SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No.1)
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 __________
Commission file number 1-12584
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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
(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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<PAGE>
/ / 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.
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<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
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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 (4,716,751) 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.
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<PAGE>
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their positions
with the Company are set forth below.
NAME AGE POSITION
- ---- --- --------
Thomas M. Fitzgerald 47 Chairman
Loren G. Peterson 41 President and Chief Executive Officer
Douglas R. Eger 36 Director
John M. Bailey 50 Director
Digby W. Barrios 60 Director
David A. Byron 49 Executive Vice President - Scientific Affairs
Carl. F. Siekmann 54 Executive Vice President - Corporate Development
Judy Roeske Bullock 40 Chief Financial Officer, Vice President, Treasurer
and Secretary
THOMAS M. FITZGERALD. Mr. Fitzgerald has been a Director of the Company
since September, 1996 and has served as Chairman of the Company since December
1997. From June 1996 to December 1997, Mr. Fitzgerald served as Chief Operating
Officer of the Company and, from February 1997 to December 1997, he served as
President of the Company. From 1989 to 1996 Mr. Fitzgerald was the Vice
President and General Counsel of Fisons Corporation, an operating unit of Fisons
Group plc, a U.K.-based ethical pharmaceutical company ("Fisons"). Mr.
Fitzgerald was Assistant General Counsel of SmithKline Beecham prior to joining
Fisons.
LOREN G. PETERSON. Mr. Peterson has been the Chief Executive Officer
and a Director of the Company since April 1997. Mr. Peterson has served as
President of the Company since December 1997. From January 1997 to April 1997,
Mr. Peterson was a principal of Camelot Pharmacal, L.L.C., a privately held
pharmaceutical development company he co-founded. From 1993 to 1996, Mr.
Peterson served as Vice President - Finance and Chief Financial Officer of Bock
Pharmacal Company, a privately held pharmaceutical company. From 1989 to 1993,
Mr. Peterson was a partner of the accounting firm of Coopers & Lybrand LLP.
DOUGLAS R. EGER. Mr. Eger has been a Director of the Company since
November 1991, served as President of the Company from March 1992 through June
1994, and served as Chairman of the Company from June 1994 to December 1997. Mr.
Eger served as Chief Executive Officer of the Company from February 1996 to
December 1997. Mr. Eger is the principal of Taconic Enterprises, Inc., a
merchant banking company providing capital and management advisory services to
high growth companies.
JOHN M. BAILEY. Mr. Bailey has been a Director of the Company since
April 1997. Mr. Bailey is the founder and majority shareholder of Bailey
Associates, a consultancy specializing in providing companies with strategic
advice and support through mergers, collaborations and divestments. From 1978 to
1996, Mr. Bailey was employed by Fisons, where he has held a number of senior
positions. In 1993, Mr. Bailey was appointed to the main board of Fisons and, in
1995, he was appointed Corporate Development Director of Fisons. In that role he
was directly responsible for worldwide strategic and corporate development and
for all merger, divestment, acquisition and business development activities of
Fisons Group worldwide.
DIGBY W. BARRIOS. Mr. Barrios has been a Director of the Company since
April 1997. Since 1992, Mr. Barrios has been a private consultant to the
pharmaceutical industry. Mr. Barrios served from 1985 to 1987
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<PAGE>
as Executive Vice President, and from 1988 to 1992 as President and Chief
Executive Officer, of Boehringer Ingelheim Corporation. Mr. Barrios is a member
of the Board of Directors of Sepracor Inc., Roberts Pharmaceutical Corporation
and Cypros Pharmaceutical Corporation.
DAVID A. BYRON. Mr. Byron has been Executive Vice President - Corporate
Development of the Company since April 1997. From January 1997 to April 1997,
Mr. Byron was a principal of Camelot Pharmacal, L.L.C., a privately held
pharmaceutical development company he co-founded. From 1994 to December 1996,
Mr. Byron served as Vice President of Scientific Affairs of Bock Pharmacal
Company, a privately held pharmaceutical company. From 1990 to 1994, Byron
served as Senior Director - New Product Development of Sanofi-Winthrop
Pharmaceutical Corporation.
CARL F. SIEKMANN. Mr. Siekmann has been Executive Vice President -
Corporate Development of the Company since April 1997. From January 1997 to
April 1997, Mr. Siekmann was a principal of Camelot Pharmacal, L.L.C., a
privately held pharmaceutical development company he co-founded. From 1992 to
1996, Mr. Siekmann served as Vice President of Business Development of Bock
Pharmacal Company, a privately held pharmaceutical company.
JUDY ROESKE BULLOCK. Ms. Bullock has been Chief Financial Officer, Vice
President, Treasurer and Secretary of the Company since November 1997. From
October 1995 to November 1997, Ms. Bullock served as Director of Executive
Compensation and Benefits of Deere & Company. From January 1994 to October 1995,
Ms. Bullock served as a senior consultant for the consulting firm of Towers
Perrin. From August 1987 to December 1993, Ms. Bullock served as a senior
manager for the accounting firm of Price Waterhouse. Ms. Bullock is a CPA
licensed in the states of Missouri and Florida.
MEETINGS AND COMMITTEES
The Board of Directors of the Company held ten meetings during the
fiscal year ended December 31, 1997. From time to time during such fiscal year,
the members of the Board acted by unanimous written consent. The Company has
standing Stock Option, Compensation, and Audit Committees. The Stock Option
Committee reviews, analyzes and approves grants of stock options and stock to
eligible persons under the Company's 1993 Stock Option Plan and the Company's
1993 Restricted Stock Plan. The current members of the Stock Option Committee
(appointed in June 1997) are Digby W. Barrios and John M. Bailey. The Stock
Option Committee held three meetings in 1997, and approved certain actions by
written consent. The Compensation Committee reviews, analyses and makes
recommendations to the Board of Directors regarding compensation of Company
directors, employees, consultants and others, including grants of stock options
(other than stock option grants under the Company's 1993 Stock Option Plan and
the Company's Directors Plan). The current members of the Compensation Committee
(appointed in June 1997) Douglas R. Eger, Digby W. Barrios and John M. Bailey.
The Compensation Committee held two meetings in 1997, and approved certain
actions by written consent. The Audit Committee reviews, analyzes and makes
recommendations to the Board of Directors with respect to the Company's
compensation and accounting policies, controls and statements, and coordinates
with the Company's independent public accountants. The current members of the
Audit Committee (appointed in June 1997) are Loren G. Peterson, Digby W. Barrios
and John M. Bailey. The Audit Committee held one formal meeting in 1997. The
Company does not have a standing nominating committee or a committee which
serves nominating functions.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to the chief executive officer of the
Company ("CEO") and the executive officers of the Company (other than the CEO)
who were executive officers of the Company during the fiscal year ended December
31, 1997 and whose salary and bonus exceeded $100,000 with respect to the fiscal
year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------- --------------
Other Annual Securities
Name and Compensation Underlying
Principal Position Year Salary($) Bonus($) ($)(1) Options(#)
- ------------------------------------- ------------- ------------ ------------- ------------- --------------
Thomas M. Fitzgerald,
<S> <C> <C> <C> <C> <C>
Chairman.............................. 1997 $175,000 0 0 300,000
1996 $94,792 0 0 0
Loren G. Petersonn,
President and Chief Executive Officer. 1997 $118,655 0 0 400,0000
David A. Byron
Executive Vice President.............. 1997 $108,485 0 0 400,0000
Carl F. Siekmann
Executive Vice President.............. 1997 $108,485 0 0 400,000
Douglas R. Eger, former Chairman
and Chief Executive Officer........... 1997 $238,730 0 0 500,000(2)
1996 $230,000 $25,000 0 0
1995 $172,500 0 0 80,000
</TABLE>
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(1) Perquisites and other personal benefits, securities or property
delivered to each executive officer did not exceed the lesser of
$50,000 or 10% of such executive's salary and bonus.
(2) On March 31, 1997 the Stock Option Committee approved the extension of
the expiration date of stock options to purchase 500,000 shares of the
Company's common stock then outstanding to Mr. Eger to March 31, 2002.
No other terms of such stock options were amended or modified.
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<PAGE>
The following table sets forth certain information regarding stock
option grants made to Messrs. Fitzgerald, Peterson, Byron, Siekmann and Eger
during the fiscal year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
% of Total
Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/sh) Date
- ----------------------------- ---------------- --------------- ------------- ---------------
<S> <C> <C> <C>
50,000 $2.75 June 1, 2001
150,000 $2.75 June 1, 2002
Thomas M. Fitzgerald, 50,000 $3.50 June 1, 2001
Chairman........................ 50,000 $4.50 June 1, 2001
----------
300,000 12.45%
Loren G. Peterson,
Presient and Chief
Executive Officer............... 400,000 16.60% $2.75 April 27, 2007
David A. Byron,
Executive Vice President........ 400,000 16.60% $2.75 April 27, 2007
Carl F. Siekmann,
Executive Vice President........ 400,000 16.60% $2.75 April 27, 2007
Douglas R. Eger, former
Chairman and Chief
Executive Officer............... 0 0 0 0
</TABLE>
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<PAGE>
The following table sets forth certain information regarding stock
options held by Messrs. Fitzgerald, Peterson, Byron, Siekmann and Eger as of
December 31, 1997.
AGGREGATED OPTION EXERCISES
DURING THE MOST RECENTLY COMPLETED
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
No. of
Securities
Shares Value (1) of
Underlying Unexercised in
Unexercised The-Money
Options at FY- Options at FY-
Shares End (#) End($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Thomas M. Fitzgerald, 0 0 50,000/300,000 0
Chairman
Loren G. Petersen 0 0 0/400,000 0
President and Chief
Executive Officer
David A. Byron 0 0 0/400,000 0
Executive Vice President
Carl F. Siekmann, 0 0 0/400,000 0
Executive Vice President
Douglas R. Eger, former 0 0 500,000/0 $16,125/0
Chairman and Chief Executive
Officer
</TABLE>
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(1) Represents the total gain that would be realized if all-in-the-money
options held at December 31, 1997 were exercised, determined by
multiplying the number of shares underlying the options by the
difference between the per share option exercise price and the closing
sale price of Common Stock of $1.375 per share reported on the American
Stock Exchange for December 31, 1997. An option is in-the-money if the
fair market value of the underlying shares exceeds the exercise price
of the option.
BOARD OF DIRECTORS COMPENSATION
The Company does not currently compensate directors who are also
executive officers of the Company for their service on the Board of Directors.
Under current Company policy, each non-employee Director of the Company receives
a fee of $750 for each Board meeting attended and $400 for each Board committee
meeting attended. Directors are reimbursed for their expenses incurred in
attending meetings of the Board of Directors.
LONG-TERM INCENTIVE AND PENSION PLANS
During the year ended December 31, 1996, the Company adopted a defined
contribution 401(k) plan in accordance with the Internal Revenue Code. Employees
are eligible to participate in the 401(k) plan upon completion of three months
of service provided they are over 21 years of age. Participants may defer up to
15% of eligible compensation. Currently, the Company does not provide matching
contributions under the 401(k) Plan.
-8-
<PAGE>
OTHER
No director or executive officer is involved in any material legal
proceeding in which he is a party adverse to the Company or has a material
interest adverse to the Company.
EMPLOYMENT AGREEMENTS
In June 1996, the Company entered into a three-year employment
agreement with Thomas M. Fitzgerald pursuant to which Mr. Fitzgerald agreed to
serve as Chief Operating Officer of the Company. The employment agreement
requires Mr. Fitzgerald to devote his full business and professional time in
furtherance of the business of the Company. Such agreement automatically renews
for successive one-year terms unless one party provides written notice to the
other of his or its intent to terminate at least six months prior to the end of
the then current term. If Mr. Fitzgerald's employment is terminated other than
for cause, he is entitled to receive a severance payment of $87,500, payable in
six equal monthly installments. The agreement contains non-compete and
confidentiality provisions. Mr. Fitzgerald's annual base salary under the
agreement is currently $175,000.
In April 1997, the Company entered into a five-year employment
agreement with Loren G. Peterson pursuant to which Mr. Peterson agreed to serve
as Chief Executive Officer of the Company. The term of the agreement is
automatically extended for an additional one year term from year to year unless
one party notifies the other of its intention to terminate at least six months
prior to the end of the then current term. The employment agreement requires Mr.
Peterson to devote his full business and professional time in furtherance of the
business of the Company. If Mr. Peterson's employment is terminated other than
for cause, he is entitled to receive a severance payment of $131,250, payable in
nine equal monthly installments. The employment agreement includes
confidentiality and non-compete provisions. Mr. Peterson's annual base salary
under the employment agreement is currently $175,000.
In April 1997, the Company entered into a five-year employment
agreement with David A. Byron pursuant to which Mr. Byron agreed to serve as
Executive Vice President - Scientific Affairs of the Company. The term of the
agreement is automatically extended for an additional one year term from year to
year unless one party notifies the other of its intention to terminate at least
six months prior to the end of the then current term. The employment agreement
requires Mr. Byron to devote his full business and professional time in
furtherance of the business of the Company. If Mr. Byron's employment is
terminated other than for cause, he is entitled to receive a severance payment
of $120,000, payable in nine equal monthly installments. The employment
agreement includes confidentiality and non-compete provisions. The employment
agreement includes confidentiality and non-compete provisions. Mr. Byron's
annual base salary under the employment agreement is currently $160,000.
In April 1997, the Company entered into a five-year employment
agreement with Carl F. Siekmann pursuant to which Mr. Siekmann agreed to serve
as Executive Vice President - Corporate Development of the Company. The term of
the agreement is automatically extended for an additional one year term from
year to year unless one party notifies the other of its intention to terminate
at least six months prior to the end of the then current term. The employment
agreement requires Mr. Siekmann to devote his full business and professional
time in furtherance of the business of the Company. If Mr. Siekmann's employment
is terminated other than for cause, he is entitled to receive a severance
payment of $120,000, payable in nine equal monthly installments. The employment
agreement includes confidentiality and non-compete provisions. Mr. Siekmann's
annual base salary under the employment agreement is currently $160,000.
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<PAGE>
In October 1995, the Company entered into a two-year agreement with
Douglas R. Eger, pursuant to which Mr. Eger served as the Company's Chairman and
Chief Executive Officer. The term of the agreement was automatically extended
for an additional one year term from year to year unless one party notifies the
other of its intention to terminate at least 60 days prior to the end of the
then current term. Under such agreement, Mr. Eger was required to devote such
time, attention and energy to the Company as required for performance of his
duties under the agreement. The employment agreement includes confidentiality
and non-compete provisions. Mr. Eger served as Chief Executive Officer of the
Company until April 1997. Mr. Eger's annual base salary under the employment
agreement at the time of his resignation was $230,000. In connection with Mr.
Eger's resignation as employee of the Company in December 1997, Mr. Eger and the
Company entered into a severance agreement terminating his employment agreement
with the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and greater than ten percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
except for one Form 4 for Thomas M. Fitzgerald and one Form 4 for Mr. Eger that
were filed late, all Section 16(a) forms that were required to be filed during
the fiscal year ended December 31, 1997 were filed in compliance with the
applicable requirements of Section 16(a).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation of the Company's senior management is determined by a
Compensation Committee, presently consisting of Douglas R. Eger, Digby W.
Barrios and John M. Bailey. Except for Mr. Eger, who resigned as an employee of
the Company on December 24, 1997, none of the members of the Compensation
Committee are executive officers of the Company.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The voting securities of the Company outstanding on March 31, 1998
consisted of 15,742,762 shares of Common Stock. The following table sets forth
information concerning ownership of the Company's Common Stock, as at March 31,
1998, by (i) each director, (ii) each executive officer, (iii) all directors and
executive officers as a group, and (iv) each person who, to the knowledge of
management, owned beneficially more than 5% of the Common Stock.
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER(1) OWNED(2) COMMON STOCK(2)
------------------- -------- ---------------
<S> <C> <C>
Thomas M. Fitzgerald............................. 64,097(3) *
Loren G. Peterson................................ 256,000(4) 1.5%
David A. Byron................................... 245,500(5) 1.5%
Carl F. Siekmann................................. 247,000(6) 1.5%
Judy Roeske Bullock.............................. 50,000(7) *
Douglas R. Eger.................................. 752,456(8) 4.5%
John M. Bailey................................... 65,000(9) *
Digby W. Barrios................................. 40,000(10) *
All Directors and Executive Officers as a Group.. 1,709,853 10.3%
</TABLE>
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* Less than 1%.
(1) The persons named in the table, to the Company's knowledge, have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes hereunder.
(2) Calculations assume that all options and warrants held by each
director, director nominee and executive officer and exercisable within
60 days after March 31, 1998 have been exercised.
(3) Includes 50,000 shares of common stock issuable upon exercise of
options exercisable within 60 days after March 31, 1998. Mr.
Fitzgerald's address is c/o Sheffield Pharmaceuticals, Inc., 425 South
Woodsmill Road, St. Louis, Missouri 63017.
(4) Includes 40,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 31, 1998. Mr. Peterson's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, Suite 270, St. Louis, Missouri 63017.
(5) Includes 40,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 31, 1998. Mr. Byron's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, Suite 270, St. Louis, Missouri 63017.
(6) Includes 40,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 31, 1998. Mr. Siekmann's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, Suite 270, St. Louis, Missouri 63017.
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<PAGE>
(7) Includes 25,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 31, 1998. Ms. Bullock's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, St. Louis, Missouri 63017.
(8) Includes 500,000 shares of Common Stock issuable upon exercise of
options and warrants exercisable within 60 days of March 31, 1998. Mr.
Eger's address is c/o Sheffield Pharmaceuticals, Inc., 425 South
Woodsmill Road, St. Louis, Missouri 63017.
(9) Includes 65,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 31, 1998. Mr. Bailey's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, St. Louis, Missouri 63017.
(10) Includes 25,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 31, 1998. Mr. Barrios'
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, St. Louis, Missouri 63017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 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. The
Company has agreed to reimburse Messrs. Peterson, Siekmann and Byron upon the
occurrence of certain events for certain income taxes payable by them upon
exercise of their stock options in an amount of up to $250,000 per person. In
connection with the merger, Anthony B. Alphin, Jr., Bernard Laurent, Stephen
Sohn and Michael Zeldin resigned as Directors of the Company.
In April 1997, the Company made a loan of $80,000 to Douglas R. Eger
(the "Eger Loan"). On December 22, 1997, the Company entered into a severance
agreement with Mr. Eger pursuant to which Mr. Eger resigned as an employee of
the Company. The severance agreement provided, among other things, for the
principal amount of the Eger Loan to be paid in six equal quarterly installments
commencing on September 30, 1998, with all remaining principal and interest
being paid in full on December 31, 1999, a severance payment of $135,000 payable
in six equal installments of $22,500 each, with $2,500 of each such installment
being applied to repay Mr. Eger's obligations under the Eger Loan, and the grant
by Mr. Eger of a security interest in 30,000 shares of the Company's common
stock to secure his obligations under the Eger Loan. The extension of the
maturity date of the Eger Loan is subject to the satisfaction of certain
conditions by Mr. Eger.
In April 1997, the Company entered into a consulting agreement with
John M. Bailey, a director of the Company, pursuant to which Mr. Bailey agreed
to provide certain business and financial consulting advise to the Company. Mr.
Bailey is paid a monthly retainer of 2,000 British Pounds Sterling under such
agreement, which monthly retainer is reduced to 1,500 British Pounds Sterling
for any month during which a Board of Directors meeting is held.
In February 1998, the Company entered into an agreement (the
"Engagement Agreement") with an unaffiliated individual pursuant to which such
individual was retained by the Company to facilitate an alliance with Zambon
Corporation or its affiliates ("Zambon"). Pursuant to the Engagement Agreement,
the Company agreed to pay such individual a fee of between 2.5% and 4.0% of any
equity investment or other financing received from Zambon. The Company also
agreed to issue such individual warrants to purchase 150,000 shares of the
Company's common stock at 125% of market price for a financing of $7.5 million
or greater, with such warrants to be prorated proportionally on financing of a
lesser amount. The Engagement Agreement also provides that the Company shall pay
such individual a fee of 5.0% of amounts actually received by the Company from
Zambon attributable to marketing or other rights to the Company's MSI system
(net of any third party
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<PAGE>
royalty obligations). On April 15, 1998, the Company announced that it had
entered into an option agreement with Zambon (the "Option Agreement") to form a
strategic alliance with Zambon for the worldwide development and
commercialization of drugs to treat respiratory disease in the Company's Metered
Solution Inhaler (MSI) system. The Company received a $650,000 option fee from
Zambon in the form of an equity investment in connection with the signing of the
option agreement. The Option Agreement contemplates (i) an additional equity
investment in the Company by Zambon, (ii) funding by Zambon of development of
respiratory drugs and (iii) co-promotion rights to respiratory drugs developed
for the MSI system and (iv) retention by the Company of all non-respiratory
disease applications of the MSI system. Douglas R. Eger, a director of the
Company, has advised the Company that he is entitled to receive a portion of the
fees payable by the Company to the individual who is the Company's counterparty
to the Engagement Agreement.
During the period January 1, 1998 through April 30, 1998 certain
executive officers provided funds for use by the Company in excess of $60,000 in
the aggregate. These funds were comprised of short-term notes having a 7% annual
interest rate, unpaid salaries and unreimbursed expenses. The largest aggregate
amounts due to certain executives during this period are as follows: Loren G.
Peterson, $85,923; David A. Byron, $80,343; and Carl F. Siekmann, $75,474. As of
April 30, 1998 a portion of the short-term notes payable and the unreimbursed
expenses have been paid, leaving balances due to such executive officers as
follows: Loren G. Peterson, $63,825; David A. Byron, $60,075; and Carl F.
Siekmann, $60,075.
-13-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Financial Statements are included:
Reports of Independent Auditors
Consolidated Balance Sheets as of
December 31, 1997 and 1996
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
Consolidated Statements of Stockholders' Equity (Net
Capital Deficiency) for the period from October 17, 1986
(inception) to December 31, 1997
Consolidated Statements of Cash Flow for the three years
in the period ended December 31, 1997 and for the period
from October 17, 1986 (inception) to December 31, 1997
Notes to Consolidated 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>
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
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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.
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)
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
23.1 Consent of Ernst & Young LLP (1)
23.2 Consent of KPMG Peat Marwick LLP (10)
27 Financial Data Schedule (10)
</TABLE>
- ----------------------------
(1) Filed with the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1997 filed with the Securities and Exchange
Commission on April 15, 1998.
(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.
(10) Filed with this report on Form 10-K/A (Amendment No. 1).
(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.
-16-
<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 30, 1998 /S/ LOREN G. PETERSON
-------------------------------------
Loren G. Peterson
President and Chief Executive Officer
-17-
<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.
/s/ Ernst & Young LLP
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.
/s/ KPMG Peat Warwick LLP
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 --
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)
============ ============ ============ ============
Accretion 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>
Notes 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
Accretion of issuance costs for
cumulative convertible redeemable
preferred stock (79,500) (79,500)
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 4,983,887 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 $36,157,290 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, 1997, 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.
At the annual meeting of stockholders of the Company held on June 26,
1997, 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 1,000,000 shares to 3,000,000 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 1,501,500 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.
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, Form S-3 No.
333-27753 and S-3 No. 333-38327) of Sheffield Pharmaceuticals, Inc. (formerly
Sheffield Medical Technologies 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/A) 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
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 YEAR 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
<INVENTORY> 0
<CURRENT-ASSETS> 520,986
<PP&E> 328,414
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<TOTAL-ASSETS> 689,937
<CURRENT-LIABILITIES> 1,358,550
<BONDS> 1,579,875
2,468,263
0
<COMMON> 126,495
<OTHER-SE> (4,716,751)
<TOTAL-LIABILITY-AND-EQUITY> 689,937
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<NET-INCOME> (9,489,138)
<EPS-PRIMARY> (0.80)
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