sales force in the U.S., the
following information will focus on the U.S. market potential for the
Premaire(TM) MSI System. There remains an opportunity to play a significant role
in other markets outside of the U.S., particularly in Europe.
Today, three principal types of devices are widely used in aerosol
administration: metered dose inhalers (MDIs), dry powder inhalers (DPIs), and
nebulizers.
METERED DOSE INHALERS. Currently, MDIs are the most commonly used
aerosol delivery system. It is estimated that in the United States, 80%
of aerosol drug delivery is via MDIs, with the majority of this use
coming from adults with asthma and COPD.
The primary advantages of an MDI include its small size/portability,
drug delivery time in seconds, and availability with most respiratory
drugs. Disadvantages include patient coordination issues and efficient
dose delivery. Additionally, because the use of chlorofluorocarbon
(CFC) propellants, traditionally used in MDIs, is being phased out
according to international agreement (Montreal Protocol), alternative
propellants and formulations are being developed. Over time, all
current MDI users will be required to move to a non-CFC MDI or other
alternative delivery systems.
DRY POWDER INHALERS. DPIs were introduced in the 1960s as single-dose
inhalers. In these devices, the drug is loaded as a unit dose that is
mechanically released as a powder for inhalation prior to each use. To
date, these systems have been the primary form of DPI available in the
United States, and account for approximately 1% of the total aerosol
delivery market.
The inconvenience of the single dose DPI has been overcome outside of
the U.S. with the development and introduction of multidose DPIs that
can deliver up to 200 doses of medication. However, like the single
dose systems, they are likely to be inspiratory flow rate dependent,
that is, the amount of drug delivered to the lung is dependent upon the
patient's ability to inhale.
Two of the most significant advantages of DPIs include 1) no
hand-breath coordination is required as with MDIs; and 2) they contain
no CFCs. However, most require a high inspiratory flow rate that can be
problematic in younger patients or in patients with compromised lung
function. In addition, they often present difficulties for those with
manual disabilities (e.g., arthritis) or limited vision and, depending
upon the powder load delivered, may induce acute bronchospasm in
sensitive individuals.
NEBULIZERS. The third widely-used aerosol delivery system is the
nebulizer. Jet nebulizers, which are by far the most commonly used,
work on a stream of compressed air or oxygen that is forced through a
narrow tube which lies just above the surface of the liquid to be
nebulized. It takes approximately 10 to 15 minutes to nebulize this
amount of liquid. During nebulization only about 10% of the drug is
delivered to the lungs; about 80% gets trapped in the reservoir, tubing
and mask; the rest is exhaled.
Nebulizers can be used for a wide range of patients, but are especially
useful for those old and young patients who cannot manage other inhaler
devices, and for whom inhalation via tidal breathing is preferred.
Nebulizers also play a key role in emergency room and intensive care
treatment for patients with acute bronchospasm. However, most
nebulizers are bulky units that are time consuming, have a high initial
cost and can be extremely noisy during operation.
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PROJECTED MARKET ENVIRONMENT
The Company believes that the U.S. respiratory market will exceed $4
billion by the year 2001. Many developments are taking place in the technology
associated with pulmonary drug delivery. Spurred on by the Montreal Protocol and
the ban on CFC propellants, much of the work in research and development has
focused on alternative propellants and dry powder systems. It is anticipated
that there will be a minimum of 11 and a maximum of 35 approved CFC-free inhaled
products on the market in the United States by 2001. Many of these are expected
to be MDIs with new propellants or DPIs. However, few of these second generation
delivery systems are expected to overcome the disadvantages associated with
their earlier counterparts.
There are a number of new devices in development that have been
designed specifically to address unmet patient needs. Among these is the
Company's patented metered solution inhaler, the Premaire(TM) MSI System, which
is designed to combine the therapeutic benefits of nebulization with the
convenience of pressurized metered dose inhalers.
DESCRIPTION OF THE TECHNOLOGY
The Premaire(TM) MSI System is a metered solution inhaler comprised of
two main components: (i) a reusable, pocket-size inhaler unit developed and
manufactured for the Company by Siemens AG, a global leader in electronics and
technology, and (ii) interchangeable drug cartridges called dosators. The basic
technology of the system involves the rapid nebulization of therapeutic agents
for the respiratory tract using ultrasonic energy. This produces a concentrated
cloud of medication delivered through the mouthpiece over a two to three second
period for inhalation. Key components of the technology include rechargeable
batteries, a battery-operated motor, ultrasonic horn, drug cartridge chamber and
mouthpiece.
The pocket-size Premaire(TM) MSI System accommodates a variety of drug
dosators to allow for administration of a range of drugs in a single,
simple-to-use, environmentally-friendly delivery system. Each dosator contains
120 actuations containing approximately a one to two month supply of drug.
The Premaire(TM) MSI System is designed to be patient friendly. A
patient simply selects the appropriate color-coded drug cartridge and places it
into the chamber of the inhaler unit. Pressing the "on" button activates the
small electrical motor that transports a precise dose of drug from the cartridge
chamber to the ultrasonic horn which transforms the solution into an aerosolized
cloud. The patient's inspiration carries a cloud of medication directly to the
lungs where it is needed. The Company expects the delivered dose to be accurate
and consistent for the following reasons: (i) the Premaire(TM) MSI System is
designed to be inspiratory flow rate independent, that is, delivery of the drug
does not depend upon the patient's ability to inhale forcefully, and (ii) the
Premaire(TM) MSI System does not require a high level of coordination between
inspiration and actuation of the device. The patient's breath carries the
medication directly to the lungs, minimizing the amount of drug deposited in the
mouth and throat.
POTENTIAL ADVANTAGES OF THE PREMAIRE(TM) MSI SYSTEM.
The Company believes that the Premaire(TM) MSI System may provide significant
advantages over other drug delivery systems. It is particularly suited for
younger and older asthma patients, and for older COPD patients who have
difficulty using MDIs and currently have to depend on larger, more
time-consuming table-top nebulizers for delivery of their medications. These
potential advantages include:
ACCURACY. The superior engineering and patient-friendly design
of the Premaire(TM) MSI System is intended to provide minimal dose to
dose variability. Patients can therefore expect to consistently receive
the correct therapeutic dose.
ENHANCED PATIENT COMPLIANCE. The pocket-size, portable
Premaire(TM) MSI System unit is designed to combine the therapeutic
benefits of nebulization with the convenience of pressurized metered
dose inhalers. Drug delivery time is measured in seconds, as compared
to 10 - 15 minutes or more for the typical nebulizer. Plus, the device
is easy to operate and requires minimal coordination between actuation
and inhalation for proper drug delivery. All of these features
contribute to improved patient compliance resulting from proper
administration of their respiratory medication.
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INSPIRATORY FLOW RATE INDEPENDENCE. The Premaire(TM) MSI
System is designed to achieve a consistent and significant level of
drug deposition over a broad range of inspiratory flow rates. This is
especially important in younger patients or in patients with
compromised lung function (e.g., during an asthma attack).
VERSATILITY. Many asthma and COPD patients are taking multiple
inhalation medications. The Premaire(TM) MSI System accommodates
interchangeable drug cartridges, or dosators, to allow for the
administration of a broad range of frequently used respiratory drugs in
a single, simple to use delivery system. The system utilizes early
warning mechanism to signal when the batteries need recharging. These
user-friendly features result in a simplified dosing procedure for both
patients and their caregivers.
ENVIRONMENTALLY-FRIENDLY. CFCs are associated with the
reduction of the Earth's ozone layer, and are subject to worldwide
regulations aimed at eliminating their production and use within the
decade. The Premaire(TM) MSI System does not use CFCs or any other type
of ozone depleting propellant.
ECONOMICAL. The Premaire(TM) MSI System offers significant
value to the patient because it allows a single device to be used with
a complete family of respiratory medications available in
cost-effective interchangeable cartridges. The inhaler unit itself has
a life of three years for a patient who uses it several times a day.
THE PREMAIRE(TM) DEVELOPMENT STRATEGY
The Company is implementing a two-tier development strategy for the
Premaire(TM) MSI System as described below:
DEVELOP AND COMMERCIALIZE FOUR NON-PATENTED INHALED
RESPIRATORY MEDICATIONS. The Company, in collaboration with Chesapeake
Biological Laboratories, is currently developing four widely used
respiratory drugs for use in the Premaire(TM) MSI System. These
include: albuterol sulfate, ipratropium bromide, cromolyn sodium and an
inhaled bronchial steroid.
IDENTIFY CORPORATE PARTNERS. The Company plans to identify
potential foreign marketing partner or partners for the four initial
compounds in the Premaire(TM) MSI System. The Company plans to market
albuterol, ipratropium, cromolyn and an inhaled steroid in the U.S.
through the use of a planned specialty sales force. The Company is
currently in the process of identifying potential marketing partners
outside of the U.S. to cover major foreign markets.
The Company plans to sublicense the Premaire(TM) MSI System
technology to pharmaceutical companies for use with new respiratory
drugs/non-respiratory drugs. The Company is actively exploring
out-licensing opportunities for developing new respiratory medications
for the Premaire(TM) MSI System, as well as exploring expansion of the
Premaire(TM) MSI for the pulmonary delivery of drugs to the bloodstream
(e.g., insulin, morphine). Out-licensing, manufacturing and supply
agreements with such companies would provide the Company with
additional revenue sources.
EARLY STAGE RESEARCH PROJECTS
As part of the Company's focus on later stage opportunities, the
Company is seeking to out-license its portfolio of early stage medical research
projects to companies that are committed to early stage biotechnology
opportunities. This portfolio consists of opportunities within the Company's
wholly-owned subsidiary, Ion, which are focused on development of new compounds
for the treatment of cancer and other diseases. In addition, the Company has
rights to potential products in the areas of human immunodeficiency virus
("HIV"), Acquired Immune Deficiency Syndrome ("AIDS") and prostrate cancer.
These early stage technologies do not fit the emerging pharmaceutical company
strategy. Consequently, the Company plans to outlicense these technologies while
maintaining an interest in the technologies' promise without incurring the
development costs associated with early stage research and development.
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RBC-CD4 ELECTROINSERTION TECHNOLOGY
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 for use as a potential therapeutic
in the treatment of HIV that leads to 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.
The Company has signed an option agreement with a private investment
group that had a prior interest in the RBC-CD4 Electroinsertion Technology, to
sell the Company's rights to this HIV/AIDS technologies. As consideration for
the option, the third party will fund an additional study related to the RBC-CD4
Electroinsertion Technology. In addition, the Company will retain a one-third
interest in all future commercial and sublicensing results.
LIPOSOME-CD4 TECHNOLOGY
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. Liposome-CD4 Technology has been targeted by the Company
at infections in the human lymphatic system, a major reservoir for infection not
directly reached by blood circulation.
The Company entered into a sublicense agreement in July 1996 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.
HIV/AIDS VACCINE
The Company holds an exclusive worldwide license to a potential
HIV/AIDS vaccine (the "HIV/AIDS Vaccine") and diagnostic test under development
at the French Institute of Health and Medical Research ("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 targets an antibody binding site or "epitope" which is on a
region of the beta-2-microglobulin that is normally associated with the Class I
major histocompatability molecule found on the surface of most human cells. It
is believed that inducing an antibody to this epitope could either prevent the
progression of existing HIV infection or entirely prevent infection of
uninfected individuals. The Company believes this approach may also protect
against both blood-born and sexual transmission of HIV. The Company's goal has
been to develop an oral formulation that would make the vaccine potentially less
costly and easier to distribute to a broad population.
The Company is seeking a partner for this technology .
UGIF TECHNOLOGY - PROSTATE CANCER
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"). Identification of UGIF as a growth inhibitory factor for certain
prostate cells was based upon laboratory studies conducted at Baylor Medical
College. This work identifies the potential of UGIF for the treatment of
prostate cancer and potentially other diseases of the prostate by elucidating
mechanisms involved in the control of growth in the prostate. The Company is
seeking a partner for this technology.
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ION PHARMACEUTICALS, INC. TECHNOLOGIES
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. 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 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.
The Company entered into a license arrangement with Imutec Pharma Inc.
in November 1997. The arrangement licenses rights to a series of compounds for
the treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly
formed company, NuChem Pharmaceuticals, Inc. ("NuChem") for which Imutec Pharma
will provide funding and management of the development program. The Company
holds a 20% equity interest in NuChem. The Company is currently participating in
discussions with certain third parties regarding the possibility of partnering
or licensing the use of clotrimazole and the Trifens(TM) in the fields of sickle
cell anemia and gastrointestinal disorders.
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 Food and Drug Administration (the "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.
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, (iii) initial Investigational New Drug Application (the "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 a New Drug Application (the "NDA"). Preclinical studies involve
laboratory evaluation of the product and animal studies to assess activity and
safety of the product. Products must be formulated in accordance with United
States Good Manufacturing Procedures ("GMP") requirements and preclinical tests
must be conducted by laboratories that comply with FDA regulations governing the
testing of drugs
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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. Phase I trials normally consist of
testing the product in a small number of patient volunteers for establishing
safety and pharmacokinetics 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 treatment
intervals are determined. Phase III trials typically involve more definitive
testing of the appropriate dose for safety and 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 (the "IRB") at the institution performing the
clinical study. The IRB is charged with protecting the safety of patients in
trials and 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. The Company must rely on other persons and institutions to conduct
these clinical 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 often required 12 months
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 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 specifications, 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 GMP. Continued registration
requires compliance with standards for GMP. In complying with 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.
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PATENTS AND PROPRIETARY RIGHTS
PREMAIRE(TM) MSI SYSTEM PATENTS
Under its agreement with Siemens AG for the technology underlying the
Premaire(TM) MSI System, the Company is responsible for jointly financing and
prosecuting the U.S. patent applications for the benefit of the owners and
licensors of this technology. To date, one U.S. patent has issued, two U.S.
patent applications are pending, and two international patent applications are
pending.
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 licensor of this technology. To
date, two U.S. patent have issued, nine foreign patents have issued and two
foreign patent applications are pending.
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, one foreign patent application is pending and
five foreign patent applications have issued.
HIV/AIDS VACCINE PATENTS
Under its license agreements for the HIV/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, and one international patent application 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.
ION TECHNOLOGY 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, six U.S. patents have issued, five U.S. patent applications
are pending and eight 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,
four U.S. patent applications are pending and one international application is
pending.
COMPETITION
The Company will compete with approximately 25 other companies involved
in developing and selling respiratory products for the U.S. market. Most of
these companies possess financial and marketing resources and developmental
capabilities substantially greater than the Company. Some of the products in
development by other companies may be demonstrated to be superior to the
Company's current or future products. Furthermore, the pharmaceutical industry
is characterized by rapid technological change and competitors may complete
development and reach the market place prior to the Company. The Company
believes that competition in the respiratory category will be based upon several
factors, including product efficacy, safety, reliability, availability, and
price, among others.
-8-
<PAGE>
RECENT BUSINESS DEVELOPMENTS
ZAMBON OPTION AGREEMENT
In April, 1998, the Company entered into an option agreement to form a
strategic arrangement with Zambon Group SpA of Milan, Italy for the worldwide
development and commercialization of drugs to treat respiratory disease with the
Company's proprietary Metered Solution Inhaler ("MSI") system. Terms of the
contemplated agreement will include an equity investment by Zambon in the
Company, funding to develop four respiratory compounds for delivery in the MSI
system, royalties, milestone payments, and retention by the Company of
co-promotion rights for the respiratory drugs in the United States. The Company
will continue to retain all rights to non-respiratory disease applications of
the MSI system.
The option agreement serves the basis upon which the parties will
negotiate a definitive agreement. Zambon is making a $650,000 equity investment
in the Company in connection with the signing of the option agreement.
CONVERTIBLE PREFERRED STOCK OFFERING
The Company completed a $1,250,000 6% redeemable convertible preferred
stock offering with an investor group in April, 1998. Under the terms of this
offering, the preferred stock must be redeemed at the time the Company concludes
a definitive sub-license agreement on the MSI system or other financing.
With proceeds from this transaction, the Company is making the DM
2,000,000 (approximately $1,100,000) payment to Siemens A.G. that was originally
due in January 1998 under the terms of the MSI license agreement.
-9-
<PAGE>
EMPLOYEES
As of March 31, 1998, the Company employed 9 persons, five of whom are
executive officers.
CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND
MARKET PRICE OF SECURITIES
DEVELOPMENT STAGE COMPANY; HISTORY OF OPERATING LOSSES AND ACCUMULATED
DEFICIT; GOING CONCERN OPINION
The Company is in the development stage. The Company has been
principally engaged to date in research, development and licensing efforts, and
has experienced significant operating losses. The Company experienced operating
losses of $9,489,139 and $7,008,889 for the fiscal years ended December 31, 1997
and 1996 and, as of December 31, 1997, the Company had an accumulated deficit of
$36,077,790. The independent auditors' report dated February 13, 1998, except
for Note 11 as to which the date is April 15, 1998, on the Company's
consolidated financial statements stated that the Company has generated only
minimal operating revenue, has incurred recurring operating losses and requires
additional capital and that these conditions raise substantial doubt about its
ability to continue as a going concern. The Company expects that it will
continue to have a high level of operating expenses and will be required to make
significant up-front expenditures in connection with its product development
activities. As a result, the Company anticipates significant additional
operating losses for 1998 and that such losses will continue thereafter until
such time, if ever, as the Company is able to generate sufficient revenues to
sustain its operations.
The Company's ability to achieve profitable operations is dependent in
large part on regulatory approvals of its products. There can be no assurance
that the Company will ever achieve such approvals or profitable operations.
SIGNIFICANT LIQUIDITY RESTRAINTS
The Company's cash available for funding its operations as of December
31, 1997 was $393,608. As of such date, the Company had trade payables of
$887,782 and current research obligations of $470,768. In addition, committed
and/or anticipated funding of research and development after December 31, 1997
is estimated at approximately $17,500,000. The Company will be required to
obtain additional funds for its business through operations or equity or debt
financings, collaborative arrangements with corporate partners or from other
resources. No assurance can be given that these funds will be available for the
Company to finance its development on acceptable terms, if at all. If adequate
funds are not available from operations or additional sources of funding, the
Company's business will suffer a material adverse effect.
NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF OBTAINING ADDITIONAL
FUNDING
The Company's operations to date have consumed substantial and
increasing amounts of cash. The negative cash flow from operations is expected
to continue and to accelerate in the foreseeable future. The development of the
Company's technology and proposed products will require a commitment of
substantial funds to conduct costly and time-consuming research, preclinical and
clinical testing, and to bring any such products to market. The Company's future
capital requirements will depend on many factors, including continued progress
in out-licensing the early stage technology and developing the Premaire(TM) MSI
System, the ability of the Company to establish and maintain collaborative
arrangements with others and to comply with the terms thereof, receipt of
payments due from partners under research and development agreements, progress
with preclinical and clinical trials, the time and costs involved in obtaining
regulatory approvals, the cost involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims, the need to acquire licenses to new
technology and the status of competitive products.
The Company needs to raise substantial additional capital to fund its
operations. The Company intends to seek such additional funding through
collaborative or partnering arrangements, the extension of existing
arrangements, or through public or private equity or debt financings. There can
be no assurance that additional financing will be available on acceptable terms
or at all. If additional funds are raised by issuing equity securities, further
dilution to shareholders may result. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or more
of its research or development programs or obtain funds through arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize. If adequate funds are
not available from operations or additional sources of funding, the Company's
business will suffer a material adverse effect.
-10-
<PAGE>
NO COMMERCIALIZATION OF PRODUCTS TO DATE
The Company has not yet begun to generate revenues from the sale of
products. The Company's products will require significant additional
development, clinical testing and investment prior to commercialization. The
Company does not expect regulatory approval for commercial sales of any of its
products in the immediate future. There can be no assurance that such products
will be successfully developed, proven to be safe and efficacious in clinical
trials, able to meet applicable regulatory standards, able to obtain required
regulatory approvals, or produced in commercial quantities at reasonable costs
or be successfully commercialized and marketed.
ROYALTY PAYMENT OBLIGATIONS
The owners and licensors of the technology rights acquired by the
Company are entitled to receive a certain percentage of all royalties and
payments in lieu of royalties received by the Company from commercialization, if
any, of products in respect of which the Company holds licenses. Accordingly, in
addition to its substantial investment in product development, the Company will
be required to make substantial payments to others in connection with revenues
derived from commercialization of products, if any, developed under licenses the
Company holds. Consequently, the Company will not receive the full amount of any
revenues that may be derived from commercialization of products to fund ongoing
operations.
POTENTIAL LOSS OF RIGHTS UPON DEFAULT
Under the terms of existing agreements, the Company is obligated to
make certain payments to its licensors. In the event that the Company defaults
on the payment of an installment under the terms of an existing licensing
agreement, its rights thereunder could be forfeited. As a consequence, the
Company could lose all rights under a license agreement to the related licensed
technology, notwithstanding the total investment made through the date of the
default. There can be no assurance that unforeseen obligations or contingencies
will not deplete the Company's financial resources and, accordingly, sufficient
resources may not be available to fulfill the Company's commitments.
In this regard, in January, 1998 a payment of DM 2.0 million was due to
Siemens AG under the terms of the agreement under which the Company hold the
world-wide marketing rights to the Premaire(TM) MSI System. This payment was not
made until April 15, 1998.
RAPID TECHNOLOGICAL CHANGE; COMPETITION
The medical field is subject to rapid technological change and
innovation. Pharmaceutical and biomedical research and product development are
rapidly evolving fields in which developments are expected to continue at a
rapid pace. Reports of progress and potential breakthroughs are occurring with
increasing frequency. There can be no assurance that the Company will have a
competitive advantage in its fields of technology or in any of the other fields
in which the Company may concentrate its efforts.
The Company's success will depend upon its ability to develop and
maintain a competitive position in the research, development and
commercialization of products and technologies in its areas of focus.
Competition from pharmaceutical, chemical, biomedical and medical companies,
universities, research and other institutions is intense and is expected to
increase. All, or substantially all, of these competitors have substantially
greater research and development capabilities, experience, and manufacturing,
marketing, financial and managerial resources. Further, acquisitions of
competing companies by large pharmaceutical or other companies could enhance
such competitors' financial, marketing and other capabilities. There can be no
assurance that developments by others will not render the Company's products or
technologies obsolete or not commercially viable or that the Company will be
able to keep pace with technological developments.
-11-
<PAGE>
GOVERNMENT REGULATION
The Company's ongoing research and development projects are subject to
rigorous FDA approval procedures. The preclinical and clinical testing
requirements to demonstrate safety and efficacy in each clinical indication (the
specific condition intended to be treated) and regulatory approval processes of
the FDA can take a number of years and will require the expenditure of
substantial resources by the Company. Delays in obtaining FDA approval would
adversely affect the marketing of products to which the Company has rights and
the Company's ability to receive product revenues or royalties. Moreover, even
if FDA approval is obtained, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections by the FDA, and a later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
Additional government regulation may be established which could prevent or delay
regulatory approval of the Company's products. Sales of pharmaceutical products
outside the United States are subject to foreign regulatory requirements that
vary widely from country to country. Even if FDA approval has been obtained,
approval of a product by comparable regulatory authorities of foreign countries
must be obtained prior to the commencement of marketing the product in those
countries. The time required to obtain such approval may be longer or shorter
than that required for FDA 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. To date, the Company
has not received final regulatory approval from the FDA or any other comparable
foreign regulatory authority in respect of any product or technology.
RISKS INCIDENT TO PATENT APPLICATIONS AND RIGHTS
The Company's success will depend in part on its ability to obtain
patent protection for products and processes and to maintain trade secret
protection and operate without infringing the proprietary rights of others. The
degree of patent protection to be afforded to pharmaceutical, biomedical or
medical inventions is an uncertain area of the law. There can be no assurance
that the Company will develop or receive sublicenses or other rights related to
proprietary technology which are patentable, that any patents pending will
issue, or that any issued patents will provide the Company with any competitive
advantages or will not be challenged by third parties. Furthermore, there can be
no assurance that others will not independently duplicate or develop similar
products or technologies to those developed by or licensed to the Company. If
the Company is required to defend against charges of patent infringement or to
protect its own proprietary rights against third parties, substantial costs will
be incurred and the Company could lose rights to certain products and
technologies.
RELIANCE ON THIRD PARTIES; NO MARKETING OR MANUFACTURING CAPABILITIES
The Company does not currently have its own sales force or an agreement
with another pharmaceutical company to market the Company's products that are in
development. When appropriate, the Company will attempt to build or otherwise
acquire the necessary marketing capabilities to promote its products. There can
be no assurance that the Company will have the resources available to build or
otherwise acquire its own marketing capabilities, or that agreements with other
pharmaceutical companies can be reached to market the Company's products on
terms acceptable to the Company.
In addition, the Company does not intend to manufacture its own
products. While the Company has already entered into two manufacturing and
supply agreements related to the Premaire(TM) MSI System Technology, there can
be no assurance that these manufacturing and supply agreements will be adequate
or that the Company will be able to enter into future manufacturing and supply
agreements on terms acceptable to the Company.
DEPENDENCE UPON OBTAINING HEALTHCARE REIMBURSEMENT
The Company's ability to commercialize human therapeutic and diagnostic
products may indirectly depend in part on the extent to which costs for such
products and technologies are reimbursed by private health insurance or
government health programs. The uncertainty regarding reimbursement may be
especially significant in the case of newly approved products. There can be no
assurance that reimbursement price levels will be sufficient to provide a return
to the Company on its investment in new products and technologies.
-12-
<PAGE>
ADEQUACY OF PRODUCT LIABILITY INSURANCE
The use of the Company's proposed products and processes during
testing, and after approval, may entail inherent risks of adverse effects which
could expose the Company to product liability claims and associated adverse
publicity. Although the Company currently maintains general liability insurance,
there can be no assurance that the coverage limits of the Company's insurance
policies will be adequate. The Company currently maintains clinical trial
product liability insurance of $2.0 million per event for certain clinical
trials and intends to obtain insurance for future clinical trials of products
under development. There can be no assurance, however, that the Company will be
able to obtain or maintain insurance for any future clinical trials. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. A successful claim brought against the
Company in excess of the Company's insurance coverage would have a material
adverse effect upon the Company and its financial condition. The Company intends
to require its licensees to obtain adequate product liability insurance.
However, there can be no assurance that licensees will be able to maintain or
obtain adequate product liability insurance on acceptable terms or that such
insurance will provide adequate coverage against all potential claims.
POTENTIALLY LIMITED TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE.
The Common Stock is listed for trading on American Stock Exchange (the
"AMEX") under the symbol ("SHM"). The Company does not presently satisfy the
listing criteria of the AMEX, including the AMEX requirement that a listed
company that has sustained losses from operations and/or net losses in three of
its four most recent fiscal years have stockholders' equity of at least
$4,000,000. The Company has sustained net losses for its four most recent fiscal
years and, at December 31, 1997, had stockholders' deficit of $(4,637,251). The
failure to meet the AMEX listing criteria may result in the Common Stock no
longer being eligible for listing on the AMEX and trading, if any, of the Common
Stock would thereafter be conducted in the over-the-counter market. If the
Company's Common Stock were to be delisted from the AMEX, it may be more
difficult for investors to dispose of, or to obtain accurate quotations as to
the market value of, the Common Stock.
In the event of the delisting of the Company's Common Stock from the
AMEX, the regulations of the Securities and Exchange Commission ("Commission")
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), require additional disclosure relating to the market for penny stocks.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. A disclosure schedule explaining the penny stock market and the
risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks (i.e., by AMEX delisting), the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and thus the ability of purchasers of the
Company's securities to sell their securities in the secondary market. In the
absence of an active trading market, holders of the Common Stock may experience
substantial difficulty in selling their securities.
VOLATILITY OF MARKET PRICE OF SECURITIES
The market price of securities of firms in the
biotechnology/pharmaceuticals industries have tended to be volatile.
Announcements of technological innovations by the Company or its competitors,
developments concerning proprietary rights and concerns about safety and other
factors may have a material adverse effect on the Company's business or
financial condition. The market price of the Common Stock may be significantly
affected by announcements of developments in the medical field generally or the
Company's research areas specifically. The stock market has experienced
volatility in market prices of companies similar to the Company that has often
been unrelated to the operating results of such companies. This volatility may
have a material adverse effect on the market price of the Common Stock.
-13-
<PAGE>
OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES; DILUTION
As of December 31, 1997, the Company had reserved approximately
4,781,290 shares of its Common Stock for issuance upon exercise of outstanding,
options, warrants and other securities convertible into shares of its Common
Stock, including shares of Common Stock issuable upon the exercise of options
and warrants held by officers and directors of the Company. In addition as of
December 31, 1997, the Company had $1,551,000 principal amount of Convertible
Debentures and 25,000 shares of Series A Convertible Series A Preferred Stock
outstanding. Each of the convertible securities provide for conversion into
shares of Common Stock of the Company at a discount to the market. The Company
has filed registration statements with the Commission covering the resale of
substantially all of the shares of Common Stock underlying such options,
warrants and other securities. The exercise of options and outstanding warrants,
the conversion of such other securities and sales of Common Stock issuable
thereunder could have a significant dilutive effect on the market price of
shares of the Company's Common Stock and could materially impair the Company's
ability to raise capital through the future sale of its equity securities.
AUTHORIZATION OF SERIES A PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors, without
shareholder approval. In the event of issuance, such preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company and preventing shareholders from
receiving a premium for their shares in connection with a change of control.
Except for the issuance of shares of the Company's Series A Cumulative
Convertible Redeemable Preferred Stock that occurred in connection with the
consummation of a private placement in February 1997, the Company has no present
intention to issue any shares of its preferred stock; however, there can be no
assurance that the Company will not issue additional shares of its preferred
stock in the future.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 425 South
Woodsmill Road, St. Louis, Missouri 63017. These premises consist of
approximately 4,521 square feet subject to a lease that expires September 14,
2002. The monthly rent for these premises is $9,042. The Company also maintains
a small office at 37 S. Main Street, Pittsford, New York (for a monthly rent of
$800). The lease on the Pittsford office 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 a defendant in DR. BONNIE S. DUNBAR V. E/J DEVELOPMENT
CORPORATION, U-TECH MEDICAL CORPORATION, SHEFFIELD MEDICAL TECHNOLOGIES, INC.
AND DOUGLAS R. EGER, No. 97-28899, in the District Court of Harris County, Texas
(133rd Judicial District). The plaintiff in this action asserts breach of
contract, fraud and a claim for quantum meruit relating principally to certain
stock options exercisable for a total of 40,000 shares of Common Stock issued in
1992 and 1993 to the plaintiff in consideration of consulting and research
services provided to the Company. The plaintiff served as the principal
investigator at Baylor College of Medicine in Houston, Texas on an ovarian
cancer research project that was funded for several years by the Company. The
plaintiff seeks actual damages against Sheffield and the other defendants,
including Douglas R. Eger, a former Chairman of the Company, together with
punitive damages, attorneys' fees, costs and expenses of the lawsuit, and pre-
and post-judgment interest. The Company has denied the plaintiff's allegations
and is vigorously contesting this action. This action is currently in the
discovery phase. The Company and the plaintiff have engaged in settlement
discussions, but no agreement has been reached to date. The Company is currently
unable predict the likely outcome of this action. However, an unfavorable
decision could have a material adverse effect on the business and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the high and low sale prices of the
Company's Common Stock on the American Stock Exchange (the "AMEX") for the
periods indicated.
1997 HIGH LOW
---- ---
Fourth Quarter...................... $2.50 $1.125
Third Quarter....................... $3.00 $2.00
Second Quarter...................... $3.375 $2.25
First Quarter....................... $3.75 $2.625
1996:
Fourth Quarter...................... $4.125 $3.125
Third Quarter....................... $4.625 $3.0625
Second Quarter...................... $6.50 $4.00
First Quarter....................... $6.75 $3.5625
The closing sale price for the Company's Common Stock on the AMEX on
March 31, 1998 was $0.6875 per share. At March 31, 1998, there were
approximately 390 holders of record of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock in the foreseeable future. The
terms of the Company's Series A Cumulative Convertible Redeemable Preferred
Stock generally prohibit the payment of cash dividends and other distributions
on the Company's Common Stock unless full cumulative stock dividends on shares
of such Series A Common Stock have been paid or declared in full.
The following unregistered securities were issued by the Company during
the quarter ended December 31, 1997:
<TABLE>
<CAPTION>
Number of Shares
Sold/Issued/ Offering/
Date of Description of Subject to Options Exercise Price
Sale/Issuance Securities Issued or Warrants per share ($) Purchaser or Class
<S> <C> <C> <C> <C>
October 1997 Common Stock 92,895 1 7/8 Holders of Series A
Preferred Stock
November - Stock Options 146,000 1 1/2 - 4 1/2 Issuances to employees
December 1997 pursuant to 1993 Stock
Option Plan
December 1997 Common Stock 44,769 1 3/16 Holders of Series A
Preferred Stock
</TABLE>
The issuance of these securities are claimed to be exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.
-15-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
(IN DOLLARS, EXCEPT PER SHARE INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------
STATEMENT OF
OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C>
Sublicense and $ 556,914 $ 673,664 $ 80,610 $ 63,290 $ 81,671
interest income
Operating costs and
expenses
Research and 5,379,193 3,841,818 4,424,154 3,989,838 2,134,330
development
General and 4,666,859 3,840,735 3,044,173 2,393,082 1,823,631
administrative
Total operating 10,046,052 7,682,553 7,468,327 6,382,920 3,957,961
costs and expenses
Loss from operations $ (9,489,138) $ (7,008,889) $ (7,387,717) $ (6,319,630) $(3,876,290)
Loss per share of common stock - $ (0.80) $ (0.65) $ (0.90) $ (0.96) $ (0.75)
basic
Weighted average common shares 11,976,090 10,806,799 8,185,457 6,596,227 5,169,830
outstanding
BALANCE SHEET DATA:
Working capital (net) $ (837,564) $ 1,433,773 $ 1,585,675 $ (799,629) $ 1,570,183
Total assets 689,937 2,773,884 2,221,050 371,073 1,834,560
Long-term obligations and 4,019,263 27,206 -- -- --
redeemable preferred stock
Accumulated deficit (36,157,290) (26,588,652) (19,579,763) (12,192,046) (5,872,416)
Shareholders' equity (net capital (4,637,251) 1,695,837 1,792,363 (573,853) 1,673,113
deficiency)
</TABLE>
No cash dividends have been paid for any of the periods presented.
Net loss per share is based upon the weighted average number of common and
certain common equivalent shares outstanding.
See consolidated financial statements and accompanying footnotes.
-16-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED HEREBY. ALL FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTY, INCLUDING WITHOUT LIMITATION, RISKS SET FORTH
ABOVE UNDER BUSINESS - CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS,
FINANCIAL CONDITION AND MARKET PRICE OF SECURITIES".
THE DISCUSSION AND ANALYSIS BELOW SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES TO FINANCIAL
STATEMENTS INCLUDED ELSEWHERE HEREIN.
OVERVIEW
Sheffield Medical Technologies Inc. ("Sheffield") was incorporated on
October 17, 1986. The Company's wholly-owned subsidiary, U-Tech Medical
Corporation ("U-Tech") was incorporated on January 13, 1992 and was liquidated
on June 30, 1997. On January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was
formed as a wholly-owned subsidiary of the Company. At that time, Ion acquired
the Company's rights to certain early-stage biomedical technologies. On April
17, 1997, CP Pharmaceuticals, Inc. ("CP") was formed for the purpose of
acquiring Camelot Pharmacal, L.L.C., a privately held pharmaceutical development
company, which acquisition was consummated on April 25, 1997.
The Company is in the development stage and to date has been principally
engaged in research, development and licensing efforts. The Company has
generated minimal operating revenue and requires additional capital which the
Company intends to obtain through out-licensing as well as 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 developing a new business, particularly since the Company will
focus on research, development and unproven technology that may require a
lengthy period of time and substantial expenditures to complete. Even if the
Company is able to successfully develop new products, there can be no assurance
that the Company will generate sufficient revenues from the sale or licensing of
such products 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 1998 is dependent upon obtaining additional financing. Until
such financing is obtained, the Company must rely on short-term loans from its
officers in order to meet certain of its obligations.
FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In 1997, the Company signed a sub-license agreement for certain
early-stage technologies and earned sub-license fees that are included in
revenue. Interest income was $56,914 for the year ended December 31, 1997
compared to $163,664 and $80,610 for the years ended December 31, 1996 and 1995,
respectively. The decrease in 1997 interest income of $106,750 compared to 1996
was due primarily to use of funds available for investment as a result of the
acquisition of the Premaire(TM) MSI System from Siemens AG. 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 were $3,729,193 for the year
ending December 31, 1997 compared to $3,841,818 and $4,424,154 for the years
ended December 31, 1996 and 1995, respectively. The 1997 decrease of $112,625
was attributable to the winding down of the early-stage technology projects. In
1997, the Company entered into two (2) major research and development
agreements. The Company sub-licensed certain technology to a subsidiary of
Imutec Pharma Inc. in exchange for cash, milestone payments, transfer of
research expenses to Imutec and a twenty percent (20%) ownership interest upon
commercialization. The Siemens AG agreement, and related development expenses
incurred relative to the Premaire(TM) MSI System, resulted in funds expended of
a total of $1,800,440 in 1997. The 1996 decrease of $582,336 in 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.
General and administrative expenses were $4,627,567 for the year ending
December 31, 1997 compared to $3,831,204 and $2,979,437 for the years ended
December 31, 1996 and 1995, respectively. The 1997 increase of $796,363 was
primarily due to an increased number management salaries resulting from the
Camelot acquisition, compensation expense associated with extension of certain
option and warrant agreements, and expenses related to the two financings
completed during the year. The 1996 increase of $851,767 primarily resulted 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.
Acquisition of in-process technology charges of $1,650,000 relate to
the April 25, 1997 acquisition of Camelot Pharmacal, L.L.C.
-17-
<PAGE>
Interest expense was $39,292 for the year ending December 31, 1997
compared with $9,531 and $64,736 for the years ended December 31, 1996 and 1995,
respectively. The 1997 increase of $29,761 was attributable to the 6%
convertible debentures issued during the year. The 1996 decrease of $55,205 was
due to satisfaction in full of the Company's $550,000 loan from SMT Investment
Partnership in 1995.
As a result of the above, net loss for 1997 was $9,489,138 compared to
$7,008,889 and $7,387,717 for the years ending December 31, 1996 and 1995,
respectively.
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 $28 million through December 31, 1997. 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. The proceeds of this offering were used to fund research and
development, patent prosecution and for working capital and general corporate
purposes.
In addition, in April 1998 the Company completed two agreements that
provided additional capital. The first provided the Company with $650,000 in
gross proceeds from the sale of the Company's Common Stock. The second provided
the Company with $1,250,000 in gross proceeds from the sale of the Company's
Series B Convertible Redeemable Preferred Stock.
From inception through December 31, 1997, the Company earned $453,827
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.
Net cash used in development stage activities was $6,677,405 for the
year ended December 31, 1997 compared with $6,043,876, $7,541,937 and
$30,198,450 for the years ended December 31, 1996 and 1995, and from inception
in 1986 through 1997, respectively. Cash of $3,284,812, $6,420,834, $9,346,901
and $27,955,005 was provided by the issuance of securities in 1997, 1996, 1995
and from inception in 1986 through 1997, respectively.
The Company's total assets were $689,937 at December 31, 1997 compared
with $2,773,884 at December 31, 1996. The 1997 decrease of $2,083,947 was
primarily attributable to expenditures related to the acquisition and
development of the Premaire(TM) MSI System technology. The Company's liabilities
at December 31, 1997, consisting of accounts payable, sponsored research,
capital lease obligations and the 6% convertible debenture, were $2,938,425
compared with $1,078,047 at December 31, 1996.
The Company spent approximately $19.3 million through December 31, 1997
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, and preclinical and clinical
testing of its product candidates. 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 the successful commercialization of the
Company's technologies. 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.
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 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 development programs may be curtailed if future financings
are not completed.
-18-
<PAGE>
The table below indicates (i) the Company's direct research and
development expenses by project for the fiscal year ended December 31, 1997 and
from the Company's inception to December 31, 1997, (ii) the Company's current
estimate by project of committed and/or anticipated funding requirements after
December 31, 1997 and (iii) revenues received to date by project.
DIRECT RESEARCH AND DEVELOPMENT EXPENSES
(IN DOLLARS)
<TABLE>
<CAPTION>
R&D PROJECT Fiscal year Inception to Committed and/or Revenue
ended 12/31/97 12/31/97 Anticipated R&D Received
Funding After
12/31/97*
<S> <C> <C> <C> <C>
Multi-Dose Solution Inhaler 1,800,440 1,944,848 17,500,000** 0
(MSI System)
Ion Pharmaceuticals, 1,014,031 4,822,595 0 510,000
Inc. Technologies
RBC-CD4 Electroinsertion 15,760 6,254,185 0 0
Technology
Liposome-CD4 Technology 0 2,322,322 0 500,000
HIV/AIDS Vaccine 137,500 1,211,618 0 0
UGIF Technology 120,036 223,437 0 0
Membrane Attack Complex 243,744 365,618 0 0
(MAC)/Complement
Technology
</TABLE>
- -----------------
* These figures include management's estimates of anticipated direct R&D
funding as of the date of this report. The amounts and rate of
application of the Company's funds to any particular project are
expected to fluctuate and will depend in part on the Company's
successful completion of various stages of research, the availability
of additional financing and the Company's identification and
acquisition of rights in new technologies in the future.
** Will be zero dollars in the event Zambon exercises its option agreement
on the MSI respiratory applications.
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that the Year 2000 problem will
not pose significant operational problems for the Company's computer systems.
Additionally, the cost of the Year 2000 problem will have no material impact on
the operations of the Company.
-19-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-20-
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 ("Regulation 14A").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.
-21-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Financial Statements are included:
Report of Independent Auditors
Consolidated Balance Sheets as of
December 31, 1997 and 1996
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 and for
the period October 17, 1986 (inception) to
December 31 1997
Consolidated Statements of Stockholders' Equity (net
capital deficiency) for the period from October 17,
1986 (inception) to December 31 1997
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 and for
the period from October 17, 1986 (inception) to
December 31 1997
Notes to Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable, or not required, or because the required information is included
in the financial statements or notes thereto.
(a)(3) Exhibits:
<TABLE>
<CAPTION>
NO. REFERENCE
<S> <C> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended (4)
3.2 By-Laws of the Company (4)
4.1 Form of Common Stock Certificate (2)
4.2 Certificate of Designation defining the powers, designations, (7)
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 between (2)
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 (7)
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 (7)
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
10.65 Employment Agreement dated as of November 17, 1997 (1)
between the Company and Judy Roeske Bullock
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 (7)
10.11 Agreement and Plan of Merger among the Company, Camelot (6)
Pharmacal, L.L.C., David A. Byron, Loren G. Peterson and
Carl Siekmann dated April 25, 1997
10.12 Employment Agreement dated as of April 25, 1997 between the (6)
Company and David A. Byron
10.13 Employment Agreement dated as of April 25, 1997 between (6)
the Company and Loren G. Peterson
10.14 Employment Agreement dated as of April 25, 1997 between the (6)
Company and Carl Siekmann
10.15 Form of the Company's 6% Convertible Subordinated (8)
Debentures due September 22, 2000.
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
NO. REFERENCE
<S> <C> <C> <C>
10.16 Lease dated August 18, 1997 between Corporate Center, L.L.C. (5)
and the Company relating to the lease of office space in St.
Louis, Missouri.
10.17 Assignment and License Agreement dated as of December 3, (9)
1997 between 1266417 Ontario Limited and Ion
Pharmaceuticals, Inc. (portions of this exhibit are omitted and
were filed separately with the Securities Exchange Commission
pursuant to the Company's application requesting confidential
treatment in accordance with Rule 24b-2 as promulgated under
the Securities Exchange Act of 1934, as amended).
10.18 Sub-License Agreement dated as of December 3, 1997 (9)
between 1266417 Ontario Limited and Ion Pharmaceuticals,
Inc. (portions of this exhibit are omitted and were filed
separately with the Securities Exchange Commission pursuant
to the Company's application requesting confidential treatment
in accordance with Rule 24b-2 as promulgated under the
Securities Exchange Act of 1934, as amended).
10.19 Severance Agreement dated December 24, 1997 between the (1)
Company and Douglas R. Eger.
10.20 Severance Agreement dated October 15, 1997 between the (1)
Company and George Lombardi.
21 Subsidiaries of Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
23.2 Consent of KPMG Peat Marwick LLP (1)
27 Financial Data Schedule (1)
</TABLE>
- ----------------------------
(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 Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 filed with the Securities and
Exchange Commission.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 filed with the Securities
and Exchange Commission.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 filed with the Securities and
Exchange Commission.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-38327) filed with the Securities and Exchange
Commission on October 21, 1997.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 17, 1997.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on December 17, 1997 relating to the Company's sale of
certain patent and other proprietary interests.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHEFFIELD PHARMACEUTICALS, INC.
Dated: April 15, 1998 /s/ Loren G. Peterson
------------------------------
Loren G. Peterson
President and Chief Executive Officer
POWER OF ATTORNEY
Sheffield Pharmaceuticals, Inc. and each of the undersigned do hereby
appoint Loren G. Peterson and Thomas Fitzgerald and each of them severally, its
or his or her true and lawful attorney to execute on behalf of Sheffield
Pharmaceuticals, Inc. and the undersigned any and all amendments to this Annual
Report and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission; each of such
attorneys shall have the power to act hereunder with or without the other.
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/ Thomas M. Fitzgerald Chairman and Director April 15, 1998
- --------------------------------------
Thomas M. Fitzgerald
/s/ Loren G. Peterson Director, President and Chief April 15, 1998
- -------------------------------------- Executive Officer
Loren G. Peterson
/s/ John M. Bailey Director April 15, 1998
- --------------------------------------
John M. Bailey
/s/ Digby W. Barrios Director April 15, 1998
- --------------------------------------
Digby W. Barrios
/s/ Douglas R. Eger Director April 15, 1998
- --------------------------------------
Douglas R. Eger
/s/ Judy Roeske Bullock Vice President, Chief April 15, 1998
- -------------------------------------- Financial Officer,
Judy Roeske Bullock Treasurer and Secretary (Chief Financial
and Chief Accounting Officer)
</TABLE>
-24-
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Table of Contents
Page
----
Consolidated Financial Statements
Reports of Independent Auditors .....................................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.........F-4
Consolidated Statements of Operations
for the three years in the period
ended December 31, 1997 and for the period from
October 17, 1986 (inception) to December 31, 1997 ..............F-5
Consolidated Statements of Stockholders'
Equity (Net Capital Deficiency)
for the period from October 17, 1986 (inception) to
December 31, 1997 ..............................................F-6
Consolidated Statements of Cash Flows
for the three years in the period
ended December 31, 1997 and for the period from
October 17, 1986 (inception) to December 31, 1997...............F-7
Notes to Consolidated Financial Statements ..........................F-8
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sheffield Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Sheffield
Pharmaceuticals, Inc. (formerly known as Sheffield Medical Technologies Inc.)
and subsidiaries (a development stage enterprise) as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity (net capital deficiency), and cash flows for each of the three years in
the period ended December 31, 1997 and for the period October 17, 1986
(inception) through December 31, 1997. 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 (net capital deficiency) and cash flows for the period
October 17, 1986 (inception) through December 31, 1997, 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 Pharmaceuticals, Inc. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 and the period from October 17, 1986 (inception) through
December 31, 1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Sheffield Pharmaceuticals, 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.
Princeton, New Jersey
February 13, 1998 except for Note 11
as to which the date is April 15, 1998
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). 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.
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.
Houston, Texas
February 11, 1994
F-3
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 393,608 $ 1,979,871
Marketable securities -- 460,768
Loan receivable - former officer 80,000 --
Prepaid expenses and other current assets 47,378 43,975
------------ ------------
Total current assets 520,986 2,484,614
------------ ------------
Property and equipment:
Laboratory equipment 185,852 185,852
Office equipment 142,562 89,019
Leasehold improvements -- 61,390
------------ ------------
328,414 336,261
Less accumulated depreciation and amortization 185,201 162,007
------------ ------------
Net property and equipment 143,213 174,254
------------ ------------
Segregated cash -- 75,000
Other assets 25,738 40,016
------------ ------------
Total assets $ 689,937 $ 2,773,884
============ ============
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current liabilities:
Accounts payable and accrued liabilities $ 887,782 $ 446,965
Sponsored research payable 470,768 580,157
Capital lease obligation-current portion -- 23,719
------------ ------------
Total current liabilities 1,358,550 1,050,841
Capital lease obligation - non-current portion -- 27,206
6% convertible subordinated debenture 1,551,000 --
Interest Payable on 6% convertible subordinated debenture 28,875 --
Cumulative convertible redeemable preferred stock, $.01 par value. Authorized,
3,000,000 shares; issued and outstanding, 25,000 and 0 shares at
December 31, 1997 and 1996, respectively 2,468,263 --
Additional paid-in capital associated with cumulative convertible
redeemable preferred stock 2,249,145 --
Stock dividends payable on preferred stock 139,368 --
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Common stock, $.01 par value. Authorized, 50,000,000 shares;
issued and outstanding, 12,649,539 and 11,388,274
shares at December 31, 1997 and 1996, respectively 126,495 113,883
Notes receivable in connection with sale of stock (72,600) (110,000)
Additional paid-in capital 31,386,644 28,319,838
Unrealized loss on marketable securities -- (39,232)
Deficit accumulated during development stage (36,157,290) (26,588,652)
------------ ------------
(4,716,751) 1,695,837
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency) $ 689,937 $ 2,773,884
============ ============
</TABLE>
F-4
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Operations
For the years ended December 31, 1997, 1996 and 1995 and for the period
from October 17, 1986 (inception) to December 31, 1997
<TABLE>
<CAPTION>
October 17, 1986
Years ended (inception) to
December 31, December 31,
-------------------------------------------------- ------------
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sub-license revenue $ 500,000 $ 510,000 $ -- $ 1,010,000
Interest income 56,914 163,664 80,610 453,827
------------ ------------ ------------ ------------
Total revenue 556,914 673,664 80,610 1,463,827
Expenses:
Acquisition of R & D in-process
technology 1,650,000 -- -- 1,650,000
Research and development 3,729,193 3,841,818 4,424,154 19,252,390
General and administrative 4,627,567 3,831,204 2,979,437 16,522,259
Interest 39,292 9,531 64,736 159,755
------------ ------------ ------------ ------------
Total expenses 10,046,052 7,682,553 7,468,327 37,584,404
------------ ------------ ------------ ------------
Loss before extraordinary item (9,489,138) (7,008,889) (7,387,717) (36,120,577)
Extraordinary item -- -- -- 42,787
============ ============ ============ ============
Net loss $ (9,489,138) $ (7,008,889) $ (7,387,717) $(36,077,790)
============ ============ ============ ============
Acretion of mandatorily redeemable preferred stock $ (79,500) $ (79,500)
------------ ------------
Net loss - attributable to common shares $ (9,568,638) $(36,157,290)
============ ============
Loss per share of common stock - basic:
Loss before extraordinary item $ (0.80) $ (0.65) $ (0.90) $ (7.30)
Extraordinary item -- -- -- 0.01
============ ============ ============ ============
Basic net loss per share $ (0.80) $ (0.65) $ (0.90) $ (7.29)
============ ============ ============ ============
Weighted average common shares
outstanding - basic: 11,976,090 10,806,799 8,185,457 4,946,268
============ ============ ============ ============
</TABLE>
F-5
<PAGE>
SHEFFIELD PHARMACEUTICALS, 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, 1997
<TABLE>
<CAPTION>
Noted Unrealized Deficit Total
receivable gain (loss) accumulated stockholders'
in connection Additional on during equity
Common with sale paid-in marketable development (Net capital
stock of stock capital securities stage deficiency)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance 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)
------------ ------------ ------------ ------------ ------------ ------------
Balance 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)
------------ ------------ ------------ ------------ ------------ ------------
Balance 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
Common stock subscribed -- (110,000) -- -- -- (110,000)
Unrealized loss on marketable securities -- -- -- (39,232) -- (39,232)
Net loss -- -- -- -- (7,008,889) (7,008,889)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 113,883 (110,000) 28,319,838 (39,232) (26,588,652) 1,695,837
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, L.L.C 6,000 -- 1,644,000 -- -- 1,650,000
Common stock issued 6,612 37,400 1,041,750 -- -- 1,085,762
Common stock options and warrants issued -- -- 165,868 -- -- 165,868
Common stock options extended -- -- 215,188 -- -- 215,188
Acretion of Issuance costs for
cumulative convertible redeemable
preferred stock (179,500) (179,500)
Unrealized gain on marketable securities -- -- -- 39,232 -- 39,232
Net loss -- -- -- -- (9,489,138) (9,489,138)
============ ============ ============ ============ ============ ============
Balance at December 31, 1997 $ 126,495 $ (72,600) $ 31,386,644 $ -- $(36,157,290) $ (4,716,751)
============ ============ ============ ============ ============ ============
</TABLE>
F-6
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995 and for the period
from October 17, 1986 (inception) to December 31, 1997
<TABLE>
<CAPTION>
October 17, 1986
Years ended (inception) to
December 31, December 31,
------------------------------------------ ------------
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash outflows from development stage activities and
extraordinary gain:
Loss before extraordinary item $ (9,489,138) $ (7,008,889) $ (7,387,717) (36,120,577)
Extraordinary gain on extinguishment of debt -- -- -- 42,787
------------ ------------ ------------ ------------
Net loss (9,489,138) (7,008,889) (7,387,717) (36,077,790)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants for services 381,056 640,762 357,032 1,922,059
Non-cash interest expense 28,875 -- 50,000 78,875
Write-off of in-process technology 1,650,000 -- -- 1,650,000
Securities aquired under sub-license agreement -- (500,000) -- (500,000)
Issuance of common stock for intellectual property rights -- -- -- 866,250
Amortization of organizational and debt issuance costs -- -- -- 77,834
Depreciation and amortization 84,584 71,652 47,992 246,591
Increase in debt issuance and organizational costs -- -- -- (77,834)
Loss realized on sale of marketable securities 324,915 -- -- 324,915
Decrease (increase) in prepaid expenses and other current assets (3,403) 109,810 (88,618) (106,419)
Decrease (increase) in other assets 14,278 44,354 (4,387) 33,303
Increase (decrease) in accounts payable, accrued liabilities 440,817 245,680 (375,785) 310,712
Increase (decrease) in sponsored research payable (109,389) 352,755 (140,454) 1,047,838
------------ ------------ ------------ ------------
Net cash used by development stage activities (6,677,405) (6,043,876) (7,541,937) (30,198,450)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds on sale of marketable securities 175,085 -- -- 175,085
Acquisition of laboratory and office equipment (53,543) (51,136) (24,517) (317,352)
Decrease (increase) in segregated cash 75,000 (75,000) -- --
Increase in notes receivable in connection with sale of stock -- (240,000) -- (240,000)
Increase in loan receivable - former officer (80,000) -- -- (80,000)
Payments of notes receivable 37,400 130,000 -- 167,400
Purchase of Camelot Pharmacal, L.L.C.,
net of cash acquired (46,687) -- -- (46,687)
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities 107,255 (236,136) (24,517) (341,554)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payments under capital lease (50,925) (21,528) -- (72,453)
Conversion of convertible, subordinated notes -- -- -- 749,976
Proceeds from issuance of convertible debenture 1,750,000 -- 550,000 2,300,000
Proceeds from issuance of common stock -- -- 7,699,574 13,268,035
Proceeds from issuance of preferred stock 3,284,812 -- -- 3,284,812
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 5,199,075 6,399,306 9,346,901 30,932,528
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents (1,586,263) 119,294 1,780,447 392,524
Cash and cash equivalents at beginning of period 1,979,871 1,860,577 80,130 1,084
============ ============ ============ ============
Cash and cash equivalents at end of period $ 393,608 $ 1,979,871 $ 1,860,577 $ 393,608
============ ============ ============ ============
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services $ 381,056 $ 640,762 $ 357,032 $ 1,921,259
Common stock issued for acquisitions 1,650,000 -- -- 1,655,216
Common stock issued for intellectual property rights -- -- -- 866,250
Common stock issued to retire debt -- -- 600,000 600,000
Common stock issued to redeem convertible securities 1,334,105 -- -- 1,334,105
Securities acquired under sub-license agreement -- 500,000 -- 500,000
Unrealized (realized) depreciation of investments (39,232) 39,232 -- --
Equipment acquired under capital lease -- 72,453 -- 72,453
Notes payable converted to common stock -- -- -- 749,976
Stock dividends 182,352 -- -- 182,352
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 10,417 $ 9,531 $ 64,736 $ 130,880
============ ============ ============ ============
</TABLE>
F-7
<PAGE>
SHEFFIELD PHARMACEUTICALS, 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. The Company's wholly-owned subsidiary, U-Tech
Medical Corporation ("U-Tech") was incorporated on January 13, 1992
and was liquidated on June 30, 1997. On January 10, 1996, Ion
Pharmaceuticals, Inc. ("Ion"), was formed as a wholly-owned
subsidiary of the Company. At that time, Ion acquired the Company's
rights to certain early-stage biomedical technologies. On April 17,
1997, CP Pharmaceuticals, Inc. ("CP") was formed for the purpose of
acquiring Camelot Pharmacal, L.L.C., a privately held pharmaceutical
development company, which acquisition was consummated on April 25,
1997. On January 26, 1995, the Company's shareholders approved the
proposal to reincorporate Sheffield in Delaware, which was effected
on June 13, 1995. On June 26, 1997, the Company's shareholders
approved the proposal to change Sheffield's name from Sheffield
Medical Technologies Inc. to Sheffield Pharmaceuticals, Inc. Unless
the context requires otherwise, Sheffield, U-Tech, Ion and CP are
referred to as "the Company." All significant inter-company
transactions are eliminated in consolidation.
The Company is in the development stage and to date has been
principally engaged in research, development and licensing efforts.
The Company has generated minimal operating revenue and requires
additional capital which the Company intends to obtain through
out-licensing as well as 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 developing a new business, particularly
since the Company will focus on product development that may require
a lengthy period of time and substantial expenditures to complete.
Even if the Company is able to successfully develop new products,
there can be no assurance that the Company will generate sufficient
revenues from the sale or licensing of such products 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 1998 are dependent upon obtaining
additional financing. (See Note 11.) Until such financing is
obtained, the Company must rely on short-term loans from its
officers in order to meet certain of its obligations.
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
$9,489,138 $7,008,889 and $7,387,717 during the years ended
December 31, 1997, 1996 and 1995 respectively, and has an
accumulated deficit of $36,077,790 from inception (October 17, 1986)
through December 31, 1997.
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
over three or five year periods using the straight-line method.
F-8
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
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
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.
BASIC LOSS PER SHARE OF COMMON STOCK
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. SFAS No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per
share. Basic net loss per share is based upon the weighted average
Common Stock outstanding during each year. Common Stock equivalents
are not included as their effect is antidilutive. The effect of
adoption of SFAS No. 128 had no financial impact, and accordingly,
no restatement of loss per share for prior years was necessary. 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" (SFAS No. 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 or exceeds the fair market
value of the underlying common stock on the date of grant.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements and applies to all enterprises.
SFAS No. 130 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 will
have no impact on the Company's consolidated results of operations,
financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which is
effective for years beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company will
adopt the new requirements retroactively in 1998. Management is
currently evaluating SFAS No. 131 and does not anticipate that the
adoption of this statement will have significant effect on the
Company's financial reporting.
F-9
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
3. ACQUISITION
On April 25, 1997, the Company completed its acquisition of Camelot
Pharmacal, L.L.C., a newly formed, privately held Missouri limited
liability company focusing on the development of specialty
pharmaceuticals. The purchase price consisted of 600,000 shares of
the Company's common stock (valued at $2.75 per share) and the
assumption of certain liabilities in excess of tangible assets
acquired of $8,262. The transaction was treated as a purchase for
accounting purposes, and accordingly, the assets and liabilities
assumed have been recorded at their estimated fair market values at
the date of acquisition. Since technological feasibility of the
in-process research and development costs have not yet been
established and the technology had no alternative future use at the
acquisition date, the in-process research and development costs of
$1,650,000 were immediately written-off and included in the results
of operations as a non-recurring charge for the year ended December
31, 1997. Camelot had no revenue and minimal operating losses for
the period ended April 24, 1997 and therefore proforma disclosure
has not been included.
4. LEASES
There were no assets under capital leases at December 31, 1997.
Capital lease for property and equipment at December 31, 1996 was
$51,990 (net of accumulated amortization).
Future minimum lease commitments under operating leases at December
31, 1997 are as follows:
1998 $108,504
1999 110,011
2000 113,025
2001 114,532
2002 83,262
--------
Total future minimum
lease commitments $529,334
========
Rent expense for the years ended December 31, 1997, 1996, 1995 and
the period from October 17, 1986 (inception) to December 31, 1997
was $190,584, $147,104, $105,946, and $523,109, respectively.
5. 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
Issued during year ended December 31, 1997 1,261,265
---------
Balance outstanding at December 31, 1997 12,649,539
==========
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
F-10
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
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 was
formerly 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 $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
F-11
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
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.
On February 26, 1997, 35,700 shares of Series A Preferred Stock were
issued pursuant to a private placement. Holders of Series A
Preferred Stock have the right, exercisable commencing May 29, 1997
and ending February 28, 1999, to convert shares of Series A
Preferred Stock into shares of Common Stock. As of December 31,
1997, 25,000 shares of Series A Preferred Stock were outstanding.
Between August 26, 1997 and December 31, 1997, 10,700 shares of
Series A Preferred stock, plus related accrued dividends thereon,
were converted into 44,769 shares of Common Stock. The number of
shares of Common Stock issuable upon conversion of Series A
Preferred Stock is determined by reference to the lesser of (i)
$3.31875 and (ii) 85% of the "current market price" per share of
Common Stock, where "current market price" means, with certain
exceptions, the average of the closing bid prices of Common Stock
for the 10 consecutive trading days ending the last trading day
before the applicable conversion date. Each share of Series A
Preferred Stock earns a cumulative dividend payable in shares of
Common Stock at a rate per share equal to 7.0% of the original $100
purchase price per share of the Series A Preferred Stock payable at
the time of conversion. Stock dividends payable on the Series A
Preferred Stock toatalled $139,368 at December 31, 1997. Under
certain circumstances, cash is payable to holders of Series A
Preferred Stock in lieu of Common Stock. The Series A Preferred
Stock is redeemable upon the occurance of certain events.
On April 25, 1997, Camelot Pharmacal, L.L.C., a Missouri limited
liability company ("Camelot"), merged with and into CP
Pharmaceuticals, Inc., a newly formed, wholly owned subsidiary of
the Company. The principals of Camelot at the time of the merger
were Loren G. Peterson, Carl F. Siekmann and David A. Byron.
Pursuant to the related agreement and plan of merger, Messrs.
Peterson, Siekmann and Byron each received 200,000 shares of Common
Stock. Following the consummation of the merger, each of Messrs.
Peterson, Siekmann and Byron entered into employment agreements with
Sheffield and received stock options providing each individual the
right to purchase up to 400,000 shares of Common Stock. (See Note
3.)
On September 22, 1997, the Company consummated a private placement
of $1,750,000 principal amount of its 6% Convertible Subordinated
Debentures due September 22, 2000, $1,551,000 of which was
outstanding as of December 31, 1997. In addition, the Company
granted the holder of the Debenture warrants to purchase 140,000
shares of the Company's common stock at $2.80 per share. A value of
$115,500 was assigned to these warrants. The Convertible Debentures
are convertible at the option of holders from December 22, 1997
until maturity, subject to certain limitations, into a number of
shares of Common Stock equal to (i) the principal amount of the
Convertible Debenture being so converted divided by (ii) 75% of the
market price of the Common Stock as of the date of conversion. For
purposes of any conversion of Convertible Debentures, "market price"
generally means the average of the closing prices of the Common
Stock for the five trading day period preceding the applicable
conversion date. The Convertible Debentures also earn interest at a
rate of 6.0% per annum that is payable by the Company, at the option
of the holders and subject to certain conditions, in shares of its
Common Stock at a conversion rate generally equal to the average of
the closing prices of the Common Stock for the ten trading days
preceding the applicable interest payment date. Subject to certain
limitations, the Convertible Debentures are subject to redemption
upon the occurrence of certain events.
6. 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 Plan must be at
F-12
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
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 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.
See also the discussion contained in Note 5 related to the Series A
Preferred Stock, the Camelot acquisition, and the 6% Convertible
Subordinated Debentures.
SFAS No. 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 SFAS No. 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 1997, 1996 and 1995: risk-free interest of
5.54%, 6.23%, 6.13%, 6.00% and 5.57%; expected volatility of 0.526
and 0.60; expected option life of one to four years from vesting and
an expected dividend yield of 0.0%.
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:
F-13
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss................................ $9,500,810 $8,500,149 $8,993,554
Pro forma basic net loss per share of common stock $ 0.79 $ 0.79 $ 1.10
</TABLE>
Because SFAS No. 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>
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Common Average Common Average Common Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, ..................... 3,033,755 4.49 4,164,834 4.02 1,792,000 3.33
Granted ..................................... 3,683,039 3.92 1,014,922 5.52 3,091,408 4.63
Expired ..................................... 327,500 3.18 70,000 3.77 0 0
Exercised ................................... 0 0 1,942,501 3.76 345,500 3.51
Canceled .................................... 1,608,004 4.11 133,500 4.53 373,074 4.79
--------- ---- --------- ---- --------- ----
Outstanding December 31, .................... 4,781,290 3.65 3,033,755 4.49 4,164,834 4.02
--------- ---- --------- ---- --------- ----
Exercisable at end of year................... 2,900,290 2,094,833 1,727,759
--------- --------- ---------
Weighted average fair value of options
granted during the year $4.05 $2.30 $2.30
</TABLE>
Stock options outstanding at December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range of Outstanding Remaining Average
Exercise Prices Options at Contractual Life Exercise
Dec. 31, 1997 (Yrs.) Price
---------------------- ----------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
$ .73 - $3.18 2,046,000 7.25 $ 2.62
$3.25 - $5.00 2,290,791 2.89 $ 4.06
$5.06 - $8.25 444,499 2.60 $ 6.26
--------
$ .73 - $8.25 4,781,290 4.73 $ 3.65
=========
During the period January 1, 1995 through December 31, 1997, the
exercise prices of options and warrants issued by the Company were
as follows:
</TABLE>
F-14
<PAGE>
Number of Exercise
Year Options/Warrants Price
---- ---------------- ------------
1995.............. 3,091,408 $3.25 - 5.00
1996.............. 1,014,922 $3.38 - 8.25
1997............... 3,683,039 $1.50 - 6.00
At December 31, 1997, a total of 2,995,000 shares were available for
future grants under the 1993 Stock Option Plan, the 1993 Restricted
Stock Plan, and the 1996 Directors Stock Option Plan.
7. 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
("UGIF"). The agreement, which is still in effect, 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.
The Company funding of UGIF research was approximately $80,000 and
$14,000 in the years ended December 31, 1997 and 1996, respectively.
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, which is still in effect, 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 funding of research was approximately $54,000
and $144,000 for the years ended December 31, 1997 and 1996,
respectively.
In July, 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 was sold in 1997. 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, which is still in effect, 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
approximately $776,000 and $985,000 for the years ended December 31,
1997 and 1996, respectively.
In October, 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-15
<PAGE>
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, which is still in
effect, 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
approximately $50,000 and $300,000 for the years ended December 31,
1997 and 1996, respectively.
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, which
is still in effect, 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 approximately $203,000 and $180,000 for the years
ended December 31, 1997 and December 31, 1996, respectively.
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 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 approximately $251,000 and $774,000 for the
years ended December 31, 1997 and 1996, respectively.
In March 1997, the Company entered into exclusive supply and license
agreements for the world-wide rights to the multi-dose inhaler
technology (MSI) of Siemens A.G. The agreements call for Siemens to
be the exclusive supplier of the MSI system, a hand-held, portable
pulmonary drug delivery system. The Company paid a licensing fee of
$1.1 million in April 1997 to Siemens pursuant to these agreements.
Under the terms of these agreements another DM 2.0 million payment
was due in January, 1998. (See Note 11.) In addition, under certain
circumstances, the Company will be required to make another DM 2.0
million payment to Siemens in January, 1999.
On November 20, 1997, the Company entered into agreement with Imutec
Pharma Inc. Under this sub-license, Imutec acquired from the Company
the rights to a series of clotrimazole-related compounds for the
treatment of cancer, Kaposi's sarcoma and actinic keratosis. In
exchange, Imutec agreed to manage and fund the remaining development
program. The Company received $500,000 in cash upon signing the
agreement, which has been recognized as revenue during the year
ended December 31, 1997, and will receive $350,000 of Imutec stock
in June, 1998. In addition, the Company is entitled to receive
additional payments upon the completion of certain milestones in the
development of these compounds and retains a 20 percent ownership
interest upon commercialization.
8. 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, formerly a member of the Board of
Directors of the Company, was also a general partner of SMT.
F-16
<PAGE>
9. 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, 1997 and 1996 which is considered noncurrent,
are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 12,400,000 $ 8,800,000
Capitalized start-up costs for tax purposes 578,000 578,000
Deferred tax asset valuation allowance (12,978,000) (9,378,000)
------------ -----------
Net deferred tax asset $ - $ -
============ ===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31,
1996 and 1995 was $9,378,000 and $6,678,000, respectively. The net
change in the total valuation allowance for the year ended December
31, 1997 was an increase of $3,600,000. At December 31, 1997, the
Company has net operating loss carryforwards of approximately
$34,000,000 for tax purposes which are available to offset federal
taxable income, if any, through 2012. An ownership change pursuant
to Section 382 of the 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. The Company has not
performed a detailed analysis to determine whether an additional
ownership change under Section 382 of the Internal Revenue Code of
1986 occurred during 1997, but believes that it is very likely that
such a change occurred during 1997. The effect of an ownership
change would be the imposition of an additional annual limitation on
the use of NOL carryforwards attributable to periods before change.
If the change occurred in late 1997, substantially all of the NOL
carryforwards would be subject to the limitation. The amount of the
annual limitation depends upon the value of the Company immediately
before the change, changes to the Company's capital during a
specified period prior to the change, and an interest rate which is
published monthly. Due to uncertainty as to the date of an ownership
change during 1997, the Company has not determined the amount of the
potential limitation.
10. CONTINGENCY
The Company is a defendant in Dr. Bonnie S. Dunbar v. E/J
Development Corporation, U-Tech Medical Corporation, Sheffield
Medical Technologies, Inc. and Douglas R. Eger, No. 97-28899, in the
District Court of Harris County, Texas (133rd Judicial District).
The plaintiff in this action asserts breach of contract, fraud and a
claim for quantum meruit relating principally to certain stock
options exercisable for a total of 40,000 shares of Common Stock
issued in 1992 and 1993 to the plaintiff in consideration of
consulting and research services provided to the Company. The
plaintiff served as the principal investigator at Baylor College of
Medicine in Houston, Texas on an ovarian cancer research project
that was funded for several years by the Company. The plaintiff
seeks actual damages against Sheffield and the other defendants,
including Douglas R. Eger, a former Chairman of the Company,
together with punitive damages, attorneys' fees, costs and expenses
of the lawsuit, and pre- and post-judgement interest. The Company
has denied the plaintiff's allegations and is vigorously contesting
this action. This action is currently in the discovery phase. The
Company and the plaintiff have engaged in settlement discussions,
but no agreement has been reached to date. The Company is currently
unable predict the likely outcome of this action. However, an
unfavorable decision could have a material adverse effect on the
business and financial condition of the Company.
F-17
<PAGE>
11. SUBSEQUENT EVENTS
On April 15, 1998, the Company entered into an option agreement with
Zambon Group SpA ("Zambon") of Milan, Italy for a sublicense to the
Company's proprietary MSI drug delivery system. Under this
contemplated transaction, Zambon will receive an exclusive
world-wide marketing and development sub-license for respiratory
products to be delivered by the MSI system including four drugs
currently under development by Sheffield. Sheffield will maintain
certain co-promotion rights in the U.S. for respiratory drugs as
well as the world-wide marketing and development rights for all
applications of the MSI delivery system outside the respiratory
therapeutic area. As part of this transaction, Zambon will agree to
fund all remaining development costs relating to these respiratory
products, will pay Sheffield an up-front fee in the form of an
equity investment as well as milestone payments upon marketing
approval for each of the four products and royalties upon
commercialization. In addition, Zambon will provide Sheffield with
an interest free line of credit upon the achievement of certain
early milestones. Sheffield is receiving a $650,000 option fee from
Zambon in the form of an equity investment. The consummation of the
sublicensing transaction with Zambon will be subject to the
negotiation by the parties of a definitive sublicensing agreement.
On April 15, 1998, the Company issued 1,250 shares of its Series B
Cummulative Convertible Redeemable Preferred Stock (the "Series B
Preferred Stock") in a private placement for an aggregate purchase
price of $1,250,000. Under the terms of this offering, the Company
must redeem the preferred stock at the time it concludes a
definitive sub-license agreement on the MSI or other financing.
On April 15, 1998, the Company made the DM 2.0 million payment to
Siemens, A.G. that was originally due in January 1998 under the
terms of the MSI license agreement. This payment was made with the
proceeds of the Series B Preferred Stock offering
For the period January 1, 1998 through April 15, 1998, a total of
4,075,797 shares of common stock were issued as a result of
conversion of Series A Preferred Stock. As of April 15, 1998, all of
the Series A Preferred Stock has been converted. For the period
January 1, 1998 through April 15, 1998, a total of 2,291,798 shares
of common stock were issued as a result of partial conversion and
interest payments made on the 6% subordinated convertible debenture.
As of April 15, 1998, $447,500 in principal remains to be repaid or
available for conversion.
Annex A
SHEFFIELD MEDICAL TECHNOLOGIES INC.
1993 STOCK OPTION PLAN
(as amended through June 26, 1997)
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. The Company intends that the
Plan meet the requirements of Rule 16b-3 and that transactions of the type
specified in subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and
directors of the Company pursuant to the Plan will be exempt from the operation
of Section 16(b) of the Exchange Act. Further, the Plan is intended to satisfy
the performance-based compensation exception to the limitation on the Company's
tax deductions imposed by Section 162(m) of the Code. In all cases, the terms,
provisions, conditions and limitations of the Plan shall be construed and
interpreted consistent with the Company's intent as stated in this Section 1.
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 Stock Option Committee composed
of two or more directors who are Non-Employee Directors and Outside
Directors and who shall be elected by and shall serve at the pleasure
of the Board and shall be responsible for administering the Plan in
accordance with paragraph (a) of Section 4 of the Plan.
(f) "EMPLOYEE" shall mean key employees, including salaried
officers and directors and other key individuals employed by the
Company. The payment of a
<PAGE>
director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(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) "NON-EMPLOYEE DIRECTOR" shall mean a non-employee director
as defined in Rule 16b-3.
(k) "NON-STATUTORY STOCK OPTION" shall mean an Option which is
not an Incentive Stock Option.
(l) "OPTION" shall mean a stock option granted under the Plan.
(m) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(n) "OPTIONEE" shall mean an Employee of the Company who has
been granted one or more Options.
(o) "OUTSIDE DIRECTOR" shall mean an outside director as
defined in Section 162(m) of the Code or the rules and regulations
promulgated thereunder.
(p) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 425(e) of the Code.
(q) "PLAN" shall mean this 1993 Stock Option Plan.
-2-
<PAGE>
(r) "SHARE" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
(s) "STOCK OPTION AGREEMENT" shall mean the written agreement
between the Company and the Optionee relating to the grant of an
Option.
(t) "SUBSIDIARY" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 425(f) of the
Code.
(u) "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 Three Million (3,000,000) 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. The maximum number of Shares that may be subject to
options granted under the Plan to any individual in any calendar year shall not
exceed 500,000 Shares and the method of counting such Shares shall conform to
any requirements applicable to performance-based compensation under Section
162(m) of the Code or the rules and regulations promulgated thereunder.
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
-3-
<PAGE>
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 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 including, without
limitation, the terms of exercise (including the period of
exercisability) or forfeiture of Options granted hereunder
upon termination of the employment of an Employee; (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.
(d) INABILITY OF COMMITTEE TO ACT. In the event that for any
reason the Committee is unable to act or if the Committee at
the time of any grant, award or other acquisition under the
Plan of options or Shares does not consist of two or more Non-
Employee Directors, then any such grant, award or other
acquisition may be approved or ratified in any other manner
contemplated by subparagraph (d) of Rule 16b-3.
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.
-4-
<PAGE>
(b) Unless otherwise provided in the applicable Stock Option
Agreement, 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).
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. If an option granted to the Company's chief executive
officer or to any of the Company's other four most highly compensated officers
is intended to qualify as "performance-based" compensation under Section 162(m)
of the Code, the exercise price of such option shall not be less than 100% of
the Fair Market Value of a Share on the date such option is granted.
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
-5-
<PAGE>
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
(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
-6-
<PAGE>
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 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. Unless otherwise
provided in the applicable Stock Option Agreement, 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, 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, for
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 or in the
applicable Stock Option Agreement, the Option shall terminate.
(c) DISABILITY. Unless otherwise provided in the applicable
Stock Option Agreement, notwithstanding the provisions of Section 9(b) above, in
the event an Employee is
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<PAGE>
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 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 or in the applicable Stock Option
Agreement, the Option shall terminate.
(d) DEATH. Unless otherwise provided in the Stock Option
Agreement, 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 or in the applicable Stock Option Agreement, 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 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.
-8-
<PAGE>
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;
(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.
-9-
<PAGE>
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.
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:
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<PAGE>
(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.
(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
-11-
<PAGE>
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-
SEVERANCE AGREEMENT
AGREEMENT made as of the 22nd day of December, 1997 by and between
Sheffield Pharmaceuticals, Inc., a Delaware corporation with its principal
offices at 425 South Woodsmill Road, St Louis, Missouri 63017-3441 (the
"Company"), and Douglas Eger residing at 4135 Ventura, Coconut Grove, Florida
33133 (the "Employee").
RECITALS
WHEREAS, the Company entered into an employment agreement dated as of
October 1, 1995 with the Employee relating to the employment of the Employee as
an executive officer of the Company, which employment (such employment
agreement, as it may have been amended, being the Employment Agreement"); and
WHEREAS, the Company and the Employee have agreed upon the terms of the
Employee's resignation as an officer and an employee of the Company and desire
to evidence such terms in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. RESIGNATION. The Employee hereby resigns as an officer of the
Company and as Chairman of the Board of Directors of the Company effective as of
the date hereof. The Employee hereby resigns as an employee of the Company and
its subsidiaries effective as of January 1, 1998.
2. SEVERANCE. The Company shall pay the Employee severance payments
totaling $135,000 payable in six equal installments of $22,500 commencing with
the first installment to be paid on January 31, 1998 and with each subsequent
installment to be paid monthly thereafter on the last day of each calendar
month. The Company shall deduct (and shall therefor not pay to the Employee)
$2,500 from each such installment, which deducted amounts shall be applied to
reduce outstanding amounts due to the Company under the promissory note of the
Employee dated April 4, 1997 issued to the Company in the original principal
amount of $80,000 (the "$80,000 Note"). The $2,500 deductions shall be applied
first to the reduction of outstanding principal and then to the reduction of
outstanding interest and any other amounts payable under the $80,000 Note.
Company and Employee acknowledge that $80,000.00 principal amount and $ 4,593.97
of accrued interest remain outstanding under the $80,000 Note on the date
hereof. In the event of the occurrence of a Change of Control, the remaining
balance of the $135,000 in severance payments shall become immediately due and
payable by the Company. As used in this paragraph, "Change of Control" means (i)
the sale, lease, exchange
<PAGE>
or other transfer of all or substantially all (50% or more) of the consolidated
assets of the Company to any person or entity or group of persons or entities
acting in concert as a partnership or other group (a "Group of Persons") or (ii)
the merger, consolidation or other business combination of the Company with or
into another corporation with the effect that the shareholders of the Company
immediately following the merger, consolidation or other business combination
hold 50% or less of the combined voting power of the then outstanding securities
of the surviving corporation of such merger, consolidation or other business
combination having the right to vote in the election of directors. The Employee
confirms that except as set forth in this Agreement, the Company has no
obligations to make any payments to the Employee of any nature.
3. NOTE SATISFACTION. (a) Employee agrees to tender and assign to the
Company a stock certificate representing 10,200 shares of the Company's common
stock within 10 days of the date hereof. Such certificate shall be freely
tradeable (without transfer restrictions). Such stock certificate shall be
delivered by Employee with stock powers executed in blank covering the shares
represented by such certificate. The delivery of such stock certificate by
Employee shall constitute the Employee's representation and warranty that the
shares of common stock represented by such certificate are owned by the Employee
free and clear of any liens or encumbrances. Upon the delivery of such stock
certificate, the Employee's obligations under the promissory note of the
Employee dated July 31, 1996 issued to the Company in the remaining principal
amount of $20,000 shall be deemed satisfied in full.
(b) In the event that the Company fails to pay any installment
of the severance payment when due under paragraph 2 above, the remaining amounts
of principal and interest payable under the Note will automatically be reduced
by 25% for each full ten (10) day period that such failure to timely pay
continues after such due date.
4. BOARD MEMBERSHIP. The Employee agrees not to seek election as a
director of the Company at the next annual meeting of the stockholders of the
Company. The Company acknowledges that the Employee is under no contractual
obligation to continue as a director of the Company and has the right to resign
as a director of the Company at any time.
5. SATISFACTION OF EMPLOYMENT AGREEMENT. The Employee acknowledges that
the Company has no further obligations to Employee under the Employment
Agreement.
6. AMENDMENT AND RESTATEMENT OF NOTE. Upon the execution of this
Agreement by the Employee and the delivery of the stock certificate representing
10,200 shares of the Company's common stock pursuant to paragraph 3 above, the
Company agrees to the
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<PAGE>
amendment and restatement of the $80,000 Note, effective as of the date hereof,
to provide (a) for the payment of the outstanding principal amount thereof
(after the deductions from the severance payments pursuant to paragraph 2 above)
in six equal installments on the last day of each March, June, September and
December commencing September 30, 1998, together with accrued interest, with any
remaining outstanding principal and accrued interest on the $80,000 Note
becoming due and payable on December 31, 1999 (b) for default interest upon the
failure to timely repay any amount payable by the Employee under the amended and
restated $80,000 Note at an interest rate of 15% per annum and (c) prepayment of
the $80,000 Note without prepayment penalty or premium. Except as provided in
the preceding sentence, the $80,000 Note will remain unchanged. The Company
agrees to promptly prepare and deliver to the Employee for his execution amended
and restated $80,000 Note reflecting the above-mentioned amendments and the
Employee agrees to promptly execute and return to the Company such amended and
restated $80,000 Note.
7. PLEDGE OF STOCK. Within 15 days of the date hereof, Employee will
transfer 30,000 shares of freely tradeable (without transfer restrictions)
common stock of the Company to an account with Merrill Lynch. At the time of
such transfer, such shares shall be owned by the Employee free and clear of any
liens or encumbrances. The Employee will execute a letter in the form attached
hereto as Exhibit A, will cause an authorized representative of Merrill Lynch to
execute such letter and shall deliver such letter (executed by the Employee and
by an authorized officer on behalf of Merrill Lynch) within 15 days of the date
hereof.
8. CONFIDENTIALITY. (a) The Employee agrees to hold in a fiduciary
capacity for the benefit of the Company and its subsidiaries all information
developed or originated by the Company (or by the Employee on behalf of the
Company) concerning the Company that is confidential or proprietary, including
without limitation, financial, technology development and other business
information, contracts, trade secrets and patent and trademark information
("Confidential Information"), and he shall not, at any time during the two year
period following the date of this Agreement, use, disclose or divulge any
Confidential Information to any person, firm, corporation or other entity other
than to the Company and its subsidiaries or their respective designees.
(b) Notwithstanding anything to the contrary
contained herein, the Employee's obligations under paragraph 8(a) hereof shall
not apply to any information which:
(i) is or becomes available to the public other than as a
result of wrongful disclosure by the Employee;
-3-
<PAGE>
(ii) becomes available to the Employee subsequent to his
employment by the Company on a nonconfidential basis from a source
other than the Company or its agents which source has a right to
disclose such information; or
(iii) results from research and development and/or commercial
operations at any time by or on behalf of any person, company or other
entity with which or with whom the Employee shall become associated (in
a manner consistent with the terms of this Agreement) subsequent to his
employment by the Company or its agents totally independent from any
disclosure from the Company or its agents.
(c) Notwithstanding anything to the contrary
contained in this paragraph 8, in the event that the Employee becomes legally
compelled to disclose any Confidential Information, the Employee will provide
the Company with prompt notice so that the Company may seek a protective order
or other appropriate remedy. In the event that such protective order or other
remedy is not obtained, the Employee shall furnish only such Confidential
Information which is legally required to be disclosed.
9. INDEMNITY. The Company agrees to indemnify the Employee in the event
that he is a party or is threatened to be made a party to any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that the Employee was an
officer or director of the Company against all out-of-pocket expenses (including
reasonable attorney's fees and disbursements), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the Employee in connection
with the action or proceeding, PROVIDED that his actions did not involve willful
misconduct or gross negligence. The Employee shall not settle any action or
proceeding subject to indemnification under this paragraph 9 without the prior
written consent of the Company, which consent shall not be unreasonably
withheld.
10. RELEASES. (a) The Employee hereby releases and discharges the
Company and all of its directors, officers, employees, agents, subsidiaries and
affiliates and its successors and assigns from any and all claims, actions,
suits, debts, accounts, contracts, agreements, damages, judgments and demands
whatsoever, in law or equity, that the Employee ever had, now has or hereafter
can, shall or may, have for, upon, or by reason of any matter, cause or thing
whatsoever from the beginning of the world to the date of this Agreement.
Notwithstanding the foregoing, this release shall not apply to any rights that
the Employee has under this Agreement. This release is irrevocable and may not
be changed orally.
(b) The Company hereby releases and discharges the Employee
and his successors and assigns from any and all claims,
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<PAGE>
actions, suits, debts, accounts, contracts, agreements, damages, judgments and
demands whatsoever, in law or equity, that the Company ever had, now has or
hereafter can, shall or may, have for, upon, or by reason of any matter, cause
or thing whatsoever from the beginning of the world to the date of this
Agreement. Notwithstanding the foregoing, this release shall not apply to (i)
any rights that the Company has under (i) this Agreement, (ii) the $80,000 Note
and (iii) the Pledge Agreement dated April 4, 1997 made by the Employee to the
Company. This release is irrevocable and may not be changed orally.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
12. MISCELLANEOUS. (a) The Company confirms that there are currently
outstanding stock options evidenced by written agreements that provide the
Employee with the right to acquire 500,000 shares of the Company's common stock,
which agreements provide for a term of exercise of such options ending in 2002.
(b) The Employee confirms that he has consulted with his own
attorney regarding his rights and obligations under this Agreement prior to
executing this Agreement.
(c) If any provision of this Agreement is determined to be
invalid, illegal or unenforceable by any court of competent jurisdiction, the
remaining provisions of this Agreement shall remain in full force and effect
provided that the economic and legal substance of the transactions contemplated
is not affected in any manner adverse to any party.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
SHEFFIELD PHARMACEUTICALS, INC.
By:
----------------------------
Loren G. Peterson, CEO
----------------------------
DOUGLAS R. EGER
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<PAGE>
Exhibit A to Severance
Agreement
SHEFFIELD PHARMACEUTICALS,INC.
425 WOODSMILL ROAD, SUITE 270
ST. LOUIS, MISSOURI 63017-3441
(314) 579-9899
[Date]
[MERRILL LYNCH]
[Address]
Attention: __________
You are hereby advised that Douglas R. Eger ("Eger") has
granted Sheffield Pharmaceuticals, Inc. ("Sheffield") a first priority security
interest in 30,000 shares of common stock, par value $.01 per share, of
Sheffield ("Common Stock") held in his name in account no. ______________ (the
"Eger Account") at [Merrill Lynch] ("Merrill Lynch") as security for a loan made
by Sheffield to Eger.
By signing below, (i) you acknowledge that Merrill Lynch is a
licensed broker-dealer and that Merrill Lynch holds at least ___________ shares
of Common Stock in the Eger Account and that such shares are not, to your
knowledge, subject to any lien or security interest (other than the security
interest granted to Sheffield), (ii) you agree to evidence Sheffield's security
interest in such 30,000 shares of Common Stock by appropriate notation in your
books and records (iii) you agree not to sell or otherwise transfer such shares
without prior written approval of Sheffield and (iv) you agree to transfer such
shares upon receipt of written instructions of Sheffield in connection with
Sheffield's enforcement of its security interest, which instructions shall state
that Sheffield is exercising its rights in connection with a default by Eger in
his obligation to repay certain indebtedness owed to Sheffield.
Very truly yours,
SHEFFIELD PHARMACEUTICALS, INC.
By:
-----------------------------------
Judy Roeske Bullock
Vice President and CFO
ACKNOWLEDGED AND AGREED:
--------------------------------------
Douglas R. Eger
ACKNOWLEDGED AND AGREED:
[MERRILL LYNCH]
- -------------------------------
Name:
Title:
AMENDED EMPLOYMENT AGREEMENT
AGREEMENT made as of the 15th day of October, 1997 by and between
Sheffield Pharmaceuticals, Inc., a Delaware corporation with its principal
offices at 425 South Woodsmill Road, St Louis, Missouri 63017-3441 (the
"Company"), and George Lombardi residing at 106 Byrd Avenue, Bloomfield, New
Jersey 07003 (the "Employee").
RECITALS
WHEREAS, the Company entered into an employment agreement dated as of
September 7, 1995 with the Employee relating to the employment of the Employee
as Vice President and Chief Financial Officer of the Company, which employment
agreement was amended by amendment dated September 22, 1996 (such employment
agreement, as so amended, being the Employment Agreement"); and
WHEREAS, the Company and the Employee have agreed upon the terms of the
Employee's resignation as an officer and an employee of the Company and desire
to evidence such terms in this Agreement Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree that the terms of the
Employment Agreement are hereby supplemented as follows:
1. RESIGNATION. The Employee agrees to resign as an officer of the
Company and its subsidiaries upon the request of the Chairman or the Chief
Executive Officer of the Company (the "CEO") (which request shall not be made
before October 31, 1997). The Company agrees to enter into amended and restated
option agreement on October 15, 1997 amending the option letter agreement dated
September 7, 1995 between the Company and the Employee (relating to the grant of
an option to purchase 100,000 shares of the Company's common stock) providing
for an extension of the expiration date of such option to March 31, 2002.
2. SEVERANCE. The Company shall pay the Employee severance payments
totaling $65,000 in six equal installments of $10,833.33 commencing with the
first installment to be paid on November 15, 1997 and with each subsequent
installment to be paid bi-monthly thereafter on the dates when the Company's
regular payroll payments are paid. Such severance payments become payable by the
Company upon Employee's resignation as an officer of the Company and its
subsidiaries on or after October 31, 1997. The severance payable to the Employee
under this paragraph shall be in lieu of any severance payment otherwise payable
under Section 11(b) of the Employment Agreement).
<PAGE>
3. EMPLOYMENT AFTER RESIGNATION. (a) The Employee agrees to continue to
serve as an employee of the Company until November 15, 1997 devoting his full
working day to Company matters assigned to him by the CEO or the Company's new
Chief Financial Officer (the "New CFO"). It is understood that the Employee's
principal duties during this period shall be to (i) prepare the Company's report
on Form 10-Q for the quarter ended September 30, 1997 under the supervision of
the New CFO and (ii) familiarize the New CFO with the Company's financial
reporting and accounting practices and the Company's files. Subject to the
following sentence, the Employee shall perform his duties either from an office
in New York City provided to the Employee by the Company or from his home in New
Jersey, as determined by the CEO. It is understood that the Employee may be
required to travel to the Company's offices in St.
Louis, Missouri, to perform his duties hereunder.
(b) The Employee agrees to resign as an employee of the Company on
November 15, 1997. The Employee agrees to serve as a consultant to the Company
from November 15, 1997 to and including December 31, 1997. The Employee agrees
to devote up to 2/3 of his working day to Company matters assigned to him by the
CEO or the CFO during this period.
4. COMPENSATION. (a) As compensation for his services to be provided to
the Company pursuant to Section 3(a) above, the Company shall, on November 15,
1997, forgive $12,800 of the principal amount payable to the Company by the
Employee under the Amended and Restated $42,800 Promissory Note of the Employee
payable to the Company dated July 31, 1997 (the "Note").
(b) As compensation for his consulting services to be provided to the
Company pursuant to Section 2(b) above, on December 31, 1997, the Company shall
forgive an additional $10,000 of the principal amount of the Note and shall
agree to an amendment and restatement of the Note to provide for (i) the
principal reductions referred to in this Section 3, (ii) the repayment of the
principal amount of the Note in installments of $2,500 each, plus accrued and
unpaid interest, on a quarterly basis commencing December 31, 1997, with the
final installment being due September 30, 1999, and (iii) a mandatory prepayment
of the Note in the event that the Employee sells any of the Company's common
stock held by him on the date hereof.
(c) The compensation payable to the Employee under this paragraph shall
constitute the only compensation payable under the Employment Agreement in
respect of services to be provided by the Employee after October 15, 1997 and
shall be payable in lieu of any other compensation (including any severance
payment otherwise payable under Section 11(b) of the Employment Agreement) that
would otherwise be payable by the Company pursuant to the Employment Agreement
after such date.
-2-
<PAGE>
5. BENEFITS. The Employee shall continue to receive all benefits under
Section 5 of the Employment Agreement (but only to the extent the Employee is
receiving such benefits as of the date hereof) through November 15, 1997, at
which time all such benefits shall terminate except as provided in this Section.
The Company shall continue to maintain Employee's benefits under the Company's
existing health and medical plans and pay the related insurance premiums
currently paid by the Company for the Employee's coverage through January 31,
1998. Thereafter, the Employee shall have the option to continue such health
insurance coverage at his own expense under applicable "COBRA" regulations.
6. RELEASE. The Employee hereby releases and discharges the Company and
all of its directors, officers, employees, agents, subsidiaries and affiliates
and its successors and assigns from any and all claims, actions, suits, debts,
accounts, contracts, agreements, damages, judgments and demands whatsoever, in
law or equity, that the Employee ever had, now has or hereafter can, shall or
may, have for, upon, or by reason of any matter, cause or thing whatsoever from
the beginning of the world to the date of this Agreement. Notwithstanding the
foregoing, this release shall not apply to any rights that the Employee has
under this Agreement Amendment. This release is irrevocable and may not be
changed orally.
7. MISCELLANEOUS. The Company shall provide the Employee with a fax
machine to be used at the Employee's home. The Company shall permit Employee to
retain ownership of such fax machine after his resignation in accordance with
Section 2(a) above. This Agreement Amendment shall constitute a supplement and
amendment to the Employment Agreement. To the extent that the Employment
Agreement and this Agreement Amendment shall conflict in any respect, the terms
of this Agreement Amendment shall be deemed the governing terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
Amendment to be duly executed as of the day and year first above written.
SHEFFIELD PHARMACEUTICALS, INC.
By:
--------------------------------
Loren G. Peterson, CEO
--------------------------------
George Lombardi
-3-
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 17th day of November, 1997, by and
between Sheffield Pharmaceuticals, Inc., a Delaware corporation with its
principal offices at 425 South Woodsmill Road, Suite 270, St. Louis, Missouri
63017-3441 (the "Corporation"), and Judy Roeske Bullock, who currently resides
at 3850 35th Avenue Court, Moline, Illinois 61265 ("Executive").
W I T N E S S E T H :
WHEREAS, the Corporation desires to employ and retain
Executive as its Vice President - Finance and Administration, Chief Financial
Officer and Secretary, upon the terms and subject to the conditions of this
Agreement; and
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT OF EXECUTIVE. The Corporation hereby employs
Executive as its Vice President - Finance and Administration, Chief Financial
Officer and Secretary, to perform the duties and responsibilities traditionally
incident to such office, subject at all times to the control and direction of
the Board of Directors of the Corporation.
2. ACCEPTANCE OF EMPLOYMENT; OFFICES; TIME AND ATTENTION, ETC.
(a) Executive hereby accepts such employment and agrees that throughout the
period of her employment hereunder, except as hereinafter provided, she will
devote her full business and professional time in utilizing her business and
professional expertise, with proper attention, knowledge and skills faithfully,
diligently and to the best of her ability in furtherance of the business of the
Corporation and its subsidiaries and will perform the duties assigned to her
pursuant to Paragraph 1 hereof. As Vice President - Finance and Administration,
Chief Financial Officer and Secretary, Executive shall also perform such
specific duties and shall exercise such specific authority related to the
management of the day-to-day operations of the Corporation and its subsidiaries
as may be reasonably assigned to Executive from time to time by the Board of
Directors of the Corporation.
(b) Executive shall at all times be subject to, observe and
carry out such rules, regulations, policies, directions and restrictions as the
Board of Directors of the Corporation shall from time to time establish. During
the period of her employment hereunder, Executive shall not, directly or
indirectly, accept employment or compensation from, or perform services of any
nature for, any business enterprise other than the Corporation and its
subsidiaries. Notwithstanding the foregoing in this Paragraph 2, Executive shall
not be precluded from (i) engaging in recreational, eleemosynary, educational
and other activities, which activities do not materially interfere with her
duties hereunder and shall occur during vacations, holidays and other periods
outside of business
<PAGE>
hours or (ii) serving as an independent director on the board of directors of up
to three for-profit corporations, PROVIDED, HOWEVER, that Executive's election
or appointment as a director to any such board of directors shall be subject to
the prior written approval of the Chief Executive Officer of the Corporation and
shall not materially interfere with her duties hereunder.
3. TERM. Except as otherwise provided herein, the term of
Executive's employment hereunder shall commence on the date hereof and shall
continue to and including November 17, 2000. Unless terminated earlier in
accordance with the terms hereof, this Agreement shall automatically be extended
for one or more additional consecutive one year terms unless either party
notifies the other party in writing at least 90 days before the end of the then
current term (including the initial term) of its or her desire to terminate this
Agreement. The last day of the term of this Agreement pursuant to this Paragraph
3 (including any early termination pursuant to the terms hereof) is referred to
herein as the "Termination Date."
4. COMPENSATION. (a) As compensation for her services
hereunder, the Corporation shall pay to Executive (i) a base annual salary at
the rate of $150,000, payable in equal installments in accordance with the
normal payroll practices of the Corporation but in no event less frequently than
semi-monthly, and (ii) such incentive compensation and bonuses, if any, as the
Board of Directors of the Corporation in its absolute discretion may determine
to award Executive (it being understood that this Agreement shall in no event be
construed to require the payment to Executive of any incentive compensation or
bonuses). All compensation paid to Executive shall be subject to withholding and
other employment taxes imposed by applicable law.
(b) During the period of Executive's employment hereunder,
Executive shall not be entitled to any additional compensation for rendering
employment services to subsidiaries of the Corporation or for serving in any
office of the Corporation or any of its subsidiaries to which she is elected or
appointed.
5. STOCK OPTIONS. As additional compensation for her services
hereunder, the Corporation shall grant to Executive an option under the
Corporation's 1993 Stock Option Plan (the "Plan") to acquire a total of 130,000
shares of the Corporation's common stock at an exercise price per share equal to
the closing sale price of the Corporation's common stock as reported by the
American Stock Exchange on the date hereof, with the terms of such option to be
evidenced by an option letter agreement in the form annexed as Exhibit "A"
hereto.
6. ADDITIONAL BENEFITS; VACATION. (a) In addition to such base
salary, Executive shall receive and be entitled to participate, to the extent
she is eligible under the terms and conditions thereof, in any profit sharing,
pension, retirement, hospitalization, disability, medical service, insurance or
other
-2-
<PAGE>
employee benefit plan generally available to the executive officers of the
Corporation that may be in effect from time to time during the period of
Executive's employment hereunder. The Corporation agrees to cover Executive
under any directors' and officers' liability policy maintained by the
Corporation.
(b) Executive shall be paid a one-time relocation allowance
equal to 15% of her base annual salary ($22,500).
(c) Executive shall be entitled to four (4) weeks' paid
vacation in respect of each 12-month period during the term of her employment
hereunder, such vacation to be taken at times mutually agreeable to Executive
and the Board of Directors of the Corporation.
(d) Executive shall be entitled to recognize as holidays all
days recognized as such by the Corporation.
7. REIMBURSEMENT OF EXPENSES. The Corporation shall reimburse
Executive in accordance with applicable policies of the Corporation for all
expenses reasonably incurred by her in connection with the performance of her
duties hereunder and the business of the Corporation, upon the submission to the
Corporation of appropriate receipts or vouchers.
8. RESTRICTIVE COVENANT. (a) In consideration of the
Corporation's entering into this Agreement, Executive agrees that during the
period of her employment hereunder and, in the event of termination of this
Agreement (i) by the Corporation upon Executive becoming Disabled (as that term
is defined in Paragraph 13 hereof), (ii) by the Corporation for Cause (as that
term is defined in Paragraph 14 hereof) or (iii) by Executive otherwise than for
Employer Breach (as that term is defined in Paragraph 15 hereof), for a further
period of six months thereafter, she will not (x) directly or indirectly own,
manage, operate, join, control, participate in, invest in, whether as an
officer, director, employee, partner, investor or otherwise, any business entity
that is engaged in a directly competitive business (as hereinafter defined) to
that of the Corporation or any of its subsidiaries within the United States of
America, (y) for herself or on behalf of any other person, partnership,
corporation or entity, call on any customer of the Corporation or any of its
subsidiaries for the purpose of soliciting away, diverting or taking away any
customer from the Corporation or its subsidiaries, or (z) solicit any person
then engaged as an employee, representative, agent, independent contractor or
otherwise by the Corporation or any of its subsidiaries, to terminate her or her
relationship with the Corporation or any of its subsidiaries. For purposes of
this Agreement, the term "directly competitive business" shall mean any business
that is then involved in the research, development, manufacturing or
commercialization in any way of any product, compound, device or method that is
or becomes a part of the Corporation's business or the business of any of its
subsidiaries during Executive's employment by the Corporation or any of its
subsidiaries. Nothing contained in this Agreement shall be deemed
-3-
<PAGE>
to prohibit Executive from investing her funds in securities of an issuer if the
securities of such issuer are listed for trading on a national securities
exchange or are traded in the over-the-counter market and Executive's holdings
therein represent less than 10% of the total number of shares or principal
amount of the securities of such issuer outstanding.
(b) Executive acknowledges that the provisions of this
Paragraph 8 are reasonable and necessary for the protection of the Corporation,
and that each provision, and the period or periods of time, geographic areas and
types and scope of restrictions on the activities specified herein are, and are
intended to be, divisible. In the event that any provision of this Paragraph 8,
including any sentence, clause or part hereof, shall be deemed contrary to law
or invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect.
9. CONFIDENTIAL INFORMATION.
(a) Executive shall hold in a fiduciary capacity for the
benefit of the Corporation and its subsidiaries all confidential information,
knowledge and data relating to or concerned with its operations, sales, business
and affairs, and she shall not, at any time during her employment hereunder and
for two years thereafter, use, disclose or divulge any such information,
knowledge or data to any person, firm or corporation other than to the
Corporation and its subsidiaries or their respective designees or except as may
otherwise be reasonably required or desirable in connection with the business
and affairs of the Corporation and its subsidiaries.
(b) Notwithstanding anything to the contrary contained herein,
Executive's obligations under Paragraph 9(a) hereof shall not apply to any
information which:
(i) becomes rightfully known to Executive subsequent or prior
to her employment by the Corporation;
(ii) is or becomes available to the public other than as a
result of wrongful disclosure by Executive;
(iii) becomes available to Executive subsequent to her
employment by the Corporation on a nonconfidential basis from a source
other than the Corporation or its agents which source has a right to
disclose such information; or
(iv) results from research and development and/or commercial
operations at any time by or on behalf of any person, company or other
entity with which or with whom Executive shall become associated (in a
manner consistent with the terms of this Agreement) subsequent to her
employment by the Corporation or its agents totally independent from
any disclosure from the Corporation or its agents.
-4-
<PAGE>
(c) Notwithstanding anything to the contrary contained herein,
in the event that Executive becomes legally compelled to disclose any
confidential information, Executive will provide the Corporation with prompt
notice so that the Corporation may seek a protective order or other appropriate
remedy. In the event that such protective order or other remedy is not obtained,
Executive shall furnish only such confidential information which is legally
required to be disclosed.
10. INTELLECTUAL PROPERTY. Any idea, invention, design,
written material, manual, system, procedure, improvement, development or
discovery conceived, developed, created or made by Executive alone or with
others, during the period of her employment hereunder and applicable to the
business of the Corporation or any of its subsidiaries, whether or not
patentable or registrable, shall become the sole and exclusive property of the
Corporation or such subsidiary. Executive shall disclose the same promptly and
completely to the Corporation and shall, during the period of her employment
hereunder and at any time and from time to time hereafter at no cost to
Executive (i) execute all documents reasonably requested by the Corporation for
vesting in the Corporation or any of its subsidiaries the entire right, title
and interest in and to the same, (ii) execute all documents reasonably requested
by the Corporation for filing and prosecuting such applications for patents,
trademarks, service marks and/or copyrights as the Corporation, in its sole
discretion, may desire to prosecute, and (iii) give the Corporation all
assistance it reasonably requires, including the giving of testimony in any
suit, action or proceeding, in order to obtain, maintain and protect the
Corporation's right therein and thereto.
11. EQUITABLE RELIEF. The parties hereto acknowledge that
Executive's services are unique and that, in the event of a breach or a
threatened breach by Executive of any of her obligations under Paragraphs 8, 9
or 10 this Agreement, the Corporation shall not have an adequate remedy at law.
Accordingly, in the event of any such breach or threatened breach by Executive,
the Corporation shall be entitled to such equitable and injunctive relief as may
be available to restrain Executive and any business, firm, partnership,
individual, corporation or entity participating in such breach or threatened
breach from the violation of the provisions of Paragraph 8, 9 or 10 hereof.
Nothing herein shall be construed as prohibiting the Corporation from pursuing
any other remedies available at law or in equity for such breach or threatened
breach, including the recovery of damages and the immediate termination of the
employment of Executive hereunder, if and to the extent permitted hereunder.
12. TERMINATION OF AGREEMENT; TERMINATION OF EMPLOYMENT;
SEVERANCE; SURVIVAL. (a) This Agreement and Executive's employment hereunder
shall terminate upon the first to occur of the following: (i) Executive becoming
Disabled (as that term is defined in Paragraph 13 hereof); (ii) Executive's
death; (iii) termination of Executive's employment by the Corporation for Cause
or pursuant to subparagraph (b) of this Paragraph 12; (iv) termination of
-5-
<PAGE>
Executive's employment for Employer Breach and (v) the termination of this
Agreement at the end of the term of this Agreement on the Termination Date
pursuant to Paragraph 3.
(b) Notwithstanding anything to the contrary contained in this
Agreement, in the event of the termination of the Executive's employment by the
Corporation for any reason (other than for Cause), Executive shall be paid a
severance payment equal to 50% of Executive's then current annual base salary
payable in six equal monthly installments, 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 month after such date until such
severance is paid in full. In the event of such termination of the Executive's
employment by the Corporation (other than for Cause), the Corporation shall have
no further obligation to the Executive under this Agreement other than the
Corporation's obligation (i) to make such severance payment to the Executive
(ii) to pay Executive's COBRA premium payments for hospitalization and medical
insurance coverage provided by the Corporation and to pay Executive's premiums
on any death and/or disability insurance being maintained by the Corporation for
Executive at the time of such termination, in each case until the payment in
full of such severance payments.
(c) Paragraphs 7, 8, 9, 10, 11, 12 and 26 of this Agreement
shall survive the termination of Executive's employment hereunder, except in the
case of termination pursuant to Paragraph 15.
13. DISABILITY. In the event that during the term of her
employment by the Corporation Executive shall become Disabled (as that term is
hereinafter defined) she shall continue to receive the full amount of the base
salary to which she was theretofore entitled for a period of six months after
she shall be deemed to have become Disabled (the "First Disability Payment
Period"). If the First Disability Payment Period shall end prior to the
Termination Date, Executive thereafter shall be entitled to receive salary at an
annual rate equal to 80% of her then current base salary for a further period
ending on the earlier of (i) six months thereafter or (ii) the Termination Date
(the "Second Disability Payment Period"). Upon the expiration of the Second
Disability Payment Period, Executive shall not be entitled to receive any
further payments on account of her base salary until she shall cease to be
Disabled and shall have resumed her duties hereunder and provided that the
Corporation shall not have theretofore terminated this Agreement as hereinafter
provided. The Corporation may terminate Executive's employment hereunder at any
time after Executive is Disabled, upon at least 10 days' prior written notice;
PROVIDED, HOWEVER, that such termination shall not relieve the Corporation from
its obligation to make the payments to Executive described above in this
Paragraph 13. For the purposes of this Agreement, Executive shall be deemed to
have become Disabled when (x) by reason of physical or mental incapacity,
Executive is not able to perform her duties hereunder for a period of 90
consecutive days or for 120 days in any consecutive 180-day period and (y)
-6-
<PAGE>
Executive's physician or a physician designated by the Corporation shall have
determined that it is unlikely that Executive will be able, by reason of
physical or mental incapacity, to perform a substantial portion of her duties
hereunder for the following 120 days. In the event that Executive shall dispute
any determination of her disability pursuant to clauses (x) or (y) above, the
matter shall be resolved by the determination of three physicians qualified to
practice medicine in the United States of America, one to be selected by each of
the Corporation and Executive and the third to be selected by the designated
physicians. If Executive shall receive benefits under any disability policy
maintained by the Corporation, the Corporation shall be entitled to deduct the
amount equal to the benefits so received from base salary that it otherwise
would have been required to pay to Executive as provided above.
14. TERMINATION FOR CAUSE. The Corporation may at any time
upon written notice to Executive terminate Executive's employment for Cause. For
purposes of this Agreement, the following shall constitute Cause: (i) the
willful and repeated failure of Executive to perform any material duties
hereunder or gross negligence of Executive in the performance of such duties,
and if such failure or gross negligence is susceptible to cure by Executive, the
failure to effect such cure within twenty (20) days after written notice of such
failure or gross negligence is given to Executive; (ii) except as permitted
hereunder, unexplained, willful and regular absences of Executive from the
Corporation; (iii) excessive use of alcohol or illegal drugs, interfering with
the performance of Executives duties hereunder; (iv) indictment for a crime of
theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty
or the violation of any law or ethical rule relating to Executive's employment;
(v) indicted for any other felony or other crime involving moral turpitude by
Executive; or (vi) the breach by Executive of any of the provisions of
paragraphs 8, 9 or 10 and if such breach is susceptible of cure by Executive,
the failure to effect such cure within twenty (20) days after written notice of
such breach is given to Executive. For purposes of this Agreement, an action
shall be considered "willful" if it is done intentionally, purposely or
knowingly, distinguished from an act done carelessly, thoughtlessly or
inadvertently. In any such event, Executive shall be entitled to receive her
base salary to and including the date of termination.
15. TERMINATION FOR EMPLOYER BREACH. Executive may upon
written notice to the Corporation terminate this Agreement (including paragraphs
8, 9, 10 and 11) in the event of the breach by the Corporation of any material
provision of this Agreement, and if such breach is susceptible of cure, the
failure to effect such cure within 20 days after written notice of such breach
is given to the Corporation (an "Employer Breach"). Executive's right to
terminate this Agreement under this Paragraph 15 shall be in addition to any
other remedies Executive may have under law or equity. Paragraphs 7 and 12(b) of
this Agreement shall survive the termination of this Agreement by Executive
pursuant to this Paragraph 15.
-7-
<PAGE>
16. INSURANCE POLICIES. The Corporation shall have the right
from time to time to purchase, increase, modify or terminate insurance policies
on the life of Executive for the benefit of the Corporation, in such amounts as
the Corporation shall determine in its sole discretion. In connection therewith,
Executive shall, at such time or times and at such place or places as the
Corporation may reasonably direct, submit herself to such physical examinations
and execute and deliver such documents as the Corporation may reasonably deem
necessary or desirable; PROVIDED that such examinations shall be performed by,
and that such documents shall be delivered only to, qualified physicians and/or
medical representatives of licensed insurance companies. At Executive's written
request upon the termination of Executive's employment under this Agreement
(other than for Cause or as result of Executive's death), the Corporation shall
assign to Executive the Corporation's interest in such life insurance policies
(to the extent such policies are so assignable by their terms), whereupon
Executive shall assume all obligations of the Corporation in respect thereof.
17. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes
the entire agreement of the parties hereto, and any prior agreement between the
Corporation and Executive is hereby superseded and terminated effective
immediately and shall be without further force or effect. No amendment or
modification herself shall be valid or binding unless made in writing and signed
by the party against whom enforcement thereof is sought.
18. NOTICES. Any notice required, permitted or desired to be
given pursuant to any of the provisions of this Agreement shall be delivered in
person or sent by responsible overnight delivery service or sent by certified
mail, return receipt requested, postage and fees prepaid, if to the Corporation,
at its address set forth above to the attention of the Corporation's Chief
Executive Officer and, if to Executive, at her address set forth above. Either
of the parties hereto may at any time and from time to time change the address
to which notice shall be sent hereunder by notice to the other party given under
this Paragraph 18. Notices shall be deemed effective upon receipt.
19. NO ASSIGNMENT; BINDING EFFECT. Neither this Agreement, nor
the right to receive any payments hereunder, may be assigned by either party
without the other party's prior written consent. This Agreement shall be binding
upon Executive, her heirs, executors and administrators and upon the
Corporation, its successors and assigns.
20. WAIVERS. No course of dealing nor any delay on the part of
either party in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
-8-
<PAGE>
21. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, except that body
of law relating to choice of laws.
22. INVALIDITY. If any clause, paragraph, section or part of
this Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.
23. FURTHER ASSURANCES. Each of the parties shall execute such
documents and take such other actions as may be reasonably requested by the
other party to carry out the provisions and purposes of this Agreement in
accordance with its terms.
24. HEADINGS. The headings contained in this Agreement have
been inserted for convenience only and shall not affect in any way the meaning
or interpretation of this Agreement.
25. PUBLICITY. The Corporation and Executive agree that they
will not make any press releases or other announcements prior to or at the time
of execution of this Agreement with respect to the terms contemplated hereby,
except as required by applicable law, without the prior approval of the other
party, which approval will not be unreasonably withheld.
26. ARBITRATION. Any disputes arising under this Agreement
shall be submitted to and determined by arbitration in St. Louis, Missouri. Such
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. Any award or decision of the arbitration shall be
conclusive in the absence of fraud and judgment thereon may be entered in any
court having jurisdiction thereof. The costs of such arbitration shall be paid
by the non-prevailing party to the extent directed by the arbitrator(s).
THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY
THE PARTIES.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
SHEFFIELD PHARMACEUTICALS, INC.
By:
-------------------------------
Loren G. Peterson
Chief Executive Officer
-----------------------------------
Judy Roeske Bullock
-10-
EXHIBIT 21
SUBSIDIARIES OF SHEFFIELD PHARMACEUTICALS, INC.
1. Ion Pharmaceuticals, Inc., a Delaware corporation.
2. CP Pharmaceuticals, Inc., a Delaware corporation.
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-95732, Form S-3 No. 333-27753 and Form S-3 No. 333-38327) of
Sheffield Pharmaceuticals, Inc. and in the related Prospectuses, in the
Registration Statement (Form S-8 No. 33-95262) pertaining to the 1993 Stock
Option Plan of Sheffield Pharmaceuticals, Inc., the 1993 Restricted Stock Plan
of Sheffield Pharmaceuticals, Inc. and options granted to directors, officers,
employees, consultants and advisors of the Company pursuant to other employee
benefit plans of Sheffield Pharmaceuticals, Inc. and in the Registration
Statement (Form S-8 No. 333-14867) pertaining to the 1993 Stock Option Plan of
Sheffield Pharmaceuticals, Inc., the 1996 Directors Stock Option Plan of
Sheffield Pharmaceuticals, Inc. and Options granted to directors, officers,
employees, consultants and advisors of the Company pursuant to other employee
benefit plans of Sheffield Pharmaceuticals, Inc. of our report dated February
13, 1998, except for Note 11 as to which the date is April 15, 1998, with
respect to the consolidated financial statements of Sheffield Pharmaceuticals,
Inc. and subsidiaries included in this Annual Report (Form 10-K) for the year
ended December 31, 1997.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Princeton, New Jersey
April 15, 1998
Exhibit 23.2
The Board of Directors
Sheffield Pharmaceuticals, Inc.
We consent to incorporation by reference in the Registration Statements (Form
S-3 No. 33-95732, Form S-8 No. 33-95262, Form S-8 No. 333-14867 and Form S-3 No.
333-38327) of Sheffield Pharmaceuticals, Inc. of our report dated February 11,
1994, relating to the consolidated financial statements of Sheffield Medical
Technologies Inc. and subsidiary included in the Annual Report (Form 10-K) for
the year ended December 31, 1997.
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
April 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 393,608
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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0
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